The Bank of N.T. Butterfield & Son Limited
65 Front Street, Hamilton, Bermuda
www.butterfieldgroup.com
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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