Bank of N.T. Butterfield & Son Ltd
Annual Report 2008

Plain-text annual report

The Bank of N.T. Butterfield & Son Limited 65 Front Street, Hamilton, Bermuda www.butterfieldgroup.com A n n u a l R e p o r t 2 0 0 8 Re:2008 The Bank of N.T. Butterfield & Son Limited Annual Report 2008 MISSION Butterfield will provide consistent and superior returns to our shareholders, offer security and opportunities to our employees, and be recognised as making a valuable contribution to the communities in which we operate by a customer focused, efficient and ethical delivery of banking and other financial services. 1 FINaNcIal & StatIStIcal SuMMary (In $ thousands except per share data) 2008 2007 Year ended 2006 2005 2004 Net income before other gains and losses Other gains (losses) Net income Diluted earnings per share At year end Total assets Cash and deposits with banks Investments Loans Deposits from customers Deposits from banks Subordinated capital and senior debt Shareholders’ equity Net book value per common share Market value per common share Number of common shares (in thousands)* Number of shareholders Number of employees Financial ratios Return on shareholders’ equity Total capital ratio 113,890 (109,051 ) 4,839 0.05 146,331 (336 ) 145,995 1.53 127,906 6,177 134,083 1.39 108,495 856 109,351 1.16 83,863 6,603 90,466 0.96 10,911,844 2,221,390 3,824,079 4,418,277 9,406,175 395,094 282,296 518,440 11,910,920 2,517,012 4,744,989 4,124,764 10,441,579 306,392 284,191 629,330 11,132,802 3,151,191 3,786,793 3,760,745 9,755,659 287,173 280,168 549,553 9,197,566 2,849,920 2,916,399 3,085,594 7,948,966 291,143 278,679 495,226 8,630,383 2,396,724 3,266,400 2,645,331 7,404,855 502,595 142,333 428,030 5.64 10.45 91,927 4,465 1,692 6.76 18.25 84,553 4,201 1,850 5.87 18.75 28,375 3,915 1,730 5.36 14.12 25,429 3,878 1,597 4.72 11.16 22,745 3,778 1,552 0.8% 11.2% 25.2% 13.0% 24.6% 13.5% 23.6% 13.1% 21.2% 10.7% In tables and graphs on this page all prior period per share data, have been restated to reflect the one for ten stock dividends in February 2008, August 2006, 2005, and 2004 and the three for one stock split in August 2007. All percentages here and in the report that follows are based on actual rather than rounded numbers. * Actual outstanding; excludes common shares held as treasury stock and common shares held by the Bank’s Stock Option Trust. Net Income ($ millions) Earnings Per Share ($) Diluted Return on Equity (%) Return on Assets (%) 146.0 134.1 113.9 † 109.4 90.5 1.53 1.39 1.22 † 1.16 0.96 4.8 0.05 24.6 25.2 23.6 21.2 1.3 1.2 1.2 1.1 18.1 † 0.8 0.9 † 0.04 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 † = Before gains and losses = After gains and losses Market Value & Net Book Value per Share ($) Annual Dividend Declared ($) 18.75 18.25 14.12 5.36 5.87 6.76 10.45 5.64 20.00 15.00 10.00 5.00 0 11.16 4.72 2004 2005 2006 2007 2008 Market Value Book Value 0.56 0.52 0.64 0.60 0.56 † 2004 2005 2006 2007 2008 † 4¢ payable in shares The year in Review 2 Butterfield Annual Report 2008 3  “For o ver 150 years, Butterfield h as been h elping individuals, fam ilies and businesses protect, grow and optim ise th eir financial well-being.” abOut butterFIeld Butterfield is a diversified financial services company operating in nine jurisdictions. We have total assets of $10.9 billion, client assets under management of $9.1 billion and over $54 billion of client assets under administration. We employ 1,692 people around the world. Butterfield is a publicly traded company with a primary share listing on the Bermuda Stock Exchange and a secondary listing on the Cayman Islands Stock Exchange. For over 150 years, Butterfield has been helping individuals, families and businesses protect, grow and optimise their financial well-being. From our Bermuda roots, we have strategically extended our reach across key local markets and international centres, building a versatile platform of services to meet clients’ needs. From everyday banking to wealth management and highly specialised institutional services, at Butterfield, clients work with some of the most experienced people in the business— approachable, disciplined and proactive professionals who are committed to understanding clients’ goals and identifying relevant, pragmatic strategies to help get them there. We strive to match clients with professionals who seek to understand the things that matter to them; professionals who have the resources and expertise to help them realise their ambitions… on their terms. To develop long-term, collaborative relationships with clients. To identify relevant opportunities and head off issues. To champion clients’ interests. Quality solutions, crafted with care by genuine and experienced professionals. That’s the Butterfield way. chaIrMaN’S letter tO the SharehOlderS 2008 was undoubtedly the most challenging of a pronounced and prolonged economic downturn. Butterfield year for financial institutions in the latter half responded with an offering of $200 million in non-convertible of Butterfield’s 150 years in operation. The preference shares, guaranteed by the Government of Bermuda. On a sub-prime crisis and the resulting collapse pro forma basis, as at 31 December 2008, this additional capital buffer of the US residential real estate market led would have raised Butterfield’s tier 1 capital and total capital ratios to unprecedented strain on the worldwide to 10.6% and 15.1%, respectively. Butterfield is appreciative of the financial system. Only the swift and massive Government’s support, which is expected to facilitate the placement intervention of governments around the globe restored some of the new preference shares in a global market that is currently semblance of order to the markets. Although Butterfield achieved a profit in 2008, the Bank’s results were disappointing. Net income before gains and losses amounted to $114 million, which was a satisfactory result in a challenging market. In unreceptive to bank capital raises. Consistent with the decision to enhance Butterfield’s capital, the Board made the difficult decision to reduce the fourth quarter dividend to $0.08 per share ($0.04 in cash and $0.04 in common shares). addition, Butterfield realised a $115 million gain on the merger of its Your Board is aware that many shareholders are concerned about the Fund Services businesses with Fulcrum Group. However, offsetting decline in value of Butterfield’s common shares over the course of these positive items were substantial losses incurred in both the 2008. Enhancing Butterfield’s value for shareholders is our principal Bank’s investment portfolio and in its support of the Butterfield Money objective and we continue to have confidence in the ability of Market Fund, which reduced net income to $4.8 million or $0.05 per Butterfield’s experienced management team to lead the Bank through diluted share. These losses, which occurred primarily on US residential difficult times and generate sustainable value over the long term. mortgage backed securities that were very highly rated when purchased, were not large as a percentage of Butterfield’s $3.3 billion investment portfolio but were large in absolute terms. The Bank also wrote off certain previously capitalised investments in technology. In 2008, we welcomed three new Directors to the Board: Graham Brooks, Butterfield’s Executive Vice President, International; Sheila Lines, Chief Executive Officer of Keytech Limited; and Patrick Tannock, Executive Vice President at ACE Bermuda. The perspectives and expertise Behind the lower than expected net income figure, however, of Messrs. Brooks and Tannock and Ms. Lines proved invaluable to there is positive news. Butterfield made good progress against the Board as we worked to oversee the Bank’s operations during a its strategic priorities, particularly in improving its information challenging year. Robert Stewart, who served as Vice Chairman, retired technology infrastructure. These enhancements are expected to result in customer service improvements, as well as improvements in 2008. We thank Mr. Stewart for the valued insight and leadership he provided over his 20 years as a Director of the Bank. Robert Steinhoff, in information management and internal controls. 2008’s market Chairman of the Audit Committee, who has been a member of the Board turmoil resulted in severe strains on many large international banks since 2004, succeeded Mr. Stewart as Vice Chairman. The Board also that relied on the global inter-bank credit markets for funding. As wishes to express thanks to Mr. Peter Rodger who retired after many Butterfield is engaged in retail banking in key jurisdictions, it does years of service as Secretary to the Board. not rely on inter-bank borrowing to fund its credit businesses. This, along with Butterfield’s conservative approach to lending and the high quality of its loan book, served the Bank well. Butterfield is liquid and its capitalisation comfortably met all regulatory requirements at year end. The Bank’s tier 1 capital ratio was 7.5% at 31 December 2008, and its total capital ratio was 11.2%. Challenging times call for greater capital cushions. The economies in which Butterfield operates are all facing challenges and we cannot rule out the possibility of further losses in the investment portfolio. This caused the Board to seek to raise capital and was reinforced by a directive from the Bermuda Monetary Authority requiring all banks in Bermuda to have adequate capital buffers against the possibility As Butterfield enters its 151st year of continuous operations, it does so as an organisation that is proud of its past, strengthened by the challenges it has successfully faced and confident in its future. On behalf of the Board of Directors, I thank you for your loyalty, which we hope to repay with enhanced shareholder returns. Robert A. Mulderig | Chairman of the Board 4 Butterfield Annual Report 2008 5 PreSIdeNt & chIeF executIve OFFIcer’S rePOrt 2008 was a watershed for financial services; a year that changed the business of banking and the nature of relationships between banks and governments, and banks and their publics. It was a year that brought the interconnectedness of the world’s financial and commercial systems into sharp focus, and one in which the bad decisions made by a relative few begat bad fortunes for individuals, industries and economies globally. For Butterfield, 2008 was one of the most notable years in our history. It was the year in which we celebrated our 150th anniversary and took important steps to revitalise our franchise; one in which we were tested, but one from which we emerged as a strong, focused organisation. Although we enjoyed a good first quarter in 2008, amid the market turbulence that played out during the balance of the year, we had significant write downs on investments and credit arrangements in subsequent quarters. Specifically, Butterfield had losses and write downs of $151.8 million on securities in our held-to-maturity investment portfolio and unrealised losses of $50.2 million related to credit support agreements provided by the Bank to the Butterfield Money Market Fund. In 2008, we also wrote off $29.2 million on previously capitalised investments in technology, which will facilitate the development of a cost-effective, modern, Group-wide technology solution. Despite receding economies, investment valuations and interest rates in most of our markets, Butterfield’s overall revenues declined only slightly versus 2007, and revenues from our asset management, foreign exchange, trust and custody/administrative services businesses actually increased during the year. Our Barbados, Guernsey and UK businesses generated record profits in a difficult environment. We see this as a validation of our strategy of continued, judicious investment in our areas of core competence—community banking, wealth management and custody/administrative services—and the generally conservative nature of our business practices. Last year’s earnings were buoyed by a significant gain in the third quarter from the merger of Butterfield Fund Services (BFS) with the Fulcrum Group. BFS was a significant contributor to the Group’s results and international profile in recent years, but a comprehensive evaluation of the business made it clear that the best way to continue to offer world-class fund administration services to our valued clients was to find a partner company for BFS with complementary strengths. Through our 40% ownership in the new company, Butterfield Fulcrum Group, we are committed to maintaining a strong presence in international fund administration and believe the business will continue to be a source of income for the Bank over the long term. In May, Butterfield also successfully refinanced outstanding debt with a $78 million private placement of subordinated lower tier capital notes, a significant accomplishment in difficult capital markets. Despite the potential distractions of 2008, Butterfield maintained a focus on the goal of becoming a top-quartile performer in key measures of business and operational performance as compared to our international peer banks. To that end, we initiated or continued several major projects during the year that will lead to cost reductions, quality improvements and the realisation of Group synergies. Principal among these were rationalisation and upgrading of our information technology systems, and a project that will see improvements in the levels of marketing coordination among our businesses internationally. We also made important changes in response to market events, taking decisive action to manage residual problematic exposures in our investment portfolios and, more recently, to enhance our already strong capital position. Butterfield was recognised with several prestigious awards from the international financial press in 2008, including Best Bank in Bermuda from Euromoney, and Best Developed Market Bank-Bermuda, Best Local Private Bank in Bermuda and Best Private Bank in the Caribbean from Global Finance. Our Card Services team received a Regional Quality Award for excellence in operational achievements from MasterCard® Worldwide, and several of our Europe-based senior staff members were named in Citywealth’s Leaders List 2008, an annual guide listing the most highly regarded figures in private wealth management. On behalf of Butterfield’s management team, I would like to express my appreciation to all of our employees. It is due to their focus and professionalism that Butterfield continues to rise to the challenges that we are presented with and find success where other companies may falter. I would also like to thank our clients for their loyalty and support. Finally, I thank our Directors for the valued oversight they provided during this most difficult of years. Alan R. Thompson | President & Chief Executive Officer 6 Butterfield Annual Report 2008 7 “Butterfield continues to rise to the challenges that we are presented with...”bOard OF dIrectOrS & PrINcIPal bOard cOMMItteeS With the exception of the President & Chief Executive Officer and the Executive Vice President, International, the Board is comprised of independent Directors who are not Butterfield employees. cOMMItteeS INdIcated by NuMberS 4 chaIrMaN rObert a. MulderIg Retired Chairman & Chief Executive Officer, Mutual Risk Management Ltd. Chairman, Woodmont Trust Co. Ltd. 1 SheIla a. lINeS Chief Executive Officer, Keytech Limited 1, 4 vIce chaIrMaN rObert SteINhOFF Retired Partner, KPMG Director, Argus Insurance Co. Ltd. 3 ShauN MOrrIS Managing Partner of the Appleby Bermuda law firm 3, 4 gleNN M. tIttertON Chairman, BF&M Insurance Group Retired President & Chief Executive Officer, BF&M Insurance Group Retired Chairman, Insurance Corporation of Barbados Limited 1, 2 harry WIlkeN President, Jardine Matheson International Services Limited Bermudian 71.9% Non-Bermudian 28.1% grahaM c. brOOkS Executive Vice President, International, The Bank of N.T. Butterfield & Son Limited 1, 3 PaulINe rIchardS Chief Operating Officer, Brevan Howard P&C Partners Limited Director, Wyndham Worldwide Inc. Former Director and Audit Committee Chair, Cendant Corporation Share Ownership: Bermudian / Non-Bermudian 2 JOhN r. WrIght Retired Bank Chief Executive 1 – 999 Shares 0.6% 1,000 – 4,999 Shares 3.1% 5,000 – 9,999 Shares 3.0% Bermudian 71.9% Non-Bermudian 28.1% Share Ownership: Bermudian / Non-Bermudian 1 – 999 Shares 0.6% 1,000 – 4,999 Shares 3.1% 5,000 – 9,999 Shares 3.0% 10,000 – 49,000 Shares 13.2% 50,000 – 99,999 Shares 10.7% 100,000 and above Shares 69.4% Distribution of Shares by Number Held 2, 3 JulIaN W. FraNcIS Former Governor, Central Bank of The Bahamas 2 PatrIck taNNOck Executive Vice President, ACE Bermuda 4 a. l. vINceNt INghaM, JP President & Chief Executive Officer, BELCO Holdings Limited and Bermuda Electric Light Company Limited alaN r. thOMPSON President & Chief Executive Officer, The Bank of N.T. Butterfield & Son Limited PrINcIPal bOard cOMMItteeS: 10,000 – 49,000 Shares 13.2% 100,000 and above Shares 69.4% dIrectOrS’ cOde OF PractIce aNd 50,000 – 99,999 Shares 10.7% 1. audIt & cOMPlIaNce cOMMIttee Oversees Butterfield’s financial reports, internal financial controls, internal audit processes and compliance. Distribution of Shares by Number Held 2. rISk POlIcy cOMMIttee Focuses on credit, market and operational risk. 3. cOrPOrate gOverNaNce cOMMIttee Focuses on Directors’ and Board Committee governance, performance and Directors’ nominations. 4. cOMPeNSatION & huMaN reSOurceS cOMMIttee Focuses on compensation and benefits, employee development and succession. grOuP cOde OF cONduct The Directors have adopted a Code of Best Practice based upon recommended principles of corporate governance. In implementing the Code, the Board meets regularly, retains full effective control over the Bank, and monitors executive management. A Group Code of Conduct applies to Directors and employees and imposes Butterfield’s principles of business, including ethics and conflicts of interest. Copies of the Codes can be accessed on www.butterfieldgroup.com. 8 Butterfield Annual Report 2008 9 MaNageMeNt alaN r. thOMPSON President & Chief Executive Officer curtIS ballaNtyNe Senior Vice President Chief Credit Officer IaN M. cOulMaN Managing Director Butterfield Asset Management Limited rObert S. MOOre Managing Director Butterfield Bank (Guernsey) Limited grahaM c. brOOkS Executive Vice President International curtIS l. dIckINSON Executive Vice President Wealth Management WIltON dOllOFF Executive Vice President Chief Operating Officer rIchard J. Ferrett Executive Vice President Chief Financial Officer JaMeS r. SteWart Executive Vice President Chief Risk Officer MalcOlM becker Managing Director Butterfield Trust (Malta) Limited dONNa e. harvey Maybury Senior Vice President Human Resources cONOr O’dea Managing Director Butterfield Bank (Cayman) Limited NIc beNtley Deputy Chairman Butterfield Private Office (HK) Limited geOrge bOguckI Managing Director Butterfield Bank (UK) Limited grahaM M. Jack Senior Vice President Strategic Development charleS laWreNce Senior Vice President Treasury JIM Parker Country Head & Managing Director Butterfield Trust (Switzerland) Limited W. aarON M. SPeNcer Senior Vice President Group Operations & I.T. katIe bOOth Managing Director Butterfield International Private Office Limited rObert v. lOtMOre Managing Director Butterfield Bank (Bahamas) Limited Fred h. teSch Senior Vice President Group Internal Audit dIaNNe M. breWer Senior Vice President Marketing & Corporate Communications g. JOhN MaraglIaNO Senior Vice President Head of Finance llOyd O. WIggaN Managing Director Butterfield Bank (Barbados) Limited bOb W. WIlSON Executive Vice President Head of Bermuda Banking SheIla M. brOWN Senior Vice President Investment Services tONya l. MarShall Senior Vice President General Counsel Secretary to the Board of Directors MIchelle WOlFe Managing Director Butterfield Trust (Bermuda) Limited 10 Butterfield Annual Report 2008 11 In 2008, we celebrated our Sesquicentennial; Butterfield’s 150th year in financial services. Our origin as a financial institution dates back to the early nineteenth century when our founder, Nathaniel T. Butterfield, recognised a need for foreign exchange and international clearing among clients and suppliers of his mercantile company and undertook to provide these services as an adjunct of his main business. In 1858, N.T. Butterfield abandoned his dry goods business and formally established the Bank in Hamilton, Bermuda. Over the course of a century and a half in continued to invest in our employees and To acknowledge the support and loyalty business, Butterfield has had good years future capabilities under a proven growth of the community in Bermuda (our original and bad, with profits that have risen and strategy. Our client base was stable. Our location and home to our corporate receded. Over the long-term, we have international reach expanded during the year. headquarters,) the Butterfield Charitable enjoyed substantial growth, but on occasion we have had to make difficult decisions to scale back operations, exit businesses or revise strategies in response to changing economic and business realities. In that context, 2008—even with the challenges it presented—can be viewed as a successful year in many respects. Although our net income was disappointing, Butterfield’s operating profitability remained strong. We To mark the occasion of our 150th anniversary and to celebrate the growth and ongoing success of the Bank, Butterfield held special appreciation events for clients in several of our jurisdictions. Butterfield also erected commemorative branch displays in Bermuda and commissioned a limited edition history of the Bank that was distributed to all employees worldwide. Foundation distributed $5 million in Bank shares to 20 registered charities on the Island for the establishment of endowments. In addition, the Foundation earmarked $1 million for the funding of capital projects in Bermuda, such as the development of a new pedestrian entrance to the historic town of St. George (a UNESCO World Heritage site). Reflecting on 150 years 12 Butterfield Annual Report 2008 13 “The Butterfield Charitable Foundation distributed $5 million in Bank shares to 20 registered charities in Bermuda...”Prudent management of Butterfield’s risks is integral to our objective of maintaining and enhancing value for shareholders. Butterfield places a priority on risk management in conducting business. In response to the increasing complexity of the market and regulatory environments in which we operate, we continue to build on our significant commitment to risk management programmes and governance. rISk MaNageMeNt The Bank’s Enterprise Risk Management (ERM) Division has overall responsibility for assessing credit, market and operational risks associated with the Bank’s activities. ERM provides for clear senior management responsibility for all risks with each product having a designated risk owner. Butterfield’s Control Framework establishes objectives with regard to the processes and resources that should be brought to bear in the design, implementation and application of internal controls along product lines. Through periodic risk assessments, the Board and executive management are able to obtain a complete and quantifiable view of key product risks and a transparent evaluation of the effectiveness of controls. With regard to risk management governance, the risk Policy committee of the board of directors has responsibility for establishing and periodically updating the policies that are to be consistently applied across the Group to manage market, liquidity, credit, interest rate, operational, legal reputational, fiduciary and strategic risks. The group risk committee of nine Butterfield executives is chaired by the President & Chief Executive Officer and The asset and liability Management committee (ALCO), chaired by the Group Chief Financial Officer, monitors Butterfield’s balance sheet trends, liquidity, trading positions and off balance sheet exposures, investment portfolios, interest rate and exchange rate exposures and capital position. ALCO has developed specific guidelines for investing in securitised assets and monitors and tests mortgage- and asset-backed securities for potential impairment. Day-to-day interest rate and liquidity risks are managed by the Bank’s Treasurer and monitored by the Group Market Risk team within Enterprise Risk Management. The Financial Institutions committee, chaired by the President & Chief Executive Officer, identifies, assesses, prioritises and manages the Group’s risks associated with counterparty exposure to other financial institutions, as well as country-specific exposures. The Investment committee is chaired by the Group Chief Risk Officer and supports the functions and programmes that identify, assess, prioritise and manage investment risks that are assumed by the Bank and all investment risks assumed by the Butterfield Money Market Fund Limited. It also monitors the Group’s compliance with serves in an advisory capacity to the Board Risk Policy Committee. both risk-related regulatory requirements and with its internal risk Consistent with our commitment to ERM, the Group Risk Committee management policies and standards. The Bank determined in promotes an integrated view across all risk disciplines, focusing on mid-2007 to cease making investments for its own account other than all elements of risk at the strategic level. Butterfield’s compliance in certificates of deposits issued by well rated financial institutions. with Basel II regulations (being adopted in Bermuda under the auspices of the Bermuda Monetary Authority) is also a key priority. Renewing our focus 14 Butterfield Annual Report 2008 15 “Assessing risks is a normal business activity that is the concern of every employee...”Chaired by the CEO, the credit committee provides a forum for ongoing executive review of loan activity, establishing Group credit guidelines and policies and approving selected credit transactions in accordance with Butterfield’s business objectives. The Committee reviews large credit exposures, establishes and reviews credit strategy and policy and approves selected credit transactions. Overall responsibility for managing credit policy and process is delegated to the Chief Credit Officer. exPeNSe MaNageMeNt cONceNtratINg ON cOre cOMPeteNcIeS Far from being an exit strategy, the transaction was a means to The Group’s expenses increased by $30.5 million (or 9.6%) in 2008; Butterfield’s longstanding strategy for growth is a focus on the increase attributed largely to expenditures on technology and developing our core businesses. This involves judicious investment communications and professional and outside services associated in business areas where we can leverage the expertise of our with strategic projects. Principal among these was a project to existing personnel along with the company’s experience and enhance Butterfield’s position in third-party fund administration internationally. Butterfield retains a 40% ownership stake in the merged company, Butterfield Fulcrum Group. Butterfield also has representatives on the Butterfield Fulcrum Group Board. identify a third party provider of information technology services reputation. In the main, our focus is on community banking and Although the revenues enjoyed by fund administrators decreased for the Group, which involved a detailed review and analysis of wealth management, with the latter representing the area of in the latter half of 2008, due to the declining asset values of funds proposals from potential providers and, ultimately, the negotiation greatest growth potential for the Bank. Butterfield manages operational risk—the chance of experiencing of a contract with EDS for the management of Butterfield’s a favourable or unfavourable outcome (i.e., financial gain or loss) information technology infrastructure. resulting from planned or unplanned changes in business processes and procedures, controls, infrastructures, and our operating environment—through policies, procedures and controls that are developed with a view to the following principles: Expense management remains a priority for Butterfield. We believe Services (BFS) with the Fulcrum Group in August 2008. When we our investment in the aforementioned strategic projects will assist us considered the nature and scope of the investment that would be in attaining improvements in operating efficiency and will produce required to maintain sufficient scale and the technology needed savings in the areas of technology development and management, to be a competitive full-service provider in the consolidating With respect to fund administration, long considered to be a core Group business, we made the decision to merge Butterfield Fund administered, we are optimistic that the business will rebound as the economy improves and we are confident that Butterfield Fulcrum Group is positioned to take advantage of future growth in the hedge fund industry. • Assessing risks is a normal business activity that is the The Group’s overall head count was reduced by some 265 positions concern of every employee in January 2009, with the transfer of Fund Services personnel from personnel and marketing. • Decisions are based on an assessment of all relevant operational risks • Risk decisions shall be made at the appropriate level based on delegated authority • Unnecessary risks shall be avoided the Bank to Butterfield Fulcrum Group. fund administration industry, we determined that the most expedient way to retain a leadership position was to find a partner with complementary strengths. In the Fulcrum Group, we found a company that had advanced, proprietary technology, a dedicated sales team and offices in locations where BFS did not have a presence. These traits were a natural complement to BFS’ international reputation and strong customer relationships. 16 Butterfield Annual Report 2008 17 “Butterfield’s longstanding strategy for growth is a focus on developing our core businesses...” In 2008, Butterfield made important strategic changes to strengthen our franchise and position the Bank to take advantage of future growth in the financial services industry. Our over-arching goal is to become a Bank that performs in the top 25% internationally when evaluated against key business measures, ranging from governance to information technology to client service, by the end of 2010. uPgradINg Our the organisation for improved collaboration • In our Cayman Islands community banking INFOrMatION techNOlOgy in the development of marketing materials business, we introduced Saturday banking In November, Butterfield reached an agreement with leading global technology provider, EDS, an HP company, to supply technology infrastructure management, application development and technical support. We are now in the process of transitioning all of our business applications and the realisation of savings. In 2008, we and relocated our George Town branch to established a Group-wide marketing council new premises, adding four new ATMs to help tasked with identifying and capitalising on shorten queues. We also introduced the Blue opportunities to jointly develop materials. Visa Debit Card for business clients. Our objective is to develop a stronger Group brand which will help amplify local marketing efforts. • In Guernsey banking, we launched a new current account mortgage product, a new packaged property holding structure with and international legacy systems to a new, Among the most visible changes in the provision of lending facilities, and a common platform that will be centrally marketing, and a source of expected new Wealth Management Account that managed. This represents a departure from savings, is the culling of logos used by combines banking, lending, custody and the decentralised I.T. management structure various divisions and subsidiaries in investment management services. that has been used in the past and should favour of the updated Butterfield logo (that enable the Bank to realise significant appears on the cover of this Report,) which efficiencies by doing away with duplication will be the new identity used by all of our in the areas of application development, businesses internationally. support and licensing. A major deliverable of the project is the eNhaNcINg Our ServIceS installation of a common core banking platform in multiple jurisdictions. This change will enhance our operating capabilities—giving us a comprehensive view of each client’s business with the Bank at the touch of a button—so we are better equipped to offer customised, forward- Across our businesses, Butterfield made targeted improvements to our services during 2008 that were designed to make things more convenient for our clients. Highlights are provided below. • In Bermuda wealth management, we looking financial solutions. The new system, opened a new investment centre, which slated to be rolled out in the Cayman Islands serves as a convenient, one-stop shop for in 2009, followed by Bermuda and the other relevant jurisdictions, will also be the basis of upgraded electronic banking services and improved client reporting. clients seeking investment advice, assistance with structuring their portfolios and execution of investment transactions. • A new Butterfield Trust office officially opened for business in Geneva, Switzerland in January. • In the UK, we expanded banking services to include children and grandchildren of private clients. • Bentley Reid offices in Malta and Hong Kong were integrated into the Bank and adopted the Butterfield name and logo. As we continue to enhance our systems and the levels of collaboration among product experts across Butterfield Group, we will continue to introduce new products and services and improve existing offerings. These actions will help us ensure that we are constantly meeting the needs of our clients and working toward being a top • In corporate banking, we created the new quartile performer among our international position of Captive Insurance Relationship peers in all key business measures. StreNgtheNINg the braNd Like information technology, marketing was traditionally managed using a decentralised approach, with each office responsible for local advertising and promotional materials. There are opportunities that exist within Manager to better meet the specialised needs of valued clients in the Captive Insurance industry. • We introduced the Super Saver savings account in Barbados, based on a similar, highly successful product offered in Bermuda. Reinforcing our capabilities 18 Butterfield Annual Report 2008 19 Reaffirm ing our commitment to our communities As a socially responsible company, Butterfield believes that our role is to do more than offer financial services. At the corporate and employee levels, we pride ourselves on providing support to causes that are encouraging progress and enriching lives in the communities we call home. In addition to the endowment programme and capital campaign developed by the Butterfield Charitable Foundation as part of our 150th anniversary celebrations, Butterfield provided sponsorship and support to a number of events and not-for-profit organisations in 2008. yOuth aNd educatION artS aNd culture Across the Group, we awarded four scholarships and seven Butterfield arranged an exclusive showing of a rare Rembrandt educational awards/bursaries during 2008. In Guernsey, Butterfield painting, Portrait of a Bearded Man in a Red Doublet (1633), at the provided support for music programmes for local youth, and our Swiss Bermuda National Gallery. We were also a sponsor of the Cayman offices sponsored a charity concert benefitting students in developing Arts Festival, where we presented the Garden Opera and hosted countries. In The Bahamas, we continued our support of the Ranfurly master classes for students. We were, again, a proud sponsor of the Home for Children, and in the Cayman Islands we sponsored the annual Barbados Jazz Festival. In addition, many Butterfield employees donated their personal time and expertise to local causes during 2008. We thank them for helping brighten the lives of our friends and neighbours, particularly during difficult economic times. Young Caymanian Leadership Awards, a platform for young leaders to excel and be recognised for their contributions to society. health aNd WellNeSS In Bermuda and Guernsey, we made significant donations to nursing and residential care homes to make necessary structural improvements to enhance the quality of life of the residents. In Malta, we donated to Park of Friendship (Ir-Razzett tal-Hbiberija), an institution that supports improved access for disabled persons. Butterfield’s largest annual fundraiser in the Cayman Islands, the 5K Irish Jog, provides all proceeds to the Cayman Islands Cancer Society. In Hong Kong, we support Project Orbis, a flying eye hospital that brings highly-skilled surgeons to developing countries to provide restorative and preventative eye surgeries. 20 Butterfield Annual Report 2008 21 “Butterfield employees donated their personal time and expertise to local causes...”MaNageMeNt’S dIScuSSION & aNalySIS OF reSultS OF OPeratIONS aNd FINaNcIal cONdItION.1 Results of operations for the 12-month period ended 31 December 2008 compared with the 12-month period ended 31 December 2007. Butterfield Group’s2 net income before gains and losses for 2008, was $113.9 million, • A $151.8 million loss was recorded previously capitalised investments on the Bank’s held to maturity (HTM) in technology, offset by realised and down 22.0% from $146.3 million reported for investment portfolio. This reflected unrealised gains of $12.9 million the same period a year ago. However, net a $25 million write down in respect of and $8.7 million respectively income after gains and losses reduced to holdings of Icelandic bank senior from investments in two credit $4.8 million as a result of the following: securities, a $7.6 million write down card companies. • A gain on sale of subsidiaries and affiliates of $115.5 million was recorded, reflecting the sale and merger of our Fund Services businesses with those of the Fulcrum Group to form the new company Butterfield Fulcrum Group in September 2008. Butterfield received $133.0 million in cash proceeds on the transaction and a 40% ownership interest in the merged entity, which has a carrying value of $6.0 million. • A $5.2 million goodwill impairment charge was taken in respect of Butterfield’s investment in its Barbados banking subsidiary. Whilst profitable, earnings have proved to be lower than originally forecast. • A $6.4 million unrealised loss on trading securities was recorded, which principally reflects changes in the carrying value of ‘seed money’ invested in Butterfield Mutual Funds, such as the Canadian Systematic Equity Fund, the Select Alternative Fund and the Select Investment Fund, reflecting negative performances of those funds in the light of world market conditions. of a $10 million senior security issued by Washington Mutual Bank, and $119.2 million of write downs of 1Management’s discussion and analysis of results of operations and financial condition should be read in conjunction with the Group’s Consolidated asset-backed securities relating to the Financial Statements, beginning on page 44, and US residential mortgage-backed market. The asset-backed securities were AAA when purchased, but have suffered other-than-temporary the notes to those financial statements, which begin on page 48. Certain statements in this discussion and analysis may be deemed to include ‘forward- looking statements’ and are based on management’s current expectations and are subject to uncertainty impairment and have therefore been and changes in circumstances. Forward looking written down to their fair value. With the exception of one security with a principal value of $23 million, which has defaulted with no expected statements are not historical facts but instead represent only management’s belief regarding future events, many of which by their nature are inherently uncertain and outside of management’s control. Actual results may differ materially from recovery value, these asset-backed those included in these statements due to a variety of factors, including worldwide economic conditions, success in business retention and obtaining new business and other factors. These statements and notes have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP). securities remain current as to payments of principal and interest. However, our analysis leads us to believe that they will not at some stage be able to meet their contractual commitments. • In addition, net other losses of $61.2 million were recorded. This was principally made up of unrealised losses of $50.2 million stemming from two credit support agreements provided by the Bank to the Butterfield Money Market Fund Limited (BMMFL), in order for it to maintain its AAAm rating, and a write down of $29.2 million on Results 22 Butterfield Annual Report 2008 23 Total revenue, before gains and losses, was $464.4 million, down $161.7 million compared to their amortised cost (carrying) value of shares. This brings the twelve-month dividend to $0.56 per share, PerFOrMaNce INdIcatOrS from $470.3 million in 2007. This reflects reduced revenues from $293.5 million. Continued instability in the markets for US mortgage- down from $0.64 per share in 2007, reflecting the reduced level of investment and pension fund administration following the sale of the backed and asset-backed securities has adversely affected the profitability. The dividend paid to shareholders in 2008 was Fund Services companies, which has resulted in a 3.1% decline in non liquidity of these markets and thereby made it difficult to obtain $57.7 million, up 6.2% on the previous year and represents a 50.7% interest income to $212.9 million. Solid growth was seen in revenues market quotations on many of these securities, thereby requiring payout on net income before gains and losses. On 12 February 2008, from asset management, customer-driven foreign exchange, trust, and significant management judgment to determine appropriate the Board approved a one-for-ten bonus share issue, which equated custody and other administration services. Net interest income was fair values. The underlying cash flows of the Bank’s holdings of a record, at $254.5 million before credit related provisions, up 0.7% US residential mortgaged-backed securities continue to be in to a 10% stock dividend which was payable on 12 March 2008 to shareholders of record on 20 February 2008. The movement in year on year. The net interest margin was resilient despite declining accordance with contractual terms. Our ongoing analysis of the shareholder value for the year, defined as the change in share price interest rates at 2.16% versus 2.18% a year ago, while average interest factors used in determining other than temporary impairment, plus dividends reinvested, was a decline of 34.3%, compared to an earning assets were up $120.8 million to $11.6 billion. together with the Bank’s ability and intent to hold these securities increase of 0.1% the previous year, reflecting a fall in the Bank’s share The Group’s balance sheet remains liquid with a loan to customer deposits ratio of 47.0%. Customer deposits, at $9.4 billion, decreased year on year from $10.4 billion primarily due the impact of foreign through to contractual maturities, leads to the conclusion that price from $18.25 at year-end 2007 to $10.45 at 31 December 2008, investments that currently have a fair value less than the current offset by dividends reinvested. By contrast, and including dividends carrying value are not other than temporarily impaired. reinvested, the FTSE All-Share Bank share index was down 53.2%. exchange translation on our Guernsey and United Kingdom balances The loan portfolio increased by 7.1% in 2008, or $294 million, to due to the significant strengthening of the US dollar against the $4.4 billion and now represents 40.5% of assets. Non-performing Share PurchaSe actIvIty The Group’s overall strength and performance are indicated by certain key measures. Return on shareholders’ equity was 0.8% for the period, down from 25.2% in 2007, while diluted earnings per share were $0.05 compared with $1.53 last year. However, when excluding other gains and losses, return on equity was 18.1% and diluted earnings per share was $1.22, reflecting solid core earnings in a very challenging economic environment. The Group’s efficiency ratio, which is operating expenses (excluding corporation tax and amortisation of intangible assets) expressed as a percentage of operating income (excluding credit provisions and other gains and losses) saw a year on year increase from 65.7% to 72.8% in 2008, reflecting the Group’s continued investment in technology projects. 2All references to Butterfield Group or “the Group” refer to The Bank of N.T. Butterfield & Son Limited and its subsidiaries on a consolidated basis. UK Pound, from $1.99 at year-end 2007 to $1.45. When excluding loans totalled $36.5 million at year-end 2008, representing 0.8% the impact of foreign exchange translation movements, customer of total loans, compared to 0.9% a year ago reflecting the Bank’s deposits were in line with the prior year. quality underwriting standards. As at 31 December 2008, the general The Bank maintains a HTM investment portfolio that is designed to be settled on the contractual maturities of the individual securities and monitors its liquidity requirements to ensure it has the ability and intent to hold designated HTM securities to their stated maturity dates. The portfolio was designed to be well diversified investing in highly rated securities. Within this portfolio the Bank has direct and indirect exposures to the US residential mortgage- provision for credit losses of $24.9 million was equivalent to 0.6% of total loans. In addition, there is a specific provision of $3.5 million held for possible shortfalls in the security for non-performing loans. In total, therefore, the allowance for credit losses is $28.4 million, or 0.6% of the loan portfolio. Delinquency and charge-off ratios continued to be below industry average. backed securities market, representing 7.7% of the investment SharehOlder value The loan to the Stock Option Trust of $34.9 million is in respect of potential obligations under the Bank’s Stock Option Plan and is deducted from shareholders’ equity as treasury stock. The decrease in the loan, from $41.6 million the previous year, reflects $6.7 million repayments from cash received on the exercise of stock options by employees and the effect of other share-based payments. Shares repurchased and held as treasury shares totalled 2,562,997 shares for an aggregate cost of $38.3 million. There were no shares repurchased and cancelled under the Share Buy-back Plan during the year and there where no shares purchased by the Bank’s Stock Option Trust or by the Bank’s Charitable Foundation during the portfolio and 9.2% of the HTM portfolio, compared to 11.5% and 14.5% respectively a year ago. The total mark-to-market discount on remaining US residential mortgage-backed securities was Butterfield’s Board of Directors approved a fourth quarter dividend same period. of $0.08 per share, comprised of $0.04 in cash and $0.04 in common 24 Butterfield Annual Report 2008 25 “Solid growth was seen in revenues from asset management, customer-driven foreign exchange, trust, and custody and other administration services.”JurISdIctION OvervIeWS berMuda the bahaMaS ButteRfIeLD heaD offIce, hamILtoN , BeRmuDa Total revenue increased year on year by $7.3 million, or 3.0%, to $253.4 million due in part to good growth in net interest income, up 9.6% to $133.4 million, offset by a $4.3 million, or 3.5%, decline in non-interest income. Net income before gains and losses, at $47.9 million, was down from $67.3 million a year ago, reflecting both the sale of the Fund Services business and increased investment in infrastructure related projects and represents 42.1% of the Group net income before gains and losses in 2008, compared to 46.0% in 2007. Total assets for community banking, at $5.4 billion, were in line with a year earlier. Revenue from wealth management & fiduciary services, excluding $16.0 million revenue from investment and pension fund administration, was $56.7 million, up 2.2% from prior year reflecting strong earnings from the trust and custody businesses. Assets under management were $6.8 billion, down from $8.9 billion a year earlier, reflecting declines in asset values, whilst assets under administration in respect of trust and custody were $8 billion and $19 billion respectively, compared to $8 billion and $23 billion a year earlier. Butterfield Fund Services (Bermuda) Limited was part of the sale of our Fund Services businesses to, and merger with, the Fulcrum Group, to form Butterfield Fulcrum Group, in September 2008. The real estate operating segment, which represents property related costs in Bermuda, recorded a net expense of $9.5 million in 2008, up $0.4 million over 2007. ($ millions; noted percentage changes reflect year on year variances) Net INcome*: ReveNue*: customeR DeposIts: LoaNs: totaL assets**: assets uNDeR aDmINIstRatIoN**: assets uNDeR maNagemeNt: *Before central cost allocations and gains and losses **Year on year variance excludes fund administration 47.9 ( 28.8%) 253.4 (r 3.0%) 3,701 ( 4.0%) 2,779 (r 9.5%) 5,468 ( 1.6%) 26,675 ( 12.9%) 6,757 ( 24.0%) majoR BusINess LINes: Community Banking, Private Banking, Asset Management, Personal Trust, Corporate Trust, Custody NumBeR of empLoyees: 803 moNtague steRLINg ceNtRe, Nassau, Bahamas Our Bahamas businesses fared well given the difficult climate experienced in 2008. Good growth was seen in both the Fiduciary and Credit Services areas. One of the most notable successes in 2008 was the growth of the loan portfolio by 73.0% year over year, mainly through the International Mortgage offering. Ultra high net worth clients also took advantage of our expertise with The Bahamas Private Trust Company. Butterfield Fund Services (Bahamas) Limited was part of the sale of our Fund Services businesses to, and merger with, the Fulcrum Group, to form Butterfield Fulcrum Group, in September 2008. ($ millions; noted percentage changes reflect year on year variances) Net INcome*: ReveNue*: customeR DeposIts: LoaNs: totaL assets: 2.4 ( 23.2%) 11.1 ( 7.6%) 117 ( 24.5%) 71 (r 73.0%) 155 ( 14.5%) assets uNDeR aDmINIstRatIoN**: 2,349 ( 26.2%) *Before central cost allocations and gains and losses **Year on year variance excludes fund administration majoR BusINess LINes: Private Banking, Personal Trust, Corporate Trust NumBeR of empLoyees: 62 26 Butterfield Annual Report 2008 27 barbadOS cayMaN ISlaNdS Our primary goal continues to be increasing market share in the highly competitive Barbados Retail Banking sector. To this end, we introduced the Super Saver savings product during the year and are currently refining our premium banking offering and comprehensive ‘professionals’ package which will be available for the second quarter 2009 opening of our south coast Banking Centre. Loan growth continued to be impressive, registering an increase of 24.2% over 2007, which was significantly higher than the growth rate of the Barbados banking sector as a whole. caRLIsLe house, BRIDgetowN, BaRBaDos ($ millions; noted percentage changes reflect year on year variances) Net INcome*: ReveNue*: customeR DeposIts: LoaNs: totaL assets: *Before central cost allocations and gains and losses majoR BusINess LINes: Community Banking NumBeR of empLoyees: 142 1.5 (r 2,453.2%) 13.0 (r 8.9%) 232 (r 2.4%) 183 (r 24.2%) 265 ( 4.6%) ButteRfIeLD pLace, geoRge towN, gRaND caymaN Our ongoing fee based businesses in the Cayman Islands experienced moderate growth in revenues of 9.1% in 2008. The commercial loan portfolio saw significant growth through our strategic regional focus, driving loan growth by 35.3% to $484 million in 2008. Interest based businesses experienced a significant reduction in margins earned following numerous successive declines in interest rate benchmarks set in international markets during the course of the year, ending at historic lows. Net interest income before credit provisions declined 20.5% to $49.6 million while non-interest income totalled $47.2 million. Total revenue before gains and losses was down 16.1% to $96.2 million. Net income before central cost allocations and gains and losses was $ 34.3 million, down 39.5%. Customer deposits rose 27.0% in 2008, with average customer deposit balances rising 6.5% in the year. Total assets rose 22.0% to $ 3.3 billion. Assets under management were up 6.2% on the year while assets under administration from wealth management businesses, excluding fund administration, declined 6.3%, reflecting continued growth in client relationships offset by declines in financial asset valuations. Butterfield Fund Services (Cayman) Limited was part of the sale of our Fund Services businesses to, and merger with, the Fulcrum Group to form Butterfield Fulcrum Group in September 2008. ($ millions; noted percentage changes reflect year on year variances) Net INcome*: ReveNue*: customeR DeposIts: LoaNs: totaL assets: assets uNDeR aDmINIstRatIoN**: assets uNDeR maNagemeNt: *Before central cost allocations and gains and losses **Year on year variance excludes fund administration 34.3 ( 39.5%) 96.2 ( 16.1%) 2,994 (r 27.0%) 484 (r 35.3%) 3,329 (r 22.0%) 5,384 ( 6.3%) 1,266 (r 6.2%) majoR BusINess LINes: Community Banking, Private Banking, Asset Management, Personal Trust, Corporate Trust NumBeR of empLoyees: 332 28 Butterfield Annual Report 2008 29 guerNSey hONg kONg The Guernsey businesses again delivered strong growth with record net income of £10.4 million ($19.2 million). This was delivered against a very difficult economic backdrop and resulted in broadly flat revenues after accounting for a circa 25% adverse movement in Sterling to Dollar exchange rates. The loan portfolio grew by £50 million year on year as we continued to deepen our relationship with clients. Custodian and investment services also performed well. Butterfield Fund Services (Guernsey) Limited was part of the sale of our Fund Services businesses to, and merger with, the Fulcrum Group to form Butterfield Fulcrum Group in September 2008. RegeNcy couRt, st peteR poRt, gueRNsey (noted percentage changes reflect year on year variances) £ millions $ millions (functional currency) DIamoND exchaNge BuILDINg, hoNg koNg Net INcome*: ReveNue*: 10.4 (r 28.4%) 19.2 (r 18.5%) 32.1 ( 0.3%) 59.2 ( 8.4%) customeR DeposIts: 883 ( 16.8%) 1,288 ( 38.8%) LoaNs: totaL assets: 284 (r 20.9%) 415 ( 10.9%) 993 ( 16.8%) 1,449 ( 38.8%) assets uNDeR aDmINIstRatIoN**: 11,730 ( 8.3%) 17,117 ( 32.6%) assets uNDeR maNagemeNt: 437 ( 4.6%) 638 ( 29.9%) *Before central cost allocations and gains and losses **Year on year variance excludes fund administration majoR BusINess LINes: Private Banking, Asset Management, Personal Trust, Corporate Trust, Custody and Custodian Trustee Services, Administered Banking NumBeR of empLoyees: 191 Our Hong Kong businesses achieved net income of $1.7 million on revenues of $3.9 million. The Bentley Reid group of businesses in Hong Kong, acquired in late 2007, was successfully rebranded with the Butterfield name. ($ millions) Net INcome*: ReveNue: assets uNDeR aDmINIstRatIoN: *Before central cost allocations 1.7 3.9 34 majoR BusINess LINes: Private Wealth Management, Asset Management, Personal Trust NumBeR of empLoyees: 10 30 Butterfield Annual Report 2008 31 Malta SWItzerlaNd In its first full year of operation as part of the Butterfield Group, Butterfield Trust (Malta) Limited (formerly Bentley Trust Limited) achieved net income of $0.3 million on revenues of $1.7 million. Established in 2006 and 2007 respectively, our Swiss asset management and trust businesses continue to build our wealth management capabilities, offering a highly specialised, expert service in private wealth structures for both Swiss and international clients. An operating loss of $3.3 million was recorded on revenues of $0.3 million reflecting the business development phase of these operations. poRtomaso toweR, st juLIaNs, maLta ($ millions) Net INcome*: ReveNue: assets uNDeR aDmINIstRatIoN: *Before central cost allocations 0.3 1.7 713 majoR BusINess LINes: Personal Trust, Company Administration NumBeR of empLoyees: 15 BouLevaRD Des tRaNchées 16, geNeva, swItzeRLaND ($ millions; noted percentage changes reflect year on year variances) Net INcome*: ReveNue: -3.3 ( 204.6%) 0.3 (r 33.5%) assets uNDeR aDmINIstRatIoN: 25.0 N/A assets uNDeR maNagemeNt: 18.0 ( 76.5%) *Before central cost allocations majoR BusINess LINes: Trust and Company Services, Asset Management NumBeR of empLoyees: 8 32 Butterfield Annual Report 2008 33 99 gResham stReet, LoNDoN, uk uNIted kINgdOM Butterfield Bank (UK) Limited, trading as Butterfield Private Bank, offers private banking services to high net worth individuals, their families and business interests from offices in the City of London. Despite the latter part of 2008 witnessing an unprecedented banking environment, our UK businesses continued to make significant progress, with record net income of £5.5 million ($10.1 million), up 266.7% on 2007. Total revenues were up 31.7% to £21.2 million, reflecting strong growth in net interest income and revenues from banking and client-driven foreign exchange. The year saw good growth in both the loan portfolio and assets under administration, up 13.3% and 3.9% respectively, whilst assets under management declined by 21.7%, reflecting economic conditions in global equity markets. The Bentley Reid group of businesses in the UK, acquired in late 2007, was successfully integrated and rebranded with the Butterfield name, which has helped to enhance our client value proposition. (noted percentage changes reflect year on year variances) £ millions $ millions (functional currency) Net INcome*: ReveNue*: 5.5 (r 266.7%) 10.1 (r 225.8%) 21.2 (r 31.7%) 39.1 (r 20.7%) customeR DeposIts: 737 ( 16.0%) 1,075 ( 38.3%) LoaNs: totaL assets: 350 (r 13.3%) 510 ( 16.6%) 906 ( 10.0%) 1,322 ( 33.9%) assets uNDeR aDmINIstRatIoN**: 848 (r 3.9%) 1,237 ( 23.6%) assets uNDeR maNagemeNt: 285 ( 21.7%) 416 ( 42.4%) *Before central cost allocations and gains and losses **Excluding fund administration majoR BusINess LINes: Private Banking and Wealth Management, Asset Management, Personal Trust, Treasury Services NumBeR of empLoyees: 129 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 36 36 37 37 38 39 40 41 42 43 44 45 46 47 48 34 Butterfield Annual Report 2008 35 Financial OVERViEW incOmE Total revenue before gains and losses for the Group after provisions was $464.4 million for the year ended 31 December 2008, down $5.9 million, or 1.3%, from $470.3 million for the same period a year ago. Net interest income before provisions for credit losses increased by 0.7% to $254.5 million. The increase reflects growth in average interest earning assets, up 1.0% to $11.6 billion, offset by a marginal decline in the net interest margin by 0.02% to 2.16% as a result of the declining global interest rate environment. We continue to be appropriately reserved with total provisions of $28.4 million. Non-performing loans totalled $36.5 million as at 31 December 2008, in line with that of a year ago. They represent 0.8% of the total loan portfolio, compared to 0.9% a year ago. Provisions in respect of credit losses charged to income were $3.0 million, compared to $2.0 million last year, while charge-offs for the year were $4.0 million. Total provisions were $28.4 million, up from $26.9 million a year ago, and represent a coverage ratio of 72.9% of non-accrual loans. Non-interest income, excluding revenues from investment and pension fund administration, grew by 4.1% to $177.4 million, reflecting business growth, notably from customer-driven foreign exchange (+17.5%), asset management (+8.0%), custody and other administration services (+4.8%) and trust (+2.6%). Revenues from investment and pension fund administration fell from $49.3 million in 2007 to $35.6 million, due to the sale of the fund services businesses. Gains and losses totalled a net loss of $109.1 million. This reflects a $115.5 million gain on sale of our fund services subsidiaries, offset by a goodwill impairment charge of $5.2 million in respect of our Barbados operation, unrealised losses of $6.4 million on trading securities, principally ‘seed money’ investments in various Butterfield mutual funds, realised and unrealised losses of $151.8 million on HTM investments and other losses of $61.2 million, including an unrealised loss of $50.2 million from two credit derivative transactions entered into with the BMMFL, a write down of $29.2 million on previously capitalised investments in technology, offset by realised and unrealised gains of $12.9 million and $8.7 million respectively from investments in two credit card companies. Changes in Net Interest Income (In $ thousands) For the year ended 31 December Assets Cash and deposits with banks Investments Loans, after provision for credit losses Interest earning assets Other assets Total assets Liabilities Deposits Subordinated capital Interest bearing liabilities 2008 2007 Average balance Interest Rate Average balance Interest Rate 2,563,071 4,767,027 4,288,159 11,618,257 80,519 193,006 261,525 535,050 3,005,511 3.14% 4,569,566 4.05% 6.10% 3,922,337 4.61% 11,497,414 124,608 253,831 282,712 661,151 4.15% 5.55% 7.21% 5.75% 495,428 12,113,685 - 535,050 - 473,076 4.42% 11,970,490 - 661,151 - 5.52% 9,768,780 284,859 10,053,639 269,668 13,946 283,614 9,731,178 2.76% 4.90% 281,750 2.82% 10,012,928 395,681 14,853 410,534 4.07% 5.27% 4.10% Non-interest bearing current accounts Other liabilities Total liabilities 1,145,869 285,289 11,484,797 - - 283,614 - 1,114,722 262,960 - 2.47% 11,390,610 - - 410,534 - - 3.60% Shareholders’ equity Total liabilities and shareholders’ equity 628,888 12,113,685 579,880 11,970,490 Spread, after provision for credit losses Net interest margin, after provision for credit losses 1.79% 2.16% 1.65% 2.18% Note: Underlying assets and liabilities are comprised of various currencies. ExpEnsEs The efficiency ratio was 72.8%, compared to 65.7% in 2007, reflecting that growth in the Group’s operating expenses before amortisation of intangibles increased by 9.7%, whilst the revenues before credit provisions and gains and losses decreased by 1.0%. The increase in the operating expenses primarily reflected significant increases in costs relating to professional and outside services, up 54.8% to $34.5 million, and technology and communications, up 43.2% to $41.1 million, due to a number of technology, risk management and client services initiatives. As at 31 December 2008 there were 803 employees in Bermuda, down from 843 a year ago, reflecting the sale and merger of the Bermuda based Fund Services business. Overseas, the total headcount decreased by 118 to 889, again reflecting the sale and merger of the fund services businesses. BalancE sHEET Total assets decreased by 8.4% to $10.9 billion, down from $11.9 billion a year ago. This decrease reflects the significant strengthening of the US dollar against the UK Pound and its impact on the translation of the assets of our Guernsey and United Kingdom businesses. Total customer deposits were $9.4 billion, down year on year by $1.0 billion, or 9.9%, from $10.4 billion, however the decrease was primarily the result of the foreign exchange translation movement. Total loans were up $0.3 billion to $4.4 billion. The ratios of loans to customer deposits and loans to total assets were 47.0% and 40.5% respectively. The Bank had 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 and had a policy of only investing in senior tranches of investment grade securities. The Bank determined in mid 2007 to cease making further investments in such securities and monitors its exposures through timely reporting, the use of industry standard models and sources of information and specialists to interpret the results of stress testing. As at 31 December 2008 investments in collateralised mortgage obligations had a carrying value (amortised cost) of $526.5 million, down from $828.5 million the previous year, with a fair value of $315.8 million, and represented 16.5% of total HTM investments. Other asset-backed securities had a carrying value (amortised cost) of $750.3 million, with a fair value of $601.8 million, and represented 23.5% of HTM investments. As at 31 December 2008, 92% of the Bank’s investments remained in securities rated ‘A’ or higher. Management supplements its fair value and impairment analyses by stress testing asset-backed securities where possible using a widely employed industry modeling and analytics software tool where the fair value of securities in the HTM investment portfolio is significantly lower than amortised cost. 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. Investments in mortgage-backed securities with fair values significantly lower than amortised cost were stress tested using pipeline frequency of default assumptions and loss severities from published independent third party sources such as major rating agencies. Specific risk factors of the underlying collateral were considered in other-than-temporary impairment assessments, namely 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, FICO scores, and seniority of tranche held. Stress tests also considered expected prepayment rates and speeds, expected timelines between delinquency and liquidation, expected annual default rates, expected loss on existing balances, projected (forward) Libor rates, expected cumulative lifetime loss rates and recovery rates on default. In light of continuing market instability and complexity in fair value and other-than-temporary impairment determinations, a large degree of judgment is involved in these assessments. The Bank continues to have exposures 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 major world economies, that may affect management’s views on other-than-temporary impairment, ultimately resulting in possible further write-downs to fair value. Distribution of 2008 Total Expense Distribution of 2008 Expense by Location Amortisation of Intangible Assets 2.1% Marketing 2.0% Non-income Taxes 4.4% Professional & Outside Services 9.9% Technology & Communications 11.7% Property 9.2% Other Expenses 7.7% Income Taxes 0.8% Salaries & Other Employee Benefits 52.2% Barbados 3.2% Cayman 17.0% Guernsey 11.0% Switzerland 1.0% The Bahamas 2.4% UK 8.0% Malta 0.4% Hong Kong 0.6% Bermuda 56.4% 36 36 Distribution of 2008 Total Revenue, Before Gains and Losses Distribution of 2008 Total Revenue by Location Butterfield Annual Report 2008 37 Other Non-interest Income 0.8% Net Interest Income 54.1% UK 8.2% The Bahamas 2.3% Switzerland 0.1% Guernsey 12.4% Cayman 20.1% Investment & Pension Fund Administration 7.7% Banking 8.1% Foreign Exchange Revenue 9.8% Asset Management 8.9% Custody & Other Administration Services 5.5% Trust 5.1% Barbados 2.7% Malta 0.4% Hong Kong 0.8% Bermuda 53.0% Distribution of 2008 Total Expense Distribution of 2008 Expense by Location Amortisation of Intangible Assets 2.1% Marketing 2.0% Non-income Taxes 4.4% Professional & Outside Services 9.9% Technology & Communications 11.7% Property 9.2% Other Expenses 7.7% Income Taxes 0.8% Salaries & Other Employee Benefits 52.2% Barbados 3.2% Cayman 17.0% Guernsey 11.0% Switzerland 1.0% The Bahamas 2.4% UK 8.0% Malta 0.4% Hong Kong 0.6% Bermuda 56.4% Distribution of 2008 Total Revenue, Before Gains and Losses Distribution of 2008 Total Revenue by Location capiTal Investment & Pension Fund Administration 7.7% Banking 8.1% Foreign Exchange Revenue 9.8% Asset Management 8.9% UK 8.2% The Bahamas 2.3% Switzerland 0.1% Guernsey 12.4% Cayman 20.1% Trust 5.1% Barbados 2.7% Custody & Other Administration Services 5.5% Malta 0.4% Hong Kong 0.8% Bermuda 53.0% Other Non-interest Income 0.8% Net Interest Income 54.1% TaxEs For the period under review the corporation tax of the Group was $3.0 million compared to $7.0 million for the same period a year ago, reflecting a reduction in the effective tax rate in Guernsey. Corporation taxes of $2.0 million in the UK, $0.9 million in Guernsey and $0.1 million in Barbados were incurred for the year. As a result the Group’s effective corporation tax rate decreased from 4.6% a year ago to 2.7% when excluding other gains and losses which were principally incurred in jurisdictions with no corporation tax. Non-income taxes of $15.1 million were also paid across the Group, up 6.9% from $14.2 million the previous year, primarily reflecting an increase in employee related taxes. Investment Portfolio by Long Term Debt Rating Lending by Location Bermuda 62.6% AAA 23.7% Other 4.3% BBB 3.6% A 13.8% AA 54.6% UK 11.5% The Bahamas 1.6% Guernsey 9.3% Cayman 10.9% Barbados 4.1% Group Loans by Type Financial Institutions & Government 5.4% Commercial Real Estate 19.9% Commercial & Industrial 24.7% Credit Card 1.7% Residential Morgages 38.3% Other Consumer Loans 10.0% Shareholders’ equity decreased by $110.9 million, or 17.6%, year on year, primarily reflecting dividends declared of $47.5 million, net purchases of treasury common shares of $11.1 million and a negative movement in comprehensive income of $55.1 million reflecting changes in the translation of foreign operations due to the decline of the UK Pound and changes in employee future benefits due to updated actuarial assumptions. On 27 May 2008, the Bank issued US$78 million of Subordinated Lower Tier II capital notes. The new notes were issued at par and in two tranches, namely US$53 million in Series A notes due 2018 and US$25 million in Series B notes due 2023. 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. The proceeds of the issue were used to repay the entire amount of the US$78 million outstanding subordinated notes redeemed in May 2008. The notes issued under Series A pay a fixed coupon of 7.59% until 27 May 2013 when they become redeemable in whole at the option of the Bank. The Series B notes pays a fixed coupon of 8.44% until 27 May 2018 when they also become redeemable in whole at the Bank’s option. The Series A notes were priced at a spread of 4.34% over the 5-year US Treasury yield and the Series B notes were priced at a spread of 4.51% over the 10-year US Treasury yield. Weighted risk assets declined year on year by 2.3% to $6.2 billion, primarily due to maturing investments and the impact of falling exchange rates on translation of foreign subsidiary assets, offset by an increase in the loan portfolio. The loan to the Stock Option Trust of $34.9 million is in respect of potential obligations under the Bank’s Stock Option Plan and is deducted from shareholders’ equity as treasury stock. The decrease in the loan from $41.6 million the previous year reflects $6.7 million repayments from cash received on the exercise of stock options by employees and the effect of other share-based payments. During the period under review, the Bank transferred 791,232 treasury shares under the Dividend Re-investment Programme, which represents a cash savings of $11.8 million, or 20.0% of the total dividend paid. As a result of the one for ten stock dividend in February 2008; 8,943,839 new shares were issued. Under the Share Buy-Back Plan, the Bank purchased and held as treasury stock 2,562,997 shares at a cost of $38.3 million. At 31 December 2008, the Group’s tier 1 capital ratio was 7.5% and total capital ratio was 11.2%. This level of capital meets the regulatory requirements of the Bermuda Monetary Authority. However, the Group has determined to enhance its capital position through the issuance of $200 million qualifying tier 1 capital in the form of non cumulative preference shares. This transaction, which subject to shareholders’ approval will close by 30 June 2009, will enable the Bank to create an additional capital buffer against any pronounced and prolonged economic downturn, and is consistent with a recent directive issued by the Bermuda Monetary Authority to all banks in Bermuda to increase their capital cushions. The issuance of preference shares as a means to enhance Butterfield’s long-term capital position is assured through the assistance of the Government of Bermuda, which has committed to support the offering by guaranteeing the principal of, and dividend payments on, the preference shares. In addition, the Government has committed to purchase any preference shares from this offering that are not subscribed by private investors. Butterfield expects to obtain the necessary shareholder approvals for this capital raise. On a pro forma basis, as at 31 December 2008, the issuance of these preference shares would have raised Butterfield’s tier 1 capital ratio to 10.6% and its total capital ratio to 15.1%. Capital Composition (In $ thousands) For the year ended 31 December Tier 1 capital Tier 2 capital Deductions * Total capital Weighted Risk Assets (In $ thousands) Cash and inter-bank placements Investments Loans Other assets Off-balance sheet items Total weighted risk assets Capital Ratios (%) Tier 1 Tier 2 Deductions * Total 2008 Proforma 663,468 307,235 (26,465 ) 944,238 2008 Actual 463,468 256,673 (26,465 ) 693,676 2007 547,801 296,922 (21,413 ) 823,310 469,371 1,587,976 3,415,452 316,780 450,384 6,239,963 429,371 1,587,976 3,415,452 316,780 450,384 6,199,963 487,158 1,795,446 3,169,395 360,335 533,420 6,345,754 10.6% 4.9% (0.4% ) 15.1% 7.5% 4.1% (0.4% ) 11.2% 8.6% 4.7% (0.3% ) 13.0% 38 Butterfield Annual Report 2008 39 * Deductions from capital comprise investments in affiliates 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 2008 Net interest income after provision for credit losses Non-interest income Total non-interest expense Net income before gains and losses Other gains and losses Net income for the quarter Earnings per share ($) * Basic Diluted Return on shareholders’ equity (%) Earnings per share before other gains (losses)($) * Basic Diluted Return on shareholders’ equity before other gains (losses) (%) 62,908 42,531 68,915 36,524 (131,965 ) (95,441 ) (1.03 ) (1.01 ) (60.5 ) 0.40 0.39 23.1 61,209 59,545 94,420 26,334 (42,832 ) (16,498 ) (0.18 ) (0.18 ) (10.4 ) 0.28 0.28 16.6 60,009 52,010 96,396 15,623 64,829 80,452 0.87 0.86 51.1 0.17 0.17 9.9 2007 67,310 58,855 90,756 35,409 917 36,326 0.39 0.38 22.9 0.38 0.38 22.3 Quarter ended 31 December 30 September 30 June 31 March Net interest income after provision for credit losses Non-interest income Total non-interest expense Net income before gains and losses Other gains and losses Net income for the quarter Earnings per share ($) * Basic Diluted Return on shareholders’ equity (%) Earnings per share before other gains (losses)($) * Basic Diluted Return on shareholders’ equity before other gains (losses) (%) 65,924 60,239 87,289 38,874 (4,118 ) 34,756 0.37 0.36 22.9 0.42 0.40 25.6 63,786 55,358 81,378 37,766 1,880 39,646 0.43 0.42 27.1 0.41 0.40 25.8 61,649 53,534 80,140 35,043 866 35,909 0.38 0.37 25.1 0.37 0.37 24.5 59,258 50,551 75,161 34,648 1,036 35,684 0.38 0.37 25.8 0.37 0.36 25.0 * All prior period per share data have been restated to reflect the one for ten stock dividend in February 2008 and the three for one stock split in August 2007. Financial sUmmaRY (In $ thousands, except per share data) Year ended 31 December 2008 2007 2006 2005 2004 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 before gains and losses Other gains and losses Net income after other gains and losses Dividends paid Financial ratios Return on assets Return on shareholders’ equity Total capital funds to total assets ratio Tier 1 capital ratio Total capital ratio Efficiency ratio Per share ($) * Net income (diluted) Dividends declared ** Net book value Number of employees Bermuda Overseas Total 2,221,390 3,824,079 4,418,277 197,155 10,911,844 9,801,269 282,296 518,440 251,436 103,890 183,152 167,335 113,890 (109,051 ) 4,839 57,733 0.04% 0.8% 7.3% 10.6% 11.2% 72.8% 0.05 0.56 5.64 803 889 1,692 2,517,012 4,744,989 4,124,764 215,379 11,910,920 10,747,971 284,191 629,330 3,151,191 3,786,793 3,760,745 171,326 11,132,802 10,042,832 280,168 549,553 250,617 219,346 184,751 139,217 146,331 (336 ) 145,995 54,366 1.2% 25.2% 7.7% 8.6% 13.0% 65.7% 1.53 0.64 6.76 843 1,007 1,850 215,221 199,831 162,504 118,465 127,906 6,177 134,083 46,496 1.3% 24.6% 7.5% 8.9% 13.5% 64.8% 1.39 0.60 5.87 845 885 1,730 Shareholder data Number of shareholders Number of common shares (in thousands) * 4,465 91,927 4,201 84,553 3,915 28,375 2,849,920 2,916,399 3,085,594 141,708 9,197,566 8,240,109 278,679 495,226 182,174 172,955 144,331 101,447 108,495 856 109,351 38,504 1.2% 23.6% 8.4% 8.6% 13.1% 66.4% 1.16 0.56 5.36 789 808 1,597 3,878 25,429 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 83,863 6,603 90,466 32,217 1.1% 21.2% 6.6% 7.3% 10.7% 69.1% 0.96 0.52 4.72 786 766 1,552 3,778 22,745 * Actual outstanding; excludes common shares held as treasury stock and common shares held by the Bank’s Stock Option Trust. **4¢ payable in shares for 2008. All prior period per share data, with the exception of dividends, have been restated to reflect the one for ten stock dividends in February 2008, August 2006, 2005 and 2004. All prior period per share data have been restated to reflect the three for one stock split in August 2007. The number of shares in 2007 increased primarily due to the three for one stock split. 40 Butterfield Annual Report 2008 41 managEmEnT’s Financial REpORTing REspOnsiBiliTY indEpEndEnT aUdiTORs’ REpORT TO THE sHaREHOldERs 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 5 March 2009 Richard J. Ferrett Executive Vice President & Chief Financial Officer 5 March 2009 42 Butterfield Annual Report 2008 43 cOnsOlidaTEd BalancE sHEET As at 31 December (In $ thousands) cOnsOlidaTEd sTaTEmEnT OF incOmE For the year ended 31 December (In $ thousands, except per share data) 2008 2007 2008 2007 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 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 260,000,000 (31 December 2007 100,000,000)) Additional paid in capital Retained earnings (accumulated deficit) 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. 572,441 1,648,949 2,221,390 48,329 579,799 3,195,951 3,824,079 4,418,277 197,155 39,567 14,364 57,250 139,762 10,911,844 267,261 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 11,910,920 920,866 1,042,062 8,485,309 395,094 9,801,269 120,038 24,931 3,819 161,051 309,839 282,296 10,393,404 98,400 604,116 (35,006 ) (82,700 ) (66,370 ) 518,440 10,911,844 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 Non-interest income Asset management Banking Foreign exchange revenue Investment and pension fund administration Trust Custody and other administration services 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 41,308 37,562 45,475 35,583 23,578 25,490 3,945 212,941 264,570 193,006 80,519 538,095 269,668 13,946 283,614 254,481 (3,045 ) 251,436 38,260 37,119 38,717 49,256 22,988 24,316 9,026 219,682 284,695 253,831 124,608 663,134 395,681 14,853 410,534 252,600 (1,983 ) 250,617 Revenue before gains and losses 464,377 470,299 Gain on sale of subsidiaries and affiliate Goodwill impairment Realised / unrealised (losses) gains on trading securities Realised / unrealised losses on held to maturity investments Net other losses Total revenue Non-interest expense Salaries and other employee benefits Technology and communications Professional and outside services Property Non-income taxes Amortisation of intangible assets Marketing Other expenses Total non-interest expense Net income before income taxes Income taxes Net income Earnings per share Basic Diluted 115,479 (5,220 ) (6,356 ) (151,772 ) (61,182 ) 355,326 183,152 41,149 34,529 32,140 15,132 7,316 7,140 26,887 347,445 7,881 (3,042 ) 4,839 0.05 0.05 170 - 3,221 - (3,727 ) 469,963 184,751 28,741 22,304 30,856 14,152 6,916 7,131 22,140 316,991 152,972 (6,977 ) 145,995 1.56 1.53 Robert A. Mulderig Chairman of the Board Robert Steinhoff Vice Chairman Alan R. Thompson President & Chief Executive Officer Earnings per share comparative figures have been restated for the one for ten stock dividend in February 2008. The accompanying notes are an integral part of these consolidated financial statements. 44 Butterfield Annual Report 2008 45 cOnsOlidaTEd sTaTEmEnT OF cHangEs in sHaREHOldERs’ EqUiTY and cOmpREHEnsiVE incOmE For the year ended 31 December (In $ thousands) cOnsOlidaTEd sTaTEmEnT OF casH FlOWs For the year ended 31 December (In $ thousands) Common share capital Authorised: 260,000,000 shares (2007: 100,000,000) of par value $1 each Issued Issued and outstanding at beginning of year (January 2008: 89,456,019 shares; January 2007: 29,869,754 shares) Dividend reinvestment (December 2008: 791,232 shares; December 2007: 306,914 shares) of which issued from treasury common stock (December 2008: 791,232 shares; December 2007: 232,392 shares) Stock dividend (December 2008: 8,943,839 shares; December 2007: nil shares) Stock split (December 2008: nil shares; December 2007: 59,637,346 shares) Shares repurchased and cancelled (December 2008: nil shares; December 2007: 125,603 shares) Issued and outstanding at end of year (December 2008: 98,399,858 shares; December 2007: 89,456,019 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 Stamp duty paid in order to increase authorised common share capital Reduction of additional paid in capital on transfer and sale of treasury shares Common shares repurchased and cancelled Balance at end of year Retained earnings (accumulated deficit) Appropriated - general reserve Unappropriated at beginning of year Effect of changing employee future benefit plans’ measurement date Net income for year Cash dividends declared Stock dividend Balance at end of year Treasury common stock Balance at beginning of year (January 2008: 4,903,324 shares; January 2007: 1,494,584 shares) Net purchases Balance at end of year (December 2008: 6,473,180 shares; December 2007: 4,903,324 shares) 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 Balance at end of year Total shareholders’ equity Comprehensive (loss) income Net income Other comprehensive (loss) income Total comprehensive (loss) income The accompanying notes are an integral part of these consolidated financial statements. 46 2008 2007 89,456 29,870 791 (791 ) 8,944 - - 307 (232 ) - 59,637 (126 ) 98,400 89,456 455,114 12,845 (12,845 ) - 149,969 3,561 (800 ) (3,728 ) - 604,116 100,000 67,607 (1,068 ) 4,839 (47,471 ) (158,913 ) (35,006 ) (71,576 ) (11,124 ) (82,700 ) (11,271 ) (21,104 ) 153 - (34,148 ) (66,370 ) 518,440 4,839 (55,099 ) (50,260 ) 514,872 12,403 (8,197 ) (59,637 ) - 2,959 - - (7,286 ) 455,114 100,000 (23,119 ) - 145,995 (55,269 ) - 167,607 (37,039 ) (34,537 ) (71,576 ) (35,031 ) 542 (398 ) 38 23,578 (11,271 ) 629,330 145,995 23,760 169,755 Cash flows from operating activities Net income Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortisation Goodwill impairment Write down of computer software Decrease (increase) in carrying value of investments in affiliates Share-based compensation Gain on sale of subsidiaries and affiliate Loss (gain) on sale of premises and equipment Realised and unrealised net gains on private equity investments Loss on credit derivative instruments Realised and unrealised losses on held to maturity investments Provision for credit losses (recoveries) Decrease (increase) in accrued interest receivable Increase in other assets (Decrease) increase in accrued interest payable Increase (decrease) in other liabilities Net change in trading account securities Cash used in operating activities Cash flows from investing activities Net decrease 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 Proceeds on sale of private equity investment Proceeds on sale of subsidiaries Purchase of subsidiary Cash provided by (used in) investing activities Cash flows from financing activities Net (decrease) increase in demand and term deposit liabilities Issuance of subordinated capital Repayment of subordinated capital Proceeds from dividend re-investment plan Stamp duty paid to increase authorised share capital Proceeds from sale of treasury shares Shares repurchased Treasury stock Cash dividend paid Cash (used in) provided by financing activities 2008 2007 4,839 145,995 28,985 5,220 29,180 2,223 6,139 (115,479 ) 937 (21,619 ) 52,275 151,772 3,045 23,017 (20,991 ) (6,672 ) 53,589 196,460 53,120 249,580 372,342 (37,915 ) (592,358 ) 4,284,395 (4,104,788 ) 5,834,046 (5,721,918 ) 12,873 133,000 - 179,677 (41,440 ) 78,000 (78,000 ) 11,765 (800 ) 4,994 (38,339 ) 4,149 (57,733 ) (117,404 ) 27,536 - - (1,051 ) 5,670 (170 ) (569 ) (4,388 ) 6,250 - 1,983 (4,069 ) (15,608 ) 1,114 (2,977 ) 159,716 (1,872 ) 157,844 573,681 (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 ) (7,293 ) (54,366 ) 569,578 Effect of exchange rates on cash and demand deposits with banks (6,673) (35 ) Net increase (decrease) in cash and demand deposits with banks 305,180 (74,321 ) 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. 267,261 572,441 278,869 3,808 341,582 267,261 411,082 5,428 Butterfield Annual Report 2008 47 nOTEs TO cOnsOlidaTEd Financial sTaTEmEnTs 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. For the years ended 31 December 2008 and 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, credit and default 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. 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 of investments is determined in accordance with note 1 p). 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. (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. The Bank accounts for and discloses non-accrual 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 provision for credit losses. (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 and incurred 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 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. (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 Statement of Financial Accounting Standard (SFAS) No. 34 Capitalisation of Interest Cost (SFAS 34). (l) Derivatives In accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133), all derivatives are recognised on the Consolidated Balance Sheet at their fair value. SFAS 133, as amended by SFAS No. 138 Accounting for Certain Derivative Instruments and Certain Hedging Activities (SFAS 138) and SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 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). 48 Butterfield Annual Report 2008 49 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. 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. 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 SFAS No. 87 Employers’ Accounting for Pensions (SFAS 87) and SFAS No. 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS 88). Its post-retirement medical and life insurance plans are accounted for in accordance with SFAS No. 106 Employers’ Accounting for Post-retirement Benefits Other Than Pensions (SFAS 106). Both plans are also accounted for in accordance with SFAS No. 158 (SFAS 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. 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 SFAS No. 123(R) Share-Based Payment (SFAS 123(R)), 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. Banking services fees primarily include fees for certain loan origination, letters of credit, other financial guarantees, compensating balances and other financial services related products. Certain loan origination fees are primarily overdraft and other revolving lines of credit fees. These fees are recognised as revenue over the period of the underlying facilities. Letters of credit fees are recognised as revenue over the period in which the related service is provided. All other fees are recognised as revenue in the period in which the service is provided. Loan interest income includes the amortisation of non-refundable loan origination and commitment fees. These fees are deferred (except for certain retrospectively determined fees meeting specified criteria) and recognised as an adjustment of yield over the life of the related loan. In accordance with SFAS No. 91 Accounting for Non-refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 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 SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Bank determines the fair values of its financial instruments based on the fair value hierarchy established in SFAS 157 which requires an entity to maximise the use of observable inputs and minimise the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. The Bank carries at fair value investments classified as trading and available for sale, and derivative assets and liabilities. The Bank carries a private equity investment in a credit card company at fair value in accordance with SFAS 159. Level 1, 2 and 3 valuation inputs Financial instruments are considered Level 1 when valuation can be based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation. The following methods and assumptions were used in the determination of the fair value of financial instruments: Cash and deposits with banks The fair value of cash and deposits with banks, being short term in nature, is deemed to equate to the carrying value. Investments The fair values of investments are determined based on observable quoted prices for identical assets or liabilities in active markets when available. If unavailable, observable inputs from similar items in active markets or identical/similar items with inactive markets are used. In the absence of observable quoted prices unobservable inputs are used. 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. Accrued interest The carrying values of accrued interest receivable and payable are assumed to approximate their fair values given their short-term nature. 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. Subordinated capital The fair value of the subordinated capital has been estimated by discounting the contractual cash flows, using current market interest rates. 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. 50 Butterfield Annual Report 2008 51 Business units The fair value of business units for which goodwill is recognised is determined by discounting estimated future cash flows using discount rates reflecting valuation-date market conditions and risks specific to the business unit. (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. On 1 January 2007, the Bank adopted the provisions of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). Accordingly, the Bank initially recognises the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The adoption of FIN 48 did not result in the derecognition of tax positions for accounting purposes. The Bank recognises interest accrued and penalties related to unrecognised tax benefits in operating expenses. (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 2008 and 2007 (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. (u) Consolidation of Variable Interest Entities FIN 46(R) 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 a periodic 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 and diVEsTiTUREs Divestiture of Fund Services Businesses On 11 September 2008, the Bank completed the sale and merger of its Bermuda-based and international Fund Services businesses with those of Fulcrum Group to form the new company, Butterfield Fulcrum Group. In relation with this transaction, the Bank has recognised a gain of $115.5 million which is included in Gain on sale of subsidiaries and affiliate in the Statement of Income. The Bank received a 40% ownership interest in Butterfield Fulcrum Group (on a fully diluted basis) and an upfront cash payment of $133 million. The Bank loaned Fulcrum Group $65 million on commercial market terms to finance a portion of the cash proceeds. The Bank’s Fund Services businesses sold were previously reported under the Wealth Management & Fiduciary Services and Investment & Pension Fund Administration segment. The equity ownership in Butterfield Fulcrum Group is also reported in the Wealth Management & Fiduciary Services and Investment & Pension Fund Administration segment. A transitional services agreement provides for certain key services such as information technology support, human resources support and premises to continue over an 18-month period, the value of which was deducted from the gain. Acquisition of Bentley Reid Group Limited 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 ($7.73 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 nOTE 3: casH and dEpOsiTs WiTH Banks 31 December Unrestricted Non-interest earning Cash and demand deposits 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 Bentley Reid 9,154 2,069 17,705 2,206 31,134 2,781 28,353 28,353 2008 Non- Bermuda Bermuda 2007 Total Non- Bermuda Bermuda Total 119,737 23,651 143,388 56,667 41,622 98,289 18,964 - - 18,964 1,998,496 2,017,460 19,591 3,303 2,021,390 2,040,354 19,591 3,303 255,443 - - 255,443 2,010,071 2,265,514 43,117 64,123 2,117,311 2,372,754 43,117 64,123 Total unrestricted cash and deposits 138,701 2,045,041 2,183,742 312,110 2,158,933 2,471,043 Affected by drawing restrictions related to minimum reserve and derivative margin requirements Non-interest earning Demand deposits Interest earning Deposits maturing within three months - 19,289 19,289 - 27,876 27,876 17,009 1,350 18,359 5,032 13,061 18,093 Total restricted deposits 17,009 20,639 37,648 5,032 40,937 45,969 Total cash and deposits with banks 155,710 2,065,680 2,221,390 317,142 2,199,870 2,517,012 52 Butterfield Annual Report 2008 53 nOTE 4: inVEsTmEnTs The following table presents securities by remaining term to maturity: Remaining term to maturity 31 December 2008 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 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 Within 3 months 3 to 12 months 1 to 5 years Over No specific Carrying value maturity 5 years - - - 731 - 731 3,945 - 3,945 3,186 - 3,186 - 40,467 40,467 7,862 40,467 48,329 471,249 9,773 - 481,022 95,959 - - 95,959 - - - - - - - - - - 2,818 2,818 567,208 9,773 2,818 579,799 - 51,000 3,675 - 187,073 15,416 257,164 - 304,000 61,611 6,275 326,723 26,960 38,129 156,406 164,411 12,083 739,911 449,572 725,569 1,560,512 75,558 - 296,784 13,293 6,326 258,389 650,350 - - - - 113,687 511,406 526,481 31,651 2,356 1,262,389 750,337 2,356 3,195,951 - 738,186 822,259 1,564,457 653,536 45,641 3,824,079 - 376,492 361,694 738,186 - - 712,447 1,324,334 109,812 240,123 822,259 1,564,457 - 542,955 110,581 653,536 440 440 37,631 2,993,859 829,780 45,641 3,824,079 7,570 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 - 47,927 47,927 10,607 47,927 58,534 669,729 11,996 - - 681,725 248,344 - - - 248,344 - - - - - - - 1,838 - 1,838 - - - 331 331 918,073 11,996 1,838 331 932,238 - 81,152 - 19,997 186,419 90,831 378,399 59,987 149,260 - 22,205 206,082 18,335 455,869 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 - - - 1,887 200,731 230,412 828,480 76,311 - 1,785,376 632,907 - 1,887 3,754,217 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 1,422,002 492 492 45,323 3,077,901 4,330 1,666,596 50,145 4,744,989 Investments at carrying value includes $2,536 million (2007: $3,062 million) of floating-rate instruments and $1,248 million (2007: $1,634 million) of fixed-rate instruments. The approximate yield on floating-rate securities at 31 December 2008 was 2.25% (2007: 5.22%), while the approximate yield on fixed-rate securities was 4.10% (2007: 5.67%). Certificates of deposit with a carrying value of $44.4 million included in the held to maturity category are restricted from sale in accordance with a credit enhancement agreement. 54 Butterfield Annual Report 2008 55 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 Total available for sale 31 December 2008 Gross Gross unrealised unrealised losses gains Cost 2007 Gross unrealised gains Cost Gross unrealised losses Fair value Fair value 565,321 9,773 - 2,818 577,912 2,017 - - - 2,017 (130 ) - - - (130 ) 567,208 9,773 - 2,818 579,799 916,187 11,996 1,838 192 930,213 2,004 - - 139 2,143 (118 ) - - - (118 ) 918,073 11,996 1,838 331 932,238 2008 2007 Gross Gross Amortised unrealised unrealised losses gains cost Gross Fair Amortised unrealised gains cost value Gross unrealised losses Fair value Held to maturity US government and federal agencies / corporations 113,687 511,406 Certificates of deposit 526,481 Collateralised mortgage obligations 31,651 Debt securities issued by non-US governments 1,262,389 Corporate debt securities 750,337 Other, primarily asset-backed securities 3,195,951 Total held to maturity 28 2,812 372 551 2,091 - 5,854 (3,784 ) - (211,060 ) (53 ) 200,731 109,931 230,412 514,218 828,480 315,793 76,311 32,149 (79,763 ) 1,184,717 1,785,376 632,907 601,814 (148,523 ) (443,183 ) 2,758,622 3,754,217 113 (821 ) (48 ) 133 719 (115,976 ) (36 ) 809 (14,317 ) 853 (33,691 ) 25 2,652 (164,889 ) 200,023 230,497 713,223 77,084 1,771,912 599,241 3,591,980 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 2008 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 Gross Fair unrealised losses value Gross Fair unrealised losses value Total Total gross fair unrealised losses value 125,310 (130 ) - - 125,310 (130 ) 16,065 16,083 2,964 136,722 44,627 (874 ) (2,402 ) (36 ) (3,524 ) (11,133 ) 90,065 291,202 983 885,738 356,771 (2,910 ) (208,657 ) (17 ) (76,239 ) (137,392 ) 106,130 307,285 3,947 1,022,460 401,398 (3,784 ) (211,059 ) (53 ) (79,763 ) (148,525 ) 216,461 (17,969 ) 1,624,759 (425,215 ) 1,841,220 (443,184 ) Total securities with unrealised losses 341,771 (18,099 ) 1,624,759 (425,215 ) 1,966,530 (443,314 ) 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 Fair unrealised losses 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 - 1,116,584 507,628 (553 ) (48 ) (113,931 ) - (12,775 ) (24,900 ) 47,287 - 134,776 40,958 205,356 48,498 (268 ) - (2,045 ) (36 ) (1,542 ) (8,791 ) 142,515 115,108 644,580 40,958 1,321,940 556,126 (821 ) (48 ) (115,976 ) (36 ) (14,317 ) (33,691 ) 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 ) Management conducts an ongoing review to identify and evaluate securities that show objective indications of impairment. An investment is written down to fair value 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, current ratings from ratings agencies, the length of time that the security has been in an unrealised loss position, the financial condition of the issuer and prospects for recovery of contractual payments (principal and interest), 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 widening credit spreads caused by illiquidity and credit concerns resulting from the 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, and the unrealised losses are primarily in higher rated securities, Management believes these losses are a result of technical spread widening rather than fundamental deterioration. The Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, and accordingly Management does not believe these investments to be other-than-temporarily impaired. 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 observable market prices or observable market parameters. When observable market prices and parameters do not exist as was the case in a number of circumstances at 31 December 2008, judgement is necessary to estimate fair value which gives rise to added uncertainty in the valuation process. 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 mortgage-backed securities where the fair value is significantly lower than amortised cost using a widely employed industry modelling 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-backed securities with fair values significantly lower than amortised cost were stress tested using pipeline default and cumulative lifetime loss severities from published independent third party sources. 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 also considered expected prepayment rates and speeds, expected annual default rates, expected loss on existing balances, timing of losses, projected (forward) Libor rates, expected cumulative lifetime loss rates and recovery rates between 40% - 45% on default. During its assessment of other-than-temporary impairment Management determined that it did not have sufficient certainty that the issuers of certain securities could service all of the contractually obligated principal and interest payments. Therefore other-than-temporary impairment has taken place and these investments were written down to their fair value. Other-than-temporary impairments of $76.392 million and $19.783 million were recorded on the Bank’s 56 Butterfield Annual Report 2008 57 investments in collateralised mortgage obligations and a CDO of residential mortgages held in the other, primarily asset-backed securities category respectively. Realised losses of $23.032 million and $32.6 million were recorded on a CDO of residential mortgages held in the other, primarily asset-backed securities category and on corporate debt securities respectively. Other currently non-investment grade securities in the collateralised mortgage obligation and other, primarily asset backed portfolios are not immune to future assessment for other-than-temporary impairment. The following table presents realised and unrealised gains and losses on trading securities that were recognised during the year: In respect of the following categories, except as noted in the previous paragraph, the Bank does not consider those investments to be other-than-temporarily impaired at 31 December 2008: Year ended 31 December Certificates of deposit The unrealised losses on the Bank’s certificates of deposit were due to widening credit spreads caused by illiquidity and credit concerns resulting from the disruption in the financial markets. However, given that all of these securities are investment grade securities, and the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, management 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 widening credit spreads caused by illiquidity and credit concerns resulting from the disruption in the financial markets, and the weakening of the US housing market. However, given that all of these securities are investment grade securities, and the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, Management 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 widening credit spreads caused by illiquidity and credit concerns resulting from the 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 the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, Management does not believe these investments to be other-than-temporarily impaired. 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 widening credit spreads caused by illiquidity and credit concerns resulting from the disruption in the financial markets. Given that these securities are investment grade, and the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, Management does not believe these investments to be other-than-temporarily impaired. Corporate debt securities The unrealised losses on the Bank’s investments in corporate bonds were due to widening credit spreads caused by illiquidity and credit concerns resulting from the disruption in the financial markets, and the weakening of the US housing market. However, given that these securities are predominantly investment grade, and the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, Management does not believe these investments to be other-than-temporarily impaired. Other, primarily asset-backed securities The unrealised losses on the Bank’s other investments, primarily asset-backed securities were due to widening credit spreads caused by illiquidity and credit concerns resulting from the 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 the Bank has the ability and intent to hold these investments until there is a recovery of carrying value, which may be at maturity, Management does not believe these investments to be other-than-temporarily impaired. In February 2008 the Bank purchased from a related party, namely the AAAm rated Butterfield Money Market Fund Ltd. (BMMFL), $75.0 million of asset backed security for fair 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. In July 2008 the Bank purchased from BMMFL $81.7 million of primarily collateralised mortgage obligations at fair value at the time. The Bank holds the purchased securities in its held to maturity portfolio. 2008 2007 (6,356 ) - 6,356 ) 3,252 (31 ) 3,221 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. nOTE 5: lOans The composition of the loan portfolio at each of the indicated dates was as follows: 31 December Commercial loans Commercial and industrial Commercial real estate Commercial mortgage Construction Financial institutions Government Overdrafts Total commercial loans Less allowance for credit losses on commercial loans Total commercial loans after allowance for credit losses Consumer loans Automobile financing Credit card Mortgages Overdrafts Other consumer Total consumer loans Less allowance for credit losses on consumer loans Total consumer loans after allowance for credit losses Total loans Less allowance for credit losses Net loans 2008 Non- Bermuda Bermuda 2007 Non- Bermuda Bermuda Total Total 655,970 176,316 832,286 173,356 205,101 154,359 36,721 81,692 1,307,199 (11,953 ) 1,295,246 666,572 493,216 216,237 11,136 194,799 40,440 44,889 8,168 182,822 264,514 912,098 2,219,297 (13,507 ) 910,544 2,205,790 (1,554 ) 62,991 54,599 1,224,148 9,075 123,641 1,474,454 (10,003 ) 1,464,451 5,092 22,663 68,083 77,262 477,378 1,701,526 13,570 4,495 243,294 366,935 752,922 2,227,376 (14,889 ) 748,036 2,212,487 (4,886 ) 2,781,653 1,665,020 4,446,673 (28,396 ) 2,759,697 1,658,580 4,418,277 (21,956 ) (6,440 ) 620,973 - 194,911 194,130 211,596 15,600 42,758 1,279,968 (12,206 ) 1,267,762 59,301 51,185 1,053,387 7,734 80,580 1,252,187 (8,965 ) 1,243,222 156,245 777,218 782,976 588,065 205,481 11,351 247,476 35,880 18,617 3,017 167,701 210,459 962,259 2,242,227 (13,963 ) 960,502 2,228,264 (1,757 ) 65,407 6,106 73,294 22,109 333,795 1,387,182 14,181 6,447 288,778 369,359 657,235 1,909,423 (12,923 ) 653,277 1,896,500 (3,958 ) 2,532,155 (21,171 ) 2,510,984 1,619,494 4,151,650 (5,715 ) (26,886 ) 1,613,779 4,124,764 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 2008 is 5.72% (2007: 7.21%). Exclusive of US residential mortgage backed securities, total investments were $3.5 billion, with a market value of $3.3 billion on 31 December 2008. 92% of the Bank’s investments remained in securities rated ‘A’ or higher as at 31 December 2008. The table below sets forth information about the Bank’s non-accrual loans: Significant risk and uncertainty In its held to maturity portfolio, the Bank holds collateralised mortgage obligations (the CMO Investments) at amortised cost of $53.4 million. Although realisation of the CMO Investments’ amortised cost is not assured, Management does not believe the CMO Investments to be other-than-temporarily impaired. The amount of the CMO Investments, however, could be reduced if estimates of cumulative lifetime loss rates, losses on existing balances, loss severity, delinquency default rates or certain other factors increase in the future, and it is possible that the rate of increase could be rapid. If these factors increase and Management then determines that it is not probable that contractual interest and principal payments will be received, an other-than-temporary impairment equal to the difference between carrying value and fair market value of the CMO Investments shall be recorded in income. Management’s best estimate of this amount is $44.0 million. 58 31 December Commercial loans - Bermuda Commercial loans - Non-Bermuda Consumer loans - Bermuda Consumer loans - Non-Bermuda Commercial and residential mortgages - Bermuda Commercial and residential mortgages - Non-Bermuda 2008 Specific Gross allowance Total Gross 2007 Specific allowance 2,942 5,053 (1,955 ) (106 ) 987 4,947 2,561 1,500 (115 ) (598 ) 2,446 902 3,354 8,746 1,416 1,381 (2,272 ) (201 ) (179 ) (747 ) Total 1,082 8,545 1,237 634 11,706 12,738 36,500 (165 ) (519 ) (3,458 ) 11,541 12,219 33,042 11,321 10,532 36,750 (165 ) (300 ) (3,864 ) 11,156 10,232 32,886 Butterfield Annual Report 2008 59 For the year ended 31 December 2008, the amount of gross interest income that would have been recorded had impaired loans been current was $3.4 million (2007: $3.1 million). For the year ended 31 December 2008, the Bank recovered overdue interest of $0.3 million (2007: $0.4 million) on impaired loans that were repaid in the year. The average balance of impaired loans during the year ended 31 December 2008 was $32.3 million (2007: $34.7 million). The table below summarises the changes in the allowances for credit losses: 31 December Allowance for credit losses at beginning of year Provision this year Recoveries Charge-offs Other Allowance for credit losses at end of year 2008 General allowances allowance Specific Specific Total allowances 2007 General allowance Total 3,865 3,220 - (3,542 ) (85 ) 3,458 23,021 (175 ) 2,539 (447 ) - 24,938 26,886 3,045 2,539 (3,989 ) (85 ) 28,396 3,615 2,794 316 (2,860 ) - 3,865 22,118 (811 ) 2,380 (666 ) - 23,021 25,733 1,983 2,696 (3,526 ) - 26,886 The table below presents information about the loan delinquencies, and charge-offs: 31 December Credit card Automobile financing Other consumer and mortgages Consumer loans Commercial loans Total loans reported nOTE 6: cREdiT Risk cOncEnTRaTiOns 2008 Loans 90 delinquent days or more Total 2007 Loans 90 delinquent days or more Total loans past due Charge-offs loans past due Charge-offs 3,817 1,264 38,678 43,759 370 1,046 22,585 24,001 1,696 445 1,743 3,884 6,001 2,563 51,854 60,418 788 1,524 19,668 21,980 26,634 70,393 14,930 38,931 105 3,989 35,694 96,112 16,293 38,273 1,534 238 1,126 2,898 628 3,526 The following table summarises the credit exposure of the Bank by region: 2008 2007 31 December Bermuda Barbados Cayman Guernsey The Bahamas United Kingdom Sub-total General allowance Total On-balance Off-balance Total credit On-balance Off-balance Total credit exposure sheet exposure sheet sheet sheet 50,991 186,676 162,661 5,701 55,109 2,779,417 184,173 483,934 414,536 71,528 509,627 766,292 3,545,709 235,164 670,610 577,197 77,229 564,736 4,443,215 1,227,430 5,670,645 (24,938 ) 4,418,277 1,227,430 5,645,707 (24,938 ) - 2,529,540 148,447 351,776 465,663 41,368 610,992 4,147,786 (23,022 ) 4,124,764 4,091 137,227 333,850 - 110,744 661,089 3,190,629 152,538 489,003 799,513 41,368 721,736 1,247,001 5,394,787 (23,022 ) - 1,247,001 5,371,765 nOTE 7: pREmisEs, EqUipmEnT and cOmpUTER sOFTWaRE The following table summarises land, buildings, equipment and computer software: 31 December Land Buildings Equipment Computer software Total 31 December 2008 2007 Accumulated Cost depreciation Net carrying value Accumulated Cost depreciation Net carrying value 13,726 163,186 51,037 72,941 300,890 - (36,511 ) (35,151 ) (32,073 ) (103,735 ) 13,726 126,675 15,886 40,868 197,155 13,726 154,737 60,332 86,254 315,049 - (34,537 ) (39,033 ) (26,100 ) (99,670 ) 13,726 120,200 21,299 60,154 215,379 2008 2007 5,225 3,565 12,583 21,373 4,755 3,407 7,742 15,904 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. Depreciation Buildings (included in property expense) Equipment (included in property expense) Computer hardware and software (included in technology & communication expense) Total depreciation charged to operating expenses The following table summarises the credit exposure of the Bank by business sector: nOTE 8: gOOdWill and OTHER inTangiBlE assETs 2008 2007 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 On-balance Off-balance Total credit On-balance Off-balance Total credit exposure sheet exposure sheet sheet sheet The following table presents goodwill and other intangible assets by business segment: - 409,692 971,055 93,480 2,226,198 32,142 682,148 28,500 524,655 934,347 474,782 1,445,837 93,480 166,725 2,392,923 36,957 732,746 34,355 4,443,215 1,227,430 5,670,645 (24,938 ) 4,418,277 1,227,430 5,645,707 4,815 50,598 5,855 (24,938 ) - 482,765 899,653 29,049 1,824,497 57,787 828,180 25,855 4,147,786 (23,022 ) 4,124,764 - 610,577 1,093,342 323,130 1,222,783 29,049 179,814 2,004,311 95,157 37,370 921,487 93,307 28,658 2,803 1,247,001 5,394,787 (23,022 ) - 1,247,001 5,371,765 Goodwill Business segment Balance as at 31 December 2006 Foreign exchange translation adjustment Balance as at 31 December 2007 Goodwill sold during the year Goodwill impairment Foreign exchange translation adjustment Balance as at 31 December 2008 Barbados Guernsey The United Bahamas Kingdom 5,220 - 5,220 - (5,220 ) - - 8,363 114 8,477 - - (2,250 ) 6,227 1,923 - 1,923 (1,032 ) - - 891 9,512 128 9,640 - - (2,394 ) 7,246 Total 25,018 242 25,260 (1,032 ) (5,220 ) (4,644 ) 14,364 60 Butterfield Annual Report 2008 61 Customer relationship intangible assets 31 December Bermuda Barbados Cayman Guernsey The Bahamas United Kingdom Malta Hong Kong Total 2008 Gross carrying Accumulated amount amortisation 8,341 6,681 1,211 38,582 5,090 18,002 3,284 7,224 88,415 (2,367 ) (2,263 ) (349 ) (18,127 ) (1,833 ) (5,407 ) (255 ) (564 ) (31,165 ) Net carrying amount 5,974 4,418 862 20,455 3,257 12,595 3,029 6,660 57,250 2007 Gross carrying Accumulated amount amortisation Net carrying amount 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 ) 24,060 4,865 943 31,357 4,971 15,034 - - 81,230 There have been no impairment losses for the years ended 31 December 2008 and 2007, other than as noted above in the Barbados segment. The estimated aggregate amortisation expense for each of the succeeding years until 31 December 2013 is $7.1 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 2008, the Bank acquired new customer relationships for nil (2007: $17.7 million) and sold customer relationship having a book value of $1.2 million. The amortisation expense amounted to $7.3 million (2007: $6.9 million) and the foreign exchange translation adjustment decreased the net carrying amount by $15.5 million (2007: increased by $0.7 million). During the year, customer relationship intangible assets related to the acquisition of Bentley Reid business units located in Malta and Hong Kong were reclassified out of the Bermuda segment into their respective geographical segments. nOTE 9: cUsTOmER dEpOsiTs and dEpOsiTs FROm Banks (a) By Maturity 31 December 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 Customers 2008 Banks Total Customers Banks Total 2007 920,866 5,031,372 5,952,238 - 920,866 71,423 5,102,795 71,423 6,023,661 1,042,062 4,869,122 5,911,184 - 1,042,062 154,769 5,023,891 154,769 6,065,953 3,045,722 196,296 211,919 3,453,937 320,931 3,366,653 199,036 211,919 323,671 3,777,608 2,740 - 4,153,351 178,814 198,230 4,530,395 147,080 4,300,431 183,357 198,230 151,623 4,682,018 4,543 - Total 9,406,175 395,094 9,801,269 10,441,579 306,392 10,747,971 (b) By Type and Location 31 December Bermuda Customers Banks Barbados Customers Banks Cayman Customers Banks Guernsey (a) Customers Banks The Bahamas Customers Banks United Kingdom (a) Customers Banks Total Customers Total Banks Total 2008 2007 Payable Payable on a on demand fixed date Total on demand Payable Payable on a fixed date Total 2,368,312 1,332,483 3,700,795 266,870 208,304 58,566 2,229,386 86,562 1,626,180 3,855,566 113,640 27,078 156,248 - 75,393 - 231,641 - 165,532 2,566 60,609 20,549 226,141 23,115 2,216,042 - 778,153 2,994,195 110,597 110,597 1,518,295 12,848 839,220 2,357,515 111,557 98,709 613,989 7,676 673,832 1,287,821 7,676 - 962,832 44,649 1,143,182 2,106,014 45,155 506 46,907 - 69,666 - 116,573 - 72,393 - 81,967 - 154,360 - 550,740 5,181 524,410 1,075,150 9,951 5,952,238 3,453,937 9,406,175 395,094 6,023,661 3,777,608 9,801,269 323,671 71,423 4,770 962,746 8,144 5,911,184 154,769 6,065,953 4,781 779,237 1,741,983 12,925 4,530,395 10,441,579 306,392 4,682,018 10,747,971 151,623 a) The decrease in the reported amounts of customer deposits and deposits from banks in the Guernsey and United Kingdom segments is partly due to movements in foreign exchange translation. 62 Butterfield Annual Report 2008 63 nOTE 10: EmplOYEE FUTURE BEnEFiTs The following table presents the expense constituents of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan: 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 31 December 2008 and 30 November 2007. Accumulated benefit obligation at end of year 102,897 - 109,978 - 2008 2007 Post-retirement Pension medical benefit plan plans Post-retirement Pension medical benefit plan plans Change in projected benefit obligation Opening projected benefit obligation Acquisitions/Change in measurement date 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 New acquisitions/Change in measurement date Actual return on plan assets Employer contribution Employee contributions Benefits paid Cost of settlement Foreign exchange translation adjustment Closing fair value of plan assets 120,212 176 2,854 310 7,233 (4,918 ) (2,775 ) (218 ) (14,884 ) 107,990 132,007 160 (17,058 ) 27,999 310 (4,918 ) (35 ) (16,530 ) 121,935 98,152 764 3,088 - 6,811 (1,663 ) - 12,800 - 119,952 - - - 1,663 - (1,663 ) - - - 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 ) 708 132,007 106,656 - 2,612 - 6,192 (1,240 ) - (16,068 ) - 98,152 - - - 1,240 - (1,240 ) - - - Annual benefit expense Service cost Interest cost Expected return on plan assets Amortisation of past service cost Amortisation of net actuarial loss Loss (gain) on settlement Defined benefit expense Defined contribution expense Total benefit expense Other changes recognised in other comprehensive loss Net loss arising during the period Amortisation of past service cost Amortisation of net actuarial (gain) loss Total changes recognised in other comprehensive loss 2008 Post-retirement Pension medical benefit plan plans 2007 Post-retirement Pension medical benefit plan plans 2,854 7,233 (8,739 ) 41 11 3 1,403 6,210 7,613 (22,680 ) 29 (22 ) (22,673 ) 3,088 6,811 N/A - 1,218 - 11,117 - 11,117 (12,693 ) - 1,218 (11,475 ) 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 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 $3.0 million and nil respectively. 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 $1.6 million. 31 December Actuarial assumptions used to determine annual benefit expense Weighted average discount rate Weighted average rate of compensation increases Weighted average expected long-term rate of return on plan assets Weighted average annual medical cost increase rate Actuarial assumptions used to determine benefit obligations at end of year 2008 Post-retirement Pension medical benefit plan plans 2007 Post-retirement Pension medical benefit plan plans 6.25% 4.00% 6.75% 6.70% N/A N/A 5.35% 3.65% 6.55% 5.75% N/A N/A N/A 9% to 5% in 2013 N/A 10% to 5% in 2013 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 13,945 - 13,945 (119,952 ) - (119,952 ) 11,795 167 11,962 (98,152 ) 89 (98,063 ) Weighted average discount rate Weighted average rate of compensation increases 6.15% 3.70% 6.10% N/A 6.25% 4.00% 6.70% N/A Weighted average annual medical cost increase rate N/A 8% to 5% in 2013 N/A 9% to 5% in 2013 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 14,031 (86 ) 13,945 - (119,952 ) (119,952 ) 11,962 - 11,962 - (98,063 ) (98,063 ) For 2008, 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 $2.3 million increase (2007: $1.9 million) and a $1.8 million decrease (2007: $1.5 million), respectively, and on the benefit obligation a $24.9 million increase (2007: $17.6 million) and a $19.4 million decrease (2007: $14.3 million), respectively. Amounts recognised in accumulated other comprehensive loss consist of: Net actuarial (loss) gain Past service cost Net amount recognised in accumulated other comprehensive loss (19,272 ) (32 ) (19,304 ) (32,616 ) - (32,616 ) 3,542 (89 ) 3,453 (21,141 ) - (21,141 ) 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. 64 Butterfield Annual Report 2008 65 The weighted average actual and target asset allocations of the pension plans by asset category, are as follows: 31 December Asset category Equity securities (including equity mutual funds) Debt securities (including debt mutual funds) Other Total 2008 Actual allocation Target allocation 2007 Actual allocation Target allocation 32% 60% 8% 100% 46% 53% 1% 100% 46% 44% 10% 100% 46% 52% 2% 100% 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 letters of guarantee does not exceed four years. The types and amounts of collateral security held by the Bank for these standby letters of credit and letters of guarantee 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 and letters of guarantee 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 and letters of guarantee. The fees are then recognised in income proportionately over the life of the credit agreements. At 31 December 2008, 42.3% (2007: 38.1%) 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 2008, 2.2% (2007: 3.1%) of the plans’ assets were invested in common shares of the Bank. The following table presents the outstanding financial guarantees with contractual amounts representing credit risk as follows: 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 2009 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 2009 2,700 3,400 Estimated benefit payments by year: 2009 2010 2011 2012 2013 2014 - 2018 3,900 4,600 4,800 5,000 5,200 29,700 3,400 3,800 4,200 4,500 4,800 30,000 The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $24.2 million and $21.4 million as at 31 December 2008 (nil as at 31 December 2007). As at 31 December 2008 and 2007 there were no pension plans that had 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, sourcing and long-term leases of nil, $163.0 million and $29.2 million respectively, as at 31 December 2008 (2007: $12.6 million, nil and $36.0 million respectively). Rental expense for premises leased on a long-term basis for the year ended 31 December 2008 amounted to $6.4 million (2007: $7.9 million). The following table summarises the Bank’s commitments for sourcing and long-term leases: Year 2009 2010 2011 2012 2013 2014 & thereafter 41,961 29,196 23,558 22,310 21,355 53,846 31 December Standby letters of credit Letters of guarantee Total 2008 Gross Collatera l Net Gross 2007 Collatera l Net 463,868 14,230 478,098 317,018 3,311 320,329 146,850 10,919 157,769 407,656 18,271 425,927 350,983 11,810 362,793 56,673 6,461 63,134 Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income. 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 unfunded legally binding commitments to extent credit with contractual amounts representing credit risk as follows: 31 December Commitments to extend credit Documentary and commercial letters of credit Total 2008 559,916 2,938 562,854 2007 1,245,604 2,381 1,247,985 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 2008, $102.1 million (2007: $97.5 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. 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 Balance of unamortised loan fees as at 31 December 2008 100,790 157,765 258,555 6,015 264,570 11,021 2007 144,240 134,190 278,430 6,265 284,695 13,723 66 Butterfield Annual Report 2008 67 nOTE 13: sEgmEnTEd inFORmaTiOn Business Area Analysis (a) Operating Segments For management reporting purposes, the operations of the Bank are grouped into the following 11 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, United Kingdom, Malta and Hong Kong. Accounting policies of the reportable segments are the same as those described in Note 1. The Bermuda Community Banking segment provides a full range of 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 (Bermuda) Limited (now part of Butterfield Fulcrum Group) which was sold during the year and wherein the Bank retains a 40% interest (on a fully diluted basis), 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. Net interest income Year ended 31 December 2007 Customer Intersegment The Malta and Hong Kong segments provide wealth management and fiduciary services. Operating segment information follows: 31 December 2008 2007 Allowance Net interest income for credit losses Customer Intersegment Non- Revenue before interest gains and income losses expenses Net Income before gains and losses Total and central Gains and allocations Central losses allocations* Net income 160,975 (24,819 ) (1,838 ) 45,081 179,399 147,870 31,529 (160,935 ) 22,335 (107,071 ) - - 160,975 86 (1,047 ) (25,780 ) - 72,678 72,764 46,827 1,208 10,751 - (1,838 ) 120,014 253,371 205,448 2,255 - 25,937 (9,543 ) - 47,923 (160,935 ) (23,860 ) 9,543 8,018 2,077 - (104,994 ) Year ended 31 December 2008 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 Malta Hong Kong Sub-total overseas 9,111 32,014 16,999 4 1,894 33,414 34 36 93,506 533 17,612 4,936 - 1,706 (5,773 ) - - 19,014 (292 ) (639 ) 47,172 - 37,270 - 270 - 3,629 12,981 11,522 96,159 61,905 59,205 40,044 274 3,595 7,534 11,134 8,779 (276 ) 11,768 39,133 29,067 1,689 1,355 3,939 2,280 (1,207 ) 113,201 224,514 158,547 1,655 3,903 - - 1,459 1,950 34,254 47,585 131 19,161 - (3,321 ) - 2,355 2,218 10,066 - 334 - 1,659 65,967 51,884 (216 ) (4,304 ) (2,078 ) - (436 ) (612 ) (116 ) (256 ) (8,018 ) 3,193 77,535 17,214 (3,321 ) 1,919 11,672 218 1,403 109,833 Total before eliminations 254,481 (6,766 ) (3,045 ) 233,215 477,885 363,995 113,890 (109,051 ) - 4,839 Less: inter-segment eliminations (principally rent and management fees) 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. ** The net gain of $47.6 million relates to the gain on sale of Butterfield Fund Services (Cayman) Limited offset by other-than-temporary impairment of a collateralised mortgage obligation and a realised loss related to a corporate debt security. (13,508 ) (13,508 ) (3,045 ) 212,941 464,377 350,487 - 113,890 (109,051 ) - 254,481 6,766 - - (20,274 ) - - - - 4,839 Non- Revenue before interest gains and income Total losses expenses Net Income before gains and losses and central Gains and allocations Central losses allocations* Net income Allowance for credit losses Bermuda Community Banking Wealth Management & Fiduciary Services and Investment & Pension Fund Administration Real Estate Sub-total Bermuda 146,817 (22,048 ) (2,332 ) 39,017 161,454 120,908 40,546 (1,172 ) 18,246 57,620 - - 146,817 526 (1,268 ) (22,790 ) - 82,942 2,387 - 83,468 47,563 1,119 10,221 (2,332 ) 124,346 246,041 178,692 35,905 (9,102 ) 67,349 (20 ) - (1,192 ) (18,587 ) 9,102 8,761 Barbados Cayman Guernsey Switzerland The Bahamas United Kingdom Hong Kong Sub-total overseas 7,323 48,603 18,589 - 418 30,850 - 105,783 1,039 13,808 4,514 (35) 2,981 (5,248 ) - 17,059 3,517 42 11,921 11,983 352 51,793 114,556 57,981 64,601 48,380 1,296 206 12,053 8,987 32,392 29,288 - 1,168 349 113,706 236,897 157,915 - 41,498 241 - 8,654 - 6,835 (45 ) 1,168 - (62 ) 56,575 16,221 (1,090 ) 3,066 3,104 1,168 78,982 233 654 (3 ) - - (28 ) - 856 (30 ) (6,549 ) (1,640 ) - (292 ) (250 ) - (8,761 ) 17,298 - 74,918 141 50,680 14,578 (1,090 ) 2,774 2,826 1,168 71,077 Total before eliminations 252,600 (5,731 ) (1,983 ) 238,052 482,938 336,607 146,331 (336 ) - 145,995 Less: inter-segment eliminations (principally rent and management fees) Total - 252,600 5,731 - - (18,370 ) (12,639 ) (1,983 ) 219,682 470,299 323,968 (12,639 ) - 146,331 - (336 ) - - - 145,995 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 Malta Hong Kong Total overseas Less: inter-segment eliminations Total 68 5,355,488 5,414,903 25,963 86,662 5,468,113 264,521 3,328,712 1,448,609 984 155,260 1,321,678 3,169 8,633 6,531,566 38,680 101,913 5,555,496 277,297 2,729,334 2,368,565 537 181,671 1,999,093 - 4,271 7,560,768 (1,087,835 ) 10,911,844 (1,205,344 ) 11,910,920 For the year ended 31 December 2008, included within other expenses are the following income tax expense amounts: Guernsey $0.9 million (2007: $4.9 million), United Kingdom $2.0 million (2007: $2.0 million) and Barbados $0.1 million (2007: $0.1 million). Transactions between operating segments Butterfield Annual Report 2008 69 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. The Bank provides 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 30% of BMMFL’s holding of a specific identified investment should that security have a fair value less than BMMFL’s carrying value and BMMFL is required to draw down on the obligation in order to retain its credit rating from the rating agency. The decision by the rating agency with regard to the rating requirements is outside the control of the Bank. In consideration, the Bank charged a fee of $4.5 million during the six month period covered by the Agreement ending 15 January 2009. As at 31 December 2008 the Bank has recognised a derivative liability for the maximum value of the credit derivative which is $44.4 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. On 16 January 2009 the Agreement was extended for three months. 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 loans to floating-rate loans, and convert fixed-rate deposits to floating-rate deposits. For the years ended 31 December 2007 and 2008, no gain or losses were realised from ineffective portion of fair value hedges. As of 31 December 2008 the Bank has recorded the fair value of derivative instrument assets of negative $26.7 million (2007: positive $0.1 million) in other assets and derivative instrument liabilities of negative $0.3 million (2007: positive $5.1 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 2008 and 2007, there was no hedge ineffectiveness related to cash flow hedges. As of 31 December 2008 and 2007 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 (2007: nil months). As of 31 December 2008, the Bank has recorded the fair value of derivative instrument of nil (2007: $0.1 million) 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 Interest rate contracts Interest rate swaps Interest rate caps and currency options Sub-total Other derivatives Spot and forward foreign exchange Credit derivative Currency options Sub-total 2008 2007 Trading ALM Total Trading ALM Total 102,143 35,021 137,164 222,265 - 222,265 324,408 35,021 359,429 40,000 38,686 78,686 407,676 - 407,676 447,676 38,686 486,362 3,597,529 44,400 - 3,641,929 - 3,597,529 44,400 - - - - 3,641,929 6,626,278 50,000 - 6,676,278 - 6,626,278 50,000 - - - - 6,676,278 Total notional amount of financial derivatives outstanding 3,779,093 222,265 4,001,358 6,754,964 407,676 7,162,640 Included in the notional amounts for fair value hedges using interest rate swaps for 2008, are $210.0 million (2007: $116.0 million) pertaining to specific loans, nil (2007: $125.0 million) pertaining to subordinated debt, and $12.3 million (2007: $166.6 million) pertaining to fixed-rate deposits. (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 Interest rate caps and currency options Spot and forward foreign exchange Credit derivative Total fair value 2008 Positive Negative Net Positive 2007 Negative Net 122 383 68,440 - 68,945 27,223 383 57,208 44,400 129,214 (27,101 ) - 11,232 (44,400 ) (60,269 ) 1,085 1,039 71,692 - 73,816 5,884 1,039 77,475 6,250 90,648 (4,799 ) - (5,783 ) (6,250 ) (16,832 ) (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 2008 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 110,183 - 110,183 1,800 - 1,800 56,573 - 56,573 50,875 35,021 85,896 104,977 - 104,977 324,408 35,021 359,429 3,541,235 44,400 3,585,635 50,749 - 50,749 5,545 - 5,545 - - 3,597,529 - 44,400 - 3,641,929 Total notional amount by remaining maturity 3,695,818 52,549 62,118 85,896 104,977 4,001,358 70 Butterfield Annual Report 2008 71 Within 6 months 6 to 12 months 1 to 3 years 3 to 5 years After 5 years Total a) Items that are recognised at fair value on a recurring basis: 31 December 2008 Fair value determination 2007 Fair value determination 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 254,582 3,970 258,552 18,333 - 18,333 84,597 - 84,597 17,073 34,716 51,789 73,090 - 73,090 447,675 38,686 486,361 6,531,123 50,000 6,581,123 84,210 - 84,210 10,946 - 10,946 - - - - 6,626,279 - 50,000 - 6,676,279 Total notional amount by remaining maturity 6,839,675 102,543 95,543 51,789 73,090 7,162,640 (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 Credit derivative Currency options Sub-total 2008 2007 Trading ALM Total value Trading ALM Total value - 383 383 122 - 122 122 383 505 - 1,039 1,039 1,085 - 1,085 1,085 1,039 2,124 68,440 - - 68,440 - - - - 68,440 - 68,440 71,692 - - 71,692 - - - - 71,692 - 71,692 Quoted prices in Significant other Significant Total carrying Quoted prices in Significant other active markets for identical assets observable unobservable inputs inputs value / active markets for identical assets fair value observable unobservable inputs Significant Total carrying value / fair value inputs Financial assets Investments Trading Available for sale Other assets - Derivatives Financial liabilities Other liabilities - Derivatives 27,868 - - 7,862 579,799 68,945 12,599 - - 48,329 579,799 68,945 35,416 - - 10,608 932,238 73,816 12,510 - - 58,534 932,238 73,816 - 129,214 - 129,214 - 90,648 - 90,648 b) Items measured on a recurring basis using significant unobservable inputs: 31 December Carrying value at beginning of year Realised and unrealised gains recognised in net income Carrying value at end of year 2008 Trading investment 12,510 89 12,599 2007 Trading investment 7,395 5,115 12,510 The trading investment measured using significant unobservable inputs consists of shares of a non-redeemable private equity fund investing primarily in the real estate sector (the ”Fund”). The Fund’s adviser retains the services of an independent valuation company at each reporting date. Due to the nature of the properties held by the Fund and lack of comparable market data, the fair values of investment properties are estimated based on the income capitalisation method, where the value is estimated from the expected future benefits to be generated by the property in the form of income streams from renting out of premises. The method considers net income generated by comparable property, capitalised to determine the value for the subject property. The change in unrealised gains or losses in shares of the Fund are reported under Realised / unrealised (losses) gains on trading securities in the Consolidated Statement of Income. Total replacement cost 68,823 122 68,945 72,731 1,085 73,816 c) Items other than those recognised at fair value on a recurring basis: nOTE 15: FaiR ValUE OF Financial insTRUmEnTs The following table presents the carrying value and fair value of financial assets and liabilities under SFAS No. 107 Disclosures About Fair Value of Financial Instruments (SFAS 107) and SFAS No. 157 Fair Value Measurements (SFAS 157). 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, Management believes it will recover the full carrying value of the securities. 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, Management may reassess whether a market value below carrying value represents an other-than-temporary impairment. During 2008, Management determined that investments with a carrying value of $103.8 million were other-than-temporarily impaired and consequently re-measured those investments at their fair value of $7.6 million. The determination of fair value was based on an unadjusted bid price determined to be Level 2 in the pricing hierarchy (significant other observable inputs). 31 December 2008 Financial assets Cash and deposits with banks Investments held to maturity Loans Commercial, net of allowance for credit losses Consumer, net of allowance for credit losses Financial liabilities Customer deposits Demand deposits Term deposits Deposits from banks Subordinated capital nOTE 16: inTEREsT RaTE Risk 2008 Appreciation/ Carrying value Fair value (depreciation) 2007 Carrying value Appreciation/ Fair value (depreciation) 2,221,390 2,221,390 3,195,951 2,758,622 - (437,329 ) 2,517,012 2,517,012 3,754,217 3,591,980 - (162,237 ) 2,205,790 2,200,051 2,212,487 2,212,591 (5,739 ) 104 2,228,264 2,225,280 1,896,500 1,896,965 (2,984 ) 465 5,952,238 5,952,238 3,453,937 3,464,756 395,094 395,094 282,296 256,751 - (10,819 ) - 25,545 5,911,184 5,911,184 4,530,395 4,526,335 306,392 306,392 290,993 284,191 - 4,060 - (6,802 ) 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. 72 Butterfield Annual Report 2008 73 Within 3 to 6 3 months months Earlier of contractual maturity or repricing date 1 to 5 years After Non-interest 5 years bearing funds 6 to 12 months Total 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. 31 December 2008 (in $ millions) 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 Total liabilities and shareholders’ equity Interest rate swaps Interest rate sensitivity gap 2,036 3,209 3,373 - - 8,618 - 8,171 - - 8,171 20 181 165 - - 366 - 299 - - 299 212 (9 ) 659 58 3 73 115 - - 191 - 199 - - 199 9 1 135 408 - - 543 - 206 - 197 403 38 333 - - 371 - 5 - 85 90 162 2,221 188 3,824 24 4,418 197 197 252 252 823 10,912 518 518 921 9,801 311 311 282 - 1,750 10,912 (107 ) (105 ) - 33 176 (927 ) - - Cumulative interest rate sensitivity gap 659 717 718 751 927 - - 31 December 2007 (in $ millions) Assets Cash and deposits with banks Investments Loans (a) Premises, equipment and computer software Other assets Total assets Liabilities and shareholders’ equity Shareholders’ equity Deposits (a) Other liabilities Subordinated capital (a) Total liabilities and shareholders’ equity Earlier of contractual maturity or repricing date Within 3 to 6 3 months months 6 to 12 months 1 to 5 years After 5 years Non-interest bearing funds Total 2,284 3,987 3,478 - - 9,749 43 301 215 - - 559 - 7,807 - 125 7,932 - 1,517 - - 1,517 64 236 52 - - 352 - 183 - - 183 - 126 175 - - 301 - 186 - 100 286 - 47 209 - - 256 - 13 - 60 73 126 2,517 48 4,745 4,125 (4 ) 215 215 309 309 694 11,911 629 629 1,042 10,748 250 284 1,920 11,911 250 (1 ) Interest rate sensitivity gap 1,817 (958 ) 169 15 183 (1,226 ) Cumulative interest rate sensitivity gap 1,817 859 1,028 1,043 1,226 - - - (a) Principal amounts of interest rate swaps are included within the lines items to which they relate. nOTE 17: sUBORdinaTEd capiTal 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. On 27 May 2008, the Bank issued US $78 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches, namely US $53 million in Series A notes due 2018 and US $25 million in Series B notes due 2023. 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. The proceeds of the issue were used to repay the entire amount of the US $78 million outstanding subordinated notes redeemed in May 2008. The notes issued under Series A pays a fixed coupon of 7.59% until 27 May 2013 when they become redeemable in whole at the option of the Bank. The Series B notes pays a fixed coupon of 8.44% until 27 May 2018 when they also become redeemable in whole at the Bank’s option. The Series A notes were priced at a spread of 4.34% over the 5-year US Treasury yield and the Series B notes were priced at a spread of 4.51% over the 10-year US Treasury yield. Interest capitalised in accordance with SFAS 34 during the year amounted to $1.9 million (2007: $1.7 million) and is excluded from interest expense 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 2008: Subordinated capital Bermuda 2003 issuance - Series B 2005 issuance - Series A 2005 issuance - Series B 2008 issuance - Series A 2008 issuance - Series B Subsidiary Total nOTE 18: EaRnings pER sHaRE Within 1 year 1 to 5 years After 5 years Carrying value Fixed-rate Fixed-rate Fixed-rate Fixed-rate Fixed-rate Fixed-rate 2,421 4,329 3,066 4,023 2,210 678 16,727 9,284 11,711 12,264 14,462 8,840 2,821 59,382 54,252 93,964 75,502 56,410 36,733 10,111 326,972 47,000 90,000 60,000 53,000 25,000 7,296 282,296 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 dividend and the stock split declared during the years ended 31 December 2008 and 2007 (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) 2008 2007 4,839 145,995 98,400 (6,051 ) 92,349 0.05 98,465 (5,207 ) 93,258 1.56 2008 2007 4,839 145,995 98,400 (6,051 ) 1,274 93,623 0.05 98,465 (5,207 ) 2,351 95,609 1.53 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. 31 December Diluted earnings per share Net income for the year The notes issued under Series A paid a fixed coupon of 3.94% until 27 May 2008 when it was redeemed in whole by the Bank. The Series B notes pays a fixed coupon of 5.15% until 27 May 2013 when they become redeemable in whole at the Bank’s option. 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. 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) 74 Butterfield Annual Report 2008 75 nOTE 19: sHaRE-BasEd paYmEnT As at 31 December 2008, 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 2008 was $6.0 million (2007: $5.4 million). The total income tax benefit recognised in the income statement for share-based compensation arrangements for the year ended 31 December 2008 was $0.2 million (2007: $0.1 million). Stock Option Plan At the Annual General Meeting of Shareholders held on 29 October 1997, the Directors were granted authority to implement a Stock Option Plan for executive officers and employees. Under the Bank’s 1997 Stock Option Plan (the 1997 Plan), options to purchase common shares of the Bank may be granted to employees and directors of the Bank that entitle the holder to purchase one common share at a subscription price equal to the market price on the effective date of the grant. Option exercise prices are stated and payable in Bermuda dollars. Generally, grants vest 25 percent at the end of each year for four years. The committee that administers the 1997 Plan has the discretion to vary the period during which the holder has the right to exercise options and, in certain circumstances, may accelerate the right of the holder to exercise options, but in no case shall the exercise period exceed ten years. The Board of Directors of the Bank has established at 9,000,000 the current maximum number of common shares which may be issued or transferred by the Stock Option Trust pursuant to exercise of options. At 31 December 2008, the Bank held as treasury stock 6,473,180 common shares (2007: 4,903,324) that can be used to satisfy the Bank’s obligations with respect to the Stock Option Plan. Directors’ and Executive Officers’ Stock Option Plan 2008 Number of shares transferable upon exercise (thousands) Weighted Weighted average average life remaining exercise (years) price ($) Aggregate intrinsic value ($) shares Weighted average exercise price ($) transferable upon exercise (thousands) 2007 Number of Employees’ Stock Option Plan 2008 31 December Outstanding at beginning of year Granted (prior to 2007 stock split) Exercised (prior to 2007 stock split) Stock split Stock dividend granted Granted (after 2007 stock split) Exercised (after 2007 stock split) Outstanding at end of year Vested and exercisable at end of year 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 split Stock dividend granted 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 1,399 - - - 170 320 - 1,889 1,126 12.91 - - - 12.46 15.76 - 12.48 10.34 6.48 5.30 1,630 1,622 542 80 (75 ) 1,093 - - (241 ) 1,399 769 30.96 58.25 19.89 12.16 - - 7.80 12.91 10.32 2007 Number of Number of shares transferable upon exercise (thousands) Weighted Weighted average average life remaining exercise (years) price ($) Aggregate intrinsic value ($) shares Weighted average exercise price ($) transferable upon exercise (thousands) 5,175 - - - - 722 2,181 (318 ) (250 ) 7,510 3,334 14.78 - - - - 14.15 15.73 8.90 - 14.27 12.27 7.41 6.21 2,613 2,479 1,706 564 (291 ) (34 ) 3,888 - 6 (576 ) (88 ) 5,175 1,836 34.87 58.25 27.03 15.56 14.24 - 20.50 9.08 16.59 14.78 11.05 The weighted average fair value of stock options granted in the year ended 31 December 2008 was $1.19 per stock option (2007: $6.54), calculated using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: Year Ended 31 December Projected dividend yield Risk-free interest rate Projected volatility Expected life (years) 2008 3.50% 2.70% 12% 5.0 2007 3.70% 4.80% 14% 5.0 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 US 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 2008 was $3.6 million (2007: $2.9 million). The total intrinsic value of options exercised during the year ended 31 December 2008 was $2.2 million (2007: $24.2 million). As at 31 December 2008, there was $2.5 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 2008, 127,812 restricted shares were granted (2007: 35,442). The fair value of common shares granted during the year ended 31 December 2008 was $1.7 million (2007: $1.5 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 and vesting may depend on the Bank’s performance. 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 2008, 88,112 shares were granted (2007: 23,532 shares). The fair value of common shares granted during the year ended 31 December 2008 was $1.4 million (2007: $1.4 million). As at 31 December 2008, there was $1.0 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. nOTE 20: sHaRE BUY-Back plans During the year, nil common shares (2007: 125,603) were purchased and cancelled at a cost of nil (2007: $7.4 million) and 2,562,997 common shares were purchased to be held as treasury stock at a cost of $38.3 million (2007: 967,119 shares at a cost of $38.1 million). During the same period, the Bank’s Stock Option Trust bought nil common shares at a cost of nil (2007: 597,818 common shares at a cost of $22.7 million). The Board of Directors of the Bank authorised the repurchase over the twelve-month period commencing 1 January 2009, 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. 76 Butterfield Annual Report 2008 77 nOTE 22: capiTal sTRUcTURE The Bank’s authorised common share capital is $260 million (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) which equates to a maximum amount of redeemable preference share capital of US $100 million and £50 million respectively. 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 In February 2008, the Bank distributed a 10% stock dividend to shareholders of record on 20 February 2008. All prior period per share data have been restated to reflect the 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. nOTE 24: VaRiaBlE inTEREsT EnTiTiEs During the first quarter of 2008, Management conducted an economic analysis of its investments in variable interest entities and determined that the Bank had ceased to be the primary beneficiary of expected gains or losses in these entities. The Bank has not made new investments in variable interest entities during the year. As a result, there was no effect of FIN 46R on the Bank’s net assets for the year ended 31 December 2008 (2007: decrease of $1.9 million). As at 31 December 2008 the total assets of variable interest entities consolidated in the balance sheet is nil (2007: $31.4 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. 31 December 2008 2007 Income taxes in Consolidated Statement of Income Current Deferred Total tax expense Deferred income tax asset Tax loss carried forward Pension liability Allowance for compensated absence Onerous leases Other Total asset Deferred income tax liability Other Net deferred income tax asset 3,168 (126 ) 3,042 557 797 19 - 1,185 2,558 756 1,802 6,977 - 6,977 444 707 31 147 2,831 4,160 1,338 2,822 For the years ended 31 December 2008 and 2007, 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 1999. nOTE 26: FUTURE accOUnTing dEVElOpmEnTs (a) Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities In June 2008, the Financial Accounting Standards Board (FASB) issued the FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP No. EITF 03-6-1), which specifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” and therefore should be included in computing earnings per share. FSP No. EITF 03-6-1 will be effective for fiscal years beginning after 15 December 2008 and therefore effective from the Bank’s first quarter in 2009. There will be no effect on adoption as the Bank is already in compliance. (b) Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlements) In May 2008, the Financial Accounting Standards Board (FASB) issued the FASB Staff Position (FSP) No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial cash Settlements) (FSP No. APB 14-1), which specifies that issuers of this type of convertible debt account for the liability and equity components separately. The initial measurement of the liability component is to be consistent with similar non-convertible debt as of the issuance date. The convertible debt proceeds less the fair value of the liability component is recorded as additional paid-in capital. FSP No. APB 14-1 will be effective for fiscal years beginning after 15 December 2008 and therefore, effective from the Bank’s first quarter in 2009. Currently, the bank is not an issuer of debt instruments considered by this FSP, therefore management does not expect any effect of adoption. (c) Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161), which addresses how companies should disclose information about derivative instruments and hedging activities. SFAS 161 is designed to improve the relevance, comparability, and transparency of financial information relating to derivative instruments and hedging activities. SFAS 161 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. (d) Disclosure about Assets of Employee Future Benefits Plans In December 2008, the FASB issued FASB Staff Position (FSP) No. FAS 132(R)-1, Employer’s Disclosures about Postretirement Benefit Plan Assets (FSP No. FAS 132(R)-1), which addresses information that employers shall disclose about postretirement plan assets as of each annual reporting date. FSP No. FAS 132(R)-1 is designed to improve the relevance, comparability, and transparency of financial information relating to Postretirement Benefit Plan Assets. FSP No. FAS 132(R)-1 will be effective for fiscal years ending after 15 December 2009, and therefore, effective from the Bank’s fourth quarter in 2009. Management is currently evaluating the effect of adoption. (e) Non-controlling Interests in Consolidated Financial Statements In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements (SFAS 160), which addresses how companies should measure and present non-controlling interests. SFAS 160 is designed to improve the relevance, comparability, and transparency of financial information relating to non-controlling interests. SFAS 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. (f) Business Combinations In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (SFAS 141R), which addresses how companies should recognise and measure assets and liabilities acquired through business combinations. SFAS 141R is designed to improve the relevance and comparability of financial information relating to business combinations. SFAS 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. nOTE 27: cOmpaRaTiVE inFORmaTiOn Certain prior period figures have been reclassified to conform to current period presentation. nOTE 28: sUBsEqUEnT EVEnT Butterfield announced on 5 March 2009, that subject to shareholder approval, it will issue of $200 million of perpetual non-cumulative preference shares (the Issuance), which qualify as Tier 1 capital, and which will be underwritten and guaranteed by the Government of Bermuda, with a closing date of 30 June 2009. The Government has agreed to support the Issuance by guaranteeing the principal of, and dividend payments on, the preference shares. In addition, the Government has committed to purchase any preference shares from this offering that are not subscribed by private investors. In exchange for the Government’s commitment, the Bank has agreed to issue to the Government 10-year warrants to purchase common shares of the Bank, representing some 4% of the issued shares of the Bank as at 31 December 2008, at an exercise price of $7.01 and to pay the Government a guarantee fee of 1% per annum with respect to any preference shares issued to private investors. On a proforma basis, as at 31 December 2008, the issuance of these preference shares would increase Butterfield Group’s tier 1 capital ratio to 10.6% and its total capital ratio to 15.1%. 78 Butterfield Annual Report 2008 79 SharEhOLDEr InfOrmatIOn Directors’ and Executive Officers’ Share Interests and Directors’ Service Contracts Cayman ISLanDS StOCk ExChangE (Secondary Listing) mEDIa rELatIOnS / PuBLICatIOn rEquEStS Pursuant to Regulation 6.8(3) of section IIA of the Bermuda Stock Exchange Listing Regulations, the total interests of all Directors and Executive Officers of the Bank in the shares of the Bank as at 31 December 2008 were 571,713 shares. With the exception of those participating in the Shareholders’ Dividend Reinvestment Plan or the Stock Option Plan, no rights to subscribe for Elizabethan Square, 4th Floor P.O. Box 2408 GT, Grand Cayman Cayman Islands Tel: (345) 945 6060 Fax: (345) 945 6061 www.csx.com.ky Marketing & Corporate Communications Tel: (441) 299 1624 or (441) 298 4610 E-mail: mark.johnson@bm.butterfieldgroup.com or stuart.roberts@bm.butterfieldgroup.com InvEStOr rELatIOnS SharE DEaLIng SErvICE Butterfield Securities (Bermuda) Limited Chief Financial Officer Tel: (441) 299 1643 shares in the Bank have been granted to or 65 Front Street exercised by any Director or Officer. None of Hamilton, HM 12 the Directors or Executive Officers had any Bermuda interest in any debt securities issued by the Tel: (441) 299 3972 Bank or its subsidiaries. Fax: (441) 296 8867 There are no service contracts with Directors, except for Alan R. Thompson, President & E-mail: info@butterfieldgroup.com Chief Executive Officer and Graham C. Brooks, SharE PrICE Executive Vice President, International, whose contracts expire on 1 January 2012 and 1 August 2009, respectively. DIvIDEnD PaymEnt Dividends declared by the Board are paid quarterly, normally occurring in November, March, May and August. Published daily in The Royal Gazette in Bermuda and available on Bloomberg Financial Markets (symbol: NTB BH). Also available on the BSX and CSX websites. DIvIDEnD rEInvEStmEnt PLan E-mail: richard.ferrett@butterfieldgroup.com WrIttEn nOtICE Of SharE rEPurChaSE PrOgrammE — BSx rEguLatIOn 6.38 The Board of Directors of the Bank authorised the repurchase over the 12-month period commencing 1 January 2009, 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 and 18 April 2007. As at 31 December 2008, 3,000,000 shares represented 3.05% of total issued shares of the Bank. This intention is subject ExChangE LIStIng Details are available from Butterfield to appropriate market conditions and Fulcrum Group (Bermuda) Limited repurchases will only be made in the best (Phone: (441) 299 3882) and on our website, interests of the Bank. The Bank’s shares are listed on the Bermuda www.butterfieldgroup.com, under “About Us Stock Exchange (BSX) and the Cayman | Investor Relations.” Shares repurchased in the 12 months to 31 December 2008 totalled 2,563,017 at an Islands Stock Exchange (CSX), located at: BErmuDa StOCk ExChangE (Primary Listing) Phase 1 – 3rd Floor, Washington Mall, Church Street Hamilton HM 11 Bermuda Tel: (441) 292 7212 or (441) 292 7213 Fax: (441) 292 7619 www.bsx.com 80 Certain restrictions apply. aggregate cost of $38,339,124 million. rEgIStrar anD tranSfEr agEnt insiders, and insiders’ associates as defined From time to time the Bank’s associates, Butterfield Fulcrum Group (Bermuda) Limited Rosebank Centre 11 Bermudiana Road Pembroke, HM 11 Bermuda Tel: (441) 299 3882 Fax: (441) 295 6759 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 PrInCIPaL OffICES & SuBSIDIarIES Field Real Estate Holdings Limited BSX Regulations, be higher than the last independent trade. The Bank will continue to advise the BSX monthly of shares repurchased and cancelled. In addition and separate to the above, the Bank’s Stock Option Trust may from time to time purchase shares of the Bank through the BSX to satisfy the Bank’s obligations with respect to the Stock Option Plan, and such purchases will likewise be advised to the BSX monthly. No shares were purchased in this way in the 12 months to 31 December 2008. 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 and Treasury Services 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: info@butterfieldgroup.com LargE SharEhOLDErS The following professional nominees at 31 December 2008 were registered holders of 5% or more of the issued share capital: mailing address: P.O. Box HM 195 Hamilton, HM AX Bermuda Harcourt & Co. (17.01%) and Palmar Limited (5.94%). BeRmuda Real Estate Holding 65 Front Street, Hamilton, HM 12 Bermuda Tel: (441) 295 1111 Fax: (441) 292 4365 The Bahamas Butterfield Bank (Bahamas) Limited Private Banking, Personal Trust and Corporate Trust managing Director: robert Lotmore 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: bahamas@butterfieldgroup.com Known beneficial holdings of 5% or more of issued share capital at that date were: Bermuda Life Insurance Company Limited (7.05%) Butterfield Asset Management Limited BaRBados Asset Management and Brokerage Services managing Director: Ian Coulman 65 Front Street Hamilton, HM 12 Bermuda Tel: (441) 299 3817 Fax: (441) 292 9947 E-mail: bermuda@butterfieldgroup.com Butterfield Trust (Bermuda) Limited Grosvenor Trust Company Limited Personal Trust, Corporate Trust and Custody Services managing Director: michelle Wolfe 65 Front Street Hamilton, HM 12 Bermuda Tel: (441) 299 3980 Fax: (441) 292 1258 E-mail: bermuda@butterfieldgroup.com Butterfield Bank (Barbados) Limited Community Banking managing Director: Lloyd Wiggan 1st Floor, Carlisle House Hincks Street Bridgetown, Barbados Tel: (246) 431 4500 Fax: (246) 430 0221 E-mail: barbados@butterfieldgroup.com Butterfield Annual Report 2008 81 Butterfield Asset Management Butterfield Trust (Guernsey) Limited swITzeRland (Barbados) Limited Representative Office vice President: Caroline Prow Belleville Corporate Centre 38 Pine Road Bellville, St Michael Barbados Tel: (246) 430 1650 Fax: (246) 436 7999 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 728 665 E-mail: barbados@butterfieldgroup.com E-mail: guernsey@butterfieldgroup.com Cayman Islands honG KonG Butterfield Bank (Cayman) Limited Bentley (Asia) Limited Community Banking, Private Banking, Personal Trust Butterfield Capital (HK) Limited Asset Management Country head: Jim Parker Butterfield Asset Management (Switzerland) Limited Asset Management managing Director: Cornelio Cappelletti Talstrasse 37 CH-8022 Zurich, Switzerland Tel: (41) 43 888 6488 Fax: (41) 43 888 6489 E-mail: switzerland@butterfieldgroup.com Butterfield Trust (Switzerland) Limited Trust and Company Services managing Director: Jim Parker Boulevard des Tranchées 16 1206 Geneva, Switzerland Asset Management, Personal Trust and 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: cayman@butterfieldgroup.com Butterfield Private Office (HK) Limited Wealth Advisory and Management Tel: (41) 22 839 0000 Fax: (41) 22 830 0099 Deputy Chairman: nic Bentley 24th Floor, Diamond Exchange Building E-mail: switzerland@butterfieldgroup.com 8-10 Duddell Street unITed KInGdom Central Hong Kong Tel: (852) 2810 1233 Fax: (852) 2810 0849 GueRnsey E-mail: hongkong@butterfieldgroup.com Butterfield Bank (Guernsey) Limited Private Banking, Asset Management, Custody and Custodian Trustee Services, Personal Trust, Corporate Trust and Administered Banking 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: guernsey@butterfieldgroup.com malTa Butterfield Trust (Malta) Limited Personal Trust and 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: malta@butterfieldgroup.com 82 Butterfield Bank (UK) Limited Private Banking, Asset Management, Wealth Management, Credit and 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: uk@butterfieldgroup.com 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: uk@butterfieldgroup.com 

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