Butterfield is a diversified financial services company operating in seven jurisdictions.
We have total assets of $9.6 billion and $69.9 billion of client assets under administration.
We employ over 1,500 people around the world. Butterfield is a publicly traded company
with a primary share listing on the Bermuda Stock Exchange and secondary listing on the
Cayman Islands Stock Exchange. Additional information can be obtained from our website,
www.butterfieldgroup.com.
1
2 CHAIRMAN’S LETTER TO THE SHAREHOLDERS
In the first quarter of 2010, Butterfield raised $550 million of new
interest in Butterfield Fulcrum Group. The Bank announced it was
capital from a group of institutional investors that included The
selling its minority ownership stake in Butterfield Fulcrum in February
Carlyle Group and CIBC. This was a necessary yet painful measure
2011. As a result, CVCP shareholders will receive a distribution of
that substantially diluted the ownership of our shareholders at the
between $0.39 and $0.41 per CVCP share during the first quarter of
time. It was taken in order to allow the Bank to sell the problematic
2011. Based upon the current performance of hospitality loans in
assets on its Balance Sheet and still maintain a strong capital position.
the Bank’s credit portfolio, however, CVCP shareholders should not
Over the last 12 months, we completed the sale of all of Butterfield’s
troubled asset-backed securities and sold three of the Bank’s four
reasonably expect to receive additional distributions or conversion
price adjustments.
remaining structured investment vehicles. We made significant
In 2010, your Board welcomed Directors James Burr and Wolf
additional provisions against the troubled hospitality loans in the
Schoellkopf following their nominations by The Carlyle Group, and
Bank’s portfolio during 2010, and took decisive actions with respect to
John Orr and Richard Venn following their nominations by CIBC.
these credit facilities. The Bank’s Balance Sheet is now largely free of
Messrs. Burr, Schoellkopf, Orr and Venn are career bankers whose
underperforming assets and its capital position is strong.
experience and insights have benefited Butterfield. Bradford Kopp,
The capital raise was a turning point for the Bank, and a first step
toward returning Butterfield to profitability. We still face challenges
from a very low interest rate environment, which makes it difficult to
generate normal levels of net interest income. The normalised net
income of the Bank in 2010, although positive, was not sufficient to
who was named President & Chief Executive Officer of the Bank in
March, also joined the Board. Subsequent to year end, Julian Francis,
who had served as a Director since 2007, resigned from the Board. We
wish Mr. Francis well and thank him for his valuable contributions to
the Bank.
cover the dividend on the preference shares. Under the direction
Working together, the Directors and the Group’s new Management
of new members of the Management team, Butterfield is working to
team have charted a course to revitalise Butterfield. With the support
acquire longer term fixed-rate assets and to take other actions which
of our shareholders and customers, we made good progress on that
are expected to increase the Bank’s earnings power in 2011.
journey. The Bank is well capitalised and largely de-risked, and is now
In the spring, legacy shareholders were given the opportunity to
well positioned for future growth.
reduce the dilutive effect of the capital raise and increase their
On behalf of the Board of Directors, I thank you for your ongoing
proportional ownership positions in Butterfield through the Rights
loyalty to Butterfield.
Offering. A majority of shareholders elected to participate, with
the result that the Offering—the largest such offering in Bermuda’s
history—was oversubscribed. Those who participated received a
combination of common shares and Contingent Value Convertible
Preference Shares (“CVCP shares”) for each Rights Unit exercised.
Holders of CVCP shares are eligible for distributions and/or downward
Robert Mulderig
adjustments of the price at which CVCP shares are convertible
to common shares, contingent on the Bank realising certain loan
recoveries and the sale or public offerings of the Bank’s equity
Chairman of the Board
Butterfield Annual Report 2010 3
4 PRESIDENT &
CHIEF EXECUTIVE OFFICER’S REPORT
As I prepare this year’s Report to Shareholders, I am nearing the conclusion of my first year as Butterfield’s President & Chief Executive Officer. Over
the last 12 months, I have had the opportunity to work closely with a reorganised Management team to continue the process of strengthening the
Bank. I am very proud of the progress we made during 2010 to revitalise Butterfield financially and reputationally.
THE YEAR IN REVIEW
In the annals of Butterfield’s 153-year history, 2010 will go down
To date, the Bank has taken action to place two hotel properties in
as a pivotal year. Following 2009’s net loss of $213.4 million, we
Bermuda in receivership—the first in the third quarter and another
announced in March that we had secured $550 million of new capital
subsequent to year end—where we deemed receivership to be the
from a group of institutional investors; sufficient to return the Bank
best course of action to protect the value of the assets and safeguard
to a strong capital position and begin the process of ridding our
the interests of the Bank’s shareholders. Early in 2011, a troubled
Balance Sheet of problematic assets. Completing the recapitalisation
hospitality loan on a Bahamian property was settled. We continue to
of Butterfield concurrently with the announcement of the loss was
work with our customers regarding repayment solutions and we are
essential to safeguard the long-term value of the Bank. However,
making good progress to resolve problems associated with the few
that action was highly dilutive to existing shareholders’ ownership, and
remaining non-performing hospitality loans in our portfolio.
was understandably met with mixed reactions.
The oversubscription of the $130 million Rights Offering in May by
notable one-time items recorded during the year. These included a
legacy shareholders who took advantage of the opportunity to recoup
reduction in the Bank’s post-retirement health care plan liability of
a portion of their prior ownership positions, along with new investors
$67.6 million during the second quarter following an actuarial review
who purchased Rights Units on the Bermuda Stock Exchange, was,
of the plan and adjustments to participant eligibility. During the third
therefore, a welcome development. It was an affirmation of optimism
quarter, the Bank sold its subsidiaries in Malta and Hong Kong at a loss
among our stakeholders about the future of Butterfield, and a vote
of $7.4 million, as they were no longer a strategic fit.
Aside from the write-offs on investments and loans, there were other
of confidence in the new Management team. During 2010, all of us
at Butterfield worked hard to strengthen our core businesses, trim
expenses and position the Bank for a return to profitability.
Exclusive of one-time gains and losses, our normalised income from
operations was $14.8 million in 2010, compared to $21.0 million the
previous year. This reflects the impact on our business of continuing
Although we again posted a net loss for 2010—amounting to
low interest rates and the effects of the global economic slowdown
$207.6 million—it was largely the result of planned events under our
being felt acutely in Butterfield’s markets.
strategy to remove problematic assets from the Balance Sheet. As we
advised in last year’s Annual Report, during the first quarter of 2010 we
sold principally all of the asset-backed securities in the Bank’s held to
maturity investment portfolio, crystallising losses of $113.8 million, and
recognised other-than-temporary impairments of $60.5 million on four
structured investment vehicles (SIVs) that were originally acquired
from the Butterfield Money Market Fund.
On a normalised basis, revenues (before provisions for credit losses)
were down slightly from $332.1 million at year end 2009, to $321.3
million at year end 2010. Net interest income (before provisions for
credit losses) was down 4% year on year to $178.9 million, owing to
compressed margins in the low-interest-rate environment and reduced
deposits. Non-interest income also declined from $145.2 million in
2009 to $142.4 million, on assets under management that declined in
The plan to de-risk the Balance Sheet also necessarily included
value by 6% during the year.
reserves against a few large, underperforming hospitality loans, and
we took total provisions of $104.9 million for 2009. Unfortunately, 2010
was a difficult year for tourism and hotels, particularly in Bermuda,
had difficulty generating revenues on lower occupancy numbers. This
contributed to Butterfield taking additional provisions of $42.0 million
during the year.
Cost control was an area of focus in 2010 and will continue to be a
priority going forward. On a normalised basis, non-interest expenses
were down by $5.8 million year on year. This was achieved through
a reduction in salaries and benefits associated with a reduced
headcount, decreased professional and outside services fees, lower
Butterfield Annual Report 2010 5
property costs and decreased marketing expenditures across the
Group Asset Management with responsibility for the Bank’s portfolio
Group. The reduction in expenses would have been larger had it not
and discretionary management services, and research functions
been for increases in technology and communications costs associated
internationally.
with a major systems initiative and the increase in non-income taxes
across the Group.
Bradley Rowse joined Butterfield as Executive Vice President & Chief
Financial Officer in September, filling a vacancy that had existed since
Butterfield closed 2010 as a well capitalised bank, with a tangible
March when I took up the position of CEO. James McPherson joined
common equity ratio of 5.8%, up from 0.9% at the end of 2009. Our total
Butterfield in October as Senior Vice President, Group Internal Audit.
capital ratio at 31 December 2010 was 21.6%, whilst our Tier 1 capital
In December, Daniel Frumkin joined as Executive Vice President
ratio was 15.7%; well in excess of regulatory minimums.
& Chief Risk Officer. Finally, Raymond Sykes, formerly the head of
MOVING FORWARD…
Butterfield’s enhanced capital position in 2010 facilitated the sale of
our private banking operation in London, was appointed Managing
Director of Butterfield Bank (UK) Limited in November.
asset-backed investments and SIVs and the decisive actions we took
The individuals who comprise the Group Executive team, along with
in respect of underperforming hospitality loans. With those events
all of the Bank’s Senior Officers, are highly experienced professionals. I
behind us, we believe that we have finally loosed the Bank from
am fortunate to have them as my colleagues.
the anchor of problematic assets that have negatively impacted our
earnings and reputation. 2011 will be a year of continued rebuilding for
the Bank; one that will be marked by further paring down of expenses
and the installation of new core technology applications in our largest
jurisdictions. We are guardedly optimistic that it will also be a year of
marginal profitability for the Bank.
TOGETHER…
Our ability to successfully introduce common technology and continue
to trim expenses across the Group will depend upon our ability to
work together across geographic and business boundaries. To foster
more efficient sharing of resources and solutions across Butterfield,
in 2010 we reorganised the Management team and filled numerous
vacancies, assigning responsibility for key functions to Group heads.
WITH A COMMON VISION…
We, and all of Butterfield’s employees worldwide, are focused on
returning the Bank to profitability as quickly as possible, restoring
confidence in the company and building sustainable value for our
shareholders. We have charted a course to get us there that involves
rationalising our operations so we can focus our resources on the core
businesses of community banking and wealth management in markets
where we have strong local knowledge and a meaningful presence.
In keeping with that focus, we sold our subsidiaries in Hong Kong
and Malta in the third quarter of 2010, as those operations were not
benefiting the Group’s revenues materially and were resident in
markets where we did not have a material presence. We similarly
announced that we were selling our minority ownership stake in fund
Conor O’Dea was named Senior Executive Vice President of the
administrator Butterfield Fulcrum Group in February 2011, as fund
Caribbean in March 2010, with direct responsibility for our operations
administration is no longer considered a core business for the Bank.
in the Cayman Islands, Barbados and The Bahamas, and Group-wide
oversight of the development of our community banking business. As
head of our largest trust jurisdiction, Robert Moore, Managing Director
of Butterfield Bank (Guernsey) Limited, now leads the coordination
and development of our fiduciary services businesses internationally.
Conor and Robert work closely with Michael Collins, who was named
Senior Executive Vice President for Bermuda during the year, with
responsibility for all client-facing businesses in Bermuda, the
Group’s headquarters and largest operation. Donna Harvey Maybury
was promoted to Executive Vice President, Human Resources at
the end of the year, and she now has overall responsibility for the
management of personnel-related functions across the Group. Michael
Neff joined the Bank in February 2011 as Executive Vice President,
6
Beyond our business model and geographic footprint, our
vision for the revitalised Butterfield is that of a company that
supports our communities and continually reinforces our relationships
with clients through service excellence and the development of
proactive solutions.
Throughout our history, Butterfield has made a priority of giving
back to the communities that support us. In 2010, we upheld that
commitment but, due to disappointing financial results and smaller
budgets, we necessarily scaled back our charitable donations.
Against the backdrop of a severe recession, we are also putting
In 2010, Butterfield received prestigious industry awards, including
greater discipline around directing funds to organisations that
Best Developed Market Bank – Bermuda from Global Finance magazine
provide humanitarian support. In Bermuda, for example, we launched
and Best Private Bank in the Cayman Islands from Euromoney. In
the Butterfield Hope Award to provide $25,000 per month to a local
addition, five senior Butterfield representatives were named in the
registered charity working in the field of human services. We have
annual CityWealth Leaders List of highly regarded figures in wealth
always repaid the loyalty of our stakeholders through an involvement
management and private banking.
with the third sector. To abandon the place we have historically
occupied as a socially responsible company during a time of great
need would have been the wrong thing to do.
On behalf of the Management team, I would like to express our
appreciation to the Board of Directors for their guidance, and to our
shareholders and customers for their support as we continue to work
In terms of serving customers effectively, one of Butterfield’s strengths
to return the Bank to profitability. I would also like to acknowledge the
is our size—large enough to provide the complete range of banking
hard work and commitment of our great team of employees, whose
and wealth management services demanded by our clients, but
dedication to our customers is simply unrivaled.
small enough to be flexible with their delivery and administration.
This enables us to offer more customised services than many of
our competitors. Despite the financial challenges that the Bank has
grappled with over the last few years, we remain committed to this
ideal. In 2010, we delivered new products and services and invested
heavily in new technology that will further enhance the efficiency of
our service and broaden our product offerings in the future.
THE RIGHT TOOLS…
Butterfield is on track to meet major milestones in the deployment
of new banking systems, with our Cayman franchise due to convert
to a new technology platform in the second quarter, followed by
Bermuda late in the third quarter. With our two largest operations
using common software applications and processes, we will be able
to realise economies of scale, more easily launch similar products in
multiple jurisdictions and further develop cross-border capabilities for
the benefit of our clients. In addition, the rationalisation of the Group’s
technology infrastructure should yield benefits in terms of savings
Together, we have returned Butterfield to a position of capital strength
and good liquidity. At 31 December 2010, we had approximately
$1.1 billion of capital. 52.8% of our total assets were held as cash,
deposits with banks and high quality investment securities. Our asset
quality improved markedly during the year, with non-accrual loans
down to $159.5 million from $233.4 million a year ago, or just 3.9% of
total loans (which reduced further to 3.7% subsequent to year end with
the settlement on a troubled hospitality loan on a Bahamian property).
Our operating earnings are trending upwards in 2011.
I look forward to continuing to work with the Butterfield team to
continue to move the Bank forward on this positive heading.
from licensing, development and support, all of which will be managed
Bradford Kopp
by HP as the Group’s technology provider.
President & Chief Executive Officer
AND DEMONSTRATED PROGRESS
All of us at Butterfield are cognizant of the loss in value of
shareholders’ holdings in the Bank over the last few years. Rebuilding
that value—by carefully managing our expenditures, investing in our
core businesses and reaffirming our commitment to service—is our
primary goal. I opened this year’s Report by noting how gratifying it
has been to have made good progress toward that goal in 2010. It is
gratifying, too, to know that industry experts have acknowledged our
progress and the value of our services.
Butterfield Annual Report 2010 7
8BOARD OF DIRECTORS & PRINCIPAL BOARD COMMITTEESCOMMITTEES INDICATED BY NUMBERS1,5CHAIRMAN ROBERT MULDERIG Retired Chairman & Chief Executive Officer, Mutual Risk Management Ltd. Chairman, Woodmont Trust Co. Ltd.1,2,5VICE CHAIRMAN ROBERT STEINHOFF Retired Partner, KPMG Director, Argus Insurance Co. Ltd.2,5,6JAMES BURRManaging Director, Carlyle Global Financial Services Group1,3,4*JULIAN FRANCIS*Former Governor, Central Bank of The Bahamas*Retired from Butterfield’s Board in January 20111BRADFORD KOPP President & Chief Executive Officer,The Bank of N.T. Butterfield & Son Limited2,6SHEILA LINESChief Executive Officer, Keytech Limited1,4SHAUN MORRIS Managing Partner of the Appleby Bermuda Law Firm3,4JOHN ORR Chief Executive Officer, FirstCaribbean International Bank2,4,6 PAULINE RICHARDSChief Operating Officer,Armour Reinsurance Group Holdings Limited Director, Wyndham Worldwide Inc. Former Director and Audit Committee Chair, Cendant CorporationPRINCIPAL BOARD COMMITTEES1. EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORSSupports the Board in fulfilling its overall governance responsibilities2. AUDIT COMMITTEEOversees Butterfield’s financial reports, internal financial controls, internal audit processes and compliance3. RISK POLICY & COMPLIANCE COMMITTEEFocuses on credit, market and operational risk4. CORPORATE GOVERNANCE COMMITTEEFocuses on Directors’ and Board Committee governance, performance and Directors’ nominations5. COMPENSATION & HUMAN RESOURCES COMMITTEEFocuses on compensation and benefits, employee development and succession6. INFORMATION TECHNOLOGY COMMITTEEFocuses on technology and systems developmentDIRECTORS’ CODE OF PRACTICE AND GROUP CODE OF CONDUCTThe Directors have adopted a Code of Best Practice based upon recommended principles of corporate governance. In implementing the Code, the Board meets regularly, retains full effective control over the Bank, and monitors Executive Management. A Group Code of Conduct applies to Directors and employees and imposes Butterfield’s principles of business, including ethics and conflicts of interest. Copies of the Codes can be accessed on www.butterfieldgroup.com.1,3WOLF SCHOELLKOPF Managing Partner, Lykos Capital Management1,3,5RICHARD VENN Senior Executive Vice-President, Corporate Development, CIBC 3,6JOHN WRIGHT Retired Bank Chief Executive GROUP EXECUTIVE MANAGEMENT
BRADFORD KOPP
President & Chief Executive Officer
TONYA MARSHALL
Senior Vice President,
General Counsel and
Secretary to the Board of Directors
MICHAEL COLLINS
Senior Executive Vice President,
Bermuda
JAMES MCPHERSON
Senior Vice President,
Group Internal Audit
CONOR O’DEA
Senior Executive Vice President,
Caribbean
ROBERT MOORE
Managing Director,
Butterfield Bank (Guernsey) Limited
WILTON DOLLOFF
Executive Vice President,
Chief Operating Officer
DANIEL FRUMKIN
Executive Vice President,
Chief Risk Officer
MICHAEL NEFF
Executive Vice President,
Group Asset Management
BRADLEY ROWSE
Executive Vice President,
Chief Financial Officer
DONNA HARVEY MAYBURY
Executive Vice President,
Human Resources
RAYMOND SYKES
Managing Director,
Butterfield Bank (UK) Limited
Butterfield Annual Report 2010 9
SENIOR OFFICERS
CURTIS BALLANTYNE
Senior Vice President,
Chief Credit Officer
RUPERT BENTLEY
Head of Asset Management,
United Kingdom
ROBERT LOTMORE
Managing Director,
Butterfield Bank (Bahamas) Limited
JOHN MARAGLIANO
Senior Vice President,
Finance
KATIE BOOTH
Managing Director,
Butterfield International Private Office Limited
MICHAEL MCWATT
Deputy Managing Director and Head of Banking,
Butterfield Bank (Cayman) Limited
DIANNE BREWER
Senior Vice President,
Marketing & Corporate Communications
JIM PARKER
Managing Director,
Butterfield Trust (Switzerland) Limited
SHEILA BROWN
Senior Vice President,
Investment Services, Bermuda
W. AARON M. SPENCER
Senior Vice President,
Group Operations and Information Technology
DAVID CARRICK
Group Controller
DAVID STEWART
Senior Vice President,
Chief Investment Officer
CURTIS DICKINSON
Executive Vice President,
Bermuda Wealth Management
LLOYD WIGGAN
Managing Director,
Butterfield Bank (Barbados) Limited
BOB WILSON
Executive Vice President,
Corporate Banking, Bermuda
CHARLES LAWRENCE
Senior Vice President,
Treasury, Bermuda
SEAN LEE
Executive Vice President,
Retail Banking, Bermuda
10
11 Bermuda is home to Butterfield’s headquarters and remains the Bank’s largest jurisdiction in
terms of number of employees, Banking Centre locations and business volumes.
Bermuda’s revenue before gains, losses and credit provisions decreased year over year
by $3.0 million, or 1.6%, reflecting lower fee revenues as a result of declining assets under
management offset by higher net interest income as margins, which increased by 0.16% over
the prior year.
The Bank continued to work through issues related to a small number of hospitality industry
loans to Bermuda properties. In July, and latterly in January 2011, to protect the value
of underlying assets and ensure the viability of the properties as tourist destinations and
employers, and to protect the interests of the Bank and our shareholders, receivers were
appointed for two local hotel properties. The properties are being managed professionally
with a view to selling them as going concerns.
Credit provisions were $25.6 million in 2010 compared to $94.3 million in 2009, primarily
related to commercial mortgage facilities in the hospitality industry. As a result, net income
before gains and losses was up $53.6 million to a loss of $33.1 million for the year ended
31 December 2010. Total assets were $5.2 billion at 31 December 2010, up $570 million from
31 December 2009, reflecting net proceeds from the capital raise. Assets under management
were $3.6 billion at 31 December 2010, down from $4.0 billion at 31 December 2009, reflecting
net redemptions, whilst assets under administration for our trust and custody businesses at
31 December 2010 were $21.3 billion and $22.7 billion, respectively, compared to
$18.5 billion and $22.1 billion at 31 December 2009.
Against a backdrop of economic difficulties locally, and despite the impact they had on
the Bank’s performance in 2010, Butterfield has reaffirmed our commitment to supporting
the third sector locally. The Bank believes that its long-term success and growth as an
organisation depends on the prosperity of the communities it serves. In 2010, the Bank
reduced the total amount it donated to local charities in Bermuda, but refocused its giving
efforts on human services.
In product news, Butterfield in Bermuda enhanced its suite of credit card products with the
launch of the AAdvantage® Business MasterCard® in November, giving local businesses the
opportunity to earn American Airlines AAdvantage miles on business-related purchases.
BERMUDA
12
Butterfield Annual Report 2010 13Note: Bermuda results include all head office overhead costs. (in $ thousands) 2010 2009 $ change Net interest income 113,363 110,376 2,987 Provision for credit losses (25,650) (94,334) 68,684 Non-interest income 71,325 77,285 (5,960) Revenue before gains and losses 159,038 93,327 65,711 Total expenses 192,174 180,015 (12,259) Net income before gains and losses & central allocations (33,136) (86,688) 53,552 Net gains and (losses) (149,940) (124,710) (25,230) Central allocations - 2,965 (2,965) Net loss (183,076) (208,433) (25,366) As at 31 December (in $ millions) Customer deposits 3,605 3,390 215 Loans, net of allowance for credit losses 2,505 2,577 (72) Total assets 5,193 4,623 570 Assets under administration Custody and other administration services 22,719 22,081 638 Trust 21,285 18,482 2,803 Total assets under administration 44,004 40,563 3,441 Assets under management Butterfield Funds 2,870 3,254 (384) Other assets under management 747 695 52 Total assets under management 3,617 3,949 (332) Number of employees 732 761 (29) 14 (in $ thousands) 2010 2009 $ change Net interest income 2,318 2,610 (292) Provision for credit losses (3,669) - (3,669) Non-interest income 5,201 5,332 (131) Revenue before gains and losses 3,850 7,942 (4,092) Total expenses 7,812 7,016 (796) Net income before gains and losses (3,962) 926 (4,888) Gains and losses - (885) 885 Central allocations - (160) 160 Net loss (3,962) (119) (3,843) As at 31 December (in $ millions) Customer deposits 122 133 (11) Loans, net of allowance for credit losses 68 76 (8) Total assets 146 166 (20) Assets under administration – Trust 3,172 2,394 778 Assets under management Butterfield Funds 26 85 (59) Other assets under management 9 1 8 Total assets under management 35 86 (51) Number of employees 43 54 (11) THE BAHAMASA net loss of $4.0 million for the year ended 31 December 2010 primarily reflected an increase in provision for credit losses of $3.7 million from $Nil in 2009. Whilst Butterfield Bank (Bahamas) Limited has no prior history of loan losses, in 2010 there was deterioration in delinquency rates and non-accrual loans resulting in the creation of a $2.9 million specific provision and a general provision of $0.8 million. At year end, total assets were $146 million compared to $166 million at 31 December 2009, due to a decrease in customer deposits. Client assets under administration increased $0.8 billion to $3.2 billion by year end, due to new business acquired during the year. In November, Butterfield in The Bahamas initiated a strategic business realignment that resulted in a paring back of private banking and lending services offered in the jurisdiction and a refocusing of resources on the exclusive development of its Trust and Corporate Services businesses. This resulted in a significant headcount reduction. Butterfield is committed to maintaining a presence in The Bahamas due to its pre-eminence as an international finance and trust jurisdication.During the year, the Bank continued its local support of the Ranfurly Home for Children. Additionally, on-the-job training opportunities were provided to Bahamian university students through the Bank’s Summer Student Programme.CARIBBEAN Butterfield Annual Report 2010 15BARBADOSTotal revenues before gains and losses in Barbados were up 6.7% year over year on strong earnings from net interest income and reduced credit provisions, offset by a decrease in lower fees from banking services. Provisions for credit losses decreased by $0.5 million compared to 2009 due to decreased write-offs of consumer loan and credit card balances, offset by an increase in the country risk premium included in the Bank’s general provisioning model.During 2010, Butterfield in Barbados continued its efforts to attract new customers and build brand recognition in the highly competitive local banking sector. To that end, Butterfield introduced a Premium Banking offering for high net worth clientele at the Somerley Banking Centre during the fourth quarter. In terms of community support, the Bank was, once again, the title sponsor of the Barbados Seniors’ Expo, and provided financial support to the Barbados Youth Business Trust (BYBT) and its Global Entrepreneurship Week.(in $ thousands) 2010 2009 $ change Net interest income 12,917 12,199 718 Provision for credit losses (1,707) (2,164) 457 Non-interest income 2,948 3,232 (284) Revenue before gains and losses 14,158 13,267 891 Total expenses 13,863 12,920 (943) Net income before gains and losses & central allocations 295 347 (52) Net gains and (losses) (151) 679 (830) Central allocations - (25) 25 Net income 144 1,001 (857) As at 31 December (in $ millions) Customer deposits 240 245 (5) Loans, net of allowance for credit losses 185 193 (8) Total assets 274 278 (4) Number of employees 138 137 1 16CAYMAN ISLANDSCayman is Butterfield’s second largest jurisdiction in terms of business and market presence. The Bank offers a full range of personal and corporate financial services in the Cayman Islands and is among the leaders in this highly competitive market. To complement Butterfield’s strong retail banking presence, Butterfield Bank (Cayman) Limited continued to focus on developing its wealth management businesses. In April, Butterfield’s private banking service in Cayman was named “Best Private Bank in the Cayman Islands” by Euromoney’s Private Banking and Wealth Management Survey, considered the benchmark of excellence in international private wealth management. The year-on-year decline in net income in Cayman was primarily attributable to the realised loss of $11.6 million on the sale of asset-backed securities in the available for sale portfolio. Net interest income was down 16.9%, year over year, to $28.6 million, whilst non-interest income was up $0.4 million, resulting from increases in gross banking service fees, trust fees and foreign exchange commissions. Cayman experienced steady growth in residential mortgages in 2010, leading to an increase in balances on the Bank’s loan book of $54 million year on year. Total expenses were $52.9 million in 2010, up $2.6 million from $50.3 million in 2009 due to an increase in salaries, health care costs and additional share-based compensation, as a result of stock options accelerated vesting in the first quarter upon change of control. Provisions for credit losses were $3.8 million, primarily related to an overseas hotel property loan. Total assets, at $2.0 billion, were down $571 million on a decline in hedge fund client deposits. Client assets under administration decreased by 8.7%, to $4.6 billion, primarily due to a decline in the value of assets relating to trust clients.In 2010, Butterfield continued to demonstrate its commitment to the Cayman Islands by supporting high-profile economic development events and charitable causes. The Bank provides support and board representation to Cayman Finance, the Government-led organisation that fosters the ongoing development of financial services in the Cayman Islands. Butterfield also had a prominent showing at the Cayman Captive Forum conference and co-sponsored the Chamber of Commerce’s single largest Cayman event, ‘Business After Hours with Island Companies’. Butterfield also sponsored the eighteenth annual St. Patrick’s Day Irish Jog, benefiting Cayman Islands’ diabetes-care initiatives, and the grand finale youth concert at the Cayman Arts Festival. Butterfield Cayman continues to be a major contributor to organisations such as Cayman Hospice Care, the Cayman Heart Fund, the Cancer Society, the Cayman Islands Red Cross, Cayman Islands Little League and Junior Squash, as well as educational institutions throughout the Cayman Islands. Butterfield Annual Report 2010 17(in $ thousands) 2010 2009 $ change Net interest income 28,571 34,362 (5,791) Provision for credit losses (3,808) (7,787) 3,979 Non-interest income 35,180 34,809 371 Revenue before gains and losses 59,943 61,384 (1,441) Total expenses 52,936 50,298 (2,638) Net income before gains and losses 7,007 11,086 (4,079) Net gains and (losses) (11,600) 261 (11,861) Central allocations - (1,845) (1,845) Net (loss) / income (4,593) 9,502 (14,095) As at 31 December (in $ millions) Customer deposits 1,781 2,335 (554) Loans, net of allowance for credit losses 608 554 54 Total assets 2,037 2,608 (571) Assets under administration Custody and other administration services 1,187 1,221 (34) Trust 3,401 3,802 (401) Total assets under administration 4,588 5,023 (435) Assets under management Butterfield Funds 270 415 (145) Other assets under management 837 794 43 Total assets under management 1,107 1,209 (102) Number of employees 326 326 - Note: Number of employees includes 28 temporary staff assigned to a major technology project. GUERNSEY
In Guernsey, Butterfield offers private banking, lending, asset management, custody,
administered banking and fiduciary services.
Non-interest income increased by $1.1 million from $21.9 million in 2009 to $23.0 million
in 2010, primarily from trust revenues. Total expenses decreased by $1.7 million to
$27.6 million for the year ended 31 December 2010, primarily as a result of the successful
settlement of a trust case in the first quarter. Total assets at 31 December 2010 were
$1.6 billion (£0.9 billion), up from $1.5 billion (£1.0 billion) at 31 December 2009, due
to customer deposit growth of $105 million offset by year-on-year exchange translation
variances. Client assets under administration were $16.4 billion at 31 December 2010, down
from $18.8 billion a year earlier. In Sterling terms, client assets under administration were
£10.5 billion as at 31 December 2010, down from £11.6 billion at 31 December 2009, reflecting
declines in net asset values.
As a non-retail financial services provider, Butterfield was able to enhance its visibility in
the community through sponsorships of the Guernsey Sailing Trust, the Guernsey Volleyball
Junior Development Programme, the Guernsey Squash Rackets Association’s first ever
Racquetball Tournament and the Guernsey Annual Squash Open. Butterfield was also the
primary sponsor of the West End musical, “Buddy” in Guernsey.
To continue to build upon the Group’s reputation for excellence in the field of fiduciary
services, the Guernsey office led Butterfield’s sponsorship of the Society of Trust and Estate
Practitioners’ Asia conference in Hong Kong. Guernsey’s Custody team was also a secondary
sponsor at the 2010 Guernsey Funds Forum in London.
EUROPE
18
Butterfield Annual Report 2010 19 (in $ thousands) 2010 2009 $ change Net interest income 12,384 11,782 602 Non-interest income 23,003 21,904 1,099 Revenue before gains and losses 35,387 33,686 1,701 Total expenses 27,625 29,341 1,716 Net income before gains and losses 7,762 4,345 3,417 Net gains and (losses) (1,433) (298) (1,135) Central allocations - (590) (590) Net income 6,329 3,457 2,872 As at 31 December (in $ millions) Customer deposits 1,462 1,357 105 Loans, net of allowance for credit losses 333 354 (21) Total assets 1,618 1,535 83 Assets under administration Custody and other administration services 7,305 11,680 (4,375) Trust 9,144 7,136 2,008 Total assets under administration 16,449 18,816 (2,367) Assets under management Butterfield Funds 180 151 29 Other assets under management 512 514 (2) Total assets under management 692 665 27 Number of employees 166 185 (19) 20 (in $ thousands) 2010 2009 $ change Net interest income 2 4 (2) Non-interest income 489 306 183 Revenue before gains and losses 491 310 181 Total expenses 2,159 3,075 (916) Net income before gains and losses (1,668) (2,765) 1,097 Gains and losses - (235) 235 Net loss (1,668) (3,000) 1,332 As at 31 December (in $ millions) Total assets 1 1 - Assets under administration – Trust 349 52 297 Number of employees 5 6 (1) SWITZERLANDButterfield Trust (Switzerland) Limited, which specialises in structuring private wealth solutions for international clientele, continued its business development programme during 2010 to enhance its visibility and reputation among high net worth individuals and their professional advisers. As an indication of the level of interest it is generating and the increased respect with which the company is regarded, it was accepted in July 2010 as a full member of the Swiss Association of Trust Companies, an organisation that works in conjunction with the Swiss Federal authorities and the Society of Trust and Estate Practitioners to strengthen the standing of the trust industry in Switzerland.Switzerland recorded a net loss of $1.7 million in 2010, compared to a net loss of $3.0 million the year before. This improvement was primarily due to a decrease in the expense base resulting from the closure of the asset management business in 2009, but also to a marked increase in new business. This continued momentum led to non-interest income rising by 59.8% year on year. Butterfield Annual Report 2010 21 (in $ thousands) 2010 2009 $ change Net interest income 9,381 15,173 (5,792) Provision for credit losses (7,136) (594) (6,542) Non-interest income 10,027 10,847 (820) Revenue before gains and losses 12,272 25,426 (13,154) Total expenses 16,088 19,280 3,192 Net income before gains and losses (3,816) 6,146 (9,962) Gains and losses (9,964) (9,381) (583) Central allocations - (345) (345) Net loss (13,780) (3,580) (10,200) As at 31 December (in $ millions) Customer deposits 939 1,116 (177) Loans, net of allowance for credit losses 415 529 (114) Total assets 1,105 1,295 (190) Assets under administration – Custody 1,263 1,153 110 Assets under management Butterfield Funds 331 289 42 Other assets under management 296 265 31 Total assets under management 627 554 73 Number of employees 109 112 (3) UNITED KINGDOMIn the UK, Butterfield Private Bank provides a range of exclusive banking, lending, treasury and investment management services. Its sister company, Butterfield International Private Office, provides family office services to high net worth international clients and their advisers from offices in London. The UK’s net loss of $13.8 million in 2010 was a result of the disposal of the Bank’s entire portfolio of mortgage-backed floating rate notes in the first quarter of 2010 as part of Management’s strategy to de-risk the Balance Sheet. This generated a realised loss, net of tax, of $7.3 million (£4.7 million). Provisions totalling $7.1 million (£4.6 million) were also raised in the year. Total revenues before gains and losses were $12.3 million (£8.0 million), down $13.1 million from $25.4 million (£16.2 million) as a result of specific loan loss provisions and the lower return the Bank achieved on its debt securities in 2010. At 31 December 2010, total assets were $1.1 billion (£0.7 billion), down $190 million due to the decrease in the value of the loan portfolio by $114.4 million (£61.3 million) to $414.5 million (£265.8 million), reflecting the strategy of de-risking the loan portfolio. During 2010, Butterfield introduced further enhancements to its Private Banking offering, with the launch of GBP, USD and EUR debit cards to improve the service for clients, along with a Flexible Mortgage product. Butterfield International Private Office similarly broadened its offering with the introduction of a Family Office Incubator Service in 2010. The Bank made a number of small donations to a range of charities connected with private clients during the year. 22
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 (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 beliefs 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.
2010 SUMMARY
Positive Developments in 2010
Reorganised Management team delivered:
(cid:115)
Strong capital position through the $550.0 million capital raise,
$67.6 million from restructuring of the post-retirement health
care plan and $38.8 million from the recovery of unrealised
losses on investments recorded in Accumulated Other
Comprehensive Income
Significantly de-risked Balance Sheet
$48.0 million recovery of value in the remaining four structured
investment vehicles (“SIVs”) and realised gain on the sale of two
positions. Third SIV security sold for a small gain subsequent to
year end
Deposit growth in the latter half of the year
in Bermuda and the Caribbean regions, as demand for travel and
vacation products diminished, driving large provisions for credit
losses in a few large loans in this book of business. Loan demand
continued to decline, negatively impacting our revenues from banking
fees and net interest income.
For Butterfield, 2010 was a year of rebuilding. The Bank raised
$550.0 million of new common equity, of which $130.0 million was
offered to existing shareholders in a Rights Offering, facilitating
the restructuring of the Balance Sheet. This involved write-downs
on hospitality loans and the sale of many of our problem asset-
backed securities in the first quarter of the year. Additionally,
other organisational restructuring took place in the year involving
the reorganisation of the Management team, position redundancies
in some of our jurisdictions and the sale of our Hong Kong and Malta
operations, resulting in further non-recurring charges.
The record-low interest rate environment continued to suppress both
net interest income and fees from asset management, as we were
Growth in our Trust business to record high revenues
forced to waive management fees on our money market funds due to
Cost management focus resulting in a decline in normalised
expense run rate
Significant progress towards replacing outdated technology
platforms
10% increase in book value per share to $1.09 since the capital
raise in Q1 2010
low yields and invest excess liquidity in short-term, low-yield assets
for the majority of the year. With the capital raise behind us and signs
of recovery in the United States in the latter part of the year, a new
investment strategy was employed, with the help of our investment
advisers, in response to record-low interest rates as we began to
build a laddered, high-quality government-backed bond portfolio in
the third and fourth quarters to hedge against a possible continued
low-rate environment and lift net interest income going into 2011.
(cid:115)
(cid:115)
(cid:115)
(cid:115)
(cid:115)
(cid:115)
(cid:115)
These positive developments were offset by continued recessionary
2011 OUTLOOK
conditions leading to:
(cid:115)
(cid:115)
$42.0 million provision for credit losses
$167.5 million net loss on the sale and write-down of investments
previously announced as part of the de-risking strategy
We remain cautiously optimistic about 2011, based on our
strengthened Balance Sheet and signs of economic recovery in the
United States. However, with the lagging effect of the global economic
downturn being experienced in most of our island jurisdictions,
we are carefully monitoring delinquency trends and working closely
For much of 2010, the ripple effects of the credit crisis that began in
2008 continued to plague developed economies creating instability,
with customers who are experiencing difficulties. Cost control will be
a continued focus for us as we recalibrate our cost base to the
deteriorating economic conditions and prolonged record low interest
reality of the prolonged low interest rate environment and reduced
rates in most jurisdictions in which we operate. Against this backdrop,
transaction volumes.
sustained negative trends continued to afflict the hospitality industry
Butterfield Annual Report 2010 23
Whilst remaining well capitalised with good liquidity, our strategy
Cost management will continue to be an area of focus in 2011 as we
is focused on building shareholder value by expanding our banking
look for continued opportunities to centralise support services,
business in jurisdictions in which we have a meaningful presence,
whilst remaining nimble, with local management empowered to make
whilst leveraging our multi-jurisdictional trust, custody and asset
decisions and provide customised service. We are employing an
management offerings to pursue wealth management opportunities
investment strategy comprised of both medium-duration, fixed rate
from both existing customers and growth markets. To support that
government-backed bonds and floating rate investments that will
strategy, we are investing heavily in new technology that will allow for
return moderate yields in a sustained low interest rate environment,
new and flexible products, enhance customer service and bring new
whilst positioning us to benefit when interest rates rise. This strategy
revenue opportunities and the ability to streamline processes, which
will maximise returns to our shareholders and position Butterfield to
we believe will give us a competitive advantage in the coming years.
capitalise on the continuing recovery of markets.
FINANCIAL SUMMARY (in $ thousands, except per share data)
Balance Sheet
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 preference shares
Common equity
Income Statement
Net interest income before provision for credit losses
Provision for credit losses
Fee and other income (as reported)
Fee and other income (excluding fund administration services business)
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 preference shares
Net (loss) income available to common shareholders
Common dividends paid
Financial ratios
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
2010
2009
2008
2007
2006
2,275,546
1,986,798
2,809,689
2,926,901
4,043,360
4,218,332
261,955
244,242
2,221,390
3,824,079
4,418,277
197,155
2,517,012
4,744,989
4,124,764
215,379
3,151,191
3,786,793
3,760,745
171,326
9,623,060
9,594,602
10,911,844
11,910,920
11,132,802
8,228,059
282,799
8,696,619
283,085
9,801,269
282,296
10,747,971
284,191
10,042,932
280,168
200,000
609,288
200,000
155,460
-
-
-
518,440
629,330
549,553
178,942
186,907
(41,970)
(104,879)
146,211
146,211
159,082
151,199
151,705
151,705
156,839
143,351
(27,098)
(66,457)
254,481
(3,045)
212,941
177,358
183,152
167,335
113,890
(180,517)
(146,956)
(109,051)
(207,615)
(213,413)
18,000
9,450
(225,615)
(222,863)
-
14,938
(2.2%)
(44.3%)
15.7%
21.6%
5.8%
1.97%
211.9%
(0.47)
-
1.09
732
787
1,519
(2.1%)
(47.0%)
7.2%
10.1%
0.9%
1.95%
86.9%
(2.34)
0.12
1.64
761
845
1,606
4,839
-
4,839
57,733
0.0%
0.8%
7.5%
11.2%
4.1%
2.18%
72.8%
0.05
0.52
5.44
803
889
1,692
252,600
(1,983)
219,682
170,426
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
843
1,007
1,850
218,218
(2,997)
193,654
147,856
162,504
118,465
127,906
6,177
134,083
-
134,083
46,496
1.3%
24.6%
8.9%
13.5%
4.1%
2.18%
64.8%
1.35
0.60
5.70
845
885
1,730
Other data
Average number of common shares on a fully diluted basis
Risk-weighted assets
477,225
95,065
96,683
98,732
99,265
4,934,569
5,734,096
6,199,963
6,345,754
5,468,668
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 and August 2006.
All prior period per share data have been restated to reflect the three for one stock split in August 2007.
24
CONSOLIDATED RESULTS OF OPERATIONS
AND DISCUSSION FOR FISCAL YEAR ENDED
31 DECEMBER 2010
We evaluate our performance on a reported basis (i.e., as reported in our consolidated financial statements prepared in accordance with 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) INCOME
The Bank reported a net loss of $207.6 million for the year ended
related guarantee fees (2009: $9.5 million), the net normalised loss to
common shareholders was $3.2 million (2009: earnings of $11.5 million)
31 December 2010, compared to a net loss of $213.4 million in 2009.
or a loss of $0.01 (2009: earnings of $0.12) per diluted common share.
Results in both years were adversely affected by various non-operating
The net effect of normalisation adjustments recorded in gains and
gains and losses. After the effect of dividends and the guarantee fee
losses, other non-interest income, provision for credit losses and
on preference shares, the net loss available to common shareholders
non-interest expenses totalled a net loss of $222.4 million in 2010 (2009:
was $225.6 million ($0.47 per share) in 2010, compared to a loss of
$234.4 million), or a loss of $0.46 per diluted share (2009: loss of $2.46).
$222.9 million ($2.34 per share) in 2009.
Non-recurring normalisation adjustments include losses on the sale and
On a normalised basis, earnings from banking and wealth management
specific provisions for loan losses on troubled hospitality loans
activities were $14.8 million in 2010 (2009: $21.0 million). After
previously written down, the loss on the sale of the Bank’s subsidiaries
deducting the $18.0 million of preferred dividends declared and
in Hong Kong and Malta and organisational restructuring charges.
write-down of asset-backed securities announced last year, additional
The following table states normalised earnings for 2010 compared to 2009:
(in $ millions)
Non-interest income
Net interest income
Total revenue before provision for credit losses
Provision for credit losses
Total revenue after provision for credit losses
Total expenses
Total normalised net income before taxes
Income tax
Net normalised income
Dividends and guarantee fee of preferred shares
Normalised (loss) / earnings attributable to common shareholders
Normalised (loss) / earnings per common share
- Basic
- Diluted
Year ended 31 December
2010
142.4
178.9
321.3
(10.1)
311.2
(294.8)
16.4
(1.6)
14.8
(18.0)
(3.2)
(0.01)
(0.01)
2009
145.2
186.9
332.1
(10.9)
321.2
(300.5)
20.7
0.3
21.0
(9.5)
11.5
0.12
0.12
Butterfield Annual Report 2010 25
The following table reconciles the Bank’s GAAP reported loss with normalised earnings for 2010 compared to 2009:
(in $ millions)
Net loss as reported
Non-core items:
Net other gains & losses (1)
Investments in affiliates
Specific provision for credit losses (2)
Legal fees pertaining to liquidity facility
Non-recurring organisational change costs (3)
Non-recurring taxation credit
Net normalised income
Year ended 31 December
2009
2010
Net income
(207.6)
Diluted EPS
(0.47)
Net income Diluted EPS
(213.4)
(2.34)
172.9
1.5
31.8
7.4
12.4
(3.6)
14.8
0.36
-
0.06
0.02
0.03
(0.01)
(0.01)
138.7
1.7
94.0
-
-
-
21.0
1.45
0.02
0.99
-
-
-
0.12
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.
(1) Net other gains & losses, include:
(cid:115) (cid:46)(cid:69)(cid:84) (cid:82)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:76)(cid:79)(cid:83)(cid:83)(cid:69)(cid:83) (cid:79)(cid:70) (cid:4)(cid:17)(cid:16)(cid:23)(cid:14)(cid:16) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78)(cid:12) (cid:79)(cid:70) (cid:87)(cid:72)(cid:73)(cid:67)(cid:72) (cid:4)(cid:17)(cid:17)(cid:19)(cid:14)(cid:24) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:82)(cid:69)(cid:76)(cid:65)(cid:84)(cid:69)(cid:83) (cid:84)(cid:79) (cid:82)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:76)(cid:79)(cid:83)(cid:83)(cid:69)(cid:83) (cid:79)(cid:78) (cid:84)(cid:72)(cid:69) (cid:83)(cid:65)(cid:76)(cid:69) (cid:79)(cid:70) (cid:65)(cid:83)(cid:83)(cid:69)(cid:84)(cid:13)(cid:66)(cid:65)(cid:67)(cid:75)(cid:69)(cid:68) (cid:83)(cid:69)(cid:67)(cid:85)(cid:82)(cid:73)(cid:84)(cid:73)(cid:69)(cid:83) (cid:72)(cid:69)(cid:76)(cid:68) (cid:73)(cid:78)
the available for sale portfolio, partially offset by realised gains of $1.9 million on the disposal of fixed income securities and realised
gains of $4.7 million on the disposal of SIVs during 2010
(cid:115) (cid:47)(cid:84)(cid:72)(cid:69)(cid:82)(cid:13)(cid:84)(cid:72)(cid:65)(cid:78)(cid:13)(cid:84)(cid:69)(cid:77)(cid:80)(cid:79)(cid:82)(cid:65)(cid:82)(cid:89) (cid:73)(cid:77)(cid:80)(cid:65)(cid:73)(cid:82)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83) (cid:79)(cid:70) (cid:4)(cid:22)(cid:16)(cid:14)(cid:21) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:79)(cid:78) (cid:84)(cid:72)(cid:69) (cid:34)(cid:65)(cid:78)(cid:75)(cid:7)(cid:83) (cid:72)(cid:79)(cid:76)(cid:68)(cid:73)(cid:78)(cid:71)(cid:83) (cid:79)(cid:70) (cid:51)(cid:41)(cid:54)(cid:83)
(cid:115) (cid:50)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:76)(cid:79)(cid:83)(cid:83) (cid:79)(cid:78) (cid:84)(cid:72)(cid:69) (cid:83)(cid:65)(cid:76)(cid:69) (cid:79)(cid:70) (cid:84)(cid:72)(cid:69) (cid:34)(cid:65)(cid:78)(cid:75)(cid:7)(cid:83) (cid:83)(cid:85)(cid:66)(cid:83)(cid:73)(cid:68)(cid:73)(cid:65)(cid:82)(cid:73)(cid:69)(cid:83) (cid:73)(cid:78) (cid:40)(cid:79)(cid:78)(cid:71) (cid:43)(cid:79)(cid:78)(cid:71) (cid:65)(cid:78)(cid:68) (cid:45)(cid:65)(cid:76)(cid:84)(cid:65) (cid:79)(cid:70) (cid:4)(cid:23)(cid:14)(cid:20) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78)
(cid:115) (cid:55)(cid:82)(cid:73)(cid:84)(cid:69)(cid:13)(cid:68)(cid:79)(cid:87)(cid:78) (cid:79)(cid:70) (cid:4)(cid:19)(cid:14)(cid:24) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:79)(cid:70) (cid:80)(cid:82)(cid:69)(cid:86)(cid:73)(cid:79)(cid:85)(cid:83)(cid:76)(cid:89) (cid:67)(cid:65)(cid:80)(cid:73)(cid:84)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:83)(cid:79)(cid:70)(cid:84)(cid:87)(cid:65)(cid:82)(cid:69) (cid:68)(cid:69)(cid:86)(cid:69)(cid:76)(cid:79)(cid:80)(cid:77)(cid:69)(cid:78)(cid:84) (cid:78)(cid:79) (cid:76)(cid:79)(cid:78)(cid:71)(cid:69)(cid:82) (cid:73)(cid:78) (cid:85)(cid:83)(cid:69)
(2) Specific provisions for credit losses of $31.8 million primarily related to commercial mortgage facilities in the hospitality industry in Bermuda
and The Bahamas, as well as private banking exposures in the UK.
(3) The organisational change costs are non-recurring expenses incurred, which comprise acceleration of vesting on stock options on change in
control, restructuring fees relating to changes to Executive Management and rationalisation of headcount in various jurisdictions.
REVENUE
Total revenue before provisions for credit losses and gains and losses for 2010 was $325.2 million, down $13.4 million (4.0%) from $338.6 million in
2009. Total non-interest income was down $5.5 million from $151.7 million in 2009 to $146.2 million in 2010; the decrease was primarily attributable
to declining asset management fees as a result of reduced assets under management and declining fees in addition to lower foreign exchange
revenues from decreased customer driven volumes. Net interest income before provisions for credit losses was down $8.0 million (4.3%) from $186.9
million in 2009 to $178.9 million in 2010 on reduced average interest earnings assets and margin. Our margin remains compressed from historical
levels due to the sustained low interest rate environment given our relatively low loan-to-total-asset ratio of 42.0% and conservatively short
investment portfolio. The Fed fund rate averaged just 0.18% in 2010, marginally higher than the 0.16% seen in 2009 and ended the year at 0.13%.
DISTRIBUTION OF 2010 TOTAL REVENUE,
BEFORE GAINS AND LOSSES AND CREDIT PROVISIONS
DISTRIBUTION OF 2010 TOTAL REVENUE BY LOCATION
BEFORE GAINS AND LOSSES AND CREDIT PROVISIONS
Other non-interest
income 2.6%
Switzerland 0.2%
UK 5.9%
The Bahamas 2.3%
Malta 0.3%
Hong Kong 0.6%
Guernsey 10.7%
Net interest
income 55%
Cayman 19.3%
Bermuda 55.9%
Investment and pension
fund administration 0.0%
Barbados 4.8%
Banking 11.3%
Foreign exchange
revenue 10%
Asset
management 7.5%
Trust 9.4%
Custody and other
administration services 4.2%
26
NON-INTEREST INCOME
Non-interest income is a 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. Our fee structure provides for
varied pricing that depends 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 asset levels.
Total non-interest income was down $5.5 million from $151.7 million in 2009 to $146.2 million in 2010 and represents 45% of total revenues before
provisions for credit losses and gains and losses for 2010, compared to 44.8% in 2009.
The following table presents the components of non-interest income for the years ended 31 December 2010 and 2009:
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
2010
24,544
36,732
32,479
30,534
13,574
8,348
2009
27,211
37,094
34,044
29,894
13,840
9,622
146,211
151,705
$ change
(2,667)
% change
(9.8%)
(362)
(1,565)
640
(266)
(1,274)
(5,494)
(1.0%)
(4.6%)
2.1%
(1.9%)
(13.2%)
(3.6%)
ASSET MANAGEMENT
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 Bermuda, the Cayman Islands, Guernsey and the United Kingdom. Revenues
from asset management were $24.5 million in 2010, down $2.7 million from $27.2 million in 2009; the decrease is primarily due to decreased client
assets under management of $0.4 billion, generally due to redemptions from the Butterfield Money Market Fund and reduced management fees
due to low yields. The sustained low interest rate environment and rising equity markets seen in 2010, led investors to seek higher returns in
alternative asset classes. This was partially offset by an increase of 5.7% in our discretionary assets under management.
The table that follows shows the changes in the year-end values of clients’ assets under management, sub-divided between those managed for
clients on a discretionary basis and those client funds invested in mutual funds that we manage:
(in $ billions)
Butterfield Funds
Discretionary
Total assets under management
2010
3.68
2.40
6.08
2009
4.20
2.27
6.47
$ change
(0.52)
% change
(12.4%)
0.13
(0.39)
5.7%
(6.0%)
BANKING
During 2010, Butterfield provided 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, 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 fee revenues reflect loans, transaction and processing,
and other fees earned in these respective jurisdictions. Despite downward pressures on transaction and volume levels, in line with general
economic activity, banking fees only fell by 1.1% in 2010 at $36.7 million, compared to $37.1 million in 2009, primarily as a result of reduced loan
volumes offset by increases in fees charged for banking services.
FOREIGN EXCHANGE
We provide foreign exchange services in the normal course of business as an integral part of our business lines which we offer in all jurisdictions.
The major contributors to foreign exchange revenues are Bermuda and the Cayman Islands, accounting for 76% of the Group’s foreign exchange
revenue (2009: 74%). Foreign exchange income totalling $32.5 million in 2010 was generated from client-driven transactions, compared with
$34.0 million in 2009; the Bank does not have a proprietary trading book. The $1.5 million decrease in 2010 compared to 2009 reflects declining
client volumes from 2009 levels. Institutional volumes, primarily from hedge fund clients, hit a low in the first half of the year but increased in
the latter half of the year from lows not seen in a decade. Our hedge fund clients are beginning to see a return of client risk appetite and rising
subscriptions, which should help fuel foreign exchange transactions and fees. To a lesser extent, the volumes of retail transactions generated from
the tourism industry was strained in Bermuda and the Cayman Islands where a decrease in hotel and restaurant volumes impacted local merchants.
Butterfield Annual Report 2010 27
TRUST
We provide both personal and institutional trust services from our operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey, the United
Kingdom and Switzerland. Trust revenues are derived from a combination of fixed fees, fees based on the market values of assets held in trust and
fees based on time spent in relation to the range of personal trust and company administration services and pension and employee benefit trust
services we provide. In 2010, trust revenues rose to a record level of $30.5 million, up from $29.9 million in 2009, whilst assets under administration
increased by $4.7 billion (14.4%) to $37.4 billion. Trust revenues represented 20.9% of total non-interest income in 2010, up from 19.7% in 2009.
In our Guernsey operation, trust revenues increased by 16.1% year on year to a record level, with assets under administration registering growth of
33% to $5.9 billion, whilst in Switzerland, momentum was achieved with revenues up 93.6% year on year and assets under administration ending the
year at $349 million, up from $52 million the year before. Significant new systems implementations were undertaken in our Bermuda and Cayman
trust businesses to provide robust support for business growth in the future. In December, restructuring of our Bahamas operations was announced,
focusing our activities predominantly on trust business. In September 2010, the Bank concluded the sale of its trust operations located in Malta,
which did not contribute significantly to this line of business.
CUSTODY AND OTHER ADMINISTRATION SERVICES
Custody fees are generally based on market values of assets in custody, the volume of transactions and flat fees for other services rendered.
We provide custody services from our offices in Bermuda, the Cayman Islands, Guernsey and the United Kingdom and other administration
services, primarily administered banking in Guernsey. In 2010, revenues were $13.6 million compared to $13.8 million in 2009, down 1.4% principally
due to declining assets under administration from administered banking in Guernsey.
The table that follows shows the changes in the year-end values of assets under administration in respect of trust, custody and other administration
services, which include the administered banking services operations provided by our Guernsey business.
(in $ billions)
Custody and other administrative services
Trust
Total assets under administration
2010
32.5
37.4
69.9
2009
36.1
32.6
68.7
$ change
(3.6)
% change
(10.0%)
4.8
1.2
14.7%
1.7%
OTHER NON-INTEREST INCOME
The components of other non-interest income are set forth in the following table:
Year ended 31 December
(in $ thousands)
Decrease in carrying value of investments in affiliates
Rental income
Fees earned on credit support agreement
Transitional service agreement with BFG
Write-back of unclaimed balances and dividends
Other
Total non-interest income
2010
(1,587)
2,779
-
-
5,785
1,371
8,348
2009
(1,688)
2,268
4,168
3,371
-
1,503
9,622
The $1.6 million decrease in the carrying value of investments in affiliates in 2010 and $1.7 million decrease in 2009 reflect our 40% equity interest in
the Butterfield Fulcrum Group, for which we recorded equity pickup losses of $2.9 million in 2010 and $3.8 million in 2009. As a result, the carrying
value of our investment declined to $1.3 million as at 31 December 2010. These losses were offset by a net increase of $1.3 million in 2010 (2009:
$2.1 million) in the carrying value of our other investments in affiliates, principally in Bermuda and the Cayman Islands. Rental income of $2.8 million
in 2010, and $2.3 million in 2009, were received on various premises the Bank owns in Bermuda that are leased to tenants. Included in the “Other”
category of $1.4 million in 2010 are maintenance fees for premises and Director fee income.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
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.
28
The following table presents the components of net interest income for the years ended 31 December 2010 and 2009:
(in $ millions)
Assets
Cash and deposits with banks
Investments
Loans
Interest earning assets
Other assets
Total assets
Liabilities
Deposits
Securities sold under repurchase agreements
Subordinated debt
Interest bearing liabilities
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Spread
Net interest margin
Free balances
Average
Balance
2,385.3
2,595.6
4,119.6
9,100.5
467.8
9,568.3
7,285.3
-
282.7
7,568.0
1,057.2
234
8,859.2
709.1
9,568.3
2010
Interest
11.0
28.3
198.1
237.4
-
237.4
(46.0)
-
(12.5)
(58.5)
-
-
(58.5)
-
178.9
Average
rate
Average
balance
0.46%
1.09%
4.81%
2.61%
2,163.5
3,090.2
4,340.0
9,593.7
-
449.1
2.48%
10,042.8
7,820.1
33.6
282.8
8,136.5
1,037.6
290.6
9,464.7
578.1
10,042.8
(0.63%)
-
(4.41%)
(0.77%)
-
-
(0.66%)
-
1.84%
1.97%
2009
Interest
12.7
46.2
211.7
270.6
-
270.6
(68.5)
(0.3)
(14.9)
(83.7)
-
-
Average
rate
0.59%
1.50%
4.88%
2.82%
-
2.77%
(0.88%)
(0.77%)
(5.28%)
(1.03%)
-
-
(83.7)
(0.88%)
-
-
186.9
1.79%
1.95%
1,532.5
1,457.2
Net interest income before provisions for credit losses declined by 4.3% to $178.9 million in 2010 compared to $186.9 million in 2009, of which
63.3% (2009: 59.0%) was generated in Bermuda and 16.0% (2009: 18.4%) in the Cayman Islands. The decrease reflects the decline in average
interest earning assets to $9.1 billion in 2010 from $9.6 billion in 2009 as a result of the decrease in average deposits of $534.8 million, primarily
from our Cayman operations, which held unusually high balances from hedge fund clients in 2009 as they built up cash balances in response
to record redemptions. The average net interest margin increased by 2 basis points to 1.97% in 2010 from 1.95% in 2009, reflecting the sustained low
interest rate environment throughout much of 2010, which constrained our net interest margin on lower deposit volumes. The reduction in average
interest earning assets accounts for $9.6 million of the decrease, whilst the 2 basis point increase in the net interest margin offset the negative
volume variance by $1.6 million. Our margin has been steadily increasing in the third and fourth quarters as we have re-invested more of our excess
liquidity in high quality government-backed bonds, which improved margins and positioned us well for 2011. Free balances of $1,532.5 million in
2010 (2009: $1,457.2 million) include non-interest bearing current accounts of $1,057.2 million (2009: $1,037.6 million) and shareholders’ equity of
$709.1 million (2009: $578.1 million) net of other assets and other liabilities. See the Risk Management section for more information on how interest
rate risk is managed.
PROVISION FOR CREDIT LOSSES
Non-accrual loans totalled $159.5 million at 31 December 2010, down $73.9 million from $233.4 million at 31 December 2009 and represented 3.9%
of the total loan portfolio at 31 December 2010, compared to 5.4% in 2009. The Bank deemed that $94.2 million of tourism-related exposures were
no longer recoverable during the year and consequently charged these amounts off against existing reserves.
For many of the jurisdictions in which the Bank operates, tourism and the related hospitality industries are key 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. 2010 saw continued declines in tourism-related economic activity, putting increased doubt on
the recoverability of our troubled hospitality exposures. As a result, the Bank made net provisions for credit losses in 2010 of $42.0 million, compared
to $104.9 million in 2009, of which $36.1 million and $72.5 million, respectively, were in respect of hospitality exposures. The Bank anticipates the
difficulties in the hospitality sector to continue for the foreseeable future and has provided sufficient amounts in anticipation of a difficult market.
The incremental provisions were required principally for the specific reserves pertaining to the hospitality industry, as well as enhancements to the
general provision, primarily in Bermuda, following increased delinquencies in 2010. These provisions were partially offset by a provision release of
$12.4 million on a private banking loan.
Butterfield Annual Report 2010 29
Charge-offs were $107.9 million in 2010 compared to $4.8 million in 2009, whilst recoveries totalled $2.5 million in 2010 compared to $1.8 million in
2009. Total allowance for credit losses was $66.8 million at 31 December 2010, down from $130.3 million at 31 December 2009. Of the total allowance,
the general allowance was $36.5 million (2009: $31.7 million) and the specific allowance was $30.3 million (2009: $98.6 million) and represents a total
coverage ratio of 19.0% of non-accrual loans at 31 December 2010, compared to 42.2% at 31 December 2009.
GAINS AND LOSSES
The following table represents the components of gains and losses for the years ended 31 December 2010 and 2009:
(in $ thousands)
Net realised / unrealised gains on trading securities
Net realised (losses) gains on available for sale securities
Other-than-temporary impairment losses on held to maturity and available for sale investments
Net realised gain on held to maturity investments
Goodwill and intangible assets impairment
Loss on sale of subsidiaries
Write-off of computer software in development
Net other losses
Total gains and losses
2010
971
(107,047)
(60,522)
-
-
(7,430)
(3,831)
(2,658)
(180,517)
2009
983
236
(132,095)
2,298
(13,266)
-
-
(5,112)
(146,956)
Gains and losses totalled a net loss of $180.5 million in 2010, compared to a net loss of $147.0 million in 2009. The primary components of gains and
losses are as follows:
NET REALISED/UNREALISED GAINS ON TRADING SECURITIES
A $1.0 million gain was recorded with respect to trading securities in each of the years 2010 and 2009, which was principally from our investment
of $9.8 million of ‘seed money’ in shares of the Butterfield Canadian Systematic Equity Fund, the Butterfield Select Investment Fund and the
Butterfield Select Alternative Fund. During the year, we redeemed $1.9 million of our seed money as it is no longer required.
NET REALISED/UNREALISED (LOSSES) GAINS ON AVAILABLE FOR SALE SECURITIES
Net realised losses totalled $107.0 million, of which $113.8 million was in relation to the sale of $820.1 million of asset-backed securities in
March 2010 as part of the Balance Sheet restructuring and de-risking strategy announced last year, offset by realised gains of $1.9 million on the
sale of a restructured corporate bond previously written down, and $4.7 million gain on the sale of two SIV investments.
OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES ON HELD TO MATURITY AND AVAILABLE FOR SALE INVESTMENTS
As part of the Balance Sheet restructuring strategy, other-than-temporary impairment (“OTTI”) losses of $60.5 million were recognised on four SIV
securities in the first quarter, as the Bank did not sell these positions as part of the restructuring as Management believed the market values of the
SIVs at the time reflected unreasonably high liquidity discounts and very low bids given the complexity of these securities. The write-down brought
the carrying value of the four SIVs to $135.9 million as at 31 March 2010, with a mark-to-market loss of $53.9 million included in Accumulated Other
Comprehensive Income (“AOCI”), which represented the estimated liquidity discount based on our impairment testing methodology. Subsequently,
the markets for these securities have substantially recovered, with the AOCI loss improving to $5.1 million as at 31 December 2010 representing a
net gain to shareholder’s equity of $48.8 million. The Bank realised gains of $4.7 million on the disposal of two SIV securities which were included
in “Net realised/unrealised (losses) gains on available for sale securities.” Subsequent to year end, a third SIV was sold, resulting in a gain of
$0.1 million. As a result, the single remaining SIV, on a pro-forma basis, had a carrying value of $33.3 million including a $2.6 million unrealised loss
recorded in AOCI.
LOSS ON SALE OF SUBSIDIARIES
Consistent with Management’s strategy of focusing resources in jurisdictions where we have a meaningful market presence and a depth of local
market knowledge, in September 2010, the Bank sold its trust, wealth management and advisory businesses in Hong Kong and its trust operation
in Malta with a resultant net loss of $7.4 million. There were no sales of subsidiaries in 2009.
WRITE-OFF OF COMPUTER SOFTWARE IN DEVELOPMENT
In anticipation of our conversion to our new technology platforms in 2010 and 2011, a full review of our existing technology assets was performed in
2010. As a result, a write-off of $3.8 million was recorded in respect of previously capitalised costs for software development that is no longer being
utilised under our new technology platforms.
NET REALISED GAIN ON HELD TO MATURITY INVESTMENTS
The Bank no longer uses held to maturity (“HTM”) accounting, effective 2 March 2010, the date on which $805 million of then HTM classified
asset-backed securities were sold, with the remaining HTM portfolio reclassed as available for sale.
30
NET OTHER LOSSES
Net other losses of $2.7 million were recorded in 2010, which mainly include: a $1.5 million loss on the write-down of an amount receivable from the
Bank’s charitable foundation; realised losses of $1.4 million on the Bank’s equity holdings in two credit cards companies, which were sold during the
year; losses of $0.7 million on the write-down of a private equity investment and an investment in affiliate to reflect lower expectation of proceeds
on eventual sales; and a $1.2 million gain on interest rate swaps designated as trading instruments, as they do not qualify for hedge accounting
but are used as part of the Bank’s overall asset and liability management strategy. This compares to the $5.1 million loss recorded in 2009, which
mainly consisted 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 costs of $5.2 million, offset by unrealised mark-to-market gains 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.
NON-INTEREST EXPENSES
Cost control continued to be a key focus of the Bank in 2010 as economic conditions and the sustained low interest rate environment challenged
the banking business model. Although reported operating expenses in 2010 increased by $11.8 million (3.9%) to $312.3 million when compared to
$300.5 million in 2009, on a normalised basis (as detailed below), the 2010 operating expenses decreased by $5.8 million to $294.8 million despite
investment in technology and asset and liability management.
DISTRIBUTION OF 2010 TOTAL EXPENSE
Marketing 1.6%
Non-income taxes 5.0%
Professional and
outside services 4.5%
Amortisation of
intangible assets 1.8%
Other expenses 10.1%
Income taxes (0.6%)
DISTRIBUTION OF 2010 TOTAL EXPENSE
BY LOCATION
Barbados 4.4%
Cayman 16.7%
Technology and
communications 17.4%
Property 8.9%
Salaries and
other employee
benefits 51.3%
Bermuda 61.0%
Guernsey 8.8%
Switzerland 0.7%
The Bahamas 2.5%
UK 5.1%
Malta 0.3%
Hong Kong 0.5%
The following table presents the components of total expenses for the years ended 31 December 2010 and 2009:
Note: Bermuda includes all head office overhead costs.
(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
Total non-interest expenses
Income tax benefit
Total expenses
2010
Reported
159,082
2010
Normalised
147,113
2009*
156,839
50,094
28,833
17,490
13,197
6,258
5,911
54,037
28,169
15,411
15,405
5,711
5,002
23,907
21,898
294,755
1,690
300,520
(330)
296,445
300,190
$ change
Normalised
% change
Normalised
9,726
(3,943)
664
2,079
(2,208)
547
909
(2,009)
5,765
(2,020)
3,745
6.2%
(7.9%)
2.3%
11.9%
(16.7%)
8.7%
15.4%
(9.2%)
1.9%
612.1%
1.3%
54,037
27,469
13,811
15,405
5,711
5,002
31,739
312,256
(1,975)
310,281
* There were no significant non-recurring non-interest expenses recognised in 2009.
SALARIES AND OTHER EMPLOYEE BENEFITS
Salaries and other employee benefits expense in 2010 includes a charge of $6.6 million in connection with retention and termination payments and
other staff-related benefits. These costs were incurred as part of the implementation of non-recurring organisational changes, including changes to
Executive Management. Also included in salaries and other employee benefits expense in 2010 is a charge of $5.8 million related to share-based
compensation expenses that occurred as all stock options and deferred incentive shares immediately vested on the equity investment in March
Butterfield Annual Report 2010 31
2010. On a normalised basis, salaries and other employee benefits, which are the largest component of non-interest expenses at 50.0% in 2010, were
$147.1 million for 2010, representing a decline of $9.7 million (6.2%) compared to the $156.8 million recorded in 2009. A $7.7 million reduction in
post-retirement health care expenses was recorded in the second half of the year following an independent tri-annual actuarial review of the
assumptions and changes to the eligibility, benefits and cost sharing criteria, which combined resulted in a $67.6 million reduction in the obligation
for post-retirement benefits. The remaining decline is a result of a decrease in headcount from 1,606 last year to 1,519 as at 31 December 2010
from the combination of a general headcount freeze, attrition and restructuring in certain locations. This was offset by a $1.2 million increase in
performance-related compensation which was not awarded in 2009 and a 1.5% cost of living increase from 2009 salary levels.
TECHNOLOGY AND COMMUNICATIONS
Technology and communication costs were $54.0 million in 2010, up $3.9 million on the $50.1 million recorded in 2009, the increase primarily driven
by contractual costs associated with the Bank’s outsourcing agreement with HP. During the two-and-a-half-year transitional phase of our outsourcing
arrangement, which began in January 2009, duplicate costs have been incurred as a result of running legacy systems and transitioning to new
systems and services, including duplicate software maintenance costs. In addition, we are incurring certain costs of developing new software that
are not capitalised. We expect that these costs will taper off as we start to attain improvements in operating efficiency and retire legacy systems.
However, the savings will be offset by the amortisation expense of capitalised software development costs, totalling $79.6 million as at 31 December
2010, once the systems are in use.
PROPERTY
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, decreased by
$1.4 million to $27.5 million in 2010 versus the $28.9 million recorded in 2009. Energy efficiency efforts and rationalisation of premises was the main
driver of the decrease.
PROFESSIONAL AND OUTSIDE SERVICES
Professional and outside services primarily include consulting, legal, audit and other professional services. In 2010, the expense was $13.8 million,
down $3.7 million compared to $17.5 million incurred in 2009, as tighter controls on consultancy agreements were implemented.
NON-INCOME TAXES
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 2010, we incurred costs of $15.4 million compared to
$13.2 million in 2009, primarily from the increased payroll tax rate in Bermuda increasing from 14% to 16% in 2010.
AMORTISATION OF INTANGIBLE ASSETS
Intangible assets relate to client relationships acquired from business acquisitions and are amortised on a straight-line basis over their
estimated useful lives, not exceeding 15 years. Acquired intangible assets estimated lives are re-evaluated annually and tested for impairment.
The amortisation expense associated with intangible assets was $5.7 million in 2010, compared to $6.3 million in 2009, the decrease principally
reflecting the sale of the Bank’s subsidiaries in Hong Kong and Malta.
MARKETING
Marketing costs reflect costs incurred in advertising and promoting our products and services. They totalled $5.0 million in 2010, down $0.9 million
from 2009 due to Management’s focused effort to reduce operating expenses.
32
OTHER NON-INTEREST EXPENSES
(in $ thousands)
Custodian & handling
Charitable donations
Insurance
Stationery & supplies
Other expenses
Maintenance fees for liquidity facility
Investment advisory services
Cheque processing
Credit card processing
Dues and subscriptions
Registrar and transfer agent fee
Agent commission fees
Foreign bank charges
Directors fees
Internal audit
ATM fees
General expenses
Other
Total normalised non-interest expenses
Commitment and legal fees to establish a liquidity facility with CIBC
Other non-recurring organisational costs
Total non-interest expenses
2010
1,810
1,240
3,241
2,209
1,765
1,004
1,662
2,791
676
931
848
755
747
290
506
2009
1,967
1,418
2,895
2,282
-
-
1,682
2,721
1,441
1,104
930
861
487
435
501
1,396
2,036
23,907
7,480
352
1,423
1,751
21,898
-
-
31,739
21,898
$ change
157
% change
8.0%
178
(346)
73
(1,765)
(1,004)
20
(70)
765
173
82
106
(260)
145
(5)
27
(285)
(2,009)
(7,480)
(352)
(9,841)
12.6%
(12.0%)
3.2%
-
-
1.2%
(2.6%)
53.1%
15.7%
8.8%
12.3%
(53.4%)
33.3%
(1.0%)
1.9%
(16.2%)
(9.2%)
-
-
(44.9%)
Other expenses increased by $9.8 million, principally driven by $7.5 million of fees incurred for establishing a $300 million liquidity facility with
CIBC, and monthly maintenance fees totalling $1.8 million during the year, as well as the added quarterly cost of $1 million in respect of our
investment advisory agreement with Carlyle Investment Management LLC (“Carlyle”), an affiliated company of The Carlye Group, which began
October 2010. Group insurance costs increased on rising group premiums, whilst Directors’ fees increased as the Bank has improved its corporate
governance with additional Board meetings throughout the year.
INCOME TAXES
In 2010, income tax expenses in our businesses in taxable jurisdictions, namely Barbados, Hong Kong, Guernsey, Malta, Switzerland and the United
Kingdom, was a benefit of $2.0 million compared to a benefit of $0.3 million in 2009. The tax credit reflects a significant investment loss incurred in
our UK operations in 2010 resulting in a tax benefit of $3.3 million and the $0.1 million tax refund receivable with respect to the sale of our Malta
operations. This was offset by income tax expenses of $0.6 million (2009: $0.1 million) in Guernsey, and $0.8 million (2009: $0.2 million) in Barbados.
Butterfield Annual Report 2010 33
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the Balance Sheet as reported as at 31 December 2010 and 31 December 2009:
(in $ millions)
Assets
Cash and deposits with banks
Investments
Loans, net of allowance for credit losses
Premises, equipment and computer software
Other assets
Total assets
Liabilities
Total deposits
Total other liabilities
Subordinated capital
Total liabilities
Preferred equity*
Common equity
Total shareholders’ equity
2010
2,275.5
2,809.7
4,043.4
262.0
232.5
9,623.1
8,228.1
302.9
282.8
8,813.8
200.0
609.3
809.3
2009
1,986.8
2,926.9
4,218.3
244.2
218.4
9,594.6
8,696.6
259.4
283.1
9,239.1
200.0
155.5
355.5
Total liabilities and shareholders’ equity
9,623.1
9,594.6
Capital Ratios
Risk weighted assets
Tangible common equity (TCE)
Tangible assets (TA)
TCE/TA
Tier 1 common ratio
Tier 1 ratio
Total capital ratio
*shown at liquidation preference
4,934.5
554.3
9,568.1
5.8%
11.2%
15.7%
21.6%
5,734.1
88.6
9,527.7
0.9%
1.5%
7.2%
10.1%
Total assets of the Bank stood at $9.6 billion, unchanged from year end 2009. The Bank maintains a highly liquid balance sheet. At 31 December
2010, cash and deposits with banks and investments represented $5.1 billion or 52.8% of total assets, up from 51.2% at year-end 2009.
At 31 December 2010, Butterfield had a tangible common equity ratio of 5.8%, total capital ratio of 21.6% and Tier 1 capital ratio of 15.7%.
CASH AND DEPOSITS WITH BANKS
The Bank only places deposits with highly rated institutions and ensures there is appropriate geographic diversification in its exposures. Limits are
set for aggregate geographic exposures and for each institution monitored and reviewed by our Credit Risk Management division approved by the
Financial Institutions Committee and are monitored for compliance with policy. As at 31 December 2010, cash and deposits with banks was
$2.3 billion, compared to $2.0 billion as at 31 December 2009.
INVESTMENTS
Total investments were $2.8 billion as at 31 December 2010, down $0.1 billion from the prior year-end balance.
As part of the strategic restructuring and de-risking of the Bank’s Balance Sheet, $820.1 million of asset-backed securities were sold in March 2010,
which, combined with further other-than-temporary impairment charges, contributed to overall recorded losses on asset-backed securities of
$174.3 million in 2010. Subsequently, in the fourth quarter, the Bank sold two of its four SIV positions for a realised gain of $4.7 million. The Bank has
now largely diminished the Balance Sheet exposure to potentially problematic investment securities, allowing us to focus our resources on returning
our businesses to a state of healthy growth. As at the end of 2010, the only remaining asset-backed securities with exposure to non-government
secured asset-backed securities are the two remaining SIVs, which are described in more detail below.
Effective 1 October 2010, the Bank entered into an investment advisory agreement with Carlyle. Under the agreement, Carlyle has agreed to
provide, for renumeration of $12 million over three years, Balance Sheet management advisory services to the Bank including, but not limited to,
development of investment strategies for consideration by the Bank’s Asset and Liability Committee; Balance Sheet simulation analysis including
34
interest rate sensitivity, economic value at risk, interest at risk and stress testing; detailed investment portfolio reporting; cash flow
and net interest income forecasting; deposit behaviour analysis and pricing strategies; and assistance with credit advisory and workout
strategies.
Our investment policies require Management to maintain a portfolio of securities that will provide the liquidity necessary to facilitate the funding
of loans and cover deposit fluctuations, and to mitigate our overall Balance Sheet exposure to interest rate risk, whilst achieving a satisfactory
return on the funds invested. The securities in which we may invest are limited to securities that are considered investment grade. Securities in
our investment portfolio are accounted for under GAAP as either trading or available for sale. Investment policies are approved by the Board of
Directors, governed by the Group Asset and Liability Management Committee and monitored daily by Group Market Risk, a division of Enterprise
Risk Management.
INVESTMENT PORTFOLIO BY
LONG-TERM DEBT RATING
BBB 3.1%
A 6.4%
Other 1.7%
AA 28.2%
AAA 60.4%
INVESTMENT PORTFOLIO BY TYPE
US government
and federal
agencies 32.7%
Corporate
debt securities
guaranteed by
non-US
governments 5.3%
Equity securities 0.4%
Certificates
of deposit 36.3%
Asset-backed
securities -
student loans 5.2%
Corporate debt
securities 12.4%
Debt securities issued by
non-US governments 5.6%
Structured investment
vehicles 2.1%
Trading securities, consisting of holdings of non-US government securities, corporate equities and seed money invested in mutual funds managed
by us, totalled $18.1 million at year-end 2010, compared to $21 million at year-end 2009. The $2.9 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 $2.8 billion at year-end 2010, compared to $2.1 billion at year-end 2009. Held to maturity (“HTM”)
investments were $839 million as at 31 December 2009 and nil at the end of 2010, reflecting the transfer of all investments from the HTM portfolio to
the AFS portfolio. The Bank no longer uses the HTM classification.
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 2010, unchanged from year-end 2009. Also included are $917.5 million (2009: $66.1 million) in US government and federal
agency securities, $150.1 million (2009: $41.4million) in debt securities issued by non-US governments, $149.7 million (2009: $nil) in corporate debt
securities guaranteed by non-US governments, $347.5 million (2009: $748.0 million) in corporate debt securities, $146.8 million (2009: $161.5 million)
in US government-backed student loans and $57.6 million (2009: $190.5 million) in SIVs. As part of the Balance Sheet restructuring in March 2010, the
Bank disposed of the majority of its mortgage-backed securities and other primarily asset-backed securities, which had a carrying value of
$517.2 million as at 31 December 2009.
As at 31 December 2010, 98.1% of our total investments were rated investment grade (i.e., rated ‘BBB’ or higher).
Butterfield Annual Report 2010 35
The following table shows the par value, carrying value, and unrealised losses of our two SIV holdings at 31 December 2010, and four SIV holdings at
31 December 2009:
(in $ millions)
Par value
Carrying value
Unrealised loss in accumulated other comprehensive income
Total amortised cost
OTTI taken during the year
Carrying amount / Par value
Market value / Par value
Amortised cost / Par value
31-Dec-2010
31-Dec-2009
122.2
57.6
5.1
62.7
355.5
190.5
70.4
260.9
(60.5)
(10.7)
47.1%
47.1%
51.3%
53.6%
45.1%
73.4%
As at 31 December 2010, the Bank held two SIV securities that had a combined carrying value of $57.6 million (2009: four SIVs with carrying value
of $190.5 million) including the $5.1 million unrealised loss recorded in Accumulated Other Comprehensive Income, which recovered from an
unrealised loss of $53.9 million as at 31 March 2010 when the impairment was recorded. In 2010, the Bank sold two of its SIV securities and realised
gains of $4.7 million, which is included in other gains and losses. Subsequent to year end, a third SIV with a carrying value of $24.3 million was sold,
resulting in a gain of $0.1 million. As a result, the single remaining SIV, on a pro-forma basis, had a carrying value of $33.3 million, and $2.6 million
unrealised loss recorded in AOCI.
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 such as GDP and unemployment during the cash flow cycle as of the end of the reporting period and includes, 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.
See “Note 4: Investments” in the 31 December 2010 audited financial statements for additional tables and information.
LOANS
The loan portfolio stood at $4.0 billion at 31 December 2010, down $0.2 billion from $4.2 billion the year before, as loan demand tapered off with
slower economic conditions in most of the jurisdictions in which we operate. At 31 December 2010, the loan portfolio represented 42.0% of total
assets, compared to 44.0% at 31 December 2009, whilst loans as a percentage of customer deposits was 49.6% (2009: 49.2%).
Specific and general allowances for loan losses at 2010 totalled $66.8 million at 31 December 2010, a decrease of $63.5 million from $130.3 million
at year-end 2009. The movement in the allowance results from $107.9 million (2009: $4.8 million) of partial charge-offs primarily on hospitality-
related exposures as the Bank deemed they were no longer recoverable, offset by $2.5 million of recoveries ($2009: $1.8 million) and $42.0 million
(2009: $104.9 million) of incremental provision for specific reserves pertaining to the hospitality industry, as well as enhancements to the general
provisions, primarily in Bermuda, in line with our provisioning policy, which incorporates projected losses in changing economic environments.
Non-accrual loans net of specific provisions decreased by 4.2% from $134.8 million to $129.2 million. Total non-accrual loans were $159.5 million,
a decline of $73.9 million from $233.4 million a year ago and represented 3.9% of total loans in 2010, down from 5.4% last year end. Subsequent to
year end, a troubled hospitality loan was settled, further reducing non-accrual loans to $151.7 million or 3.7% of total loans.
36
The ratio of gross non-accrual loans to tangible common equity and provisions for loan losses (also known as the “Texas ratio”) was 25.7% at
31 December 2010.
LOANS
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.
LENDING BY LOCATION
GROUP LOANS BY TYPE
Guernsey 8.1%
Commercial
and industrial 12.6%
The Bahamas 1.8%
Cayman 14.5%
UK 10.3%
Barbados 4.6%
Other consumer
loans 6.5%
Automobile
financing 1.1%
Bermuda 60.7%
Residential
mortgages 52.5%
Commercial
real estate 23.7%
Credit Card 2.0%
Financial institutions
& government 1.6%
COMMERCIAL AND INDUSTRIAL
The commercial and industrial loan portfolio, which totalled $440.4 million as at 31 December 2010 (2009: $489.6 million), 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 $57.1 million at 31 December 2010
compared to $35.0 million the prior year end.
Commercial mortgage financing, which totalled $934.7 million at 31 December 2010 compared to $1,107.6 million at the end of 2009, is provided for
the acquisition or refinancing of income-producing properties. Cash flows from the properties, primarily from rental income generally supported by
long-term leases to high quality international businesses, are principally sufficient to service the loan. These loans are primarily located in Bermuda
and in the United Kingdom.
RESIDENTIAL
The residential mortgage portfolio is composed of mortgages to clients with whom we are seeking to establish, or already have, a comprehensive
financial services relationship and include mortgages to individuals and corporate loans secured by residential property. At 31 December 2010,
residential mortgages totalled $2.2 billion (or 52.5% of total loans) of which $1.3 billion, or 62.1%, were in Bermuda and the remainder distributed
throughout our other banking operations. This compares to 31 December 2009 when residential loans totalled $2.2 billion or 51.0% of total loans.
All mortgages were underwritten utilising our stringent credit standards. Residential loans consist of conventional home mortgages and equity
credit lines.
OTHER LOAN PORTFOLIOS
In addition, we provide loans as part of our normal banking business in respect of automobile financing, consumer financing, credit cards,
commercial financing, loans to financial institutions and governments and overdraft facilities to retail, corporate and private banking clients in the
jurisdictions in which we operate.
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 table that follows.
See “Note 5: Loans” and “Note 6: Credit Risk Concentration” in the 31 December 2010 audited financial statements for additional tables and
information.
Butterfield Annual Report 2010 37
Year ended 31 December 2010
Floating rate
Fixed rate
Total
Average
Average
Net
Average
Net carrying
maturity in
Net carrying
maturity in
carrying
maturity in
(in $ millions)
value
years
value
years
value
years
Commercial loans
Banks
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
0.3
66.1
408.4
73.0
547.8
740.3
57.1
797.4
14.2
13.6
10.0
164.8
202.6
0.0
1.4
3.5
-
2.8
5.6
8.7
5.8
3.4
-
0.1
1.8
1.7
0.1
-
30.0
3.1
33.2
173.1
-
173.1
29.1
70.0
0.4
66.9
166.4
0.0
-
9.5
-
8.6
9.5
-
9.5
3.0
-
-
7.0
3.4
0.4
66.1
438.4
76.1
581.0
913.4
57.1
970.5
43.3
83.6
10.4
231.7
369.0
0.0
1.4
4.0
-
3.1
6.3
8.7
6.5
3.1
-
0.1
3.3
2.4
Residential mortgage loans
1,980.0
13.2
179.3
23.3
2,159.3
14.1
Total gross loans
Less general provision for credit losses
Total net loans
3,527.8
(32.8)
3,495.0
9.1
-
9.4
552.0
(3.7)
548.3
12.1
-
12.2
4,079.8
(36.5)
4,043.3
9.5
-
9.7
DEPOSITS
Deposits are our principal funding source for use in lending, investments and liquidity. Total customer deposits were $8.1 billion as at
31 December 2010, compared to $8.6 billion as at 31 December 2009. The 5.8% decrease is primarily due to a decline in hedge fund client deposits
in Cayman, due to large cash deposit levels last year end as hedge funds liquidated portfolios to meet the high level of fund redemptions within the
industry. Demand deposits, which include chequing accounts, both interest and non-interest bearing, savings and call accounts, totalled $5.5 billion,
or 67.9% of total customer deposits at year-end 2010, compared to $5.7 billion, or 66.3%, at year-end 2009. Term deposits decreased by 8.9% from $3.0
billion in 2009 to $2.7 billion in 2010.
See “Note 9: Customer Deposits and Deposits from Banks” in the 31 December 2010 audited financial statements for additional tables
and information.
BORROWINGS
We have no issuances of certificates of deposit (CD), commercial paper (CP) or senior notes outstanding and have no CD or CP issuance programmes.
As at 31 December 2010, the Bank had a $300 million committed line of credit from CIBC and we are also 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 interest rate
and liquidity management. At 31 December 2010, deposits from banks totalled $79.7 million compared to $118.7 million at 31 December 2009.
EMPLOYEE FUTURE BENEFITS
In Q2 2010, shareholders’ equity was bolstered by a combination of changes to post-retirement health care benefits. Following an independent,
tri-annual actuarial review, the health care liability was reduced by approximately $27 million, reflecting changes in demographics and claims costs.
Additionally, the Bank amended the plan for eligibility, benefits and cost sharing criteria, which resulted in a further reduction of approximately
$41 million. As at 31 December 2010, the Bank still had a substantial obligation for post-retirement health care benefits in the amount of
$81.1 million, down $60.5 million from $141.6 million the year before.
38
SUBORDINATED DEBT, INTEREST PAYMENTS AND MATURITIES
We have outstanding issuances of subordinated debt with a carrying value of $282.8 million as at 31 December 2010, of which $275.0 million is issued
in US dollars and £5.0 million in Sterling. All but $18.0 million of outstanding subordinated debt is eligible for inclusion in our Tier 2 regulatory
capital base and is limited to 50% of Tier 1 capital.
See “Note 17: Subordinated Capital” in the 31 December 2010 audited financial statements for additional tables and information.
REPURCHASE AGREEMENTS
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 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 and also provides liquidity on agency paper 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 2010 and 2009.
SHAREHOLDERS’ EQUITY
Shareholders’ equity increased during the year ended 31 December 2010 by $453.8 million to $809.3 million, primarily reflecting:
(cid:115) (cid:4)(cid:21)(cid:18)(cid:17)(cid:14)(cid:19) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:79)(cid:70) (cid:78)(cid:69)(cid:84) (cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:69)(cid:68)(cid:83) (cid:70)(cid:82)(cid:79)(cid:77) (cid:84)(cid:72)(cid:69) (cid:67)(cid:65)(cid:80)(cid:73)(cid:84)(cid:65)(cid:76) (cid:82)(cid:65)(cid:73)(cid:83)(cid:69) (cid:73)(cid:78) (cid:45)(cid:65)(cid:82)(cid:67)(cid:72) (cid:18)(cid:16)(cid:17)(cid:16)
(cid:115) (cid:4)(cid:21)(cid:23)(cid:14)(cid:23) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:78)(cid:69)(cid:84) (cid:73)(cid:78)(cid:67)(cid:82)(cid:69)(cid:65)(cid:83)(cid:69) (cid:70)(cid:82)(cid:79)(cid:77) (cid:67)(cid:72)(cid:65)(cid:78)(cid:71)(cid:69)(cid:83) (cid:84)(cid:79) (cid:80)(cid:79)(cid:83)(cid:84)(cid:13)(cid:82)(cid:69)(cid:84)(cid:73)(cid:82)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:72)(cid:69)(cid:65)(cid:76)(cid:84)(cid:72) (cid:66)(cid:69)(cid:78)(cid:69)(cid:108)(cid:84)(cid:83) (cid:65)(cid:78)(cid:68) (cid:65)(cid:67)(cid:84)(cid:85)(cid:65)(cid:82)(cid:73)(cid:65)(cid:76) (cid:82)(cid:69)(cid:86)(cid:73)(cid:69)(cid:87) (cid:79)(cid:70) (cid:84)(cid:72)(cid:69) (cid:65)(cid:83)(cid:83)(cid:85)(cid:77)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83) (cid:78)(cid:69)(cid:84) (cid:79)(cid:70) (cid:18)(cid:16)(cid:17)(cid:16)
accrued costs and increase in the defined benefit pension plan liability
(cid:115) (cid:4)(cid:19)(cid:24)(cid:14)(cid:24) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:70)(cid:82)(cid:79)(cid:77) (cid:85)(cid:78)(cid:82)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:71)(cid:65)(cid:73)(cid:78)(cid:83) (cid:79)(cid:78) (cid:33)(cid:38)(cid:51) (cid:83)(cid:69)(cid:67)(cid:85)(cid:82)(cid:73)(cid:84)(cid:73)(cid:69)(cid:83)(cid:12) (cid:80)(cid:82)(cid:73)(cid:77)(cid:65)(cid:82)(cid:73)(cid:76)(cid:89) (cid:82)(cid:69)(cid:67)(cid:79)(cid:86)(cid:69)(cid:82)(cid:73)(cid:69)(cid:83) (cid:73)(cid:78) (cid:77)(cid:65)(cid:82)(cid:75)(cid:69)(cid:84) (cid:86)(cid:65)(cid:76)(cid:85)(cid:69) (cid:79)(cid:70) (cid:84)(cid:72)(cid:69) (cid:70)(cid:79)(cid:85)(cid:82) (cid:51)(cid:41)(cid:54)(cid:83)(cid:12) (cid:78)(cid:69)(cid:84) (cid:79)(cid:70) (cid:85)(cid:78)(cid:82)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:76)(cid:79)(cid:83)(cid:83)(cid:69)(cid:83) (cid:73)(cid:78) (cid:79)(cid:84)(cid:72)(cid:69)(cid:82)
investment asset classes
(cid:115) (cid:4)(cid:21)(cid:24)(cid:14)(cid:22) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:70)(cid:82)(cid:79)(cid:77) (cid:84)(cid:72)(cid:69) (cid:84)(cid:82)(cid:65)(cid:78)(cid:83)(cid:70)(cid:69)(cid:82) (cid:79)(cid:70) (cid:85)(cid:78)(cid:82)(cid:69)(cid:65)(cid:76)(cid:73)(cid:83)(cid:69)(cid:68) (cid:76)(cid:79)(cid:83)(cid:83)(cid:69)(cid:83) (cid:79)(cid:78) (cid:40)(cid:52)(cid:45) (cid:73)(cid:78)(cid:86)(cid:69)(cid:83)(cid:84)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83) (cid:73)(cid:78)(cid:67)(cid:76)(cid:85)(cid:68)(cid:69)(cid:68) (cid:73)(cid:78) (cid:33)(cid:67)(cid:67)(cid:85)(cid:77)(cid:85)(cid:76)(cid:65)(cid:84)(cid:69)(cid:68) (cid:47)(cid:84)(cid:72)(cid:69)(cid:82) (cid:35)(cid:79)(cid:77)(cid:80)(cid:82)(cid:69)(cid:72)(cid:69)(cid:78)(cid:83)(cid:73)(cid:86)(cid:69)
Income to realised losses recognised in income as a result of the sale of asset-backed securities included in the Balance Sheet
de-risking strategy
These increases were offset by:
(cid:115) (cid:4)(cid:18)(cid:16)(cid:23)(cid:14)(cid:22) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:78)(cid:69)(cid:84) (cid:76)(cid:79)(cid:83)(cid:83) (cid:70)(cid:79)(cid:82) (cid:84)(cid:72)(cid:69) (cid:89)(cid:69)(cid:65)(cid:82)
(cid:115) (cid:4)(cid:17)(cid:24)(cid:14)(cid:16) (cid:77)(cid:73)(cid:76)(cid:76)(cid:73)(cid:79)(cid:78) (cid:80)(cid:82)(cid:69)(cid:70)(cid:69)(cid:82)(cid:82)(cid:69)(cid:68) (cid:68)(cid:73)(cid:86)(cid:73)(cid:68)(cid:69)(cid:78)(cid:68) (cid:65)(cid:78)(cid:68) (cid:71)(cid:85)(cid:65)(cid:82)(cid:65)(cid:78)(cid:84)(cid:69)(cid:69) (cid:70)(cid:69)(cid:69)
CAPITAL RESOURCES
One of Management’s primary objectives is to maintain a strong capital base to promote confidence in the Bank among our clients, the investing
public, bank regulators and shareholders. The Bank manages its capital both on a total Group basis and, where appropriate, on a legal entity basis.
The Finance department has the responsibility for measuring, monitoring and reporting 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 in
stressed scenarios, regulatory requirements, capital levels relative to our peers and the impact on our credit ratings.
The Bank is subject to Basel II, which is a risk-based capital adequacy framework 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.
From this date, the Bank has calculated its capital requirement on the Standardised approach under Basel II requirements.
The Bank is fully compliant with all regulatory capital requirements and maintains capital ratios well in excess of regulatory minimums as at
31 December 2010.
As at 31 December 2010, the Bank’s regulatory capital stood at $1,067.5 million with the consolidated Tier 1 total and total capital ratios being 15.7%
and 21.6%, respectively (31 December 2009: 7.2% and 10.1%, respectively).
Butterfield Annual Report 2010 39
The following table sets forth our capital adequacy as at 31 December 2010 and 31 December 2009 in accordance with the Basel II framework:
Year ended 31 December
(in $ millions)
Capital
Tier 1 capital
Tier 2 capital
Deductions
Total capital
Weighted risk assets
Cash and inter-bank placements
Investments
Loans
Other assets
Off-balance sheet items
Operational risk charge
Total weighted risk assets
Capital ratios (%)
Tier 1 common
Tier 1 total
Total capital
2010
2009
772.5
310.3
(15.3)
1,067.5
451.2
506.4
2,552.2
426.0
372.4
626.4
4,934.6
11.2%
15.7%
21.6%
412.7
238.0
(73.5)
577.2
397.3
1,289.5
2,744.3
362.6
313.2
627.2
5,734.1
1.5%
7.2%
10.1%
Under Basel II Pillar III (market disclosure), the Bank is required to publish further information about the risks to which it is exposed. The Bank’s
Pillar III disclosures for the year ended 31 December 2010 will be published on the corporate website, www.butterfieldgroup.com, shortly after the
publication of these financial statements.
PREFERENCE SHARES
In June 2009, the Bank offered 200,000 of 8.00% Non-Cumulative Perpetual Limited Voting Preference Shares (the “preference shares”), liquidation
preference of US $1,000 per share 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 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.
CAPITAL RAISE
On 2 March 2010, the Bank issued 144.8 million common shares of par value $1 per share, for a consideration of $175.0 million and 281,770
Mandatorily Convertible Preference Shares of par value $0.01 per share and 93,230 Contingent Convertible Preference Shares of par value
$0.01 per share, for a consideration of $281.8 million and $93.2 million respectively.
40
Following the Bank’s Annual General Meeting held on 8 April 2010, The Bank of N.T. Butterfield & Son Limited’s shareholders approved an
increase in the authorised share capital to 26,000,000,000 common shares of par value BD$0.01. Subsequent to the increase, conversion of 281,770
Mandatorily Convertible Preference Shares into 233,157,035 common shares and 93,230 Contingent Convertible Preference Shares into 77,144,993
common shares took place.
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.
RIGHTS OFFERING (see the Rights Offering Prospectus for details)
In March 2010, the Bank offered up to 99.3 million common shares and 8.3 million contingent value convertible preference shares (“CVCP shares”) in
the form of up to 107.6 million Rights Units, each Unit consisting of 0.92038 common shares and 0.07692 CVCP shares, for each common share held
at a price of BD$1.21 per Rights Unit. Each qualifying shareholder received 1.113 transferable rights to purchase one Rights Unit. Unallocated Rights
Shares were available to qualifying shareholders who exercised all the rights issued to them. Any unallocated Rights Units remaining thereafter were
available to qualifying holders of 8.0% preference shares.
Following the closing of the Rights Offering on 11 May 2010, the gross proceeds of $130 million were used to repurchase 107,571,361 shares from the
2 March 2010 investors at the same price at which the investors originally subscribed for the shares.
CONTINGENT VALUE CONVERTIBLE PREFERENCE SHARES (see the Rights Offering Prospectus for details)
A holder of CVCP shares has the option to convert any such shares to common shares at any time. All CVCP shares outstanding will automatically
convert into common shares at the earlier of 31 March 2015 or a sale of the Bank. On such conversion, the CVCP shares will convert into common
shares at the Conversion Price. The initial Conversion Price shall be US $1.21 subject to any customary anti-dilution adjustments and certain
downward notional adjustment based on certain loan recoveries.
A holder of CVCP shares will be entitled to certain distributions in connection with certain sales or public offerings of the Bank’s equity interest in
BFG. On 9 February 2011, the Bank announced that it has agreed to sell its minority ownership position in BFG to a new company founded by fund
industry executives Tim Calveley and Glenn Henderson and private equity firm, BV Investment Partners. BFG will operate as a subsidiary of the
new company. The Bank will continue to provide BFG and its clients with commercial banking, foreign exchange and custody services. BFG was
established in 2008 through the merger of Butterfield Fund Services and the Fulcrum Group. Through this transaction, the Bank will fully divest
itself of its minority ownership stake in BFG. The transaction is expected to close during the first quarter of 2011, subject to regulatory approvals.
Proceeds from the sale will result in a distribution to holders of the Bank’s CVCP shares, estimated at $0.39 to $0.41 per share. See “Note 27:
Subsequent events” of the 31 December 2010 audited financial statements for details of distributions attributable to the sale of the Bank’s 36%
diluted interest in BFG.
When, as and if declared by the Board, holders of the outstanding CVCP shares will be entitled to receive dividends, when, as and if declared by the
Board, based on the number of common shares into which the CVCP shares would be convertible as of the dividend record date.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Bank, the holders of the CVCP shares will be
entitled to receive from its assets legally available for distribution to shareholders as a liquidation preference before any distribution of assets is
made to or set aside for the holders of any junior shares, such as the common shares, the greater of (i) US$1.21 per CVCP share plus any declared
but unpaid dividends with respect to the then-current dividend period and (ii) the amount per CVCP share that would be received if such CVCP
share had converted into common shares immediately prior to such liquidation, dissolution or winding up.
The CVCP shares are issued as perpetual securities subject to conversion to common shares and shall not be redeemable by any holders at
any time.
The holders of the CVCP shares will vote together with the holders of the common shares on all matters upon which the holders of the common
shares are entitled to vote. The CVCP shares shall be entitled to such number of votes based on the number of common shares into which the CVCP
shares are convertible as of the applicable record date.
The class vote of the holders of at least 66.6% of the CVCP shares shall be required for (i) the creation or issuance of shares that are senior to
liquidation, (ii) an amendment of rights of the CVCP shares or (iii) a reclassification, merger, amalgamation or consolidation where the holders of
CVCP shares would not receive the consideration that would be received if such CVCP shares had converted into common shares immediately prior
to such event.
The CVCP shares shall be privately transferable (subject to applicable securities laws and any required regulatory consents) but shall not be listed
on the Bermuda Stock Exchange or any other stock exchange. The CVCP shares will not be registered under the securities laws of any jurisdiction.
This will result in a limited market for the CVCP shares.
Butterfield Annual Report 2010 41
With respect to the 8.0% preference shares, the CVCP shares rank pari passu as to liquidation and pari passu as to dividends and, with respect to
common shares, the CVCP shares rank senior as to liquidation and pari passu as to dividends (other than dividends relating to BFG, as to which the
CVCP shares rank senior).
As at 31 December 2010, there were 7.8 million CVCP shares outstanding with 0.5 million shares converted to common shares at the holders’ option
during the year. As at 31 December 2010 there were no loan recoveries attributable to the CVCP shares as defined in the certificate of designation.
Consequently, the conversion factor to common shares at 31 December 2010 remained 1 to 1. Loan recoveries mean the amount by which the
cumulative amount of collections actually received by the Bank with respect to “Covered Loans” from and after 1 January 2010 and through (and
including) the Measurement Date exceeds US$102.3 million but in no event shall the loan recoveries exceed US$42 million. As at 31 December 2010,
the carrying value of the Covered Loans was $58.5 million reflecting charge-offs during the year as approved by the Audit Committee and reviewed
by an independent committee of the Board of Directors.
WARRANTS
Following the capital raise on 2 March 2010, the terms of the 4,279,601 warrants with an exercise price of $7.01 previously issued to the Bermuda
Government in conjunction with the issuance of 200,000 Government guaranteed 8% Non-Cumulative Perpetual Limited Voting Preference Shares in
2009 were adjusted in accordance with the terms of the guarantee. Subsequently, the Government of Bermuda now holds 4,150,774 warrants with an
exercise price of $3.614.
DIVIDENDS
No common dividends were declared or paid in 2010. In 2009, dividends declared on common shares were $0.24 per share, comprised of
$0.12 in cash and $0.12 in bonus common shares. There were four preference share dividends paid in 2010 of $16.6 million in total (2009:
two dividends totalling $7.1 million).
CASH FLOW
For the year ended 31 December 2010, net cash provided by operating activities totalled $128.8 million (2009: $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 increased $71.0 million from 2009 to 2010 due primarily from the net reduction in other assets and liabilities.
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 the ordinary course of investment activities or as a result of the ordinary course loan
work-outs. Net cash used in investing activities for the year ending 31 December 2010 totalled $476.5 million compared to cash provided by
investing activities of $1,072.8 million in 2009. The $1,549.3 million decrease in 2010 over 2009 was mainly due to a $908.7 million net cash payment
provided from proceeds from the sale of HTM investments in 2009 compared to $20.6 million in 2010, as well as the movement in term deposits with
banks year over year (2010: decrease of $536.2 million; 2009: increase of $276.7 million).
Net cash provided by financing activities totalled $121.8 million in 2010 compared to the $1,149.5 million net cash used in financing activities
in 2009. The $1,271.3 million increase reflects the net cash used to fund deposit decreases in 2009, compared to the $380.8 million decrease in
deposits offset by the $521 million net issuance of shares and rights.
42
OFF BALANCE SHEET ARRANGEMENTS
ASSETS UNDER ADMINISTRATION AND ASSETS UNDER MANAGEMENT
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 GAAP, these assets are not assets of the Bank and are not included in our Consolidated Balance Sheet.
CREDIT-RELATED ARRANGEMENTS
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, whilst 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 are 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:
As at 31 December 2010
(in $ thousands)
Standby letters of credit
Letters of guarantee
Total
Gross
386,728
14,115
400,843
Collateral
354,310
8,655
362,965
Net
32,418
5,460
37,878
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, it is shown in gross amounts including interest income.
CONTRACTUAL OBLIGATIONS (INCLUDING SUBORDINATED DEBT)
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 Bank entered into a commitment letter for a $500 million line of credit at market rates with CIBC. The fees incurred for the line of credit facility
were $7.4 million. As at 31 December 2010 the credit facility had been reduced to $300 million and remains undrawn. The Bank incurs facility fees
of $200,000 per month.
The Bank entered into an asset liability management agreement with Carlyle with an effective date of 1 October 2010. Per the agreement Carlyle has
agreed to provide Balance Sheet management advisory services to the Bank for an annual fee of $4 million for a three-year period.
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 2010, $174.5 million (2009: $133.3 million) of standby letters of credit were issued under this facility.
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.
Butterfield Annual Report 2010 43
We enter into other contractual obligations in the normal course of business. Certain of these 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 17: Subordinated Capital” in the 31 December 2010 audited financial statements for terms of subordinated debt arrangements and
interest rates.
The $133.2 million contractual obligation in respect of sourcing—Bermuda and the Cayman Islands—relates to an eight-year agreement entered
into in October 2008 with global technology service provider HP (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
2011, and in Bermuda by the end of the third quarter in 2011. 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.
44
RISK MANAGEMENT: CREDIT, LIQUIDITY,
MARKET AND OPERATIONAL RISK OVERVIEW
The Board of Directors’ Risk Policy & Compliance Committee provides oversight with respect to credit, market, interest rate and foreign exchange,
liquidity, fiduciary, operational, compliance and reputational risks. 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 the 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 all 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 view of key product risks
and an 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, foreign exchange, 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 BMA is also a key priority to the Risk Policy & Compliance Committee.
The Group Risk Committee is chaired by the Group Chief Risk Officer and is attended by members of the Executive Committee, including the Chief
Executive Officer. 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 & 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, reports into the Group Risk Committee and 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 ERM.
The Financial Institutions Committee, chaired by the Chief Credit Officer, identifies, assesses, prioritises and manages our risks associated with
counterparty exposure to other financial institutions, as well as country-specific exposures.
Chaired by our Group Chief Risk 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 RATE, FOREIGN EXCHANGE RATE AND MARKET 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.
Butterfield Annual Report 2010 45
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, the United Kingdom and Switzerland. 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 interest income simulation analysis to measure inherent risk in
our Balance Sheets at specific points in time. See “Note 16: Interest Rate Risk” in the 31 December 2010 audited financial statements for our interest
rate sensitivity gap profile.
LIQUIDITY
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.
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 BMA apprised of our liquidity position throughout the year.
There is no central bank in Bermuda and thus we have no ‘lender of last resort’. 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.
The Bank’s asset funding strategies draw upon our ability to allocate funding among subsidiaries through inter-company loans. As of 31 December
2010, material outstanding loans between jurisdications included an inter-company deposit from Cayman to Bermuda for $253.2 million, down from
$501.0 million.
46
CREDIT 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 Group Chief Risk Officer.
CRM 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 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 & 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 CRM, country exposure limits are reviewed and approved on a country-by-country basis.
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.
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.
OPERATIONAL RISK MANAGEMENT
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, 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:
(cid:115) (cid:65)(cid:83)(cid:83)(cid:69)(cid:83)(cid:83)(cid:73)(cid:78)(cid:71) (cid:82)(cid:73)(cid:83)(cid:75)(cid:83) (cid:73)(cid:83) (cid:65) (cid:68)(cid:65)(cid:89)(cid:13)(cid:84)(cid:79)(cid:13)(cid:68)(cid:65)(cid:89) (cid:66)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83) (cid:65)(cid:67)(cid:84)(cid:73)(cid:86)(cid:73)(cid:84)(cid:89) (cid:84)(cid:72)(cid:65)(cid:84) (cid:73)(cid:83) (cid:84)(cid:72)(cid:69) (cid:67)(cid:79)(cid:78)(cid:67)(cid:69)(cid:82)(cid:78) (cid:79)(cid:70) (cid:69)(cid:86)(cid:69)(cid:82)(cid:89) (cid:69)(cid:77)(cid:80)(cid:76)(cid:79)(cid:89)(cid:69)(cid:69)
(cid:115) (cid:68)(cid:69)(cid:67)(cid:73)(cid:83)(cid:73)(cid:79)(cid:78)(cid:83) (cid:65)(cid:82)(cid:69) (cid:66)(cid:65)(cid:83)(cid:69)(cid:68) (cid:79)(cid:78) (cid:65)(cid:78) (cid:65)(cid:83)(cid:83)(cid:69)(cid:83)(cid:83)(cid:77)(cid:69)(cid:78)(cid:84) (cid:79)(cid:70) (cid:65)(cid:76)(cid:76) (cid:82)(cid:69)(cid:76)(cid:69)(cid:86)(cid:65)(cid:78)(cid:84) (cid:79)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76) (cid:82)(cid:73)(cid:83)(cid:75)(cid:83)
(cid:115) (cid:82)(cid:73)(cid:83)(cid:75) (cid:68)(cid:69)(cid:67)(cid:73)(cid:83)(cid:73)(cid:79)(cid:78)(cid:83) (cid:83)(cid:72)(cid:65)(cid:76)(cid:76) (cid:66)(cid:69) (cid:77)(cid:65)(cid:68)(cid:69) (cid:65)(cid:84) (cid:84)(cid:72)(cid:69) (cid:65)(cid:80)(cid:80)(cid:82)(cid:79)(cid:80)(cid:82)(cid:73)(cid:65)(cid:84)(cid:69) (cid:76)(cid:69)(cid:86)(cid:69)(cid:76) (cid:66)(cid:65)(cid:83)(cid:69)(cid:68) (cid:79)(cid:78) (cid:68)(cid:69)(cid:76)(cid:69)(cid:71)(cid:65)(cid:84)(cid:69)(cid:68) (cid:65)(cid:85)(cid:84)(cid:72)(cid:79)(cid:82)(cid:73)(cid:84)(cid:89)
(cid:115) (cid:85)(cid:78)(cid:78)(cid:69)(cid:67)(cid:69)(cid:83)(cid:83)(cid:65)(cid:82)(cid:89) (cid:82)(cid:73)(cid:83)(cid:75)(cid:83) (cid:83)(cid:72)(cid:65)(cid:76)(cid:76) (cid:66)(cid:69) (cid:65)(cid:86)(cid:79)(cid:73)(cid:68)(cid:69)(cid:68)
Butterfield Annual Report 2010 47
The ERM 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 of implementing new systems and information technology
infrastructure with the aid of HP 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:
(cid:115) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:82)(cid:85)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78) (cid:79)(cid:82) (cid:73)(cid:77)(cid:80)(cid:65)(cid:73)(cid:82)(cid:77)(cid:69)(cid:78)(cid:84) (cid:79)(cid:70) (cid:66)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83) (cid:79)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)
(cid:115) (cid:65)(cid:68)(cid:68)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76) (cid:68)(cid:69)(cid:86)(cid:69)(cid:76)(cid:79)(cid:80)(cid:77)(cid:69)(cid:78)(cid:84) (cid:65)(cid:78)(cid:68) (cid:82)(cid:69)(cid:77)(cid:69)(cid:68)(cid:73)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:67)(cid:79)(cid:83)(cid:84)(cid:83)
(cid:115) (cid:68)(cid:73)(cid:86)(cid:69)(cid:82)(cid:83)(cid:73)(cid:79)(cid:78) (cid:79)(cid:70) (cid:84)(cid:69)(cid:67)(cid:72)(cid:78)(cid:73)(cid:67)(cid:65)(cid:76) (cid:65)(cid:78)(cid:68) (cid:79)(cid:84)(cid:72)(cid:69)(cid:82) (cid:82)(cid:69)(cid:83)(cid:79)(cid:85)(cid:82)(cid:67)(cid:69)(cid:83)
(cid:115) (cid:76)(cid:79)(cid:83)(cid:83) (cid:79)(cid:70) (cid:67)(cid:76)(cid:73)(cid:69)(cid:78)(cid:84)(cid:83)
(cid:115) (cid:78)(cid:69)(cid:71)(cid:65)(cid:84)(cid:73)(cid:86)(cid:69) (cid:80)(cid:85)(cid:66)(cid:76)(cid:73)(cid:67)(cid:73)(cid:84)(cid:89)
(cid:115) (cid:76)(cid:73)(cid:84)(cid:73)(cid:71)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:79)(cid:82) (cid:79)(cid:84)(cid:72)(cid:69)(cid:82) (cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82) (cid:67)(cid:76)(cid:65)(cid:73)(cid:77)(cid:83)
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.
CREDIT RATINGS
Our credit ratings are provided in the table below:
Short-term deposits
Long-term deposits and debt
Outlook
Standard
& Poor’s
A-2
A-
Negative
Moody’s
Fitch
P-1
A2
F1
A-
Negative
Stable
48
FINANCIALSManagement’s Financial Reporting Responsibility 50Independent Auditors’ Report to the Shareholders 51Consolidated Balance Sheet 52Consolidated Statement of Operations 53Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income (Loss) 54Consolidated Statement of Cash Flows 56Notes to the Consolidated Financial Statements 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 Kopp
President & Chief Executive Officer
22 February 2011
Bradley Rowse
Executive Vice President & Chief Financial Officer
22 February 2011
50
51
CONSOLIDATED BALANCE SHEET As at 31 December (In thousands of Bermuda dollars)
2010
Assets
Cash and demand deposits with banks
Term deposits with banks
Total cash and deposits with banks
Debt and equity securities
Trading
Available for sale
Held to maturity
Total investments in debt and equity securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Accrued interest
Goodwill
Intangible assets
Investments in affiliates
Receivable from investments sold
Other assets
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Customers
Banks
Total deposits
Employee future benefits
Accrued interest
Preference shares dividend payable
Payable for investments purchased
Other liabilities
Total other liabilities
Subordinated capital
Total liabilities
325,367
1,950,179
2,275,546
18,088
2,791,601
-
2,809,689
4,043,360
261,955
17,691
16,017
38,946
33,534
50,817
75,505
9,623,060
7,170,963
79,679
8,228,059
85,209
9,647
715
112,663
94,680
302,914
282,799
8,813,772
977,417
954,191
2009
551,249
1,435,549
1,986,798
21,023
2,067,163
838,715
2,926,901
4,218,332
244,242
16,285
16,712
50,129
38,518
-
96,685
9,594,602
7,623,753
118,675
8,696,619
141,741
12,391
1,337
-
103,969
259,438
283,085
9,239,142
99,060
2
-
764,206
(283,964)
(34,660)
(189,184)
355,460
9,594,602
Shareholders’ equity
Common share capital ($0.01 par; authorised shares 26,000,000,000 (2009: $1 par; authorised shares 260,000,000)
issued and outstanding: 549,143,488 (2009: 99,060,111))
Preference share capital ($0.01 par; $1,000 liquidation preference)
issued and outstanding: 200,000 (2009: 200,000)
Contingent value convertible preference share capital ($0.01 par)
issued and outstanding: 7,789,087 (2009: nil)
Additional paid-in capital
Accumulated deficit
Less: treasury common shares (2,401,593 shares; 2009: 3,426,106 shares)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
5,491
2
78
1,376,037
(509,579)
(24,127)
(38,614)
809,288
9,623,060
The accompanying notes are an integral part of these consolidated financial statements.
Robert Mulderig
Chairman of the Board
52
Robert Steinhoff
Vice Chairman
Bradford Kopp
President & Chief Executive Officer
CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended 31 December (In thousands of Bermuda dollars, except per share data)
Non-interest income
Asset management
Banking
Foreign exchange revenue
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 on trading investments
Net realised (losses) gains on available for sale investments
Other-than-temporary impairment losses on available for sale investments
Net realised gains on held to maturity investments
Other-than-temporary impairment losses on held to maturity investments
Goodwill and intangible assets impairment
Loss 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 before income taxes
Income tax benefit
Net loss
Cash dividends declared on preference shares
Preference shares guarantee fee
Net loss attributable to common shareholders
Loss per common share
Basic
Diluted
2010
24,544
36,732
32,479
30,534
13,574
8,348
146,211
198,008
28,330
11,047
237,385
45,988
12,455
-
58,443
178,942
(41,970)
136,972
971
(107,047)
(60,522)
-
-
-
(7,430)
(6,489)
102,666
159,082
54,037
27,469
13,811
15,405
5,711
5,002
31,739
312,256
(209,590)
1,975
(207,615)
(16,000)
(2,000)
(225,615)
(0.47)
(0.47)
2009
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)
The accompanying notes are an integral part of these consolidated financial statements.
Butterfield Annual Report 2010 53
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the year ended 31 December (In thousands of Bermuda dollars)
2010
Common share capital issued
99,060
Balance at beginning of year (2010: 99,060,111 shares; 2009: 98,399,858 shares)
144,836
Issuance (2010: 147,703,758 shares; 2009: nil shares)
(241,429)
Reduction in par value of shares
(1,076)
Repurchased (2010: 107,571,361 shares; 2009: nil shares)
992
Rights conversion (2010: 99,173,842 shares; 2009: nil shares)
Conversion of mandatorily and contingent convertible preference shares (2010: 310,302,028 shares; 2009: nil shares) 3,103
5
Conversion of contingent value convertible preference shares (2010: 475,070 shares; 2009: nil shares)
-
Dividend reinvestment (2010: nil shares; 2009: 572,246 shares)
-
of which issued from treasury common shares (2010: nil shares; 2009: 572,246 shares)
-
Stock dividend (2010: nil shares; 2009: 3,061,919 shares)
of which issued from treasury common shares (2010: nil shares; 2009: 2,401,666 shares)
-
5,491
Balance at end of year (2010: 549,143,488 shares; 2009: 99,060,111 shares)
Preference shares
Balance at beginning of year (2010: 200,000 shares; 2009: nil shares)
Issuance (2010: nil; 2009: 200,000 shares)
Balance at end of year (2010: 200,000 shares; 2009: 200,000 shares)
Mandatorily convertible preference shares
Balance at beginning of year (2010: nil shares; 2009: nil shares)
Issuance (2010: 281,770 shares; 2009: nil shares)
Conversion to common shares (2010: 281,770 shares; 2009: nil shares)
Balance at end of year (2010: nil shares; 2009: nil shares)
Contingent convertible preference shares
Balance at beginning of year (2010: nil shares; 2009: nil shares)
Issuance (2010: 93,230 shares; 2009: nil shares)
Conversion to common shares (2010: 93,230 shares; 2009: nil shares)
Balance at end of year (2010: nil shares; 2009: nil shares)
Contingent value convertible preference shares
Balance at beginning of year (2010: nil shares; 2009: nil shares)
Rights conversion (2010: 8,264,157 shares; 2009: nil shares)
Conversion to common shares (2010: 475,070 shares; 2009: nil shares)
Balance at end of year (2010: 7,789,087 shares; 2009: nil shares)
Additional paid in capital
Balance at beginning of year
Issuance of common shares
Issuance of preference shares
Issuance of mandatorily convertible preference shares
Issuance of contingent convertible preference shares
Reduction of par value of common shares
Conversion of mandatorily and contingent convertible preference shares
Cost of capital raise and rights offering
Reduction of additional paid in capital on transfer and sale of treasury shares
Cost of issuing preference share capital
Dividend reinvestment
of which related to treasury common shares
Stock dividend
Stock option plan expense
Balance at end of year
54
2
-
2
-
3
(3)
-
-
1
(1)
-
-
83
(5)
78
764,206
30,192
-
281,767
93,229
241,429
(3,099)
(28,767)
(6,939)
-
-
-
-
4,019
1,376,037
2009
98,400
-
-
-
-
-
-
572
(572)
3,062
(2,402)
99,060
-
2
2
-
-
-
-
-
-
-
-
-
-
-
-
604,116
-
199,998
-
-
-
-
-
(31,485)
(12,655)
2,274
(2,274)
1,984
2,248
764,206
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) Continued
For the year ended 31 December (In thousands of Bermuda dollars)
2010
2009
Accumulated deficit
Balance at beginning of year
Net loss for year
Cash dividends declared on common shares
Cash dividends declared on preference shares
Preference shares guarantee fee
Stock dividend
Balance at end of year
Treasury common shares
Balance at beginning of year (2010: 3,426,106 shares; 2009: 6,473,180 shares)
Share based compensation
Net purchases, sales and transfers of treasury shares
Balance at end of year (2010: 2,401,593 shares; 2009: 3,426,106 shares)
Accumulated other comprehensive loss
Balance at beginning of year
Net change in unrealised (losses) gains on translation of net investment in foreign operations
Net change in unrealised gains (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
Other comprehensive income (loss)
Total comprehensive loss
Components of accumulated other comprehensive loss
Cumulative change in unrealised losses on translation of investment in foreign operations
Cumulative change in unrealised 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.
(283,964)
(207,615)
-
(16,000)
(2,000)
-
(509,579)
(34,660)
3,593
6,940
(24,127)
(189,184)
(4,494)
38,809
58,557
57,698
(38,614)
809,288
(207,615)
150,570
(57,045)
(12,144)
(18,182)
-
(8,288)
(38,614)
(35,006)
(213,413)
(11,124)
(8,400)
(1,050)
(14,971)
(283,964)
(82,700)
1,255
46,785
(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)
Butterfield Annual Report 2010 55
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December (In thousands of Bermuda dollars)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss 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
Realised loss on disposal of subsidiaries
Loss on sale of premises and equipment
Net gains on credit derivative instruments
Net realised and unrealised gains on private equity investments
Net realised gains on held to maturity investments
Other-than-temporary impairments on held to maturity investments
Net realised losses (gains) on sale of available for sale investments
Other-than-temporary impairments on available for sale investments
Provision for credit losses
Net change in trading investments
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable
(Increase) decrease in other assets
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Cash provided by operating activities
Cash flows from investing activities
Net (increase) decrease in term deposits with banks
Additions to premises, equipment and computer software
Net decrease in loans
Held to maturity investments: proceeds from maturities
Held to maturity investments: purchases
Available for sale investments: proceeds from sales and maturities
Available for sale investments: purchases
Payment of deferred consideration in relation with acquisition of subsidiaries
Cash and demand deposits held by subsidiaries at time of sale
Cash (used in) provided by investing activities
Cash flows from financing activities
Net decrease in demand and term deposit liabilities
Issuance of common share capital
Issuance of preference share capital
Cost of issuing share capital and rights
Common shares repurchased
Proceeds from dividend re-investment plan
Treasury shares
Cash dividends paid on common shares
Cash dividends paid on preference shares
Preference shares guarantee fee paid
Cash provided by (used in) financing activities
Effect of exchange rates on cash and demand deposits with banks
Net decrease in cash and demand deposits with banks
Cash and demand deposits with banks at beginning of year
Cash and demand deposits with banks at 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.
56
2010
2009
(207,615)
(213,413)
25,216
-
-
3,831
1,959
7,612
7,430
63
-
-
-
-
107,047
60,522
41,970
2,371
(1,520)
(27,557)
(2,707)
110,223
128,845
(536,208)
(39,611)
104,878
20,584
-
6,315,787
(6,337,270)
-
(4,657)
(476,497)
(380,828)
295,000
385,001
(28,767)
(130,000)
-
-
-
(16,622)
(2,000)
121,784
(14)
(225,882)
551,249
325,367
58,770
468
27,859
8,020
5,246
5,120
1,688
3,498
-
200
(3,304)
(6,220)
(2,298)
132,095
(236)
-
104,879
21,022
24,422
19,617
(13,186)
(57,048)
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)
(2,363)
(21,192)
572,441
551,249
62,778
899
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Bermuda dollars)
NOTE 1: NATURE OF BUSINESS
The Bank of N.T. Butterfield & Son Limited (“Butterfield”, “Bank” or the “Company”) is incorporated under the laws of Bermuda and has a banking license
under the Bank and Deposit Companies Act, 1999 (“the Act”). Butterfield is regulated by the Bermuda Monetary Authority (“BMA”), which operates in
accordance with Basel principles.
Butterfield is a full service community bank and a provider of specialised wealth management services. Our services offered include retail, private & corporate
banking, treasury, custody, asset management and personal & institutional trust services. The Bank provides such services from our seven jurisdictions:
Bermuda, The Bahamas, Barbados, Cayman, Guernsey, Switzerland and the United Kingdom.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation and Use of Estimates and Assumptions
The accounting and financial reporting policies of 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:
Allowance for credit losses
i.
Investments
ii.
Impairment of long-lived assets
iii.
Impairment of goodwill
iv.
Employee future benefits
v.
vi.
Fair value of financial instruments
vii. Concentrations of credit risk & customers
viii. Commitments and contingencies
b. Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries (collectively the “Bank”) and those
variable interest entities (“VIEs”) where the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated. 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
VIEs where it is considered to be the primary beneficiary. The Bank is deemed to have a controlling financial interest and is the primary beneficiary of
a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and an obligation to absorb
losses or the right to receive benefits that could potentially be significant to 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 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 Operations.
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 (loss) (“AOCI”). Gains and losses on foreign currency based subsidiaries are recorded in the Consolidated
Statement of Operations 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 in debt and equity securities are classified as trading, available for sale (“AFS”) or held to maturity (“HTM”).
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
Butterfield Annual Report 2010 57
strategic longer-term investments. AFS investments are carried at fair value in the Consolidated Balance Sheet with unrealised gains and losses reported
as net increase or decrease to accumulated other comprehensive income (loss). Debt and equity securities classified as trading investments are carried
at fair value in the Consolidated Balance Sheet, with unrealised gains and losses included in the Consolidated Statement of Operations as net realised /
unrealised gains (losses) on trading investments.
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 Operations.
As of 2 March 2010 the Bank no longer applied the HTM classification.
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 Operations. 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.
Contained within other assets are investments in a closed ended fund and private equity companies for which the Bank does not have sufficient rights
or ownership interests to follow the equity method of accounting. The Bank accounts for these investments, which do not have readily determinable
market values, at estimated fair value as it has no significant influence over these entities. Fair values for investments in the closed ended fund and
private equity companies are primarily based on the net asset value provided by the investment manager or the respective entity, recent financial
information, available market data or, in certain cases, Management judgment may be required. The change in fair value in these investments are
included in other gains/(losses) in the Consolidated Statement of Operations.
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 this 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, the investor must evaluate expected
cash flows to be received and determine if recovery of the security’s entire amortised cost basis (the recoverable value) is expected and whether a
credit loss exists.
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 for AFS Investements, the decrease in fair value relating to factors other than credit losses are recognised in Other Comprehensive Income
(Loss) (“OCI”).
The Bank adopted the aforementioned 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.
Investments in debt securities in unrealised loss positions are analysed as part of Management’s ongoing assessment of OTTI. When Management
intends to sell such securities or it is more likely than not that the Bank will be required to sell the securities before recovering the amortised cost, 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 or it is not more likely than not that the Bank will be required to sell such securities before recovering the amortised cost,
Management estimates cash flows over the remaining lives of the underlying security to assess whether credit losses exist. In determining whether
credit losses exist, Management considers 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. 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.
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.
Losses projected for the underlying collateral (“pool losses”) are compared 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 2010,
Management’s cash flow forecasts for structured investment vehicles (“SIVs”) were created in conjunction with a third-party specialist 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.
58
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.
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.
Impaired loans
A loan is considered to be impaired when, based on current information and events, the Bank determines that it will not be able to collect all amounts
due according to the loan contract, including scheduled interest payments. The Bank accounts for and discloses non-accrual loans as impaired loans.
When a loan is identified as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s
effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases
the current fair value of the collateral, less selling costs, is used instead of discounted cash flows.
If the Bank determines that the expected realisable value of the impaired loan is less than the recorded investment in the loan (net of previous
charge-offs, deferred loan fees or costs and unamortised premium or discount), impairment is recognised through an allowance estimate or a charge-off.
Non-accrual
Commercial, Commercial real estate and Consumer loans (excluding credit card consumer loans) are placed on non-accrual status immediately if:
(cid:115)
(cid:115)
(cid:73)(cid:78) (cid:84)(cid:72)(cid:69) (cid:79)(cid:80)(cid:73)(cid:78)(cid:73)(cid:79)(cid:78) (cid:79)(cid:70) (cid:45)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:12) (cid:70)(cid:85)(cid:76)(cid:76) (cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84) (cid:79)(cid:70) (cid:80)(cid:82)(cid:73)(cid:78)(cid:67)(cid:73)(cid:80)(cid:65)(cid:76) (cid:79)(cid:82) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84) (cid:73)(cid:83) (cid:73)(cid:78) (cid:68)(cid:79)(cid:85)(cid:66)(cid:84)(cid:27) (cid:79)(cid:82)
(cid:80)(cid:82)(cid:73)(cid:78)(cid:67)(cid:73)(cid:80)(cid:65)(cid:76) (cid:79)(cid:82) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84) (cid:73)(cid:83) (cid:25)(cid:16) (cid:68)(cid:65)(cid:89)(cid:83) (cid:80)(cid:65)(cid:83)(cid:84) (cid:68)(cid:85)(cid:69)(cid:14)
Residential mortgages are placed on non-accrual status immediately if:
(cid:115)
(cid:115)
(cid:73)(cid:78) (cid:84)(cid:72)(cid:69) (cid:79)(cid:80)(cid:73)(cid:78)(cid:73)(cid:79)(cid:78) (cid:79)(cid:70) (cid:45)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:12) (cid:70)(cid:85)(cid:76)(cid:76) (cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84) (cid:79)(cid:70) (cid:80)(cid:82)(cid:73)(cid:78)(cid:67)(cid:73)(cid:80)(cid:65)(cid:76) (cid:79)(cid:82) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84) (cid:73)(cid:83) (cid:73)(cid:78) (cid:68)(cid:79)(cid:85)(cid:66)(cid:84)(cid:27) (cid:79)(cid:82)
(cid:87)(cid:72)(cid:69)(cid:78) (cid:80)(cid:82)(cid:73)(cid:78)(cid:67)(cid:73)(cid:80)(cid:65)(cid:76) (cid:79)(cid:82) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84) (cid:73)(cid:83) (cid:25)(cid:16) (cid:68)(cid:65)(cid:89)(cid:83) (cid:80)(cid:65)(cid:83)(cid:84) (cid:68)(cid:85)(cid:69)(cid:12) (cid:85)(cid:78)(cid:76)(cid:69)(cid:83)(cid:83) (cid:84)(cid:72)(cid:69) (cid:76)(cid:79)(cid:65)(cid:78) (cid:73)(cid:83) (cid:87)(cid:69)(cid:76)(cid:76) (cid:83)(cid:69)(cid:67)(cid:85)(cid:82)(cid:69)(cid:68) (cid:65)(cid:78)(cid:68) (cid:65)(cid:78)(cid:89) (cid:79)(cid:78)(cid:71)(cid:79)(cid:73)(cid:78)(cid:71) (cid:67)(cid:79)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:69)(cid:70)(cid:70)(cid:79)(cid:82)(cid:84)(cid:83) (cid:65)(cid:82)(cid:69) (cid:82)(cid:69)(cid:65)(cid:83)(cid:79)(cid:78)(cid:65)(cid:66)(cid:76)(cid:89) (cid:69)(cid:88)(cid:80)(cid:69)(cid:67)(cid:84)(cid:69)(cid:68) (cid:84)(cid:79)
result in repayment of all amounts due under the contractual terms of the loan.
Interest income on non-accrual loans is recognised only to the extent it is received in cash. Cash received on non-accrual loans where there is no doubt
regarding full repayment (no impairment recognised in the form of a specific allowance) is first applied as repayment of the past due principal amount
of the loan and secondly to past due interest and fees.
Where there is doubt regarding the ultimate full repayment of the non-accrual loan (impairment recognised in the form of a specific allowance), all cash
received is applied to reduce the principal 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.
Delinquencies
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.
Charge-offs
The Bank recognises charge-offs when it determines that loans are uncollectible and this generally occurs when all commercially reasonable means
of recovering the loan balance have been exhausted.
Commercial and Consumer loans are either fully or partially charged off down to the fair value of collateral securing the loans when:
(cid:115)
(cid:115)
(cid:115)
(cid:115)
(cid:45)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:74)(cid:85)(cid:68)(cid:71)(cid:69)(cid:83) (cid:84)(cid:72)(cid:69) (cid:76)(cid:79)(cid:65)(cid:78) (cid:84)(cid:79) (cid:66)(cid:69) (cid:85)(cid:78)(cid:67)(cid:79)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:73)(cid:66)(cid:76)(cid:69)(cid:27)
(cid:82)(cid:69)(cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84) (cid:73)(cid:83) (cid:69)(cid:88)(cid:80)(cid:69)(cid:67)(cid:84)(cid:69)(cid:68) (cid:84)(cid:79) (cid:66)(cid:69) (cid:80)(cid:82)(cid:79)(cid:84)(cid:82)(cid:65)(cid:67)(cid:84)(cid:69)(cid:68) (cid:66)(cid:69)(cid:89)(cid:79)(cid:78)(cid:68) (cid:82)(cid:69)(cid:65)(cid:83)(cid:79)(cid:78)(cid:65)(cid:66)(cid:76)(cid:69) (cid:84)(cid:73)(cid:77)(cid:69) (cid:70)(cid:82)(cid:65)(cid:77)(cid:69)(cid:83)(cid:27)
(cid:84)(cid:72)(cid:69) (cid:65)(cid:83)(cid:83)(cid:69)(cid:84) (cid:72)(cid:65)(cid:83) (cid:66)(cid:69)(cid:69)(cid:78) (cid:67)(cid:76)(cid:65)(cid:83)(cid:83)(cid:73)(cid:108)(cid:69)(cid:68) (cid:65)(cid:83) (cid:65) (cid:76)(cid:79)(cid:83)(cid:83) (cid:66)(cid:89) (cid:69)(cid:73)(cid:84)(cid:72)(cid:69)(cid:82) (cid:84)(cid:72)(cid:69) (cid:34)(cid:65)(cid:78)(cid:75)(cid:7)(cid:83) (cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:78)(cid:65)(cid:76) (cid:76)(cid:79)(cid:65)(cid:78) (cid:82)(cid:69)(cid:86)(cid:73)(cid:69)(cid:87) (cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83) (cid:79)(cid:82) (cid:69)(cid:88)(cid:84)(cid:69)(cid:82)(cid:78)(cid:65)(cid:76) (cid:69)(cid:88)(cid:65)(cid:77)(cid:73)(cid:78)(cid:69)(cid:82)(cid:83)(cid:27) (cid:79)(cid:82)
(cid:84)(cid:72)(cid:69) (cid:67)(cid:85)(cid:83)(cid:84)(cid:79)(cid:77)(cid:69)(cid:82) (cid:72)(cid:65)(cid:83) (cid:108)(cid:76)(cid:69)(cid:68) (cid:66)(cid:65)(cid:78)(cid:75)(cid:82)(cid:85)(cid:80)(cid:84)(cid:67)(cid:89) (cid:65)(cid:78)(cid:68) (cid:84)(cid:72)(cid:69) (cid:76)(cid:79)(cid:83)(cid:83) (cid:66)(cid:69)(cid:67)(cid:79)(cid:77)(cid:69)(cid:83) (cid:69)(cid:86)(cid:73)(cid:68)(cid:69)(cid:78)(cid:84) (cid:79)(cid:87)(cid:73)(cid:78)(cid:71) (cid:84)(cid:79) (cid:65) (cid:76)(cid:65)(cid:67)(cid:75) (cid:79)(cid:70) (cid:65)(cid:83)(cid:83)(cid:69)(cid:84)(cid:83) (cid:79)(cid:82) (cid:67)(cid:65)(cid:83)(cid:72) (cid:109)(cid:79)(cid:87)(cid:14)
The outstanding balance of Commercial and Consumer real estate secured loans and residential mortgages that are in excess of the estimated property
value, less cost to sell, is charged off once there is reasonable assurance that such excess outstanding balance is not recoverable.
Credit card consumer loans that are contractually 180 days past due and other consumer loans with an outstanding balance under $100,000 that are
contractually 180 days past due are written off and reported as charge-offs.
Butterfield Annual Report 2010 59
g. Allowance for Credit Losses
The Bank maintains an allowance for credit losses, which in Management’s opinion is adequate to absorb all estimated credit related losses in its lending
and off-Balance Sheet credit related arrangements 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 the 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 various analyses that estimate the incurred loss at the Balance
Sheet date inherent in the lending and off-Balance Sheet credit related arrangements portfolios. 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 installment, revolving credit, and most other consumer loans, is collectively
evaluated for impairment. The allowance for credit losses attributed to these loans is established via a process that estimates the probable losses
inherent 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 the recoverability of the carrying amount of premises, equipment and computer software when indicators of impairment exist
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: 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).
The changes in the fair value for a derivative 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. When the hedge is highly effective, the changes
in the fair value of a derivative 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.
60
The changes in the fair value of a derivative 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 when the hedge is highly
effective. 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 certain qualifying 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. The actuarial gains and losses, transition obligation and past service costs of the defined
pension plans and post-retirement medical benefits plan are recognised in OCI net of tax and amortised to net income over the average service period.
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 engages in equity settled share-based payment transactions in respect of services received from eligible employees. The fair value of the
services received is measured by reference to the fair value of the shares or share options granted on the date of the grant. The cost of the employee
services received in respect of the shares or share options granted is recognised in the Income Statement over the shorter of the vesting or service period.
The fair value of the options granted is determined using option pricing models, which take into account the exercise price of the option, the current
share price, the risk free interest rate, expected dividend rate, the expected volatility of the share price over the life of the option and other relevant
factors. Time vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of
employee services so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. The Bank
recognises compensation cost for awards with performance conditions if and when the Bank concludes that it is probable that the performance condition
will be achieved, net of an estimate of pre-vesting forfeitures (e.g., due to termination of employment prior to vesting).
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. 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
Butterfield Annual Report 2010 61
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 Operations. 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.
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.
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.
62
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.
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.
ii.
Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financing for specific
amounts and maturities, subject to certain conditions.
Standby letters of credit, which represent irrevocable obligations to make payments to third parties in the event that the customer is unable to
meet its financial obligations.
iii. Documentary and commercial letters of credit, primarily related to the import of goods 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 Operations 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 have been calculated using the weighted average number of common shares outstanding during the year (see also Notes 18 and
22). Dividends declared on preference 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.
Butterfield Annual Report 2010 63
u. New Accounting Pronouncements
Accounting for transfers of financial assets
In June 2009, the Financial Accounting Standards Board (“FASB”) issued final authoritative guidance over accounting for transfers of financial assets
which removed the concept of a qualifying special-purpose entity from existing accounting guidance over transfers of financial assets and also removed
the exception from applying guidance surrounding consolidation of variable interest entities to qualifying special-purpose entities. The guidance was
effective for all interim and annual periods beginning after 15 November 2009. Earlier application was prohibited. This new guidance was applied by
the Bank from 1 January 2010; however, it did not have a material impact on the Bank’s consolidated financial condition or results of operations.
Accounting for consolidation of variable interest entities
In June 2009, the FASB issued final authoritative accounting guidance in an effort to improve financial reporting by enterprises involved with variable
interest entities. This guidance retained the scope of the previous standard covering variable interest entities with the addition of entities previously
considered qualifying special-purpose entities, as the concept of these entities was eliminated in the new authoritative guidance. The new guidance
required an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest
in a variable interest entity under revised guidelines that are more qualitative than under previous guidance and amends previous guidance to require
ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Before this update, previous guidance required
reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred.
The new guidance also amended previous guidance to require enhanced disclosures that provide users of financial statements with more transparent
information about an enterprise’s involvement with a variable interest entity. The enhanced disclosures are required for any enterprise that holds a
variable interest in a variable interest entity. The guidance was effective for all interim and annual periods beginning after 15 November 2009.
Earlier application was prohibited. The Bank applied this new guidance from 1 January 2010; however, it did not have a material impact on the Bank’s
consolidated financial condition and results of operations.
In February 2010, the FASB issued an accounting standards update for amendments to certain investment funds which indefinitely defers the effective
date of the new guidance for an asset manager’s interests in entities that have attributes of investment companies (e.g., mutual funds, hedge funds,
private equity funds, and venture capital funds), provided that the asset manager does not have an explicit or implicit obligation to fund actual losses
that potentially could be significant to the investment company. The update also clarifies certain conditions under which fees paid to a decision maker
or service provider are considered variable interests in a variable interest entity. Under the provisions of the new guidance the Bank may have been
required to consolidate certain entities to which we provide asset management services. In accordance with the provisions of the update, the Bank
deferred adoption of the new guidance for those entities. The Bank has not yet completed its assessment of the effect, if any, that the lapsing of the
deferral period will have on the Bank’s consolidated financial condition or results of operations.
Fair value measurements and disclosures — improving disclosures about fair value measurements
In January 2010, FASB issued an accounting standards update on Improving Disclosures about Fair Value Measurements which clarified existing
disclosure requirements, about fair value measurements. The additional requirements included disclosure regarding the amounts and reasons for
significant transfers in and out of Level 1 and 2 of the fair value hierarchy and also separated presentation of purchases, sales, issuances and settlements
of items measured using significant unobservable inputs (i.e., Level 3). The guidance clarified existing disclosure requirements regarding the inputs and
valuation techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. The requirements were effective
for interim and annual reporting periods beginning after 15 December 2009 except for the disclosures about Level 3 purchases, sales, issuances and
settlements which are effective for fiscal years beginning after 15 December 2010 and for interim periods within those fiscal years. The Bank has added
the fair value disclosures that are required by this update to our consolidated financial statement footnotes. This standard affected disclosures only and
accordingly did not have an impact on the Bank’s consolidated financial condition or results of operations.
Financing receivables and the allowance for credit losses disclosures
In July 2010, the FASB issued an accounting standards update about additional “Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses”. The new disclosure guidance significantly expanded the existing requirements. The extensive new disclosures of
information became effective for both interim and annual reporting periods ending after 15 December 2010. Specific items regarding activity that
occurred before the issuance of the Accounting Standards Update, such as the allowance roll forward and modification disclosures are required for
periods beginning after 15 December 2010. The adoption of this standard did not affect the Bank’s consolidated financial condition or results of
operations since it amended only the disclosure requirements for financing receivables and the allowance for credit losses. The prior period figures
for loan disclosures have been reclassified to conform to the current enhanced note disclosures required by the standard.
64
NOTE 3: CASH AND DEPOSITS WITH BANKS
2010
Non-
Bermuda
Bermuda
Total
Bermuda
2009
Non-
Bermuda
Total
42,895
161,050
118,155
Unrestricted
Non-interest earning
Cash and demand deposits
Interest earning
2,088,104
Deposits maturing within three months and on demand
392
Deposits maturing between three to six months
1,215
Deposits maturing between six to twelve months
2,089,711
Sub-total - Interest earning
Total unrestricted cash and deposits
2,250,761
Affected by drawing restrictions related to minimum reserve and derivative margin requirements
Non-interest earning
Demand deposits
Interest earning
Deposits maturing within three months
Total restricted deposits
502,174 1,585,930
392
1,215
502,174 1,587,537
620,329 1,630,432
18,157
18,157
18,629
24,785
472
6,628
6,156
6,156
-
-
-
30,030
52,914
82,944
247,589
-
-
247,589
277,619
1,628,336
2,030
2,239
1,632,605
1,685,519
1,875,925
2,030
2,239
1,880,194
1,963,138
-
8,463
8,463
14,871
14,871
326
8,789
15,197
23,660
Total cash and deposits with banks
638,486 1,637,060
2,275,546
292,490
1,694,308
1,986,798
NOTE 4: INVESTMENTS
Amortised cost, carrying amounts and estimated fair value.
The amortised cost, carrying amounts and fair values are as follows:
2010
Gross
Gross
Amortised unrealised unrealised
losses
gains
cost
Carrying
amount/ Amortised
cost
Fair value
2009
Gross
unrealised
gains
Gross
unrealised
losses
Carrying
amount/
Fair value
150
273
423
(192)
(677)
(869)
6,511
11,577
18,088
7,724
13,358
21,082
215
-
215
(274)
-
(274)
7,665
13,358
21,023
Trading
Debt securities issued by non-US governments
Equity securities
Total trading
6,553
11,981
18,534
Available for sale
1,017,378
Certificates of deposit
US government and federal agencies
927,598
Debt securities issued by non-US governments 148,465
Corporate debt securities guaranteed
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 investment vehicles
Equity securities
Total available for sale
149,948
352,960
-
-
-
152,434
-
-
-
62,762
77
2,811,622
There were no held to maturity investments as at 31 December 2010.
4,890
398
1,675
76
14
-
-
-
-
-
-
-
-
-
7,053
(14) 1,022,254 1,036,190
66,915
12,456
917,494
150,129
(10,502)
(11)
(304)
(5,504)
-
-
-
(5,623)
-
-
-
(5,116)
-
149,720
347,470
-
-
-
146,811
-
-
-
57,646
77
(27,074) 2,791,601
-
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)
-
1,039,597
66,095
12,456
-
(9,154)
(1,319)
(708)
-
(5,568)
(3,139)
(322)
(1,450)
(36,579)
(53)
(60,147)
-
542,144
29,648
34,746
6,320
150,717
112,879
4,496
18,064
49,929
72
2,067,163
Butterfield Annual Report 2010 65
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 investment vehicles
Total held to maturity
Non-credit
impairments
recognised in
AOCI
Amortised
cost
Gross
Carrying unrecognised
gains
amount
Gross
unrecognised
losses
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)
Fair
values
30,034
201,651
17,824
139,072
32,802
9,859
8,915
27,494
9,395
103,716
110,431
691,193
The impairments recognised in AOCI in 2010 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 2010 and are the result of various factors other than deterioration in the creditworthiness of the issuer
such as changes in interest rates, credit spreads or liquidity discounts. As at 31 December 2010, Management did not intend to sell these securities and
believed it not likely that the Bank would be required to sell these securities prior to recovery of their amortised cost basis.
Unrecognised and unrealised losses have decreased since 31 December 2009 due primarily to the transfer of investments from the HTM to the AFS portfolio
and the effect of the recognition of $60.5 million of impairment during the year 2010, the disposal of securities resulting in a realised loss of $107 million,
reduction of amortised cost from application of cash receipts and increased fair values across asset classes resulting from improved market spread and
market liquidity.
Unrealised loss positions
The following tables show the fair value and gross unrealised losses of the Bank’s available for sale and held to maturity 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 2010
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities guaranteed by
non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Structured investment vehicles
Total available for sale securities
with unrealised losses
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Gross
unrealised
losses
Fair
value
176,125
775,157
3,239
108,611
8,075
-
-
(14)
(10,459)
(11)
(304)
(46)
-
-
-
23,337
-
-
322,995
146,811
57,646
-
(43)
-
-
(5,458)
(5,623)
(5,116)
Total
fair value
Total gross
unrealised
losses
176,125
798,494
3,239
108,611
331,070
146,811
57,646
(14)
(10,502)
(11)
(304)
(5,504)
(5,623)
(5,116)
1,071,207
(10,834)
550,789
(16,240)
1,621,996
(27,074)
66
31 December 2009
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Gross
unrealised
losses
Fair
value
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 investment 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 investment vehicles
Total held to maturity securities with unrecognised losses
226,933
-
-
-
-
-
-
-
-
49,929
72
276,934
1,996
12,961
-
-
-
-
-
-
-
-
63,362
78,319
(946)
-
-
-
-
-
-
-
-
(36,579)
(53)
(37,578)
(19)
(781)
-
-
-
-
-
-
-
-
(30,184)
(30,984)
-
62,404
502,440
29,648
26,345
150,716
112,880
4,496
18,063
-
-
906,992
-
183,782
17,823
120,313
32,801
9,859
8,915
17,613
9,395
101,700
-
502,201
-
(909)
(9,154)
(1,319)
(708)
(5,568)
(3,139)
(322)
(1,450)
-
-
(22,569)
-
(4,896)
(674)
(61,583)
(7,194)
(995)
(1,085)
(4,295)
(675)
(37,691)
-
(119,088)
Total
fair value
226,933
62,404
502,440
29,648
26,345
150,716
112,880
4,496
18,063
49,929
72
1,183,926
1,996
196,743
17,823
120,313
32,801
9,859
8,915
17,613
9,395
101,700
63,362
580,520
Total gross
unrealised
losses
(946)
(909)
(9,154)
(1,319)
(708)
(5,568)
(3,139)
(322)
(1,450)
(36,579)
(53)
(60,147)
(19)
(5,677)
(674)
(61,583)
(7,194)
(995)
(1,085)
(4,295)
(675)
(37,691)
(30,184)
(150,072)
The following is a description of the Bank’s main investments:
Certificates of deposit
As of 31 December 2010, gross unrealised losses on the Bank’s holdings of certificates of deposit (“CDs”) were $0.01 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.
US government and federal agencies
As of 31 December 2010, gross unrealised losses on the Bank’s holdings of securities guaranteed by the United States (“US”) government and its federal
agencies were $10.5 million, $0.04 million of which related to investments that were in an unrealised loss position for longer than 12 months. Management
believes that all the securities in this class 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 2010, gross unrealised losses on debt securities issued by non-US governments were $0.01 million, all of which related to investments
that were in an unrealised loss position for less 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 guarantees provided by the non-US governments.
Corporate debt securities guaranteed by non-US governments
As of 31 December 2010, gross unrealised losses related to corporate debt securities guaranteed by non-US governments were $0.3 million, all of which
related to investments that were in an unrealised loss position for less than 12 months. All the bank issued securities held are explicitly guaranteed by
the following governments: United Kingdom, Netherlands, France, Australia, Denmark and Germany. One security is jointly and explicitly guaranteed
proportionately by three European Governments: Belgium, France and Luxembourg. These securities do not have any credit losses, given the guarantees
provided by the non-US governments.
Corporate debt securities
As of 31 December 2010, gross unrealised losses related to corporate debt securities were $5.5 million, all of which related to investments that were in an
unrealised loss position for longer than 12 months. Management estimates of cash flows are based on market observable data, issuer-specific information
and credit ratings. Management believes these securities do not have any credit losses.
Butterfield Annual Report 2010 67
Asset-backed securities - Student loans
As of 31 December 2010, gross unrealised losses on student-loan asset-backed securities were $5.6 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. All student loan asset-backed securities (“ABS”) are backed by loans that fall within the US Federally guaranteed Federal Family Education Loan
Program (“FFELP”). The unrealised losses were due to wider credit spreads and a maturity profile that was longer than was initially estimated.
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 invests 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 2010, gross unrealised losses related to SIVs were $5.1 million (2009: $66.8 million), all of which related to SIVs that were in an
unrealised loss position for greater than 12 months. Unrealised losses have decreased since 31 December 2009 as a result of the OTTI recognised increases
in fair value, reduction of amortised cost from application of cash receipts and the disposal of two SIVs during 2010. The Bank recognised $60.5 million
of OTTI losses in net income for SIVs whose underlying cash flow assumptions deteriorated. In analysing SIVs for potential credit losses, key inputs to cash
flow projections were congruous with the key inputs noted in the Bank’s audited financial statements for the year ending 31 December 2009 for each
collateral class.
During the year ended 31 December 2010 the Bank disposed of its investment in two SIVs and realised a net gain of $4.7 million on disposal.
At 31 December 2010, the Bank is exposed to two remaining SIVs. See Note 27 for subsequent events.
The following table presents securities by remaining term to earlier of expected or contractual maturity:
Remaining term to earlier of expected or contractual maturity
No specific
maturity
3 to 12
months
Over
5 years
1 to 5
years
Within
3 months
-
-
-
785,891
660
16,982
-
39,365
-
-
-
842,898
842,898
-
407,509
435,389
842,898
728
-
728
158,362
23,575
32,224
-
121,878
-
-
-
336,039
336,767
-
73,393
263,374
336,767
2,967
-
2,967
78,001
803,851
80,385
149,720
185,160
5,872
57,646
-
1,360,635
1,363,602
-
1,241,066
122,536
1,363,602
2,816
-
2,816
-
89,408
20,538
-
1,067
140,939
-
3
251,955
254,771
-
242,523
12,248
254,771
Carrying
amount
6,511
11,577
18,088
-
11,577
11,577
-
-
-
1,022,254
917,494
150,129
-
-
-
-
74
74
11,651
149,720
347,470
146,811
57,646
77
2,791,601
2,809,689
169
5,273
6,209
11,651
169
1,969,764
839,756
2,809,689
31 December 2010
Trading
Debt securities issued by non-US governments
Equity securities
Total trading
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities guaranteed by
non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Structured investment vehicles
Equity securities
Total available for sale
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
68
The following table presents securities by remaining term to earlier of expected or contractual maturity:
Remaining term to earlier of expected or contractual maturity
1 to 5
years
3 to 12
months
Over
5 years
No specific
maturity
Within
3 months
31 December 2009
Trading
Debt securities issued by non-US governments
Equity securities
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 investment 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 investment vehicles
Total held to maturity
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
-
-
-
285,920
1
9,956
35,068
-
1,287
6,320
-
-
-
-
-
-
338,552
3
19,304
-
-
-
-
-
-
-
-
-
19,307
357,859
-
102,852
255,007
357,859
910
-
910
569,093
-
-
99,142
-
15,227
-
-
84,070
-
-
-
-
767,532
1,333
32,587
-
6,701
-
-
-
-
-
50,960
-
91,581
860,023
-
449,925
410,098
860,023
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
1,212,418
-
935,521
276,897
1,212,418
3,458
-
3,458
-
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
483,171
-
411,944
71,227
483,171
Carrying
amount
7,665
13,358
21,023
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
2,926,901
-
13,358
13,358
-
-
-
-
-
-
-
-
-
-
-
-
72
72
-
-
-
-
-
-
-
-
-
-
-
-
13,430
183
8,000
5,247
13,430
183
1,908,242
1,018,476
2,926,901
Transfer of investments from the Held To Maturity (“HTM”) to the Available For Sale (“AFS”) portfolio
The entire HTM portfolio as at 31 December 2009 was transferred to the AFS portfolio in March 2010 as the Company no longer had the intent following
the capital raise to hold these securities to maturity. The net carrying amount of the transferred securities was $805.0 million at the time of the transfer.
Subsequent to the transfer, a net unrealised non-credit loss of $126.3 million was recognised in AOCI.
Receivable from investments sold and payable from investments purchased
At 31 December 2010, the Bank had a pending receivable due from the sale of a SIV of $50.8 million (2009: nil) and subsequent to year end received
the amount receivable. The payable of $112.7 million (2009: nil) was due to trades entered into before year end that were settled subsequent to year end.
Disposals of investments
The Bank disposed of asset-backed securities and SIV investments in 2010 totalling $907.1 million in sale proceeds, resulting in a gross realised loss of
$113.8 million and a gross realised gain of $4.7 million, respectively.
Butterfield Annual Report 2010 69
Gains and losses on investments
The following table presents gains and losses on investments:
Year ended 31 December
2010
Available
Held to
for sale maturity
2009
Available
for sale
Trading
Total
Trading
Held to
maturity
Total
Gains (losses) other than OTTI recognised in net income 971
(107,047)
Total impairment applied against carrying amount
Less: change in non-credit related
impairments recognised in OCI
OTTI impairments recognised in net income
-
-
-
36,844
(97,366)
(60,522)
Net gains (losses) recognised in net income
971
(167,569)
-
-
-
-
-
(106,076)
983
236
2,298
3,517
36,844
(97,366)
(60,522)
-
-
-
-
-
-
(190,851)
(190,851)
58,756
(132,095)
58,756
(132,095)
(166,598)
983
236
(129,797)
(128,578)
Non-credit related impairments recognised in OCI
Effect of transfer of HTM to AFS
Net change in gains (losses) recognised in AOCI
-
-
-
97,366
(58,557)
38,809
-
58,557
58,557
97,366
-
97,366
-
-
(54,281)
(199)
(54,480)
(58,756)
199
(58,557)
(113,037)
-
(113,037)
NOTE 5: LOANS
The composition of the loan portfolio by collateral exposure at each of the indicated dates was as follows:
31 December
Commercial loans
Banks
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Less specific allowance for credit losses on commercial loans
Total commercial loans after specific allowance for credit losses
2010
Non-
Bermuda Bermuda
276
61,739
249,965
35,539
347,519
(313)
347,206
81
4,365
190,424
40,691
235,561
(1,746)
233,815
Total
357
66,104
440,389
76,230
583,080
(2,059)
581,021
2009
Non-
Bermuda Bermuda
161
36,323
299,098
22,642
358,224
(1,937)
356,287
-
4,500
190,462
92,872
287,834
(208)
287,626
Total
161
40,823
489,560
115,514
646,058
(2,145)
643,913
Commercial real estate loans
567,776
Commercial mortgage
44,093
Construction
611,869
Total commercial real estate loans
Less specific allowance for credit losses on commercial real estate loans
(16,400)
Total commercial real estate loans after specific allowance for credit losses 595,469
366,933
13,047
379,980
(4,900)
375,080
934,709
57,140
991,849
(21,300)
970,549
705,986
18,596
724,582
(83,165)
641,417
401,576 1,107,562
16,377
34,973
417,953 1,142,535
(7,293)
(90,458)
410,660 1,052,077
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Less specific allowance for credit losses on consumer loans
Total consumer loans after specific allowance for credit losses
37,296
58,582
4,995
94,756
195,629
(118)
195,511
6,025
25,035
5,415
139,276
175,751
(2,269)
173,482
43,321
83,617
10,410
234,032
371,380
(2,387)
368,993
50,468
57,754
5,582
116,257
230,061
(3,635)
226,426
6,076
24,537
3,198
142,331
176,142
(768)
175,374
56,544
82,291
8,780
258,588
406,203
(4,403)
401,800
1,341,461
Residential mortgage loans
Less specific allowance for credit losses on residential mortgage loans
(1,710)
Total residential mortgage loans after specific allowance for credit losses 1,339,751
822,365 2,163,826
(2,856)
(4,566)
819,509 2,159,260
1,333,249
(165)
1,333,084
820,604 2,153,853
(1,411)
(1,576)
819,193 2,152,277
Total gross loans
Less specific allowance for credit losses
Less general allowance for credit losses
Net loans
70
2,496,478 1,613,657 4,110,135
(30,312)
(11,771)
(36,463)
(10,425)
2,451,899 1,591,461 4,043,360
(18,541)
(26,038)
2,646,116 1,702,533 4,348,649
(98,582)
(31,735)
2,534,967 1,683,365 4,218,332
(88,902)
(22,247)
(9,680)
(9,488)
31 December
Total loans individually evaluated for impairment
Total loans collectively evaluated for impairment
2010
Commercial
583,080
-
Commercial
real estate
991,849
-
Consumer
9,035
362,345
Residential
45,598
2,118,228
Total
1,629,562
2,480,573
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 2010 is 4.81% (2009: 4.88%).
The table below summarizes the changes in allowances for credit losses:
General allowances
General allowances at beginning of year
Provision taken during the year
Recoveries
Charge-offs
Other
General allowances at end of year
Specific allowances
Specific allowances at beginning of year
Provision taken during the year
Charge-offs
Other
Specific allowances at end of year
Ending Balance: individually evaluated for impairment
Ending Balance: collectively evaluated for impairment
The table below sets forth information about the Bank’s impairment loans:
31 December 2010
31,735
2,933
2,456
(628)
(33)
36,463
31 December 2010
98,582
39,037
(107,307)
-
30,312
30,312
36,463
31 December 2009
24,938
5,541
1,784
(528)
-
31,735
31 December 2009
3,458
99,338
(4,318)
104
98,582
98,582
31,735
31 December 2010
Non-accrual Loans
30-90 days
past due
Gross non-
accrual
loans
90 days past due
Specific
allowance
Net non-
accrual loans
Non-delinquent
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Total commercial real estate loans
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
-
-
-
-
-
130
-
164
294
2,483
2,777
-
22
22
2,151
2,151
519
-
843
1,362
10,870
14,405
5,364
8,855
14,219
88,476
88,476
340
556
6,483
7,379
32,245
142,319
5,364
8,877
14,241
90,627
90,627
989
556
7,490
9,035
45,598
159,501
(2,002)
(57)
(2,059)
(21,300)
(21,300)
-
-
(2,387)
(2,387)
(4,566)
(30,312)
3,362
8,820
12,182
69,327
69,327
989
556
5,103
6,648
41,032
129,189
Butterfield Annual Report 2010 71
31 December 2009
Non-accrual Loans
Non-delinquent
30-90 days
past due
90 days past due
Gross non-
accrual loans
Specific
allowance
Net non-
accrual loans
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
2,297
235
2,532
174,826
-
174,826
128
404
31
4,334
4,897
9,181
191,436
556
-
556
-
-
-
306
-
-
-
306
4,803
5,665
Gross interest income would have been recorded had impaired loans been current
The table below presents information about the loan delinquencies:
5,286
-
5,286
8,848
-
8,848
343
-
-
5,861
6,204
15,934
36,272
8,139
235
8,374
183,674
-
183,674
777
404
31
10,195
11,407
29,918
233,373
(2,104)
(41)
(2,145)
(90,458)
-
(90,458)
-
-
-
(4,403)
(4,403)
(1,576)
(98,582)
6,035
194
6,229
93,216
-
93,216
777
404
31
5,792
7,004
28,342
134,791
31 December 2010
10,800
31 December 2009
1,800
31 December
30-59 days
60-89 days
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
1,219
-
1,219
2,971
-
2,971
197
3,720
10
1,718
5,645
21,285
31,120
205
54
259
99
8,068
8,167
322
400
8
1,793
2,523
10,966
21,915
2010
90 days
or more
5,364
8,855
14,219
88,476
-
88,476
340
659
556
6,483
8,038
61,606
172,339
2009
Total
delinquent
loans
Loans past due
90 days and
still accruing
interest
Total Loans past due 90
days and still
accruing interest
delinquent
loans
6,788
8,909
15,697
91,546
8,068
99,614
859
4,779
574
9,994
16,206
93,857
225,374
-
-
-
-
-
-
-
659
-
-
659
29,361
30,020
10,242
6
10,248
9,168
-
9,168
1,758
4,449
-
8,888
15,095
57,093
91,604
-
-
-
-
-
-
-
525
-
-
525
21,021
21,546
72
The following table presents information about the credit quality of the Bank’s loan portfolio:
31 December 2010
Commercial loans
Banks
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
31 December 2009
Commercial loans
Banks
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial Real Estate
Commercial mortgage
Construction
Total commercial real estate
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
Pass
Special mention
Substandard
Non-accrual
Total
357
66,104
421,306
58,704
546,471
773,350
40,549
813,899
42,095
83,079
9,286
215,088
349,548
2,071,185
3,781,103
-
-
12,929
8,311
21,240
59,905
16,591
76,496
159
-
437
11,375
11,971
38,260
147,967
-
-
790
338
1,128
10,827
-
10,827
78
538
131
79
826
8,783
21,564
-
-
5,364
8,877
14,241
90,627
-
90,627
989
-
556
7,490
9,035
45,598
159,501
357
66,104
440,389
76,230
583,080
934,709
57,140
991,849
43,321
83,617
10,410
234,032
371,380
2,163,826
4,110,135
Pass
Special mention
Substandard
Non-accrual
Total
161
40,823
463,042
111,375
615,401
870,118
32,121
902,239
55,413
81,461
8,723
228,016
373,613
2,043,091
3,934,344
-
-
14,152
2,923
17,075
53,311
2,852
56,163
214
-
5
12,843
13,062
77,882
164,182
-
-
4,227
981
5,208
459
-
459
140
426
21
7,534
8,121
2,962
16,750
-
-
8,139
235
8,374
183,674
-
183,674
777
404
31
10,195
11,407
29,918
233,373
161
40,823
489,560
115,514
646,058
1,107,562
34,973
1,142,535
56,544
82,291
8,780
258,588
406,203
2,153,853
4,348,649
The four credit quality classifications set out above are defined below and describe the credit quality of the Group’s lending portfolio.
These classifications each encompass a range of more granular, internal credit rating grades assigned.
Quality classification definitions
Pass:
A pass loan shall mean a loan that is expected to be repaid as agreed. A loan is classified as pass where the Bank is not expected to face repayment
difficulties because the present and projected cash flows are sufficient to repay the debt and the repayment schedule as established by the
agreement is being followed.
Special mention:
A special mention loan shall mean a loan under close monitoring by the Bank’s Management. Loans in this category are currently protected and still
performing (current with respect to interest and principal payments), but are potentially weak and present an undue credit risk exposure, but not to
the point of justifying a classification of Substandard.
Butterfield Annual Report 2010 73
Substandard:
A Substandard loan shall mean a loan whose evident unreliability makes repayment doubtful and there is a threat of loss to the Bank unless the
unreliability is averted.
Non-accrual:
Either where management is of the opinion full payment of principal or interest is in doubt or when principal or interest is 90 days past due and for
residential loans which are not well secured and in the process of collection.
NOTE 6: CREDIT RISK CONCENTRATIONS
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. The on-Balance Sheet exposure amounts disclosed is net of
specific allowances and the off-Balance Sheet exposure amounts disclosed is gross of collateral held as disclosed in Note 11: Commitments and Credit
Related Arrangements.
Total credit
exposure
778,510
690,356
68,250
2,278,115
112,588
815,115
131,528
10,902
4,885,364
(36,463)
4,848,901
Total credit
exposure
2,919,422
197,065
822,448
439,383
71,055
435,991
4,885,364
(36,463)
4,848,901
On-Balance
Sheet
406,526
536,230
40,823
2,240,465
73,972
789,143
151,682
11,226
4,250,067
(31,735)
4,218,332
31 December 2009
Off-Balance
Sheet
404,864
256,591
-
68,616
77,334
1,453
14,912
2,002
825,772
-
825,772
On-Balance
Sheet
2,557,213
194,480
541,058
354,485
76,377
526,454
4,250,067
(31,735)
4,218,332
31 December 2009
Off-Balance
Sheet
509,149
13,472
169,040
100,911
5,310
27,890
825,772
-
825,772
Total credit
exposure
811,390
792,821
40,823
2,309,081
151,306
790,596
166,594
13,228
5,075,839
(31,735)
5,044,104
Total credit
exposure
3,066,362
207,952
710,098
455,396
81,687
554,344
5,075,839
(31,735)
5,044,104
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
355,215
439,429
68,250
2,218,136
70,212
789,155
128,724
10,702
4,079,823
(36,463)
4,043,360
31 December 2010
Off-Balance
Sheet
423,295
250,927
-
59,979
42,376
25,960
2,804
200
805,541
-
805,541
The following table summarises the credit exposure of the Bank by region:
On-Balance
Sheet
2,477,937
188,938
595,425
332,827
69,321
415,375
4,079,823
(36,463)
4,043,360
31 December 2010
Off-Balance
Sheet
441,485
8,127
227,023
106,556
1,734
20,616
805,541
-
805,541
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Sub-total
General allowance
Total
74
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
2010
Accumulated
depreciation
-
(46,524)
(41,588)
(43,796)
-
(131,908)
Cost
13,371
185,335
55,383
60,202
79,572
393,863
Net carrying
value
13,371
138,811
13,795
16,406
79,572
261,955
2009
Accumulated
depreciation
-
(41,670)
(38,957)
(39,978)
-
(120,605)
Net carrying
amount
13,371
143,953
15,944
15,242
55,732
244,242
Cost
13,371
185,623
54,901
55,220
55,732
364,847
31 December
Depreciation
Buildings (included in property expense)
Equipment (included in property expense)
Computer hardware and software (included in technology & communications expense)
Total depreciation charged to operating expenses
Impairment
Write off of computer software in development (included in net other losses)
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill and other intangible assets by business segment:
2010
2009
5,257
3,207
8,070
16,534
5,223
3,547
11,388
20,158
3,831
5,120
Goodwill
Business segment
Guernsey
Balance as at 31 December 2008
Goodwill acquired during the year
Goodwill impairment
Foreign exchange translation adjustment
Balance as at 31 December 2009
Foreign exchange translation adjustment
Balance as at 31 December 2010
6,227
-
-
690
6,917
(245)
6,672
Customer relationship intangible assets
31 December
The
Bahamas
United
Kingdom
Malta
Hong Kong
Total
891
-
(891)
-
-
-
-
7,246
1,782
-
767
9,795
(450)
9,345
-
2,228
(2,228)
-
-
-
-
-
4,901
(4,901)
-
-
-
-
2010
2009
Accumulated Accumulated
impairment amortisation
Cost
Bermuda - Wealth Management
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Malta
Hong Kong
Total
8,342
6,681
1,211
41,242
5,204
19,153
-
-
81,833
-
-
-
-
-
-
-
-
-
(3,479)
(3,152)
(511)
(24,924)
(2,517)
(8,304)
-
-
(42,887)
Net
carrying
amount
4,863
3,529
700
16,318
2,687
10,849
-
-
38,946
Accumulated Accumulated
amortisation
impariment
Cost
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)
14,364
8,911
(8,020)
1,457
16,712
(695)
16,017
Net
carrying
amount
5,419
3,973
781
19,792
2,917
12,563
3,102
1,582
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 year ended 31 December 2010.
The 31 December 2010 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 2010. The discount rate used for testing is the discount rate implied in the initial
purchase price acquisition.
Butterfield Annual Report 2010 75
During 2010 and 2009, the Bank did not acquire new customer relationship intangible assets. During 2010, the amortisation expense amounted
to $5.7 million (2009: $6.2 million) and the foreign exchange translation adjustment increased the net carrying amount by $0.05 million
(2009: increased by $4.4 million). The estimated aggregate amortisation expense for each of the succeeding five years (until 31 December 2016)
is $27.4 million.
NOTE 9: CUSTOMER DEPOSITS AND DEPOSITS FROM BANKS
a) By Maturity
Demand deposits
Demand deposits - Non-interest bearing
Demand deposits - Interest bearing
Sub-total - demand deposits
31 December 2010
Banks
Customers
Total
31 December 2009
Banks
Customers
Total
977,417
4,558,249
5,535,666
-
10,793
10,793
977,417
4,569,042
5,546,459
954,191
4,753,743
5,707,934
-
27,681
27,681
954,191
4,781,424
5,735,615
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
2,353,217
132,359
127,138
2,612,714
64,133
4,753
-
68,886
2,417,350
137,112
127,138
2,681,600
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
Total
8,148,380
79,679
8,228,059
8,577,944
118,675
8,696,619
b) By Type and Location
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
Payable
on demand
31 December 2010
Payable on a
fixed date
31 December 2009
Payable on a
fixed date
Payable
on demand
Total
Total
2,458,003
-
1,146,796
44,988
3,604,799
44,988
2,195,304
-
1,195,124
41,545
3,390,428
41,545
159,255
-
1,348,636
8,587
1,010,897
1,516
84,357
-
474,518
690
5,535,666
10,793
5,546,459
80,686
-
239,941
-
163,538
-
432,140
22,387
1,780,776
30,974
1,764,566
16,090
450,895
-
1,461,792
1,516
980,013
7,712
37,606
-
121,963
-
67,429
-
81,930
-
570,875
48,802
377,324
404
65,760
-
245,468
-
2,335,441
64,892
1,357,337
8,116
133,189
-
464,591
1,511
2,612,714
68,886
2,681,600
939,109
2,201
8,148,380
79,679
8,228,059
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
NOTE 10: EMPLOYEE FUTURE BENEFITS
The Bank maintains trusteed pension plans including non-contributory defined benefit plans and a number of defined contribution plans, and
provides post-retirement medical benefits to its qualifying retirees. The defined benefit provisions under the pension plans are generally based upon
years of service and average salary during the final years of employment. The defined benefit plans are not open to new participants and are
non-contributory and the funding required is provided by the Bank, based upon the advice of an independent actuary.
76
The following table presents the expense constituents of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefits:
For the year ended 31 December 2010
2010
2009
Accumulated benefit obligation at year end
Change in projected benefit obligation
Opening projected benefit obligation
Service cost
Employee contributions
Interest cost
Benefits paid
Settlement and curtailment of liability
Plan amendment
Actuarial loss (gain)
Foreign exchange translation adjustment
Closing projected benefit obligation
Change in plan assets
Opening fair value of plan assets
Actual return on plan assets
Employer contribution
Employee contributions
Benefits paid
Foreign exchange translation adjustment
Closing fair value of plan assets
Post-
retirement
medical
benefit plan
-
141,645
2,466
-
6,521
(2,452)
-
(40,641)
(26,425)
-
81,114
-
-
2,452
-
(2,452)
-
-
Pension
plans
131,177
125,470
2,366
248
7,424
(5,727)
-
-
12,959
(1,866)
140,874
135,986
10,931
4,557
248
(5,727)
(2,017)
143,978
Post-
retirement
medical
benefit plan
-
119,952
3,635
-
7,318
(1,960)
(1,917)
-
14,617
-
141,645
-
-
1,960
-
(1,960)
-
-
Pension
plans
115,187
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
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
Amounts recognised in accumulated other comprehensive loss
consist of:
Net actuarial loss
Past service cost
Net amount recognised in accumulated other
comprehensive loss
7,199
-
10,612
-
(4,095)
(81,114)
(96)
(141,645)
3,104
(81,114)
10,516
(141,645)
(29,405)
-
(15,781)
37,520
(22,146)
-
(43,840)
-
(29,405)
21,739
(22,146)
(43,840)
As at 30 June 2010, the Bank conducted a tri-annual revaluation of its post retirement medical benefit obligations to qualifying retirees in Bermuda.
Following the revaluation by an independent third party actuary, the associated liability for post retirement medical benefits decreased by
$26.9 million, primarily as a result of changes in demographics and claim cost development since 2007.
Additionally, effective 30 June 2010, the Bank’s post retirement medical benefits were amended whereby eligibility, benefits and cost sharing
were modified for current active employees. The benefits amendment resulted in a further reduction in the post retirement medical liability of
$40.7 million as at 30 June 2010. The benefits amendment are being amortised to the Statement of Operations over the expected average remaining
service lifetime of the active employees in the plan.
Butterfield Annual Report 2010 77
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
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 year
Past service (credit) / cost arising during the year
Amortisation of past service cost
Amortisation of net actuarial loss (gain)
Total changes recognised in other comprehensive loss
2010
Post-retirement
medical benefit plan
2009
Post-retirement
medical benefit plan
Pension plans
Pension plans
2,366
7,424
(8,617)
-
3,386
-
4,559
5,043
9,602
(10,645)
-
-
3,386
(7,259)
2,466
6,521
N/A
(3,121)
1,634
-
7,500
-
7,500
26,425
40,641
(3,121)
1,634
65,579
2,513
6,746
(8,055)
36
2,945
1,332
5,517
4,893
10,410
(5,819)
-
32
2,945
(2,842)
3,635
7,318
N/A
-
1,476
-
12,429
-
12,429
(12,700)
-
-
1,476
(11,224)
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 $4.0 million. The estimated portion of the net actuarial loss and the past service cost 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 $0.9 million
for the net actuarial loss and a credit of $6.2 million for the past service cost.
31 December
2010
Post-retirement
medical benefit plan
2009
Post-retirement
medical benefit plan
Pension plans
Pension plans
Actuarial assumptions used to
determine annual benefit expense
5.85%
Weighted average discount rate
Weighted average rate of compensation increases
3.80%
Weighted average expected long-term rate of return on plan assets 6.45%
N/A
Weighted average annual medical cost increase rate
6.10%
N/A
N/A
7.5% to 4.5% in 2027
6.15%
3.70%
6.50%
N/A
6.10%
N/A
N/A
8% to 5% in 2013
Actuarial assumptions used to
determine benefit obligations at end of year
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average annual medical cost increase rate
5.30%
3.75%
N/A
5.50%
N/A
7.5% to 4.5% in 2027
5.85%
3.80%
N/A
6.10%
N/A
7.5% to 4.5% in 2027
For 2010, 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 $2.1 million increase (2009: $2.7 million) and a $1.6 million decrease (2009: $2.0 million), respectively, and on the benefit obligation
a $13.7 million increase (2009: $30.3 million) and a $11.1 million decrease (2009: $23.8 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 remained unchanged at 7.5% to 4.5% in 2010.
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.
78
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
2010
Actual
allocation
46%
52%
2%
100%
Target
allocation
46%
47%
7%
100%
2009
Actual
allocation
45%
50%
5%
100%
Target
allocation
46%
52%
2%
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
2010
Fair value determination
2009
Fair value determination
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
Level 1
-
-
-
-
-
-
Level 2
8,242
47,912
9,696
74,794
2,957
143,601
Level 3
-
-
-
377
-
377
Total
fair value
8,242
47,912
9,696
75,171
2,957
143,978
Level 1
-
2,651
7,975
55,338
2,180
68,144
Level 2
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 3
-
-
-
-
-
-
At 31 December 2010, 28.7% (2009: 29.5 %) 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 2010, 0.4% and 1.6% (2009: 0.8% and 1.7%) of the plans’ assets were
invested in common and preference 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 2011 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical benefit
plans are as follows:
31 December 2010
Estimated Bank contributions for 2011
Estimated benefit payments by year:
2011
2012
2013
2014
2015
2016 - 2020
Pension Plans
4,553
Post-retirement medical benefit plan
2,700
5,500
5,500
5,800
6,300
6,900
32,800
2,700
2,921
3,156
3,402
3,698
22,409
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were
$81.7 million and $77.7 million as at 31 December 2010.
NOTE 11: COMMITMENTS AND CREDIT RELATED ARRANGEMENTS
Commitments
The Bank was committed to expenditures under contract for sourcing and leases of $133.2 million and $29.5 million respectively as at
31 December 2010 (2009: $142.9 million and $33.0 million respectively). Rental expense for premises leased on a long-term basis for the year
ended 31 December 2010 amounted to $5.8 million (2009: $6.2 million). The expenditures committed under the other agreements relate to the
Liquidity Facility Agreement and the Balance Sheet Management Advisory Agreement entered into with CIBC and Carlyle as disclosed in Note 25:
Related Party transactions.
Butterfield Annual Report 2010 79
The following table summarises the Bank’s commitments for sourcing, long-term leases and other agreements:
31 December 2010
2011
2012
2013
2014
2015
2016 & thereafter
Total commitments
Sourcing
24,297
23,373
23,116
22,207
22,020
18,212
133,225
Leases
5,643
5,130
4,977
4,429
3,915
5,422
29,516
Other agreements
6,400
4,000
3,000
-
-
-
13,400
Total
36,340
32,503
31,093
26,636
25,935
23,634
176,141
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
Standby letters of credit
Letters of guarantee
Total
Gross
386,728
14,115
400,843
2010
Collateral
354,310
8,655
362,965
Net
32,418
5,460
37,878
Gross
352,016
19,601
371,617
2009
Collateral
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, this is shown gross including interest income.
The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards
at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of
the allowance for possible loan losses.
The following table presents the unfunded legally binding commitments to extend credit with contractual amounts representing credit risk as follows:
31 December
Commitments to extend credit
Documentary and commercial letters of credit
Total
2010
402,567
2,131
404,698
2009
451,015
3,140
454,155
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 2010, $174.5 million (2009: $133.3 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.
80
NOTE 12: INTEREST INCOME
Loans
The following table presents the components of loan interest income:
31 December
Mortgages
Other loans
Amortisation of loan premium / discount
Amortisation of loan origination fees (net of amortised costs)
Total loan interest income
Balance of unamortised loan fees as at 31 December
2010
97,667
93,958
191,625
53
6,330
198,008
7,764
2009
95,229
109,744
204,973
-
6,721
211,694
10,829
NOTE 13: OPERATING SEGMENTS
At 31 December 2010, for management reporting purposes, the operations of the Bank are grouped into the following 9 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 and United Kingdom. Accounting policies
of the reportable segments are the same as those described in Note 2.
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, 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 and credit cards.
The Cayman segment provides a comprehensive range of community and commercial banking services to private and corporate customers through
five locations and through Internet banking, ATMs and debit cards. Wealth management and fiduciary services are also provided.
The Guernsey segment provides a broad range of services to private clients and financial institutions including, private banking and treasury services,
Internet banking, administered bank services, wealth management and fiduciary services.
The Switzerland segment provides fiduciary services.
The Bahamas segment provides institutional, corporate and private clients with a range of wealth management & fiduciary services.
The United Kingdom segment provides a broad range of services including private banking and treasury services, Internet banking and wealth
management and fiduciary services to high net worth individuals and privately owned businesses.
The Malta and Hong Kong segments were sold on 8 September 2010 as disclosed in Note 21: Disposal of subsidiaries.
Butterfield Annual Report 2010 81
Total Assets by Segment
31 December
Bermuda
Community Banking
Wealth Management
Real Estate
Total Bermuda
Barbados
Cayman
Guernsey
Malta
Hong Kong
Switzerland
The Bahamas
United Kingdom
Total overseas
Less: inter-segment eliminations
Total
Segment Analysis
Net interest income
2010
4,780,465
342,108
70,012
5,192,585
273,797
2,036,512
1,617,976
-
-
1,191
146,069
1,104,946
5,180,491
(750,016)
9,623,060
2009
4,198,903
351,336
72,671
4,622,910
277,551
2,607,542
1,534,520
10,166
2,894
1,039
166,455
1,295,451
5,895,618
(923,926)
9,594,602
For year ended
Inter-
31 December 2010 Customer segment
Bermuda
Community Banking 104,512
8,747
Wealth Management
Real Estate
-
Sub-total Bermuda 113,259
(2,740)
3,716
(872)
104
Barbados
Cayman
Guernsey
Hong Kong **
Malta **
Switzerland
The Bahamas
United Kingdom
Sub-total overseas
12,921
26,590
12,521
1
5
2
2,270
11,373
65,683
(4)
1,981
(137)
-
-
-
48
(1,992)
(104)
Total before
eliminations
Less: inter-segment
eliminations
Total
178,942
-
178,942
-
-
-
Provision
for
credit
losses
Revenue
before
gains
Non-
interest
income and losses expense
Net income
before gains
and losses
Total and central
allocations
Gains
and
Central
losses allocations* Net income
(38,023)
12,373
-
(25,650)
(1,707)
(3,808)
-
-
-
-
(3,669)
(7,136)
(16,320)
37,940
30,149
3,236
71,325
2,948
35,180
23,003
2,119
886
489
5,201
10,027
79,853
101,689 151,348
29,445
54,985
11,381
2,364
159,038 192,174
(49,659) (149,941)
1
-
(33,136) (149,940)
25,540
(9,017)
14,158
13,863
59,943
52,936
35,387
27,625
2,120
1,730
891
861
491
2,159
3,850
7,812
16,088
12,272
129,112 123,074
295
7,007
7,762
390
30
(1,668)
(3,962)
(3,816)
6,038
(151)
(11,600)
(1,433)
(3,639)
(3,790)
-
-
(9,964)
(30,577)
(41,970)
151,178
288,150 315,248
(27,098) (180,517)
-
(4,967)
(41,970) 146,211
(4,967)
(4,967)
283,183 310,281
-
-
(27,098) (180,517)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(199,600)
25,541
(9,017)
(183,076)
144
(4,593)
6,329
(3,249)
(3,760)
(1,668)
(3,962)
(13,780)
(24,539)
(207,615)
-
(207,615)
* During the year ending 31 December 2010 there were no central allocation costs.
** Disposed of the subsidiaries on 8 September 2010 as disclosed in Note 21: Disposal of subsidiaries.
For the year ended 31 December 2010, included within other expenses are the following income tax expense (benefit) amounts: Barbados
$0.8 million (2009: $0.2 million), Guernsey $0.6 million (2009: $0.1 million) and United Kingdom $(3.3) million (2009: $(0.9) million). Transactions
between operating segments principally include interbank deposits and rent which are recorded based upon market rates, and management fees,
which are recorded based on the cost of the services provided.
82
Net interest income
For the year ended
Inter-
31 December 2009 Customer segment
Bermuda
Community Banking
Wealth Management
Real Estate
Sub-total Bermuda
103,882
10,876
-
(4,705)
1,209
(886)
(4,382)
114,758
Provision
for
credit
losses
Net income
before gains
and losses
Non-
interest
Total and central
income and losses expense allocations
Revenue
before
gains
Gains
and
Central
losses allocations* Net income
(73,934)
(20,400)
-
(94,334)
42,148
31,816
3,321
77,285
67,391
23,501
2,435
93,327
137,722
31,461
10,832
180,015
(70,331) (124,710)
(7,960)
(8,397)
-
-
(86,688) (124,710)
5,474
(10,906)
8,397
2,965
(189,567)
(18,866)
-
(208,433)
Barbados
Cayman
Guernsey
Hong Kong
Malta
Switzerland
The Bahamas
United Kingdom
Sub-total overseas
Total before
eliminations
Less: inter-segment
eliminations**
Total
12,188
27,883
10,933
10
13
4
2,390
18,728
72,149
11
6,479
849
-
-
-
220
(3,555)
4,004
(2,164)
(7,787)
3,232
34,809
- 21,904
2,633
-
1,526
-
306
-
5,332
-
10,847
80,589
13,267
61,384
33,686
2,643
1,539
310
7,942
25,426
146,197
12,920
50,298
29,341
2,483
1,553
3,075
7,016
19,280
125,966
347
11,086
4,345
160
(14)
(2,765)
926
6,146
679
261
(298)
(10,147)
(2,240)
(235)
(885)
(9,381)
20,231 (22,246)
(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)
(594)
(10,545)
186,907
(378)
(104,879)
157,874
239,524
305,981
(66,457) (146,956)
-
(213,413)
-
186,907
378
-
- (6,169)
151,705
(104,879)
(5,791)
233,733
(5,791)
300,190
-
-
(66,457) (146,956)
-
-
-
(213,413)
* 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.
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 derivative contracts contain credit-risk-related contingent features in which the counterparty has the option to accelerate cash settlement
of the Bank’s net derivative liabilities with the counterparty in the event the Bank’s credit rating falls below specified levels or the liabilities reach
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 2010 was $17.4 million. The Bank has posted $15.4 million collateral against these liabilities and therefore the maximum amount of
termination payments that could have been required at 31 December 2010 was $2 million. 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 Operations depends on whether the contract has been designated as a hedge and qualifies for hedge accounting.
Butterfield Annual Report 2010 83
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.
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 2010 and 2009, 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 2010 and 2009 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 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.
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 is 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.
84
31 December 2010
Risk management derivatives
Fair Value Hedges
Fixed rate loans
Customer deposits
Sub-total fair value hedges
Not designated as hedging instruments
Sub-total not designated as hedges
Derivative instrument
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
Interest rate swaps
Interest rate swaps
Interest rate swaps
Currency swaps
206,434
9,148
215,621
360,000
264,843
624,843
275
-
275
1,481
4,028
5,509
(16,971)
(206)
(17,177)
(16,696)
(206)
(16,902)
(555)
(1)
(556)
926
4,027
4,953
Sub-total risk management derivatives
840,464
5,784 (17,733)
(11,949)
Client services derivatives
Sub-total client services derivatives
Spot and forward foreign
exchange
Interest rate caps
4,842,989
37,435
4,880,424
(39,755)
389 (389)
40,163 (40,144)
39,774
19
-
19
Total derivative instruments
5,720,888
45,947 (57,877)
(11,930)
31 December 2009
Risk management derivatives
Fair Value Hedges
Fixed rate loans
Customer deposits
Sub-total fair value hedges
Not designated as hedging instruments
Sub-total not designated as hedges
Derivative instrument
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
Interest rate swaps
Interest rate swaps
Interest rate swaps
Currency swaps
188,689
10,497
199,186
380,714
167,516
548,230
-
11
11
705
327
1,032
(13,054)
(538)
(13,592)
(933)
(2,946)
(3,879)
(13,054)
(527)
(13,581)
(228)
(2,619)
(2,847)
Sub-total risk management derivatives
747,416
1,043
(17,471)
(16,428)
Client services derivatives
Sub-total client services derivatives
Spot and forward foreign
exchange
Interest rate caps
2,168,705
38,808
2,207,513
27,202
752
27,954
(25,050)
(752)
(25,802)
2,152
-
2,152
Total derivative instruments
2,954,929
28,997
(43,273)
(14,276)
The following table shows the location and amount of gains (losses) recorded in the Consolidated Statement of Operations.
Derivative instrument
Non hedging interest rate swaps
Forward foreign exchange
Credit derivative
Total net gains recognised in net loss
Consolidated Statement of Operations line item
Net other gains (losses)
Foreign exchange revenue
Net other gains
2010
1,154
1,076
-
2,230
2009
(76)
3,632
3,304
6,860
Butterfield Annual Report 2010 85
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 2.
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 2.
Financial instruments in Level 1 include 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 rate swaps and caps and forward foreign exchange contracts.
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
2010
Fair value determination
Level 1
Level 2
Level 3
Financial assets
Debt equity securities
Trading
Debt securities issued by non-US governments
Equity securities
Total trading
-
10,021
10,021
6,511
1,556
8,067
2009
Fair value determination
Total
carrying
amount/
Fair value
Level 1
Level 2
Total
carrying
amount/
Level 3 Fair value
6,511
11,577
18,088
-
11,674
11,674
7,665
1,389
9,054
-
295
295
7,665
13,358
21,023
-
-
-
-
-
-
- 1,022,254
917,494
-
150,129
-
149,720
347,470
-
-
-
135,632
-
-
-
24,342
77
2,747,118
-
-
-
-
-
11,179
-
-
-
33,304
-
44,483
1,022,254
917,494
150,129
149,720
347,470
-
-
-
146,811
-
-
-
57,646
77
2,791,601
-
45,947
9,044
-
9,044
45,947
57,877
-
57,877
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 1,039,597
66,095
-
12,456
-
-
-
349,130
-
6,506
-
32,849
-
6,320
-
58,210
-
108,980
-
4,496
-
-
-
-
-
-
72
- 1,684,711
- 1,039,597
66,095
-
12,456
-
-
193,014
23,142
1,897
-
92,507
3,899
-
18,064
49,929
-
-
542,144
29,648
34,746
6,320
150,717
112,879
4,496
18,064
49,929
72
382,452 2,067,163
-
-
-
-
28,997
8,307
-
8,307
28,997
43,273
-
43,273
Trading investments
-
-
2010
Available
for sale investments
-
1,002,803
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities guaranteed
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
Total Available for sale
Other assets - Closed ended real estate fund
Other assets - Derivatives
Financial liabilities
Other liabilities - Derivatives
Transfers of securities
31 December
Transfers in and (out) of Level 1
Transfers in and (out) of Level 2
86
Level 3 reconciliation
2010
Carrying amount at beginning of year
Purchases
Proceeds from sale
Realised and unrealised losses recognised in net income
Realised and unrealised losses recognised in other
comprehensive income
Transfers in and out of Level 3
Foreign exchange translation adjustment
Carrying amount at end of year
Available
Closed
ended
for sale property
fund
8,307
-
-
1,020
investments
382,452
-
(103,064)
(3,245)
Trading
investments
296
151
(447)
-
2009
Available
for sale
investments
-
-
-
-
Closed
ended
property
fund
12,599
-
-
(4,096)
Trading
investments
-
295
-
-
-
-
-
-
(137,093)
(94,567)
-
44,483
-
-
(283)
9,044
-
-
-
295
-
382,452
-
382,452
-
-
(196)
8,307
The transfer in to available for sale investments Level 2 classification is primarily due to the transfer of the HTM portfolio to the AFS portfolio.
These securities were transferred into the AFS portfolio and the related Level 2 hierarchy at the fair value of the securities. The transfers out of
Level 3 are due to enhanced interpretation of the required disclosure resulting in reclassifications in the fair value hierarchy.
Items other than those recognised at fair value on a recurring basis
31 December
Financial assets
Cash and deposits with banks
Investments held to maturity
Loans, net of allowance for credit losses
Carying
amount
2010
Fair
value
2,275,546
-
4,043,360
2,275,546
-
4,043,360
Appreciation/
(depreciation)
Carrying
amount
Fair Appreciation/
(depreciation)
value
2009
-
-
-
1,986,798
838,715
4,218,332
1,986,798
691,193
4,218,332
-
(147,522)
-
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Subordinated capital
5,535,666
5,535,666
2,612,714 2,621,188
79,679
244,606
79,679
282,799
-
(8,474)
-
38,193
5,707,948
2,869,996
118,675
283,085
5,707,948
2,869,129
118,675
223,624
-
867
-
59,461
NOTE 16: INTEREST RATE RISK
The following table sets out the assets, liabilities and shareholders’ equity and off-balance sheet instruments on the date of the earlier of contractual
maturity or repricing date. Use of this table to derive information about the Bank’s interest rate risk position is limited by the fact that customers
may choose to terminate their financial instruments at a date earlier than the contractual maturity or repricing date. Examples of this include fixed-
rate mortgages, which are shown at contractual maturity but which may pre-pay earlier, and certain term deposits, which are shown at contractual
maturity but which may be withdrawn before their contractual maturity, and certain investments which have call or pre-payment features.
Butterfield Annual Report 2010 87
31 December 2010
(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
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
Within 3
months
2,017
1,320
3,588
-
-
7,015
-
4,569
2,042
-
90
6,701
448
762
762
Earlier of maturity or repricing date
After
5 years
6 to 12
months
3 to 6
months
1 to 5
years
-
14
63
-
-
77
-
-
376
-
-
376
2
200
48
-
-
250
-
-
137
-
-
137
-
(299)
463
(339)
(226)
237
-
1,115
138
-
-
1,253
-
-
126
-
168
294
(48)
911
1,148
-
92
109
-
-
201
-
-
1
-
25
26
(61)
114
1,262
Earlier of maturity or repricing date
After
6 to 12
Within 3
5 years
months
months
3 to 6
months
1 to 5
years
1,891
1,908
3,706
-
-
7,505
-
4,782
2,114
-
-
6,896
2
146
44
-
-
192
-
-
508
-
90
598
2
488
59
-
-
549
-
-
191
-
-
191
67
425
746
-
164
206
-
-
370
-
-
144
-
108
252
-
25
60
-
-
85
-
-
4
-
85
89
(111)
7
753
(74)
(78)
675
Non-interest
bearing funds
167
69
97
262
232
827
809
977
-
303
-
2,089
-
(1,262)
-
Non-interest
bearing funds
92
204
143
244
211
894
355
954
-
260
-
1,569
-
(675)
-
Total
2,276
2,810
4,043
262
232
9,623
809
5,546
2,682
303
283
9,623
-
-
-
Total
1,987
2,935
4,218
244
211
9,595
355
5,736
2,961
260
283
9,595
-
-
-
Interest rate swaps
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
99
708
708
19
(387)
321
NOTE 17: SUBORDINATED CAPITAL
On 28 May 2003, the Bank issued US $125 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches,
namely US $78 million in Series A notes due 2013 and US $47 million in Series B notes due 2018. The issuance was by way of private placement with
US institutional investors. The notes are listed on the Bermuda Stock Exchange (“BSX”) in the specialist debt securities category. Part proceeds of
the issue were used to repay the entire amount of the US $75 million outstanding subordinated notes redeemed in July 2003. The notes issued under
Series A 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 $7.8 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 $60 million in Series B notes due 2020. The issuance was by way of private placement with US
institutional investors. The notes are listed on the BSX in the specialist debt securities category. The notes issued under Series A paid a fixed coupon
88
of 4.81% until 2 July 2010 after which the coupon rate became floating and the principal became redeemable in whole at the Bank’s option. At
31 December 2010 the Bank has not redeemed any of the Notes issues under Series A and effective 2 July 2010 the coupon rate became floating at
3 months US$ LIBOR + 1.095%. 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 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 $3 million (2009: $2.1 million) and is excluded from interest expense in the Consolidated Statement
of Operations.
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2010.
The interest payments are calculated until contractual maturity using the current LIBOR rates
Interest payments
until contractual
maturity
Interest rate
until date
Contractual
Earliest date
redeemable maturity date redeemable
Intersest rate from
earliest date
Principal Within 1 to 5 After
redeemable to contractual
maturity Outstanding 1 year years 5 years
27 May 2013
2 July 2010
2 July 2015
27 May 2013
27 May 2018
27 May 2018
2 July 2015
2 July 2020
27 May 2018
27 May 2023
8 February 2012 8 February 2017
3 months US$ LIBOR + 2.000%
5.15%
3 months US$ LIBOR + 1.095%
4.81%
3 months US$ LIBOR + 1.695%
5.11%
3 months US$ LIBOR + 4.185%
7.59%
8.44%
3 months US$ LIBOR + 4.929%
9.29% 10.29%
47,000
90,000
60,000
53,000
25,000
7,799
2,704
2,421 6,341
-
1,466 5,499
3,066 12,566 5,698
4,023 11,990 5,943
2,110 8,440 11,818
724 3,171 1,204
282,799 13,810 48,007 27,367
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
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. 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. Diluted earnings per common share include the dilutive effect resulting from the conversion of treasury stock.
Numbers of shares are expressed in thousands.
31 December
Basic loss per share
Net loss for the year
Less: Preference dividends declared and guarantee fee
Net loss 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 loss per share
Net loss 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 diluted common shares (in thousands)
2010
2009
(207,615)
(18,000)
(225,615)
(213,413)
(9,450)
(222,863)
479,882
(2,657)
477,225
(0.47)
100,266
(5,201)
95,065
(2.34)
(225,615)
(222,863)
479,882
(2,657)
477,225
(0.47)
100,266
(5,201)
95,065
(2.34)
Butterfield Annual Report 2010 89
NOTE 19: SHARE-BASED PAYMENTS
As a result of capital transaction announced on 2 March 2010, shares in the Bank’s two share-based compensation plans being the Stock Option
compensation plan and the Executive long-term incentive restricted shares compensation plan (“ELTIP”) became fully vested. Consequently
compensation expense was recognised on the Stock Option compensation plan and ELTIP of $2.6 million and $3.4 million respectively.
In conjunction with the Capital Raise, the Board of Directors approved the 2010 Stock Option Plan (the “2010 Plan”) on 26 April 2010. Under the
plan, five percent of the Company’s fully diluted common shares, equal to approximately 29.3 million shares, were available for grant to certain
officers. Such options have either time or performance vesting metrics and also required surrender of all prior vested options by certain executives.
The following table presents the share-based compensation cost that has been charged against net income and the value of share-based settlements.
The 2010 Stock Option plan is described below.
For the year ended 31 December
Share-based compensation plans
Awards granted in years 2009 and prior
Awards granted in year 2010
Total share-based compensation
Share-based settlement plans
Directors shares and retainers settlement plan
Total share-based payments
2010
ELTIP
outright and
performance
Stock option
plans
2,655
1,305
3,960
3,381
-
3,381
2009
ELTIP
outright and
performance
994
-
994
Stock option
plans
2,248
-
2,248
Total
6,036
1,305
7,341
271
7,612
Total
3,242
-
3,242
256
3,498
2010 Stock Option Plan
Under the Bank’s 2010 Plan, options are awarded to Bank employees and executive management, based on predetermined vesting conditions that
entitle the holder to purchase one common share at a subscription price usually equal to last traded common share price when granted and have
a term of 10 years. The Plan comprises 2 types of vesting conditions upon which the options will be awarded, i.e.,
(cid:115) (cid:52)(cid:73)(cid:77)(cid:69) (cid:54)(cid:69)(cid:83)(cid:84)(cid:73)(cid:78)(cid:71) (cid:35)(cid:79)(cid:78)(cid:68)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78) (cid:110) (cid:21)(cid:16)(cid:5) (cid:79)(cid:70) (cid:69)(cid:65)(cid:67)(cid:72) (cid:79)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78) (cid:65)(cid:87)(cid:65)(cid:82)(cid:68) (cid:73)(cid:83) (cid:71)(cid:82)(cid:65)(cid:78)(cid:84)(cid:69)(cid:68) (cid:73)(cid:78) (cid:84)(cid:72)(cid:69) (cid:70)(cid:79)(cid:82)(cid:77) (cid:79)(cid:70) (cid:52)(cid:73)(cid:77)(cid:69) (cid:54)(cid:69)(cid:83)(cid:84)(cid:69)(cid:68) (cid:47)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83) (cid:65)(cid:78)(cid:68) (cid:86)(cid:69)(cid:83)(cid:84)(cid:83) (cid:18)(cid:21)(cid:5) (cid:79)(cid:78) (cid:84)(cid:72)(cid:69) (cid:18)(cid:78)(cid:68)(cid:12) (cid:19)(cid:82)(cid:68)(cid:12) (cid:20)(cid:84)(cid:72)
and 5th anniversary of the effective grant date subject to employee’s continued employment ; and
(cid:115) (cid:48)(cid:69)(cid:82)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:78)(cid:67)(cid:69) (cid:54)(cid:69)(cid:83)(cid:84)(cid:73)(cid:78)(cid:71) (cid:35)(cid:79)(cid:78)(cid:68)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78) (cid:13) (cid:21)(cid:16)(cid:5) (cid:79)(cid:70) (cid:69)(cid:65)(cid:67)(cid:72) (cid:79)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78) (cid:65)(cid:87)(cid:65)(cid:82)(cid:68) (cid:73)(cid:83) (cid:71)(cid:82)(cid:65)(cid:78)(cid:84)(cid:69)(cid:68) (cid:73)(cid:78) (cid:84)(cid:72)(cid:69) (cid:70)(cid:79)(cid:82)(cid:77) (cid:79)(cid:70) (cid:48)(cid:69)(cid:82)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:78)(cid:67)(cid:69) (cid:47)(cid:80)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83) (cid:65)(cid:78)(cid:68) (cid:86)(cid:69)(cid:83)(cid:84)(cid:83) (cid:79)(cid:78) (cid:65) (cid:104)(cid:54)(cid:65)(cid:76)(cid:85)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:37)(cid:86)(cid:69)(cid:78)(cid:84)(cid:118)
date (date any of the 2 March 2010 Investors transfers at least 5% of total number of shares or the date that there is a change in control)
and any of the New Investors achieve a Multiple of Invested Capital (“MOIC”)based on predetermind MOICs. In the event of a Valuation Event
and the MOIC reaching 200%, all options would vest.
For the year ending 31 December 2010, 28.1 million options were granted whereby approximately 2.7 million options remain available for grant under
the approved plan.
The Bank has recognised $1.3 million compensation expense for the year ended 31 December 2010 related to the time vesting options granted.
The unrecognised expense for the time vesting options amounts to $7.3 million. That cost is expected to be recognised over a weighted average
period of 4.35 years.
Additionally the Bank determined the performance stock options granted have an aggregate fair value of $9.2 million. Such expense will only be
recognised as and when the set performance criteria, primarily based on returns to New Investors, are achieved.
No options were exercised during the year ended 31 December 2010.
Weighted average fair value of stock options granted in the year ended 31 December 2010
Time Vested Options
$0.62
Performance Options
$0.66
The weighted average fair value of stock options granted in the year ended 31 December 2010 was calculated using the Black-Scholes-Merton
option-pricing model for the Time Vested Options and the Monte Carlo method for the Performance Options using the following weighted
average assumptions.
90
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years)
Time Vested Options
0% for 2010-2012
1.0% for 2013
2.0% for 2014
3.5% for 2015 and later years
1.82% to 3.32%
35% to 37%
6.75 years
Performance Options
0% for 2010-2012
1.0% for 2013
2.0% for 2014
3.5% for 2015 and later years
0% to 4.06%
35% to 37%
8 to 10 years
The projected dividend yield are based on the Bank’s estimate as the Bank has suspended dividend payments, but expects to start paying dividends
in 2013. The projected volatilities are based on the historical trading prices of the Bank’s common shares. The risk-free interest rate for periods within
the expected life of the option is based on the US Treasuries yield curve in effect at the time of grant. As the time vested options granted are “plain
vanilla” option, the Bank uses one-half of the time between the average vesting date and the full option term to estimate the expected option life;
separate groups of employees that have similar historical exercise behaviour are considered separately for valuation purposes.
31 December
Outstanding at beginning of year
Granted
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
Number of shares
transferable
upon exercise
(thousands)
12,428
28,137
(6,257)
34,308
6,275
2010
Weighted
average
exercise
price ($)
11.72
1.21
11.04
3.26
12.38
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
($ thousands)
8.68
5.61
1,069
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. No Deferred Incentive Plan shares were granted during the years ended 31 December 2010 and 2009.
Directors’ Compensation
The Bank’s Non-Executive Directors record their annual retainer compensation in the form of cash or fully vested and unrestricted Bank shares or a
combination of the two.
A Bank Non-Executive Director received additional compensation in the form of a one-time shares grant to vest over a 2-year period amounting to
$0.25 million. The Bank has recognised $0.06 million compensation expense for the year ended 31 December 2010 related to the time vesting shares
granted. The unrecognised expense for the time vesting shares amounts to $0.19 million. That cost is expected to be recognised over a vesting period
of 1.34 years.
NOTE 20: SHARE BUY-BACK PLANS
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. During the years 2009 and 2010, no common shares were purchased.
NOTE 21: DISPOSAL OF SUBSIDIARIES
Divestiture of Hong Kong and Malta
On 8 September 2010, the Bank completed the sale of its trust, wealth management and advisory businesses in Hong Kong and its trust operation in
Malta to the founder from whom the businesses were acquired. Under the transaction Nic Bentley, founder and previously Chairman of the Bentley
Butterfield Annual Report 2010 91
Reid Group, reacquired the Malta and Hong Kong businesses which will now operate under the Bentley Reid name. The sale resulted in a loss of
$7.4 million being recorded under realised loss on disposal of subsidiaries in the Statement of Operations.
The Hong Kong and Malta subsidiaries were previously reported under their respective geographical segment. Prior to disposal, Hong Kong and
Malta had total assets of $5.5 million and $3.6 million (31 December 2009: $10.2 million and $2.9 million) and recorded year to date net loss of
$3.3 million and $3.8 million (31 December 2009: $9.9 million and $2.3 million) respectively.
NOTE 22: CAPITAL STRUCTURE
Authorised capital
The Bank’s total authorised share capital as of 31 December 2010 consisted of (i) 26 billion ordinary shares of par value BD$0.01, (ii) 100,200,001
preference shares of par value US$0.01 and (iii) 50 million preference shares of par value £0.01.
On 2 March 2010, the Bank issued 144.8 million common shares of par value $1 per share, for a consideration of $175 million.
Following the Bank’s Annual General Meeting held on 8 April 2010, The Bank of N.T. Butterfield & Son Limited’s shareholders approved an increase in
the authorised share capital to 26,000,000,000 common shares of par value BD$0.01. Subsequent to the increase, conversion of 281,770 mandatorily
convertible preference shares into 233,157,035 common shares and 93,230 contingent convertible preference shares into 77,144,993 common shares
took place.
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.
On 11 May 2010 the rights were over subscribed with the maximum allowable number of rights of 107,438,016 were exercised and subsequently
converted on the ratio of 0.92308 common shares for each right unit exercised amounting to 99,173,842 common shares issued.
Following the closing of the Rights Offering on 11 May 2010, the gross proceeds of $130 million were used to repurchase 107,571,361 shares from the
2 March 2010 investors at the same price at which the investors originally subscribed for the shares.
As part of the cost of the Capital Raise, the Bank’s investment advisor was compensated $10 million in cash and $3.5 million in common shares at
the same prices as the New Investors. On 12 May 2010 in settlement of the aforementioned, the Bank issued 2,896,152 common shares to the Bank’s
investment advisor.
Preference 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.
On 2 March 2010, the Bank issued 281,770 mandatorily convertible preference shares of par value $0.01 per share and 93,230 contingent convertible
preference shares of par value $0.01 per share, for a consideration of $281.8 million and $93.2 million respectively. Subsequent to the Bank’s Annual
General Meeting held on 8 April 2010 the 281,770 mandatorily convertible preference shares and 93,230 contingent convertible preference shares
were converted into 233,157,035 and 77,144,993 common shares respectively.
As stated above, on 11 May 2010, 107,438,016 rights were exercised and subsequently converted on the ratio of 0.07692 contingent value convertible
preference share for each right unit exercised amounting to 8,264,157 contingent value convertible preference shares (“CVCP”) issued. The
contingent value preference shares have specific rights and conditions attached which is explained in detail in the Prospectus of The Rights Offering.
Following the Capital Raise on 2 March 2010 the terms of the 4,279,601 warrants with an exercise price of $7.01 previously issued to the Bermuda
Government in conjunction with the issuance of 200,000 Government guaranteed 8% non-cumulative perpetual limited voting preference shares in
2009 were adjusted in accordance with the terms of the guarantee. Subsequently, the Government of Bermuda now holds 4,150,774 warrants with an
exercise price of $3.614.
92
NOTE 23: VARIABLE INTEREST ENTITIES
The Bank had no investments in variable interest entities for which it was deemed the primary beneficiary during the years 2010 and 2009.
The Bank has an equitable mortgage in a hospitality related company that has been placed under Receivership and as the Bank is an equity holder at
risk, the hospitality related company was considered to be a variable interest entity. As the Bank did not have the legal power to direct the activities
of the company that most significantly impact the company’s economic performance it was considered not to be the primary beneficiary.
NOTE 24: INCOME TAXES
The Bank is incorporated in Bermuda, and pursuant to Bermuda law are not taxed on either income or capital gains. The Bank’s subsidiaries in the
Cayman Islands and The Bahamas are not subject to any taxes in their respective jurisdictions on either income or capital gains under current law
applicable in the respective jurisdictions. The Bank’s subsidiaries in the United Kingdom (“UK”), Guernsey, Barbados and Switzerland are subject to
the tax laws of those jurisdictions and the jurisdictions in which they operate.
For the years ended 31 December 2010 and 2009, the Bank did not record any unrecognised tax benefits or expenses. The Bank has not recorded any
interest or penalties during the years ended 31 December 2010 and 2009 and have no uncertain tax positions as at 31 December 2010 and 2009.
The Company records income taxes based on the enacted tax laws and rates applicable in the relevant jurisdictions for each of the years ended
31 December 2010 and 2009. Interest and penalties related to uncertain tax positions, of which there have been none, would be recognised in
income tax expense.
The components of income taxes attributable to the Bank’s subsidiaries’ operations for the years ended 31 December 2010 and 2009 were as follows:
31 December
Income taxes in Consolidated Statement of Operations
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
2010
(3,676)
1,701
(1,975)
5,797
515
676
30
115
490
7,623
-
7,623
2009
(361)
31
(330)
660
1,259
1,687
29
120
36
3,791
-
3,791
Management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realised.
NOTE 25: RELATED PARTY 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 2010, these positions were held by Bradford Kopp, the Bank’s President & Chief
Executive Officer, and Robert Mulderig, Butterfield’s Chairman of the Board.
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 at 31 December 2010,
$74.4 million of the facilities were drawn.
See Note 27: Subsequent events for additional disclosure.
Butterfield Annual Report 2010 93
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. The staff loans
outstanding at 31 December 2010 amount to $219 million (2009: $217.4 million) resulting in an interest rate benefit to employees of $6.2 million
(2009: $6.2 million).
Interested Officers and Director transactions
In the ordinary course of business, the Bank provides loans and other banking services to the Bank’s Directors, as well as their family members and
companies with which they are affiliated. The Bank provides these services on terms no less favourable to the Bank than those with unaffiliated
parties of comparable creditworthiness.
In connection with the capital transaction announced by the Bank on 2 March 2010, the Chief Executive Officer and the Senior Vice President General
Counsel subscribed and paid for $1.5 million and $0.3 million of common and mandatorily convertible preference shares, respectively. The purchase
price was the same as the other new investors. Additionally, the Bank created a Director and Executive Stock Purchase Plan as part of the capital
raise whereby Directors and other members of management purchased an aggregate of 4,846,550 common shares at $1.21. The total consideration
received amounted to $5.9 million of which $4.2 million was financed by loans to certain executives at normal staff rates.
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 $1.2 million
at 31 December 2010 (2009: $2.7 million). As at 31 December 2010, the Charitable Trust held 772,971 Bank’s common shares
(2009: 729,088 shares) and 6,223 of the Bank’s contingent value preference shares (2009: nil)
Capital transaction
The Carlyle Group and Canadian Imperial Bank of Commerce (“CIBC”) each hold approximately 18% of the Bank’s equity voting power, along with
the right to each designate 2 members of the Bank’s Board of Directors.
The Bank incurred $28.7 million in transaction fees and related expenses in respect of the capital raise and the Rights Offering (of which $8.5 million
was paid to The Carlyle Group and $6.5 million paid to CIBC).
Liquidity facility agreement
The Bank entered into a commitment letter for a $500 million line of credit at market rates with CIBC. The fees incurred for the line of credit facility
were $7.4 million. As at 31 December 2010 the credit facility had been reduced to $300 million and remains undrawn. The Bank incurs facility fees
of $200,000 per month.
Balance sheet management advisory agreement
The Bank entered into an asset liability management agreement with Carlyle Investment Management LLC (“Carlyle”), an affiliated company of
The Carlyle Group with an effective date of 1 October 2010. Per the agreement Carlyle has agreed to provide balance sheet management advisory
services to the Bank for an annual fee of $4 million for a three year period.
Cash held with related parties
Included in cash and term deposits held with banks is $52.7 million cash deposited with CIBC at 31 December 2010.
NOTE 26: COMPARATIVE INFORMATION
Certain prior-period figures have been reclassified to conform to current period presentation.
NOTE 27: SUBSEQUENT EVENTS
Disposal of investment in Butterfield Fulcrum Group Limited
On 8 February 2011, the Bank entered into an agreement with an investor group (comprised of BV Investor Partners, Glen Henderson and Tim
Calveley, (“BV Investor Group”) to dispose of its 36% equity interest on a diluted basis in Butterfield Fulcrum Group Limited (“BFG”). It is anticipated
that the sale will be completed in the first quarter of 2011. Additionally, under the terms of the agreement, BV Investor Group will pay down BFG’s
existing debt and revolving credit facility with the Bank and combine their overall funding requirements with another related entity, FORS Limited
(“FORS”), whereby the total loan facilities post-disposition, on commercial market terms, will be $45.1 million. A Bank Non-Executive Director is a
minority shareholder with approximately 3% of FORS.
The Bank has guaranteed to purchase services from BFG, on commercial market terms, for three years at minimum agreed revenue levels of
$5.5 million, $5.0 million and $4.5 million per annum. It is anticipated, given anticipated levels of services provided to the Bank by BFG, that there
will be no shortfalls to the minimum agreed revenue levels. In the event there is a shortfall, the Bank is required to pay 38% of the shortfall.
94
Upon closing, the sale is expected to result in a distribution equivalent to $3.3 million to be distributed to CVCP shareholders.
Disposal of investment in SIV
The Bank sold one of its SIV investments subsequent to year end resulting in proceeds of $26.5 million and a gain of $0.1 million. The Bank’s
remaining SIV had a carrying amount of $33.3 million at 31 December 2010.
Settlement of non-accrual loan
Subsequent to year the Bank reached a settlement on one of its troubled hospitality loans resulting in a decrease of non-accrual loans of $7.8 million.
The financial statements were available to be issued and subsequent events have been evaluated up to 22 February 2011.
Butterfield Annual Report 2010 95
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 (TERMINATED)
Details are available from Butterfield Fulcrum Group (Bermuda)
Limited (Phone (441) 299 3882).
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@butterfieldgroup.com
or stuart.roberts@butterfieldgroup.com
INVESTOR RELATIONS
Senior Vice President, Finance
Tel: (441) 298 4758
E-mail: john.maragliano@butterfieldgroup.com
WRITTEN NOTICE OF SHARE REPURCHASE
PROGRAMME — BSX REGULATION 6.38
No shares were purchased under any share repurchase programme
in 2010.
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 2011 were 5,880,195 shares. Following the 2010 capital
raise and rights offering transactions, a total of 18.4 million stock
options were allocated to Executive Officers of the Bank pursuant
to the 2010 Stock Option Plan to vest in accordance with timelines
established by the Plan. In 2010 a Non-Executive Director received
additional compensation in the form of a one time shares-grant of
172,413 shares to vest over a two year period. None of the Directors
or Executive Officers had any interest in any debt securities issued
by the Bank or its subsidiaries as at 31 December 2010.
There are no service contracts with Directors, except for that of
Bradford Kopp, 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), which are located at:
BERMUDA STOCK EXCHANGE
(Primary Listing)
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) 292 9947
E-mail: info@butterfieldgroup.com
96
LARGE SHAREHOLDERS
The following, at 31 December 2010, were registered holders of 5%
or more of the issued share capital:
Canadian Imperial Bank of Commerce, 18.84%
Carlyle Global Financial Services Partners LP, 17.36%
Wellcome Trust Investments, 6.78%
Ithan Creek Master Investor (Cayman) LP, 6.16%
PRINCIPAL OFFICES & SUBSIDIARIES
This list does not include all companies in the Group.
The Bank of N.T. Butterfield & Son Limited
Group Parent 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
Investment Management
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3817
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
Butterfield Securities (Bermuda) Limited
Brokerage Services
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
Butterfield Trust (Bermuda) Limited
Grosvenor Trust Company Limited
Personal Trust & Corporate Trust
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3980
Fax: (441) 292 1258
E-mail: info@butterfieldgroup.com
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
Trust & Fiduciary Services, Wealth Management
Managing Director: Robert Lotmore
Third Floor
Montague Sterling Centre, East Bay Street
P.O. Box N-3242
Nassau, N.P.
The Bahamas
Tel: (242) 393 8622
Fax: (242) 393 3772
E-mail: bahamas@butterfieldgroup.com
BARBADOS
Butterfield Bank (Barbados) Limited
Community Banking
Managing Director: Lloyd Wiggan
1st Floor, Carlisle House
Hincks Street
Bridgetown, BB11000
Barbados
Tel: (246) 431 4500
Fax: (246) 429 2428
E-mail: barbados@butterfieldgroup.com
Butterfield Annual Report 2010 97
CAYMAN ISLANDS
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) 22 839 0099
E-mail: switzerland@butterfieldgroup.com
UNITED KINGDOM
Butterfield Bank (UK) Limited
Private Banking, Asset Management, Wealth Management,
Credit and Treasury Services
Managing Director: Raymond Sykes
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
Second Floor
26 Upper Brook Street
London, W1K 7QE
Tel: (44) 207 776 6795
Fax: (44) 207 776 6739
E-mail: uk@butterfieldgroup.com
Butterfield Bank (Cayman) Limited
Community Banking, Private Banking, Asset Management,
Personal Trust and Corporate Trust
Managing Director: Conor O’Dea
Butterfield House
68 Fort Street
P.O. Box 705
Grand Cayman KY1-1107
Cayman Islands
Tel: (345) 949 7055
Fax: (345) 949 7004
E-mail: cayman@butterfieldgroup.com
GUERNSEY
Butterfield Bank (Guernsey) Limited
Private Client and Institutional Banking and Credit,
Investment Management, Custody and Custodian Trustee Services,
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: (44) 1481 728 665
E-mail: guernsey@butterfieldgroup.com
98
NOTES
NOTES