The Bank of N.T. Butterfield & Son Limited
Butterfield is a diversified financial services company operating in nine jurisdictions.
We have total assets of $9.6 billion and $60.7 billion of client assets under administration.
We employ 1,606 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.
ChaIrman’S LEttEr to thE SharEhoLdErS
Butterfield is in the midst of the most important transition in its 152-year history. over the past two years, we have realised
significant losses on investments and felt the negative impact of the global financial crisis on our revenues. at year-end 2009,
the Board decided that it was in the best interests of our shareholders for the Bank to take proactive steps to substantially
de-risk the Balance Sheet. this action ended a protracted period of ongoing losses and the adverse effects this had on our
share price and reputation in the market. Concurrently with this decision, the Board sought and secured new sources of
capital to help offset the impact of the losses. Unfortunately, this capital raise was highly dilutive to shareholders.
my objective with this letter is to provide a summary of the circumstances that led the Board to its decision, along with more details of the capital
raising transaction. Prior to taking the actions we did, your Board considered several alternatives for increasing capital, and although we are aware
that many shareholders are disappointed with our decision, we are confident that it was the best alternative for preserving the long-term value of
the Butterfield franchise.
2009 Results
Following write downs of more than $210 million in 2008, we foresaw
non-interest income), our operating profitability was also significantly
the possibility of further problems in our held-to-maturity portfolio in
diminished. therefore, even with the successful $200 million
early 2009. to increase the Bank’s capital as a means of offsetting these
preference share offering behind us, it became necessary for the
potential losses, Butterfield raised $200 million through a preference
Bank to raise additional capital to remain in compliance with
share offering in June.
regulatory requirements.
In the fourth quarter, it became apparent that we would again have to
Upon this turn of events, and following two challenging years during
take significant write downs on certain mortgage-backed securities and
which the Bank’s performance had suffered from ongoing write downs
large loss provisions on several corporate loans in the hospitality sector
associated with investments in structured assets made prior to
by year end. With 2009 revenues down by more than $93 million year-
mid-2007, your Board sought a solution that would generate enough
on-year on a normalised basis, (a function of historically low interest
capital to allow us to, once and for all, clear problematic assets from the
rates and depressed asset values that impaired our ability to generate
Balance Sheet.
3
-
OuR RestRuctuRing and RecapitalisatiOn sOlutiOn
Under a comprehensive restructuring plan, the Bank took losses of
Should the rights be fully subscribed, existing shareholders will
$91 million on impaired securities in the fourth quarter. We also
own 37% of the Bank. none of the new investors will own more than
increased our provision for credit losses to $105 million; a figure that
22.8%, and they cannot seek to increase their ownership positions
we believe represents adequate provisioning for loans over the
in Butterfield for a period of four years without the prior approval
anticipated duration of the recession. In addition, the restructuring plan
of the Board.
factors in anticipated investment losses in the range of $150 million to
$175 million in the first quarter of 2010 associated with the sale of most
of the Bank’s remaining troubled assets. at the time of writing,
I am pleased to report that the sale of these assets has been
largely completed.
the Board is aware that many of our shareholders are disappointed
that they were not given the opportunity to approve the capital
raising transaction through a vote. Given the magnitude of the Bank’s
fourth quarter 2009 loss and an anticipated Q1 2010 loss, and against
a backdrop of speculation about the Bank among investors and
to offset the losses, the Board secured $550 million of new capital
the media, Butterfield’s Board of directors determined that having
through the sale of new Butterfield common equity to a group of
new capital in place at the time we announced the loss for 2009 was
investors led by the Carlyle Group and Canadian Imperial Bank
essential to ease market uncertainty about the Bank. our view was that
of Commerce (“CIBC”). as part of this transaction, the Board negotiated
if we had waited for a vote, that uncertainty would have done more
a $130 million rights offering that will enable existing shareholders
damage to the value of existing shareholders’ interests than proceeding
to purchase shares at the same per-share price of $1.21 as the new
with the transaction did. We therefore sought an exemption from the
investors, giving them the opportunity to maintain a meaningful
requirement for a shareholder vote from the Bermuda Stock Exchange
proportional ownership position. the rights offering is backstopped
and it was granted.
by the new investors, meaning that the subscription rate of new shares
under the upcoming rights offering notwithstanding, the Bank had the
net proceeds of the capital raise of $520 million in place at the time the
transaction closed on 2 march 2010.
With the transaction concluded, Butterfield is a well-capitalised bank.
on a pro-forma basis, factoring in the new capital and the anticipated
Q1 2010 losses, our total capital at 31 december 2009 would have been
$1.1 billion, putting our tier 1 capital ratio at 13.5%, and our total capital
ratio at 18.7%, well in excess of regulatory requirements.
4
dividends
It has long been the Bank’s policy to pay out a portion of earnings in
has retired. mr. Kopp, a career banker with more than 33 years
the form of common dividends. Consistent with that policy, and with
of experience, was instrumental in bringing our capital solution
the Bank having posted a significant net loss for the year, the Board
to fruition. the Board is impressed with mr. Kopp’s insight and
did not declare a fourth quarter dividend on common shares and has
business acumen, and we are confident that he is the right person
suspended the payment of common dividends until Butterfield returns
to lead Butterfield.
to a position of sustainable profitability. dividend payments totalling
$0.24 per common share ($0.12 in cash and $0.12 in shares) were made
during the first three quarters of 2009. Butterfield paid dividends
totalling $7.1 million on outstanding preference shares during 2009,
meaning the Government of Bermuda was not called upon to pay any
portion of the dividends on these Government-guaranteed securities.
gOveRnance
at the annual General meeting of shareholders in September 2009,
I advised the attendees that we had commissioned an independent,
third-party review and assessment of the Bank’s governance practices
and management hierarchy. In late 2009, the Board received the
evaluation and set about implementing a number of recommendations.
We reconstituted the Board ad hoc I.t. Committee as a vehicle through
which the Board of directors will oversee matters pertaining to
technology changes. We authorised changes in the Bank’s management
reflective of their ownership interests in the Bank, each of Carlyle and
CIBC will have two directors join a 12-person Board. It is my opinion
structures that will draw a clearer distinction between Group and
local management responsibilities and improve the level of head
that the Board will benefit from the perspective and expertise of these
office oversight of jurisdictional operations. Finally, we adjusted the
seasoned, international bankers.
We announced on 2 march 2010 that the Board had appointed Bradford
Kopp as Butterfield’s new President & Chief Executive officer and
a director of the Bank. mr. Kopp, who joined Butterfield as Chief
Financial officer in november, replaces alan thompson who
composition of the various functional committees—Group asset
and Liability Committee, Group risk Committee, Group Investment
Committee, Group Credit Committee and Group Financial Institutions
Committee—to ensure that we have appropriate stakeholder
representation by the correct mix of executives on each committee.
5
there have been several changes on the Board in recent months. Vince Ingham, a non-executive director, retired from the Board in early march 2010.
Upon his retirement from the Bank, alan thompson also retired from the Board of directors. Patrick tannock resigned as a director in January 2010
for personal reasons. Graham Brooks, Butterfield’s Executive Vice President, International, retired from the Bank and the Board at the end of June.
Glenn titterton retired in april 2009. this past February, we were saddened by the untimely death of harry Wilken, who had served on the Board
with distinction for 12 years.
With the difficulties of the last two years behind us and new investor partnerships in place, we are looking optimistically to the future. Butterfield
is well capitalised. our Balance Sheet will be substantially de-risked by the end of the first quarter of 2010. We now have world-class governance
protocols and structures in place. the Board, management and our new investors firmly believe the Bank is positioned for strong top-line and
bottom-line growth as interest rates begin to rise. although we view the dilutive effect that our capital raising transaction had on our current
shareholders as unfortunate, we are pleased that we are able to offer them the opportunity to participate in the renewal and growth of the
Butterfield franchise as we move forward.
on behalf of the Board of directors, I thank you for your ongoing loyalty and support.
RObeRt a. MuldeRig | Chairman of the Board of directors
6
PrESIdEnt & ChIEF ExECUtIVE oFFICEr’S rEPort
I am honoured that Butterfield’s Board of directors
and depositors. It is my goal to work with the management team and the
has appointed me to the position of President
Board to return the Bank to a position of sustainable growth and restore
& Chief Executive officer at a challenging, but
confidence in the Butterfield brand.
exciting time in the history of the Bank.
the Bank had a record net loss of $213 million
for the 12 months ended 31 december 2009,
translating to a loss per share of $2.34. this loss comes at the conclusion
of two very difficult years for the Bank. historically low interest rates
brought on by a severe global recession narrowed our interest margins.
non-interest revenues were reduced as valuations of clients’ assets
administered or managed by Butterfield continued to languish on slow-
to-recover securities markets. For the first time in memory, Butterfield
began to experience delinquencies of significant value within its loan
portfolio; a function of the impact of the worldwide economic decline on
the tourism industry and tourism-dependent sectors.
on top of those external economic factors, the legacy issues associated
with past investments in mortgage-backed securities and other
structured assets continued to impact the Bank. We had write downs of
more than $130 million on impaired securities and loan losses of more
than $104 million in 2009.
our common share price trended downward throughout the year.
We know that all of this has shaken the confidence of our shareholders
WORking tOgetheR
2009 was an exceedingly challenging year for Butterfield employees.
on top of the daily demands of their jobs, they were called upon to
help respond to customer and shareholder concerns. We sought their
assistance with the smooth decoupling of the Fund Services businesses
from the Bank following the sale of those subsidiaries to Fulcrum
Group in late 2008. and we began to make changes to the systems
and procedures they use to do their jobs under the one Butterfield
programme, which is overhauling and updating the Bank’s technology and
operations infrastructure.
In an environment of tightly controlled compensation and benefits
spending, the Butterfield team remained committed to providing clients
with the finest in fiduciary, banking and investment services. I thank our
employees for their hard work, patience and loyalty. as we move ahead,
we are putting the pieces in place that will enable our employees to do
their jobs more efficiently, have greater input on strategic decisions and
provide value-added service to clients.
7
Changes in ManageMent struCture
onE BUttErFIELd
In late 2009, under direction from the Board, the Bank established a Group
With its objective of replacing a multitude of disparate technologies with
Executive Committee that has representation from and responsibility for
new, common Group applications, the one Butterfield programme will
our major business segments and organisational functions internationally.
help facilitate the coordinated rollout of new and improved products and
this year, we have begun to manage various business lines and key
services in multiple jurisdictions. Upgrading to a common core banking
functions through cross-jurisdictional Councils, each headed by a member
system for key banking jurisdictions, for example, will make it possible
of the Group Executive Committee. In this way, we will be able to jointly
to launch common banking products where market demand warrants it,
establish and prioritise business goals, more efficiently execute our plans
without the need to incur systems development and testing costs multiple
concurrently across countries and ensure we have broad oversight of all
times. With client data stored in identical formats and applications, it also
functions at the executive level. With the improved flow of lateral and
allows for the introduction of enhanced cross-border client services. the
vertical communications that this new structure will allow, we are hopeful
programme’s initial focus is on the implementation of new technology in
that we will be able to be more proactive in addressing clients’ needs and
our largest jurisdictions, Bermuda and the Cayman Islands.
in leveraging learning and best practices from one market to the next.
a key tenet of the one Butterfield programme is replacing outdated,
during 2009, Butterfield introduced changes to the reporting structure
paper-based processes with workflow technology that enables client data
of our offices outside Bermuda to create greater regional synergies.
to be captured by front line employees and automatically routed to the
Conor o’dea, managing director of Butterfield Bank (Cayman) Limited,
appropriate parties within the Bank for review, approval and processing.
was given overall management responsibility for Butterfield in the
this eliminates the need to re-key data multiple times, increasing
Bahamas, Barbados and the Cayman Islands. robert moore, managing
efficiency, reducing errors and freeing up employees’ time to focus on
director of Butterfield Bank (Guernsey) Limited, has overall management
customer care and value added services.
responsibility for Butterfield in Guernsey, hong Kong, malta and
Switzerland. messrs. o’dea and moore, along with George Bogucki,
managing director of Butterfield Bank (UK) Limited, are members of the
Group Executive Committee.
the Bank completed the planning stages of the one Butterfield
programme in 2009 and successfully implemented the first major
transition—the outsourcing of help desk services to hewlett Packard
(“hP”)—in the summer. In February this year, we transitioned the vast
In addition, the Bank welcomed michael Collins as EVP, Corporate
majority of Cayman’s existing applications and server infrastructure to an
development in august, and promoted James Stewart to EVP & Chief risk
hP facility in Canada with relatively few minor issues internally and zero
officer, Bob Wilson to EVP, Bermuda Banking, Curtis dickinson to EVP,
impact to clients. Bermuda will similarly transition this Spring. Later in
Bermuda Wealth management, and dianne Brewer to SVP, marketing &
the year, we will begin the process of transforming our operating systems,
Corporate Communications during the year.
migrating data to a new, robust and powerful core operating system.
during my first four months at Butterfield, I have been most impressed
the successful completion of the one Butterfield programme, with the
with the members of the Group Executive team that is now in place and
benefits it will deliver in terms of operating efficiency and enhanced client
I am pleased to report that all of us, veterans and newcomers alike, are
services, is a key aspect of our strategy to return the Bank to a position of
working together cohesively toward common goals.
healthy growth.
8
Brand rEVItaLISatIon
In 2009, the Bank continued its Brand revitalisation project, which
communities that Butterfield calls home. despite the financial difficulties
aims to bring greater consistency to Butterfield’s promotional materials
Butterfield faced in 2009, the Bank and its employees around the world
and merchandising across jurisdictions. Similar to one Butterfield,
honoured that pledge. a few highlights are noted below.
common branding will permit us to increase sharing of materials across
jurisdictions, saving on marketing development costs. In 2010, we will
finalise the Brand revitalisation with the change of building signs
and Banking Centre merchandising, and updates to remaining
marketing materials.
FOcused On custOMeRs
Butterfield has a strong brand in three distinct business lines: retail
banking in select markets, wealth management & fiduciary services, and
custody & other administration services. We enjoy leadership positions
among retail financial services providers in Bermuda and Cayman, and
have a growing retail presence in Barbados. In Bermuda, the Bahamas,
Cayman, Guernsey, hong Kong, malta, Switzerland and the UK, we
provide an expert service in private wealth structures to international,
high net worth clientele. We also provide custody and company
the Group donated over $1 million to community and charitable
organisations in 2009. In Barbados, we partnered with the Barbados
Youth Business trust to assist and mentor young entrepreneurs.
We again co-sponsored the annual St. Patrick’s day 5K ‘Irish Jog’
benefitting the Cayman Islands Cancer Society. our Guernsey
office sponsored a team of young fencers so they could attend the
Commonwealth Junior Fencing Championship in malaysia.
our Bermuda-based employees volunteered their time and energy,
clearing trash from green spaces to assist Keep Bermuda Beautiful
and planting endemic trees and clearing invasive plants with Buy Back
Bermuda. Employees also organised two internal drives in 2009—
the first provided 90 boxes of Easter food for needy families, and
a second in September delivered needed school supplies to
230 Bermudian students.
administration services from Bermuda, the Bahamas, Cayman, Guernsey
as is described in the Chairman’s letter, we have successfully completed
and the UK. We recently incorporated Butterfield Corporate Services in
a capital raising transaction that will enable us to continue to put the
malta to assist clients with the incorporation and administration of malta
distractions of underperforming assets behind us and which has raised
companies used in the international context.
having recapitalised the Bank and set a process in motion to
substantially de-risk Butterfield’s Balance Sheet by the end of the
first quarter, we can now turn our focus to strengthening these core
businesses. our clients can take comfort in the knowledge that
Butterfield is now well positioned for growth through continued
innovation. We remain committed to building a strong presence in select
services in each of our markets and increasing market share therein.
suppORting OuR cOMMunities
along with the goals of providing efficient, ethical delivery of financial
services to our customers, consistent returns to our shareholders, and
offering security and opportunities to our employees, enshrined in our
our capital ratios to strong levels. that is the starting point in the story
of recovery and growth that is yet to come. We now have the means to
invest in our core businesses and find better ways to serve our clients.
Butterfield has a terrific team of professional, knowledgeable and
experienced people. our task is now to pull together under a common
vision to make Butterfield an even better bank for our customers,
shareholders, employees and communities.
mission Statement is the pledge to make valuable contributions to the
bRadFORd b. kOpp | President & Chief Executive officer
9
Board oF dIrECtorS and PrInCIPaL Board CommIttEES
CommIttEES IndICatEd BY nUmBErS
chaiRMan RObeRt a. MuldeRig 1, 5
retired Chairman & Chief Executive officer,
mutual risk management Ltd.
Chairman, Woodmont trust Co. Ltd.
vice chaiRMan RObeRt steinhOFF 1, 2, 5
retired Partner, KPmG
director, argus Insurance Co. Ltd.
gRahaM c. bROOks *
Julian W. FRancis 1, 3, 4
Former Governor, Central Bank of the Bahamas
a.l. vincent inghaM, Jp 3, 5, 6 †
bRadFORd b. kOpp
President & Chief Executive officer
the Bank of n.t. Butterfield & Son Limited
sheila a. lines 2, 6
Chief Executive officer, Keytech Limited
shaun MORRis 1,4
managing director of the appleby Bermuda Law Firm
pauline RichaRds 2, 4, 6
Chief operating officer, armour reinsurance Group holdings Limited
director, Wyndham Worldwide Inc.
Former director and audit Committee Chair, Cendant Corporation
patRick tannOck †
alan R. thOMpsOn 1 †
glenn M. titteRtOn *
haRRy Wilken 2, 3 ‡
JOhn R. WRight 3, 6
retired Bank Chief Executive
pRincipal bOaRd cOMMittees:
diRectORs’ cOde OF pRactice and gROup cOde OF cOnduct
1. ExECUtIVE CommIttEE oF thE Board oF dIrECtorS
The Directors have adopted a Code of Best Practice based upon recommended
Supports the Board in fulfilling its overall governance responsibilities.
principles of corporate governance. In implementing the Code, the Board meets
2. aUdIt CommIttEE
regularly, retains full effective control over the Bank, and monitors executive
Oversees Butterfield’s financial reports, internal financial controls,
management. A Group Code of Conduct applies to Directors and employees
internal audit processes and compliance.
3. rISK PoLICY & ComPLIanCE CommIttEE
Focuses on credit, market and operational risk.
4. CorPoratE GoVErnanCE CommIttEE
Focuses on Directors’ and Board Committee governance, performance
and Directors’ nominations.
5. ComPEnSatIon & hUman rESoUrCES CommIttEE
Focuses on compensation and benefits, employee development
and succession.
6. InFormatIon tEChnoLoGY CommIttEE
Focuses on technology and systems development.
10
and imposes Butterfield’s principles of business, including ethics and conflicts of
interest. Copies of the Codes can be accessed on www.butterfieldgroup.com.
* Retired prior to 31 December 2009
† Retired in 2010
‡ Deceased
manaGEmEnt
gROup executive cOMMittee
seniOR OFFiceRs
bRadFORd b. kOpp
President & Chief Executive officer
cuRtis ballantyne
Senior Vice President, Chief Credit officer
geORge bOgucki
managing director, Butterfield Bank (UK) Limited
MalcOlM beckeR
managing director, Butterfield trust (malta) Limited
dianne M. bReWeR
Senior Vice President, marketing & Corporate Communications
nic bentley
deputy Chairman, Butterfield Private office (hK) Limited
Michael cOllins
Executive Vice President, Corporate development
katie bOOth
managing director, Butterfield International Private office Limited
cuRtis dickinsOn
Executive Vice President, Bermuda Wealth management
sheila M. bROWn
Senior Vice President, Investment Services
WiltOn dOllOFF
Executive Vice President, Chief operating officer
david g. caRRick
Group Controller
dOnna e. haRvey MaybuRy
Senior Vice President, human resources
chaRles laWRence
Senior Vice President, treasury
tOnya l. MaRshall
Senior Vice President, General Counsel
and Secretary to the Board of directors
RObeRt v. lOtMORe
managing director, Butterfield Bank (Bahamas) Limited
RObeRt s. MOORe
managing director, Butterfield Bank (Guernsey) Limited
cOnOR O’dea
managing director, Butterfield Bank (Cayman) Limited
JaMes R. steWaRt
Executive Vice President, Chief risk officer
bOb W. WilsOn
Executive Vice President, Bermuda Banking
g. JOhn MaRaglianO
Senior Vice President, head of Finance
JiM paRkeR
managing director, Butterfield trust (Switzerland) Limited
W. aaROn M. spenceR
Senior Vice President, Group operations and Information technology
david steWaRt
Senior Vice President, Chief Investment officer
FRed h. tesch
Senior Vice President, Group Internal audit
llOyd O. Wiggan
managing director, Butterfield Bank (Barbados) Limited
11
Management’s discussion & analysis of Results of Operations and Financial condition
Financial Summary
Consolidated results of operations and discussion for Fiscal Year Ended 31 december 2009
Jurisdiction overview: Performance by business segment
Consolidated Balance Sheet and discussion
off Balance Sheet arrangements
risk management: credit, liquidity, market and operational risk review
Management’s Financial Reporting Responsibility
independent auditor’s Report to the shareholders
consolidated balance sheet
consolidated statement of income
16
17
18
31
40
50
52
60
61
62
63
consolidated statement of changes in shareholders’ equity and comprehensive income
64
consolidated statement of cash Flows
notes to consolidated Financial statements
65
66
MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The financial overview of results of operations and financial condition should be read in conjunction with our
consolidated financial statements and the related notes. The financial statements and notes have been prepared in
accordance with generally accepted accounting principles in the United States of America (US GAAP). All references
to “Butterfield”, the “Group” or the “Bank” refer to The Bank of N.T. Butterfield & Son Limited and its subsidiaries on a
consolidated basis. 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 and changes in
circumstances. Forward looking 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 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.
16
FIN AN CI AL SUMM ARY
(in $ thousands, except per share data)
As at 31 D ecember
2 0 0 9
2 0 0 8
2 0 0 7
2 0 0 6
2 0 0 5
Cash and deposits with banks
Investments
Loans, net of allowance for credit losses
Premises, equipment and computer software
Total assets
Total deposits
Subordinated capital
Shareholders' equity
Liquidation preference of preferred shares
Common equity
For the year ended
Net interest income before provision for
credit losses
Provision for credit losses
Fee and other income
Salaries and other employee benefits
Other non-interest expenses
Net income before gains and losses
Gains and losses
Net (loss) income
Dividends and guarantee fee of preferred shares
Net (loss) income available to common
shareholders
Common dividends paid
F in anci a l Rat ios
Return on assets
Return on common shareholders' equity
Tier 1 capital ratio
Total capital ratio
Tangible common equity ratio
Net interest margin
Efficiency ratio
Per common share ($)
Net income (diluted)
Cash dividends
Net book value
Number of employees
Bermuda
Overseas
Total
Shareholder data
2,221,390
3,824,079
4,418,277
197,155
1,98 6,7 9 8
2,93 5,2 0 8
4,21 8,3 3 2
2 4 4,24 2
3,151,191 2,849,920
3,786,793 2,916,399
3,760,745 3,085,594
141,708
9,59 4,6 0 2 10,911,844 11,910,920 11,132,802 9,197,566
9,801,269 10,747,971 10,042,932 8,240,109
8,69 6,6 1 9
278,679
2 8 3,08 5
2,517,012
4,744,989
4,124,764
215,379
284,191
282,296
171,326
280,168
2 0 0,00 0
1 5 5,46 0
-
518,440
-
629,330
-
549,553
-
495,226
252,600
(1,983)
219,682
184,751
139,217
146,331
(336)
145,995
-
145,995
54,366
1.2%
25.2%
8.6%
13.0%
4.4%
2.20%
65.7%
1.48
0.64
6.53
218,218
(2,997)
193,654
162,504
118,465
127,906
6,177
134,083
-
185,346
(3,172)
172,099
144,331
101,447
108,495
856
109,351
-
134,083
46,496
109,351
38,504
1.3%
24.6%
8.9%
13.5%
4.1%
2.18%
64.8%
1.35
0.6
5.70
1.2%
23.6%
8.6%
13.1%
4.4%
2.09%
66.4%
1.13
0.56
5.24
1 8 6,90 7
(1 0 4,87 9)
1 5 1,70 5
1 5 6,83 9
1 4 3,35 1
(6 6,45 7)
(1 4 6,95 6)
(2 1 3,41 3)
9,45 0
254,481
(3,045)
212,941
183,152
167,335
113,890
(109,051)
4,839
-
(2 2 2,86 3)
1 4,93 8
4,839
57,733
0.0%
0.8%
7.5%
11.2%
4.1%
2.18%
72.8%
0.05
0.52
5.44
(2.1%)
(4 7.0%)
7.2%
1 0.1%
0.9%
1.95 %
8 6.9%
(2.34)
0.12
1.64
7 6 1
8 4 5
1,60 6
803
889
1,692
843
1,007
1,850
845
885
1,730
789
808
1,597
Average number of common shares on a
fully diluted basis
9 5,06 5
96,683
98,732
99,265
96,986
Risk weighted assets
5,73 4,0 9 6
6,199,963
6,345,754
5,468,668 4,681,349
All prior period per common share data and number of common shares, with the exception of dividends, have been restated to reflect the $0.04
stock dividend declared for March, May, August and November 2009 and the one for ten stock dividends in February 2008, August 2006 and 2005.
All prior period per share data have been restated to reflect the three for one stock split in August 2007.
17
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR
FISCAL YEAR ENDED 31 DECEMBER 2009
We evaluate our performance on a reported basis (i.e., as reported in our consolidated financial statements prepared
in accordance with United States generally accepted accounting principles (GAAP)), as well as on a normalised basis.
Transactions that are viewed by Management not to be in the normal course of day to day business and are unusual
in nature are excluded from normalised earnings as they obscure or distort the analysis of trends. Certain earnings
measures, such as normalised earnings, do not have standardised meanings as prescribed by GAAP and therefore are
unlikely to be comparable to similar measures presented by other companies.
Net (loss ) inc ome
The Bank reported a net loss for the year ended 31 December 2009 of $213.4 million compared to net income of
$4.8 million in 2008, both years were adversely affected by various gains and losses as noted above. Diluted loss
per share for 2009 was $2.34 compared to earnings of $0.05 per share in 2008. The net effect of normalisation
adjustments recorded in gains and losses, other non-interest income, and provision for credit losses totalled a net
loss of $234.4 million in 2009 (2008: $100.5 million), or a loss of $2.46 per diluted share (2008: $1.04) and includes
gains and losses associated with investment and credit support agreements, goodwill impairments, the gain on sale
of Butterfield Fund Services businesses in 2008, and certain specific provisions for loan losses primarily related to the
hospitality industry. When adjusted, normalised earnings from banking and wealth management activities were
$21.0 million in 2009 (2008: $105.3 million) or $0.12 (2008: $1.09) per diluted common share after deducting the
$9.5 million of total dividends declared and related guarantee fees paid in respect of the preferred shares in 2009.
The decline in normalised earnings is due primarily to the impact of the continuing historically low interest rate
environment, and the decline in customer balances from the high levels seen in prior years. If interest rates increase
as implied by long dated securities, we expect to benefit as margins return to normal levels.
18
The following table reconciles the Bank’s US GAAP reported loss with normalised earnings for 2009 compared to
2008:
(in $ thousands)
Net (loss) / income
Items recognised in Other ga ins and losses
Net realised gains on available for sale securities
Goodwill and intangibles impairment
Net realised / unrealised (losses) gains on trading securities
Net realised / unrealised (losses) gains on HTM securities
Other than temporary impairment on HTM securities
Gain on sale of subsidiaries
Net other gains
Sub-tota l: Items recognised in Other ga ins and losses
Items recognised in Other non-interest income
Non interest income - investment in affiliates
Deferred gain on sale of subsidiary
Credit support fees
Gain on sale of land
Sub-tota l: Items recognised in Other non-interest income
Other items
Net income from Butterfield Fund Services
Specific provision for loan losses
Sub-tota l: Other it ems
Tota l adjustments
Tota l norma l is ed earnings
Dividends and guarantee fee of preferred shares
200 9
2008
(21 3,4 1 3)
4,839
(23 6)
13,26 6
(98 3)
(2,29 8)
132,09 5
-
5,11 2
-
5,220
6,356
22,986
128,786
(115,479)
61,182
146,95 7
109,051
1,68 8
(3,37 1)
(4,16 8)
(69 9)
2,223
(922)
(2,038)
-
(6,55 0)
(737)
-
94,00 0
(7,820)
-
94,00 0
(7,820)
234,40 7
100,494
20,99 4
(9,45 0)
105,333
-
Tota l norma l is ed earnings attributabl e to common shareholders
11,54 4
105,333
Items recognised in other gains and losses include:
o A $13.3 million goodwill and intangibles impairment charge was taken in respect of Butterfield’s investment
in its Malta ($2.2 million), Hong Kong ($10.1 million) and Bahamas ($0.9 million) subsidiaries as the carrying
value of our investment exceeded the fair value. In 2008, the Bank incurred a goodwill impairment charge of
$5.2 million in respect of its investment in the Barbados subsidiary.
o A net realised gain on trading securities of $1.0 million, represented the return on the Bank’s investment in
seed money in the Butterfield Funds.
o Realised gains on held to maturity investments of $2.3 million representing a recovery of unrealised losses
on previously recorded OTTI in respect of two bank securities.
19
o A net loss of $132.1 million in other-than-temporary impairments was recorded in the Bank’s held to maturity
(HTM) investment portfolio consisting of:
$190.9 million in total unrealised losses on other-than-temporary impairment securities,
representing the carrying value less the fair value of impaired HTM securities, offset by:
$58.8 million in non-credit related OTTI recognised in other comprehensive income “OCI”. The OCI
component will accrete back to the book value over the life of the security.
o Net other losses of $5.1 million were recorded in 2009 as a result of a $9.0 million write-down of a receivable
due from the Bank’s Charitable foundation and an additional write off of previously capitalised investment
in technology related costs ($5.2 million). These losses were offset by an unrealised marked to market gain of
$6.5 million from our equity holding in two credit card companies and a $3.3 million gain (2008 loss: $50.2
million) stemming from credit support agreements provided by the Bank to the Butterfield Money Market
Fund. Credit support to the Money Market Fund is no longer required and ended in the third quarter of
2009.
In addition to other gains and losses, the following items were recorded in the 2009 net loss which impacted the
Bank’s normalised earnings:
Recognised in other non-interest income:
o Net losses of $1.7 million from our minority stake in several investments in affiliates. The Bank recorded its
share of losses from a single affiliate of $3.8 million offset by gains on the remaining investments of
$2.1 million
o $3.3 million of deferred revenue was recorded in 2009, which related to the sale of our Fund Services
businesses in 2008. The amortisation of the deferred gain ended in September 2009 as the majority of the
transitional services the Bank was obligated to deliver terminated after 12 months
o Credit support fees of $4.2 million
Other:
o Provision for credit losses of $94.0 million related to five large commercial mortgage facilities in the
hospitality industry.
20
Reve n ue
Total revenue before gains and losses, revenues from pension fund administration, and provisions for credit losses
for 2009 was $338.6 million, down $93.2 million (21.6%) from $431.8 million in the prior year. However, there were
strong revenues from banking and trust services which were sustained despite the challenging economic
environment with only marginal decreases from the prior year. Total non-interest income excluding revenues from
investment and pension fund administration was down $25.7 million from $177.4 million in 2008 to $151.7 million
in 2009; the decrease was primarily attributable to progressively lower foreign exchange volumes through 2009 from
hedge fund clients as they saw unprecedented redemptions in response to the collapsing equity markets from
September 2008 and from declining asset management fees as a result of historically low interest rates requiring
management fee reductions combined with lower assets under management levels.
The Fed fund rates declined to an average of 0.16% in 2009 and ended the year at 0.05% from a high of 2.97% in
October 2008 when credit spreads peaked in response to the market turmoil as a result of the failure of several large
banking institutions. When interest rates are maintained at these low levels, our net interest margin is compressed, as
the difference between the returns the Bank earns on employing client deposits and interest paid on client deposits
is squeezed. The consequence of lower interest rates also leads to lower customer deposit volumes as they seek
higher returns in other asset classes. In 2009, net interest income before provision for credit losses was down 26.6%
from $254.5 million in 2008 to $186.9 million in 2009 as a result of declining interest rates to historically low levels.
Our net interest margin was challenged and declined by 23 basis points from 2.18% to 1.95% on lower average interest
earnings assets of $9.6 billion in 2009, down $2 billion compared to $11.6 billion in 2008; the volume variance
accounting for approximately two thirds of the decline in net interest income.
Revenue before gains and losses was $233.7 million, compared to $464.4 million in 2008, which was adversely
impacted by the increase in the provision for credit losses at $104.9 million, up $101.9 million from $3.0 million the
year before, mainly due to the $196.9 million increase in non-accrual loans from $36.5 million in 2008 to
$233.4 million in 2009; the increase relating to four corporate clients in Bermuda totalling $167.9 million and
increased delinquencies in the residential mortgage book at $17.1 million in 2009 compared to $11.4 million in 2008.
No n-i nt er est inc om e
Non-interest income is the function of a number of factors including the composition and value of client assets
under management and administration, the volume and nature of clients’ transaction activities, and the types of
products and services our clients use. Weaker equity markets depress non-interest income by reducing the value of
client assets on which fees are based. Our fee structure provides for varied pricing dependent on the value of client
assets and the nature of services provided. As a result it is not always possible to draw a direct relationship between
the value of client assets and the level of non-interest income, although the trend of non-interest income generally
follows the trend in client assets levels.
Excluding revenues from investment and pension fund administration in 2008, total non-interest income was down
$25.6 million from $177.4 million in 2008 to $151.7 million in 2009 and represents 64.9% of total revenues before
gains and losses for 2009, compared to 38.2% in 2008. The increase in the percentage of non-interest income to total
revenue from 2008 principally reflects the strength of non-interest income compared to the sensitivity of net interest
income to the declining interest rate environment seen in 2009.
21
The following table presents the components of non-interest income for the years ended 31 December 2009 and
2008:
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Investment and pension fund administration
Trust
Custody and other administration services
Other non-interest income
2 0 0 9
27,211
37,094
34,044
-
29,894
13,840
9,622
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
2 0 0 8
41,308
37,562
45,475
35,583
30,344
18,724
3,945
(14,097)
(468)
(11,431)
(35,583)
(450)
(4,884)
5,677
(34.1%)
(1.2%)
(25.1%)
N/A
(1.5%)
(26.1%)
143.9%
Tota l non-interest income
Tota l non-interest income excluding fund admini stration
services
151,705 212,941
(61,236)
(28.8%)
151,705 177,358
(25,653)
(14.5%)
22
Asse t ma nag em en t
Asset management revenues are generally based on the market value of assets managed and the volume of
transactions and fees for other services rendered. We provide asset management services from our offices in
The Bahamas, Bermuda, the Cayman Islands, Guernsey, Switzerland and the United Kingdom. Revenues from asset
management were $27.2 million in 2009, down $14.1 million from $41.3 million in 2008; the decrease primarily due
to declining asset values and the decision made by Management to approve a decrease in the investment
management fee earned on the Butterfield Money Market Funds as a consequence of the sustained low interest rate
environment. Fees generated from the Butterfield Money Market Fund (“BMMF”) decreased $9.0 million from
$15.3 million in 2008 to $6.3 million in 2009. Assets under management declined in total for the Group from
$9.1 billion in 2008, to $8.0 billion in 2009, reflecting declines in net asset values mainly due to general global
economic conditions and redemptions from the BMMF. The sustained low interest rate environment and stable and
rising equity markets seen in the second half of 2009, led investors to seek higher returns in alternative asset classes.
The table that follows shows the changes in the year-end values of assets under management (“AUM”), sub-divided
between those managed for clients on a discretionary basis and those client funds invested in mutual funds that we
manage:
(in $ bi l l ions)
2 0 0 9
2 0 0 8
2 0 0 9 / 2 0 0 8
$ change
2 0 0 9 / 2 0 0 8
% change
Butterfield Funds
Discretionary
Tota l assets under manag em ent
4.21
3.80
8.01
5.07
4.07
9.14
(0.86)
(0.27)
(1.13)
(17.0%)
(6.6%)
(12.4%)
Ba nki ng
Butterfield provides a full range of community, commercial and private banking services in select jurisdictions. Retail
and community banking services are offered to individuals and small to medium sized businesses through branch
locations and through telephone banking, Internet banking, automated teller machines and debit cards in Bermuda,
the Cayman Islands and Barbados, whilst private banking services are offered in The Bahamas, Bermuda, the Cayman
Islands, Guernsey and the United Kingdom. Banking fees reflect loan, transaction and processing, and other fees in
Bermuda, The Bahamas, the Cayman Islands, Guernsey and the United Kingdom. Banking fees were relatively
unchanged in 2009 at $37.1 million, compared to $37.6 million in 2008.
Fo rei gn excha ng e
We provide foreign exchange services in the normal course of business as an integral part of our business lines out of
our banking businesses in The Bahamas, Bermuda, the Cayman Islands, Guernsey and the United Kingdom. The
major contributors to foreign exchange revenues are Bermuda and the Cayman Islands, accounting for 74% of the
Group’s foreign exchange revenue. Foreign exchange income totalling $34.0 million in 2009 is generated from client-
driven international cash flows, compared with $45.5 million in 2008; 2008 being a record for the Bank. The $11.4
million decrease in 2009 compared to 2008 reflects declining client volumes and lower volatility in currency prices
than seen in 2008. We saw significant declines in volumes from hedge fund clients, as record redemptions forced
investment managers to liquidate fund assets to meet client demands for safer asset classes as fear and uncertainty
gripped the markets in late 2008 through quarter one of 2009 in response to the global credit crisis. To a lesser extent,
the volumes of retail transactions generated from the tourism industry was strained as Bermuda and the Cayman
Islands experienced a considerable decrease in stay-over tourism and cruise ship arrivals, which impacted local
merchant, hotel and restaurant volumes.
Inv estm en t an d pensi on f u n d a dminis tra tio n
This business line was exited in September 2008, following the sale of our fund administration services businesses
to the Fulcrum Group. Prior to our sale of the fund administration services businesses, this activity was conducted at
our operations in The Bahamas, Bermuda, Canada, the Cayman Islands and Guernsey. As a direct result of this sale,
23
revenues from this business activity fell from $35.6 million in 2008 to nil in 2009. We retain a 40% equity interest in the
Butterfield Fulcrum Group, which we account for based on the equity method of accounting, with the equity in
earnings or loss recorded in ‘Other non-interest income.’
Tr ust
We provide both personal and corporate trust services from our operations in The Bahamas, Bermuda, the Cayman
Islands, Guernsey, Malta and the United Kingdom. Trust fees are generally based on the market value of client assets
under trust and from special assignments and projects at the request of our clients and are generated from the
provision of a range of trust, estate, pension administration and employee benefit services. In 2009, trust services
revenue, at $29.9 million, was down marginally from $30.3 million in 2008 and represents 19.7% of total non-interest
income in 2009, up from 17.1% in 2008 (excluding investment and pension fund administration revenue).
Custo dy an d ot he r a dmi nistr ati on s ervic es
Custody fees are generally based on market values of assets custodied, and the volume of transactions and flat fees
for other services rendered. We provide custody services and other administration services from our offices in
Bermuda and Guernsey. In 2009, revenues were $13.8 million, compared to $18.7 million in 2008, down $4.9 million.
The decrease relates to the decline in the net asset values of assets custodied in Guernsey and Bermuda resulting in
fee reductions of $3.0 million and $1.0 million respectively.
The table that follows shows the changes in the year-end values of assets under administration (“AUA”) in respect of
trust, custody and other administration services, which include the provision of administered banking services by
our Guernsey trust and fund administration business.
(in $ bi l l ions)
Custody and other administrative services
Trust
Tota l assets under administrat ion
Oth er n on -int er est i nco me
2 0 0 9
2 0 0 8
2 0 0 9 / 2 0 0 8
$ change
2 0 0 9 / 2 0 0 8
% change
33.5
27.2
60.7
33.8
23.7
57.5
(0.3)
3.5
3.2
(0.9%)
14.8%
5.6%
The components of other non-interest income are set forth in the following table:
(in $ thousands)
Decrease in carrying value of investments in affiliates
Rental income
Fees earned on credit support agreement
Transitional service agreement with the Butterfield Fulcrum Group
Other
Tota l non-interest income
Year ended 31 D ecember
2 0 0 8
2 0 0 9
(1,688)
2,268
4,168
3,371
1,503
9,622
(2,223)
2,141
2,038
922
1,067
3,945
The $1.7 million reduction in the carrying value of investments in affiliates in 2009 and $2.2 million reduction in 2008
is in respect of our 40% equity interest in the Butterfield Fulcrum Group, as we recorded equity pickup losses of $3.8
million in 2009 and $2.6 million in 2008. As a result, the carrying value is $4.2 million as at 31 December 2009. These
losses were offset by an increase of $2.1 million in 2009 (2008: $0.4 million) in the carrying value of our other
investments in affiliates principally in Bermuda and the Cayman Islands. Rental income of $2.3 million in 2009, and
$2.1 million in 2008, was received on various premises we own in Bermuda that are leased to tenants. Fees earned on
the credit support agreement relate to the credit support agreement with the BMMF which ended in September 2009.
The BMMF no longer requires credit support from the Bank. The $3.4 million transitional service agreement revenue
relates to a $5.4 million deferred gain on the sale of our fund administration services businesses to the Fulcrum
24
Group in September 2008. The deferred gain was amortised over 12 months, which ended September 2009, in line
with termination of the transitional services the Bank was providing to the Butterfield Fulcrum Group, such as
information technology and human resource support. Included in the “other” category of $1.5 million in 2009 is a
$0.7 million gain on sale of vacant land.
Net i nt er est i ncom e bef or e pr ovisi on f or l oa n l osses
Net interest income is the amount of interest earned on our interest earning assets less interest paid on our interest
bearing liabilities. There are several drivers of the change in net interest income including changes in the volume and
mix of interest earning assets and interest bearing liabilities, their relative sensitivity to interest rate movements, and
the proportion of non-interest bearing sources of funds such as equity and non-interest bearing current accounts.
The following table represents the components of net interest income for the years ended 31 December 2009 and
2008:
Assets
Cash and deposits with banks
Investments
Loans
Interest earning assets
2 0 0 9
2 0 0 8
Aver a g e
Ba l ance
Inter est
Aver a g e
Rat e
Aver a g e
Ba l ance
Inter est
Aver a g e
Rat e
2,163,459
3,090,202
4,340,034
9,593,695
12,660
46,215
211,694
270,569
0.59%
1.50%
4.88%
2.82%
2,563,071
4,767,027
4,288,159
11,618,257
80,519
193,006
264,570
538,095
3.13%
4.04%
6.15%
4.62%
Other assets
Tota l Assets
449,067
10,042,761
-
270,569
-
2.69%
495,428
12,113,685
-
538,095
-
4.43%
Li abi l it i es
Deposits
Securities sold under repurchase
agreements
Subordinated debt
Interest bearing liabilities
Non interest bearing current accounts
Other liabilities
Tota l Liab i l i t i es
Shareholders’ Equity
Tota l Liab i l i t i es and
Shareholders’ Equity
Spread
Net Interest Marg in
7,820,070 (68,471)
(0.88%)
9,768,780 (269,668)
(2.75%)
33,606 (258)
282,814 (14,933)
8,136,490 (83,662)
-
1,037,615
290,630
-
9,464,735 (83,662)
578,026
(0.77%)
(5.28%)
(1.03%)
-
-
(0.88%)
-
-
284,859 (13,946)
10,053,639 (283,614)
-
1,145,869
285,289
-
11,484,797 (283,614)
628,888
-
(4.88%)
(2.81%)
-
-
(2.46%)
10,042,762
12,113,685
186,907
1.79%
1.95%
254,481
1.81%
2.18%
Net interest income before provisions for credit losses declined by 26.6% to $186.9 million in 2009 compared to
$254.5 million in 2008, of which 59.0% (2008: 53.1%) was generated in Bermuda and 18.4% (2008: 19.5%) in the
Cayman Islands for a combined total of 77.4% (2008: 72.6%). The decrease reflects the decline in average interest
earning assets to $9.6 billion in 2009 from $11.6 billion in 2008 as a result of the decrease in average deposits of
$2.0 billion. The net interest margin fell by 23 basis points to 1.95% in 2009 from 2.18% in the year before, reflecting
the sustained low level of interest rates worldwide, particularly in Bermuda, the United Kingdom and the United
States. As a result of the lower interest rate environment, interest earned on non-interest bearing funds of $1.5
billion, declined by an average of 2.5% reducing net interest income by some $38 million and was a major
contributor to the decline in the net interest margin as the spread remained consistent with the prior year.
Non-interest bearing funds include non-interest bearing current accounts of $1.0 billion and shareholders’ equity
25
of $355 million net of other assets and other liabilities. The reduction in average interest earning assets accounts for
$44.2 million of the decrease while the 23 basis point decrease in the net interest margin accounts for the remaining
$23.2 million decline. The declining margin is due in part to the strategic decision of management in 2009 to only
place excess liquidity on a short-term basis with other banks, primarily overnight, in response to the credit crisis and
global economic environment, combined with the compression in the difference between the interest the Bank is
able to earn in the market versus the interest paid to customers.
Pr ovisi on f or cr e dit l osses
The Bank experienced a significant increase in the level of non-accrual loans. Non-accrual loans totalled
$233.4 million at 31 December 2009, up $196.9 million from $36.5 million at 31 December 2008 and represented 5.5%
of the total loan portfolio at 31 December 2009, compared to 0.8% in 2008. The predominant increase in non-accrual
loans was in Bermuda; the major contributors were five commercial mortgage facilities which accounted for $187.1
million of the $196.9 million increase year-on-year. The other main increase in non-accrual loans was in residential
mortgages which increased from $11.4 million to $17.1 million year on year in Bermuda. As a result, provisions in
respect of credit losses charged to income were $104.9 million in 2009, compared to $3.0 million in 2008, of which
$93.9 million was in respect of four commercial mortgage facilities in Bermuda that encountered financial difficulty.
For many of the jurisdictions in which the Bank operates, tourism and the related hospitality industries are critical
drivers to the success of the associated economies. There is a heavy reliance on the direct and indirect economic
inflows from the related airline, cruise ships and taxi services as well as hotels, resorts, restaurants and retail sales.
As a result of the global economic recession, which included higher oil prices, international travel was severely
curtailed and suffered a significant downturn beginning in June 2008. This declining trend was exacerbated by
further economic deterioration in 2009 and the outbreak of the influenza AH1N1 virus. Tourism earnings have
suffered as consumers either stayed at home or travelled for shorter periods of time. The outlook for 2010, according
to the World Tourism Organisation, indicates an increase for the industry as a whole. However, the pace of such a
recovery will be highly dependent on consumer confidence, which in turn is driven by unemployment, house prices
and general cost of living considerations. The Bank has on and off-balance sheet credit exposures to the hospitality
industry of $135 million and $15 million, respectively, net of $68.2 million specific provisions.
Charge-offs were $4.8 million in 2009 compared to $4.0 million in 2008. Total provisions were $130.3 million at 31
December 2009, up from $28.4 million at 31 December 2008. Of the total provisions, the general provision was $31.7
million and the specific provision was $98.6 million and represents a coverage ratio of 55.8% of non-accrual loans at
31 December 2009, compared to 77.8% at 31 December 2008, the decrease reflecting the five large mortgage facilities
mentioned above.
Gains an d l osses
The following table represents the components of gains and losses for the years ended 31 December 2009 and 2008:
(in $ thousands)
Net realised / unrealised gains (losses) on trading securities
Net realised gains on available for sale securities
Net realised gains (losses) on held to maturity investments
Total other-than-temporary impairments on held to
maturity investments
Goodwill and intangible assets impairment
Gain on sale of subsidiaries
Net other losses
Tota l g a ins and losses
2 0 0 9
983
236
2,298
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(115.5%)
N/A
(110.0%)
7,339
236
25,284
2 0 0 8
(6,356)
-
(22,986)
(3,309)
(132,095) (128,786)
(8,046)
(5,220)
(13,266)
- 115,479 (115,479)
56,070
(61,182)
(5,112)
(37,905)
(109,051)
(146,956)
2.6%
154.1%
N/A
(91.6%)
34.8%
26
Gains and losses totalled a net loss of $147.0 million in 2009, compared to a net loss of $109.1 million in 2008. The
primary components of gains and losses are as follows:
Gain o n sale of su bsi dia ries an d affili at e
In 2008, a gain of $115.5 million was recorded, reflecting the sale of our Fund Services businesses to the Fulcrum
Group to form the Butterfield Fulcrum Group in September 2008. We received $133.0 million in cash proceeds from
the transaction and a 40% ownership interest in the entity. Our carrying value is now $4.2 million as a result of
recording our 40% share of losses during the year. To facilitate the transaction, the Bank provided the Butterfield
Fulcrum Group with $65 million in seven-year term debt financing and a $14.5 million three-year revolving credit
facility on commercial market terms. There were no sales of subsidiaries in 2009.
Go o dwill a n d in ta ngi bles im pairm en t
In 2009, we recognised a $13.3 million goodwill and intangibles impairment charge in respect of Butterfield’s
investment in its Malta ($2.2 million), Hong Kong ($10.1 million) and Bahamas ($0.9 million) subsidiaries as the
carrying value of our investment exceeded the fair value.
We test annually, or as a result of a triggering event, for impairment and, as a result of lower earnings from those
originally anticipated, and higher required discount rates in 2009, the fair value fell below our carrying value,
resulting in a goodwill impairment charge. In 2008, we fully impaired and recorded a $5.2 million impairment
charge on goodwill associated with the investment in our Barbados banking subsidiary.
Realise d/ u nr ealis ed gai ns (loss es) on tra di ng s ecu riti es
In 2009, a $1.0 million unrealised gain was recorded with respect to trading securities compared to a loss of
$6.4 million in 2008, which principally reflects in the carrying value of approximately $11.5 million of ‘seed money’
invested in various Butterfield mutual funds, such as the Butterfield Canadian Systematic Equity Fund, the
Butterfield Select Alternative Fund and the Butterfield Select Investment Fund, resulting in positive performances of
those funds as equity markets rebounded from their lows seen in March 2009, which was up 70.1% from March 2009 to
the end of the year.
Realise d/ u nr ealis ed l oss es o n h el d to m at urit y inves tme nts
In 2009, $2.3 million realised gains were recorded reflecting the sale of two securities previously written down to nil
but which had recovered a portion of their market values. This compares to a realised loss of $23.0 million
recognised in 2008 on one asset-backed security that defaulted and had no expected recovery.
To tal o th er -t han -t em po rar y im pairm e nts o n h el d t o mat uri ty in ves tme nts
In accordance with, Accounting Standards Codification™ (“ASC”) 320 Investments - Debt and Equity Securities -
Subsequent Measurement, which became effective 30 June 2009, investments with fair values less than their carrying
values are deemed to be impaired. If a security is other-than-temporarily impaired, the carrying value is written down
to fair value. We test for other-than-temporary impairment (“OTTI”) by calculating the net present value of the
expected cash flows using the effective yield on the investment; the economic value. If the economic value is less than
the carrying value, the investment is deemed to be other-than-temporarily impaired. The difference between the
carrying value and the economic value is recognised through earnings (“credit loss”), while the portion of the marked
to market losses attributable to all other factors such as liquidity, is recognised in other comprehensive income,
a component of equity. In 2009, a net credit loss of $132.1 million was recorded in earnings on our held to maturity
(“HTM”) investment portfolio which included $190.9 million gross marked to market loss net of the non-credit loss
of $58.8 million recognised in other comprehensive income. This reflects a $111.9 million write-down related to
the US residential mortgage-backed market in 2009 compared to $76.4 million in 2008, $10.7 million write-down
in respect of structured investment vehicles (2008: $ nil), $6.4 million write-down of collaterised debt obligations
(2008: $19.8 million) and $3.1 million write-down of asset-backed securities (2008: $ nil). There were no write-downs
of corporate bonds in 2009 (2008: $32.6 million). The asset-backed securities were AAA when purchased but have
suffered OTTI, as reflected in subsequent downgrades to non-investment grade ratings, and have therefore been
27
written down to their economic value. These asset-backed securities remain current as to payments of principal and
interest; however, our analysis leads us to believe that it is probable that they will not, at some point in the future, be
able to meet their contractual commitments.
Net ot h er gai ns (l osses )
Net other losses of $5.1 million were recorded in 2009 as a result of a $9.0 million write-down of a receivable due
from the Bank’s charitable foundation and an additional write off of a previously capitalised investment in
technology-related costs ($5.2 million). These losses were offset by an unrealised marked to market gain of
$6.5 million from our equity holdings in two credit card companies and a $3.3 million gain stemming from a credit
support agreement provided by the Bank to the Butterfield Money Market Fund (“BMMF”) in order for it to maintain
its AAAm (S&P) rating. Credit support to the BMMF is no longer required and ended in the third quarter of 2009.
2008 saw net other losses of $61.2 million principally made up of unrealised losses of $52.3 million stemming from
two credit support agreements provided by us to BMMF, and 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.
No n-i nt er est ex pe nses
Reported operating expenses were $300.5 million in 2009, and $347.4 million in the prior year, compared to
$312.9 million excluding costs associated with the fund administration businesses (“BFS”) in 2008.
Cost control continued to be a key focus of the Bank in 2009 as economic conditions and sustained low interest rate
environment challenged the banking business model. Operating expenses decreased by $46.9 million (13.5%) to
$300.5 million when compared $347.4 million in 2008 but when excluding the $34.5 million in expenses related to
the Fund Services businesses in 2008, expenses were down $12.4 million.
The following table represents the components of non-interest expenses for the years ended 31 December 2009 and
2008 showing the effect of expenses in 2008 including and excluding the costs attributable to the Fund Services
businesses which were sold in September 2008 for comparative purposes:
(in $ thousands)
Salaries and other employee benefits
Technology and communications
Property
Professional and outside services
Non-income taxes
Amortisation of intangible assets
Marketing
Other non-interest expenses
Tota l non-interest expense
Sala ries a n d o th er em plo ye e be n efits
2 0 0 9
2 0 0 8
(includi ng
BFS)
2 0 0 8
2 0 0 8 2 0 0 9 / 2 0 0 8
(excl udin g
BFS)
BFS
156,839
50,094
28,833
17,490
13,197
6,258
5,911
21,898
300,520
183,152
41,149
32,140
34,529
15,132
7,316
7,140
26,887
347,445
20,963
3,454
1,569
1,372
1,302
-
296
5,575
34,531
162,189
37,695
30,571
33,157
13,830
7,316
6,844
21,312
312,914
$ ch an ge
(5,350)
12,399
(1,738)
(15,667)
(633)
(1,058)
(933)
586
(12,394)
These costs, which are the largest component of non-interest expense representing 52.2% of total operating costs
(52.7% in 2008), were $156.8 million for 2009, representing a decline of $5.4 million (3.3%) compared to the
$162.2 million recorded in 2008 when excluding Fund Services costs in 2008. The decline is a result of a decrease in
the number of employees in 2009 which ended the year at 1,606 compared to 1,692 in 2008 resulting in a decrease of
$1.7 million. In addition, a reduction of $3.1 million in performance-related compensation, a $1.2 million reduction
in staff recruitment and relocation costs and employment services as management implemented a hiring freeze in
2009, and a $1.0 million reduction in training costs offset by an increase in staff benefits of $1.7 million.
28
Tec hn ol ogy a n d co mmu nica tio ns
Technology and communication costs were $50.1 million in 2009, up $12.4 million on the $37.7 million recorded in
2008; the increase primarily as a result of contractual costs associated with our outsourcing agreement with Hewlett
Packard (formerly EDS). During the planned two-year transitional phase of our outsourcing arrangement, which
began in January 2009, duplicate costs are being incurred as a result of running legacy systems and transitioning to
new systems and services, including duplicate software maintenance. We expect that these costs will taper off as we
start to attain improvements in operating efficiency and retire legacy systems that are replaced with world class
infrastructure and client delivery systems to meet our clients’ needs. During 2009, the Bank paid approximately
$3.5 million in technology costs associated with Butterfield Fund Services during the transitional period which
ended September 2009.
Pr oper ty
Property costs, which reflect occupancy expenses and building maintenance, decreased by $1.7 million to
$28.9 million in 2009 over the $30.6 million recorded in 2008. This reflects a $0.7 million decrease as Bentley Reid
Europe companies were merged with the UK operations and a $1.0 million decrease in the Cayman Islands property
expenses due to leases being cancelled and a major lease being capitalised during the information technology
transformation period.
Pr ofessi on al a nd o utsi de s erv ices
Professional and outside services primarily include consulting, legal and other professional services. In 2009, the
expense was $17.5 million, down $15.7 compared to $33.2 million in 2008. The significant decrease primarily reflects
a reduction of $14.0 million in consulting and legal costs which were incurred in 2008 in association with our
strategic decision to select an information technology partner and the assessment process related to selecting new
software and hardware solutions.
No n-i ncom e t axes
These taxes reflect non-income related taxes levied on us in the various jurisdictions in which we operate, including
those associated with employee-related costs, such as payroll tax, customs duties and business licenses. In 2009, we
incurred costs of $13.2 million compared to $13.8 million the year before, with the decrease a result of lower head
count and salary costs.
Am ortis ati on of in ta ngi ble assets
Intangible assets relate mostly to client relationships acquired from business acquisitions and are amortised on
a straight-line basis over their estimated useful lives, not exceeding 15 years. Intangible assets estimated lives are
re-evaluated annually. The amortisation expense associated with intangible assets was $6.3 million in 2009,
compared to $7.3 million in 2008, the decrease principally reflecting the movement of exchange rates year over
year ($0.7 million).
Mark eti ng
Marketing costs reflect costs incurred in advertising and promoting our products and services and totalled
$5.9 million in 2009, down $0.9 million from 2008 as part of management’s focused effort to reduce
operating expenses.
29
Oth er n on -int er est ex pe ns es
(in $ thousands)
Custodian & handling
Charitable donations
Insurance
Stationery & supplies
Other expenses
Cheque processing
Credit card processing
Dues and subscriptions
Registrar and transfer agent fee
Agent commission fees
Foreign bank charges
Directors fees
Internal Audit cost
ATM fees
General expenses
Other
Tota l non-interest expenses
2 0 0 9
1,967
1,418
2,895
2,282
2 0 0 8
(includi ng
BFS)
2,366
1,833
2,713
2,631
2 0 0 8
2 0 0 8 2 0 0 9 / 2 0 0 8
BFS
ex cludi ng
BFS
- 2,366
1,758
75
2,509
204
2,425
206
$ ch an ge
(399)
(340)
386
(143)
1,682
2,721
1,441
1,104
930
861
487
435
501
1,423
1,751
21,898
1,590
2,359
735
-
2,100
801
1,452
207
493
1,736
5,871
26,887
8
-
11
-
-
2
6
12
-
48
5,003
5,575
1,582
2,359
724
-
2,100
799
1,446
195
493
1,688
868
21,312
100
362
717
1,104
(1,170)
62
(959)
240
8
(265)
883
586
The $0.6 million increase in other expenses, from $21.3 million in 2008 to $21.9 million in 2009 was partly a reflection
of Management’s focus on cost control and also declining were custody and handling costs, as the custody business
saw reduced transaction volumes. These decreases were offset by an increase of $1.1 million in other expenses.
Incom e tax es
In 2009, income tax expenses in our businesses in taxable jurisdictions, namely Barbados, Hong Kong, Guernsey,
Malta, Switzerland and the United Kingdom, was a benefit of $0.3 million compared to an expense of $3.0 million
in 2008; the decrease reflects a significant investment loss incurred in our UK operations in 2009 resulting in a tax
benefit of $0.9 million. This was offset by income tax expenses of $0.1 million (2008: $0.9 million) in Guernsey,
$0.2 million (2008 : $0.1 million) in Barbados and $0.1 million (2008: nil) in Malta.
30
JURISDICTION OVERVIEW
PERF O RMAN CE BY BUS I N ESS SEGM EN T
Berm u da
Revenue before gains and losses and credit provisions decreased year over year by $64.4 million, or 25.5%, from
$252.1 million for the year ended 31 December 2008 to $187.7 million for the year ended 31 December 2009. This
reflects declining net interest margins in the community banking segment as a result of historically low interest rates,
in conjunction with decreasing non-interest income from the wealth management and fiduciary services segment,
partly due to the sale of our fund administration services business in September 2008 which contributed
$13.7 million in revenues in 2008, and lower fee revenues as a result of declining assets under management.
AUM were $5.5 billion at 31 December 2009, down from $6.8 billion at 31 December 2008, reflecting the net
redemptions, while AUA for our trust and custody businesses at 31 December 2009 were $13.0 billion and
$19.4 billion, respectively, compared to $11.9 billion and $18.6 billion at 31 December 2008. Credit provisions were
$94.3 million in 2009 compared to $1.9 million in 2008 primarily related to specific provisions in respect of
hospitality loans. As a result, net income before gains and losses was down $134.6 million to a loss of $86.7 million
for the year ended 31 December 2009. Including gains and losses, our Bermuda segment recorded a net loss of
$208.4 million. Total assets were $4.6 billion at 31 December 2009, down $845 million from 31 December 2008,
reflecting lower levels of customer deposits by fund administration services clients and inter-segment balances.
(in $ thousands)
Net interest income
Provision for credit losses
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses & central allocations
Net gains and (losses)
Net loss
2 0 0 9
110,37 6
(94,3 3 4)
77,28 5
93,32 7
180,01 5
(86,6 8 8)
(12 4,7 1 0)
(20 8,4 3 3)
2 0 0 8
135,195
(1,838)
116,932
250,289
202,366
47,923
(160,935)
(104,994)
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(18.4%)
(24,819)
(5032.4%)
(92,496)
(33.9%)
(39,647)
(62.7%)
(156,962)
11.0%
22,351
(280.9%)
(134,611)
(22.5%)
36,225
98.5%
(103,439)
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Total assets under administration
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
3,390
2,577
4,623
3,701
2,796
5,468
(311)
(219)
(845)
19,40 0
13,03 8
32,43 8
18,644
11,850
30,494
756
1,188
1,944
3,266
2,238
5,504
4,052
2,705
6,757
(786)
(467)
(1,253)
(8.4%)
(7.8%)
(15.5%)
4.1%
10.0%
6.4%
(19.4%)
(17.3%)
(18.5%)
Number of employees
761
803
(42)
(5.2%)
31
Ba rba dos
Total revenues before gains and losses were up 2.2% year-over-year, to $13.3 million, for the year ended 31 December
2009, on strong earnings from net interest income. Provision for credit losses increased by $1.9 million compared to
2008 due to the increase in the country risk premium included in the Bank’s general provisioning model and are not
related to specific loan loss reserves. Net income before gains and losses, and central allocations was $0.3 million,
down from $1.5 million a year earlier on increasing expenses as the business invested in a new branch location and
other premises upgrades. Total assets were $278 million, up $13 million from 31 December 2008.
(in $ thousands)
Net interest income
Provision for credit losses
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses & central allocations
Net gains and (losses)
Net income
2 0 0 9
12,19 9
(2,16 4)
3,232
13,26 7
12,92 0
347
679
1,001
2 0 0 8
9,644
(292)
3,629
12,981
11,522
1,459
1,950
3,193
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
26.5%
2,555
(641.1%)
(1,872)
(10.9%)
(397)
2.2%
286
(12.1%)
(1,398)
(76.2%)
(1,112)
(65.2%)
(1,271)
(68.7%)
(2,192)
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
245
193
278
232
183
265
13
10
13
5.6%
5.6%
5.1%
Number of employees
137
142
(5)
(3.5%)
32
Cay ma n Islan ds
Net income was $9.5 million for the year ended 31 December 2009, compared to $77.5 million for the year ended
31 December 2008. Included in 2008 was a net gain of $47.6 million consisting of a $77.3 million gain on the sale of
the Fund Services business offset by other-than-temporary impairments of held to maturity investments totalling
$29.7 million. The remaining decline in net income is attributable to the sustained low US interest rates and credit
provisions of $7.8 million primarily related to a hospitality loan. Net interest income was down 30.8%, year-over-year,
to $34.4 million, while non-interest income was consistent with prior year, at $34.8 million, when excluding the
impact of the sale of our Fund Services business. Total expenses were $50.3 million in 2009, down $11.6 million from
$61.9 million in 2008, of which $11.0 million of the decrease relates to the sale of the Fund Services business. Total
assets, at $2.6 billion, were down $721 million on a decline in customer deposits, primarily hedge fund client
deposits. Client assets under administration, excluding fund administration in 2008, decreased by 6.7%, to $5.0
billion, primarily due to a decline in assets under custody.
(in $ thousands)
Net interest income
Provision for credit losses
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains and (losses)
Net income
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Total assets under administration
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
2 0 0 9
34,36 2
(7,78 7)
34,80 9
61,38 4
50,29 8
11,08 6
261
9,502
2 0 0 8
49,626
(639)
47,172
96,159
61,905
34,254
47,585
77,535
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(30.8%)
(15,264)
(1118.6%)
(7,148)
(26.2%)
(12,363)
(36.2%)
(34,775)
18.7%
11,607
(67.6%)
(23,168)
(99.5%)
(47,324)
(87.7%)
(68,033)
2,335
554
2,608
2,994
497
3,329
(659)
57
(721)
1,221
3,802
5,023
1,842
3,542
5,384
(621)
260
(361)
415
794
1,209
579
687
1,266
(164)
107
(57)
(22.0%)
11.4%
(21.7%)
(33.7%)
7.3%
(6.7%)
(28.3%)
15.6%
(4.5%)
Number of employees
326
332
(6)
(1.8%)
33
Gu er nse y
Net income before gains and losses declined by $14.8 million to $4.3 million for the year ended 31 December 2009,
of which $2.8 million of the decline related to the weakening US dollar against the Great Britain pound and
$3.0 million related to the sale of our Fund Services business. Net interest income, at $11.8 million, was down
$10.1 million, or 46.3%, due to a contraction in margins, which was the primary contributor to the decline in core
earnings. Non interest income declined $7.6 million from $29.5 million (excluding fund administration revenues
of $7.8 million in 2008) to $21.9 million, offset by a decline in total expenses of $10.7 million, of which $5.0 million
related to the Fund Services business. Total assets at 31 December 2009 were $1.5 billion (£1.0 billion), up from
$1.4 billion (£1.0 billion) at 31 December 2008. Client AUA, excluding investment and pension fund administration,
were $18.8 billion at 31 December 2009, up from $17.1 billion. In GBP terms, client AUA was £11.6 billion as at
31 December 2009 down from £11.7 billion at 31 December 2008, reflecting declines in net asset values.
(in $ thousands)
Net interest income
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains and (losses)
Net income
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Total assets under administration
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
2 0 0 9
11,78 2
21,90 4
33,68 6
29,34 1
4,345
(29 8)
3,457
2 0 0 8
21,935
37,270
59,205
40,044
19,161
131
17,214
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(46.3%)
(10,153)
(41.2%)
(15,366)
(43.1%)
(25,519)
26.7%
10,703
(77.3%)
(14,816)
(327.5%)
(429)
(79.9%)
(13,757)
1,357
354
1,535
1,288
415
1,449
69
(61)
86
11,68 0
7,136
18,81 6
12,048
5,069
17,117
(368)
2,067
1,699
151
514
665
188
450
638
(37)
64
27
5.4%
(14.7%)
5.9%
(3.1%)
40.8%
9.9%
(19.7%)
14.2%
4.2%
Number of employees
185
191
(6)
(3.1%)
34
Ho ng K on g
The major business lines in Hong Kong are private wealth management, advisory asset management and personal
trust. Our Hong Kong segment recorded a net loss of $10.0 million on revenues of $2.6 million for the year ended
31 December 2009, reflecting the write down of goodwill and intangible assets totalling $10.1 million.
(in $ thousands)
Net interest income
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains and (losses)
Net (loss) income
As at 31 D ecember
(in $ mi l l ions)
Total assets
Assets under administration - Trust
2 0 0 9
10
2,633
2,643
2,483
160
(10,1 4 7)
(9,98 7)
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
2 0 0 8
36
3,903
3,939
2,280
1,659
-
1,403
(26)
(1,270)
(1,296)
(203)
(1,499)
(10,147)
(11,390)
(72.2%)
(32.5%)
(32.9%)
(8.9%)
(90.4%)
N/A
(811.8%)
10
45
9
34
2
11
17.8%
32.4%
Number of employees
11
10
1
10.0%
35
Malta
The major business lines in Malta are personal trust and company administration. Butterfield Trust (Malta) Limited
recorded a net loss of $2.3 million on revenues of $1.5 million for the year ended 31 December 2009. $2.2 million of
the loss relates to the write-down of intangible assets. On a normalised basis, excluding gains and losses and
amortisation of intangible assets, Malta recorded net income of $0.4 million compared to $0.6 million the year
before. Client AUA were $733 million at 31 December 31 2009, up $20 million or 2.8% from the prior year.
(in $ thousands)
Net interest income
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains and (losses)
Net income
As at 31 D ecember
(in $ mi l l ions)
Total assets
Assets under administration - Trust
2 0 0 9
13
1,526
1,539
1,553
(14)
(2,24 0)
(2,25 4)
2 0 0 8
34
1,655
1,689
1,355
334
-
218
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(61.8%)
(21)
(7.8%)
(129)
(8.9%)
(150)
(14.6%)
(198)
(104.2%)
(348)
N/A
(2,240)
(1133.9%)
(2,472)
3
733
3
713
-
20
(8.7%)
2.8%
Number of employees
15
16
(1)
(6.3%)
36
Switz erla n d
The major business line in Switzerland is trust and company services established in 2007. Our Swiss trust business
continues to build our wealth management offering with a highly specialised, expert service in private wealth
structures for both Swiss and international clients. Our Switzerland segment recorded a net loss of $3.0 million
on revenues of $0.3 million, consistent with the year ended 31 December 2008. AUA more than doubled from
$25 million as at 31 December 2008 to $52 million by year end 2009. The asset management business in Switzerland
was closed in 2009.
(in $ thousands)
Net interest income
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Gains and losses
Net loss
As at 31 D ecember
(in $ mi l l ions)
Total assets
Assets under administration - Trust
Total assets under management
2 0 0 9
4
306
310
3,075
(2,76 5)
(23 5)
(3,00 0)
2 0 0 8
4
270
274
3,595
(3,321)
-
(3,321)
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
0.0%
13.3%
13.1%
14.5%
(16.7%)
N/A
(9.7%)
-
36
36
520
556
(235)
321
1
52
-
1
25
18
-
27
(18)
-
108.0%
(100.0%)
Number of employees
6
8
(2)
(25.0%)
37
Th e Ba hamas
A net loss of $0.1 million for the year ended 31 December 2009 was reported, down from a net income of $1.9 million
a year ago. A goodwill write-down of $0.9 million was recorded in gains and losses as a result of our annual
impairment testing. Net income before gains and losses was $1.0 million in 2009 compared to $2.4 million recorded
in 2008. The decrease reflecting the sale of our Fund Services business and declining net interest margins. As a result
of the sale of our fund services business and declining net interest margins, total revenues fell year-over-year by
28.7%, to $7.9 million from $11.1 million the year before. At 31 December 2009, total assets were $166 million,
compared to $155 million at 31 December 2008, while client AUA were $2.4 billion, unchanged from last year,
excluding fund administration.
(in $ thousands)
Net interest income
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Gains and losses
Net income
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration - Trust
Assets under management
2 0 0 9
2,610
5,332
7,942
7,016
926
(88 5)
(11 9)
2 0 0 8
3,600
7,534
11,134
8,779
2,355
-
1,919
2 0 0 9 / 2 0 0 8 2 0 0 9 / 2 0 0 8
$ change % change
(27.5%)
(990)
(29.2%)
(2,202)
(28.7%)
(3,192)
20.1%
1,763
(60.7%)
(1,429)
(885) N/A
(2,038)
(106.2%)
133
76
166
2,394
86
117
71
155
2,349
46
16
5
11
45
40
13.7%
6.8%
7.2%
1.9%
87.0%
Number of employees
54
60
(6)
(10.0%)
38
Unit e d Ki ng dom
A net loss of $3.6 million was recorded for the year ended 31 December 2009, compared to net income of
$11.7 million for the year ended 31 December 2008. But when excluding gains and losses, net income was
$6.1 million in 2009, down from $10.1 million the year before. Total revenues before gains and losses were
$25.4 million (£16.2 million), down $13.7 million from $39.1 million (£21.2 million) principally reflecting the
strengthening of the Great Britain pound against the US dollar and a $12.5 million (£5.3 million) decline in net
interest income. At 31 December 2009, total assets were $1.3 billion (£0.8 billion), unchanged from prior year.
AUM totalled $0.6 billion (£0.3 billion) at 31 December 2009, compared to $0.4 billion (£0.3 billion) at
31 December 2008, while client AUA were $1.2 billion (£0.7 billion) at 31 December 2009, compared to $1.2 billion
(£0.8 billion) at 31 December 2008.
(in $ thousands)
Net interest income
Provision for credit losses
Non interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Gains and losses
Net income
As at 31 D ecember
(in $ mi l l ions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration - Custody
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
2 0 0 9
15,17 3
(59 4)
10,84 7
25,42 6
19,28 0
6,146
(9,38 1)
(3,58 0)
2 0 0 8
27,641
(276)
11,768
39,133
29,067
10,066
2,218
11,672
2 0 0 9 / 2 0 0 8
$ change
(12,468)
(318)
(921)
(13,707)
9,787
(3,920)
(11,599)
(15,252)
2 0 0 9 / 2 0 0 8
% change
(45.1%)
(115.2%)
(7.8%)
(35.0%)
33.7%
(38.9%)
(522.9%)
(130.7%)
1,116
529
1,295
1,153
1,075
511
1,322
1,237
289
265
554
208
208
416
41
18
(26)
(84)
81
57
138
3.8%
3.5%
(2.0%)
(6.8%)
38.9%
-
33.2%
Number of employees
112
129
(17)
(13.2%)
39
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the Balance Sheet as reported as at 31 December 2008 and 31 December 2009. Also
included is the 31 December 2009 pro-forma impact of the capital raise fully described in the “Capital Management”
section following the Balance Sheet discussion:
(in $ thousands)
Assets
Cash and deposits with banks
Investments
Loans, net of allowance for credit losses
Premises, equipment and computer software
Other assets
Tota l assets
Li abi l it i es
Total deposits
Total other liabilities
Subordinated capital
Tota l l i ab i l i t i es
Preferred equity *
Common equity
Tota l shareholders' equity
2008
2009
200 9PF
2,221,390
3,824,079
4,418,277
197,155
250,943
10,911,844
9,801,269
309,839
282,296
10,393,404
-
518,440
518,440
1,986,798
2,935,208
4,218,332
244,242
210,022
9,594,602
8,696,619
259,438
283,085
9,239,142
200,000
155,460
355,460
2,50 6,7 9 8
2,78 5,2 0 8
4,21 8,3 3 2
2 4 4,24 2
2 1 0,02 2
9,96 4,6 0 2
8,69 6,6 1 9
2 5 9,43 8
2 8 3,08 5
9,23 9,1 4 2
2 0 0,00 0
5 2 5,46 0
7 2 5,46 0
Tota l l i ab i l i t i es and shareholders' equity
10,911,844
9,594,602
9,96 4,6 0 2
Cap ita l Rat ios
Risk weighted assets
Tangible common equity (TCE)
Tangible assets (TA)
TCE/TA
Tier 1 common ratio
Tier 1 ratio
Total capital ratio
* Preferred shares shown at liquidation preference
The following are included in the pro-forma Balance Sheet:
o $550 million capital raise
o $30 million transaction costs
o $150 million potential investment losses
6,200.0
446,826
10,840,230
4.1%
7.5%
7.5%
11.2%
5,734.1
88,619
9,527,761
0.9%
3.7%
7.2%
10.1%
5,858.9
4 5 8,61 9
9,89 7,7 6 1
4.6%
1 0.1%
1 3.5%
1 8.7%
Total assets were $9.6 billion as at 31 December 2009, down from $10.9 billion as at 31 December 2008. Of this total,
$4.1 billion was in cash and deposits with banks and high quality available for sale securities as at 31 December 2009,
compared to $2.8 billion the year end before. Average interest earning assets were down from $11.6 billion in 2008 to
$9.6 billion in 2009. This decrease reflects the decline in the customer deposit base from historically high levels,
down year on year by $1.1 billion from 31 December 2008 to 31 December 2009. The decline in deposits is primarily
linked to hedge fund clients who have seen record redemptions in response to the credit crisis.
40
Cas h a nd de posi ts wit h ban ks
The Bank only places deposits with highly rated institutions and ensures there is appropriate geographic
diversification to exposures. Limits are set for aggregate geographic exposures and for each institution approved by
our Credit Risk division and are monitored for compliance with policy. As at 31 December 2009, cash and deposits
with banks was $2.0 billion compared to $2.2 billion as at 31 December 2008.
Inv estm en ts
Total investments decreased by $0.9 billion compared to 2008 ending the 2009 year at $2.9 billion compared to the
prior year-end balance of $3.8 billion.
Our investment policies require management to maintain a portfolio of securities which will provide liquidity
necessary to facilitate the funding of loans and to cover deposit fluctuations, and to mitigate our overall balance
sheet exposure to interest rate risk, whilst at the same time achieving a satisfactory return on the funds invested.
The securities in which we may invest are generally limited to securities that are considered investment grade.
Securities in our investment portfolio are accounted for under US GAAP as either trading, available for sale or held
to maturity. Investment decisions are governed by The Group Investment Committee which supports the functions
and programmes that identify, assess, prioritise and manage investment risks that are assumed by Butterfield and all
investment risks assumed by Butterfield Money Market Fund Limited.
Trading securities, consisting of holdings of non-US government securities, corporate equities and seed money
invested in mutual funds managed by us, totalled $29.3 million at year-end 2009, compared to $48.3 million at
year-end 2008. The $19.0 million decline primarily reflects redemptions by the Bank in Butterfield Funds as certain
Funds no longer require seed money.
Available for sale (“AFS”) securities totalled $2.1 billion at year-end 2009, compared to $580 million in 2008; the
increase reflecting the transfer of $986 million of held to maturity (“HTM”) securities to AFS securities and the
employment of excess liquidity in this category. The transfer from HTM to AFS was effected in order to meet the
Bermuda Monetary Authority’s (BMA) requirement for banks to hold an additional capital and liquidity buffer to
withstand a 1-in-100-year severe economic downturn as a proactive, precautionary measure. AFS securities principally
consist of holdings of certificates of deposit issued by highly-rated banking institutions, which had a carrying value
of $1.0 billion at year-end 2009 ($567 million in 2008). As a result of the transfer from HTM to AFS, also included are
$66.1 million (nil in 2008) in US government and federal agency securities, $70.7 million (nil in 2008) in collateralised
mortgage obligations, $542 million (nil in 2008) in corporate debt securities and $336 million (nil in 2008) in other,
primarily asset-backed securities.
Held to maturity (“HTM”) investments were $839 million as at 31 December 2009 compared to $3.2 billion the year
before and represent 29% of our investment portfolio in 2009 compared to 84% in 2008. The decrease in the HTM
portfolio reflects maturities of $909 million, the transfer of $986 million of investments from the HTM portfolio to the
AFS portfolio, the transfer of $316 million of short-dated (less than 3 months to maturity) bank certificates of deposit
from HTM to AFS for liquidity management, the write down of $190 million other-than-temporarily impaired
securities, and an increase of $44 million related to foreign exchange fluctuations and amortisation.
As at 31 December 2009, investments in mortgage-backed securities had a carrying value of $329.9 million, down
from $524.3 million the previous year, with a fair value of $260.4 million as at the year ended 2009, compared to
$314.5 million in 2008. These assets represented 11.3% of total investments in 2009, down from 13.7% in 2008.
Other asset-backed securities, CDOs, CLOs and SIVs had a carrying value of $680.8 million ($750.3 million in 2008),
with a fair value of $605.9 million ($601.8 million in 2008), and represented 23.2% (19.6% in 2008) of investments.
As at 31 December 2009, 92.6 % (95.3 % in 2008) of our total investments remained in investment
grade securities (i.e., rated ‘ BBB ’ or higher).
Continued instability (although somewhat improved during 2009) in the markets for mortgage-backed and
asset-backed securities has adversely affected the liquidity of these markets and thereby made it difficult to
obtain market quotations on many of these securities, thereby requiring significant management judgment
41
to determine appropriate fair values. Our review indicates that the expected cash flows of our remaining
non-other-than-temporarily impaired (non-OTTI) holdings of residential mortgaged-backed securities continue
to be in accordance with contractual terms.
Securities in unrealised loss positions are analysed as part of Management’s ongoing assessment of OTTI. When
Management intends to sell securities, it recognises an impairment loss equal to the full difference between the
amortised cost basis and the fair value of those securities. When Management does not intend to sell equity or debt
securities in an unrealised loss position, potential OTTI is considered using a variety of factors, including the length
of time and extent to which the market value has been less than cost; adverse conditions specifically related to the
industry, geographic area or financial condition of the issuer or underlying collateral of a security; payment structure
of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and
changes in fair value of the security after the balance sheet date.
For debt securities, Management estimates cash flows over the remaining lives of the underlying collateral to assess
whether credit losses exist and to determine if any adverse changes in cash flows have occurred. Management’s cash
flow estimates take into account expectations of relevant market and economic data as of the end of the reporting
period—including, for example, underlying loan-level data, and structural features of securitisation, such as
subordination, excess spread, overcollateralisation or other forms of credit enhancement. Management compares
the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the
securitisation structure to determine whether these features are sufficient to absorb the pool losses, or whether a
credit loss on the debt security exists. Management’s cash flow forecasts are created in conjunction with well-known
third-party corporations specialising in analytical cash flow modelling. Management also performs other analyses
to support its cash flow projections, such as stress scenarios. For debt securities, Management considers a decline
in fair value to be other-than-temporary when it does not expect to recover the entire amortised cost basis of the
security.
Assu mptio ns
The majority of the Bank’s investments are originated from the US, while the remainder is principally originated
from the UK. When estimating cash flows, Management expects recessionary levels for US and UK gross domestic
product (“GDP”) and unemployment during this economic cycle. In the US, Management expects that real GDP will
grow (decline) by (2.5%) in 2009 and 2.3% in 2010, median home prices will experience peak-to-trough decline
of 34%, with a turnaround in early 2011, the Federal Funds rate will end 2009 at 0.1% and 2010 at 0.9%, whilst
unemployment will peak at 10.6% in late 2010. In the UK, Management expects that real GDP will grow (decline)
by (4.8%) in 2009 and 1.3% in 2010, median home prices will experience peak-to-trough decline of 25%, with a
turnaround after late 2010, the Funds rate will end 2009 at 0.5% and 2010 at 1.0%, whilst unemployment will peak
at 8.8% in early 2010. Results, which are based on models using the above assumptions, will change as these
assumptions become more or less pessimistic.
Lo ans
The loan portfolio stood at $4.2 billion at 31 December 2009, down $0.2 billion from $4.4 billion the year
before, as loan demand tapered off with slower economic conditions in all the jurisdictions in which we
operate. At 31 December 2009, the loan portfolio represented 44.0% of total assets, compared to 40.5%
at 31 December 2008, whilst loans as a percentage of customer deposits was 49.2%, compared to 47.0%
at 31 December 2008. During 2009, the Bank concluded a non-monetary loan restructuring transaction in
which the Bank accepted real estate in settlement of a loan balance receivable from a non-related party by
$21.1 million. The real estate has been added to Premises, Equipment and Computer Software as an
operating long-term asset of the Bank.
Loans and other extensions of credit
A significant component of our credit risk relates to our loan portfolio. In addition, credit risk is inherent in
certain contractual obligations such as legally binding unfunded commitments to extend credit, commercial
letters of credit, and standby letters of credit. Our real estate loan portfolio comprises lending secured by
commercial and residential real estate.
42
Commercial and industrial
The commercial and industrial loan portfolio includes loans to businesses, other than financial institutions,
that are not primarily collateralised by mortgages on commercial real estate. Loan repayment is expected to
flow from the operation of the underlying businesses.
Commercial real estate
In managing our credit exposure, Management has defined a commercial real estate loan as one where the
principal collateral is real estate held for commercial purposes and is supported by a registered mortgage.
Construction loans provide financing for the initial phases of the acquisition or development of
commercial real estate, with the intent that the borrower will refinance the loan or sell the project upon
its completion. These interim loans are primarily in those markets where we have a strong presence and
a thorough knowledge of the local economy, particularly in Bermuda. These loans totalled $16 million at
31 December 2009 compared to $203 million the prior year end, as construction projects have completed
during 2009 and transferred to commercial mortgages.
Commercial mortgage financing, which totalled $1.0 billion at 31 December 2009, is provided for the
acquisition or refinancing of income-producing properties. Cash flows from the properties, primarily from
rental income, generally are sufficient to service the loan. These loans are primarily located in Bermuda and
in the United Kingdom.
Residential real estate
The residential real estate loan portfolio is primarily composed of mortgages to clients with whom we are
seeking to establish, or already have, a comprehensive financial services relationship. At 31 December 2009,
residential real estate loans totalled $1.9 billion of which $1.2 billion, or 66.8%, were in Bermuda and the
remainder distributed throughout our other banking operations. At 31 December 2008, residential real
estate loans totalled $1.7 billion, or 39.3%, of total loans. All mortgages were underwritten utilising our
stringent credit standards. Residential real estate loans consist of conventional home mortgages and equity
credit lines.
Other loa n portfolios
In addition, we provide loans as part of our normal banking business in respect of automobile financing,
consumer financing, including credit cards, commercial financing, financial institutions, governments in the
jurisdictions in which we operate and overdrafts facilities to both retail, corporate and private banking
clients.
Our loan portfolio and contractual obligations and arrangements are discussed in Notes 5 and 6 to the
consolidated financial statements and are presented in the tables that follow.
See “Note 5: Loans & Note 6: Credit Risk Concentration” in the 31 December 2009 audited financial
statements for additional tables and information.
43
F loat ing Rate
Year ended 31 D ecember 2009
F ixed rate
Total
Net
Carrying
Value
Averag e
maturity
in years
Net
Carrying
Value
Averag e
maturity
in years
Net
Carrying
Value
Averag e
maturity
in years
Commercia l loans
Financial institutions
Government
Commercial real estate
Commercial mortgage
Construction
Commercial and industrial
Loans
Overdrafts
Total commercia l loans
Consumer loans
Automobile financing
Credit card
Mortgages
Overdrafts
Other consumer
Total consumer loans
161
40,823
795,066
16,101
775,562
115,472
1,743,185
15,813
12,416
1,648,193
8,781
223,172
1,908,375
0.01
3.27
4.24
5.82
3.73
0.06
3.76
159,643
9.35
161
40,823
954,709
16,101
41,463
201,106
0.78
817,025
115,472
7.58 1,944,291
4.10
0.1
14.70
0.22
2.67
13.25
42,043
69,876
215,624
69,858
397,401
3.39
0.00
57,856
82,292
23.53 1,863,817
8,781
293,030
14.02 2,305,776
5.12
0.01
3.27
5.09
5.82
3.58
0.06
4.16
3.58
0.1
15.72
0.22
3.26
13.38
Total gross loans
Less genera l provision for
credit losses
Total net loans
3,651,560
8.72
598,507
11.86 4,250,067
9.17
(31,735)
3,619,825
8.72
598,507
(31,735)
11.86 4,218,332
9.17
Deposits
Deposits are our principal funding source for use in lending, investments and liquidity. Total customer
deposits were $8.6 billion as at 31 December 2009, an 8.8% decrease over the same period in 2008.
Demand deposits, which include chequing accounts, both interest and non-interest bearing, savings and
call accounts, totalled $5.7 billion, or 66.5% of total customer deposits at year-end 2009, compared to
$6.0 billion, or 63.3%, at year-end 2008. Because of the declines in interest rates across the major world
currencies, notably the US dollar and Great Britain pound, plus lower levels of interest rates in Bermuda,
customers have preferred to place deposits on a demand basis rather than a term basis given limited yield
opportunities in longer duration products in the low interest rate environment.
See “Note 9: Customer Deposits and Deposits from Banks” in the 31 December 2009 audited financial
statements for additional tables and information.
Borr owings
We have no issuances of certificates of deposit, commercial paper (CP) or senior notes outstanding and
have no CD or CP issuance programmes.
We do not have committed funding lines from other banks but we are able to source funding on an
uncommitted basis from a number of major banks, including our principal correspondent banks.
We use funding from the inter-bank market as part of our interest rate and liquidity management.
At 31 December 2009, deposits from banks totalled $118.7 million compared to $395.1 million at
31 December 2008.
44
Su bor dinat ed de bt, inter est payme nts and mat urities
We have outstanding issuances of subordinated debt with a carrying value of $283.1 million as at
31 December 2009, of which $275 million is issued in US dollars and £5 million in Great Britain pounds.
All outstanding subordinated debt is eligible for inclusion in our Tier II regulatory capital base and is
limited to 50% of Tier I capital.
See “Note 17: Subordinated Capital” in the 31 December 2009 audited financial statements for additional
tables and information.
Re purc hase agre ements
We also obtain funds from time to time from the sale of securities to institutional investors under
repurchase agreements. In a repurchase agreement transaction, we will generally sell an investment
security, agreeing to repurchase either the same or a substantially identical security on a specified later
date, generally not more than 90 days, at a price slightly greater than the original sales price. The
difference in the sale price and repurchase price is the cost of the use of the proceeds, or interest
expense. The investment securities underlying these agreements may be delivered to securities dealers
who arrange such transactions as collateral for the repurchase obligation. Repurchase agreements
represent a cost competitive funding source for us. However, we are subject to the risk that the borrower
of the securities may default at maturity and not return the collateral. In order to minimise this potential
risk when entering into such transactions, we generally deal with large, established investment brokerage
firms with whom we have ‘Master Repurchase’ agreements. Repurchase transactions are accounted for as
financing arrangements rather than as sales of such securities, and the obligation to repurchase such
securities is reflected as a liability in our Consolidated Financial Statements. No repurchase agreements
had been entered into as at year-ends 2009 and 2008.
Capit al manageme nt
One of Management’s primary objectives is to maintain the confidence of our clients, the investing
public, bank regulators and shareholders.
We are subject to the framework for risk-based capital adequacy, sometimes referred to as Basel II, which
was developed by the Basel Committee on Banking Supervision (the “Basel Committee”) and has been
endorsed by the central bank governors and heads of bank supervision of the G10 countries. In December
2008, the Bermuda Monetary Authority (BMA) published final rules, effective 1 January 2009, with respect
to the implementation of the Basel II framework, the latest agreed version of which was released by the
Basel Committee in November 2005. Previously, we were subject to the Basel I framework for risk-based
capital adequacy. On 6 March 2009, the BMA announced that it required all banks in Bermuda to
maintain a capital buffer such that they would be able to withstand a severe economic downturn (a 1-in-
100-year event) and still maintain a Tier 1 capital ratio of at least 6%. The Tier 1 capital ratio is calculated
by dividing Tier 1 capital by total risk weighted assets, where risk weighted assets is calculated by
assigning a risk weight to each asset and exposure. All of Bermuda’s banks have now agreed with the
BMA on the necessary levels of capital required to meet the stress test capital buffer and, where
necessary, are executing plans to ensure that additional capital is provided.
We manage our capital both on a total group basis and, where appropriate, on a legal entity basis. The
Finance department has the day-to-day responsibility for measuring and managing capital levels within
guidelines and limits established by the Risk Policy & Compliance Committee of the Board. The
management of capital will also involve regional management when appropriate. In establishing the
guidelines and limits for capital, a variety of factors are taken into consideration, including the overall
risk of the business, regulatory requirements, capital levels relative to our peers, and the impact on our
credit ratings.
Capit al raise and capital position
On 2 March 2010, the Bank announced the issuance to certain new investors (the “New Investors”) of 144.8 million
common shares of par value $1 per share, for a consideration of $175 million and the issuance of 375,000
45
mandatorily convertible preference shares of par value $0.01 per share, for a consideration of $375 million. The net
proceeds to the Bank from both issuances, net of transaction costs, is expected to be approximately $520.0 million.
On a pro-forma basis as at 31 December 2009, the issuance of the common and mandatorily convertible preference
shares would increase Butterfield Group’s Tier 1 regulatory capital ratio to 13.5% and its total regulatory capital ratio
to 18.7%. Both these ratios exceed the minimum regulatory capital requirements as prescribed by the BMA.
Upon appropriate shareholders' approvals, the Bank intends to commence a Rights Offering (the “Offering”) to
existing common shareholders of the Bank, excluding individuals in the US and the New Investors and mandatorily
convertible preference shares issued on 2 March 2010. Each right will entitle the holder thereof to subscribe for their
pro rata portion of the total of common shares and mandatorily convertible preference shares. The maximum
amount of the Offering will be $130 million. The use of the Offering net proceeds will be to repurchase shares from
the New Investors at the same price at which the New Investors originally purchased the shares.
Following the share issuance, the Bank may restructure its investment portfolios in the quarter ending 31 March 2010.
Consequently, the Bank may no longer be able to assert that it will retain the held to maturity investments until
recovery of their amortised cost and the securities would be reclassified to available for sale. Should such a change
occur, total losses, including previously unrecognised losses on the held to maturity investments, of approximately
$150 to $175 million may be recognised in the quarter ending 31 March 2010. It is anticipated that the majority of
such losses may be realised through earnings as securities are sold to restructure the portfolio.
As at 31 December 2009, the Bank's consolidated Tier 1 and total regulatory capital ratios were 7.2% and
10.1%, respectively. As at 31 December 2009, the Bank is in compliance with the BMA prescribed
minimum Tier 1 regulatory capital ratio of 6% and is not in compliance with the Individual Capital
Guidelines (ICG) prescribed by the BMA for Bank's total regulatory capital requirement. As described
above, on a pro-forma basis as at 31 December 2009, the issuance of the common and mandatorily
convertible preference shares would increase Butterfield Group’s Tier 1 regulatory capital ratio to 13.5%
and its total regulatory capital ratio to 18.7%. Both these ratios exceed the minimum regulatory capital
requirements as prescribed by the BMA.
The following table sets forth our capital adequacy position for the year ended 2009 as reported and the
pro-forma 31 December 2009 position in accordance with Basel II framework and the 2008 year end
position as calculated in accordance with the Basel I framework:
46
(in $ thousands)
Tier 1 capital
Tier 2 capital
Deductions
Tota l capita l
We i ghted Risk Assets
(In $ thousands)
Cash and inter-bank placements
Investments
Loans
Other assets
Off-balance sheet items
Operational risk charge
Tota l w e i ghted risk assets
Cap ita l Rat ios (%)
Tier 1 common
Tier 1 total
Total capital
* Based on Basel I framework
Share hol ders’ equity
Year ended 31 D ecember
2008*
2 0 0 9
2 0 0 9PF
463,468
256,673
(26,465)
693,676
412,67 0
238,06 9
(73,53 2)
577,20 7
782,67 0
314,81 9
(16,93 2)
1,08 0,55 7
429,371
1,587,976
3,415,452
316,780
450,384
-
6,199,963
397,26 3
1,28 9,53 7
2,74 4,30 6
362,63 8
313,20 7
627,14 5
5,73 4,09 6
501,26 3
1,24 2,83 7
2,74 4,30 6
362,63 8
313,20 7
627,14 5
5,79 1,39 6
7.5%
7.5%
11.2%
3.7%
7.2%
10.1%
1 0.1%
1 3.5%
18.7%
In 2009, our shareholders’ equity decreased $162.9 million to $355.5 million at 31 December 2009, from
$518.4 million at 31 December 2008; the decrease primarily reflecting net loss for the year of
$213.4 million, cash dividends declared and guarantee fee of $20.6 million, net transfers of treasury
Common Shares of $48.0 million and changes in other comprehensive income of $122.8 million
representing
o changes in the translation of foreign operations mainly due to the decline of the Great Britain
pound of $4.3 million,
o changes in unrealised gains and loss on available for sale securities of $54.5 million, which
primarily reflects a $36.6 million loss from the SIV purchased from the BMMF and net unrealised
loss of $20.1 million from the transfer of securities from the HTM to the AFS portfolios.
o net change in non-credit OTTI on held to maturity securities of $58.6 million which primarily
includes $30.9 million related to a SIV and $11.8 million related to a commercial asset-backed
security.
o changes in employee future benefits, due to changes in actuarial assumptions, of $14.1 million
including $11.2 million actuarial loss on the post retirement medical benefit plan resulting
mainly from the change in the medical cost trend rates.
Weighted risk assets declined year-on-year by 9.2% to $5.7 billion at 31 December 2009. The measurement
of risk weighted assets differs significantly under Basel II and so the stated figures for 31 December 2009
are not directly comparable with those for 31 December 2008. For example, under Basel II retail mortgages
that are considered to be secured and not past due are weighted at 35%; under Basel I the same
mortgages are weighted at 50%.
The loan to the Stock Option Trust of $34.7 million is in respect of potential obligations under our
Stock Option Plan and is deducted from our shareholders’ equity as treasury shares. The decrease,
47
year-over-year, of $48.1 million principally reflects the use of treasury shares for $37.8 million of stock dividends
declared and $9.0 million from the Dividend Reinvestment Programme.
We did not purchase common shares under the Share Repurchase Programme during the year ended
31 December 2009, compared to 2,562,997 common shares purchased and held as treasury shares at a
cost of $38.3 million during the year ended 31 December 2008.
Prefer ence shar es
In June 2009, the Bank offered 200,000 of 8.00% Non-Cumulative Perpetual Limited Voting Preference
Shares, liquidation preference of US$1,000 per share (the “Preference Shares”) and $200,000,000 in the
aggregate. The Preference Shares are fully and unconditionally guaranteed, with the full faith and credit
of the Government of Bermuda (the “Guarantor”), as to payment of dividends for up to ten years and as
to payment of the liquidation preference on, or in certain circumstances prior to, the ten-year anniversary
of the date of issuance (the “Guarantee”).
Dividends on the Preference Shares are payable quarterly on a non-cumulative basis, only when, as and if
declared by our Board of Directors, on 15 March, 15 June, 15 September and 15 December of each year at
a fixed rate equal to 8.00% per annum on the liquidation preference, commencing on 15 September 2009.
In the event that, during the ten-year term of the Guarantee, the Bank does not pay full dividends in
respect of any quarterly dividend period on any Preference Shares that are then issued and outstanding,
the Guarantor has agreed to pay to holders of the Preference Shares an amount equal to such unpaid
dividends pursuant to the Guarantee. The Bank may redeem the Preference Shares at its option, subject
to approval of the Bermuda Monetary Authority (BMA), in whole or in part, on the tenth day prior to the
ten-year anniversary of the date of issuance (the “Bank Redemption Date”), at a redemption price equal
to 100% of the liquidation preference thereof plus any unpaid dividends for the then-current dividend
period to the Guarantee End Date, regardless of whether any dividends are actually declared for such
dividend period. In addition, the Bank may redeem the Preference Shares prior to the Bank Redemption
Date, at its option, subject to approval of the BMA, in whole or in part, at any time and from time to time,
at a redemption price equal to the Make-Whole Redemption Price. Unless previously redeemed, the
Guarantor has agreed to purchase from the holders thereof, and such holders will be required to transfer
to the Guarantor, on the ten-year anniversary of the date of issuance, all Preference Shares then issued
and outstanding, at a price per Preference Share equal to the liquidation preference thereof plus any
unpaid dividends for the then-current dividend period to the date of such purchase, regardless of
whether any dividends are actually declared for such dividend period. In addition, upon the occurrence of
a Liquidation Event at any time prior to the ten-year anniversary of the date of issuance of the Preference
Shares, the Guarantor has agreed to purchase from the holders thereof, and such holders will be required
to transfer to the Guarantor, all Preference Shares then issued and outstanding, at a price per Preference
Share equal to the liquidation preference thereof plus any unpaid dividends for the then-current dividend
period to the date of payment, regardless of whether any dividends are actually declared for such
dividend period.
Reg ulatory capital
New capital adequacy rules came into force in Bermuda from the 1 January 2009 following the
implementation of Basel II, which was developed by the Basel Committee on Banking Supervision
(the “Basel Committee”). From this date the Bank adopted Pillar 1 standardised approach to credit and
operational risk; it also became subject to Pillar 2 (Supervisory Review and Assessment) and Pillar 3
(Disclosure) from that date. Under the requirements of Pillar 2 of the Basel II framework, the Bank
conducts an internal Capital Assessment and Risk Profile (CARP) at least annually. The CARP is used
by the BMA to determine and set the Individual Capital Guidance (ICG) for each Bermuda bank.
As at 31 December 2009, the Bank's consolidated Tier 1 and total regulatory capital ratios are 7.2%
and 10.1%, respectively. Including the successful capital raise noted above and the $150 million projected
losses in the investment portfolio in the first quarter of 2010, on a pro-forma basis as at 31 December
2009, the issuance of the common and mandatorily convertible preference shares would increase
Butterfield Group’s Tier 1 regulatory capital ratio to 13.5% and its total regulatory capital ratio to 18.7%.
Both these ratios bring the Bank’s capital position back into compliance from year-end levels and indeed
48
provide a comfortable buffer between the minimum regulatory capital requirements as prescribed by
the BMA.
Divide nds
In 2009, dividends declared on common shares were $0.24 per share, comprising of $0.12 in cash and
$0.12 in bonus common shares, down from $0.56 per share in 2008. The dividend paid to shareholders in
2009 was $14.9 million, down 74.1% from the previous year in order to conserve capital. The Board of
Directors has determined that there will not be a common dividend declared in the fourth quarter of
2009. There were two preference share dividends paid in 2009 of $7.1 million in total. The Board of
Directors has declared a quarterly preference share dividend based on the fixed rate of 8% per annum on
the liquidation preference payable on 15 March 2010 to shareholders of record on 1 March 2010.
Cash flow
For the year ended 31 December 2009, net cash provided by operating activities totalled $58.0 million.
Cash flows from operating activities are generally the cash effects of transactions and other events
that enter into the determination of net income. Cash provided by operating activities decreased
$191.6 million from 2008 to 2009 principally reflecting the lower earnings power in 2009, hindered by low
interest rates and lower non-interest income.
Net cash provided by investing activities for the year ending 31 December 2009 totalled $1,073 million
compared to $179.7 million at 31 December 2008. Our investing activities include capital expenditures,
loan activities, investment activities, and divesture and acquisition activities. We do not own, directly or
indirectly, any shares of stock or any other equity interest or long-term debt securities of any company,
corporation, firm, partnership, joint venture, association or other entity, except pursuant to ordinary
course investment activities or as a result of ordinary course loan work-outs. The $893.1 million increase
in 2009 over 2008 in cash provided by (used in) investing activities was mainly due to a $908.7 million net
cash provided from the maturities of held to maturity investments, $276.7 million decrease in term
deposits with banks and $156.7 million decrease in loans offset by $209.4 million net increase in
purchases of available for sale securities.
Net cash used in financing activities totalled $1,150 million in 2009 compared to $117.4 million in 2008.
The $1,032 million increase was primarily due to the $1,317 million decrease in customer deposits offset
by the $200 million issuance of preference shares.
49
OFF BALANCE SHEET ARRANGEMENTS
Assets un der a dministration a nd assets un de r manageme nt
The Bank, in the normal course of business, holds assets under administration and assets under
management in a fiduciary or agency capacity for our clients. In accordance with US GAAP, these assets
are not assets of the Bank and are not included in our Consolidated Balance Sheet.
Cre dit-r elate d arrang emen ts
We enter into standby letters of credit, letters of guarantee and contractual commitments to extend
credit in the normal course of business, which are not required to be recorded on the Balance Sheet.
Since many commitments expire unused or only partially used, these totals do not necessarily reflect
future cash requirements. Management believes there are no material commitments to extend credit that
represent risks of an unusual nature.
Standby letters of credit and letters of guarantee are issued at the request of our clients in order to
secure a client’s payment or performance obligations to a third party. These guarantees represent our
irrevocable obligation 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 client. 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.
Credit risk is the principal risk associated with these instruments. The contractual amounts of these
instruments represent the credit risk should the instrument be fully drawn upon and the client defaults.
To control the credit risk associated with issuing letters of credit and letters of guarantee, we subject
such activities to the same credit quality and monitoring controls as our lending activities. The types and
amounts of collateral security we hold for these standby letters of credit and letters of guarantee is
generally represented by our deposits or a charge over assets held in mutual funds. We are obligated to
meet the entire financial obligation of these agreements and in certain cases are able to recover the
amounts paid through recourse against the collateral security.
The following table sets forth the outstanding financial guarantees with contractual amounts
representing credit risk:
Standby letters of credit
Letters of guarantee
Tota l
Year ended 31 D ecember 20 0 9
G ross
Co l l at er a l
352,016
19,601
371,617
322,582
15,135
337,717
Net
29,434
4,466
33,900
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, it is shown in
gross amounts including interest income.
Co ntractual o bligations (inclu ding su bor dinat e d de bt)
We enter into contractual commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. These credit arrangements are subject
to our normal credit standards and collateral is obtained where appropriate. Substantially all of our
commitments to extend credit are contingent upon clients 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 contractual amounts for these commitments represent the maximum payments we would have to
make should the contracts be fully drawn, the counterparty default, and any collateral held prove to be of
no value. Commitments when drawn would be funded from our free cash resources.
We enter into other contractual obligations in the normal course of business. Certain of these
50
obligations, such as subordinated debt, are recorded as liabilities in our Consolidated Balance Sheet.
Other items, such as sourcing agreements, operating leases and other purchase contracts, are not
required to be recorded on the Balance Sheet. Expected cash payments associated with subordinated
debt are based on principal payment dates. See “Note to Consolidated Financial Statements—Note 17:
Subordinated Capital” for terms of subordinated debt arrangements and interest rates.
The $142.9 million contractual obligation in respect of sourcing—Bermuda and the Cayman Islands—
relates to an agreement with global technology service provider Hewlett Packard (previously EDS) to
supply technology infrastructure and application development management, information security and
technical support for our locations in Bermuda and the Cayman Islands. With HP, we have commenced
the process of transitioning all our business applications and legacy systems in these locations to a new,
common platform that will be centrally managed. Under our agreement with HP, server management and
maintenance, technology field support, application support and development and help desk functions
will be managed by HP. In addition, HP will manage the installation of and conversion to a new, common
core banking system in Bermuda and the Cayman Islands. The transition of functional responsibility for
information technology management and support and the implementation of a new core banking system
are expected to be largely completed in the Cayman Islands by the end of the second quarter of 2010,
and in Bermuda by the end of the third quarter in 2010. Under the agreement, we have the option to
expand HP’s service to our other locations, subject to agreement on an expansion plan and fees.
We believe that our arrangement with HP will help us to optimise operations, improve productivity and
enhance client service and may potentially impact revenues in Bermuda and the Cayman Islands by
reducing the amount of time our relationship managers must spend on processing data, freeing up time
to spend on business development and client service. We also expect to derive synergies in the form of
cost savings gradually over time. Management and coordination of our international information
technology functions will continue to be carried out from our head office in Bermuda.
We have entered into additional contractual obligations in the normal course of business which are not
significant to the amounts above.
51
RISK MANAGEMENT:
CREDIT, LIQUIDITY, MARKET AND OPERATIONAL RISK OVERVIEW
The Board of Directors’ Risk Policy & Compliance Committee provides oversight with respect to credit
risk, market risk, interest rate and foreign exchange risk, liquidity risk, fiduciary risk, operational risk and
the regulatory component of compliance risk. The Committee’s expectation is that risk is consciously
considered by our Management as part of strategic decisions and in day-to-day activities.
Risk tolerances are detailed in separate credit, operational, market, fiduciary and compliance risk policies
and tolerance statements. Various corporate committees and oversight entities have been established to
review and approve risk management strategies, standards, management practices and tolerance levels.
These committees and entities monitor and provide periodic reporting to the Risk Policy & Compliance
Committee on risk performance and effectiveness of risk management processes. Our business units are
expected to manage business activities within the parameters set forth in the various risk policy
statements.
Our Enterprise Risk Management (“ERM”) Division has overall responsibility for assessing credit, market
and operational risks associated with our activities. ERM provides for clear senior management
responsibility for all risks with each product having a designated risk owner. Our 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 of Directors 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 & Compliance Committee has responsibility
for establishing and periodically updating the policies that are to be consistently applied across the Bank
to manage market, liquidity, credit, interest rate, operational, legal, reputational, fiduciary and strategic
risks. Consistent with our commitment to ERM, the Risk Policy & Compliance Committee promotes an
integrated view across all risk disciplines, focusing on all elements of risk at the strategic level. Our
compliance with Basel II framework (having been adopted in Bermuda under the auspices of the
Bermuda Monetary Authority) is also a key priority to the Risk Policy & Compliance Committee.
The Group Risk Committee consists of eleven executives and is chaired by the President and Chief
Executive Officer who serves in an advisory capacity to the Risk Policy & Compliance Committee. The
Group Risk Committee ensures that Butterfield develops and maintains Group-wide risk management
strategies based on an integrated view of credit, market, liquidity, compliance, operational, interest rate,
investment, capital and reputational risks. The Committee ensures that risk owners effectively and
efficiently manage exposures across all product and support activities and assume risk exposures that
are consistent with the Bank’s risk appetite and tolerances. These Committees regularly review reports
from the Head of Group Compliance related to the Anti-Money Laundering/Anti-Terrorist Financing
activities of the Group. Additionally, the Committee develops and proposes to the President and Chief
Executive Officer strategies for the effective management of risk-based capital under Basel II.
The Asset and Liability Committee (ALCO), chaired by the Chief Financial Officer, monitors our 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 our Treasurer and monitored by
the market risk team within Enterprise Risk Management.
The Financial Institutions Committee, chaired by the Executive Vice President, Corporate Development,
identifies, assesses, prioritises and manages our risks associated with counterparty exposure to other
financial institutions, as well as country-specific exposures.
The Investment Committee is chaired by the Chief Risk Officer and supports the functions and
programmes that identify, assess, prioritise and manage investment risks we assume. We also monitor
our compliance with both risk-related regulatory requirements and with our internal risk management
policies and standards.
52
Chaired by our Chief Executive Officer, the Credit Committee provides a forum for ongoing executive
review of credit activity, establishing our credit guidelines and policies and approving selected credit
transactions in accordance with our 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.
Interest rat e, foreign exchan ge rate a nd marke t risk
Market risk is the risk of a loss in earnings or economic value due to adverse movements in market
factors such as interest rates, credit spreads, and equity prices. We consider interest rate risk to be a
significant market risk for us. Interest rate risk is our exposure to adverse changes in our net income, or
our economic value as a result of changes in interest rates. Consistency in our earnings is related to the
effective management of interest rate sensitive assets and liabilities due to changes in interest rates, and
on the degree of fluctuation of investment management fee income due to movements in the bond and
equity markets. We are also subject to market risk in connection with the fair value of our investments,
which consist of cash and cash equivalents and investment securities.
Fee income from investment management, custody and trust services is not directly dependent on
market interest rates and may provide us with a relatively stable source of income in varying market
interest rate environments. However, this fee income is generally based upon the value of assets under
management and, therefore, can be significantly affected by changes in the values of equities and bonds.
In addition to directly impacting net interest income, changes in the level of interest rates can also affect
(i) the amount of loans originated, (ii) the ability of borrowers to repay loans, (iii) the average maturity of
loans, deposits and mortgage-backed securities, (iv) the rate of amortisation of premiums paid on
securities, and (v) the amount of unrealised gains and losses on securities available for sale.
We hold various non-US dollar denominated assets and liabilities and maintain investments in
subsidiaries whose domestic currency is either not the US dollar or their domestic currency is not pegged
to the US dollar. The domestic currencies of Barbados, Bermuda, the Cayman Islands and The Bahamas
are all pegged to the US dollar; although that may not always remain the case. Assets and liabilities
denominated in currencies other than the US dollar are translated to 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. Assets and liabilities of subsidiaries outside
of Bermuda 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 rate of exchange prevailing
through the accounting 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 or losses are recorded in the consolidated statement of
income only when realised. Our foreign currency subsidiaries which may give rise to significant foreign
currency translation movements against the US dollar are located in Guernsey and the United Kingdom.
We also provide foreign exchange services to our clients, principally in connection with our community
banking and wealth management businesses, and effect other transactions in non-US dollar currencies.
Foreign currency volatility and fluctuations in exchange rates may impact the value of non-US dollar
denominated assets and liabilities and raise the potential for losses resulting from foreign currency
trading positions where aggregate obligations to purchase and sell a currency other than the US dollar
do not offset one another, or offset each other in different time periods. If the policies and procedures
we have in place to assess and mitigate potential impacts of foreign exchange volatility are not followed,
or are not effective to mitigate such risks, our results and earnings may be negatively affected.
The principal objective of our interest rate risk management is to maintain the appropriate balance
between profit potential and our vulnerability to changes in interest rates by means of managing the
ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities
or repricing dates. Our actions in this regard are taken under the guidance of the ALCO, which is
comprised of members of senior management. The committee is actively involved in formulating
the economic assumptions that we use in our financial planning and budgeting processes and
establishes policies which control and monitor the sources, uses and pricing of funds. We may utilise
hedging techniques to reduce interest rate risk. ALCO uses both interest rate “gap” sensitivity and
53
interest income simulation analysis to measure inherent risk in our balance sheets at specific points
in time. See “Note to Consolidated Financial Statements—Note 16: Interest Rate Risk” for our interest
rate sensitivity gap profile.
Liqui dity
The objectives of liquidity risk management are to ensure that we can meet our cash flow requirements
and capitalise on business opportunities in a timely and cost effective manner. Liquidity is defined as
the ability to generate sufficient cash to meet normal operating requirements. Liquidity risk is the risk of
potential loss if we were unable to meet our funding requirements at a reasonable cost.
We do not manage our liquidity on a Group-wide basis, but rely on treasury operations in our
subsidiaries located in Bermuda, Barbados, Guernsey, the United Kingdom and The Bahamas to manage
day-to-day liquidity. The Group Market Risk Department of ERM is responsible for measuring and
reporting liquidity risk positions by calculating various ratios of assets to liabilities within specified
maturity dates. Management’s actions in this regard are taken under ALCO’s guidance, and are designed
to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities
in a changing marketplace.
ALCO is responsible for establishing and monitoring liquidity targets as well as strategies to meet
these targets. We maintain a balance sheet with loans representing only 44.0% of total assets as at
31 December 2009. Further, at 31 December 2009, there were significant sources of liquidity within
our Balance Sheet in the form of cash, and cash equivalents and securities available-for-sale, which
amounted to $4.1 billion, or 42.3%, of total assets as compared to $2.8 billion, or 25.7% of total assets
at 31 December 2008.
Consistent with prudent industry practice, we maintain a contingent liquidity plan which can be
employed in the event of a liquidity crisis. The objective of the contingent liquidity plan is to ensure that
we maintain our liquidity during periods of stress. This plan takes into consideration a variety of
scenarios that could challenge our liquidity. These scenarios include specific and systemic events that
can impact our on-and off-balance sheet sources and uses of liquidity. We have kept the Bermuda
Monetary Authority apprised of our liquidity position throughout the year.
There is no central bank in Bermuda and thus we have no ‘lender of last resort’ and neither do we have
committed standby facilities in our favour. We do have access to funding from the inter-bank market on
an uncommitted basis and also have put in place formalised ‘Repo’ facilities with counterparties which
enable us to access funding on a secured basis. However, in a financial crisis, our access to these
liquidity sources may be restricted or we may not be able to access these sources at all. Another source
of liquidity for us is the ability to draw funding from capital markets globally. The availability and cost of
these funds are influenced by our credit rating; as a result, a downgrade in our credit ratings could have
an adverse impact on our liquidity. Similarly, a downgrade in Bermuda’s sovereign credit rating could
also adversely affect our ability to access liquidity because, historically, our ratings have been closely
linked to those of Bermuda.
On 2 March 2010, Standard and Poors (‘S&P’) affirmed it’s ‘A-/A-2’ counterparty credit ratings on the Bank and left
the outlook as ‘Negative”. The negative outlook reflects S&P’s concern that credit quality could experience further
deterioration and operating performance could remain weak over the next couple of years given the difficult
economic environment. However, they also stated that the ratings could be raised if financial performance
improves. On 2 March 2010, Moody’s affirmed Prime-1 short-term deposit rating but downgraded the long-term
deposit and debt ratings of the Bank to A2 and A3 from A1 and A2 respectively. The outlook was changed from
“Stable” to “Negative” reflecting the large investment and credit losses and new share ownership. On 2 March 2010
Fitch affirmed the Bank’s long-term issuer default rating (‘IDR’) at ‘A-‘and short term IDR at F1 and the outlook was
left at “Stable”. Fitch also affirmed the Bank’s long and short term deposits, subordinated debt and preferred stock
ratings. Our credit ratings are provided in the table below:
54
Short term deposits
Long term deposits and debt
Outlook
Last date confirmed
Cr edit rat ings
Standard &
Poor's
A-2
A-
Negative
March 2010
Moody's
P-1
A2
Negative
March 2010
F itch
F1
A-
Stable
March 2010
Our A-2 short-term deposits rating from S&P is the second from the highest and indicates the Bank is susceptible to
adverse economic conditions; however the Bank’s capacity to meet its financial commitment on the obligation is
satisfactory. Our A- long-term deposits and debt rating from S&P indicates that the economic situation can affect our
financial position. Our P-1 short-term deposits rating from Moody’s is the highest level and indicates a superior
ability to repay short-term debt obligations; our A2 long-term deposits and debt rating from Moody’s indicates that
the obligation is of” upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a
susceptibility to impairment over the long term. Our short-term deposits rating from Fitch is the best quality grade,
indicating strong capacity of the obligor to meet its financial commitment. Our A- long-term deposits and debt rating
from Fitch indicates that the economic situation can affect our finance.
The Bank’s asset funding strategies draw upon our ability to allocate funding among subsidiaries through
inter-company loans. As of 31 December 2009, loans to and from Butterfield subsidiary companies were:
D eposits and loans issued by
Bermuda Barbados Cayman Guernsey Malta
The
Bahamas
United
Kingdom
Total
D eposits and
loans due to
Bermuda
-
157
501,035
7,879
Cayman
-
-
-
-
-
-
14,793
1,692
525,556
11,382
Guernsey
19,794
-
17,397
-
809
16,069
Switzerland
7,964
-
-
-
The Bahamas
12,500
-
-
-
United
Kingdom
37,164
-
-
3,565
22
-
-
-
-
-
-
-
-
11,382
54,069
7,964
12,500
40,751
77,422
157
518,432
11,444
831
42,244
1,692
652,222
Cre dit risk
Credit risk is tied to the ability of a client or other counterparty to meet his / her financial obligations and
is relevant to many of our products and services. In general, we extend credit on a relationship basis; that
is, to clients who also take advantage of our other financial services. Credit risk is managed through the
Credit Risk Management (“CRM”) Department, headed up by the Chief Credit Officer, to whom we have
delegated overall responsibility for managing credit policy and process, including responsibility for
ensuring adherence to a high level of credit standards. The Chief Credit Officer reports to our Chief Risk
Officer.
Credit Risk Management provides a system of checks and balances for our diverse credit-related activities
by establishing and monitoring all credit-related policies and practices throughout our Bank and
assuring their uniform application. These activities are designed to diversify credit exposure on an
industry and client basis, thus lessening overall credit risk. These credit management activities also apply
55
to our use of derivative financial instruments, including foreign exchange contracts and interest rate
management instruments, which are primarily used to facilitate client transactions. We also use
derivatives in the asset and liability management of positions to minimise significant unplanned
fluctuations in earnings that are caused by interest rate volatility. Our 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.
Our derivative contracts principally involve over-the-counter transactions that are privately negotiated
between ourselves and the counterparty to the contract. Derivative instruments that are used as part of
our 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.
Individual credit authority for commercial and other loans is limited to specified amounts and
maturities. Credit decisions involving commitment exposure in excess of the specified individual limits
are submitted to the Chief Credit Officer and then to the Credit Committee, chaired by the President and
Chief Executive Officer, which provides a forum for ongoing executive review of loan activity, establishing
our credit guidelines and policies and approving selected credit transactions in accordance with our
business objectives. The Committee reviews large credit exposures, establishes and reviews credit
strategy and policy and approves selected credit transactions.
The Financial Institutions Committee manages counterparty risk. This committee has sole credit
authority for exposure to all banks which are deemed to be counterparties and which do not have
commercial credit relationships within our Bank, and certain other exposures. Under the auspices
of Credit Risk Management (CRM), country exposure limits are reviewed and approved on a
country-by-country basis.
As part of our ongoing credit granting process, CRM assigns internal ratings only to commercial clients
before credit is extended, based on an assessment of creditworthiness. CRM performs, at least annually,
a review of selected significant credit exposures to identify, at an early stage, clients who might be facing
financial difficulties. Internal credit ratings are also reviewed during this process. Credit ratings range
from “1” for the strongest credits to “8” for the weakest credits; an “8” rated loan would normally
represent a complete loss. Above average risk loans receive special attention by both lending officers and
CRM. This approach allows management to take remedial action in an effort to deal with potential
problems.
An integral part of the CRM function is a formal review of past due and potential problem loans to
determine which credits, if any, need to be placed on non-accrual status or charged off. The provision for
credit losses is reviewed quarterly to determine the amount necessary to maintain an adequate provision
for credit losses.
Another way in which credit risk is managed is by requiring collateral. Management’s assessment of the
borrower’s creditworthiness determines whether collateral is obtained. The amount and type of collateral
held varies but may include deposits held in financial institutions, US Treasury securities, other
marketable securities, income-producing commercial properties, accounts receivable, residential real
estate, property, plant and equipment, and inventory. Collateral values are monitored on a regular basis
to ensure that they are maintained at an appropriate level.
Our Loan Review function, which reports to the Head of Group Internal Audit, independently reviews and
reports on credit processes and exposures across all subsidiaries that have loan portfolios. The
function’s primary goal is to ensure that we maintain and observe procedures, practices and credit
exposures that are consistent with Group policies and standards and our risk tolerance.
Ope rational risk managem ent
In providing our services, we are exposed to operational risk which is the risk of loss from inadequate or
failed internal processes, people, and systems or from external events. Our success depends, in part,
56
upon maintaining our reputation as a well managed institution with shareholders, existing and
prospective clients, creditors and regulators. In order to maintain this reputation, we seek to minimise
the frequency and severity of operational losses associated with compliance and fiduciary matters,
product, process, and technology failures, and business continuity.
Operational risk is mitigated through a system of internal controls and risk management practices that
are designed to keep operational risk at levels appropriate to our overall risk appetite and the inherent
risk in the markets in which we operate. While operational risk controls are extensive, operational losses
have occurred in the past, and there can be no assurance that such losses will not occur in the future.
The Group Risk Committee approves Group business risk strategies to ensure compliance with Group
Operational Risk Management Policies and jurisdictional regulatory requirements.
We manage operational risk through policies, procedures and controls that are developed based on the
following principles:
o assessing risks is a day-to-day business activity that is the concern of every employee
o decisions are based on an assessment of all relevant operational risks
o
risk decisions shall be made at the appropriate level based on delegated authority
o unnecessary risks shall be avoided
The Enterprise Risk Management function is the focal point for the operational risk management
framework and works closely with the business units to achieve the goal of assuring proactive
management of operational risk within the Bank. Each business unit is responsible for complying with
corporate policies and external regulations applicable to the unit.
The financial services industry is undergoing rapid technological changes with frequent introductions of
new technology-driven products and services. In order to provide better service to our clients, we are in
the process implementing new systems and information technology infrastructure with the aid of
Electronic Data Systems, LLC, a Hewlett Packard company (“EDS”), to transition our business
applications and legacy systems in Bermuda and the Cayman Islands to a new, common platform that
will be centrally managed.
Like all financial services firms, information technology is critical to our business, and related transition
projects are complex. Potential challenges include:
o
interruption or impairment of business operations
o additional development and remediation costs
o diversion of technical and other resources
o
loss of clients
o negative publicity
o
litigation or other customer claims
Although we maintain project methodologies and controls that are designed to reduce the probability
and severity of these exposures, any combination of these outcomes could have an adverse effect on our
results of operations and financial condition.
57
MANAGEMENT’S FINANCIAL REPORTING RESPONSIBILTY
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 reports to, and has full and free access to the Audit Committee of the
Board of Directors.
The Audit 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.
Bradford B. Kopp
President & Chief Executive Officer
Chief Financial Officer
2 March 2010
60
PricewaterhouseCoopers
Chartered Accountants
Dorchester House
7 Church Street
Hamilton HM 11
Bermuda
Telephone +1 (441) 295 2000
Facsimile +1 (441) 295 1242
www.pwc.com/bermuda
To the Shareholders of
The Bank of N.T. Butterfield & Son Limited
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of changes in shareholders’ equity and comprehensive income, and of cash
flows present fairly, in all material respects, the financial position of The Bank of N.T. Butterfield & Son
Limited and its subsidiaries at 31 December 2009 and 2008 and the results of their operations and
their cash flows for the years then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the responsibility of the Bank’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Chartered Accountants
2 March 2010
A list of partners can be obtained from the above address.
"PricewaterhouseCoopers" refers to PricewaterhouseCoopers (a Bermuda partnership) or, as the context requires, the PricewaterhouseCoopers
global network or other member firms of the network, each of which is a separate and independent legal entity.
61
Consolidated Balance Sheet
As at 31 December (In thousands of Bermuda dollars)
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 (2008: 260,000,000))
issued and outstanding: 99,060,111 (2008: 98,399,858)
Preferred share capital ($0.01 par; $1,000 liquidation preference)
issued and outstanding: 200,000 (2008: nil)
Additional paid in capital
Accumulated deficit
Less: treasury common shares (3,426,106 shares; 2008: 6,473,180 shares)
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
2009(cid:232)
2008(cid:232)
551,249
1,435,549
1,986,798
29,330
2,067,163
838,715
2,935,208
4,218,332
244,242
16,285
16,712
50,129
126,896
9,594,602
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
954,191
920,866
7,623,753
118,675
8,696,619
141,741
12,391
1,337
103,969
259,438
283,085
9,239,142
8,485,309
395,094
9,801,269
120,038
24,931
3,819
161,051
309,839
282,296
10,393,404
99,060
98,400
2
764,206
(283,964)
(34,660)
(189,184)
355,460
9,594,602
-
604,116
(35,006)
(82,700)
(66,370)
518,440
10,911,844
RobeRt A. MuldeRig
Chairman of the Board
RobeRt steinhoff
Vice Chairman
bRAdfoRd b. kopp
President & Chief Executive Officer
62
Consolidated Statement of Income
For the year ended 31 December (In thousands of Bermuda dollars, except per share data)
2009
2008
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
Securities sold under repurchase agreements
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Net realised / unrealised gains (losses) on trading investments
Net realised gains on available for sale investments
Net realised gains (losses) on held to maturity investments
Other-than-temporary impairment losses on held to maturity investments
Goodwill and intangible assets impairment
Gain on sale of subsidiaries
Net other losses
Total revenue
Non-interest expense
Salaries and other employee benefits
Technology and communications
Property
Professional and outside services
Non-income taxes
Amortisation of intangible assets
Marketing
Other expenses
Total non-interest expense
Net (loss) income before income taxes
Income taxes benefit (expense)
Net (loss) income
Cash dividends declared on preferred shares
Preferred shares guarantee fee
Net (loss) income attributable to common shareholders
(Loss) earnings per common share
Basic
Diluted
27,211
37,094
34,044
-
29,894
13,840
9,622
151,705
211,694
46,215
12,660
270,569
68,471
14,933
258
83,662
186,907
(104,879)
82,028
983
236
2,298
(132,095)
(13,266)
-
(5,112)
86,777
156,839
50,094
28,833
17,490
13,197
6,258
5,911
21,898
300,520
(213,743)
330
(213,413)
(8,400)
(1,050)
(222,863)
(2.34)
(2.34)
41,308
37,562
45,475
35,583
30,344
18,724
3,945
212,941
264,570
193,006
80,519
538,095
269,668
13,946
-
283,614
254,481
(3,045)
251,436
(6,356)
-
(22,986)
(128,786)
(5,220)
115,479
(61,182)
355,326
183,152
41,149
32,140
34,529
15,132
7,316
7,140
26,887
347,445
7,881
(3,042)
4,839
-
-
4,839
0.05
0.05
(Loss) earnings per share comparative figures have been restated for the $0.04 stock dividend declared for March, May, August and November 2009.
The accompanying notes are an integral part of these consolidated financial statements.
63
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income
For the year ended 31 December (In thousands of Bermuda dollars)
Common share capital issued and outstanding
Balance at beginning of year (2009: 98,399,858 shares; 2008: 89,456,019 shares)
Dividend reinvestment (2009: 572,246 shares; 2008: 791,232 shares)
of which issued from treasury common shares (2009: 572,246 shares; 2008: 791,232 shares)
Stock dividend (2009: 3,061,919 shares; 2008: 8,943,839 shares)
of which issued from treasury common shares (2009: 2,401,666 shares; 2008: nil shares)
Balance at end of year (2009: 99,060,111 shares; 2008: 98,399,858 shares)
Preferred shares
Balance at beginning of year (2009: nil shares; 2008: nil shares)
Issuance (2009: 200,000 shares; 2008: nil)
Balance at end of year (2009: 200,000 shares; 2008: nil shares)
Additional paid in capital
Balance at beginning of year
Dividend reinvestment
of which related to treasury common shares
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
Issuance of preferred shares
Cost of issuing preferred share capital
Balance at end of year
(Accumulated deficit) retained earnings
Balance at beginning of year
Effect of changing employee future benefit plans' measurement date
Net (loss) income for year
Cash dividends declared on common shares
Cash dividends declared on preferred shares
Preferred shares guarantee fee
Stock dividend
Balance at end of year
Treasury common shares
Balance at beginning of year (January 2009: 6,473,180 shares; January 2008: 4,903,324 shares)
Net purchases, sales and transfers of treasury shares
Balance at end of year (December 2009: 3,426,106 shares; December 2008: 6,473,180 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 investments
Net change in unrealised non-credit losses on held to maturity investments
Net change in employee future benefits liability
Balance at end of year
Total shareholders' equity
Comprehensive loss
Net (loss) income
Other comprehensive loss
Total comprehensive loss
Components of accumulated other comprehensive loss
Cumulative change in unrealised gains and losses on translation of investment in foreign operations
Cumulative change in unrealised gains and losses on available for sale investments
Cumulative change in unrealised non-credit losses on held to maturity investments
Cumulative change in employee future benefits liability
Balance at end of year
The accompanying notes are an integral part of these consolidated financial statements.
2009
2008
98,400
89,456
572
(572)
3,062
(2,402)
99,060
-
2
2
604,116
2,274
(2,274)
1,984
2,248
-
(31,485)
199,998
(12,655)
764,206
(35,006)
-
(213,413)
(11,124)
(8,400)
(1,050)
(14,971)
(283,964)
(82,700)
48,040
(34,660)
(66,370)
4,289
(54,480)
(58,557)
(14,066)
(189,184)
355,460
(213,413)
(122,814)
(336,227)
(7,650)
(56,991)
(58,557)
(65,986)
(189,184)
791
(791)
8,944
-
98,400
-
-
-
455,114
10,974
(10,974)
149,969
3,561
(800)
(3,728)
-
-
604,116
167,607
(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)
(11,939)
(2,511)
-
(51,920)
(66,370)
64
Consolidated Statement of Cash Flows
For the year ended 31 December (In thousands of Bermuda dollars)
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to operating cash flows
Depreciation and amortisation
Goodwill impairment
Intangible assets impairment
Write down of computer software in development
Decrease in carrying value of investments in affiliates
Share-based payments
Gain on sale of subsidiaries
Loss on sale of premises and equipment
Net realised and unrealised gains on private equity investments
Net (gains) losses on credit derivative instruments
Other-than-temporary impairments on held to maturity investments
Net realised gains on held to maturity investments
Net realised gains on sale of available for sale investments
Provision for credit losses
Changes in operating assets and liabilities
Decrease in accrued interest receivable
Decrease (increase) in other assets
Decrease in accrued interest payable
(Decrease) increase in other liabilities
Net change in trading investments
Cash provided by operating activities
Cash flows from investing activities
Net decrease in term deposits with banks
Net additions to premises, equipment and computer software
Net decrease (increase) in loans
Held to maturity investments: proceeds from maturities
Held to maturity investments: purchases
Available for sale investments: proceeds from sale and maturities
Available for sale investments: purchases
Proceeds on sale of private equity investment
Proceeds on sale of subsidiaries
Payment of deferred consideration in relation with acquisition of subsidiaries
Cash provided by investing activities
Cash flows from financing activities
Net decrease in demand and term deposit liabilities
Issuance of subordinated capital
Repayment of subordinated capital
Issuance of preferred share capital
Cost of issuing preferred share capital
Proceeds from dividend re-investment plan
Stamp duty paid to increase authorised share capital
Proceeds from sale of treasury shares
Common shares repurchased
Net other movements in treasury common shares
Cash dividends paid on common shares
Cash dividends paid on preferred shares
Preferred shares guarantee fee paid
Cash used in financing activities
2009
2008
(213,413)
4,839
27,859
8,020
5,246
5,120
1,688
3,498
-
200
(6,220)
(3,304)
132,095
(2,298)
(236)
104,879
24,422
19,617
(13,186)
(57,048)
36,939
21,022
57,961
276,722
(51,832)
156,721
908,725
(3,515)
2,053,818
(2,263,266)
-
-
(4,618)
1,072,755
(1,316,814)
-
-
200,000
(12,655)
2,846
-
-
-
133
(14,938)
(7,067)
(1,050)
(1,149,545)
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)
Effect of exchange rates on cash and demand deposits with banks
(2,363)
(6,673)
Net (decrease) increase in cash and demand deposits with banks
(21,192)
305,180
Cash and demand deposits with banks: beginning of year
Cash and demand deposits with banks: end of year
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.
572,441
551,249
267,261
572,441
62,778
899
278,869
3,808
65
Notes to Consolidated Financial Statements
For the years ended 31 December 2009 and 2008 (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, and actual results could differ from those estimates.
Critical accounting estimates are those that require Management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may
change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our future financial
condition and results of operations. We believe that our most critical accounting policies upon which our financial condition depends, and which involves the most complex or
subjective decisions or assessments, are as follows:
(i) Allowance for credit losses
(ii) Investments
(iii) Impairment of long-lived assets
(iv) Impairment of goodwill
(v) Employee future benefits
(vi) Fair value of financial instruments
(vii) Concentrations of credit risk & customers
(viii) Commitments and contingencies
(ix) Going concern
(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.
The Bank consolidates variable interest entities (VIE) for which 1) it has the ability to exercise significant influence and 2) it will absorb a majority of the expected losses of the VIE,
receive a majority of residual returns of the VIE, or both. The Bank is then considered the primary beneficiary of the VIE. The determination of whether the Bank 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.
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 non-interest income.
(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 (AOCI). 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 are classified as trading, available for sale (AFS) or held to maturity (HTM). Debt and equity securities classified as trading investments are carried at fair value in the
Consolidated Balance Sheet, with the unrealised gains and losses included in the Consolidated Statement of Income as Net realised / unrealised gains (losses) on trading
investments.
Investments are classified primarily as AFS when used to manage the Bank’s exposure to interest rate and liquidity movements, as well as to make strategic longer-term
investments. AFS investments are carried at fair value in the Consolidated Balance Sheet with unrealised gains and losses reported as net increases or decreases to
Accumulated other comprehensive income (loss).
Investments that the Bank has the positive intent and ability to hold to maturity are classified as HTM and are carried at amortised cost in the Consolidated Balance Sheet.
Unrecognised gains and losses on HTM securities are disclosed in the notes to the financial statements. The specific identification method is used to determine realised gains
and losses on AFS and HTM investments, which are included in Net realised gains and losses on AFS and HTM investments respectively in the Consolidated Statement of
Income.
Dividend and interest income, including amortisation of premiums and discounts, on securities for which cash flows are not considered uncertain are included in interest income in
the Consolidated Statement of Income. For securities with uncertain cash flows, the investments are accounted for under the cost recovery method, whereby all principal and
coupon payments received are applied as a reduction of the amortised cost and carrying amount. 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.
66 Recognition of other-than-temporary impairments
In April 2009, the FASB amended the other-than-temporary impairment (OTTI) model for debt securities. The impairment model for equity securities was not affected. Under the
new guidance, OTTI loss must be recognised in net income if it is more likely than not that the investor will sell the debt security before recovery of its amortised cost basis.
However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if it expects to recover the security's entire
amortised costs basis (the recoverable value) and whether a credit loss exists.
In situations where there is no credit loss, the unrealised loss on HTM investments is not recognised. In situations where there is a credit loss, only the amount of impairment
relating to credit losses on AFS and HTM investments is recognised in net income and the decrease in fair value relating to factors other than credit losses are recognised in
Other Comprehensive Income (loss) (OCI).
The Bank adopted the new guidance effective for the period ending 30 June 2009. The Bank did not record a transition adjustment for securities held at 30 June 2009, which
were previously considered other-than-temporarily impaired, as Management’s analysis showed OTTI on securities which it had previously recognised other-than-temporary
impairments to be entirely credit related.
Determining whether the entire amoritsed cost basis is recoverable 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 recoverable value of the Bank's positions may frequently change. The degree of judgment involved in determining the
recoverable 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, judgment is necessary to estimate recoverable 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's valuations may include inputs and assumptions that are less observable or require greater estimation, thereby resulting in values which may be greater or lower
than the actual value at which the investments may be ultimately sold or the ultimate cash flows that may be recovered. If the assumptions on which Management based its
valuations change, the Bank may experience additional OTTI or realised losses or gains, and the period-to-period changes in value could vary significantly.
Investments in unrealised loss positions are analysed as part of Management’s ongoing assessment of OTTI. When Management intends to sell securities, it recognises an
impairment loss equal to the full difference between the amortised cost basis and the fair value of those securities. When Management does not intend to sell equity or debt
securities in an unrealised loss position, potential OTTI is considered using a variety of factors, including the length of time and extent to which the fair value has been less than
cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a security; payment structure of the
security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date.
For debt securities, Management estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and to determine if any adverse
changes in cash flows have occurred. Management’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting
period – including, for example, underlying loan-level data, and structural features of securitisation, such as subordination, excess spread, over collateralisation or other forms of
credit enhancement.
Management compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitisation structure to determine
whether these features are sufficient to absorb the pool losses, or whether a credit loss on the debt security exists. As at 31 December 2009, Management’s cash flow forecasts
were created in conjunction with well-known third-party corporations specialising in analytical cash flow modelling. Management also performs other analyses to support its cash
flow projections. For debt securities, management considers a decline in fair value to be other-than-temporary when it does not expect to recover the entire amortised cost basis
of the security.
(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 effective 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 Bank accounts for and discloses non-accrual loans as impaired loans. 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 full repayment of the loan principal, all cash thereafter received is applied to reduce the carrying amount of the loan. Interest
income on these loans is recognised only after the entire balance receivable is recovered and interest is actually received. Loans are restored to accrual status only when interest
and principal payments are brought current and future payments are reasonably assured.
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. 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 written off and reported as charge-offs.
67 (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 lending and off-balance sheet
credit related arrangements portfolios at the balance sheet date. The allowance for credit losses consists of specific allowances and a general allowance as follows:
Specific Allowances
Specific allowances are determined on an exposure by exposure 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 an
allowance with a corresponding charge to provision for credit losses.
General Allowance
The allowance for credit losses attributed to the remaining portfolio is established through a process that estimates the incurred loss at the balance sheet date inherent in the
lending and off-balance sheet credit related arrangements portfolios 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.
(h) 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.
(i) 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, including interest cost incurred during the development phase, 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 10 years.
Management reviews at least annually the recoverability of the carrying amount of premises, equipment and computer software and an impairment charge is recorded when the
carrying amount of the reviewed asset is deemed not recoverable by future expected cash flows to be derived from the use and disposition of the asset.
(j) Derivatives
All derivatives are recognised on the Consolidated Balance Sheet at their fair value. On the date that the Bank enters into a derivative contract, it designates the derivative as
either: a hedge of the fair value of a recognised asset or liability (a fair value hedge); a hedge of a forecasted transaction or the variability of cash flows that are to be received or
paid in connection with a recognised asset or liability (a cash flow hedge), or an instrument that is held for trading or non-hedging purposes (a trading or non-hedging instrument).
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of a derivative that is highly effective and that is designated
and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash
flows of the hedged transaction. Any hedge ineffectiveness is recorded in current period earnings.
68 Changes in the fair value of a derivative that is highly effective 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 recognised in net income.
(k) Employee Future Benefits
The Bank maintains trusteed pension plans for substantially all employees as either non-contributory defined benefit plans or 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 active and retired Bermuda-based employees.
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 fair 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.
(l) Share-Based Compensation
The Bank has a number of share-based compensation plans for eligible employees. The grant date fair value of share-based compensation awards that eventually vest is
amortised over the substantive vesting period of the award.
(m) Revenue Recognition
Trust and investment services fees include fees for private and institutional trust, executorship, and custody services. Asset management fees include fees for investment
management, investment advice and brokerage services. Investment and pension fund administration fees include fees for pension fund administration, institutional fund
administration, registration and transfer agent and corporate services. Fees are recognised as revenue over the period of the relationship or 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 contingencies associated with the fee.
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. 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, including amortisation of premiums and discounts, on securities for which cash flows are not considered uncertain are included in interest income in
the Consolidated Statement of Income. Loans placed on non-accrual status and investments with uncertain cash flows are accounted for under the cost recovery method,
whereby all principal, dividends, interest and coupon payments received are applied as a reduction of the amortised cost and carrying amount.
69 (n) Fair Values
Fair value is defined 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 assets and liabilities based on the fair
value hierarchy 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. Investments classified as trading and available for sale, and derivative assets and liabilities are
recognised in the Consolidated Balance Sheet at fair value.
Level 1, 2 and 3 valuation inputs
Management classifies items that are recognised at fair value on a recurring basis based on the Level of inputs used in their respective fair value determination as described
below.
Fair value inputs are considered Level 1 when based on unadjusted quoted prices in active markets for identical assets.
Fair value inputs are considered Level 2 when based on internally developed models or based on prices published by independent pricing services using proprietary models. To
qualify for Level 2, all significant inputs used in these models must be observable in the market place or can be corroborated by observable market data for substantially the full
term of the instrument and includes, among others: interest yield curves, credit spreads, prices for similar assets and foreign exchange rates. Level 2 also includes financial
instruments that are valued using quoted price for identical assets but for which the market is not considered active due to low trading volumes.
Fair value inputs are considered Level 3 when based on internally developed models using significant unobservable assumptions involving management's estimations or non-
binding bid quotes from brokers.
The following methods and assumptions were used in the determination of the fair value of financial instruments:
Cash and deposits with banks
The carrying amount of cash and deposits with banks, being short term in nature, is deemed to equate to the fair value.
Investments and employee future benefits plans' assets
The fair values of investments and pension plans assets 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 management estimates that the fair value of loans is not
significantly different than their carrying amount. The fair value of significant fixed-rate loan exposures have been hedged by entering into corresponding pay-fixed-
receive-floating interest rate swaps. These swaps are considered effective hedges of the fair value of fixed-rate loans and are designated as such. Accordingly, the
carrying amount of hedged fixed-rate loans is adjusted to reflect their fair value. In situations where the Bank carries significant non-hedged fixed-rate loans, the
fair value is estimated by performing discounted cash flow calculations using interest rates for loans of similar risk and duration issued shortly before or on the
balance sheet date.
Accrued interest
The carrying amounts 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 carrying amount of deposits with no stated maturity date is deemed to equate to the fair value.
Subordinated capital
The fair value of the subordinated capital has been estimated by discounting the contractual cash flows, using current market interest rates applicable to the Bank.
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.
Reporting units
The fair value of reporting 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 reporting unit.
70 (o) 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 are fully collateralised, the contractual amounts do not necessarily
represent future cash requirements. The Bank does not carry any liability for these obligations.
(p) 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.
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 Bank recognises interest accrued and penalties related to unrecognised tax benefits in operating expenses.
(q) 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.
(r) 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 2009 and 2008 (see also Notes 18 and 23). Dividends declared on preferred shares and related guarantee fees are
deducted from net income to obtain net income available to common shareholders. In periods when basic earnings per share is positive, the dilutive effect of share-based
compensation plans is 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.
(s) Impairment or Disposal of Long-Lived Assets
Impairment losses are recognised when the carrying amount of a long-lived asset 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.
(t) Charitable Trust
In July 2000 the Bank established a charitable trust with the irrevocable purpose to make charitable donations to persons ordinarily resident in Bermuda (the Charitable Trust). As
a not for profit organisation, the Charitable Trust is not consolidated in the Bank's financial statements. As the Charitable Trust's trustees are representatives of the Bank, the
Bank's endowment donations to the Charitable Trust are recognised at their recoverable amount in Other assets in the Consolidated Balance Sheet until dispersed by the
Charitable Trust, at which time, donations are recognised in Other expenses in the Consolidated Statement of Income.
Note 2: Significant Acquisitions and Divestitures
Divestiture of fund services businesses
On 11 September 2008, the Bank completed the sale 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 in the Consolidated
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 segment. The equity ownership in Butterfield Fulcrum Group is also reported in the Wealth Management 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 from the sale date, the value of which
was deducted from the gain.
71 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
2009
Non-
Bermuda
Bermuda
Total
Bermuda
2008
Non-
Bermuda
Total
30,030
33,649
63,679
119,737
23,651
143,388
247,589
-
-
247,589
1,628,336
2,030
2,239
1,632,605
1,875,925
2,030
2,239
1,880,194
18,964
-
-
18,964
1,998,496
19,591
3,303
2,021,390
2,017,460
19,591
3,303
2,040,354
Total unrestricted cash and deposits
277,619
1,666,254
1,943,873
138,701
2,045,041
2,183,742
Affected by drawing restrictions related to minimum reserve and derivative margin requirements
Non-interest earning
Demand deposits
-
27,728
27,728
-
19,289
19,289
Interest earning
Deposits maturing within three months
Total restricted deposits
14,871
14,871
326
28,054
15,197
42,925
17,009
17,009
1,350
20,639
18,359
37,648
Total cash and deposits with banks
292,490
1,694,308
1,986,798
155,710
2,065,680
2,221,390
Note 4: Investments
Gains and losses on investments
The following table presents the gains and losses on investments:
Year ended 31 December
2009
2008
Trading
Available
for sale
Held to
maturity
Total
Trading
Available
for sale
Held to
maturity
Total
Gains (losses) other than OTTI
recognised in net income
983
236
2,298
3,517
(6,356)
Total impairment applied against carrying amount
Less: non-credit related impairments recognised in OCI
OTTI impairments recognised in net income
-
-
-
-
-
-
(190,851)
58,756
(132,095)
(190,851)
58,756
(132,095)
-
-
-
Net gains (losses) recognised in net income
983
236
(129,797)
(128,578)
(6,356)
Non-credit related impairments recognised in OCI
Effect of HTM to AFS transfer of investments
Net change in gains (losses) recognised in AOCI
-
-
(54,281)
(199)
(54,480)
(58,756)
199
(58,557)
(113,037)
-
(113,037)
-
-
-
Total recognised gains (losses)
983
(54,244)
(188,354)
(241,615)
(6,356)
-
-
-
-
-
153
-
153
306
(22,986)
(29,342)
(128,786)
-
(128,786)
(128,786)
-
(128,786)
(151,772)
(158,128)
-
-
-
153
-
153
(151,772)
(157,822)
72
Amortised cost, carrying amount and estimated fair value
Unrealised gains and losses that are not reflected in the carrying amount of investments are reported as unrecognised gains and losses on HTM investments. The amortised cost,
carrying amounts and fair values, are as follows:
31 December
2009
2008
Amortised
cost
Gross
unrealised
gains
Gross
unrealised
losses
Carrying
amount /
Fair value
Amortised
cost
Gross
unrealised
gains
Gross
unrealised
losses
Carrying
amount /
Fair value
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Equity securities
Total available for sale
31 December 2009
Held to maturity
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Total held to maturity
31 December 2008
Held to maturity
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Total held to maturity
1,036,190
66,915
12,456
550,227
30,967
35,033
6,312
156,285
116,018
4,818
19,514
86,508
125
2,121,368
4,353
89
-
1,071
-
421
8
-
-
-
-
-
-
5,942
(946)
(909)
-
(9,154)
(1,319)
(708)
-
(5,568)
(3,139)
(322)
(1,450)
(36,579)
(53)
(60,147)
1,039,597
66,095
12,456
542,144
29,648
34,746
6,320
150,717
112,879
4,496
18,064
49,929
72
2,067,163
565,321
-
9,773
-
-
-
-
-
-
-
-
-
2,818
577,912
2,017
-
-
-
-
-
-
-
-
-
-
-
-
2,017
(130)
-
-
-
-
-
-
-
-
-
-
-
-
(130)
567,208
-
9,773
-
-
-
-
-
-
-
-
-
2,818
579,799
Non-credit
impairments
recognised in
AOCI
Amortised
cost
Carrying
amount
Gross
unrecognised
gains
Gross
unrecognised
losses
Fair
value
28,893
205,938
18,498
216,573
39,996
10,854
10,000
43,560
10,070
141,407
174,484
900,273
-
-
-
(15,918)
-
-
-
(11,771)
-
-
(33,869)
(61,558)
28,893
205,938
18,498
200,655
39,996
10,854
10,000
31,789
10,070
141,407
140,615
838,715
1,160
1,390
-
-
-
-
-
-
-
-
-
2,550
(19)
(5,677)
(674)
(61,583)
(7,194)
(995)
(1,085)
(4,295)
(675)
(37,691)
(30,184)
(150,072)
30,034
201,651
17,824
139,072
32,802
9,859
8,915
27,494
9,395
103,716
110,431
691,193
Non-credit
impairments
recognised in
AOCI
Amortised
cost
Carrying
amount
Gross
unrecognised
gains
Gross
unrecognised
losses
Fair
value
511,406
123,748
31,651
1,254,450
82,248
388,158
53,954
177,683
126,043
50,708
14,937
180,551
203,414
3,198,951
-
-
-
-
-
-
-
-
-
-
-
-
(3,000)
(3,000)
511,406
123,748
31,651
1,254,450
82,248
388,158
53,954
177,683
126,043
50,708
14,937
180,551
200,414
3,195,951
2,812
28
551
1,450
-
993
20
-
-
-
-
-
-
5,854
-
(3,965)
(53)
(79,763)
(6,841)
(189,897)
(14,140)
(26,531)
(33,362)
(30,458)
(5,347)
(52,826)
-
(443,183)
514,218
119,811
32,149
1,176,137
75,407
199,254
39,834
151,152
92,681
20,250
9,590
127,725
200,414
2,758,622
Investments in the above table with gross unrecognised losses as at 31 December 2009 were considered temporarily impaired on that date. The impairments recognised in
AOCI, when added to gross unrecognised losses on HTM investments, represent the total loss that would have been recognised in net income if the investment securities had
been sold at their estimated fair value on 31 December 2009. The impairments recognised in AOCI are the result of various factors other than deterioration in the creditworthiness
of the issuer. As at 31 December 2009, management did not intend to sell these securities and believed it is not likely that the Bank would be required to sell these securities prior
to recovery of their amortised cost (see Note 29 - Subsequent events).
73
Overall, unrecognised losses have decreased since 31 December 2008 due primarily to the effect of the recognition of $132.1 million of impairment during the year 2009 and
increased fair values across asset classes resulting from improved market spread and market liquidity. As of 31 December 2009, Management does not intend to sell the
securities with a loss position recognised in AOCI, and believes it is not likely that the Bank will be required to sell these securities before recovery of their amortised cost basis.
Unrealised loss positions
The following tables show 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. Debt securities are categorised as being in a
continuous loss position for "less than 12 months" or "12 months or more" based on the point in time that the fair value declined below the cost basis.
31 December 2009
Available for sale
Certificates of deposit
US government and federal agencies
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Equity securities
Total available for sale securities
with unrealised losses
Held to maturity
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Total held to maturity securities
with unrecognised losses
31 December 2008
Available for sale
Certificates of deposit
Held to maturity
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Total held to maturity securities
with unrecognised losses
Less than 12 months
12 months or more
Fair
value
Gross
unrealised
losses
Fair
value
Gross
unrealised
losses
Total
fair value
Total gross
unrealised
losses
226,933
-
-
-
-
-
-
-
-
49,929
72
(946)
-
-
-
-
-
-
-
-
(36,579)
(53)
-
62,404
502,440
29,648
26,345
150,716
112,880
4,496
18,063
-
-
-
(909)
(9,154)
(1,319)
(708)
(5,568)
(3,139)
(322)
(1,450)
-
-
226,933
62,404
502,440
29,648
26,345
150,716
112,880
4,496
18,063
49,929
72
(946)
(909)
(9,154)
(1,319)
(708)
(5,568)
(3,139)
(322)
(1,450)
(36,579)
(53)
276,934
(37,578)
906,992
(22,569)
1,183,926
(60,147)
1,996
12,961
-
-
-
-
-
-
-
-
63,362
(19)
(781)
-
-
-
-
-
-
-
-
(30,184)
-
183,782
17,823
120,313
32,801
9,859
8,915
17,613
9,395
101,700
-
-
(4,896)
(674)
(61,583)
(7,194)
(995)
(1,085)
(4,295)
(675)
(37,691)
-
1,996
196,743
17,823
120,313
32,801
9,859
8,915
17,613
9,395
101,700
63,362
(19)
(5,677)
(674)
(61,583)
(7,194)
(995)
(1,085)
(4,295)
(675)
(37,691)
(30,184)
78,319
(30,984)
502,201
(119,088)
580,520
(150,072)
Less than 12 months
12 months or more
Fair
value
Gross
unrealised
losses
Fair
value
Gross
unrealised
losses
Total
fair value
Total gross
unrealised
losses
125,310
(130)
-
-
125,310
(130)
16,065
2,964
137,219
-
16,083
-
29,473
-
-
-
15,154
(874)
(36)
(3,563)
-
(2,402)
-
(7,527)
-
-
-
(3,606)
99,946
983
885,192
75,407
172,497
33,417
121,679
92,682
20,251
9,591
112,569
(3,091)
(17)
(76,200)
(6,841)
(187,495)
(14,140)
(19,004)
(33,362)
(30,458)
(5,347)
(49,220)
116,011
3,947
1,022,411
75,407
188,580
33,417
151,152
92,682
20,251
9,591
127,723
(3,965)
(53)
(79,763)
(6,841)
(189,897)
(14,140)
(26,531)
(33,362)
(30,458)
(5,347)
(52,826)
216,958
(18,008)
1,624,214
(425,175)
1,841,172
(443,183)
74
The following is a description of the Bank’s main investments categories and the key assumptions used in estimating the present value of cash flows most likely to be collected
from these investments.
Certificates of deposit
As of 31 December 2009, gross unrealised losses on the Bank’s holdings of certificates of deposit (CDs) were $0.9 million, all of which related to CDs that have been in an
unrealised loss position for less than 12 months. Management assesses the credit quality of the issuers, which includes assessments of credit ratings (the Bank only purchases
CDs that are rated investment grade) and credit worthiness of the issuer and concluded that the CDs do not have any credit losses. The unrealised losses were due to increasing
interest rates and widened credit spreads caused by illiquidity since the time of purchase.
US government and federal agencies
As of 31 December 2009, gross unrealised losses on securities related to United States (US) government and federal agencies were $0.9 million, all of which related to securities
that have been in an unrealised loss position for longer than 12 months. Management believes these securities do not have any credit losses, given the explicit and implicit
guarantees provided by the US federal government.
Debt securities issued by non-US governments
As of 31 December 2009, gross unrealised losses on debt securities issued by non-US governments were $0.02 million, none of which related to securities that have been in an
unrealised loss position for longer than 12 months. All securities in this category were issued by governments of Caribbean jurisdictions. These securities do not have any credit
losses, given the explicit and implicit guarantees provided by the non-US governments. The unrealised losses were due to widened credit spreads caused by illiquidity.
Corporate debt securities
As of 31 December 2009, gross unrealised losses related to corporate debt securities were $14.8 million, of which $14.1 million related to investments that were in an unrealised
loss position for longer than 12 months. Overall losses have decreased since 31 December 2008, mainly as a result of an increase in high-yield markets, lower default forecasts
and spread tightening across various asset classes. Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions
regarding probability of default and also the timing and amount of recoveries associated with defaults. Management develops these estimates using information based on market
observable data, issuer specific information, and credit ratings. Management believes these securities do not have any credit losses.
Mortgage-backed securities – Prime
As of 31 December 2009, gross unrealised losses related to prime residential mortgage-backed securities were $2.0 million, all of which related to securities that have been in an
unrealised loss position for longer than 12 months. Overall unrealised losses have decreased since 31 December 2008, due primarily to increased market stabilisation, resulting
from increased demand for higher-yielding asset classes and new US government programmes. As at 31 December 2009, all of the Bank's investments in prime mortgage-
backed securities are investment grade and approximately 86% of these positions are rated “AAA”. Despite the downgrades experienced, the portfolio continues to possess credit
enhancement levels sufficient for the Bank not to have suffered a credit related loss.
The Bank has recognised no prime mortgage-backed securities OTTI losses in net income during the year ended 31 December 2009. In analysing prime residential
mortgage-backed securities for potential credit losses, the key inputs to cash flow projections were estimated peak-to-trough home price declines of up to 34% and an
unemployment rate of 10.6%. The cash flow projections assumed liquidation rates of 100% for non-performing loans (90 days or more in arrears) and loss severities in the range
of 55% to 65%, depending on the underlying collateral type and seasoning.
Mortgage-backed securities – Subprime and Alt-A
As of 31 December 2009, gross unrealised losses related to subprime and Alt-A residential mortgage-backed securities were $62.3 million, all of which related to securities that
have been in an unrealised loss position for longer than 12 months. Overall unrealised losses have decreased since 31 December 2008, due to the recognition of impairment
losses and to increased market stabilisation, resulting from increased demand for higher-yielding asset classes and new US government programmes. As at 31 December 2009,
approximately 57% of these positions are currently rated “AAA” and approximately 77% are investment grade.
Despite the downgrades experienced, the portfolio continues to possess credit enhancement levels sufficient to support the carrying amount. However, the Bank has recognised
$111.9 million of OTTI losses in net income for subprime and Alt-A securities that have experienced increased delinquency rates associated with specific collateral types and
origination dates. In analysing subprime and Alt-A residential mortgage-backed securities for potential credit losses, the key inputs to cash flow projections were estimated
peak-to-trough home price declines of up to 34% and unemployment rate of 10.6%. The cash flow projections assumed liquidation rates of 100% for non-performing loans (90
days or more in arrears) and loss severities typically in the range of 65% to 70% with a maximum of 85%, depending on the underlying collateral type and seasoning.
Mortgage-backed securities – Commercial
As of 31 December 2009, gross unrealised losses related to commercial mortgage-backed securities were $7.2 million, all of which related to securities that have been in an
unrealised loss position for longer than 12 months. The Bank’s commercial mortgage-backed securities are all rated “AAA” and possess significant subordination (a form of credit
enhancement for the benefit of senior securities, expressed here as the percentage of pool losses that can occur before a senior asset-backed security will incur its first dollar of
principal loss). In considering whether potential credit-related losses would occur, property price declines and/or defaults were forecasted to be at least equal to the worst
historical cohort (and in some cases, worse); estimated peak-to-trough property price declines of 45% were assumed. No credit losses were recognised on these securities.
Asset-backed securities - Student loans
As of 31 December 2009, gross unrealised losses on student-loan asset backed securities were $6.6 million, all of which related to securities that have been in an unrealised loss
position for longer than 12 months. All of these securities are "AAA" rated and management believes these securities do not have any credit losses. There are explicit and implicit
guarantees provided by the US government as well as the UK government (UK student loans constitute 6.5% of the amortised cost of the student loans asset-backed securities).
The unrealised losses were due to widened credit spreads caused by illiquidity.
75 Asset-backed securities - Automobile loans
As of 31 December 2009, gross unrealised losses on automobile loan backed securities were $4.2 million, all of which related to securities that have been in an unrealised loss
position for longer than 12 months. As at 31 December 2009, approximately 32% of these investments were rated "AAA" rated and 68% were "BB" rated. The unrealised losses
were due to widened credit spreads caused by illiquidity. The factors considered in analysing potential credit losses were the security’s position in the capital structure, lease
rates, lessee defaults, loss severity, manufacturer defaults, depreciation rates, and residual values. Additional consideration was given to asset performance relative to the
projected economic scenario and historical cohort performance. No credit losses were recognised on these securities.
Asset-backed securities - Commercial
As of 31 December 2009, gross unrealised losses related to Other asset-backed securities were $4.3 million, all of which related to securities that were in an unrealised loss
position for longer than 12 months. Overall unrealised losses have decreased since 31 December 2008, mainly as a result of an increase in high-yield markets, lower default
forecasts and spread tightening across relevant asset classes.
The key considerations in analysing potential credit losses were position in capital structure, underlying asset defaults and loss severity, lease rates, utilisation rates, useful life of
assets, depreciation rates and salvage values. Additional consideration was given to asset performance relative to the projected economic scenario and historical cohort
performance. In the year ended 31 December 2009, the Bank has recognised $3.1 million of OTTI losses in net income for a commercial asset backed security that has
experienced industry stresses and decreased performance expectations relating to the underlying asset collateral.
Asset-backed securities - Credit cards
As of 31 December 2009, gross unrealised losses on credit card debt backed securities were $1.0 million, all of which related to securities that have been in an unrealised loss
position for longer than 12 months. The credit card–related asset-backed securities are rated "A”. One of the key metrics considered for credit card–related asset-backed
securities is each trust’s excess spread – which is the credit enhancement resulting from cash that remains each month after payments are made to investors for principal and
interest and to servicers for servicing fees, and after credit losses are allocated. No credit losses were recognised on these securities.
Collateralised debt and loan obligations
As of 31 December 2009, gross unrealised losses on collateralised debt and loan obligations were $39.1 million, all of which related to securities that have been in an unrealised
loss position for longer than 12 months. Unrealised losses have decreased since 31 December 2008, mainly as a result of an increase in high-yield markets, lower default
forecasts and spread tightening across various asset classes. As at 31 December 2009, approximately 76% of these securities are investment grade.
Credit enhancement in collateralised loan obligations (CLOs) is composed of subordination, whereby the Bank's holdings have higher payment priority than other tranches, and
benefit from over collateralisation (which is the excess of the par amount of collateral over the par amount of securities). The key factors considered in analysing potential credit
losses were underlying loan credit quality, the corresponding probabilities of default and ultimate loss severities. Loss severities were generally assumed to be 50% with a low of
30% and a high of 100%. In the year ended 31 December 2009, the Bank has recognised $6.4 million of OTTI losses in earnings for one CDO security that has experienced
increased delinquency rates associated with its underlying specific collateral.
Structured investment vehicles
A structured investment vehicle (SIV) was a type of fund whose strategy was to borrow money by issuing highly rated short-term securities bearing low interest and then invest
that money by buying long-term securities such as a range of asset-backed securities, as well as some corporate bonds, earning higher interest, making a profit from the spread.
As of 31 December 2009, gross unrealised losses related to SIVs were $66.8 million, all of which related to SIVs that were in an unrealised loss position for less than 12 months.
Overall unrealised losses have increased since 31 December 2008 due to the purchase from the Butterfield Money Market Fund of a SIV as discussed below in the section titled
Support for Butterfield Money Market Fund Limited. The Bank has recognised $10.7 million of OTTI losses in net income for a SIVs whose underlying collateral has experienced
increased delinquency and loss rates. In analysing SIVs for potential credit losses, key inputs to cash flow projections were congruous with the key inputs noted above for each
collateral class. Additionally for one SIV, inputs to cash flow projections included expected outcomes of certain litigation and negotiation actions affecting payout.
76 The following table presents securities by remaining term to earlier of expected or contractual maturity:
31 December 2009
Trading
Debt securities issued by non-US governments
Corporate securities and other
Total trading
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Equity securities
Total available for sale
Held to maturity
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Total held to maturity
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
Remaining term to earlier of expected or contractual maturity
Within
3 months
3 to 12
months
1 to 5
years
Over
5 years
No specific
maturity
Carrying
amount
-
-
-
285,920
1
9,956
35,068
-
1,287
6,320
-
-
-
-
-
-
338,552
3
19,304
-
-
-
-
-
-
-
-
-
19,307
910
-
910
569,093
-
-
99,142
-
15,227
-
-
84,070
-
-
-
-
767,532
1,333
32,587
-
6,701
-
-
-
-
-
50,960
-
91,581
3,297
-
3,297
184,584
27,466
-
407,934
8,140
14,941
-
9,342
28,809
4,496
-
49,929
-
735,641
16,598
148,525
-
79,813
39,996
10,854
10,000
-
10,070
17,009
140,615
473,480
3,458
-
3,458
-
21,665
21,665
7,665
21,665
29,330
-
38,628
2,500
-
21,508
3,291
-
141,375
-
-
18,064
-
-
225,366
10,959
5,522
18,498
114,141
-
-
-
31,789
-
73,438
-
254,347
-
-
-
-
-
-
-
-
-
-
-
-
72
72
-
-
-
-
-
-
-
-
-
-
-
-
1,039,597
66,095
12,456
542,144
29,648
34,746
6,320
150,717
112,879
4,496
18,064
49,929
72
2,067,163
28,893
205,938
18,498
200,655
39,996
10,854
10,000
31,789
10,070
141,407
140,615
838,715
357,859
860,023
1,212,418
483,171
21,737
2,935,208
-
102,852
255,007
357,859
-
449,925
410,098
860,023
-
935,521
276,897
1,212,418
-
411,944
71,227
483,171
183
16,307
5,247
21,737
183
1,916,549
1,018,476
2,935,208
77
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
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Commercial
Asset-backed securities - Credit cards
Collateralised debt and loan obligations
Structured investments vehicles
Total held to maturity
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
Remaining term to earlier of expected or contractual maturity
Within
3 months
3 to 12
months
1 to 5
years
Over
5 years
No specific
maturity
Carrying
amount
-
-
-
731
-
731
3,945
-
3,945
3,186
-
3,186
-
40,467
40,467
471,249
9,773
-
481,022
51,000
-
-
187,073
-
3,675
-
-
-
15,416
-
-
-
257,164
95,959
-
-
95,959
304,000
-
6,275
326,723
27,620
20,031
13,961
13,459
-
-
-
13,500
-
725,569
-
-
-
-
156,406
38,129
12,083
731,973
33,562
98,796
39,993
18,173
126,043
-
14,937
90,003
200,414
1,560,512
-
-
-
-
-
85,619
13,293
6,325
21,066
265,656
-
146,051
-
35,292
-
77,048
-
650,350
-
-
2,818
2,818
-
-
-
2,356
-
-
-
-
-
-
-
-
-
2,356
7,862
40,467
48,329
567,208
9,773
2,818
579,799
511,406
123,748
31,651
1,254,450
82,248
388,158
53,954
177,683
126,043
50,708
14,937
180,551
200,414
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
109,812
822,259
-
1,324,334
240,123
1,564,457
-
542,955
110,581
653,536
440
37,631
7,570
45,641
440
2,993,859
829,780
3,824,079
Transfer of investments from the HTM to the AFS portfolio
During 2009, the Bank’s regulator, the Bermuda Monetary Authority, announced that as a precautionary measure it required all banks in Bermuda to maintain a capital buffer
such that they would be able to withstand a severe economic downturn (a 1-in-100-year event) and still maintain Tier 1 capital of at least 6%.
In response to this significant and unforeseen increase in liquidity and capital requirements, the Bank transferred investments from the HTM to the AFS portfolio. Management
believes that such transfer was necessary to meet the increased liquidity and capital requirements. On this basis, management believes that the transfer falls within the HTM
investments tainting exemptions of ASC 320-10-25-6 e) and does not result in the tainting of the entire HTM portfolio. The net carrying amount of the transferred securities was
$986.1 million at the time of the transfer. Subsequent to the transfer, a net unrealised loss of $21.0 million was recognised in OCI.
Support for Butterfield Money Market Fund Limited
In September 2009, under an existing credit enhancement agreement, the Bank purchased from a related party, namely the AAAm rated Butterfield Money Market Fund Limited,
a SIV investment at a price of $131.9 million, reflecting the nominal value and accrued interest at the time, and placed this investment into the available for sale portfolio at its
estimated fair value of $52.8 million, the difference reflecting $41.1 million of previously recognised credit losses from the credit enhancement agreement (recognised in the
Consolidated Statement of Income under Other gains and losses) as well as the 30 September 2009 $38.0 million unrealised non-credit related fair value adjustment recognised
in Other comprehensive income.
78
Note 5: Loans
The composition of the loan portfolio at each of the indicated dates was as follows:
31 December
Commercial loans
Banks
Government
Commercial real estate
Commercial mortgage
Construction
Commercial and industrial
Loans
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
2009
Non-
Bermuda
Bermuda
Total
Bermuda
2008
Non-
Bermuda
Total
161
36,323
654,022
13,098
446,943
22,642
1,173,189
(99,030)
1,074,159
51,780
57,754
1,246,383
5,582
111,427
1,472,926
(12,119)
1,460,807
-
4,500
161
40,823
374,379
3,003
1,028,401
16,101
483
94,751
423,454
191,905
392,855
92,872
867,609
(14,263)
853,346
6,076
24,537
618,211
3,198
182,903
834,925
(4,905)
830,020
839,798
115,514
2,040,798
(113,293)
1,927,505
570,899
22,762
1,304,254
(12,068)
1,292,186
57,856
82,291
1,864,594
8,780
294,330
2,307,851
(17,024)
2,290,827
60,333
54,599
1,209,071
6,352
147,044
1,477,399
(9,888)
1,467,511
-
8,000
296,248
11,136
413,918
182,797
912,099
(1,554)
910,545
5,093
22,662
527,884
4,416
192,866
752,921
(4,886)
748,035
483
102,751
719,702
203,041
984,817
205,559
2,216,353
(13,622)
2,202,731
65,426
77,261
1,736,955
10,768
339,910
2,230,320
(14,774)
2,215,546
Total loans
Less allowance for credit losses
Net loans
2,646,115
(111,149)
2,534,966
1,702,534
(19,168)
1,683,366
4,348,649
(130,317)
4,218,332
2,781,653
(21,956)
2,759,697
1,665,020
(6,440)
1,658,580
4,446,673
(28,396)
4,418,277
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 2009 is 4.75% (2008: 5.72%).
The table below sets forth information about the Bank's non-accrual loans:
31 December
Commercial loans - Bermuda
Commercial loans - Non-Bermuda
Consumer loans - Bermuda
Consumer loans - Non-Bermuda
Commercial and residential mortgages - Bermuda
Commercial and residential mortgages - Non-Bermuda
2009
Specific
allowance
(21,807)
(208)
(530)
(768)
(66,565)
(8,704)
(98,582)
Gross
38,204
4,671
2,596
6,265
143,991
37,647
233,374
Total
Gross
16,397
4,463
2,066
5,497
77,426
28,943
134,792
3,224
5,053
2,278
1,500
11,706
12,739
36,500
2008
Specific
allowance
(2,070)
(106)
-
(598)
(165)
(519)
(3,458)
Total
1,154
4,947
2,278
902
11,541
12,220
33,042
For the year ended 31 December 2009, the amount of gross interest income that would have been recorded had impaired loans been current was $1.8 million (2008: $3.4
million). For the year ended 31 December 2009, the Bank recovered overdue interest of $0.1 million (2008: $0.3 million) on impaired loans that were repaid in the year. The
average balance of impaired loans, net of specific allowances, during the year ended 31 December 2009 was $99.6 million (2008: $32.3 million).
As at 31 December 2009, $191.4 million of non-delinquent loans were placed on non-accrual status since, in the opinion of Management, full payment of principal or interest was
in doubt. As at 31 December 2009, $49.7 million of fully secured delinquent loans remained on accrual status since collection efforts are reasonably expected to result in
repayment of all amounts due under the contractual term of the loans.
79
The table below summarises the changes in the allowances for credit losses:
31 December
2009
Allowance for credit losses at beginning of year
Provision taken during the year
Recoveries
Charge-offs
Other
Allowance for credit losses at end of year
Specific
allowances
General
allowance
Specific
allowances
Total
3,458
99,338
-
(4,318)
104
98,582
24,938
5,541
1,784
(528)
-
31,735
28,396
104,879
1,784
(4,846)
104
130,317
3,865
3,220
-
(3,542)
(85)
3,458
2008
General
allowance
23,021
(175)
2,539
(447)
-
24,938
The table below presents information about the loan delinquencies, and charge-offs:
31 December
Credit card
Automobile financing
Residential mortgages and other consumer loans
Consumer loans
Commercial loans
Total loans reported
Note 6: Credit Risk Concentrations
2009
Total
delinquent
loans
Loans 90
days or more
past due
Charge-offs
2008
Total
delinquent
loans
Loans 90
days or more
past due
4,449
1,758
38,879
45,086
46,519
91,605
525
447
15,714
16,686
45,370
62,056
2,077
1,853
916
4,846
-
4,846
3,817
1,161
38,411
43,389
27,004
70,393
370
943
22,403
23,716
15,215
38,931
Total
26,886
3,045
2,539
(3,989)
(85)
28,396
77.80%
Charge-offs
1,696
445
1,743
3,884
105
3,989
Concentrations of credit risk in the lending and off-balance sheet credit related arrangements portfolios 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.
Unconditionally cancellable credit cards and overdrafts lines of credit are excluded from the tables below.
The following table summarises the credit exposure of the Bank by business sector:
31 December
2009
2008
Banks and financial services
Commercial and merchandising
Governments
Individuals
Primary industry and manufacturing
Real estate
Hospitality industry
Transport and communication
Sub-total
General allowance
Total
On-balance
sheet
Off-balance
sheet
Total credit
exposure
On-balance
sheet
Off-balance
sheet
Total credit
exposure
332,965
967,804
40,823
2,242,599
69,367
459,604
134,879
2,026
4,250,067
(31,735)
4,218,332
404,864
256,591
-
68,616
77,334
1,453
14,912
2,002
825,772
-
825,772
737,829
1,224,395
40,823
2,311,215
146,701
461,057
149,791
4,028
5,075,839
(31,735)
5,044,104
275,619
1,228,458
103,612
2,268,165
41,496
360,389
159,384
6,092
4,443,215
(24,938)
4,418,277
462,929
276,461
-
162,880
66,542
50,598
19,842
1,700
1,040,952
-
1,040,952
738,548
1,504,919
103,612
2,431,045
108,038
410,987
179,226
7,792
5,484,167
(24,938)
5,459,229
80
The following table summarises the credit exposure of the Bank by region:
31 December
2009
2008
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Sub-total
General allowance
Total
On-balance
sheet
Off-balance
sheet
Total credit
exposure
On-balance
sheet
Off-balance
sheet
Total credit
exposure
2,557,213
194,480
541,058
354,485
76,377
526,454
4,250,067
(31,735)
4,218,332
509,149
13,472
169,040
100,911
5,310
27,890
825,772
-
825,772
3,066,362
207,952
710,098
455,396
81,687
554,344
5,075,839
(31,735)
5,044,104
2,779,419
184,173
483,934
414,536
71,528
509,625
4,443,215
(24,938)
4,418,277
644,398
22,852
150,229
162,661
5,701
55,111
1,040,952
-
1,040,952
3,423,817
207,025
634,163
577,197
77,229
564,736
5,484,167
(24,938)
5,459,229
Note 7: Premises, Equipment and Computer Software
The following table summarises land, buildings, equipment and computer software:
31 December
Land
Buildings
Equipment
Computer software in use
Computer software in development
Total
2009
2008
Accumulated
depreciation
Net carrying
value
Cost
Accumulated
depreciation
Net carrying
value
Cost
13,371
185,623
54,901
55,220
55,732
364,847
-
(41,670)
(38,957)
(39,978)
-
(120,605)
13,371
143,953
15,944
15,242
55,732
244,242
13,726
163,186
51,037
55,797
17,144
300,890
-
(36,511)
(35,151)
(32,073)
-
(103,735)
13,726
126,675
15,886
23,724
17,144
197,155
During 2009, the Bank concluded a non-monetary commercial mortgage restructuring transaction in which the Bank acquired from a non-related party fractional apartment units
valued at $21.1 million. The Bank settled the transaction by reducing the balance on the related commercial mortgage by $21.1 million. The fractional apartment units are
included in Buildings in the above table.
31 December
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
2009
5,223
3,547
11,388
20,158
2008
5,225
3,565
12,583
21,373
Note 8: Goodwill and Other Intangible Assets
The following table presents goodwill and other intangible assets by business segment:
Goodwill
Business segment
Balance as at 31 December 2007
Goodwill sold during the year
Goodwill impairment losses
Foreign exchange translation adjustment
Balance as at 31 December 2008
Goodwill acquired during the year
Goodwill impairment
Foreign exchange translation adjustment
Balance as at 31 December 2009
Barbados
Guernsey
The
Bahamas
United
Kingdom
Malta
Hong Kong
Total
5,220
-
(5,220)
-
-
-
-
-
-
8,477
-
-
(2,250)
6,227
-
-
690
6,917
1,923
(1,032)
-
-
891
-
(891)
-
-
9,640
-
-
(2,394)
7,246
1,782
-
767
9,795
-
-
-
-
-
2,228
(2,228)
-
-
-
-
-
-
-
4,901
(4,901)
-
-
25,260
(1,032)
(5,220)
(4,644)
14,364
8,911
(8,020)
1,457
16,712
81
During the 2009 annual review process, the carrying amount of goodwill relating to the Bahamas segment was considered fully impaired due to a recent decrease in profitability of
the operation of the Bahamas segment and was fully written off.
In October 2009, a contingent payment of £2.9 million ($4.6 million at the time of payment) became due and was paid in relation to the 29 October 2007 acquisition of Bentley
Reid Group Limited. Management has assessed that it is now probable that the Bank will have to pay, in October 2010, the second and last contingent payment to be made in
relation with the acquisition of Bentley Reid Group Limited. Therefore the corresponding liability of £2.9 million ($4.3 million as at 31 December 2009) has been recognised and is
included in the Balance Sheet under Other liabilities.
Both the 2009 and 2010 contingent payments are considered purchases of goodwill and have been allocated to the United Kingdom, Malta and Hong Kong segments based on
Bentley Reid Group's purchase price allocation. The carrying amount of goodwill allocated to the Malta and Hong Kong segments was immediately considered fully impaired due
to the profitability of these segments being significantly less than the expectations made on the acquisition date.
Customer relationship intangible assets
31 December
2009
2008
Accumulated
impairment
Accumulated
amortisation
Net carrying
amount
Cost
Accumulated
amortisation
Net carrying
amount
Cost
Bermuda - Wealth Management
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Malta
Hong Kong
Total
8,341
6,681
1,211
40,598
5,090
19,284
3,626
7,978
92,809
-
-
-
-
-
-
-
(5,246)
(5,246)
(2,922)
(2,708)
(430)
(20,806)
(2,173)
(6,721)
(524)
(1,150)
(37,434)
5,419 8,341 (2,367) 5,974
3,973 6,681 (2,263) 4,418
781 1,211 (349) 862
19,792 38,582 (18,127) 20,455
2,917 5,090 (1,833) 3,257
12,563 18,002 (5,407) 12,595
3,102 3,284 (255) 3,029
1,582 7,224 (564) 6,660
57,250
(31,165)
88,415
50,129
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. There have been no intangible asset impairment losses for the years ended 31
December 2009 and 2008, other than a $5.2 million impairment loss in the Hong Kong segment which is included in Other losses in the Consolidated Statement of Income.
The carrying amount of the Hong Kong segment's customer relationship intangible assets was impaired and recorded at its estimated fair value as at 31 December 2009 because
the actual profitability derived from acquired customers is significantly less that the expectations made on the acquisition date. The 31 December 2009 fair value of customer
relationship intangible assets is based on the present value of net cash flows expected to be derived solely from the recurring customer base existing as at 31 December 2009.
The discount rate used for testing is the discount rate implied in the initial purchase price acquisition.
During 2009, the Bank did not acquire new customer relationship intangible assets and did not sell any. During 2008, the Bank did not acquire new customer relationship
intangible assets and sold customer relationship intangible assets having a book value of $1.2 million. During 2009, the amortisation expense amounted to $6.2 million (2008:
$7.3 million) and the foreign exchange translation adjustment increased the net carrying amount by $4.4 million (2008: decreased by $15.5 million). The estimated aggregate
amortisation expense for each of the succeeding five years (until 31 December 2014) is $5.9 million.
82
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
2009
2008
Customers
Banks
Total
Customers
Banks
Total
954,191
4,753,743
5,707,934
-
27,681
27,681
954,191
4,781,424
5,735,615
920,866
5,031,372
5,952,238
-
71,423
71,423
920,866
5,102,795
6,023,661
2,536,812
185,651
147,547
2,870,010
85,755
5,239
-
90,994
2,622,567
190,890
147,547
2,961,004
3,045,722
196,296
211,919
3,453,937
320,931
2,740
-
323,671
3,366,653
199,036
211,919
3,777,608
Total
8,577,944
118,675
8,696,619
9,406,175
395,094
9,801,269
(b) By Type and Location
31 December
2009
2008
Payable
on demand
Payable on a
fixed date
Payable
on demand
Payable on a
fixed date
Total
Total
Bermuda
Customers
Banks
Barbados
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
The Bahamas
Customers
Banks
United Kingdom
Customers
Banks
Total Customers
Total Banks
Total
2,195,304
-
1,195,124
41,545
3,390,428
41,545
2,368,312
58,566
1,332,483
208,304
3,700,795
266,870
163,538
-
81,930
-
245,468
-
156,248
-
75,393
-
231,641
-
1,764,566
16,090
570,875
48,802
2,335,441
64,892
2,216,042
-
778,153
110,597
2,994,195
110,597
980,013
7,712
377,324
404
1,357,337
8,116
613,989
7,676
673,832
-
1,287,821
7,676
67,429
-
65,760
-
133,189
-
46,907
-
69,666
-
116,573
-
537,098
3,865
5,707,948
27,667
5,735,615
578,983
257
2,869,996
91,008
2,961,004
1,116,081
4,122
8,577,944
118,675
8,696,619
550,740
5,181
5,952,238
71,423
6,023,661
524,410
4,770
3,453,937
323,671
3,777,608
1,075,150
9,951
9,406,175
395,094
9,801,269
83
Note 10: Employee Future Benefits
The Bank maintains trusteed pension plans including non-contributory defined benefit plans and a number of defined contribution plans, and provides post-retirement medical
benefits to its qualifying retirees in Bermuda. 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 third-party actuaries.
The following table presents the financial position of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan, which is unfunded. The benefit
obligations and plan assets are measured as at 31 December 2009 and 2008.
For the year ended 31 December
2009
2008
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
Accumulated benefit obligation at end of year
115,187
-
102,897
-
Change in projected benefit obligation
Opening projected benefit obligation
Change in measurement date
Service cost
Employee contributions
Interest cost
Benefits paid
Settlement and curtailment of liability
Actuarial loss (gain)
Foreign exchange translation adjustment
Closing projected benefit obligation
Change in plan assets
Opening fair value of plan assets
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
107,990
-
2,513
259
6,746
(4,586)
-
7,819
4,729
125,470
121,935
-
8,435
4,695
259
(4,586)
-
5,248
135,986
119,952
-
3,635
-
7,318
(1,960)
(1,917)
14,617
-
141,645
-
-
-
1,960
-
(1,960)
-
-
-
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)
-
-
-
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
Surplus (deficit) of plan assets over projected benefit obligation at measurement date
10,612
(96)
10,516
-
(141,645)
(141,645)
14,031
(86)
13,945
-
(119,952)
(119,952)
Amounts recognised in accumulated other comprehensive loss consist of:
Net actuarial loss
Past service cost
Net amount recognised in accumulated other comprehensive loss
(22,146)
-
(22,146)
(43,840)
-
(43,840)
(19,272)
(32)
(19,304)
(32,616)
-
(32,616)
84
The following table presents the expense constituents of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan:
For the year ended 31 December
2009
2008
Annual benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortisation of past service cost
Amortisation of net actuarial loss
Loss 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 loss (gain)
Total changes recognised in other comprehensive loss
2,513
6,746
(8,055)
36
2,945
1,332
5,517
4,893
10,410
(5,819)
32
2,945
(2,842)
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
3,088
6,811
N/A
-
1,218
-
11,117
-
11,117
Pension
plans
2,854
7,233
(8,739)
41
11
3
1,403
6,210
7,613
3,635
7,318
N/A
-
1,476
-
12,429
-
12,429
(12,700)
-
1,476
(11,224)
(22,680)
29
(22)
(22,673)
(12,693)
-
1,218
(11,475)
The estimated portion of the net actuarial loss for the pension plans that will be amortised from accumulated other comprehensive loss into benefit expense over the next fiscal
year is $3.3 million. 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 $2.3 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
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average annual medical cost increase rate
2009
2008
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
6.15%
3.70%
6.50%
N/A
6.10%
N/A
N/A
8% to 5% in
2013
6.25%
4.00%
6.75%
N/A
6.70%
N/A
N/A
9% to 5% in
2013
5.85%
3.80%
N/A
6.10%
N/A
7.5% to 4.5%
in 2027
6.15%
3.70%
N/A
6.10%
N/A
8% to 5% in
2013
For 2009, 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 $2.7 million
increase (2008: $2.3 million) and a $2.0 million decrease (2008: $1.8 million), respectively, and on the benefit obligation a $30.3 million increase (2008: $24.9 million) and a $23.8
million decrease (2008: $19.4 million), respectively.
To develop the expected long-term rate of return on the plan assets assumption for each plan, the Bank considered the historical returns and the future expectations for returns
for each asset class, as well as the target asset allocations of the funds. The weighted average discount rate used to determine benefit obligations at the end of the year is
derived from interest rates on high quality corporate bonds with maturities that match the expected benefit payments.
The weighted average annual medical cost increase rate was changed from 8% to 5% in 2008 to 7.5% to 4.5% in 2009 to reflect the latest available statistics in Bermuda. This
resulted in the year ultimate rate being reached changing from 2013 to 2027.
85
Investments policies and strategies
The pension plans assets are managed according to each plan's Investment Policy Statement which outlines the Purpose of the Plan, Statement of Objectives and Guidelines &
Investment Policy. The asset allocation is diversified and any use of derivatives is limited to hedging purposes only
The weighted average actual and target asset allocations of the pension plans by asset category, are as follows:
31 December
Asset category
Debt securities (including debt mutual funds)
Equity securities (including equity mutual funds)
Other
Total
2009
2008
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
45%
50%
5%
100%
46%
52%
2%
100%
60%
32%
8%
100%
53%
46%
1%
100%
Fair value measurements of pension plans assets
The following table presents the fair value of plans assets by category and Level of Inputs used in their respective fair value determination as described in Note 1.
31 December
US government and federal agencies
Corporate debt securities
Debt securities issued by non-US governments
Equity securities and mutual funds
Other
Total fair value of plans assets
2009
Fair value determination
2008
Fair value determination
Level 1
Level 2
Level 3
-
2,651
7,975
55,338
2,180
68,144
6,243
45,039
-
12,042
4,518
67,842
-
-
-
-
-
-
Total
fair value
6,243
47,690
7,975
67,380
6,698
135,986
Level 1
Level 2
Level 3
-
18,747
5,391
44,959
418
69,515
7,890
33,809
-
7,781
2,940
52,420
-
-
-
-
-
-
Total
fair value
7,890
52,556
5,391
52,740
3,358
121,935
At 31 December 2009, 29.5% (2008: 42.3%) 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 2009, 0.8% and 1.7% (2008: 2.2% and nil) of the plans' assets were invested in common and preferred shares of the Bank
respectively.
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 2010 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical benefit plans are as follows:
Estimated Bank contributions for 2010
Estimated benefit payments by year:
2010
2011
2012
2013
2014
2015 - 2019
Post-
retirement
medical
benefit plan
Pension
plans
1,727
3,750
4,600
4,800
5,100
5,300
5,700
31,400
3,750
4,150
4,540
4,960
5,430
35,960
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were nil million and nil million as at
31 December 2009 ($24.2 million and $21.4 million as at 31 December 2008).
As at 31 December 2009 and 2008 there were no pension plans that had an excess of accumulated benefit obligations over the plan assets.
86
Note 11: Commitments and Credit Related Arrangements
Commitments
The Bank was committed to expenditures under contract for sourcing and leases of $142.9 million and $33.0 million respectively as at 31 December 2009 (2008: $163.0 million
and $29.2 million respectively). Rental expense for premises leased on a long-term basis for the year ended 31 December 2009 amounted to $6.2 million (2008: $8.4 million).
The following table summarises the Bank's commitments for sourcing and long-term leases:
Year
Sourcing
Leases
Total
2010
2011
2012
2013
2014
2015 & thereafter
Total commitments
28,210
18,691
17,611
17,090
17,090
44,251
142,943
5,824
5,321
5,120
5,053
4,874
6,805
32,997
34,034
24,012
22,731
22,143
21,964
51,056
175,940
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.
The following table presents the outstanding financial guarantees with contractual amounts representing credit risk as follows:
31 December
Gross
2009
Collateral
Net
Gross
Standby letters of credit
Letters of guarantee
Total
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income.
352,016
19,601
371,617
463,868
14,230
478,098
322,582
15,135
337,717
29,434
4,466
33,900
2008
Collateral
317,018
3,311
320,329
Net
146,850
10,919
157,769
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 extend credit with contractual amounts representing credit risk as follows:
31 December
Commitments to extend credit
Documentary and commercial letters of credit
Total
2009
451,016
3,140
454,156
2008
559,916
2,938
562,854
The Bank has a facility by one of its custodians, whereby the Bank may offer up to US$200 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 2009, $133.3 million (2008: $102.1
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.
87
Note 12: Interest Income
Loans
The following table presents the components of loan interest income:
Year ended 31 December
Mortgages
Other loans
Amortisation of loan origination fees (net of amortised costs)
Total loan interest income
Balance of unamortised loan fees as at 31 December
Note 13: Segmented Information
2009
2008
95,229
109,744
204,973
6,721
211,694
100,790
157,765
258,555
6,015
264,570
10,829
11,021
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 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 segment consists of Butterfield Asset Management Limited, which provides investment management, advisory and brokerage services,
Butterfield Fund Services Limited (now Butterfield Fulcrum Group) which was sold in 2008 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.
During 2009, the Bermuda private banking operations were moved from the Bermuda Community Banking segment to the Bermuda Wealth Management segment. Figures for
year ended 31 December 2008 were restated accordingly.
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 are also provided. Investment and pension fund administration services were offered until
11 September 2008 when this business line was divested as part of the sale to the Fulcrum Group.
The Guernsey segment provides a broad range of services to private clients and financial institutions including, private banking and treasury services, Internet banking,
administered bank services, wealth management and fiduciary services. Investment and pension fund administration services were offered until 11 September 2008 when this
business line was divested as part of the sale to the Fulcrum Group.
The Switzerland segment provides wealth management services.
The Bahamas segment provides institutional, corporate and private clients with a range of wealth management & fiduciary services. Investment and pension fund administration
services were offered until 11 September 2008 when this business line was divested as part of the sale to the Fulcrum Group.
The United Kingdom segment provides a broad range of services including private banking and treasury services, Internet banking and wealth management and fiduciary
services to high net worth individuals and privately owned businesses.
The Malta and Hong Kong segments provide wealth management and fiduciary services.
88
2009
2008
4,198,903
351,336
72,671
4,622,910
277,551
2,607,542
1,534,520
1,039
166,455
1,295,451
2,894
10,166
5,895,618
5,030,926
350,525
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
(923,926)
9,594,602
(1,087,835)
10,911,844
Total Assets by Segment
31 December
Bermuda
Community Banking
Wealth Management
Real Estate
Total Bermuda
Barbados
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Malta
Hong Kong
Total overseas
Less: inter-segment eliminations
Total
Segment Analysis
Net interest income
Year ended
31 December 2009
Bermuda
Community Banking
Wealth Management
Real Estate
Sub-total Bermuda
Barbados
Cayman
Guernsey
Hong Kong
Malta
Switzerland
The Bahamas
United Kingdom
Sub-total overseas
Customer Inter-segment
Provision for
credit losses
Non-interest
income
Revenue
before gains
and losses
Total
expenses
Net income
before gains
and losses
and central
allocations
Gains and
losses
Central
allocations*
Net income
103,882
10,876
-
114,758
12,188
27,883
10,933
10
13
4
2,390
18,728
72,149
(4,705)
1,209
(886)
(4,382)
11
6,479
849
-
-
-
220
(3,555)
4,004
(73,934)
(20,400)
-
(94,334)
(2,164)
(7,787)
-
-
-
-
-
(594)
(10,545)
42,148
31,816
3,321
77,285
3,232
34,809
21,904
2,633
1,526
306
5,332
10,847
80,589
67,391
23,501
2,435
93,327
13,267
61,384
33,686
2,643
1,539
310
7,942
25,426
146,197
137,722
31,461
10,832
180,015
12,920
50,298
29,341
2,483
1,553
3,075
7,016
19,280
125,966
(70,331)
(7,960)
(8,397)
(86,688)
347
11,086
4,345
160
(14)
(2,765)
926
6,146
20,231
(124,710)
-
-
(124,710)
679
261
(298)
(10,147)
(2,240)
(235)
(885)
(9,381)
(22,246)
186,907
Total before
eliminations
Less: inter-segment
eliminations**
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.
** Principally rent and management fees.
-
(146,956)
-
(104,879)
(6,169)
151,705
(5,791)
233,733
(5,791)
300,190
-
(66,457)
-
186,907
(104,879)
(146,956)
378
-
(66,457)
157,874
239,524
305,981
(378)
5,474
(10,906)
8,397
2,965
(189,567)
(18,866)
-
(208,433)
(25)
(1,845)
(590)
-
-
-
(160)
(345)
(2,965)
1,001
9,502
3,457
(9,987)
(2,254)
(3,000)
(119)
(3,580)
(4,980)
-
-
-
(213,413)
-
(213,413)
89
Year ended
31 December 2008
Bermuda
Community Banking
Wealth Management
Real Estate
Sub-total Bermuda
Barbados
Cayman
Guernsey
Hong Kong
Malta
Switzerland
The Bahamas
United Kingdom
Sub-total overseas
Total before
eliminations
Less: inter-segment
eliminations**
Total
Net interest income
Customer Inter-segment
Provision for
credit losses
Non-interest
income
Revenue
before gains
and losses
Total
expenses
Net income
before gains
and losses
and central
allocations
Gains and
losses
Central
allocations*
Net income
143,847
17,128
-
160,975
9,111
32,014
16,999
36
34
4
1,894
33,414
93,506
(14,910)
(9,823)
(1,047)
(25,780)
533
17,612
4,936
-
-
-
1,706
(5,773)
19,014
(1,838)
-
-
(1,838)
(292)
(639)
-
-
-
-
-
(276)
(1,207)
44,381
70,296
2,255
116,932
3,629
47,172
37,270
3,903
1,655
270
7,534
11,768
113,201
171,480
77,601
1,208
250,289
12,981
96,159
59,205
3,939
1,689
274
11,134
39,133
224,514
142,667
48,948
10,751
202,366
11,522
61,905
40,044
2,280
1,355
3,595
8,779
29,067
158,547
28,813
28,653
(9,543)
47,923
1,459
34,254
19,161
1,659
334
(3,321)
2,355
10,066
65,967
(160,935)
-
-
(160,935)
1,950
47,585
131
-
-
-
-
2,218
51,884
254,481
(6,766)
(3,045)
230,133
474,803
360,913
113,890
(109,051)
-
254,481
6,766
-
-
(3,045)
(17,192)
212,941
(10,426)
464,377
(10,426)
350,487
-
113,890
-
(109,051)
22,335
(23,860)
9,543
8,018
(216)
(4,304)
(2,078)
(256)
(116)
-
(436)
(612)
(8,018)
-
-
-
(109,787)
4,793
-
(104,994)
3,193
77,535
17,214
1,403
218
(3,321)
1,919
11,672
109,833
4,839
-
4,839
For the year ended 31 December 2009, included within other expenses are the following income tax expense (benefit) amounts: Barbados $0.2 million (2008: $0.1 million),
Guernsey $0.1 million (2008: $0.9 million), United Kingdom ($0.9) million (2008: $2.0 million) and Malta $0.1 million (2008: nil). Transactions between operating segments
principally include interbank deposits and rent which are recorded based upon market rates, and management fees, which are recorded based on the cost of the services
provided.
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 meet the needs of its customers with their risk management objectives. The Bank’s
derivative contracts principally involve over the counter transactions that are privately negotiated between the Bank and the counterparty to the contract and include interest rate
contracts and foreign exchange contracts.
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.
Certain of these agreements contain credit-risk-related contingent features in which the counterparty has the option to accelerate cash settlement of our net derivative liabilities
with the counterparty in the event the Bank's credit rating falls below specified levels or the liabilities reaches certain levels. The aggregate fair value of all derivative instruments
with credit-risk-related contingent features that are in a liability position on 31 December 2009, was $12.6 million. The Bank has posted $14.9 million collateral against these
liabilities and therefore the maximum amount of termination payments that could have been required at 31 December 2009 was nil. Accelerated settlement because of such
events would not affect net income and would not have a material effect on the consolidated financial position or liquidity of the Bank.
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheet at fair value within other assets or other liabilities.
These amounts include the effect of netting. The accounting for changes in the fair value of a derivative in the Consolidated Statement of Income depends on whether the
contract has been designated as a hedge and qualifies for hedge accounting.
90
Notional amounts
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. Credit risk is limited to the positive fair value of the derivative instrument, which is significantly less than the
notional amount.
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 fair value is defined as the profit or loss associated with replacing the derivative contracts at prevailing market prices.
Risk management derivatives
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. Derivative instruments that are used as part of the Bank’s interest rate
risk management strategy include interest rate swap 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.
The Bank uses derivative instruments to hedge its exposure to interest rate risk. Certain hedging relationships are formally designated and qualify for hedge accounting as fair
value or cash flow hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and, therefore, are
accounted for as if they were trading instruments. In order to qualify for hedge accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives
used in designated hedging transactions continue to be highly effective as offsets to changes in fair value or cash flows of the hedged item. If a derivative ceases to be highly
effective, or if the hedged item matures, is sold, or is terminated, hedge accounting is terminated and the derivative is treated as if it were a trading instrument.
Fair value hedges
Derivatives are designated as fair value hedges to minimise the Bank's exposure to changes in the fair value of assets and liabilities due to movements in interest rates. 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. Changes in fair value of
these derivatives are recognised in income. For fair value hedges, the Bank applies the "shortcut" method of accounting, which assumes there is no ineffectiveness in a hedge.
As a result, changes recorded in the fair value of the hedged item are equal to the offsetting gain or loss on the derivative and are reflected in the same line item. For the years
ended 31 December 2009 and 2008, no gains or losses were realised from ineffective portions of fair value hedges.
Cash flow hedges
Derivatives are designated as cash flow hedges in order to minimise the variability in cash flows of interest earning assets caused by movements in interest rates. The effective
portion of changes in the fair value of such derivatives is recognised in accumulated other comprehensive income, a component of shareholders' equity. When the hedged item
impacts earnings, balances in other comprehensive income are reclassified to the same income or expense classification as the hedged item. The Bank applies the "shortcut"
method of accounting for cash flow hedges of held to maturity investments, in assessing whether these hedging relationships are highly effective at inception and on an ongoing
basis. Any ineffectiveness in cash flow hedge is recognised in earnings.
As of 31 December 2009 and 2008 there were no cash flow hedges in place and there were no deferred net gains or losses on derivative instruments accumulated in other
comprehensive income in relation with cash flow hedges.
Derivatives not formally designated as hedges
Derivatives not formally designated as hedges are entered into to manage the interest rate risk of fixed rate deposits with banks. Changes in the fair value of derivative
instruments not formally designated as hedges are recognised in income.
Client service derivatives
The Bank enters into foreign exchange contracts and interest rate caps primarily to meet the foreign exchange needs of its customers. Foreign exchange contracts are
agreements to exchange specific amounts of currencies at a future date at a specified rate of exchange. Changes in the fair value of client services derivative instruments are
recognised in income.
Credit derivatives
In 2008 and 2009, the Bank provided credit enhancements to a related party, namely Butterfield Money Market Fund Limited (BMMFL or the Fund). Under the credit
enhancement agreement (the Agreement), the Bank committed to compensate BMMFL, subject to specified maximum amount, should specified securities have a fair value less
than BMMFL’s carrying amount and BMMFL would have been 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 was outside the control of the Bank. All credit enhancements were expired as at 31 December 2009.
91 The following table shows the aggregate notional amounts of derivative contracts outstanding listed by type and respective gross positive or negative fair values and divided by
those used for risk management (sub-classified as hedging and those that do not qualify for hedge accounting), client services and credit derivatives. Fair value of derivatives are
recorded in the Consolidated Balance Sheet in Other assets and Other liabilities. Gross positive fair values are recorded in Other assets and gross negative fair values are
recorded in Other liabilities, subject to netting when master netting agreements are in place.
31 December 2009
Derivative Instrument
Risk Management Derivatives
Fair Value Hedges
Fixed rate loans
Customer deposits
Subtotal fair value hedges
Interest rate swaps
Interest rate swaps
Not designated as hedging instruments
Term deposits with banks
Interest rate swaps
Subtotal risk management derivatives
Client Services Derivatives
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
188,689
10,497
199,186
380,714
579,900
-
11
11
705
716
(13,054)
(538)
(13,592)
(13,054)
(527)
(13,581)
(933)
(14,525)
(228)
(13,809)
Subtotal client services derivatives
Spot and forward foreign exchange
Interest rate caps
2,336,222
38,808
2,375,030
27,529
752
28,281
(27,996)
(752)
(28,748)
(467)
-
(467)
Total derivative instruments
2,954,930
28,997
(43,273)
(14,276)
31 December 2008
Derivative Instrument
Risk Management Derivatives
Fair Value Hedges
Fixed rate loans
Customer deposits
Subtotal fair value hedges
Interest rate swaps
Interest rate swaps
Not designated as hedging instruments
Time deposits with banks
Interest rate swaps
Subtotal risk management derivatives
Client Services Derivatives
Spot and forward foreign exchange
Interest rate caps
Subtotal client services derivatives
Other
Total derivative instruments
Credit derivative
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
209,928
12,337
222,265
102,143
324,408
3,597,529
35,021
3,632,550
148,000
4,104,958
62
59
122
-
122
(26,775)
(351)
(27,126)
(26,713)
(291)
(27,004)
(97)
(27,223)
(97)
(27,101)
68,440
383
68,823
-
68,945
(57,208)
(383)
(57,591)
11,232
-
11,232
(44,400)
(129,214)
(44,400)
(60,269)
The following table shows the location and amount of gains (losses) recorded in the Consolidated Statement of Income.
For the year ended 31 December
Consolidated Statement of Income line item
Interest rate swaps
Forward foreign exchange
Credit derivative
Total net gains (losses) recognised in net income (loss)
Net other gains (losses)
Foreign exchange revenue
Net other gains (losses)
2009
2008
(76)
3,632
3,304
6,860
(6)
2,365
(56,775)
(54,416)
92
Note 15: Fair Value of Financial Instruments
The following table presents the financial assets and liabilities that are measured at fair value on a recurring basis and classifies such fair value based on the type
of input used in the related valuations as described in Note 1.
Management classifies items that are recognised at fair value on a recurring basis based on the Level of Inputs used in their respective fair value determination as described in
Note 1.
Financial instruments in Level 1 includes equity shares actively traded and redeemable shares of mutual funds.
Financial instruments in Level 2 include equity securities not actively traded, certificate of deposits, corporate bonds, mortgage-backed securities and other asset-backed
securities, interest rates swaps and caps, forward foreign exchange and, in 2008 only, a credit derivative contract.
Financial instruments in Level 3 include non-redeemable private equity shares, corporate bonds, mortgage-backed securities and other asset-backed securities for which the
market is relatively illiquid and for which information about actual trading prices is not readily available.
Items that are recognised at fair value on a recurring basis
31 December
Financial assets
Investments
Trading
2009
Fair value determination
2008
Fair value determination
Level 1
Level 2
Level 3
Total carrying
amount /
Fair value
Level 1
Level 2
Level 3
Total carrying
amount /
Fair value
Debt securities issued by non-US governments
Equity securities
-
11,674
7,665
1,389
-
8,602
7,665
21,665
-
27,868
7,862
-
-
12,599
7,862
40,467
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Mortgage-backed securities – Prime
Mortgage-backed securities – Subprime and Alt-A
Mortgage-backed securities – Commercial
Asset-backed securities - Student loans
Asset-backed securities - Automobile loans
Asset-backed securities - Credit cards
Collateralised debts and loans obligations
Structured investments vehicles
Equity securities
Other assets - Derivatives
Financial liabilities
Other liabilities - Derivatives
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,039,597
66,095
12,456
349,130
6,506
32,849
6,320
58,210
108,980
4,496
-
-
72
28,997
43,273
-
-
-
193,014
23,142
1,897
-
92,507
3,899
-
18,064
49,929
-
-
-
1,039,597
66,095
12,456
542,144
29,648
34,746
6,320
150,717
112,879
4,496
18,064
49,929
72
28,997
43,273
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
567,208
-
9,773
-
-
-
-
-
-
-
-
-
2,818
68,945
129,214
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
567,208
-
9,773
-
-
-
-
-
-
-
-
-
2,818
68,945
129,214
Items measured on a recurring basis using significant unobservable inputs
For the year ended 31 December
Carrying amount at beginning of year
Net purchases
Realised and unrealised gains recognised in net income
Transfers in and out of Level 3
Foreign exchange translation adjustment
Carrying amount at end of year
2009
2008
Trading
investments
12,599
296
(4,096)
-
(197)
8,602
Available
for sale
investments
-
-
-
382,452
-
382,452
Trading
investments
12,510
-
(455)
-
544
12,599
Available
for sale
investments
-
-
-
-
-
-
93
Items other than those recognised at fair value on a recurring basis
31 December
2009
2008
Carrying
amount
Fair
value
Appreciation /
(depreciation)
Carrying
amount
Fair
value
Appreciation /
(depreciation)
Financial assets
Cash and deposits with banks
Investments held to maturity
Loans, net of allowance for credit losses
Commercial
Consumer
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Subordinated capital
Note 16: Interest Rate Risk
1,986,798
838,715
1,986,798
691,193
-
(147,522)
2,221,390
3,195,951
2,221,390
2,758,622
-
(437,329)
1,927,505
2,290,827
1,927,505
2,290,827
-
-
2,202,731
2,215,546
2,202,731
2,215,546
-
-
5,707,948
2,869,996
118,675
283,085
5,707,948
2,869,129
118,675
223,624
-
867
-
59,461
5,952,238
3,453,937
395,094
282,296
5,952,238
3,464,756
395,094
256,751
-
(10,819)
-
25,545
The following table sets out the assets, liabilities and shareholders' equity and off-balance sheet instruments on the date of the earlier of contractual maturity or repricing date.
Use of this table to derive information about the Bank’s interest rate risk position is limited by the fact that customers may choose to terminate their financial instruments at a date
earlier than the contractual maturity or repricing date. Examples of this include fixed-rate mortgages, which are shown at contractual maturity but which may pre-pay earlier, and
certain term deposits, which are shown at contractual maturity but which may be withdrawn before their contractual maturity, and certain investments which have call or
pre-payment features.
31 December 2009
(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
Demand deposits
Term deposits
Other liabilities
Subordinated capital
Total liabilities and shareholders' equity
Interest rate swaps
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing funds
1,891
1,908
3,706
-
-
7,505
-
4,782
2,114
-
-
6,896
99
708
708
2
146
44
-
-
192
-
-
508
-
90
598
19
(387)
321
2
488
59
-
-
549
-
-
191
-
-
191
67
425
746
-
164
206
-
-
370
-
-
144
-
108
252
(111)
7
753
-
25
60
-
-
85
-
-
4
-
85
89
(74)
(78)
675
92
204
143
244
211
894
355
954
-
260
-
1,569
-
(675)
-
Total
1,987
2,935
4,218
244
211
9,595
355
5,736
2,961
260
283
9,595
-
-
-
94
31 December 2008
(in $ millions)
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing funds
Total
Assets
Cash and deposits with banks
Investments
Loans
Premises, equipment and computer software
Other assets
Total assets
Liabilities and shareholders' equity
Shareholders’ equity
Demand deposits
Term deposits
Other liabilities
Subordinated capital
Total liabilities and shareholders' equity
Interest rate swaps
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Note 17: Subordinated Capital
2,036
3,209
3,373
-
-
8,618
-
5,103
3,068
-
-
8,171
212
659
659
20
181
165
-
-
366
-
-
299
-
-
299
(9)
58
3
73
115
-
-
191
-
-
199
-
-
199
9
1
717
718
-
135
408
-
-
543
-
-
206
-
197
403
-
38
333
-
-
371
-
-
5
-
85
90
(107)
(105)
33
751
176
927
162
188
24
197
252
823
518
921
-
311
-
1,750
-
(927)
-
2,221
3,824
4,418
197
252
10,912
518
6,024
3,777
311
282
10,912
-
-
-
On 28 May 2003, the Bank issued US $125 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches, namely US $78 million in Series
A notes due 2013 and US $47 million in Series B notes due 2018. The issuance was by way of private placement with US institutional investors. The notes are listed on the
Bermuda Stock Exchange (BSX) in the specialist debt securities category. Part proceeds of the issue were used to repay the entire amount of the US $75 million outstanding
subordinated notes redeemed in July 2003. The notes issued under Series A 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 $8.1 million. The issuance was by way of private placement in the United Kingdom and pays a fixed coupon of 9.29% until February 2012 when it becomes redeemable in
whole at the option of the Bank and 10.29% thereafter until February 2017.
On 27 June 2005, the Bank issued US $150 million of Subordinated Lower Tier II capital notes. The notes were issued at par in two tranches, namely US $90 million in Series A
notes due 2015 and US $60 million in Series B notes due 2020. The issuance was by way of private placement with US institutional investors. The notes are listed on the BSX in
the specialist debt securities category. The notes issued under Series A pays a fixed coupon of 4.81% until 2 July 2010, when they will become redeemable in whole at the
Bank's option. The Series B notes pays a fixed coupon of 5.11% until 2 July 2015 when they also become redeemable in whole at the Bank’s option. The Series A notes were
priced at a spread of 1.00% over the 5-year US Treasury yield and the Series B notes were priced at a spread of 1.10% over the 10-year US Treasury yield.
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 during the year amounted to $2.1 million (2008: $1.9 million) and is excluded from interest expense in the Consolidated Statement of Income.
95
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2009. The interest payments are
calculated until contractual maturity using the current LIBOR rates.
Earliest date
redeemable
Contractual
maturity date
Interest rate until
date redeemable
Interest rate from earliest date
redeemable to contractual
maturity
Principal
outstanding
Within
1 year
1 to 5
years
After
5 years
Interest payments until contractual maturity
Subordinated capital
Bermuda
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
2008 issuance - Series A
2008 issuance - Series B
Subsidiary
Total
Note 18: Earnings per Share
27 May 2013
2 July 2010
2 July 2015
27 May 2013
27 May 2018
27 May 2018
2 July 2015
2 July 2020
27 May 2018
27 May 2023
8 February 2012 8 February 2017
5.15%
4.81%
5.11%
7.59%
8.44%
9.29%
3 months US$ LIBOR + 2.000%
3 months US$ LIBOR + 1.095%
3 months US$ LIBOR + 1.695%
3 months US$ LIBOR + 4.185%
3 months US$ LIBOR + 4.929%
10.29%
47,000
90,000
60,000
53,000
25,000
8,085
283,085
2,421
4,644
3,066
4,023
2,110
751
17,015
7,677
5,007
12,264
13,628
8,440
3,206
50,222
3,782
936
9,043
8,307
13,926
2,080
38,074
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 2009 and 2008 (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.
For the year ended 31 December
2009
2008
Basic earnings per share
Net income for the year
Less: Preferred dividends declared and guarantee fee
Net (loss) income attributable for common shareholders
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)
Diluted earnings per share
Net (loss) income attributable for common shareholders
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)
Note 19: Share-Based Payments
(213,413)
(9,450)
(222,863)
100,266
(5,201)
95,065
(2.34)
4,839
-
4,839
101,616
(6,249)
95,367
0.05
(222,863)
4,839
100,266
(5,201)
-
95,065
(2.34)
101,616
(6,249)
1,316
96,683
0.05
As at 31 December 2009, the Bank has two share-based compensation plans being the Stock Option compensation plan and the Executive long-term incentive restricted shares
compensation plan (ELTIP). Under share-based compensation plans, unvested awards of options or shares are granted to participants. Awards vest only when employees have
rendered the requisite service period.
As at 31 December 2009, the Bank has two share-based settlement plans being the Deferred incentive settlement plan (DIP) and the Directors' retainer settlement plan. Under
share-based settlement plans, an amount of otherwise calculated vested compensation payable is settled by the issuance of fully vested shares having a fair value equal to such
amount of compensation payable.
96
The following table presents the share-based compensation cost that has been charged against net income and the value of share-based settlements. Each plan is described
below.
For the year ended 31 December
2009
2008
Stock option
plans
ELTIP
Outright
ELTIP
Performance
Stock option
plans
Total
ELTIP
Outright
ELTIP
Performance
Total
Share-based compensation plans
Awards granted in year 2005
Awards granted in year 2006
Awards granted in year 2007
Awards granted in year 2008
Awards granted in year 2009
Total share-based compensation
Share-based settlement plans
Deferred incentive settlement plan
Directors retainers settlement plan
Total share-based payments
-
334
412
368
1,134
2,248
-
-
79
51
864
994
-
-
-
-
-
-
-
334
491
419
1,998
3,242
-
256
3,498
336
674
916
1,634
-
3,560
-
-
152
525
-
677
-
-
-
-
-
-
336
674
1,068
2,159
-
4,237
1,668
234
6,139
Stock option compensation 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 15,000,000 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 2009, the Bank held as treasury stock 3,426,106 common shares (2008: 6,473,180) that can be used to satisfy the Bank’s
obligations with respect to the Stock Option Plan.
The total intrinsic value of options exercised during the year ended 31 December 2009 was $0.07 million (2008: $2.2 million). As at 31 December 2009, there was $2.4 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 2.51
years.
The weighted average fair value of stock options granted in the year ended 31 December 2009 was $0.60 per stock option (2008: $1.19), calculated using the Black-Scholes-
Merton option-pricing model with the following weighted average assumptions:
Year Ended 31 December
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years)
2009
2008
3.40%
1.90%
16%
5.0
3.50%
2.70%
12%
5.0
The projected dividend yield and volatility are based on the historical dividends paid and trading prices of the Bank's common shares. The risk-free interest rate for periods within
the expected life of the option is based on the US Treasuries yield curve in effect at the time of grant. The Bank uses historical data to estimate expected option life and employee
termination rates; separate groups of employees that have similar historical exercise behaviour are considered separately for valuation purposes.
Executive officers' stock option plan
31 December
2009
2008
Outstanding at beginning of year
Transferred in
Granted
Stock dividend granted
Outstanding at end of year
Vested and exercisable at end of year
Number of
shares
transferable
upon exercise
(thousands)
Weighted
average
exercise
price ($)
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
Number of
shares
transferable
upon exercise
(thousands)
1,889
472
1,322
-
3,683
1,702
12.48
14.86
5.27
-
10.20
11.69
1,399
-
320
170
1,889
1,126
7.08
5.00
22
22
Weighted
average
exercise
price ($)
12.91
-
15.76
12.46
12.48
10.34
97
Employees' stock option plan
31 December
Outstanding at beginning of year
Transferred out
Granted
Stock dividend granted
Exercised
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
2009
2008
Number of
shares
transferable
upon exercise
(thousands)
Weighted
average
exercise
price ($)
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
Number of
shares
transferable
upon exercise
(thousands)
7,510
(472)
2,181
-
(22)
(452)
8,745
4,393
14.27
14.86
6.40
-
5.56
13.02
12.37
13.10
5,175
-
2,181
722
(318)
(250)
7,510
3,334
7.05
5.77
27
27
Weighted
average
exercise
price ($)
14.78
-
15.73
14.15
8.90
-
14.27
12.27
Executive long-term incentive restricted shares compensation plan
The purpose of the Executive Long-Term Incentive Restricted Share Compensation 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 granted under the
ELTIP-Outright plan are granted unvested and vest at a rate of 25 percent at the end of each year for four years. Shares granted under the ELTIP-Performance plan are granted
unvested and at the end of each of the following four years, 25 percent either vest (if annual performance targets are met) or forfeit (if annual performance targets are not met).
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 2009, 191,950 shares were granted under the ELTIP-Outright plan (2008: 29,372 shares) and 383,902 shares were granted under the ELTIP-Performance plan
(2008: 57,234 shares). The fair value of common shares granted during the year ended 31 December 2009 was $3.7 million (2008: $1.4 million).
As at 31 December 2009, there was $2.8 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 3.0 years.
Deferred incentive settlement plan
Under its Deferred Incentive Plan as approved by the Board of Directors, the Bank settles a portion of the annual bonus of selected members of the Management team by
granting restricted common shares. 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 2009, no restricted shares were granted (2008: 127,812). The fair value of common shares granted during the year ended 31 December 2009 was nil (2008:
$1.7 million).
Directors retainers settlement plan
The Bank's Non-Executive Directors received their annual retainer compensation in the form of fully vested and unrestricted Bank's shares.
Note 20: Share Buy-Back Plans
During the years 2008 and 2009, no common shares were purchased and cancelled. During 2009 nil common shares were purchased to be held as treasury stock at a cost of nil
(2008: 2,562,997 shares at a cost of $38.3 million).
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 Bank's Stock Option Trust and the Bank's Charitable Trust.
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.
98
Note 22: Capital Structure
Authorised capital
The Bank's total authorised share capital consists of (i) 260 million ordinary shares of par value BD$1.00, (ii) 100,200,001 preference shares of par value US$0.01and (iii) 50
million preference shares of par value £0.01.
At the special general meeting of shareholders held on 14 April 2009, the Board of Directors were granted the authority to issue, allot or grant options, warrants or similar rights
over or otherwise dispose of all the authorised but unissued share capital of the Bank.
Preferred shares
On 22 June 2009, the Bank issued 200,000 Government guaranteed, 8.00% Non-Cumulative Perpetual Limited Voting Preference Shares (the “Preference Shares”). The
issuance price was US$1,000 per share. The Preference Share principal and dividend payments are guaranteed by the Government of Bermuda.
Holders of Preference Shares will be entitled to receive, on each Preference Share only when, as and if declared by our Board of Directors, non-cumulative cash dividends at a
rate per annum equal to 8.00% on the liquidation preference of $1,000 per Preference Share payable quarterly in arrears.
At any time after the expiry of the guarantee offered by the Government of Bermuda, and subject to the approval of the Bermuda Monetary Authority, the Bank may redeem, in
whole or in part, any Preference Shares at the time issued and outstanding, at a redemption price equal to the liquidation preference plus any unpaid dividends at the time.
In exchange for the Government's commitment, the Bank issued to the Government 4,279,601 warrants to purchase common shares of the Bank at an exercise price of $7.01.
The warrants expire on 22 June 2019.
Regulatory capital
New capital adequacy rules came into force in Bermuda from 1 January 2009 following the implementation of Basel II, which was developed by the Basel Committee on Banking
Supervision (the “Basel Committee”). From this date the Bank adopted Pillar 1 standardised approach to credit and operational risk; it also became subject to Pillar 2
(Supervisory Review and Assessment) and Pillar 3 (Disclosure) from that date. Under the requirements of Pillar 2 of the Basel II framework, the Bank conducts an internal Capital
Assessment and Risk Profile (CARP) at least annually. The CARP is used by the BMA to determine and set the Individual Capital Guidance (ICG) for each Bermuda bank.
As at 31 December 2009, the Bank's consolidated Tier 1 and total regulatory capital ratios are 7.2% and 10.1%, respectively. As at 31 December 2009, the Bank is in compliance
with the BMA prescribed minimum Tier 1 regulatory capital ratio of 6% and is not in compliance with the ICG prescribed by the BMA for the Bank's total regulatory capital
requirement. As described in Note 29: Subsequent events, on a pro-forma basis as at 31 December 2009, the issuance of the common and mandatorily convertible preference
shares would increase Butterfield Group’s Tier 1 regulatory capital ratio to 13.5% and its total regulatory capital ratio to 18.7%. Both these ratios exceed the minimum regulatory
capital requirements as prescribed by the BMA.
Note 23: Stock Split and Stock Dividend
In 2009 the Bank distributed a $0.04 stock dividend to shareholders of record on 16 March 2009, 15 May 2009, 7 August 2009 and 4 November 2009. All prior period per share
data have been restated to reflect the 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.
Note 24: Variable Interest Entities
The Bank had no investments in variable interest entities for which it was deemed the primary beneficiary during the years 2008 and 2009.
99
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
Income taxes in Consolidated Statement of Income
Current
Deferred
Total tax (benefit) expense
Deferred income tax asset
Tax loss carried forward
Pension liability
Fixed assets
Allowance for compensated absence
Onerous leases
Other
Total asset
Deferred income tax liability
Other
Net deferred income tax asset
2009
2008
(361)
31
(330)
3,168
(126)
3,042
660
1,259
1,687
29
120
36
3,791
-
3,791
557
797
-
19
-
1,185
2,558
756
1,802
For the years ended 31 December 2009 and 2008, there were no unrecognised tax benefits and the tax-related interest and penalties recognised in net income were nil.
Note 26: Future Accounting Developments
Consolidation of variable interest entities
In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No.46(R) (FAS No. 167) (referenced by ASC 105-10-65-1(d)), which addresses
which entities shall be considered as variable interest entities and whether such entities shall be consolidated. FAS No. 167 is designed to improve financial reporting by
enterprises involved with variable interest entities. FAS No. 167 will be effective for annual and interim periods beginning after 15 November 2009, and therefore, effective from
the Bank's first quarter in 2010. Management is currently evaluating the effect of adoption.
Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures which requires additional disclosures about fair value measurements. The new
requirements are effective for interim and annual reporting periods beginning after 15 December 2009, and therefore, effective from the Bank's first quarter in 2010. Management
is currently evaluating the effect of adoption.
Note 27: Related parties transactions
Butterfield Fulcrum Group Limited
On 11 September 2008, the Bank completed the sale of its international fund administration services businesses to the Fulcrum Group. The sale was accomplished by a share
purchase agreement (SPA), through which the Bank sold six subsidiaries that carried out its fund administration services operations. The Bank received, pursuant to the sale, an
upfront cash payment of $133 million and a 40% equity ownership in the combined fund administration services business, Butterfield Fulcrum Group Limited. The Bank also has
the right to nominate two directors to the Butterfield Fulcrum Group’s seven-member board of directors. As at 31 December 2009, these positions were held by Alan R.
Thompson, the Bank's President and Chief Executive Officer at the time, and Robert A. Mulderig, Butterfield's Chairman of the Board. Mr. Thompson resigned effective
28 February 2010. A new DIrector will be nominated by the Bank forthwith.
To facilitate the transaction, the Bank provided the Butterfield Fulcrum Group with $65.0 million in seven-year term debt financing and a $14.5 million three-year revolving credit
facility on commercial market terms. The Bank also entered into a transition services agreement (TSA) with the Butterfield Fulcrum Group. Under the TSA, the Bank agreed to
provide certain transition services to the Butterfield Fulcrum Group, including use of certain office facilities, information technologies and personnel, during the transition period.
The Bank's obligations under the TSA expired during the year ended 31 December 2009. As part of the SPA, the Bank and the Butterfield Fulcrum Group undertook to create an
arms-length client referral arrangement through which both the Bank and the Butterfield Fulcrum Group have the option to refer clients in need of each others’ services in return
for a nominal fee. Since the sale, the Bank has substantially ceased all fund administration services operations.
As a result of the Butterfield Fulcrum Group transaction, the Bank recognised a gain of $115.5 million in the year ended 31 December 2008, which is included in the Consolidated
Statement of Income under Gain on sale of subsidiaries. The Bank accounts for its ongoing 40% equity interest in the Butterfield Fulcrum Group under equity accounting
principles.
100
Employee loan programme
As of 17 May 2005, the Bank established a programme to offer loans with preferential rates to eligible bank employees, subject to certain conditions set by the Bank and provided
that such employees meet certain credit criteria. Loan payments are serviced by automatically debiting the employee’s chequing or savings account with the Bank. Applications
for loans are handled according to the same policies as those for the Bank's regular retail banking clients. The Bank's ability to offer preferential rates on loans depends upon a
number of factors, including market conditions, regulations and the Bank's overall profitability. The Bank has the right to change our employee loan policy at any time after
notifying participants.
Interested officers and director transactions
In the ordinary course of business, the Bank provides loans and other banking services to the Bank's officers and directors, as well as their family members and companies with
which they are affiliated. The Bank provide these services on terms which management believe are no less favourable to the Bank than those with unaffiliated parties of
comparable creditworthiness.
Charitable Trust
The Bank historically has provided a loan facility to the Charitable Trust which it used to purchase shares in the Bank which amounted to $2.7 million at 31 December 2009 (2008:
$11.7 million). As at 31 December 2009, the Charitable Trust held 729,088 Bank's common shares (2008: 706,018 shares).
Note 28: Comparative Information
Certain prior period figures have been reclassified to conform to current period presentation.
Note 29: Subsequent Events
On 2 March 2010, the Bank announced the issuance of 144.8 million common shares of par value $1 per share, for a consideration of $175 million and the issuance of 375,000
mandatorily convertible preference shares of par value $0.01 per share, for a consideration of $375 million. The net proceeds to the Bank from both issuances, net of transaction
costs, is expected to be approximately $520.0 million. On a pro-forma basis as at 31 December 2009, the issuance of the common and mandatorily convertible preference
shares would increase Butterfield Group’s Tier 1 regulatory capital ratio to 13.5% and its total regulatory capital ratio to 18.7%. Both these ratios exceed the minimum regulatory
capital requirements as prescribed by the BMA.
Upon appropriate shareholders' approvals, the Bank intends to conduct a Rights Offering (the “Offering”) to existing common shareholders of the Bank, except to individuals in the
US and the New Investors. Each right will entitle the holder thereof to subscribe for their pro rata portion of the total of common shares and mandatorily convertible preference
shares. The maximum amount of the Offering will be $130 million. The use of the Offering net proceeds will be to repurchase shares from the 2 March 2010 investors at the
same price at which the investors originally subscribed the shares.
Following the share issuance, the Bank may restructure its investment portfolios in the quarter ending 31 March 2010. Consequently, the Bank may no longer be able to assert
that it will retain the held to maturity investments until recovery of their amortised cost and the securities would be reclassified to available for sale. Should such a change occur,
total losses, including previously unrecognised losses on the held to maturity investments, of approximately $150 to $175 million may be recognised in the quarter ending
31 March 2010. It is anticipated that the majority of such losses may be realised through earnings as securities are sold to restructure the portfolio.
101 SHAREHOLDER INFORMATION
Directors’ anD executive officers’ share
interests anD Directors’ service contracts
Pursuant to Regulation 6.8(3) of section IIA of the Bermuda Stock
Exchange Listing Regulations, the total interests of all Directors
and Executive Officers of the Bank in the shares of the Bank as at
31 December 2009 were 424,315 shares. With the exception of those
participating in the Shareholders’ Dividend Reinvestment Plan or the
Stock Option Plan, no rights to subscribe for shares in the Bank have
been granted to or exercised by any Director or Officer. None of the
Directors or Executive Officers had any interest in any debt securities
issued by the Bank or its subsidiaries.
There are no service contracts with Directors, except for those of
Bradford Kopp, President & Chief Executive Officer, whose contract
expires on 1 March 2013.
exchange Listing
The Bank’s shares are listed on the Bermuda Stock Exchange (BSX) and
the Cayman 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
cayman isLanDs stock exchange
(Secondary Listing)
Elizabethan Square, 4th Floor
P.O. Box 2408
GT, Grand Cayman
Cayman Islands
Tel: (345) 945 6060
Fax: (345) 945 6061
www.csx.com.ky
share DeaLing service
Butterfield Securities (Bermuda) Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 296 8867
share Price
Published daily in The Royal Gazette in Bermuda and available on
Bloomberg Financial Markets (symbol: NTB BH).
Also available on the BSX and CSX websites.
DiviDenD reinvestment PLan
Details are available from Butterfield Fulcrum Group (Bermuda) Limited
(Phone (441) 299 3882) and on our website, www.butterfieldgroup.com,
under “About Us | Investor Relations.”
Certain restrictions apply.
registrar anD transfer agent
Butterfield Fulcrum Group (Bermuda) Limited
Rosebank Centre
11 Bermudiana Road
Pembroke, HM 11
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
meDia reLations / PuBLication requests
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
Senior Vice President, Head of Finance
Tel: (441) 298 4758
E-mail: john.maragliano@bm.butterfieldgroup.com
Written notice of share rePurchase
Programme — Bsx reguLation 6.38
The Board of Directors of the Bank announced that there is no intention
to repurchase shares over the 12-month period commencing 1 January
2010 pursuant to its share repurchase programme authorised by
shareholders on 29 October 1997 and 18 April 2007.
No shares were repurchased in the 12 months to 31 December 2009.
From time to time the Bank’s associates, insiders, and insiders’
associates as defined in the BSX Regulations may sell shares which may
result in being repurchased pursuant to the programme, but under BSX
Regulations such trades must not be prearranged and all repurchases
must be made in the open market. Prices paid by the Bank must not,
according to BSX Regulations, be higher than the last independent trade.
The Bank will continue to advise the BSX monthly of shares repurchased
E-mail: info@butterfieldgroup.com
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
102 purchases will likewise be advised to the BSX monthly. No shares were
Butterfield Trust (Bermuda) Limited
purchased in this way in the 12 months to 31 December 2009.
Large sharehoLDers
The following professional nominees at 31 December 2009 were
registered holders of 5% or more of the issued share capital:
Harcourt & Co. 13.96%*
Palmar Limited 6.31%
Murdoch & Co. 5.95%
Wilson & Co. 5.24%
Grosvenor Trust Company Limited
Personal Trust, Corporate Trust and Custody Services
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3980
Fax: (441) 292 1258
E-mail: info@butterfieldgroup.com
*Harcourt & Co. Ltd. is wholly owned by Butterfield Trust (Bermuda)
Grosvenor Trust Company Limited is wholly owned by Butterfield Trust
Limited, which is wholly owned by The Bank of N.T. Butterfield & Son
(Bermuda) Limited.
Limited.
Butterfield Trust (Bermuda) Limited is wholly owned by The Bank of N.T.
Known beneficial holdings of 5% or more of issued share capital at that
Butterfield & Son Limited.
date were:
Bermuda Life Insurance Company Limited 7.30%
PrinciPaL offices & suBsiDiaries
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
mailing address:
P.O. Box HM 195
Hamilton, HM AX
Bermuda
BermuDa
Butterfield Asset Management Limited
Asset Management and Brokerage Services
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3817
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
Butterfield Asset Management Limited is wholly owned by The Bank of
N.T. Butterfield & Son Limited.
Field Real Estate Holdings Limited
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
BarBaDos
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
103 Butterfield Asset Management (Barbados) Limited
Representative Office
Vice President: Caroline Prow
Belleville Corporate Centre
Butterfield Private Office (HK) Limited
Private Wealth Management,
deputy Chairman: nic Bentley
24th Floor, Diamond Exchange Building
38 Pine Road
Bellville, St Michael
Barbados
Tel: (246) 430 1650
Fax: (246) 436 7999
8-10 Duddell Street
Central
Hong Kong
Tel: (852) 2810 1233
Fax: (852) 2810 0849
E-mail: barbados@butterfieldgroup.com
E-mail: hongkong@butterfieldgroup.com
Cayman Islands
Butterfield Bank (Cayman) Limited
Community Banking, Private Banking, Asset Management,
malta
Butterfield Trust (Malta) Limited
Personal Trust
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
Guernsey
Butterfield Bank (Guernsey) Limited
Private Banking, Asset Management, Custody and Custodian Trustee
Services, Personal Trust, Coporate 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
Butterfield Trust (Guernsey) Limited
Fiduciary Services
managing director: Paul Hodgson
P.O. Box 25
Regency Court
Glategny Esplanade
St Peter Port, Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 711 521
Fax: (0)1481 728 665
E-mail: guernsey@butterfieldgroup.com
HOnG KOnG
Butterfield Trust (FE) Limited
Personal Trust
Butterfield Capital (HK) Limited
Asset Management
Butterfield Corporate Services (Malta) Limited
Company Formation and 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
swItzerland
Butterfield Trust (Switzerland) Limited
Trust and Company Services
managing director: Jim Parker
Boulevard des Tranchées 16
1206 Geneva, Switzerland
Tel: (41) 22 839 0000
Fax: (41) 22 830 0099
E-mail: switzerland@butterfieldgroup.com
unIted KInGdOm
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
2nd Floor Upper Brook Street
London, W1K 7QE
United Kingdom
Tel: (44) 207 776 6700
Fax: (44) 207 776 6701
E-mail: uk@butterfieldgroup.com
104 The Bank of N.T. Butterfield & Son Limited
65 Front Street, Hamilton, Bermuda
www.butterfieldgroup.com