A Foundation for Growth
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The Bank of N.T. Butterfield & Son Limited
Annual Report 2011
Cover: Banyan tree, Hamilton Parish, Bermuda
About Butterfield
Butterfield is a diversified financial services Group operating in seven jurisdictions. We have total
assets of $8.8 billion and $71.7 billion of client assets under administration. We employ over 1,300
people around the world. The parent company, The Bank of N.T. Butterfield & Son Limited, is a publicly
traded company with a primary share listing on the Bermuda Stock Exchange and a secondary listing on
the Cayman Islands Stock Exchange. Additional information can be obtained from our website,
www.butterfieldgroup.com.
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“Butterfield is pursuing a strategy that will continu e to
strength en th e company and promote its long-term growth.”
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CHAIRMAN’S LETTER TO THE SHAREHOLDERS
I am pleased to report that Butterfield returned to profitability
Subject to his election to the Board, the Directors intend to appoint
in 2011, producing net income of $40.5 million and delivering
Brendan McDonagh to the position of Executive Chairman of the
operating profits in each quarter. The Bank’s 2011 income is modest
Bank. Mr. McDonagh is a career banker with more than 30 years of
by historical standards, reflecting a period of protracted economic
international experience in consumer finance, retail and commercial
dislocation and low interest rates. Against that backdrop, the Bank’s
banking and wealth management. His knowledge and experience will
financial performance in 2011 should be viewed as an important
be advantageous to the Board as it works to continue to move the
accomplishment and evidence that the Bank is on a solid financial
Bank forward on its current, profitable trajectory.
base following an extremely difficult period.
Butterfield was adversely impacted during the global financial crisis
April 2011, filling the vacancy created by the earlier resignation of
by investments in troubled asset-backed securities and the
Julian Francis. Additionally, Victor Dodig replaced John Orr as one of
non-performance of certain loans. In response, the Bank raised
CIBC’s nominees to the Board in August. James Burr, whose term as a
$750 million of new capital during 2009 and 2010, and over the past
Director expires in 2012, will not stand for re-election. Olivier Sarkozy
two years, has deployed that capital to de-risk the Balance Sheet
is nominated to replace Mr. Burr as one of Carlyle’s two nominees to
The Board transition also saw Barclay Simmons join as a Director in
and enhance business systems and structures. The resulting dilutive
the Board.
impact of the recapitalisation on legacy Shareholders’ ownership was
severe, but the actions taken to address underperforming assets,
It has been my honour to have been a member of the Board for the
improve the Bank’s operating infrastructure and control costs have
past 15 years and Chairman since February 2008; unfortunately the
created a foundation for rebuilding Shareholder value. Butterfield is
beginning of the financial crisis and the toughest years in Butterfield’s
pursuing a strategy that will continue to strengthen the company and
154-year history. I have had the opportunity to work closely with many
promote its long-term growth.
talented Directors and the Bank’s dedicated employees. I believe
that the Bank, its employees and the communities we serve are in an
During 2011, Butterfield paid dividends totalling $16 million on
excellent position following the Bank’s recapitalisation.
outstanding Preference Shares. Consistent with the Board’s view that
the distribution of profits should be suspended until such time as the
I extend my sincere best wishes to Mr. McDonagh. I am confident that,
Bank is generating sufficient income to allow for a meaningful
under his leadership, the Board will continue to successfully rebuild
per-Share dividend, no dividends were declared or paid on Common
value for the benefit of Butterfield Shareholders.
Shares in 2011. Holders of Contingent Value Convertible Preference
Shares (“CVCP Shares”), issued in 2010 as part of our rights offering,
were eligible for certain distributions in connection with the sale or
public offering of the Bank’s equity interest in fund administrator
Butterfield Fulcrum Group Limited (“BFG”). In the second quarter,
the Bank completed the sale of its minority interest in BFG, resulting
in a distribution of $3.3 million (or $0.42 per CVCP Share).
I committed to Shareholders that, following the recapitalisation,
we would work to accomplish an orderly transition of the Board to
provide continuity of experience. As part of this transition I have
advised the Board that I will retire as a member of the Board and
Chairman effective at the close of the 2012 Annual General Meeting.
Robert Steinhoff, Vice Chairman, has similarly announced his
retirement from the Board effective at the close of the 2012 Annual
General Meeting.
Robert A. Mulderig
Chairman of the Board
Butterfield Annual Report 2011 3
“We ha ve realigned our resources to areas with
greater growth potential…”
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PRESIDENT &
CHIEF EXECUTIVE OFFICER’S REPORT
2011 was a year of transition for Butterfield; one in which we continued
to institutions paying higher interest. Average deposits for 2011
to build a foundation for future growth. Our focus was on enhancing
decreased by $356 million versus 2010. The Bank’s core deposits,
profitability, maintaining and further strengthening our Balance Sheet
consisting primarily of demand deposits and savings deposits,
and investing in our core businesses of community banking and
remained stable.
wealth management.
ENHANCING PROFITABILITY
Despite a difficult operating environment for banks, with low interest
rates and depressed demand for some services, Butterfield generated
The Bank also remained in a very liquid position, with the percentage
of assets held in cash, cash equivalents, short-term investments and
investments totalling 46.5% at year end.
net income of $40.5 million for the year, with four profitable quarters.
Reflective of our conservative investment stance, the Bank sought to
limit its exposure to the debt crisis in Europe and actively reduced its
Revenue was up by $30.5 million versus normalised 2010 figures.
exposure to Continental Europe in the fourth quarter.
Contributing substantially to our 2011 earnings was an increase in net
interest income before provisions for credit losses of $34.8 million.
Although we have seen an increase in the incidence of delinquencies
The Bank’s net interest margin increased by 47 basis points to 2.50%
in loan and mortgage payments, the increase is commensurate with
in 2011.
the general economic decline. Non-accrual loans as a percentage
of total loans declined to 2.8% at the end of 2011 from 3.9% in 2010,
As a result of streamlining certain processes, the introduction of new
whilst non-performing assets as a percentage of total assets was
technology and a reduced demand for some services, headcount was
1.7%, a reflection of the transfer of $27.4 million of non-accrual loans
reduced by 135 across the Group.
to the “Other Real Estate Owned” category in settlement of certain
commercial loans and foreclosed residential property. The Bank
Butterfield had no significant investment losses and recognised no
employs conservative standards in its lending activities and, during
other-than-temporary impairments on investments during 2011, having
these challenging times, has exercised flexibility with customers who
dealt decisively with its problematic assets following the capital raise
are experiencing difficulty in repaying loans on the original terms.
in 2010. Charge-offs against loans were $23.8 million in 2011 amidst
ongoing economic challenges (compared to $107.9 million in 2010).
Through our private banking businesses in Guernsey and the United
STRENGTHENING THE BALANCE SHEET
As a result of ongoing diligence with respect to the quality of
Kingdom, we began targeting under-served segments of the lending
market in 2011, increasing residential lending to high net worth clients
who purchased prime Central London properties. The addition
investments and loans we make, our Balance Sheet was further
strengthened in 2011.
of these high quality assets, in combination with the extension of
additional credit facilities to the Government of Bermuda, contributed
Total assets decreased by $799 million to end the year at $8.8 billion,
Loans represented a conservative 48.1% of total assets and 57.4% of
to an increase in the loan portfolio of $200 million during the year.
the year-on-year decrease owed primarily to fluctuations in hedge
customer deposits at year end.
fund deposits and some loss of non-core deposits that migrated
Butterfield Annual Report 2011 5
CAPITAL
During 2011, the Bank’s capital position improved from already-strong
Michael Neff, Head of Group Asset Management, who joined
2010 levels. The Tier 1 capital ratio was 17.7% at year end, and the total
Butterfield in early 2011, is working to strengthen and grow the asset
capital ratio stood at 23.5%, well ahead of both industry norms and
management offerings across the Group. Our asset management
regulatory minimums. Butterfield’s tangible common equity ratio was
strategy involves the rationalisation of the Butterfield Fund line
6.6% and the tangible total equity ratio was 8.9% at 31 December 2011.
up, partnering with third-party investment managers to deliver new
INVESTING IN OUR CORE BUSINESSES
During the year, the Bank completed a three-year project to convert
its core banking systems in Bermuda and the Cayman Islands to a new
Oracle platform managed by HP. The new systems replace software
that was beyond its service life and provide the Bank with a
state-of-the-art platform. They allow the Bank to improve stability, risk
management and customer service. With the same banking platform in
place in our two largest jurisdictions, we also have more opportunities
to gain efficiencies from the synchronisation of processes and product
line ups moving forward.
products and tailoring products and services to clients’ life stages and
advisory requirements.
During the year, we introduced a managed portfolio service and an
online brokerage service in Bermuda—the first of its kind in the
jurisdiction—making a wide range of US exchange-traded securities
available to self-directed retail investors. The online brokerage
service will continue to be expanded to include third-party funds. For
institutional clients, we introduced the BNY Mellon Butterfield Income
Advantage Fund, a fixed income fund with a low risk profile that aims
to deliver higher returns than money market funds.
We realigned our trust businesses across the Group under a
centralised reporting structure in 2011. Bob Moore, who was previously
Managing Director of our Guernsey bank, took on the role of Head
of Group Trust in July and is working to harmonise our offerings and
approach to the marketing and delivery of fiduciary services across the
Group. Work continues on installing new systems for our Group trust
businesses in key jurisdictions.
SERVING OUR COMMUNITIES
Community banking is a core Butterfield business and investing in
people and projects that are helping improve the prosperity and
well-being of people in our markets is viewed as an important
investment for the Bank. To that end, we provided sponsorship,
donations and the helping hands of employee volunteers to
deserving organisations and events across our jurisdictions in 2011.
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Working together, the Board, the Bank’s Management team and our
instrumental in helping Butterfield secure new sources of capital to
employees have made great progress under our strategy to streamline
enable the Bank to survive the financial crisis and emerge in a position
and strengthen our businesses and processes. We have realigned
to prosper as the global economy recovers. I would also like to extend
our resources to areas with greater growth potential, and trimmed
thanks to Director James Burr, who will be leaving the Board in 2012, for
underperforming assets and offerings in the interest of fostering
his valued contributions to Butterfield.
future profitability.
Our success in strengthening the Bank financially has been recognised
we enjoy from our clients and Shareholders.
Finally, I would like to express my appreciation for the ongoing support
by the rating agencies. In 2011, both Fitch and Standard & Poor’s
affirmed our ratings, the latter on more stringent criteria that saw many
international banks downgraded during the year.
The financial press, too, has acknowledged our progress and
recognised our people for their expertise. Several of our senior
executives in Europe were included among Citywealth’s honoured
practitioners in the areas of trust, investment management and private
banking. Euromoney recently identified Butterfield in Bermuda and
the Caribbean as providing the “Best Private Banking Services” in a
number of key areas.
On behalf of the Management team, I would like to thank Chairman
Robert Mulderig and Vice Chairman Robert Steinhoff, who will both
retire following the 2012 Annual General Meeting, for their many years
of service to Butterfield. Both Mr. Mulderig and Mr. Steinhoff were
Bradford Kopp
President & Chief Executive Officer
Butterfield Annual Report 2011 7
BOARD OF DIRECTORS &
PRINCIPAL BOARD COMMITTEES
L to R - Back Row: Richard Venn, Victor G. Dodig, Wolfgang Schoellkopf, Bradford Kopp, Brendan McDonagh, Barclay Simmons, James Burr, Shaun Morris
Front Row: Sheila Lines, Robert Steinhoff, Robert A. Mulderig, Pauline Richards, John Wright
COMMITTEES INDICATED BY NUMBERS
1,5
CHAIRMAN
ROBERT A. MULDERIG*
Retired Chariman & Chief Executive Officer,
Mutual Risk Management Ltd.
1
1,3
BRADFORD KOPP
President & Chief Executive Officer,
WOLFGANG SCHOELLKOPF
Managing Partner,
The Bank of N.T. Butterfield & Son Limited
Lykos Capital Management
Chairman, Woodmont Trust Co. Ltd.
2,4,6
1,2,5
VICE CHAIRMAN*
ROBERT STEINHOFF
Retired Partner, KPMG
Director, Argus Insurance Co. Ltd.
2,5,6
JAMES BURR
Managing Director,
Carlyle Global Financial Services Group
SHEILA LINES*
Chief Executive Officer,
KeyTech Limited
1,4
SHAUN MORRIS*
Partner,
Appleby Bermuda law firm
2,4,6
PAULINE RICHARDS*
Chief Operating Officer,
3,4
VICTOR G. DODIG
Senior Executive Vice-President
Armour Group Holdings Limited
Director, Wyndham Worldwide Inc.
Director, Apollo Global Management, LLC
and Group Head, Wealth Management, CIBC
Former Director and Audit Committee Chair,
Cendant Corporation
3,5
BARCLAY SIMMONS*
Managing Partner,
Attride-Stirling & Woloniecki,
Barristers & Attorneys
1,3,5
RICHARD VENN
Senior Executive Vice-President,
Advisor to the CEO Office, CIBC
3,6
JOHN WRIGHT*
Retired Bank Chief Executive
*Independent, Non-Executive Director. On an annual basis, the Corporate Governance Committee ensures the appropriate composition of the Board
and its Committees in accordance with the Group’s Corporate Governance Policy. The assessment of the independence of a Director is based upon a
number of factors including, but not limited to: whether he or she has been employed by the Group within the last five years; whether he or she has
had, within the last three years, a material relationship with the Group; and whether he or she represents a significant Shareholder.
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PRINCIPAL BOARD COMMITTEES
1. EXECUTIVE COMMITTEE OF THE
3. RISK POLICY & COMPLIANCE
BOARD OF DIRECTORS
Supports the Board in fulfilling its
COMMITTEE
Focuses on credit, market and
5. COMPENSATION & HUMAN
RESOURCES COMMITTEE
Focuses on compensation and
overall governance responsibilities.
operational risk.
benefits, employee development and
succession.
2. AUDIT COMMITTEE
4. CORPORATE GOVERNANCE
Oversees Butterfield’s financial
reports, internal financial controls,
COMMITTEE
Focuses on Directors’ and Board
6. AD HOC I.T. COMMITTEE
Focuses on technology and systems
internal audit processes and
Committee governance, performance
development.
compliance.
and Directors’ nominations.
On 5 January 2012, the Bank announced that Brendan McDonagh, who was previously Chief Executive Officer, HSBC North America and
Group Managing Director, HSBC Holdings plc, will be nominated for election to its Board of Directors at the 2012 Annual General Meeting of
Shareholders. Subject to his election, the Directors intend to appoint Mr. McDonagh to the position of Executive Chairman of the Bank.
DIRECTORS’ CODE OF PRACTICE AND GROUP CODE OF CONDUCT
The Directors have adopted a Code of Best Practice based upon recommended principles of corporate governance. In implementing the Code,
the Board meets regularly, retains full effective control over the Bank, and monitors Executive Management. A Group Code of Conduct applies to
Directors and employees and imposes Butterfield’s principles of business, including ethics and conflicts of interest. Copies of the Codes can
be accessed on www.butterfieldgroup.com.
Butterfield Annual Report 2011 9
SENIOR MANAGEMENT
BRADFORD KOPP*
President & Chief Executive Officer
PHILIP JONES
Senior Relationship Manager &
MARTIN POLLOCK
Managing Director,
Deputy Head of Corporate Banking,
Butterfield Trust (Bermuda) Limited
Bermuda
CHARLES LAWRENCE
Senior Vice President,
Treasury, Bermuda
SEAN LEE
Executive Vice President,
Retail Banking, Bermuda
JOHN MARAGLIANO
Senior Vice President,
Finance
JULIEN MARTEL
Managing Director,
JONATHAN RAYNOR
Senior Vice President,
Group Head of Compliance & Risk Change
JOHN ROBINSON
Managing Director,
Butterfield Bank (Guernsey) Limited
BRADLEY ROWSE*
Executive Vice President,
Chief Financial Officer
NIR SADEH
Senior Vice President,
Private Banking, Bermuda
Butterfield Bank (Bahamas) Limited
MICHAEL MCWATT
Executive Vice President,
RICHARD SAUNDERS
Head of European Asset Management
Banking and Deputy Managing Director,
Butterfield Bank (Cayman) Limited
W. AARON M. SPENCER
Senior Vice President,
Operations and Information Technology
JAMES MCPHERSON*
Senior Vice President,
Group Internal Audit
ROBERT MOORE*
Executive Vice President,
Head of Group Trust
MICHAEL NEFF*
Executive Vice President,
Head of Group Asset Management
JIM PARKER
Managing Director,
Butterfield Trust (Switzerland) Limited
RAYMOND SYKES
Managing Director,
Butterfield Bank (UK) Limited
LLOYD WIGGAN
Managing Director,
Butterfield Bank (Barbados) Limited
BOB WILSON
Executive Vice President,
Corporate Banking, Bermuda
MICHAEL COLLINS*
Senior Executive Vice President,
Bermuda
CONOR O’DEA*
Senior Executive Vice President,
International Banking and Managing
Director, Butterfield Bank (Cayman) Limited
CURTIS BALLANTYNE
Senior Vice President,
Chief Credit Officer
SHEILA BROWN
Senior Vice President,
Investment Services, Bermuda
CURTIS DICKINSON
Executive Vice President,
Group Capital Markets & Treasury
ERWIN DIKAU
Chief Financial Officer,
Butterfield Bank (Cayman) Limited
WILTON DOLLOFF*
Executive Vice President,
Chief Operating Officer
DANIEL FRUMKIN*
Executive Vice President,
Chief Risk Officer
DONNA HARVEY MAYBURY*
Executive Vice President,
Human Resources
PAUL HODGSON
Managing Director,
Butterfield Trust (Guernsey) Limited
*Member, Group Executive Committee
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CONTENTS
MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2011
CONSOLIDATED BALANCE SHEET AND DISCUSSION
OFF BALANCE SHEET ARRANGEMENTS
RISK MANAGEMENT
JURISDICTION AND GROUP BUSINESS OVERVIEWS
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FINANCIALS
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(cid:115)(cid:0) (cid:35)(cid:79)(cid:78)(cid:83)(cid:79)(cid:76)(cid:73)(cid:68)(cid:65)(cid:84)(cid:69)(cid:68)(cid:0)(cid:51)(cid:84)(cid:65)(cid:84)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)(cid:79)(cid:70)(cid:0)(cid:35)(cid:72)(cid:65)(cid:78)(cid:71)(cid:69)(cid:83)(cid:0)(cid:73)(cid:78)(cid:0)(cid:51)(cid:72)(cid:65)(cid:82)(cid:69)(cid:72)(cid:79)(cid:76)(cid:68)(cid:69)(cid:82)(cid:83)(cid:7)(cid:0)(cid:37)(cid:81)(cid:85)(cid:73)(cid:84)(cid:89)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(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)(cid:0)(cid:41)(cid:78)(cid:67)(cid:79)(cid:77)(cid:69)(cid:0)(cid:8)(cid:44)(cid:79)(cid:83)(cid:83)(cid:9)(cid:0)
(cid:115)(cid:0) (cid:35)(cid:79)(cid:78)(cid:83)(cid:79)(cid:76)(cid:73)(cid:68)(cid:65)(cid:84)(cid:69)(cid:68)(cid:0)(cid:51)(cid:84)(cid:65)(cid:84)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)(cid:79)(cid:70)(cid:0)(cid:35)(cid:65)(cid:83)(cid:72)(cid:0)(cid:38)(cid:76)(cid:79)(cid:87)(cid:83)(cid:0)
(cid:115)(cid:0) (cid:46)(cid:79)(cid:84)(cid:69)(cid:83)(cid:0)(cid:84)(cid:79)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:35)(cid:79)(cid:78)(cid:83)(cid:79)(cid:76)(cid:73)(cid:68)(cid:65)(cid:84)(cid:69)(cid:68)(cid:0)(cid:38)(cid:73)(cid:78)(cid:65)(cid:78)(cid:67)(cid:73)(cid:65)(cid:76)(cid:0)(cid:51)(cid:84)(cid:65)(cid:84)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)
SHAREHOLDER INFORMATION
12
(cid:17)(cid:18)
(cid:17)(cid:19)
(cid:17)(cid:19)
(cid:17)(cid:19)
(cid:17)(cid:20)
(cid:17)(cid:21)
(cid:17)(cid:22)
17
26
35
37
41
(cid:20)(cid:17)
(cid:20)(cid:18)
(cid:20)(cid:20)
(cid:20)(cid:22)
(cid:20)(cid:24)
(cid:20)(cid:25)
(cid:21)(cid:16)
52
(cid:21)(cid:19)
(cid:21)(cid:20)
(cid:21)(cid:21)
(cid:21)(cid:22)
(cid:21)(cid:23)
(cid:21)(cid:25)
(cid:22)(cid:16)
102
Butterfield Annual Report 2011 11
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 belief regarding future events, many of which by their nature are
inherently uncertain and outside of Management’s control. Actual results may differ materially from those included in these statements due to a
variety of factors, including worldwide economic conditions, success in business retention and obtaining new business and other factors.
PERFORMANCE MEASUREMENT
We use a number of financial measures to assess the performance
Total Capital Ratio
The Total Capital Ratio measures the amount of the Bank’s capital in
of our business lines. Some measures are calculated in accordance
relation to the amount of risk it is taking. All banks must ensure that a
with GAAP while other measures do not have a standardised meaning
reasonable proportion of their risk is covered by permanent capital.
under GAAP. Accordingly, these measures, described below, may
Under Basel II, Pillar I, banks must maintain a minimum total capital
not be comparable with similar measures used by other companies.
ratio of 8%. In effect, this means that 8% of RWA must be covered by
Investors may, however, find these non-GAAP financial measures
permanent or near permanent capital. At least half of the regulatory
useful in analysing financial performance.
capital must fall into Tier 1, which only takes into account the pure
Return on Assets (“ROA”)
ROA is an indicator of profitability relative to total assets. ROA
process takes into account the relative risk of various types of lending.
The higher the capital adequacy ratio a bank has, the greater the level
demonstrates how efficient Management is at using assets to
of unexpected losses it can absorb before becoming insolvent.
equity capital so the Tier 1 ratio must be at least 6%. The risk weighting
generate earnings. The ROA ratio is calculated as Annual earnings /
Average total assets.
Tangible Common Equity / Tangible Asset Ratio (“TCE / TA”)
TCE / TA is used to determine how much loss the Bank can take before
Return on Common Shareholders’ Equity (“ROE”)
ROE measures profitability by revealing how much profit is generated
Shareholder equity is impacted. The TCE / TA ratio is calculated as
(Common equity - Intangible assets - Goodwill) / Tangible assets.
with the money invested by Shareholders. ROE is the amount
Common equity is the Bank’s Total Shareholders’ equity less the
of net income returned as a percentage of Shareholders’ Equity
$200 million liquidation preference on Preference Shares. Tangible
and calculated as Net Income / Average Shareholders’ Equity. Net
assets are the Bank’s total assets less goodwill and intangibles.
income is for the full fiscal year (before dividends paid to Common
stock holders but after dividends to Preferred stock). Common
Shareholders’ Equity does not include the $200 million liquidation
Net Interest Margin (“NIM”)
NIM is a performance metric that examines how successful the Bank’s
preference on Preference Shares.
investment decisions are compared to its cost of funding assets
and is calculated as (Interest income – Interest expenses) / Average
Tier 1 Capital Ratio
The Tier 1 Capital Ratio is the ratio of the Bank’s core equity capital,
Interest Earning Assets. The daily average was used in calculating the
average balance for deposits to avoid any distortion caused by large
as measured under Basel II, to its total risk-weighted assets (“RWA”).
fluctuations.
RWA are the total of all assets held by the Bank weighted by credit risk
according to a formula determined by the Regulator. The Bank follows
the Basel Committee on Banking Supervision (BCBS) guidelines in
setting formulae for asset risk weights.
Tier 1 Common Ratio
The Tier 1 Common Ratio is the same as the Tier 1 Capital Ratio but
only includes Common equity in the numerator and deducts the
$200 million liquidation preference on Preference Shares.
Efficiency Ratio
The Efficiency Ratio is defined as non-interest expenses before
amortisation of intangible assets and income taxes as a percentage of
total revenue before gains and losses and provisions for credit losses.
12
ABOUT BUTTERFIELD
Established in 1858, Butterfield provides community banking and wealth management in Bermuda and select markets in the Caribbean and
Europe. Today we are the largest independent bank in Bermuda and have a significant market position in the Cayman Islands. Group-wide,
we have over 1,300 employees across seven jurisdictions. Butterfield offers a full range of community banking services in Bermuda, Barbados and
the Cayman Islands, consisting of institutional, corporate, commercial and retail banking and treasury activities. In wealth management, we provide
private banking, asset management, custody and trust services to individual, family, institutional and corporate clients from our headquarters in
Bermuda and subsidiary offices in The Bahamas, the Cayman Islands, Guernsey, Switzerland and the United Kingdom.
BUSINESS STRATEGY
Whilst remaining well capitalised with strong liquidity, our strategic
Given the large, loyal customer deposit base enjoyed in our main
focus is on building Shareholder value by expanding our share of the
jurisdictions, and the relatively low volume of lending demand from
community and private banking markets in jurisdictions in which we
our customer base, our investment strategy is more important than
have a meaningful presence and a depth of local market knowledge.
to most financial institutions. At 31 December 2011, we had $4.1
Our strategy also involves leveraging our multi-jurisdictional trust,
billion of cash and investments representing almost 47% of total
custody and asset management offerings to build our wealth
assets. In recognition of this defining characteristic of Butterfield, we
management business from both cross-referrals with existing
have adopted a conservative approach to our investments, including
customers and new client generation from our core and new growth
significantly reducing the list of international banks from whom we will
markets. We aim to build upon our relationship-based business
purchase certificates of deposit. 2011 also represented a significant
approach by delivering exceptional client service experiences,
advancement in reducing our Interest Rate Risk, which measures the
as well as a wide range of products to meet our clients’ financial
degree to which our profitability is at risk due to changes in interest
services needs.
rates. This advancement has allowed us to improve the profitability of
our investments despite the ongoing challenges of a low and volatile
The wide range of products we offer is reflective of our strategy of
investment climate and without increasing credit risk. Our continued
pursuing diversified business lines, including private banking, asset
management of Interest Rate Risk requires us to purchase fixed rate
management, custody, corporate trust and personal trust services.
investments that, while complying with our credit safety requirements,
Those diverse businesses directly contribute to the high level of fee
will experience temporary declines in market values when rates
income relative to our total income. Despite the current economic
start to increase. Rising interest rates will improve the profitability of
environment reducing the volume of customer activity, our fee income
Butterfield, such that these anticipated negative marks are part of our
remains at almost 39% of revenue before provisions and gains
strategy—they will not affect earnings, as they are not credit related,
or losses.
but they will potentially give rise to negative impacts in equity through
“Other Comprehensive Income”. To minimise the impact on our equity
To build on our community banking and wealth management
in such circumstances, while implementing proper management of
strategies, we will also leverage our strong and loyal client base.
Interest Rate Risk, we have instituted a Held to Maturity (“HTM”)
Unlike many banks, Butterfield is almost exclusively funded by our
portfolio of $64.8 million at year end. This portfolio is expected to
Shareholders and our customers. Our core customer deposits have
grow to up to $250 million and the range of permitted investments
been remarkably stable throughout the crisis. In 2011, we focused on
is very limited to ensure a very high credit quality. Unless modified
these core deposits and pricing discipline to significantly improve
by the Board of Directors, the HTM investments must be explicitly or
their contribution to net interest income. This contribution reflects
implicitly guaranteed by a G7 nation or supranational, rated AA+ or
the strength of being a deposit-led organisation even in times of low
better in either case.
interest rates.
To support our strategy, we have realigned our Management structure
to focus on lines of business and central support services with
less emphasis on independent management and support teams
by jurisdiction. However, we remain flexible and nimble in each
jurisdiction, with decision making on client service-related matters
based locally. In addition, we have invested heavily—and continue to
invest—in new technology that allows for new and flexible products,
enhanced customer service and a streamlined, more efficient
operation. We expect our recent investment in new core banking
systems in our two largest markets—Bermuda and the Cayman
Islands—will help drive new revenue opportunities, improved
internal control, and operational efficiencies. Our strategy of moving to
centralised support services and centres of excellence is enhanced by
these technological investments and will drive further efficiencies.
2011 OVERVIEW
During 2011, we continued to build our core infrastructure, made
progress in rightsizing our cost base, and generated revenue growth
of 9.8%. Overall, we are pleased with the direction of Butterfield’s
financial performance in 2011, delivering net income of $40.5 million
following two years of significant losses. However, our goal of returning
to a position of greater sustainable profitability remains a work
in progress. We are resolute in our commitment to continuing the
positive momentum we have developed and to improving
Shareholder value.
More effective deployment of liquidity, combined with disciplined
deposit pricing drove a 19.4% increase in net interest income before
credit losses. Cost management objectives established in 2010
were achieved, contributing to a 3.5% decrease in operating costs,
a reduction in headcount of 135, and a 10.4% improvement in the
Butterfield Annual Report 2011 13
efficiency ratio. However, these improvements were partially offset
by declines in non-interest income as the recessionary environment
MARKET ENVIRONMENT
For much of 2011, the impact of the sovereign debt crisis in Europe
caused continued declines in transaction volumes with some loss of
overshadowed the more encouraging economic news from western
business from customers restructuring their own businesses. Our core
economies, creating uncertainty and market volatility as market
deposits remained stable in all jurisdictions, whilst maturing higher
participants attempted to interpret the impact on the near-term
priced deposits in Bermuda, Guernsey and the United Kingdom
macro economic direction. The fear of a double-dip recession in the
migrated to financial institutions willing to pay higher deposit rates.
United States subsided in the second half of the year, whilst European
Key Accomplishments in 2011 were as follows:
(cid:115)(cid:0) Systems: We implemented new core banking systems in
Bermuda and the Cayman Islands.
(cid:115)(cid:0) Capital: We maintained a strong capital position, with over
$1.0 billion of regulatory capital, a Tier 1 capital ratio of 17.7% at
31 December 2011, with a TCE / TA ratio of 6.6%, up 13.8% from
5.8% in 2010.
(cid:115)(cid:0) Profitability: The Bank delivered four consecutive quarters of
political disputes and threats of disruption of oil production in the
Middle East violently swayed markets. Consistent with the volatility,
the impacts in the economies in which we operate were mixed. Island
economies have generally experienced rising unemployment and
shrinking populations as companies have downsized and moved
central support services to less expensive jurisdictions. This has had
a ripple effect as demand for local business services has declined.
In Bermuda and the Cayman Islands, the worst impact was felt in the
construction and quarrying sectors, as both the number and value of
construction projects continued to decline during the year. Tourism
profitability; with net income for the year rising from
$14.8 million normalised in 2010 to $40.5 million in 2011.
continued to struggle, given the high correlation with the United
States economy, but some strengthening was seen in 2011 with
increases in air arrivals and hotel occupancy levels in both Bermuda
and the Cayman Islands, albeit at significantly reduced levels from
the highs seen in 2007. These factors contributed to a muted business
environment in our Bermuda and Caribbean operations with little loan
demand and limited growth opportunities.
Our customers have not been immune to the economic downturn,
and we saw more pressure on their ability to service loan payment
obligations during the year. However, our close relationship with
our customers and hands-on approach to working with them to
address loan servicing challenges has softened the impact on our
non-performing assets. Conversely, our private banking business
in Europe enjoyed strong loan demand as some European banks
withdrew from sectors of the lending market appropriate for our
private banking businesses. We were able to advance more quality
loans to high net worth customers, improve our low loan-to-deposit
ratio and grow our European lending book. Additionally, we have seen
increasing demand for wealth management products from high net
worth individuals seeking asset protection strategies in defence of
uncertainty and volatility.
(cid:115)(cid:0)
Investment strategy: We implemented a new investment
strategy for the deployment of excess liquidity that contributed
to our NIM increasing by 47 basis points, from 2.03% in 2010 to
2.50% in 2011, despite an environment of falling interest rates
and our dedication to conservative investments.
(cid:115)(cid:0) Expenses: We reduced non-interest expenses by $10.9 million,
from $309.4 million in 2010, to $298.5 million in 2011.
(cid:115)(cid:0) Headcount: Across the Group, headcount was reduced by 135,
from 1,519 as at 31 December 2010 to 1,384 by the end of 2011.
(cid:115)(cid:0) Deposits: The Bank maintained stable core deposits, whilst
decreasing deposit costs by 13 basis points, from 65 basis
points in 2010 to 52 basis points in 2011.
(cid:115)(cid:0) Loan quality: Gross non-accrual loans as a percentage of gross
loans decreased to 2.8% at year-end 2011 from 3.9% at year-end
2010 as certain properties previously used by customers as
security for loans are now held directly by the Bank as Other
Real Estate Owned.
(cid:115)(cid:0) Asset quality: Non-performing assets as a percentage of total
assets remained stable at 1.7% at year-end 2011. This ratio is a
new measure comprising both non-accrual loans and Other Real
Estate Owned.
(cid:115)(cid:0) Ratings reaffirmed: Standard & Poor’s ratings reaffirmed at
A- under new ratings methodology; Fitch reaffirmed at A-.
14
2012 OUTLOOK
Although 2011 provided a difficult economic climate in which to
In 2012, we are focusing our attention on product development and
customer service, which we expect will drive revenue growth from both
operate, Butterfield made progress against our strategic priorities
cross selling to our existing client base and winning new business.
and emerged profitable. 2012 is beginning to show some cause for
Business development plans are continually being refined by our
optimism, partially as a result of the heightened level of new company
Executive Management team and are closely monitored by the Board
registrations and levelling off of population declines seen in Bermuda
of Directors to ensure targets are being met. Incentive plans have
and the Cayman Islands in 2011. In Bermuda, we are seeing strong
been more closely aligned with business development targets and
political will to make the necessary changes to immigration and land
metrics that reflect Shareholders’ interests.
ownership policies that are expected to attract new international
businesses to the island, as well as efforts to reduce deficit levels.
On 25 January 2012, officials from the United States Federal Reserve
This optimism is tempered by the ongoing economic challenges, high
announced that they expect interest rates to remain low until at least
unemployment and low interest rates.
late 2014. We reduced our exposure to declining interest rates in
this sustained low-rate environment and have successfully increased
In the Cayman Islands, a special economic zone was officially
our investment returns and net interest margin by employing our
launched in 2012 to help attract new businesses to the country,
conservative investment strategy and with the help of our investment
known as “Cayman Enterprise City”; it is expected to welcome its first
advisers, building a laddered, high quality securities portfolio.
businesses in the first quarter. Temporary accommodations have been
However, our Balance Sheet will benefit significantly from a rising
gazetted to allow operations to commence immediately while phase
rate environment due to our asset sensitivity. Through the continued
one of Cayman Enterprise City’s permanent campus is constructed.
employment of this strategy, we expect the returns on our investments
In our European operations, we expect that competitive pressures
dependent on our ability to purchase qualifying assets as maturities
in 2012 will modestly exceed the returns achieved in 2011, but is
on deposit pricing will be sustained, but we continue to benefit from
fall due.
high quality, low loan-to-value lending opportunities to high net worth
private clients.
We expect to be able to continue to realise cost efficiencies in
2012 based on leveraging our previous investments in technology.
After several years in ‘rebuilding’ mode, and having completed our
The use of common systems, lapsing support contracts on legacy
strategy to de-risk the Balance Sheet, and made significant progress
systems, redesigning processes and centralising support services are
in restructuring operations and enhancing our technology, Butterfield
anticipated to drive further cost savings in 2012.
is well positioned to take advantage of market opportunities as they
emerge. With a strong total capital ratio of over 23%, good liquidity
versus our peer banks (with a loan-to-asset ratio of only 48%), low cost
core deposits (at only 52 basis points), stable loan quality metrics, and
new systems in our two largest jurisdictions, we are optimistic about
our ability to compete for new business.
Butterfield Annual Report 2011 15
FINANCIAL SUMMARY (in $ thousands, except per share data)
As at 31 December
Cash and cash equivalents
Short-term investments
Investments in debt and equity securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Goodwill and intangible assets
Total assets
Total deposits
Subordinated capital
Shareholders’ equity
Liquidation preference of Preference Shares
Common and Contingent Value Preferred equity
For the year ended
Net interest income before provision for credit losses
Provision for credit losses
Non-interest income (as reported)
Non-interest income (excluding fund
administration services business)
Salaries and other employee benefits
Other non-interest expenses (including income taxes)
Net income before gains and losses
Gains and losses
Net income (loss)
Dividends and guarantee fee of Preference Shares
Net income (loss) available to Common Shareholders
Common dividends paid
Financial ratios
Return on assets
Return on Common Shareholders’ equity (1)
Tier 1 capital ratio
Total capital ratio
Tangible common equity ratio
Net interest margin
Efficiency ratio (3)
Per participating Share ($) (1) (2)
Net income (diluted)
Cash dividends
Net book value
Number of employees
Bermuda
Overseas
Total
2011
1,979,458
34,814
2,089,726
4,247,260
276,114
49,184
8,824,109
7,525,440
267,755
200,000
629,725
213,735
(14,326)
135,246
135,246
150,752
147,706
36,197
4,275
40,472
21,270
19,202
-
0.4%
3.0%
17.7%
23.5%
6.6%
2.50%
83.9%
0.03
-
1.14
664
720
1,384
2010
2,429,699
26,392
2,629,144
4,043,360
261,955
54,963
9,623,060
8,228,059
282,799
200,000
609,288
178,942
(41,970)
143,420
143,420
159,082
148,408
(27,098)
(180,517)
(207,615)
18,000
(225,615)
-
(2.2%)
(44.3%)
15.7%
21.6%
5.8%
2.03%
94.3%
(0.47)
-
1.10
732
787
1,519
2009
1,986,798
N/A
2,926,901
4,218,332
244,242
66,841
9,594,602
8,696,619
283,085
200,000
155,460
186,907
(104,879)
151,705
151,705
156,839
143,351
(66,457)
(146,956)
(213,413)
9,450
(222,863)
14,938
(2.1%)
(47.0%)
7.2%
10.1%
0.9%
1.95%
89.0%
(2.34)
0.12
1.64
761
845
1,606
2008
2,221,390
N/A
3,824,079
4,418,277
197,155
71,614
10,911,844
9,801,269
282,296
-
518,440
254,481
(3,045)
212,941
177,358
183,152
167,335
113,890
(109,051)
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
2007
2,517,012
N/A
4,744,989
4,124,764
215,379
106,490
11,910,920
10,747,971
284,191
-
629,330
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
Other data
Average number of participating Shares on a fully diluted basis 555,615
4,425,639
Risk-weighted assets
477,225
4,934,569
95,065
5,734,096
96,683
6,199,963
98,732
6,345,754
(1) Includes both Common and Contingent Value Convertible Preferred equity. (2) 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 dividend of February 2008. All prior period per Share data has been restated to reflect the three-for-one stock split
of August 2007. (3) 2010 & 2009 calculated based on normalised income for comparability purposes.
16
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2011
In 2010, we evaluated 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. In 2011, we discontinued reporting normalised income as we believe our 2011 financial results
better reflect normal ongoing operations. For comparative purposes, we have included comparison to 2010 normalised income as reported in the
prior year. For 2010, transactions that were viewed by Management not to be in the normal course of day-to-day business and were unusual in
nature were 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 Income (Loss)
The Bank reported net income of $40.5 million for the year ended 31 December 2011, compared to a net loss of $207.6 million in 2010. Results in
both years were adversely affected by various non-operating gains and losses. After deduction of dividends ($19.3 million) and the guarantee fee
($2.0 million) on Preference Shares, the net income available to Common Shareholders was $19.2 million ($0.03 per share) in 2011 compared to a
reported loss of $225.6 million ($0.47 per Share) in 2010. On a normalised basis, after non-recurring normalisation adjustments, the 2010 loss was
$3.2 million ($0.01) per Share.
The following table states reported earnings for 2011 compared to normalised 2010 earnings (the Bank discontinued reporting normalised
earnings in 2011):
(in $ millions)
Non-interest income
Net interest income before provision for credit losses
Total revenue before provision for credit losses and gains and losses
Net gains and losses
Provision for credit losses
Total revenue
Total non-interest expenses
Net income before taxes
Income tax
Net income
Year ended 31 December
2011
2010
2010
Reported Normalised
139.6
Reported
143.4
$ change (1) % change (1)
(3.2%)
(4.4)
135.2
213.7
348.9
4.3
(14.3)
338.9
(298.5)
40.4
0.1
40.5
178.9
318.5
0.0
(10.1)
308.4
(292.0)
16.4
(1.6)
14.8
179.0
322.4
(180.5)
(42.0)
99.9
(309.5)
(209.6)
2.0
(207.6)
34.8
30.4
4.3
(4.2)
30.5
(6.5)
24.0
1.7
25.7
19.4%
9.5%
100.0%
41.6%
9.8%
2.2%
146.3%
106.3%
173.6%
Dividends and guarantee fee of Preference Shares
(21.3)
(18.0)
(18.0)
(3.3)
18.3%
Net income (loss) / earnings attributable to Common Shareholders
Net income (loss) / earnings per Common Share
Basic
Diluted
19.2
(3.2)
(225.6)
22.4
700.0%
0.03
0.03
(0.01)
(0.01)
(0.47)
(0.47)
0.04
0.04
133.3%
133.3%
(1) Change shown is reported 2011 compared to normalised 2010.
Butterfield Annual Report 2011 17
The following table reconciles the Bank’s GAAP reported net income for 2010 with normalised earnings for 2010. There were no normalisation
adjustments in 2011.
(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 2010
Net income (loss)
(207.6)
Diluted EPS
(0.47)
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)
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 for the year ended 31 December 2010 as they obscure or distort the analysis of trends.
Normalisation adjustments for 2010 include:
(1) Net other gains & losses as follows:
(cid:115)(cid:0) Net realised losses of $107.0 million, of which $113.8 million relates to realised losses on the sale of asset-backed securities held in 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 Structured Investment Vehicles (“SIVs”) during 2010.
(cid:115)(cid:0) Other-than-temporary impairments of $60.5 million on the Bank’s holdings of SIVs.
(cid:115)(cid:0) Realised loss on the sale of the Bank’s subsidiaries in Hong Kong and Malta of $7.4 million.
(cid:115)(cid:0) Write-down of $3.8 million of previously capitalised software development no longer in use.
(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 United Kingdom.
(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 (Actual 2011 Versus Normalised 2010)
Total revenue before provisions for credit losses and gains and losses for 2011 was $348.9 million, up $30.4 million (9.5%) from $318.5 million in
2010. Total non-interest income was down $4.4 million (3.2%) from $139.6 million in 2010 to $135.2 million in 2011; the decrease was primarily
attributable to the sale of our Hong Kong and Malta businesses in 2010, which had related revenue of $3.0 million in the prior year. Net interest
income before provisions for credit losses rebounded by $34.8 million (19.4%) from $178.9 million in 2010 to $213.7 million in 2011, driven by a
47 basis point increase in the net interest margin from 2.03% in 2010 rising to 2.50% in 2011. The efficient deployment of excess liquidity under
our new investment strategy, along with disciplined deposit pricing drove the improvement in the net interest margin, despite the sustained low
interest rate environment.
18
DISTRIBUTION OF 2011 TOTAL REVENUES BEFORE
PROVISIONS FOR CREDIT LOSSES AND GAINS AND LOSSES
DISTRIBUTION OF 2011 TOTAL REVENUES BY LOCATION BEFORE
PROVISIONS FOR CREDIT LOSSES AND GAINS AND LOSSES
Other Non Interest Income 2%
Custody and Other
Administration Services 3%
Trust 9%
Foreign Exchange
Revenue 9%
Asset
Management 7%
The Bahamas 2%
Barbados 4%
United Kingdom 7%
Switzerland 1%
Bermuda 58%
Guernsey 10%
Net Interest Income 61%
Banking 9%
Cayman 18%
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 $8.2 million from $143.4 million in 2010 to $135.2 million in 2011 and represents 38.8% of total revenues before
provisions for credit losses and gains and losses for 2011, compared to 44.5% in 2010.
The following table presents the components of non-interest income for the years ended 31 December 2011 and 2010:
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
2011
22,942
33,302
31,519
29,995
11,780
5,708
135,246
2010
24,544
33,941
32,479
30,534
13,574
8,348
143,420
$ change
(1,602)
% change
(7.0%)
(639)
(960)
(539)
(1,794)
(2,640)
(8,174)
(1.9%)
(3.0%)
(1.8%)
(15.2%)
(46.3%)
(6.0%)
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 $22.9 million in 2011, down $1.6 million from $24.5 million in 2010; however, excluding the $1.9 million
of revenue included in 2010 related to businesses sold in 2010, asset management revenues increased $0.3 million. Assets under management
declined $433 million, primarily from redemption in the money market fund due to historically low rates, however a change in product mix to
higher margin services increased revenues year on year.
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 Butterfield manages:
(in $ millions )
Butterfield Funds
Discretionary
Total assets under management
2011
3,375
2,269
5,644
2010
3,677
2,400
6,077
$ change
(302)
% change
(8.2%)
(131)
(433)
(5.5%)
(7.1%)
Butterfield Annual Report 2011 19
Banking
During 2011, 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 were offered in
Bermuda, the Cayman Islands, Guernsey and the United Kingdom. Banking fee revenues reflect loan, transaction and processing, and other fees
earned in these jurisdictions. Banking fee revenues fell by 1.9% in 2011 to $33.3 million, compared to $33.9 million in 2010, mainly due to a
one-off fee earned in 2010 and the discontinuation of banking activities in The Bahamas.
Foreign Exchange
We provide foreign exchange services in the normal course of business in all jurisdictions. The major contributors to foreign exchange revenues are
Bermuda and the Cayman Islands, accounting for 77% of the Group’s foreign exchange revenue (2010: 76%). The Bank does not have a proprietary
trading book. Foreign exchange income is thus generated from client-driven transactions and totalled $31.5 million in 2011, compared with
$32.5 million in 2010. The $1.0 million year-on-year decrease reflects declining client volumes, in line with the slowing economic conditions.
Trust
We provide both personal and institutional trust services from our operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey 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 2011, trust revenues totalled $30.0 million, marginally lower than the $30.5 million recorded in 2010; however, prior year included
$1.0 million in revenue related to the Malta business that was sold in 2010 and when excluded, trust revenues increased $0.5 million. Trust
revenues represented 22% of total non-interest income in 2011, up from 21% in 2010. Revenue increases were seen in four of our five trust
operations: The Bahamas increased by 4.3%, Bermuda increased 3.6% and Guernsey rose 1.7%, while in Switzerland revenues were up 38.2% year
on year. In December 2010, a restructuring of our Bahamas operations to focus predominantly on trust activities was announced. 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. Total Trust
assets under administration were $40.7 billion as at 31 December 2011 compared to $40.5 billion the prior year.
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 2011, revenues were $11.8 million compared to $13.6 million in 2010, down 13.2%,
in part due to lower transaction volumes in our custody business, and partly due to a reduction in administered banking mandates as two large
mandates wound down their operations. Total custody and other assets under administration (which includes the administered banking services
operations provided by our Guernsey business) were $31.0 billion as at 31 December 2011, up $3.2 billion from $27.8 billion the prior year.
Other Non-Interest Income
The components of other non-interest income are set forth in the following table:
(in $ thousands)
Net share of earnings (losses) from investments in affiliates
Rental income
Write back of unclaimed balances and dividends
Other
Total non-interest income
Year ended 31 December
2011
884
2,889
-
1,935
5,708
2010
(1,587)
2,779
5,785
1,371
8,348
In 2010, we recorded equity pickup losses of $2.9 million in connection with our minority interest in Butterfield Fulcrum Group Limited (“BFG”),
which is reflected in the 2010 net loss of $1.6 million from investments in affiliates. In the second quarter of 2011, the Bank sold all its remaining
shares in BFG.
Rental income of $2.9 million in 2011, and $2.8 million in 2010, were received on various premises the Bank owns in Bermuda that are leased to
tenants. Included in the “Other” category are maintenance fees from leased premises, Director fee income, and other miscellaneous charges.
20
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.
The following table presents the components of net interest income for the years ended 31 December 2011 and 2010:
(in $ millions)
Assets
Cash and cash equivalents and short-term investments
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
Non-interest-bearing funds net of
non-interest-earning assets (free balance)
Net interest margin
Average
balance
Interest
1,932.5
2,486.0
4,132.8
8,551.4
466.3
9,017.6
10.8
45.6
202.6
259.0
-
259.0
2011
Average
rate
0.56%
1.84%
4.90%
3.03%
-
2.87%
Average
balance
Interest
2,107.6
2,595.6
4,119.6
8,822.8
467.8
9,290.6
11.0
28.3
198.1
237.4
-
237.4
2010
Average
rate
0.52%
1.09%
4.81%
2.69%
-
2.56%
6,720.9
(34.7)
(0.52%)
7,103.2
(46.0)
(0.65%)
-
(10.5)
(45.2)
-
-
-
(3.77%)
(0.65%)
-
-
(45.2)
(0.55%)
-
-
3.6
278.4
7,002.9
987.7
192.3
8,182.9
834.7
9,017.6
1,548.4
-
282.7
7,385.9
961.6
243.0
8,581.5
709.1
9,290.6
1,436.9
-
(12.5)
(58.5)
-
-
-
(4.41%)
(0.79%)
-
-
(58.5)
(0.68%)
-
-
213.8
2.50%
178.9
2.03%
Net interest income before provisions for credit losses increased by 19.4% to $213.7 million in 2011 compared to $178.9 million in 2010, of which
62% (2010: 63%) was generated in Bermuda and 18% (2010: 16%) in the Cayman Islands. Investment yields of 1.84% on $2.5 billion, up from 1.09%
in 2010, combined with a 13 basis point decrease in deposit cost, drove a 47 basis point improvement in the net interest margin to 2.50% in 2011
compared to 2.03% in 2010. Although average interest-earning assets decreased by $275.5 million to $8.55 billion in 2011, the decrease had a
positive impact on net interest income as the decline was driven by the migration of high-cost deposits which were deployed in lower yielding
assets in the cash and cash equivalent category. Free balances of $1.5 billion in 2011 (2010: $1.4 billion) include non-interest-bearing current
accounts of $1.0 billion (2010: $1.0 billion) and Shareholders’ equity of $835 million (2010: $709 million) net of other assets and other liabilities.
See the Risk Management section for more information on how interest rate risk is managed.
Butterfield Annual Report 2011 21
Provision For Credit Losses
The Bank’s net provisions for credit losses in 2011 were $14.3 million compared to $42.0 million in 2010. The Bank anticipates the difficulties in the
local economies, as well as the hospitality sector, will continue for the foreseeable future and has made sufficient provisions in anticipation of a
difficult market. The incremental provisions were required principally for the specific reserves pertaining to commercial and residential exposures
as well as enhancements to general provision.
Gains and Losses
The following table represents the components of gains and losses for the years ended 31 December 2011 and 2010:
(in $ thousands)
Net realised / unrealised (losses) gains on trading securities
Net realised gains (losses) on available for sale securities
Other-than-temporary impairment losses on held to maturity and available for sale investments
Loss on sale of Malta and Hong Kong located subsidiaries
Net other gains (losses)
Total gains and losses
2011
(919)
2,059
-
-
3,135
4,275
2010
971
(107,047)
(60,522)
(7,430)
(6,489)
(180,517)
Net Realised / Unrealised (Losses) Gains on Trading Securities
A $0.9 million loss was recorded with respect to trading securities in 2011 compared to a gain of $1.0 million in 2010, which primarily relates to the
fair value adjustments of the Bank’s seed money in shares of the Butterfield Select Investment Fund, the Butterfield Select Alternative Fund and
$50 million in shares of the BNY Mellon Butterfield Income Advantage Fund, which was launched in 2011. During the year, we redeemed
$3.8 million of our seed money as it was no longer required.
Net Realised Gains (Losses) on Available For Sale Securities
Net realised gains of $2.1 million were recorded on securities sold in the normal course of business as part of our asset and liability management
strategy. The $107.0 million loss recorded in the prior year was a result of the sale of asset-backed securities as part of the Bank’s Balance Sheet
de-risking strategy.
Other-Than-Temporary Impairment (“OTTI”) Losses on Held to Maturity and Available For Sale Investments
No OTTI losses were recognised in 2011 as Management believes there are no credit losses in the investments, compared to the 2010 OTTI credit
loss of $60.5 million recognised.
Loss on Sale Of Malta And Hong Kong Located 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.
Net Other Gains (Losses)
Net other gains and losses were $3.1 million in 2011 compared to net other losses of $6.5 million in 2010.
Net other gains and losses in 2011 include the second quarter of 2011 BFG gain of $3.1 million, the gain on repayment of the subordinated debt of
$1.1 million and the $1.4 million equity pick up losses of affiliates in the first quarter of 2011.
During the second quarter, Butterfield completed the sale of its equity interest in BFG for proceeds of $3.3 million, which triggered a dividend of
$3.3 million ($0.42 per Share) to holders of Butterfield Contingent Value Convertible Preference Shares (“CVCP Shares”), which was paid on
16 August 2011 to Shareholders of record on 26 July 2011.
A realised gain of $1.1 million was recorded during the third quarter of 2011 as a result of the purchase and cancellation of $15.0 million of our own
subordinated debt.
22
Net other losses of $6.5 million were recorded in 2010, which included: a write off of $3.8 million in respect of previously capitalised costs for the
development of software that would no longer be used, 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 card companies, which were sold during 2010; losses of
$0.7 million on the write down of a private equity investment and an investment in an affiliate to reflect lower expectations of proceeds on
eventual sales; and a $1.2 million gain on interest rate swaps designated as trading instruments, as they did not qualify for hedge accounting but
are used as part of the Bank’s overall asset and liability management strategy.
Non-Interest Expenses
Cost control continued to be a key focus of the Bank in 2011 as the recessionary economic conditions and persistently low interest rate
environment challenged the banking business model. Total non-interest expenses in 2011 were $298.5 million compared to $309.5 million
recorded in 2010. Salary and employee benefits account for 51% of non-interest expenses with technology, communications and property
making up 28% combined. Bermuda expenses (including head office costs) represent the majority of the Group costs at 59% of total costs.
DISTRIBUTION OF 2011 EXPENSES
DISTRIBUTION OF 2011 EXPENSES BY LOCATION
Other Expenses 6%
Marketing 2%
Amortisation of Intangible Assets 2%
Non-Income Taxes 5%
Professional and
Outside Services 6%
Property 10%
Technology and
Communications 18%
Salaries and Other
Employee Benefits 51%
The Bahamas 2%
Switzerland 1%
Guernsey 10%
Cayman 18%
Barbados 4%
United Kingdom 7%
Bermuda 58%
The following table presents the components of non-interest expenses for the years ended 31 December 2011 and 2010:
(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
2011
Reported
150,752
55,037
29,316
18,762
14,500
5,799
5,257
19,068
298,491
(33)
298,458
2010
2010 $ change vs. % change vs.
Reported Normalised Normalised Normalised
2.5%
147,113
159,082
3,639
54,037
27,469
13,811
15,405
5,711
5,002
28,948
309,465
(1,975)
311,440
54,037
28,169
15,411
15,405
5,711
5,002
21,116
291,964
1,960
293,924
1,000
1,147
3,351
(905)
88
255
(2,050)
6,525
(1,993)
4,532
1.9%
4.1%
21.7%
(5.9%)
1.5%
5.1%
(9.7%)
2.2%
(101.7%)
1.5%
Butterfield Annual Report 2011 23
Salaries and Other Employee Benefits
Salaries and other employee benefits of $150.8 million in 2011 represents a decrease of $8.3 million from 2010. Excluding the $12.0 million of
non-recurring costs in 2010, salaries and other employee benefits increased by $3.7 million. However, during 2011, further staff reductions and the
implementation of our new core banking system in Bermuda and the Cayman Islands resulted in additional one-off costs of $7.9 million. The 2011
one-off costs are made up of: $3.0 million in overtime and temporary employment services related to the systems implementation projects and
$4.9 million in staff termination and redundancy costs. Net of one-off costs, salaries and other employee benefits declined by $4.2 million year
over year. Salary cost reductions of $4.1 million, as a result of reduced headcount, which was down 135 from 1,519 at the end of 2010 to 1,384 by
2011, was partially offset by $1.5 million of annual merit increases. A further $7.9 million of savings was realised from reduced staff benefit costs,
of which $7.5 million relates to a reduction in post-retirement health care expenses as a result of the changes to the benefit plan made in 2010.
These savings were partially offset by a $6.3 million increase in staff incentive expenses, following several years of minimal incentive compensation
awards, and also include the amortisation expense related to the previous year’s stock option and Executive long-term Share plan awards.
In 2010, salaries and other employee benefits expenses included a charge of $6.2 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 2010. These costs are deducted to arrive at normalised earnings in 2010.
Technology and Communications
Technology and communication costs were $55.0 million in 2011, up $1.0 million on the $54.0 million recorded in 2010. This reflects the ramped-up
run rate technology costs as the Bank’s technology platforms have now been fully transitioned to our outsourcing partners, in addition to a
partial-year increase of $1.5 million in depreciation from the costs capitalised as part of the new systems implementations in Bermuda and the
Cayman Islands during the year. Offsetting these increases were savings of $0.8 million in communication costs from the migration of our traditional
land line telephony system to a VOIP phone system.
Property
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, increased by
$1.1 million to $29.3 million in 2011 versus the $28.2 million normalised expense of 2010. The increase was due to accelerated depreciation on
certain premises totalling $1.6 million per year in additional depreciation.
Professional and Outside Services
Professional and outside services primarily include consulting, legal, audit, and other professional services. In 2011, the expense was $18.8 million,
up $3.4 million compared to $15.4 million incurred in 2010 on a normalised basis; the increase driven mainly by increased investment advisory
costs related to our investment advisory agreement with Carlyle Investment Management LLC. The 2011 fees included $1.2 million in consulting
fees to assist in the development of future efficiencies.
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 2011, we incurred costs of $14.5 million compared to
$15.4 million in 2010, the decrease reflecting lower payroll tax in Bermuda due to a decreased number of employees.
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 $5.8 million in 2011, compared to $5.7 million in 2010, as the Bank did not
acquire or sell intangible assets during 2011.
Marketing
Marketing expenses reflect costs incurred in advertising and promoting our products and services. They totalled $5.3 million in 2011,
up $0.3 million from 2010.
24
Other Non-Interest Expenses
(in $ thousands)
Stationery & supplies
Custodian & handling
Charitable donations
Insurance
Other expenses
Maintenance fees for liquidity facility
Cheque processing
Dues and subscriptions
Registrar and transfer agent fee
Agent commission fees
Foreign bank charges
Directors’ fees
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
2011
1,945
1,752
1,239
2,944
356
1,615
590
822
639
948
845
426
1,455
3,492
19,068
-
-
19,068
2010
2,209
1,810
1,240
3,241
1,765
1,662
676
931
848
755
747
506
1,396
3,330
21,116
7,480
352
28,948
$ change
(264)
(58)
(1)
(297)
(1,409)
(47)
(86)
(109)
(209)
193
98
(80)
59
160
(2,050)
(7,480)
(352)
(9,882)
Other expenses were $19.1 million in 2011, a decrease of $2.1 million compared to 2010 normalised, primarily driven by the cancellation of the
liquidity facility with CIBC in early 2011.
Income Taxes
In 2011, income tax expenses associated with our businesses in taxable jurisdictions, namely Barbados, Guernsey, Switzerland and the United
Kingdom, were netted to nil compared to a benefit of $2.0 million in 2010. 2011 taxes reflect a tax benefit of $1.2 million (2010: $3.3 million) for our
UK operation, which recorded a net loss in 2011, offset by income tax expenses of $0.8 million (2010: $0.6 million) in Guernsey and $0.3 million
(2010: $0.8 million) in Barbados.
Butterfield Annual Report 2011 25
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the Balance Sheet as reported as at 31 December 2011 and 31 December 2010.
(in $ millions)
Assets
Cash and cash equivalents
Short-term investments
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
Liquidation preference of Preference Shares
Common equity
Total Shareholders’ equity
Total liabilities and Shareholders’ equity
Capital Ratios
Risk weighted assets
Tangible Common equity (TCE)
Tangible assets (TA)
TCE/TA
Tier 1 Common ratio
Tier 1 ratio
Total Capital ratio
2011
1,979
34
2,090
4,247
276
196
8,824
7,525
201
268
7,994
200
630
830
8,824
4,426
581
8,775
6.6%
13.1%
17.7%
23.5%
2010
2,430
26
2,629
4,043
262
233
9,623
8,228
303
283
8,814
200
609
809
9,623
4,935
554
9,568
5.8%
11.6%
15.7%
21.6%
The Bank maintains a highly liquid Balance Sheet and is very well capitalised. On 31 December 2011, total assets of the Bank stood at $8.8 billion,
down $0.8 billon from year-end 2010, reflecting lower year-end customer deposit balances in Bermuda, Guernsey and United Kingdom. At
31 December 2011, the total of cash and cash equivalents, short-term investments and investments represented $4.1 billion, or 46.5% of total
assets, down from 52.8% at year-end 2010. At 31 December 2011, Butterfield’s capital ratios were strong, having improved from year-end 2010,
with the TCE / TA ratio ending 2011 at 6.6% (2010: 5.8%), whilst the Total Capital ratio and Tier 1 Capital ratios were of 23.5% (2010: 21.6%) and 17.7%
(2010: 15.7%) respectively. These ratios are well in excess of regulatory minimums.
Cash, Cash Equivalents and Short-Term Investments
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 for each institution and are monitored and reviewed by our Credit Risk Management (“CRM”) division
and approved by the Financial Institutions Committee. Effective 1 January 2011, the Bank changed its accounting policy with respect to cash and
cash equivalents for the purposes of the Consolidated Statement of Cash Flows. The Bank defines cash and cash equivalents to include cash on
hand, cash items in the process of collection, amounts due from correspondent banks and highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of change in fair value. Such investments are those with less than three months
maturity from the date of acquisition and include unrestricted term deposits, certificates of deposit, treasury bills and securities purchased under
agreements to resell. Investments of a similar nature that are either restricted or have a maturity of more than three months but less that one year
are classified as short-term investments. Previously, cash and demand deposits with banks only included cash and demand deposits, vault cash
and cash in transit for the purposes of the Consolidated Statement of Cash Flows. The Bank believes the new policy is preferable as it more closely
reflects the manner in which the Bank manages its liquid assets. As at 31 December 2011, cash and cash equivalents and short-term investments
were $2.0 billion, compared to $2.5 billion as at 31 December 2010.
See “Note 3: Change in accounting policy” and “Note 4: Cash and cash equivalents” in the 31 December 2011 audited Financial Statements for
additional tables and information.
26
Investments
Total investments were $2.1 billion as at 31 December 2011, down $0.5 billion from the prior year-end balance, due primarily to the sale of the
majority of our European exposures in the fourth quarter of 2011 and the purchase of treasury securities, which are included in the cash and cash
equivalents category.
Effective 1 October 2010, the Bank entered into an investment advisory agreement with Carlyle Investment Management LLC, an affiliated
company of the Carlyle Group. Under the agreement, Carlyle has agreed to provide 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 interest rate sensitivity, economic value at risk, interest at risk and stress testing; detailed investment portfolio
reporting; cash flows 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 US GAAP as either Trading, Available For Sale or Held to Maturity. 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.
31 DECEMBER 2011 INVESTMENT PORTFOLIO BY
LONG-TERM DEBT RATING
31 DECEMBER 2011 INVESTMENT PORTFOLIO BY TYPE
Other 2%
BBB 3%
Mutual Funds 3%
A 17%
Certificates of Deposit 17%
Corporate Debt
Securities Guaranteed
by Non-US Governments 6%
AA 9%
Pass-Through Note 1%
US Government and
Federal Agencies 41%
AAA 69%
Asset-backed Securities-
Student Loans 7%
Corporate Debt Securities 19%
Debt Securities Issued
by Non-US Governments 6%
Trading securities, consisting of holdings of non-US government securities, corporate equities and seed money invested in mutual funds managed
by us, totalled $62.6 million at year-end 2011, compared to $18.1 million at year-end 2010, primarily reflecting the $50 million initial seed money
invested by the Bank in BNY Mellon Butterfield Income Advantage Fund, which was off set by the disposal of the Butterfield Systematic Equity
Fund in 2011.
Available for Sale (“AFS”) securities totalled $2.0 billion at year-end 2011, compared to $2.6 billion at year-end 2010. As at 31 December 2011, 40.3%
or $790.8 million (2010: 35% or $917.5 million) of AFS securities consisted of holdings of mortgage-backed securities issued by US government
agencies. Corporate debt securities, certain of which are guaranteed by non-US governments totalled 27.0%, or $530.6 million (2010: 19.0% or
$497.2 million), and certificates of deposit represented 18.2% or $356.5 million (2010: 33.0% or $859.1 million). The remaining 14.7% AFS securities
are comprised primarily of debt securities issued by non-US governments ($113.0 million), government guaranteed student loan-backed securities
($144.3 million) and one pass-through note ($27.0 million), which was formerly a structured investment vehicle (“SIV”).
Held to maturity (“HTM”) investments were $64.8 million as at 31 December 2011 (2010: nil) and consisted entirely of mortgage-backed securities
issued by US government agencies that Management has no intention to sell before maturity.
As at 31 December 2011, 95% (2010: 98.1%) of our total investments were rated investment grade (i.e., rated ‘BBB’ or higher).
Butterfield Annual Report 2011 27
The Bank held two SIV-related securities at 31 December 2010.
During 2011, a SIV-related security with carrying value of $24.3 million was sold, resulting in a gain of $0.1 million. The following table shows the par
value, carrying value and unrealised losses of the Bank’s only remaining SIV-related security (now restructured as a pass-through note) as at
31 December 2011.
(in $ millions)
Par value
Carrying value
Unrealised loss in accumulated other comprehensive income
Total amortised cost
OTTI taken during the year
Carrying amount (market value) / Par value
Amortised cost / Par value
As at 31 December
2011
58.8
27.0
6.7
33.7
-
45.9%
57.3%
2010
122.2
57.6
5.1
62.7
(60.5)
47.1%
51.3%
Securities in unrealised loss positions are analysed as part of Management’s ongoing assessment of Other-Than-Temporary Impairment (“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 whether 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 gross domestic product (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, over-collateralisation or other forms of credit enhancement. Management compares the losses projected for the underlying collateral
(“pool losses”) against the level of credit enhancement in the securitisation structure to determine whether these features are sufficient to absorb
the pool losses, or whether a credit loss on the debt security exists. 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 6: Investments” in the 31 December 2011 audited Financial Statements for additional tables and information.
Loans
The loan portfolio stood at $4.2 billion at 31 December 2011, up $0.2 billion from $4.0 billion the year before, due to the net advancement of
$196 million to the Government of Bermuda and an increase of $121 million in Guernsey, offset by the partial and full settlement of certain
corporate loans. At 31 December 2011, the loan portfolio represented 48.1% of total assets, compared to 42.0% at 31 December 2010, whilst loans
as a percentage of customer deposits were 57.4% (2010: 49.6%).
Specific and general allowances for loan losses at 2011 totalled $61.4 million at 31 December 2011, a decrease of $5.4 million from $66.8 million
at year-end 2010. The movement in the allowance results from $23.8 million (2010: $107.9 million) of partial charge-offs, primarily on commercial
related exposures, which the Bank deemed unrecoverable. This was offset by $4.1 million of recoveries (2010: $2.5 million) and $14.3 million
(2010: $42.0 million) of incremental provisions for specific reserves, as well as enhancements to the general provisions in line with our provisioning
policy that incorporates projected losses in changing economic environments.
Charge-offs were $23.8 million in 2011 compared to $107.9 million in 2010, whilst recoveries totalled $4.1 million in 2011 compared to $2.5 million in
2010. Total allowance for credit losses was $61.4 million at 31 December 2011, down from $66.8 million at 31 December 2010. Of the total allowance,
the general allowance was $35.5 million (2010: $36.5 million) and the specific allowance was $25.9 million (2010: $30.3 million) and represents a total
coverage ratio of 21.2% of gross non-accrual loans at 31 December 2011, compared to 19.0% at 31 December 2010.
28
Gross non-accrual loans totalled $122.5 million at 31 December 2011, down $37.0 million from $159.5 million at 31 December 2010, and represented
2.8% of the total loan portfolio at 31 December 2011, compared to 3.9% in 2010. During 2011 the Bank recorded Other Real Estate Owned
properties (“OREO”) amounting to $27.4 million comprising real estate, amounting to $20.8 million, received during 2011 as settlement for a
commercial mortgage loan balance and foreclosed residential properties with a fair value less cost to sell of $6.6 million.
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.
31 DECEMBER 2011 LENDING BY LOCATION
31 DECEMBER 2011 GROUP LOANS BY TYPE
United Kingdom 10%
Commercial Mortgages 19%
Bermuda 58%
Guernsey 11%
Other Consumer 5%
Credit Cards 2%
Automobile Financing 1%
Commercial Overdrafts 2%
Commercial and Industrial 7%
Governments 6%
Construction 1%
Cayman 17%
Barbados 4%
Residential Mortgages 57%
Commercial and Industrial
Government
Loans to governments increased by $194.6 million, primarily as a result of the Bank’s continued investment in the Bermuda economy. During 2011,
the Bank extended the Government of Bermuda loan facility to $235 million, which was fully drawn down at the end of 2011.
Commercial and Industrial
The commercial and industrial loan portfolio includes loans and overdraft facilities advanced primarily to corporations and small and
medium-sized entities, which are generally not collateralised by mortgages and where loan repayments are expected to flow from the operation of
the underlying businesses.
Commercial and industrial loans decreased by $134.1 million in 2011 due to the combination of the partial settlement of a loan to BFG in the first
quarter of 2011 of $40.9 million, and full settlements of corporate loans during 2011.
Commercial Mortgages
Commercial mortgages are offered to real estate investors, developers and builders domiciled primarily in Bermuda and the United Kingdom.
To manage our credit exposure on such loans, the principal collateral is real estate held for commercial purposes and is supported by a registered
mortgage. Cash flows from the properties, primarily from rental income, are generally supported by long-term leases to high quality international
businesses. These cash flows are principally sufficient to service the loan.
Commercial mortgage financing decreased by $101.7 million, from $934.1 million at 31 December 2010 to $832.4 million at 31 December 2011,
primarily due to increased pay downs, including real estate, amounting to $20.8 million, received during 2011 as settlement for a commercial
mortgage loan balance, and managed reductions in commercial mortgage exposures. In addition, the Bank charged off commercial real estate
loans, which in the opinion of Management, are considered uncollectible.
Butterfield Annual Report 2011 29
Residential
The residential mortgage portfolio is comprised of mortgages to clients with whom we are seeking to establish (or already have) a comprehensive
financial services relationship. It includes mortgages to individuals and corporate loans secured by residential property.
At 31 December 2011, residential mortgages totalled $2.4 billion (or 56.4 % of total gross loans), an increase of $0.2 billion from 31 December 2010.
The value of residential mortgages in Bermuda decreased slightly during 2011, due to the transfer of foreclosed properties to OREO at a fair value
net of selling costs of $6.6 million. Our Guernsey and United Kingdom offices increased residential mortgage lending to high net worth individuals,
secured by high-end properties in the London, UK area during the year, resulting in a significant increase in non-Bermuda residential mortgages in
the portfolio.
All mortgages were underwritten utilising our stringent credit standards. Residential loans consist of conventional home mortgages and equity
credit lines.
Other Loan Portfolios
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 overdrafts 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 more detail in the Notes to the Consolidated
Financial Statements.
See “Note 7: Loans” and “Note 8: Credit Risk Concentration” in the 31 December 2011 audited Financial Statements for additional tables
and information.
Deposits
Deposits are our principal funding source for use in lending, investments and liquidity. Butterfield is a deposit-led Bank and does not require
the use of wholesale funding to fund its loan business. During 2011, core deposits remained stable despite reductions in interest rates paid on
deposits. Deposit balances at the end of reporting periods, particularly in our Bermuda and Cayman Islands operations, can fluctuate due to
significant balances that flow in and out from hedge fund clients to meet quarter-end subscriptions and redemptions, and are generally paid out
in the first few days of the quarter. The Bank views average customer deposits as a more representative measure of customer deposit balances.
The table below shows the average customer deposit balances by jurisdiction, comparing 2011 with 2010.
(in $ millions)
Barbados
Bermuda
Cayman Islands
Guernsey
The Bahamas
United Kingdom
Total average deposits
Average balance during
2011
3,340
259
1,732
1,470
92
816
7,709
2010
3,351
240
1,823
1,488
129
1,034
8,065
$ Change
(11)
19
(91)
(18)
(37)
(218)
(356)
Average customer balances were $7.7 billion, down $356 million from the prior year’s average of $8.1 billion. The decrease was primarily in the UK
where the Bank made a strategic decision to exit its unprofitable Self Invested Personal Pension (“SIPP”) deposit business. In the Cayman Islands,
the decrease represents lower cash balances held by institutional hedge fund clients during the year; core deposits were flat.
At year-end 2011, total customer deposits were $7.4 billion compared to $8.1 billion at 31 December 2010. The decrease primarily occurred in
Bermuda, the Cayman Islands, Guernsey and the United Kingdom. The decrease in comparative year-end balances in Bermuda was primarily a
result of lower hedge fund balances at 31 December 2011, as the Bank had experienced a build up of hedge fund deposits to meet the high rate of
fund redemptions in the prior year. The $125.8 million decrease in Guernsey was primarily due to attrition as a result of the intense competition
by European banks to attract new deposits at very high rates, as other forms of liquidity have dissipated due to the credit crisis. In the United
Kingdom, deposits fell $204.1 million, primarily due to our exiting the SIPP deposit business.
30
Demand deposits, which include chequing accounts (both interest-bearing and non-interest-bearing), savings and call accounts, totalled
$5.2 billion, or 69.7% of total customer deposits at year-end 2011, compared to $5.5 billion, or 67.9%, at year-end 2010. Term deposits decreased
by 14.4% from $2.7 billion at year-end 2010 to $2.2 billion at year-end 2011 as customers moved to demand deposits given the low interest rate
spread on longer-term deposits.
The cost of funds was 0.52% in 2011, down 13 basis points from the 0.65% paid in 2010, as a result of disciplined deposit pricing that contributed to
the improvement in net interest income.
See “Note 11: Customer Deposits and Deposits from Banks” in the 31 December 2011 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. The Bank had a $300 million committed line of credit that we cancelled in the second quarter of 2011. We are able to source funding
on an uncommitted basis from a number of major banks, including our principal correspondent banks. We use funding from the inter-bank market
as part of interest rate and liquidity management. At 31 December 2011, deposits from banks totalled $125.4 million, compared to $79.7 million at
31 December 2010.
Employee Future Benefits
As at 31 December 2011, the Bank had a substantial obligation for employee future benefits in the amount of $104.9 million, up $19.7 million from
$85.2 million at year-end 2010. The increase is primarily the result of lower discount rates used to value the future obligations, in line with the
general downward trend in interest rates, as well as lower than expected returns on plan assets.
In the second quarter of 2010, Shareholders’ equity was bolstered by a combination of changes to post-retirement health care benefits. Following
an independent, tri-annual actuarial review, the healthcare 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 in
the liability of approximately $41 million.
See “Note 12: Employee Future Benefits” in the 31 December 2011 audited Financial Statements for additional tables and information.
Subordinated Debt, Interest Payments and Maturities
We have outstanding issuances of subordinated debt with a carrying value of $267.8 million as at 31 December 2011, of which $260 million is
issued in US dollars and £5 million in Great Britain pounds compared to $282.8 million as at 31 December 2010. All but $27.0 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.
During September 2011, the Bank repurchased a portion of the outstanding 5.11% 2005 Series B Subordinated Notes (“the Note”). The face value
of the portion of the Note repurchased was $15 million and the purchase price paid for the repurchase was $13.875 million, which realised a gain of
$1.125 million.
See “Note 19: Subordinated Capital” in the 31 December 2011 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 provide 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 were outstanding as at year-ends 2011 and 2010.
Butterfield Annual Report 2011 31
Shareholders’ Equity
Shareholders’ equity increased during the year ended 31 December 2011 by $20.4 million to $829.7 million, reflecting:
(cid:115)(cid:0) $40.5 million net income for the year.
(cid:115)(cid:0) $19.8 million from unrealised gains on AFS securities.
(cid:115)(cid:0) $3.9 million of Share-based compensation.
(cid:115)(cid:0) $0.8 million translation adjustments on foreign operations.
These increases were offset by:
(cid:115)(cid:0) $23.4 million net increase in employee future benefits from the decline in interest rates used to discount the future cash flows, and lower
than expected return on plan assets.
(cid:115)(cid:0) $18.0 million Preference Share dividend and guarantee fee.
(cid:115)(cid:0) $3.3 million cash dividends on CVCP Shares.
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, rating agencies, 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 and
has been endorsed by the central bank governors and heads of bank supervision of the G10 countries. The Bank calculates its capital requirement
on the Standardised approach under Basel II requirements. The Bank does not expect the changes being proposed to the capital adequacy ratios
under Basel III to have a material impact on the Bank’s capital ratios.
The Bank is fully compliant with all regulatory capital requirements and maintains capital ratios well in excess of regulatory minimums as at
31 December 2011.
As at 31 December 2011, the Bank’s regulatory capital stood at $1,041.0 million with the consolidated Tier 1 total and total capital ratios being 17.7%
and 23.5%, respectively (31 December 2010: 15.7% and 21.6%, respectively).
The following table sets forth our capital adequacy as at 31 December 2011 and 31 December 2010 in accordance with Basel II framework:
Year ended 31 December
(in $ millions)
Capital
Tier 1 capital
Tier 2 capital
Deductions
Total capital
Weighted Risk Assets
Cash and cash equivalents and 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
32
2011
2010
781.4
276.3
(16.7)
1,041.0
722.7
2,408.7
401.7
320.2
572.3
4,425.6
13.1%
17.7%
23.5%
772.5
310.3
(15.3)
1,067.5
957.6
2,552.2
426.0
372.4
626.4
4,934.6
11.6%
15.7%
21.6%
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 2011 will be published on the corporate website, www.butterfieldgroup.com, shortly after the
publication of these Financials Statements.
Preference Shares
In June 2009, the Bank offered 200,000 of 8.00% Non-Cumulative Perpetual Limited Voting Preference Shares, liquidation preference of US $1,000
per share (the “Preference Shares”) and $200,000,000 in the aggregate. The Preference Shares are fully and unconditionally guaranteed, with the
full faith and credit of the Government of Bermuda (the “Guarantor”), as to payment of dividends for up to ten years and as to payment of the
liquidation preference on, or in certain circumstances prior to, the ten-year anniversary of the date of issuance (the “Guarantee”).
Dividends on the Preference Shares are payable quarterly on a non-cumulative basis, only when, as and if declared by our Board of Directors,
on 15 March, 15 June, 15 September and 15 December of each year at a fixed rate equal to 8.00% per annum on the liquidation preference,
commencing on 15 September 2009. In the event that, during the ten-year term of the Guarantee, the Bank does not pay full dividends in respect
of any quarterly dividend period on any Preference Shares that are then issued and outstanding, the Guarantor has agreed to pay to holders of
the Preference Shares an amount equal to such unpaid dividends pursuant to the Guarantee. The Bank may redeem the Preference Shares at its
option, subject to approval of the Bermuda Monetary Authority (“BMA”), in whole or in part, on the tenth day prior to the ten-year anniversary
of the date of issuance (the “Bank Redemption Date”), at a redemption price equal to 100% of the liquidation preference thereof plus any
unpaid dividends for the then-current dividend period to the Guarantee End Date, regardless of whether any dividends are actually declared
for such dividend period. In addition, the Bank may redeem the Preference Shares prior to the Bank Redemption Date, at its option, subject to
approval of the BMA, in whole or in part, at any time and from time to time, at a redemption price equal to the Make-Whole Redemption Price.
Unless previously redeemed, the Guarantor has agreed to purchase from the holders thereof, and such holders will be required to transfer to
the Guarantor, on the ten-year anniversary of the date of issuance, all Preference Shares then issued and outstanding, at a price per Preference
Share equal to the liquidation preference thereof plus any unpaid dividends for the then-current dividend period to the date of such purchase,
regardless of whether any dividends are actually declared for such dividend period. In addition, upon the occurrence of a Liquidation Event at
any time prior to the ten-year anniversary of the date of issuance of the Preference Shares, the Guarantor has agreed to purchase from the holders
thereof, and such holders will be required to transfer to the Guarantor, all Preference Shares then issued and outstanding, at a price per Preference
Share equal to the liquidation preference thereof plus any unpaid dividends for the then-current dividend period to the date of payment,
regardless of whether any dividends are actually declared for such dividend period.
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.
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 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 1 Rights Unit. Unallocated Rights Shares were available to qualifying
Shareholders who exercised all the rights issued to them. Any unallocated Rights Shares 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.
Butterfield Annual Report 2011 33
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 is 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. The sale transaction closed during the
second quarter of 2011 and generated proceeds of $3.31 million. The completion of the sale triggered a dividend of $3.27 million ($0.42 per Share)
to holders of Butterfield CVCP Shares, which was paid on 16 August 2011 to Shareholders of record on 26 July 2011. Through this transaction, the
Bank has fully divested itself of its minority ownership stake in BFG. BFG now operates as a subsidiary of the new company. The Bank continues to
provide BFG and its clients with commercial banking, foreign exchange and custody services. BFG was originally established in 2008 through the
merger of Butterfield Fund Services and the Fulcrum Group.
When, as and if declared by the Board, holders of the outstanding CVCP Shares will be entitled to receive dividends 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 (1) 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.
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 2011, there were 7.46 million CVCP Shares outstanding with 0.325 million Shares converted to Common Shares at the holders’
option during the year ended as at 31 December 2011. As at 31 December 2011 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 2011 remained one to one (1:1).
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 $102.3 million. In no event shall the loan recoveries
exceed US$42.0 million. As at 31 December 2011, the carrying value of the covered loans was $27.9 million (2010: $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.
34
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
Government of Bermuda in conjunction with the issuance of the 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 Share dividends were declared or paid in 2011 or 2010. Preference Share dividends declared and paid were $16.0 million during 2011
(2010: $16.6 million) in relation to the 8% dividends. In 2011, a $3.3 million dividend was paid to holders of CVCP Shares triggered by the sale of the
Bank’s minority interest in BFG. Guarantee fees paid to the Government of Bermuda were $2.0 million during each of 2011 and 2010.
Cash Flows
Cash and cash equivalents were $2.0 billion as at 31 December 2011, compared to $2.4 billion in the prior year. The decrease is described below by
category of operating, investing and financing activities.
For the year ended 31 December 2011, net cash provided by operating activities totalled $43.7 million (2010: $67.0 million). Cash flows from
operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided
by operating activities decreased by $23.3 million from 2010 to 2011, due primarily from the $50 million investment of seed money in the new BNY
Mellon Butterfield Income Advantage Fund, classified as “trading investments” for accounting purposes. However, cash generated from operating
activities before changes in trading investments increased $23.5 million on a rebound of cash earnings compared to the prior year.
Our investing activities include capital expenditures, loan activities, investment activities, and divestiture 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, the strategic investment
in an associated company or as a result of the ordinary course loan structuring. Net cash provided by investing activities for the year ending 31
December 2011 totalled $235.9 million compared $197.3 million in 2010. The $38.6 million increase in 2011 over 2010 was mainly due to a $594.8
million net cash provided from proceeds from the sale or maturity of AFS investments in 2011, compared to $95.3 million in 2010, offset by the
movement in loans year over year (2011: increase of $255.1 million; 2010: decrease of $104.9 million).
Net cash used in financing activities totalled $736.4 million in 2011, compared to the $121.8 million in 2010. The $858.2 million decrease reflects the
net cash used to fund deposit decreases of $701.2 million in 2011, compared to the $380.8 million decrease in deposits offset by the $521.0 million
net issuance of Shares and rights in 2010.
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 US 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.
Butterfield Annual Report 2011 35
Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk
should the instrument be fully drawn upon and the client defaults. To control the credit risk associated with issuing letters of credit and letters
of guarantee, we subject such activities to the same credit quality and monitoring controls as our lending activities. The types and amounts of
collateral security we hold for these standby letters of credit and letters of guarantee is generally represented by our deposits or a charge over
assets held in mutual funds. We are obligated to meet the entire financial obligation of these agreements and in certain cases are able to recover
the amounts paid through recourse against the collateral security.
The following table sets forth the outstanding financial guarantees with contractual amounts representing credit risk:
As at 31 December
(in $ millions)
Standby letters of credit
Letters of guarantee
Total
Gross Collateral
321.0
13.4
334.4
303.8
9.9
313.7
2011
Net
17.2
3.5
20.7
Gross
386.7
14.1
400.8
Collateral
354.3
8.7
363.0
2010
Net
32.4
5.4
37.8
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.
In the second quarter of 2011, the Bank cancelled its commitment for a $300 million line of credit with CIBC as Management deemed it was no
longer necessary. Whilst outstanding, the facility fees were $200,000 per month. In 2010, the Bank had incurred non-recurring fees of $7.48 million
to setup the line of credit facility. A committed line of credit to our Bank in the Cayman Islands, from one of its custodians, was allowed to expire
on its maturity on 31 December 2011. Both committed lines were exited as they were no longer required as part of the Bank’s liquidity
management programme.
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 $4.0 million until 1 October 2013.
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 2011, $137.1 million (2010: $174.5 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.
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 19: Subordinated Capital” for terms of subordinated debt arrangements and interest rates.
36
The $112.5 million contractual obligation in respect of sourcing—for Bermuda and the Cayman Islands—relates to an eight-year agreement entered
into in October 2008 with global technology service provider Hewlett Packard (“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. In 2011,
working with HP, we completed the transition of 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 are managed by HP. In addition, HP managed the installation of and conversion to our new, common core
banking system in Bermuda and the Cayman Islands which went live in 2011. The transition of functional responsibility for information technology
management and support, and the implementation of a new core banking system were completed in the Cayman Islands in the second quarter
and in Bermuda in the fourth quarter. 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 optimise operations, improve productivity and enhance client service. We expect to derive
synergies in the form of cost savings over time. The 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.
RISK MANAGEMENT
Risk Governance
The Group’s risk governance and management structure is illustrated below:
BOARD OF DIRECTORS
RISK POLICY & COMPLIANCE
COMMITTEE
AUDIT COMMITTEE
GROUP RISK COMMITTEE
GROUP ASSET & LIABILITY
COMMITTEE
GROUP CREDIT COMMITTEE
PROVISION & IMPAIRMENTS
COMMITTEE
POLICY DEVELOPMENT
COMMITTEE
JURISDICTIONAL BUSINESS UNITS & OVERSIGHT COMMITTEES
The Board of Directors oversees the Group’s risk management programme through the approval of the Risk Appetite Framework and supporting
risk management policies. It accomplishes its mandate through the activities of two dedicated Committees:
The Risk Policy & Compliance Committee
This Committee assists the Board in fulfilling its responsibilities by overseeing the Group’s risk profile and its performance against approved risk
appetites and tolerance thresholds. Specifically, the Committee considers the sufficiency of the Group’s policies, procedures and limits related
to the identification, measurement, monitoring and control of activities that give rise to credit, market, liquidity, interest rate, operational and
reputational risks, as well as overseeing its compliance with laws, regulations and codes of conduct.
The Audit Committee
This Committee reviews the overall adequacy and effectiveness of the Group’s system of internal controls and the control environment, including
those that are brought to bear in respect of the risk management process. It reviews recommendations arising from internal and independent audit
review activities and Management’s response to any findings raised.
Butterfield Annual Report 2011 37
Both the Risk Policy & Compliance Committee and the Audit Committee are supported in the execution of their respective mandates by the
dedicated Audit, Compliance & Risk Policy Committees for our UK, Guernsey and Caribbean operations, which oversee the sufficiency of local risk
management policies and procedures and the effectiveness of the system of internal controls that are in place. These Committees are chaired by
Non-Executive Directors drawn from our jurisdictional Boards.
The Group Executive Management team, led by the President & Chief Executive Officer (“CEO”) and including the members of Executive
Management reporting directly to the CEO, is responsible for setting business strategy and for monitoring, evaluating and managing risks across
the Group. It is supported by the following committees:
The Group Risk Committee (GRC)
This is the Senior Management Committee with responsibility for risk governance. It provides a forum for the strategic assessment of risks
assumed across the Group as a whole, based on an integrated view of credit, market, liquidity, legal and regulatory compliance, operational,
interest rate, investment, capital and reputational risks, ensuring that these exposures are consistent with the risk appetites and tolerances
promulgated by the Board. It is responsible for reviewing, evaluating and recommending the Group’s Risk Appetite Framework, the results of the
Capital assessment and risk profile (“CARP”) process (including all associated stress testing performed) and the Group’s key risk policies to the
Board of Directors for approval, for reviewing and evaluating current and proposed business strategies in the context of our risk appetites and for
identifying, reviewing and advising on current and emerging risk issues and associated mitigation plans.
Its membership is drawn from the Group Executive Management team, including the CEO. The meeting is chaired by the Chief Risk Officer.
The Group Asset & Liability Committee
This Committee is responsible for liquidity, interest rate and exchange rate risk management and other Balance Sheet issues. It also oversees
the execution of the Group’s investment and capital management strategies and monitors the associated risks assumed. It is supported in the
execution of its mandate by the work undertaken by the dedicated Asset & Liability Committees in each of the Bank’s jurisdictional business units.
Its membership is drawn from the Group Executive and Senior Management teams, including the Chief Risk Officer and the CEO. The meeting is
chaired by the Chief Financial Officer.
The Group Credit Committee
This Committee is responsible for a broad range of activities relating to the monitoring, evaluation and management of credit risks assumed across
the Group, at both transaction and portfolio levels. It is supported in the execution of its mandate by the Financial Institutions Committee, a
dedicated Sub-Committee that is responsible for the evaluation and approval of recommended inter-bank and counterparty exposures assumed
in the Group’s treasury and investment portfolios, and by the activities of local Credit Committees in the UK, Guernsey, and the Caribbean, which
review and approve transactions within delegated authorities and recommend specific transactions outside of these limits to the Group Credit
Committee for approval.
Its membership is drawn from the Group Executive and Senior Management teams. The meeting is chaired by the Chief Risk Officer.
The Provisions & Impairments Committee
This Committee is responsible for approving significant provisions and other impairment charges. It also oversees the overall credit risk profile
of the Group in regard to non-accrual loans and assets. It is supported in the execution of its mandate by local Credit Committees and the Group
Credit Committee, which make recommendations to this Committee.
Its membership is drawn from the Group Executive Management team, including the CEO. The meeting is chaired by the Chief Risk Officer.
The Policy Development Committee
This Committee is responsible for overseeing the design, development and maintenance of the Group’s framework of operational policies.
It develops recommendations regarding policy requirements, engages with nominated members of Executive Management to ensure that policies
are drafted or updated on a timely basis and provides a forum through which they are debated Group-wide prior to their adoption, thereby
ensuring a consistency of application and interpretation. It also ensures that all policies and any policy exception requests are reviewed and
recommended prior to presentation to the Group Risk Committee or Risk Policy & Compliance Committee of the Board for approval.
Its membership is drawn from the Senior Management team across the Group. It is chaired by the Group Head of Compliance.
Risk Management
The Group manages its exposure to risk through a three “lines of defence” model. This may be summarised as follows:
38
The first “line of defence”
This is provided by our jurisdictional business units, which retain ultimate responsibility for the risks they assume and for bearing the cost of risk
associated with these exposures.
The second “line of defence”
This is provided by the Risk Management group, which works in collaboration with our business units to identify, assess, mitigate and monitor the
risks associated with our business activities and strategies. It does this by:
(cid:115)(cid:0) Making recommendations to the Group Risk Committee regarding the constitution of the Risk Appetite Framework.
(cid:115)(cid:0) Setting risk strategies that are designed to manage risk exposures assumed in the course of pursuing our business strategies and aligning
them with agreed appetites.
(cid:115)(cid:0) Establishing and communicating policies, procedures and limits to control risks in alignment with these risk strategies.
(cid:115)(cid:0) Measuring, monitoring and reporting on risk levels.
(cid:115)(cid:0) Opining on specific transactions that fall outside delegated risk limits.
(cid:115)(cid:0)
Identifying and assessing emerging risks.
The four functions within the Risk Management group that support our risk management activities are outlined below. To ensure a formal
separation of duties, each reports directly to the Chief Risk Officer.
Group Market Risk – This provides independent oversight of the measurement, monitoring and control of liquidity and funding risks, interest
rate and foreign exchange risks as well as the market risks associated with the Group’s investment portfolios. It also monitors compliance with
both regulatory requirements and the Group’s internal policies and procedures relating to the management of these risks.
Credit Risk Management – This unit is responsible for the adjudication and oversight of credit risks associated with our retail and
commercial lending activities and the management of risks associated with our investment portfolios and counterparty exposures. It also
establishes the parameters and delegated limits within which credit risks may be assumed and promulgates guidelines on how exposures
should be managed and monitored.
Compliance – This unit provides independent analysis and assurance of the Group’s compliance with applicable laws, regulations, codes
of conduct and recommended best practices, including those associated with anti-money laundering/counter terrorist financing requirements.
It is also responsible for assessing the Group’s potential exposure to upstream risks and for providing guidance on the preparations that
should be made in advance of these changes coming into effect.
Group Operational Risk – This unit assesses the effectiveness of the Group’s procedures and internal controls in managing its exposure
to various forms of operational risk, including those associated with new business activities and processes and the deployment of new
technologies. It also oversees the Group’s incident management processes and reviews the effectiveness of its loss data collection activities.
The third “line of defence”
This is provided by our Group Internal Audit function, which provides ongoing review, oversight and challenge of the effectiveness of the internal
controls that are executed by both the business and Risk Management communities in the management, monitoring and measurement of our
exposure to risk. This includes the review of the accuracy of the underlying data and appropriateness of the stress testing methodologies that are
executed as a part of our CARP process.
The Risk Appetite Framework
The Risk Appetite Framework is the cornerstone of our approach to risk management. Developed by Executive Management and approved
formally by the Board of Directors, it communicates a willingness to take on certain risks in the pursuit of our strategic objectives and defines
those that should be avoided. It also provides Management with a clear mandate regarding the amount and type of risk that it may accept and
establishes minimum expectations regarding the practices and behaviours that should be brought to bear in managing the exposures assumed. It
is aligned with the interests of our stakeholders, feeds into our business planning processes, and shapes our discussions on risk matters generally.
Our framework comprises the following elements:
(i). Nine broad categories of risk: Credit; Market; Liquidity; Legal & Regulatory; Governance; Process & Technology; People, Country & Political;
and Reputational. These represent the various risks that the Group assumes across the entirety of its operations in the pursuit of its
strategic goals.
Butterfield Annual Report 2011 39
(ii). For each risk category, there is a declared risk appetite. To ensure consistency in our risk conversations, these have been distilled into
the three options set out in the table below, with each appetite designed to convey a clear strategic direction in terms of the risk/reward
profile assumed:
APPETITE
DEFINITION
PROFILE
Averse
The Group will work to avoid exposure to this risk
Our processes and controls are defensive and
given its potential for financial loss, reputational
focus on detection and prevention.
damage, and/or the loss of customer and/or
investor confidence.
Cautions
Given the potential for financial loss, reputational
Security is favoured over reward. Exposures are
damage, and the loss of customer and/or investor
only assumed when the risk can be quantified
confidence, the Group will be very selective in the
accurately and is assessed as being acceptable.
exposures assumed to this risk and will monitor
it closely.
Open
The Group will consider opportunities to accept
Reward is commensurate with the risk assumed.
this risk and will accept those that fall within clearly
Exposures can be estimated reliably and
defined parameters. The risk of loss or reputational
structures, systems and processes are in
damage is accepted but the exposure can be
place to manage it.
estimated reliably and can be managed to a
tolerable level.
(iii). A statement of our governing principles relating to each risk category. This establishes the characteristics of the risks that the Bank is willing
to assume and the management behaviours that we should exhibit when doing so.
Specific performance measures and tolerance thresholds in respect of each risk category, combining quantitative and qualitative targets (which are
designed to reflect both forward looking as well as historical perspectives), are designed to provide Executive Management and the Board with an
indication of the “direction” of our exposure relative to our declared risk appetite and an early warning of material adverse developments requiring
remedial action. The metrics are monitored independently by the Group Risk function and are measured against actual results. The results of
these analyses are reported to Management at all levels of the organisation and are reviewed regularly by both the Group Risk and Risk Policy &
Compliance Committees in the performance of their oversight activities.
Application Of The Risk Appetite Framework
The limits, targets and thresholds used to measure performance continue to be refined by the Group Risk Management function in an effort to
express as complete a “picture” as possible of our exposure to a given risk, relative to the stated appetite. All changes proposed pass through a
formal review and approval process at both the Executive Management and Board levels prior to their adoption.
Through this approach, the Risk Appetite Framework sets the tone for our risk culture across the Group as a whole, influencing behaviours at all
levels of the organisation and reinforcing accountability for decisions taken. Many of our Jurisdictional offices have developed subsidiary risk
appetite frameworks in conjunction with their local Risk Management functions. This ensures appropriate coverage of local risk factors and the
establishment of proportional tolerance thresholds. Group Risk has reviewed these frameworks prior to their adoption and has modified any
appetites proposed that are considered to be inconsistent with the overall Group approach.
Credit Ratings
Our credit ratings are provided in the table below:
Short-term deposits
Long-term deposits and debt
Outlook
40
Standard
Moody’s
Fitch
& Poor’s
A-2
A-
P-1
A2
F1
A-
Negative
Negative
Stable
JURISDICTION AND GROUP BUSINESS OVERVIEWS
BARBADOS
Total revenues before gains and losses in Barbados were down 6.6%
Throughout 2011, tight cost management was a major strategy of
year over year, primarily due to lower earnings from net interest
Butterfield in Barbados. In line with this strategy, the Bank
income offset by reduced credit provisions. There was a weak
restructured its operations, resulting in a reduced workforce and an
demand for credit in the local market during the year, reflective of
overall reduction in non-interest expense of 12.5% year over year.
continued slowness in the Barbados economy.
In terms of community support, the Bank continued its title
sponsorship of the Barbados Seniors’ Expo.
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains (losses)
Net income
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Number of employees
2011
11,485
(1,156)
2,896
13,225
12,135
1,090
37
1,127
269
178
304
114
2010
12,917
(1,707)
2,948
14,158
13,863
295
(151)
144
240
185
274
138
$ change
(1,432)
% change
(11.1)
551
(52)
(933)
(1,728)
795
188
983
29
(7)
30
(32.3)
(1.8)
(6.6)
(12.5)
269.5
(124.5)
682.6
12.1
(3.8)
10.9
(24)
(17.4)
Butterfield Annual Report 2011 41
BERMUDA
Bermuda is home to Butterfield’s headquarters and remains the Bank’s
Loans secured by commercial office buildings continue to perform
largest jurisdiction in terms of number of employees, Banking Centre
well, whilst residential mortgage delinquencies have risen modestly
locations and business volume. The Bank of N.T. Butterfield & Son
and remain low by international standards.
Limited (“Butterfield”) is Bermuda’s first and largest independent
bank, offering a full range of community banking services and wealth
Credit provisions were $25.6 million in 2010 compared to $1.2 million
management, including private banking, asset management and
in 2011, primarily due to the release of provisions during the year
personal trust services. Butterfield also provides services to corporate
relating to real estate received in settlement of loans outstanding.
and institutional clients, which include asset management and
As a result, net income was up $208.9 million to $25.8 million for the
corporate trust services.
year ended 31 December 2011. Total assets were $4.6 billion at
31 December 2011, down $0.6 billion from 31 December 2010. Assets
Bermuda’s revenue before gains and losses increased year over year
under management were $3.4 billion at 31 December 2011, down
by $38.8 million, or 24.4%, reflecting higher interest income, decreased
from $3.6 billion at 31 December 2010, reflecting the net redemptions,
interest expense, and decreased provisions for credit losses offset
whilst assets under administration for our trust and custody
against decreased non-interest income.
businesses at 31 December 2011 were $24.7 billion and $21.8 billion,
respectively, compared to $22.8 billion and $19.6 billion at
The Bank has stabilised its exposure to the hospitality industry. The
31 December 2010.
Bank has taken action to place two hotel properties in Bermuda in
receivership, where it was deemed to be the best course of action to
Against a backdrop of economic difficulties locally, and despite the
protect the value of assets and safeguard the interests of the Bank’s
impact they had on the Bank’s performance in 2011, Butterfield has
Shareholders. The properties are being managed professionally
reaffirmed our commitment to supporting the third sector, locally. The
with a view to selling them as going concerns as soon as appropriate
Bank believes that its long-term success and growth as an organisation
arrangements can be reached.
depends on the prosperity of the communities it serves. In 2011,
the Bank reduced the total amount it donated to local charities in
Bermuda, but refocused its giving efforts on human services.
42
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains (losses)
Net income (loss)
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
2011
131,937
(1,202)
67,081
197,816
176,726
21,090
4,754
2010
113,363
$ change
18,574
% change
16.4
(25,650)
24,448
(95.3)
71,325
(4,244)
(6.0)
159,038
38,778
24.4
192,174
(15,448)
(8.0)
(33,136)
54,226
(163.6)
(149,940)
154,694
(103.2)
25,844
(183,076)
208,920
(114.1)
3,260
2,507
4,578
3,605
(345)
(9.6)
2,505
2
0.1
5,193 (615)
(11.8)
21,761
24,735
19,633
2,128
10.8
22,835
1,900
8.3
2,653
752
3,405
2,870
(217)
(7.6)
746
6
0.8
3,616 (211)
(5.8)
Number of employees
664
732
(68)
(9.3)
Butterfield Annual Report 2011 43
CAYMAN ISLANDS
Cayman is Butterfield’s second largest jurisdiction in terms of business
increases in professional and outside services costs related to asset
and market presence. The Bank offers a full range of personal and
liability management services and investment advice, along with
corporate financial services in the Cayman Islands and is among the
additional cost associated with auditing the current year’s system
leaders in this highly competitive market. To complement Butterfield’s
conversion. Provisions for credit losses were up 4.4% to $4.0 million
strong retail banking presence, Butterfield Bank (Cayman) Limited
on certain overseas investment mortgages, certain commercial loans
continued to focus on developing its wealth management businesses.
and overall loan growth year over year. Total assets, at $2.0 billion,
For the second year in a row, Butterfield’s private banking service
were down $63 million or 3.1%. Client assets under administration
in Cayman was named “Best Private Bank in the Cayman Islands”
decreased by 25.6% to $3.4 billion, due primarily to declines in the
by Euromoney’s Private Banking and Wealth Management Survey,
value of assets relating to trust clients.
considered the benchmark of excellence in international private
wealth management. In April, the Bank implemented its new banking
In 2011, Butterfield continued to demonstrate its commitment to the
platform providing the basis for future client service offerings.
Cayman Islands by supporting high-profile economic development
events and charitable causes. The Bank provides financial support
Net income before gains and losses of $9.0 million improved 28.6%,
and board representation to the Cayman Islands Banker’s Association
whilst the year-on-year improvement in net income in Cayman was
and Cayman Finance, the industry-led organisations that foster the
primarily attributable to the realised gains on sale of $2.0 million in
ongoing development of financial services in the Cayman Islands.
the current year compared to realised losses of $11.6 million on the
Butterfield also had a prominent showing at the Cayman Captive
sale of asset-backed securities in the Available For Sale portfolio in
Forum conference.
the prior year. Net interest income improved 30.6% year over year,
to $37.3 million, whilst non-interest income declined by 5.4% to
Butterfield sponsored the nineteenth annual St. Patrick’s Day Irish
$30.6 million, resulting from decreases in net banking services
Jog, benefiting The Lighthouse School, Cayman’s only school for
revenues due to increases in credit card servicing costs, reduced
special needs children. Butterfield Cayman continues to be a major
asset management fees, trust fees and foreign exchange commissions.
contributor to organisations such as Cayman Hospice Care, the
While Cayman experienced steady growth in residential mortgages in
Cayman Heart Fund, the Cancer Society, the Cayman Islands Red
2011, absorbing the Bahamas-based residential mortgage book and
Cross, Cayman Islands Little League and Junior Squash. Additionally,
participating in several commercial lending deals with its parent led
2011 saw the launch of the Butterfield Education Grant, where schools
to an increase in the Bank’s loan book of $114 million, or 18.8% year
compete for a grant of $20,000 to fund specific initiatives.
on year.
Total expenses were $55.0 million in 2011, up $4.8 million from
$50.2 million in 2010, due to increased technology and communication
costs driven by the Bank’s outsourced I.T. services model and new
operating systems implemented in April, including depreciation of its
software fixed asset during the balance of the year. There were
44
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains (losses)
Net income (loss)
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
2011
37,325
(3,974)
30,650
64,001
54,988
9,013
1,955
2010
28,571
$ change
8,754
% change
30.6
(3,808)
(166)
4.4
32,389
(1,739)
(5.4)
57,152
6,849
12.0
50,145
4,843
9.7
7,007
2,006
28.6
(11,600)
13,555
(116.9)
10,968
(4,593)
15,561
(338.8)
1,743
722
1,974
1,226
2,188
211
760
971
308
1,781
(38)
(2.1)
608
114
18.8
2,037 (63)
(3.1)
1,187
39
3.3
3,401
(1,213)
(35.7)
270
837
(59)
(21.9)
(77)
(9.2)
1,107 (136)
(12.3)
326 (18)
(5.5)
Butterfield Annual Report 2011 45
GUERNSEY
In Guernsey, Butterfield offers private banking, lending, asset
Butterfield in Guernsey has continued to support initiatives and its
management, custody, administered banking and fiduciary services.
profile in the local community through sponsorships of the Guernsey
Volleyball Junior Development Programme, the Guernsey Squash
Net interest income increased by $6.0 million, from $12.4 million in
Rackets Association’s Racketball coaching programme and Guernsey
2010, to $18.4 million in 2011, from the purchase of higher-yielding,
Annual Squash Open, The Guernsey Sinfonietta, as well as the Classic
longer duration assets, and strong growth in our lending book.
Yacht Regatta, which was hosted on the island.
Non-interest income decreased by $1.3 million from $23.0 million in
2010 to $21.7 million in 2011, from the loss of two administered bank
To build upon the Group’s reputation and profile in the area of
mandates and lower foreign exchange revenues, compensated in
fiduciary services, sponsorship was provided for the Society of Trust
part, by increases in asset management revenues. Total expenses
and Estate Practitioner’s Asia conference held in Singapore. Support
increased by $2.6 million to $30.2 million for the year ended
for promotional initiatives led by Guernsey Finance was also provided
31 December 2011, due to increases in professional and advisory
with a secondary sponsorship at the 2011 Guernsey Funds Forum held
fees in 2011 coupled with a non-recurring expense recovery in
in London.
2010. Total assets at 31 December 2011 were $1.5 billion, down
from $1.6 billion at 31 December 2010, due to customer deposit
balances reducing by $128 million, offset by year-on-year exchange
translation variances. Loans increased $120 million to $453 million
from $333 million at 31 December 2010 as a direct result of our
strategy to increase our lending balances with high net worth clients
investing in high end residential prime property. Client assets under
administration were $16.7 billion at 31 December 2011, up from
$16.4 billion a year earlier.
46
(in $ thousands)
Net interest income
Non-interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Net gains (losses)
Net income
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
2011
18,379
21,664
39,406
30,245
9,161
242
9,403
1,334
453
1,480
2010
12,384
$ change
5,995
% change
48.4
23,003
(1,339)
(5.8)
35,387
4,019
11.4
27,625
2,620
9.5
7,762
1,399
18.0
(1,433)
1,675
(116.9)
6,329
3,074
48.6
1,462
(128)
(8.8)
333
120
36.0
1,618 (138)
(8.5)
6,714
9,944
5,694
1,020
17.9
10,754
(810)
(7.5)
141
447
588
165
180
512
(39)
(21.7)
(65)
(12.7)
692 (104)
(15.0)
166 (1)
(0.6)
Butterfield Annual Report 2011 47
UNITED KINGDOM
In the UK, Butterfield Private Bank provides a range of exclusive
During 2011, Butterfield re-focused its business on providing exclusive
banking, lending, treasury and investment management services. This
private banking and wealth management services to wealthy clients
includes family office services to high net worth international clients
and their families through the exit of non-core business. As part of
and their advisers from offices in London.
a re-focused private banking strategy, the Bank enhanced its credit
The UK’s net loss of $3.3 million in 2011 was a result of credit
relationship managers to meet the demand of its clients. The Bank’s
provisions relating to historical non-core private banking business.
lending focus is on providing lending services to wealthy clients
These specific loan loss provisions generated a realised loss, net of
at modest loan-to-value ratios secured on prime Central London
offering through the recruitment of a specialist team of experienced
tax, of $4.7 million. Total revenues before gains and losses were
residential property.
$16.9 million, up $4.6 million from $12.3 million as a result of an
increase in UK residential lending and a higher return the Bank
The Bank made a number of small donations to a range of charities
achieved on its debt securities in 2011. At 31 December 2011, total
connected with private clients during the year.
assets were $1.0 billion, down $129 million due to the decrease in
customer deposits, mainly reflecting the strategic decision to exit
non-core private banking business.
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Revenue before gains and losses
Total expenses
Net income before gains and losses
Gains and losses
Net loss
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
48
2011
12,688
(6,724)
10,929
16,893
20,253
(3,360)
45
2010
9,381
$ change
3,307
% change
35.3
(7,136)
412
(5.8)
10,027
902
9.0
12,272
4,621
37.7
16,088
4,165
25.9
(3,816)
456
(11.9)
(9,964)
10,009
(100.5)
(75.9)
(3,315)
(13,780)
10,465
735
434
976
939
415
(204)
(21.7)
19
4.6
1,105 (129)
(11.7)
1,276
1,263
13
1.0
330
309
639
101
331
296
(1)
(0.3)
13
4.4
627
12
1.9
109 (8)
(7.3)
GROUP ASSET MANAGEMENT
Butterfield Asset Management focuses on fulfilling the financial needs
mass affluent clients are served out of Bermuda and the Cayman
of those who demand the highest level of service and expertise.
Islands as part of the Bank’s community banking platform.
Clients have direct access to their portfolio managers who are, in turn,
supported by a Group investment discipline designed to leverage
Group Asset Management revenues increased by $0.3 million in 2011,
resources from across the organisation, including a Core Strategy &
largely attributable to a change in the mix of services favouring higher
Research Team based in London.
margin offerings.
The Group provides a broad range of investment services to
Assets under management decreased by $0.4 billion (7.1%) to
institutional and private clients in Bermuda, the Cayman Islands,
$5.6 billion in 2011, largely due to a fall in money market balances in
Guernsey, and the United Kingdom. Principal services include
Cayman and particularly Bermuda as clients sought better yielding
discretionary investment management and managed portfolio
alternatives for short-term investments. In addition, Cayman
services. Advisory and self-directed brokerage offerings are available
institutional assets under management declined as insurance captives
to clients in Bermuda and the Cayman Islands. The Group also offers
moved to manage more of their assets onshore. Private client asset
money market and mutual funds to both client bases. Institutional
growth was strong in the first half of the year, especially in the UK. In
clients consist primarily of captive insurance companies in Bermuda
the second half of the year, private clients were increasingly reluctant
and the Cayman Islands. High net worth private clients and their
to invest in correcting and volatile markets and select large trust
fiduciary vehicles are served from all four jurisdictions. Retail and
mandates concluded as scheduled in Guernsey.
Non-interest income
(in $ thousands)
Bermuda
Cayman Islands
Guernsey
UK
Total
Asset Management
2011
8,858
4,150
4,255
5,679
22,942
2010
9,396
4,407
3,784
5,078
22,665*
$ change
(538)
(257)
471
601
277
*Excludes non-interest income of $1.9 million attributable to the Hong Kong subsidiary disposed on 8 September 2010.
Note: the above amounts quoted are net of inter-jurisdiction eliminations.
Total assets under management (“AUM”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
The Bahamas
UK
Total
Butterfield
Funds
2,653
211
141
40
330
2011
Other
assets
752
760
447
1
309
Total AUM
3,405
Butterfield
Funds
2,870
971
588
41
639
270
180
26
331
2010
Other
assets
746
Total AUM
3,616
837
512
9
296
1,107
692
35
627
3,375
2,269
5,644
3,677
2,400
6,077
Butterfield Annual Report 2011 49
GROUP TRUST
Our trust and corporate services specialists deliver fiduciary solutions
Trust revenues are derived from a combination of fixed fees, fees
to meet a range of client needs, including estate and succession
based on the market values of assets held in trust and fees based
planning, administration of complex asset holdings, and tax-efficient
on time spent in relation to the range of personal trust and company
co-ordination for the affairs of international families, the pension
administration services and pension and employee benefit trust
and employee benefit planning requirements of multi-national
services we provide.
corporations and institutions.
In 2011, trust revenues totalled $30.0 million, almost 2% higher than
We provide both personal and institutional trust services from our
the $29.5 million recorded in 2010, excluding $1.0 million in revenue
operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey
related to the Malta business that was sold in 2010. Revenue
and Switzerland, with our multi-jurisdictional capability therefore
increases were seen in four of our five trust operations: The Bahamas
spanning the world’s leading international trust and fiduciary centres.
was up 4.3%, Bermuda increased 3.6% and Guernsey rose 1.7%, while in
Alongside our traditional strengths in providing services to families
a restructuring of our Bahamas operations to focus predominantly
and institutions with links to the United Kingdom, North America and
on trust activities was announced. In September 2010, the Bank
Europe, our business increasingly supports clients connected to the
concluded the sale of its trust operations located in Malta, which did
Switzerland revenues were up 38.2% year on year. In December 2010,
Asian and Latin American regions.
not contribute significantly to this line of business. Total Trust assets
under administration were $40.7 billion as at 31 December 2011,
Our goal is to develop long-term relationships with our clients, based
compared to $40.5 billion the prior year.
on consistently reliable service and underpinned by the technical
expertise and competencies of our team. To this end, training and
continual professional development for our staff remained a key
priority in 2011. Following our selection as The Society of Trust and
Estates Professional’s (STEP) Institutional Trust Company of the
Year in 2009/10, we were pleased to be recognised as one of Private
Client Practitioner’s Top 25 Trust Companies in 2011. Butterfield Trust
(Switzerland) Limited also received a nomination as Swiss Trust
Company of the Year for Citywealth’s 2012 Offshore Awards.
50
The tables below shows trust revenues by jurisdiction, followed by assets under administration.
Non-interest income
(in $ thousands)
Bermuda
Cayman Islands
Guernsey
Switzerland
The Bahamas
UK
Total
2011
13,166
4,879
6,549
677
4,180
544
Trust
2010
12,704
5,263
6,437
490
4,009
607
29,995
29,510*
$ change
462
(384)
112
187
171
(63)
485
*Excludes non-interest income of $1.0 million attributable to the Malta subsidiary disposed on 8 September 2010.
Note: the above amounts quoted are net of inter-jurisdiction eliminations.
Total Trust assets under administration (“Trust AUA”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
Switzerland
The Bahamas
UK
Total
2011
24,735
2,188
9,944
386
3,439
-
2010
22,835
3,401
10,754
349
3,172
-
40,692
40,511
Butterfield Annual Report 2011 51
Financials
52
MANAGEMENT’S FINANCIAL
REPORTING RESPONSIBILITY
The Management of The Bank of N.T. Butterfield & Son Limited is responsible for the preparation of the Consolidated Financial Statements
contained in this Report, which covers all of the interests of the Bank. Management has fully disclosed its income, assets, liabilities and off Balance
Sheet commitments. These Financial Statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and, where appropriate, are based on the best estimates and judgement of Management.
Management has established and maintains a system of financial reporting and internal controls to provide reasonable assurance that transactions
are properly authorised and recorded, assets are protected against unauthorised use or disposition and liabilities are recognised. These
procedures include the careful selection and training of qualified staff, the establishment of organisational structures providing an appropriate and
well-defined division of responsibilities, and the communication of policies and standards of business conduct throughout the Bank.
The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic inspections of all aspects of
the Bank’s operations. In addition, the Bank’s Head of Group Internal Audit 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 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
29 February 2012
Bradley Rowse
Executive Vice President & Chief Financial Officer
29 February 2012
Butterfield Annual Report 2011 53
54
CONSOLIDATED BALANCE SHEET
As at 31 December (in thousands of Bermuda dollars)
Assets
Cash and demand deposits with banks
Cash equivalents
Total cash and cash equivalents
Short-term investments
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 real estate owned
Other assets
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Customers
Banks
Total deposits
Employee future benefits
Accrued interest
Preference Share dividends payable
Payable for investments purchased
Other liabilities
Total other liabilities
Subordinated capital
Total liabilities
Shareholders’ equity
Common Share capital (BMD 0.01 par; authorised Shares 26,000,000,000
(2010: BMD 0.01 par; authorised Shares 26,000,000,000)
issued and outstanding: 549,468,349 (2010: 549,143,448)
Preference Share capital (USD 0.01 par; USD 1,000 liquidation preference)
issued and outstanding: 200,000 (2010: 200,000)
Contingent Value Convertible Preference Share capital (USD 0.01 par)
issued and outstanding: 7,464,186 (2010: 7,789,087)
Additional paid-in capital
Accumulated deficit
Less: Treasury Common Shares: 2,163,958 Shares (2010: 2,401,593 Shares)
Accumulated other comprehensive loss
Total Shareholders’ equity
Total liabilities and Shareholders’ equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
Robert A. Mulderig
Chairman of the Board
Robert Steinhoff
Vice Chairman
2011
2010
413,213
1,566,245
1,979,458
34,814
62,591
1,962,346
64,789
2,089,726
4,247,260
276,114
25,259
15,937
33,247
32,582
-
27,354
62,358
8,824,109
300,865
2,128,834
2,429,699
26,392
18,088
2,611,056
-
2,629,144
4,043,360
261,955
17,691
16,017
38,946
33,534
50,817
-
75,505
9,623,060
961,002
977,417
6,439,076
125,362
7,525,440
104,913
8,905
715
-
86,656
201,189
267,755
7,994,384
5,494
2
75
1,377,556
(490,377)
(21,723)
(41,302)
829,725
8,824,109
7,170,963
79,679
8,228,059
85,209
9,647
715
112,663
94,680
302,914
282,799
8,813,772
5,491
2
78
1,376,037
(509,579)
(24,127)
(38,614)
809,288
9,623,060
Bradford Kopp
President & Chief Executive Officer
Butterfield Annual Report 2011 55
CONSOLIDATED STATEMENTS 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 agreement
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 (losses) gains on trading investments
Net realised gains (losses) on available for sale investments
Other-than-temporary impairment losses on available for sale investments
Realised loss on disposal of subsidiaries
Net other gains (losses)
Total net 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 income (loss) before income taxes
Income tax benefit
Net income (loss)
Cash dividends declared on Contingent Value Convertible Preference Shares
Cash dividends declared on Preference Shares
Preference Shares guarantee fee
Net income (loss) attributable to Common Shareholders
Income (loss) per Common Share
Basic
Diluted
The accompanying notes are an integral part of these Consolidated Financial Statements.
56
2011
22,942
33,302
31,519
29,995
11,780
5,708
135,246
202,473
45,640
10,846
258,959
34,736
10,486
2
45,224
213,735
(14,326)
199,409
(919)
2,059
-
-
3,135
338,930
150,752
55,037
29,316
18,762
14,500
5,799
5,257
19,068
298,491
40,439
33
40,472
(3,270)
(16,000)
(2,000)
19,202
0.03
0.03
2010
24,544
33,941
32,479
30,534
13,574
8,348
143,420
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)
99,875
159,082
54,037
27,469
13,811
15,405
5,711
5,002
28,948
309,465
(209,590)
1,975
(207,615)
-
(16,000)
(2,000)
(225,615)
(0.47)
(0.47)
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the year ended 31 December (in thousands of Bermuda dollars)
Common Share capital issued and outstanding
Balance at beginning of year (2011: 549,143,448 Shares; 2010: 99,060,111 Shares)
Issuance (2011: nil Shares; 2010: 147,703,758 Shares)
Reduction in par value of Shares
Repurchased (2011: nil Shares; 2010: 107,571,361 Shares)
Rights conversion (2011: nil Shares; 2010: 99,173,842 Shares)
Conversion of Mandatorily and Contingent Convertible Preference Shares (2011: nil Shares; 2010: 310,302,028 Shares)
Conversion of Contingent Value Convertible Preference Shares (2011: 324,901 Shares; 2010: 475,070 Shares)
Balance at end of year (2011: 549,468,349 Shares; 2010: 549,143,448 Shares)
Preference Shares
Balance at beginning of year (2011: 200,000 Shares; 2010: 200,000 Shares)
Issuance (2011: nil Shares; 2010: nil Shares)
Balance at end of year (2011: 200,000 Shares; 2010: 200,000 Shares)
Mandatorily Convertible Preference Shares
Balance at beginning of year (2011: nil Shares; 2010: nil Shares)
Issuance (2011: nil Shares; 2010: 281,770 Shares)
Conversion to Common Shares (2011: nil Shares; 2010: 281,770 Shares)
Balance at end of year (2011: nil Shares; 2010: nil Shares)
Contingent Convertible Preference Shares
Balance at beginning of year (2011: nil Shares; 2010: nil Shares)
Issuance (2011: nil Shares; 2010: 93,230 Shares)
Conversion to Common Shares (2011: nil Shares; 2010: 93,230 Shares)
Balance at end of year (2011: nil Shares; 2010: nil Shares)
Contingent Value Convertible Preference Shares
Balance at beginning of year (2011: 7,789,087 Shares; 2010: nil Shares)
Rights conversion (2011: nil Shares; 2010: 8,264,157 Shares)
Conversion to Common Shares (2011: 324,901 Shares; 2010: 475,070 Shares)
Balance at end of year (2011: 7,464,186 Shares; 2010: 7,789,087 Shares)
Additional paid-in capital
Balance at beginning of year
Stock option plan expense
Reduction of additional paid-in capital on transfer and sale of Treasury Shares
Issuance of Common 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
Balance at end of year
Accumulated deficit
Balance at beginning of year
Net income (loss) for year
Cash dividends declared on Contingent Value Convertible Preference Shares
Cash dividends declared on Preference Shares
Preference Shares guarantee fee
Balance at end of year
The accompanying notes are an integral part of these Consolidated Financial Statements.
2011
5,491
-
-
-
-
-
3
5,494
2
-
2
-
-
-
-
-
-
-
-
78
-
(3)
75
1,376,037
3,567
(2,048)
-
-
-
-
-
-
1,377,556
(509,579)
40,472
(3,270)
(16,000)
(2,000)
(490,377)
2010
99,060
144,836
(241,429)
(1,076)
992
3,103
5
5,491
2
-
2
-
3
(3)
-
-
1
(1)
-
-
83
(5)
78
764,206
4,019
(6,939)
30,192
281,767
93,229
241,429
(3,103)
(28,763)
1,376,037
(283,964)
(207,615)
-
(16,000)
(2,000)
(509,579)
Butterfield Annual Report 2011 57
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (Continued)
For the year ended 31 December (in thousands of Bermuda dollars)
Treasury Common Shares
Balance at beginning of year (2011: 2,401,593 Shares; 2010: 3,426,106 Shares)
Share-based compensation
Net purchases, sales and transfers of Treasury Shares
Balance at end of year (2011: 2,163,958 Shares; 2010: 2,401,593 Shares)
Accumulated other comprehensive loss
Balance at beginning of year
Net change in unrealised gains (losses) on translation of net investment in foreign operations
Net change in unrealised gains 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 income (loss)
Net income (loss)
Other comprehensive (loss) income
Total comprehensive income (loss)
Components of accumulated other comprehensive loss
Cumulative unrealised losses on translation of investment in foreign operations
Cumulative unrealised gains (losses) on available for sale 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.
2011
(24,127)
356
2,048
(21,723)
(38,614)
823
19,845
-
(23,356)
(41,302)
829,725
40,472
(2,688)
37,784
(11,321)
1,663
(31,644)
(41,302)
2010
(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)
58
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended 31 December (in thousands of Bermuda dollars)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to operating cash flows:
Depreciation and amortisation
Write down of computer software in development
Decrease in carrying value of investments in affiliates
Share-based payments
Loss on sale of premises and equipment
Net (gain) loss on sale of affiliate / subsidiaries
Net gain on repayment of sub-debt
Net realised (gains) losses of available for sale securities
Other-than-temporary impairments on available for sale investments
Provision for credit losses
Changes in operating assets and liabilities:
Increase in accrued interest receivable
Decrease in other assets
Decrease in accrued interest payable
Decrease in other liabilities
Net change in trading investments
Cash provided by operating activities
Cash flows from investing activities
Net (increase) decrease in short-term investments
Net proceeds on sale of affiliate
Additions to premises, equipment and computer software
Net (increase) decrease in loans
Held to maturity investments: proceeds from maturities
Held to maturity investments: purchases
Available for sale investments: proceeds from sale and maturities
Available for sale investments: purchases
Cash and demand deposits held by subsidiaries at time of sale
Cash provided by investing activities
Cash flows from financing activities
Net decrease in demand and term deposit liabilities
Repayment of subordinated capital
Issuance of Common Share capital
Issuance of Preference Share capital
Cost of issuing Share capital and rights
Common Shares repurchased
Cash dividends paid on Contingent Value Convertible Preference Shares
Cash dividends paid on Preference Shares
Preference Shares guarantee fee paid
Cash (used in) provided by financing activities
Net effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Cash interest paid
Cash income tax paid
Non-cash item
Transfer to Other Real Estate Owned and other repossessed assets
2011
40,472
39,084
-
952
3,923
-
(3,178)
(1,125)
(2,059)
-
14,326
(7,769)
12,918
(731)
(8,716)
88,097
(44,422)
43,675
(8,668)
3,178
(33,476)
(255,145)
-
(64,789)
2,383,659
(1,788,827)
-
235,932
(701,240)
(13,875)
-
-
-
-
(3,270)
(16,000)
(2,000)
(736,385)
6,537
(450,241)
2,429,699
1,979,458
47,268
871
27,354
2010
(207,615)
25,216
3,831
1,959
7,612
63
7,430
-
107,047
60,522
41,970
(1,520)
23,259
(2,707)
(2,441)
64,626
2,371
66,997
20,802
-
(39,611)
104,878
20,584
-
2,181,165
(2,085,825)
(4,657)
197,336
(380,828)
-
295,000
385,001
(28,763)
(130,000)
-
(16,622)
(2,000)
121,788
(21,597)
364,524
2,065,175
2,429,699
58,770
468
-
The accompanying notes are an integral part of these Consolidated Financial Statements.
Butterfield Annual Report 2011 59
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. Services offered include retail, private & corporate
banking, treasury, custody, asset management and personal & institutional trust services. The Bank provides such services from seven jurisdictions:
Bermuda, Barbados, Cayman, Guernsey, Switzerland, The Bahamas and the United Kingdom. The Bank holds all applicable licenses required in the
jurisdictions in which it operates.
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 year, 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 the future financial condition and results of operations. Management believes that the most critical accounting policies upon which
the financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for credit losses
Fair value of financial instruments
Impairment of long-lived assets
Impairment of goodwill
Employee future benefits
Share-based payments
i.
ii.
iii.
iv.
v.
vi.
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 VIE 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 of the parent company
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, whilst
associated revenues and expenses are translated to Bermuda dollars at the average rates of exchange prevailing throughout the year. 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”).
60
Investments are classified primarily as AFS when used to manage the Bank’s exposure to interest rate and liquidity movements, as well as to make
strategic longer-term investments. AFS investments are carried at fair value in the Consolidated Balance Sheet with unrealised gains and losses reported
as a 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.
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. With respect to the closed ended fund, the Bank uses the net assets value as a practical
expedient for fair value. Unquoted equity investments, which are held directly by the Bank and which do not have readily determinable fair values, are
recorded at cost and reviewed for impairment if indicators of impairment exist.
Investments in affiliates includes investments whereby the Bank has the ability to influence, but not control, the financial or operating policies of such
entities, are accounted for using the equity method of accounting.
Recognition of other-than-temporary impairments
Investments in debt securities in unrealised loss positions are analysed as part of Management’s ongoing assessment of other-than-temporary
impairment (“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 determines whether any credit losses exist to identify any OTTI. Under certain circumstances,
Management will perform qualitative determination. Alternatively, Management estimates cash flows over the remaining lives of the underlying security
to assess whether credit losses exist. 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 investments, the decrease in fair value relating to factors other than credit losses are recognised
in Other Comprehensive Income (Loss) (“OCI”). 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 2011,
Management’s cash flow forecasts for its Pass-through note investment (“PTN”) was created in conjunction with a specialist in analytical cash flow
modelling. Management also performs other analyses to support its cash flow projections to assess the reasonability. 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.
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 as 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.
Butterfield Annual Report 2011 61
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. Impaired loans include all non-accruing loans and all loans modified in a
troubled debt restructuring (‘‘TDR’’) even if full collectability is expected following the restructuring.
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. If the Bank determines
that part of the allowance is uncollectible, that amount is charged off.
Non-accrual
Commercial, commercial real estate and consumer loans (excluding credit card consumer loans) are placed on non-accrual status immediately if:
in the opinion of Management, full payment of principal or interest is in doubt; or
(cid:115)(cid:0)
(cid:115)(cid:0) principal or interest is 90 days past due.
Residential mortgages are placed on non-accrual status immediately if:
in the opinion of Management, full payment of principal or interest is in doubt; or
(cid:115)(cid:0)
(cid:115)(cid:0) when principal or interest is 90 days past due, unless the loan is well secured and any ongoing collection efforts are reasonably expected to 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.
Loans Modified in a Troubled Debt Restructuring
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. If a
restructuring is considered a TDR, the Bank is required to make certain disclosures in the notes of the financial statements and individually evaluate the
restructured loan for impairment. The Bank employs various types of concessions when modifying a loan that it would not otherwise consider, which may
include extension of repayment periods, interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimise
economic loss and to avoid foreclosure or repossession of collateral.
Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines
to term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Commercial mortgage and construction loans modified in a TDR often involve extending the maturity date at an interest rate lower than the current
market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.
Construction loans modified in a TDR may also involve extending the interest only payment period.
Residential mortgage modifications generally involve a short-term forbearance period after which the missed payments are added to the end of the loan
term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the mortgage
remains unchanged. As the forbearance period usually involves an insignificant payment delay, they typically do not meet the reporting criteria for a TDR.
Automobile loans modified in a TDR are primarily comprised of loans where the Bank has lowered monthly payments by extending the term.
Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have, in some cases, already been taken against the
outstanding loan balance.
Loans that have been modified in a TDR are restored to accrual status only when interest and principal payments are brought current for a continuous
period of six months under the modified terms. However, performance prior to the modification, or significant events that coincide with the modification,
are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan
modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on
non-accrual status.
62
A loan that is modified in a TDR prior to becoming impaired will be left on accrual status if full collectability in accordance with the restructured terms
is expected. The Bank works with its customers in these difficult economic times and may enter into a TDR for loans that are in default, or at risk of
defaulting, even if the loan is not impaired.
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:0) Management judges the loan to be uncollectible;
(cid:115)(cid:0)
(cid:115)(cid:0)
(cid:115)(cid:0)
repayment is expected to be protracted beyond reasonable time frames;
the asset has been classified as a loss by either the Bank’s internal loan review process or external examiners; or
the customer has filed bankruptcy and the loss becomes evident owing to a lack of assets or cash flow.
The outstanding balance of commercial and consumer real estate-secured loans and residential mortgages that are in excess of the estimated property
value, less costs 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.
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 that are more than 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. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in the process of collection, amounts due from correspondent banks and highly liquid
investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in fair value. Such investments
are those with less than three months’ maturity from the date of acquisition and include unrestricted term deposits, certificates of deposit and treasury
bills. See Note 3.
i. 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.
Butterfield Annual Report 2011 63
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.
j. Premises, Equipment and Computer Software
Land, buildings, 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.
k. Other Real Estate Owned (“OREO”)
OREO comprise commercial and residential real estate properties acquired in partial or total satisfaction of loans acquired through foreclosure
proceedings, acceptance of a deed-in-lieu of foreclosure or by taking possession of assets that were used as loan collateral. These properties are
recorded at fair value less estimated costs to sell the property. If the recorded investment in the loan exceeds the property’s fair value at the time of
acquisition, a charge-off is recorded against the specific allowance. Subsequent decreases in the property’s fair value and operating expenses of the
property are recognised through charges to non-interest expense.
l. 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 of 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 year 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
year earnings.
The changes in the fair value of a derivative that is designated and qualifies as a foreign currency hedge is recorded in either current year earnings or
other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge 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 year 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.
m. 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.
64
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, respectively. 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.
n. 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 Consolidated Statement of Operations 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 Consolidated Statement of Operations 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).
o. 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
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.
p. 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 relevant accounting 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.
Butterfield Annual Report 2011 65
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 cash equivalents
The carrying amount of cash and demand deposits with banks, being short term in nature, is deemed to equate to the fair value.
Cash equivalents include unrestricted term deposits, certificates of deposit and treasury bills with a maturity of less than three months from the date
of acquisition and the carrying value at cost is considered to approximate fair value because they are short term in nature, bear interest rates that
approximate market rates, and generally have negligible credit risk.
Short-term investments
Short-term investments comprise restricted term and demand deposits and the carrying value at cost is considered to approximate fair value because
they are short term in nature, bear interest rates that approximate market rates, and generally have negligible credit risk.
Investments and employee future benefits plans’ assets
The fair values of investments and pension plan 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. For significant fixed-rate loan exposures, fair value is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities of
such loans.
Accrued interest
The carrying amounts of accrued interest receivable and payable are assumed to approximate their fair values given their short-term nature.
Other real estate owned (“OREO”)
OREO assets are carried at the lower of cost or fair value less estimated costs to sell. Fair value is based on third-party appraisals adjusted to reflect
Management’s judgment as to the realisable value of the properties. Appraisals of OREO properties are updated on an annual basis.
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.
Derivatives
Fair value of exchange-traded derivatives is based on quoted market prices. Over-the-counter (OTC) derivative contracts may include forward, swap and
option contracts relating to interest rates or foreign currencies. Depending on the product and the terms of the transaction, the fair value of the OTC
derivative products are modelled taking into account the counterparties’ creditworthiness and using a series of techniques. Many pricing models do not
entail material subjectivity because the methodologies employed do not necessitate significant judgements and the pricing inputs are observed from
actively quoted markets, as is the case for interest rate swap and option contracts.
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.
q. Credit Related Arrangements
In the normal course of business, the Bank enters into various commitments to meet the credit requirements of its customers. Such commitments, which
are not included in the Consolidated Balance Sheet, include:
(cid:115)(cid:0) 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.
66
(cid:115)(cid:0) 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.
(cid:115)(cid:0) 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 13) 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.
r. Income Taxes
The Bank uses the asset and liability method whereby income taxes reflect the expected future tax consequences of temporary differences between
the financial statements’ carrying amounts of assets and liabilities and their respective tax bases. Accordingly, a deferred income tax asset or liability
is determined for each temporary difference based on the enacted tax rates to be in effect on the expected reversal date of the temporary difference.
Income taxes on the Consolidated Statement of 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.
s. Consolidated Statement of Cash Flows
For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents include cash on hand, cash items in the process of collection,
amounts due from correspondent banks and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of change in fair value.
t. Earnings Per Share
Earnings per Share have been calculated using the weighted average number of Common Shares outstanding during the year (see also Note 20).
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.
u. 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.
v. 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 Operations.
w. New Accounting Pronouncements
The following accounting developments were issued during the year ending 31 December 2011:
Financing receivables and the allowance for credit losses disclosures
In July 2010, the Financial Accounting Standards Board (“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 and
were effective for the Bank on 1 January 2011. The prior-period figures for loan disclosures have been reclassified to conform to the current enhanced
note disclosures required by the Standard. The Standard did not affect the Bank’s consolidated financial condition or results of operations.
Butterfield Annual Report 2011 67
Troubled debt restructurings
During March 2011, the FASB issued an accounting standards update, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt
Restructuring” to assist creditors in determining whether a loan modification is a TDR. The new guidance was effective for public companies in interim
and annual periods beginning on or after 15 June 2011 and must be applied retrospectively to restructurings occurring on or after the beginning of the
year. The Bank applied the provisions of this update retrospectively to all modifications and restructurings occurring on or after 1 January 2011. As a
result of the retrospective application, the Bank classified $33.6 million loan modifications as TDRs that, in previous periods, had not been classified as
TDRs. These newly identified TDRs did not have a significant impact on the specific allowance or provision expense. At 31 December 2011, these amounts
included $20.9 million of performing loans that were not previously considered to be impaired loans.
Fair value measurements
In May 2011, the FASB issued accounting standard update, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure requirements in US GAAP and IFRS”. The amendments clarify the application of the highest and best use and valuation
premise concepts, preclude the application of blockage factors in the valuation of all financial instruments and include criteria for applying the fair value
measurement principles to portfolios of financial instruments. The amendments additionally prescribe enhanced financial statement disclosures for Level
3 fair value measurements. The new amendments will be effective for first interim or annual period beginning on or after 15 December 2011. The new
guidance will require prospective application. The impact of this additional accounting guidance is expected to be primarily on disclosures.
Repurchase agreements
During May 2011, the FASB issued an accounting standard update, “Reconsideration of Effective Control for Repurchase Agreements“. The amendments
in this update remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets
on substantially the agreed terms, even in the event of default by the transferee. The amendments in this update also eliminate the requirement to
demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.
The guidance in this update is effective for the first interim or annual period beginning on or after 15 December 2011. The guidance should be applied
prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted.
Other comprehensive income
In June 2011, the FASB issued an accounting standards update, “Presentation of Comprehensive Income”, which eliminates the current option to report
other comprehensive income and its components in the statement of changes in equity. The amendments are effective for fiscal years, and interim
periods within those years, beginning after 15 December 2011 and should be applied retrospectively. Early adoption is permitted but the Bank elected
not to early adopt. These amendments do not require any transition disclosures. The impact of these amendments is primarily on disclosures on the face
of the Consolidated Statement of Operations.
Goodwill impairment test
During September 2011, the FASB issued an accounting standards update, “Testing Goodwill for Impairment (the revised standard)” that permits an
entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before
applying the two-step goodwill impairment test. The update is effective for annual and interim goodwill impairment tests performed in fiscal years
beginning after 15 December 2011. Early adoption is permitted. The Bank is assessing the impact of these amendments.
68
NOTE 3: CHANGE IN ACCOUNTING POLICY
Effective 1 January 2011, the Bank changed its accounting policy with respect to cash and cash equivalents for the purposes of the Consolidated
Statement of Cash Flows. The Bank defines cash and cash equivalents to include cash on hand, cash items in the process of collection, amounts due
from correspondent banks and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant
risk of change in fair value. Such investments are those with less than three months maturity from the date of acquisition and include unrestricted term
deposits, certificates of deposit, treasury bills and securities purchased under agreements to resell. Previously cash and demand deposits with banks only
included cash and demand deposits, vault cash and cash in transit for the purposes of the Consolidated Statement of Cash Flows. The Bank believes the
new policy is preferable as it more closely reflects the manner in which the Bank manages its liquid assets.
The impact of this voluntary change in accounting policy on the Consolidated Financial Statements since the Bank’s adoption of the change in accounting
policy is shown in the table below:
Consolidated Balance Sheet
Cash and demand deposits with banks
As reported
2010
Adjustments
2010
325,367
(24,502)
Cash equivalents
Term deposits with banks 1,950,179
-
Certificates of deposit and treasury bills
1,950,179
Total cash equivalents
(1,890)
180,545
178,655
Total cash and cash equivalents
2,275,546
154,153
Short-term investments
-
26,392
Restated
2010
300,865
1,948,289
180,545
2,128,834
2,429,699
26,392
Debt and equity securities
Trading
Available for sale
Total investments in debt and equity securities
18,088
2,791,601
2,809,689
As reported
2010
18,088
-
(180,545)
2,611,056
(180,545) 2,629,144
Adjustments
2010
Restated
2010
Extract of Consolidated Cash Flow Statement
Cash flows from investing activities
Net increase in term deposits with banks
Net decrease in short-term investments
Available for sale securities: proceeds from sale and maturities
Available for sale securities: purchases
(536,208)
-
6,264,970
(6,224,605)
536,208
20,802
(4,083,805)
4,138,780
-
20,802
2,181,165
(2,085,825)
Net effect of exchange rates on cash and cash equivalents
(14)
(21,583)
(21,597)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(225,882)
551,249
325,367
590,406
1,513,926
2,104,332
364,524
2,065,175
2,429,699
NOTE 4: CASH AND CASH EQUIVALENTS
Unrestricted
Non-interest earning
Cash and demand deposits
Interest earning
Demand deposits
Cash equivalents
Sub-total - Interest earning
2011
Non-
Bermuda
Bermuda
Total
Bermuda
2010
Non-
Bermuda
Total
176,091
30,847
206,938
118,155
42,895
161,050
49
206,226
489,391 1,076,854
489,440 1,283,080
206,275
1,566,245
1,772,520
44
602,135
602,179
139,771
1,526,699
1,666,470
139,815
2,128,834
2,268,649
Total cash and cash equivalents
665,531 1,313,927
1,979,458
720,334
1,709,365
2,429,699
Butterfield Annual Report 2011 69
NOTE 5: SHORT-TERM INVESTMENTS
Unrestricted
Interest earning
Term deposits maturing between three to six months
Term deposits maturing between six to twelve months
Total unrestricted short-term investments
Affected by drawing restrictions related to minimum
reserve and derivative margin requirements
Non-interest earning
Demand deposits
Interest earning
Demand deposits
Total restricted short-term investments
2011
Non-
Bermuda
Bermuda
Total
Bermuda
-
-
-
4,630
2,900
7,530
4,630
2,900
7,530
-
12,394
12,394
-
-
-
-
2010
Non-
Bermuda
392
1,215
1,607
Total
392
1,215
1,607
6,156
6,156
12,641
12,641
2,249
14,643
14,890
27,284
18,157
18,157
472
6,628
18,629
24,785
Total short-term investments
12,641
22,173
34,814
18,157
8,235
26,392
NOTE 6: INVESTMENTS
Amortised cost, carrying amounts and estimated fair value
The amortised cost, carrying amounts and fair values are as follows:
2011
2010
Gross
Gross
Amortised unrealised unrealised
losses
gains
cost
Carrying
amount /
Fair value
Gross
Amortised unrealised
gains
cost
Gross
unrealised
losses
Carrying
amount /
Fair value
Trading
Debt securities issued by non-US governments
Mutual funds (1)
Total trading
5,788
56,964
62,752
419
224
643
(236)
(568)
(804)
5,971
56,620
62,591
6,553
11,981
18,534
150
273
423
(192)
(677)
(869)
6,511
11,577
18,088
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
Pass-through note
Equity securities
Total available for sale
354,847
778,387
2,411
14,419
(765)
(2,002)
356,493
790,804
854,273
927,598
4,885
398
(12)
(10,502)
859,146
917,494
111,172
1,966
(106)
113,032
131,028
1,675
(11)
132,692
122,987
412,285
149,759
33,696
120
1,963,253
38
421
-
-
-
19,255
(1,377)
(3,744)
(5,413)
(6,705)
(50)
121,648
408,962
144,346
26,991
70
(20,162) 1,962,346
149,948
352,960
152,434
62,762
77
2,631,080
76
14
-
-
-
7,048
(304)
(5,504)
(5,623)
(5,116)
-
(27,072)
149,720
347,470
146,811
57,646
77
2,611,056
(1) The Bank invested $50 million of seed money in the BNY Mellon Butterfield Income Advantage Fund during September 2011.
70
2011
Held to maturity
US government and federal agencies
Total held to maturity
Non-credit
impairments
recognised in
AOCI
Gross
Carrying unrecognised
gains
amount
Gross
unrecognised
losses
-
-
64,789
64,789
228
228
(429)
(429)
Amortised
cost
64,789
64,789
Fair
values
64,588
64,588
There were no held to maturity investments as at 31 December 2010.
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.
2011
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
Pass-through note
Equity securities
Total available for sale securities
with unrealised losses
Held to maturity
US government and federal agencies
Total held to maturity securities
with unrealised losses
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
Pass-through note
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
Total
fair value
Total gross
unrealised
losses
48,623
144,364
9,493
30,179
217,612
-
-
70
(765)
(1,585)
(54)
(3)
(2,859)
-
-
(50)
-
72,600
2,198
47,267
125,101
144,346
26,992
-
-
(417)
(52)
(1,374)
(885)
(5,413)
(6,705)
-
48,623
216,964
11,691
77,446
342,713
144,346
26,992
70
(765)
(2,002)
(106)
(1,377)
(3,744)
(5,413)
(6,705)
(50)
450,341
(5,316)
418,504
(14,846)
868,845
(20,162)
30,034
30,034
(429)
(429)
-
-
-
-
30,034
30,034
(429)
(429)
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Gross
unrealised
losses
Fair
value
128,619
775,157
3,239
108,611
8,075
-
33,304
(12)
(10,459)
(11)
(304)
(46)
-
(2,589)
-
23,337
-
-
322,995
146,811
24,342
-
(43)
-
-
(5,458)
(5,623)
(2,527)
Total
fair value
128,619
798,494
3,239
108,611
331,070
146,811
57,646
Total gross
unrealised
losses
(12)
(10,502)
(11)
(304)
(5,504)
(5,623)
(5,116)
1,057,005
(13,421)
517,485
(13,651)
1,574,490
(27,072)
There were no held to maturity investments as at 31 December 2010.
Butterfield Annual Report 2011 71
The following is a description of the Bank’s main investments.
Certificates of deposit
As of 31 December 2011, gross unrealised losses on the Bank’s holdings of certificates of deposit (“CDs”) were $0.8 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 or above) 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 2011, gross unrealised losses on securities related to United States (“US”) government and federal agencies were $2.0 million,
$0.4 million of which related to investments that were in an unrealised loss position for longer than 12 months. Overall, 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 2011, gross unrealised losses on debt securities issued by non-US governments were $0.1 million, $0.05 million of which related
to investments that were in an unrealised loss position for greater than 12 months. All securities in this category were issued by governments of the
United Kingdom and Caribbean jurisdictions. Management believes that 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 2011, gross unrealised losses related to corporate debt securities guaranteed by non-US governments were $1.4 million, all of
which related to investments that were in an unrealised loss position for greater than 12 months. All the bank-issued securities acquired are explicitly
guaranteed by the following governments: United Kingdom, Australia, Denmark and Germany. One security is jointly and explicitly guaranteed by
three European Governments: Belgium, France and Luxembourg. Management believes that these securities do not have any credit losses, given the
guarantees provided by the non-US governments.
Corporate debt securities
As of 31 December 2011, gross unrealised losses related to corporate debt securities were $3.7 million, of which $0.9 million related to investments
that were in an unrealised loss position for longer than 12 months. Management estimates of cash flows are based on observable market data,
issuer-specific information and credit ratings. Management believes these securities do not have any credit losses.
Asset-backed securities - Student loans
As of 31 December 2011, gross unrealised losses on student loan asset-backed securities were $5.4 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 are backed by loans that fall within the US federally guaranteed Federal Family
Education Loan Program (“FFELP”). The unrealised losses were due to maturity profiles that were longer than was initially estimated.
Pass-through note (“PTN”)
During 2010, the Bank’s investment in its remaining structured investment vehicle (“SIV”) was legally amended to a pass-through note structure
whereby the Bank maintained the identical beneficial interest in the same underlying securities of the SIV.
As of 31 December 2011, the PTN was in an unrealised loss position amounting to $6.7 million (2010: $5.1 million) for a period exceeding 12 months.
Unrealised losses have increased since 31 December 2010 as a result of general risk aversion in the market with regards to distressed assets. The net
present value of expected cash flows, or the intrinsic value, to be generated from the underlying assets of the PTN, calculated on both a stressed and
severely-stressed environment, is in excess of the amortised cost of the PTN and Management believes that these securities do not have any credit
losses. Residential housing prices in the United States, a key driver of the underlying intrinsic value, have performed better than assumed in the
models supporting the intrinsic value, which confirms that the unrealised loss is primarily attributable to market risk appetite and not to fundamental
valuations.
72
The following table presents securities by remaining term to earlier of expected or contractual maturity:
2011
Within
3 months
Remaining term to earlier of expected or contractual maturity
3 to 12
months
Over 10 No specific
years maturity
5 to 10
years
1 to 5
years
Trading
Debt securities issued by non-US governments
Mutual funds
Total trading
-
-
-
811
-
811
2,026
-
2,026
2,106
-
2,106
1,028
-
1,028
-
56,620
56,620
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
Pass-through note
Equity securities
Total available for sale
105,318
-
7,749
-
27,514
-
-
-
140,581
174,302
4,740
66,056
90,882
106,639
-
-
-
442,619
76,873
622,559
17,905
30,766
260,755
58,183
-
-
1,067,041
-
149,245
20,349
-
14,054
74,999
26,991
-
285,638
-
14,258
971
-
-
11,164
-
-
26,393
Held to maturity
US government and federal agencies
Total held to maturity securities
-
-
-
-
-
-
24,854
24,854
39,935
39,935
-
2
2
-
-
-
-
70
74
-
-
Carrying
amount
5,971
56,620
62,591
356,493
790,804
113,032
121,648
408,962
144,346
26,991
70
1,962,346
64,789
64,789
Total investments
140,581
443,430
1,069,067
312,598
67,356
56,694
2,089,726
Total by currency
Bermuda dollars
US dollars
Other
Total investments
2010
-
-
140,581
140,581
-
186,614
256,816
443,430
-
990,571
78,496
1,069,067
-
300,714
11,884
312,598
-
65,358
1,998
67,356
181
55,226
1,287
56,694
181
1,598,483
491,062
2,089,726
Within
3 months
Remaining term to earlier of expected or contractual maturity
3 to 12
months
5 to 10
years
Over 10 No specific
years maturity
1 to 5
years
Trading
Debt securities issued by non-US governments
Mutual funds
Total trading
-
-
-
728
-
728
2,968
-
2,968
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
Pass-through note
Equity securities
Total available for sale
582,783
660
-
-
39,365
-
-
-
622,808
198,362
23,575
31,770
-
121,878
-
-
-
375,585
78,001
803,851
80,384
149,720
185,160
5,872
57,646
-
1,360,634
533
-
533
-
67,803
18,298
-
1,067
129,760
-
-
216,928
2,282
-
2,282
-
21,605
2,240
-
-
11,179
-
3
35,027
-
11,577
11,577
-
-
-
-
-
-
-
74
74
Carrying
amount
6,511
11,577
18,088
859,146
917,494
132,692
149,720
347,470
146,811
57,646
77
2,611,056
Total investments
622,808
376,313
1,363,602
217,461
37,309
11,651
2,629,144
Butterfield Annual Report 2011 73
2010
Total by currency
Bermuda dollars
US dollars
Other
Total investments
Within
3 months
-
257,887
364,921
622,808
Remaining term to earlier of expected or contractual maturity
3 to 12
months
5 to 10
years
Over 10 No specific
years maturity
1 to 5
years
-
112,939
263,374
376,313
-
1,241,066
122,536
1,363,602
-
209,736
7,725
217,461
-
32,786
4,523
37,309
169
5,273
6,209
11,651
Gains and losses on investments
The following table presents gains and losses on investments:
Year ended
2011
Trading
Available
Held to
for sale maturity
Total
Trading
2010
Available
for sale
Held to
maturity
Gains (losses) other than OTTI recognised in net income (919)
2,059
Total impairment applied against carrying amount
Less: change in non-credit related
impairments recognised in OCI
OTTI impairments recognised in net income
-
-
-
-
-
-
Net gains (losses) recognised in net income
(919)
2,059
Gross unrealised gains (losses) recorded in OCI
Realised (gains) losses transferred to net income
Total net gains recognised in OCI
Non-credit related impairments recognised in OCI
Effect of transfer of HTM to AFS
Net change in gains (losses) recognised in AOCI
-
-
-
-
-
-
21,904
(2,059)
19,845
-
-
19,845
Sale proceeds and realised gains (losses)
During the year ended 31 December 2011, the Bank disposed of:
-
-
-
-
-
-
-
-
-
-
-
1,140
971
(107,047)
-
-
-
-
-
-
36,844
(97,366)
(60,522)
1,140
971
(167,569)
21,904
(2,059)
19,845
-
-
19,845
-
-
-
-
-
-
(70,203)
167,569
97,366
-
(58,557)
38,809
-
-
-
-
-
-
-
-
-
58,557
58,557
Carrying
amount
169
1,859,687
769,288
2,629,144
Total
(106,076)
36,844
(97,366)
(60,522)
(166,598)
(70,203)
167,569
97,366
-
-
97,366
(cid:115)(cid:0) Certificates of deposit totalling $580.2 million in sale proceeds, resulting in a gross realised gain of $0.8 million and a gross realised loss
of $0.4 million;
US agency securities totalling $302.8 million in sale proceeds, resulting in a gross realised gain of $1.8 million; and
(cid:115)(cid:0)
(cid:115)(cid:0) Corporate bonds totalling $88.3 million in sale proceeds, resulting in a gross realised loss of $0.2 million.
During the year ended 31 December 2010, the Bank disposed of:
(cid:115)(cid:0)
(cid:115)(cid:0)
SIV investments totalling $87.0 million in sale proceeds, resulting in a gross realised gain of $4.7 million; and
Asset-backed securities totalling $820.1 million in sale proceeds, resulting in a gross realised loss of $113.8 million.
74
NOTE 7: LOANS
The composition of the loan portfolio by collateral exposure at each of the indicated dates was as follows:
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
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Less specific allowance for credit losses on commercial real estate loans
Total commercial real estate loans after specific
allowance for credit losses
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
Residential mortgage loans
Less specific allowance for credit losses on residential mortgage loans
Total residential mortgage loans after specific allowance for credit
losses
2011
Non-
Bermuda Bermuda
-
256,442
103,922
64,733
425,097
(1,222)
423,875
-
4,230
186,715
28,209
219,154
(1,655)
217,499
Total
-
260,672
290,637
92,942
644,251
(2,877)
641,374
2010
Non-
Bermuda Bermuda
Total
276
61,739
249,965
35,539
347,519
(313)
347,206
81
4,365
357
66,104
191,699 441,664
76,030
40,491
584,155
236,636
(577)
(264)
236,372 583,578
502,110
37,178
539,288
(9,225)
330,286
2,814
333,100
(2,829)
832,396
39,992
872,388
(12,054)
567,776
44,093
611,869
(16,400)
366,366
13,047
379,413
(5,134)
934,142
57,140
991,282
(21,534)
530,063
330,271
860,334
595,469
374,279
969,748
23,964
59,469
9,147
87,889
180,469
(160)
180,309
5,862
25,073
5,731
144,002
180,668
(388)
180,280
29,826
84,542
14,878
231,891
361,137
(548)
360,589
37,296
58,582
4,995
94,756
195,629
(118)
195,511
6,025
25,035
5,241
43,321
83,617
10,236
139,450 234,206
371,380
175,751
(1,529)
(1,411)
369,851
174,340
1,348,606 1,082,308 2,430,914
(10,446)
(3,184)
(7,262)
1,341,461
(1,710)
821,857 2,163,318
(6,672)
(4,962)
1,345,422 1,075,046 2,420,468
1,339,751
816,895 2,156,646
Total gross loans
Less specific allowance for credit losses
Less general allowance for credit losses
Net loans
2,493,460 1,815,230 4,308,690
(25,925)
(12,134)
(35,505)
(12,031)
2,456,194 1,791,066 4,247,260
(13,791)
(23,474)
2,496,478 1,613,657 4,110,135
(30,312)
(36,463)
2,451,899 1,591,461 4,043,360
(18,541)
(26,038)
(11,771)
(10,425)
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 2011 is 4.90% (2010: 4.81%).
Butterfield Annual Report 2011 75
The table below presents information about the loan delinquencies:
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
30-59 days
60-89 days
2,297
-
2,297
9,866
16,680
26,546
611
3,944
6
2,776
7,337
210
26
236
1,280
1,629
2,909
299
1,722
9
839
2,869
2011
90 days
or more
6,136
4,810
10,946
47,032
-
47,032
633
1,272
76
3,351
5,332
Residential mortgage loans
68,173
37,238
52,983
158,394
Total loans
104,353
43,252
116,293
263,898
30-59 days
60-89 days
Total
delinquent
loans
Loans past due
90 days and
still accruing
interest
Total
delinquent
loans
Loans past due
90 days and
still accruing
interest
8,643
4,836
13,479
58,178
18,309
76,487
1,543
6,938
91
6,966
15,538
8,063
8,709
16,772
90,978
8,068
99,046
859
4,779
400
10,169
16,207
93,349
2010
90 days
or more
6,639
8,660
15,299
87,908
-
87,908
340
659
390
6,762
8,151
205
49
254
99
8,068
8,167
322
400
-
1,689
2,411
10,966
61,098
21,798
172,456
225,374
-
-
-
8
-
8
-
1,272
11
173
1,456
17,589
19,053
-
5
5
-
-
-
-
659
8
104
771
29,361
30,137
1,219
-
1,219
2,971
-
2,971
197
3,720
10
1,718
5,645
21,285
31,120
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
76
The table below sets forth information about the Bank’s non-accrual loans:
2011
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
Current
30-90 days
past due
Non-accrual
90 days gross recorded
investments
past due
1,590
873
2,463
8,148
89
-
46
135
45
-
45
-
261
-
144
405
6,136
4,810
10,946
7,771
5,683
13,454
47,024
55,172
633
65
3,178
3,876
983
65
3,368
4,416
Residential mortgage loans
3,149
10,907
35,394
49,450
Total loans
2010
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
13,895
11,357
97,240
122,492
Current
30-90 days
past due
Non-accrual
90 days gross recorded
investments
past due
-
-
-
-
130
-
164
294
-
22
22
6,639
8,655
15,294
6,639
8,677
15,316
2,151
87,908
90,059
519
-
843
1,362
340
382
6,658
7,380
989
382
7,665
9,036
2,483
10,870
31,737
45,090
2,777
14,405
142,319
159,501
Butterfield Annual Report 2011 77
The table below presents information about the credit quality of the Bank’s loan portfolio:
31 December 2011
Pass
Special mention
Substandard
Non-accrual
31 December 2010
Pass
Special mention
Substandard
Non-accrual
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
-
260,672
267,499
84,131
612,302
625,770
38,363
664,133
28,843
83,159
14,741
219,959
346,702
-
-
10,716
3,128
13,844
109,678
1,629
111,307
-
-
72
987
1,059
Residential mortgage loans
2,293,083
46,087
Total loans
3,916,220
172,297
-
-
4,651
-
4,651
41,766
-
41,776
-
1,383
-
7,577
8,960
42,294
97,681
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
357
66,104
421,306
58,704
546,471
773,351
40,549
813,900
42,095
83,079
9,286
215,087
349,547
Residential mortgage loans
2,071,185
Total loans
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
78
49,450
2,430,914
122,492
4,308,690
Total
gross recorded
investments
-
260,672
290,637
92,942
644,251
832,396
39,992
872,388
29,826
84,542
14,878
231,891
361,137
Total
gross recorded
investments
357
66,104
441,664
76,030
584,155
934,142
57,140
991,282
43,321
83,617
10,236
234,206
371,380
-
-
7,771
5,683
13,454
55,172
-
55,172
983
-
65
3,368
4,416
-
-
6,639
8,677
15,316
90,059
-
90,059
989
-
382
7,665
9,036
45,090
2,163,318
159,501
4,110,135
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.
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.
The table below presents the impairment methodology applied to the Bank’s loan portfolio:
Total gross loans evaluated for impairment
Commercial loans
Commercial real estate loans
Consumer loans
Residential mortgage loans
Total gross loans
2011
2010
Individually
evaluated
644,251
872,388
4,416
56,832
1,577,887
Collectively
evaluated
-
-
356,721
2,374,082
2,730,803
Individually
evaluated
583,080
991,849
9,035
45,598
1,629,562
Collectivelly
evaluated
-
-
362,345
2,118,228
2,480,573
The table below presents the changes in the allowance for credit loan losses:
Loan Allowances
Allowances at beginning of year
Provision taken during the year
Recoveries
Charge-offs
Other
Allowances at end of year
Commercial
loans
7,725
2,259
546
(1,360)
11
9,181
Commercial
real estate
loans
28,099
1,482
634
(12,280)
(10)
17,925
2011
Consumer
loans
9,120
3,882
2,890
(6,730)
6
9,168
Residential
mortgage
loans
21,831
6,703
13
(3,412)
21
25,156
2010
Total
130,317
41,970
2,456
(107,935)
(33)
66,775
Total
66,775
14,326
4,083
(23,782)
28
61,430
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
2,877
6,304
12,054
5,871
548
8,620
10,446
14,710
25,925
35,505
30,312
36,463
Butterfield Annual Report 2011 79
The table below presents information about the Bank’s impaired loans:
2011
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Credit cards
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total impaired loans
2010
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total impaired loans
2011
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Credit cards
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total impaired loans
Gross recorded
investments
Impaired loans with an allowance
Net
loans
Specific
allowance
Gross recorded
investments
Impaired loans without an allowance
Net
Specific
loans
allowance
4,007
669
4,676
41,697
(2,208)
(669)
(2,877)
(12,054)
1,799
-
1,799
29,643
240
-
-
861
1,101
30,206
77,680
(75)
-
-
(473)
(548)
(10,446)
(25,925)
165
-
-
388
553
19,760
51,755
6,611
6,056
12,667
23,178
743
-
65
2,507
3,315
26,626
65,786
-
-
-
-
6,611
6,056
12,667
23,178
-
-
-
-
-
-
-
743
-
65
2,507
3,315
26,626
65,786
Gross recorded
investments
Impaired loans with an allowance
Net
loans
Specific
allowance
2,730
57
2,787
53,849
-
314
3,807
4,121
18,372
79,129
(520)
(57)
(577)
(21,534)
-
(314)
(1,215)
(1,529)
(6,672)
(30,312)
2,210
-
2,210
32,315
-
-
2,592
2,592
11,700
48,817
Gross recorded
investments
Impaired loans without an allowance
Net
loans
Specific
allowance
3,909
8,620
12,529
36,210
989
68
3,858
4,915
26,718
80,372
-
-
-
-
-
-
-
-
-
-
3,909
8,620
12,529
36,210
989
68
3,858
4,915
26,718
80,372
Average recorded investment
Interest income recognised
Impaired loans
9,284
7,314
16,598
79,801
1,167
78
95
4,273
5,613
36,359
138,371
86
5
91
520
-
-
-
-
-
273
884
During the year ended 31 December 2011, the amount of gross interest income that would have been recorded had impaired loans been current was
$6.9 million (2010: $10.8 million).
80
The table below presents information about the Bank’s loans modified in a troubled debt restructuring as of 31 December 2011:
Effect of modification
on recorded investment
2011
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Residential mortgage loans
Total loans
Number of
contracts
4
1
5
5
11
21
Pre-modification Post-modification
outstanding
recorded
outstanding
recorded
investment
Recorded
investment
Changes in the
timing of
principal or
Interest
investment interest payments capitalisation
2,847
1,042
3,889
22,279
7,382
33,550 (1)
2,777
1,142
3,919
23,121
7,146
34,186
2,777
1,142
3,919
23,183
7,336
34,438
-
-
-
-
9
9
-
-
-
61
180
241
(1) The amount comprised $12.6 million of non-accrual loans and $20.9 million of loans on accrual status.
The table below presents information about the Bank’s loans modified in a troubled debt restructuring from 1 January 2011 to 31 December 2011
that subsequently became 90 days or more past due following a modification:
Commercial real estate loans
Number of contracts
1
Recorded investment
1,519
NOTE 8: 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, overdrafts and 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 are net of
specific allowances and the off-Balance Sheet exposure amounts disclosed are gross of collateral held as disclosed in Note 13: Commitments and
Credit Related Arrangements.
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
331,726
278,614
258,479
2,301,823
226,030
779,450
97,340
9,303
4,282,765
(35,505)
4,247,260
2011
Off-Balance
Sheet
496,753
137,023
-
100,500
2,692
94,029
-
-
830,997
-
830,997
Total credit
exposure
828,479
415,637
258,479
2,402,323
228,722
873,479
97,340
9,303
5,113,762
(35,505)
5,078,257
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
2010
Off-Balance
Sheet
423,295
250,927
-
59,979
42,376
25,960
2,804
200
805,541
-
805,541
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
Butterfield Annual Report 2011 81
The following table summarises the credit exposure of the Bank by region:
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Sub-total
General allowance
Total
On-Balance
Sheet
2,479,669
181,325
728,572
454,039
4,742
434,418
4,282,765
(35,505)
4,247,260
2011
Off-Balance
Sheet
406,094
8,563
177,846
149,387
90
89,017
830,997
-
830,997
Total credit
exposure
2,885,763
189,888
906,418
603,426
4,832
523,435
5,113,762
(35,505)
5,078,257
On-Balance
Sheet
2,477,937
188,938
595,425
332,827
69,321
415,375
4,079,823
(36,463)
4,043,360
2010
Off-Balance
Sheet
441,485
8,127
227,023
106,556
1,734
20,616
805,541
-
805,541
Total credit
exposure
2,919,422
197,065
822,448
439,383
71,055
435,991
4,885,364
(36,463)
4,848,901
NOTE 9: PREMISES, EQUIPMENT AND COMPUTER SOFTWARE
The following table summarises land, buildings, equipment and computer software:
Land
Buildings
Equipment
Computer software in use
Computer software in development
Total
2011
Accumulated
depreciation
-
(53,306)
(44,545)
(52,525)
-
(150,376)
Cost
13,371
184,943
56,585
168,738
2,853
426,490
Net carrying
amount
13,371
131,637
12,040
116,213
2,853
276,114
2010
Accumulated
depreciation
-
(46,524)
(41,588)
(43,796)
-
(131,908)
Net carrying
amount
13,371
138,811
13,795
16,406
79,572
261,955
Cost
13,371
185,335
55,383
60,202
79,572
393,863
Depreciation
Buildings (included in property expense)
Equipment (included in property expense)
Computer hardware and software (included in technology & communications expense)
Total depreciation charged to non-interest expense
Impairment
Write off of computer software in development (included in net other losses)
2011
2010
6,819
2,876
9,559
19,254
5,257
3,207
8,070
16,534
-
3,831
82
NOTE 10: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill and other intangible assets by business segment:
Goodwill
Business segment
Balance as at 31 December 2009
Foreign exchange translation adjustment
Balance as at 31 December 2010
Foreign exchange translation adjustment
Balance as at 31 December 2011
Guernsey
6,917
(245)
6,672
(38)
6,634
United
Kingdom
9,795
(450)
9,345
(42)
9,303
Customer relationship intangible assets
2011
2010
Accumulated Accumulated
impairment amortisation
Cost
Bermuda - Wealth Management
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Total
8,342
6,681
1,211
41,010
5,234
19,036
81,514
-
-
(180)
-
-
-
(180)
(4,034)
(3,597)
(593)
(27,542)
(2,867)
(9,454)
(48,087)
Net
carrying
amount
4,308
3,084
438
13,468
2,367
9,582
33,247
Accumulated Accumulated
amortisation
impairment
Cost
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)
Total
16,712
(695)
16,017
(80)
15,937
Net
carrying
amount
4,863
3,529
700
16,318
2,687
10,849
38,946
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. The 31 December 2011 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 2011. The discount rate used for testing is the discount rate implied in the initial purchase price acquisition.
During 2011 and 2010, the Bank did not acquire new customer relationship intangible assets. Intangible asset impairment loss for the year ended
31 December 2011 of $0.02 million was recognised. During 2011, the amortisation expense amounted to $5.8 million (2010: $5.7 million) and the
foreign exchange translation adjustment increased the net carrying amount by $0.07 million (2010: increased by $0.05 million). The estimated
aggregate amortisation expense for each of the succeeding five years (until 31 December 2016) is $5.5 million.
NOTE 11: CUSTOMER DEPOSITS AND DEPOSITS FROM BANKS
a) By Maturity
Demand deposits
Demand deposits - Non-interest bearing
Demand deposits - Interest bearing
Sub-total - demand deposits
Term deposits
Term deposits maturing within six months
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Sub-total - term deposits
Customers
2011
Banks
Total
Customers
961,002
4,202,728
5,163,730
-
118,449
118,449
961,002
4,321,177
5,282,179
977,417
4,558,249
5,535,666
2010
Banks
-
10,793
10,793
Total
977,417
4,569,042
5,546,459
2,005,446
131,932
98,970
2,236,348
6,410
382
121
6,913
2,011,856
132,314
99,091
2,243,261
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
Total
7,400,078
125,362
7,525,440
8,148,380
79,679
8,228,059
Butterfield Annual Report 2011 83
b) By Type and Location
Bermuda
Customers
Banks
Barbados
Customers
Cayman
Customers
Banks
Guernsey
Customers
Banks
The Bahamas
Customers
United Kingdom
Customers
Banks
Total Customers
Total Banks
Total
Payable
on demand
31 December 2011
Payable on a
fixed date
Total
Payable
on demand
31 December 2010
Payable on a
fixed date
Total
2,237,849
109,923
1,021,747
-
3,259,596
109,923
2,458,003
-
1,146,796
44,988
3,604,799
44,988
171,705
97,378
269,083
159,255
80,686
239,941
1,319,357
5,692
1,018,084
2,834
423,436
6,074
1,742,793
11,766
1,348,636
8,587
316,172
388
1,334,256
3,222
1,010,897
1,516
432,140
22,387
450,895
-
1,780,776
30,974
1,461,792
1,516
55,350
3,968
59,318
84,357
37,606
121,963
361,385
-
5,163,730
118,449
5,282,179
373,647
451
2,236,348
6,913
2,243,261
735,032
451
7,400,078
125,362
7,525,440
474,518
690
5,535,666
10,793
5,546,459
464,591
1,511
2,612,714
68,886
2,681,600
939,109
2,201
8,148,380
79,679
8,228,059
NOTE 12: 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 and post-retirement medical 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.
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
2011
2010
Pension
Post-
retirement
medical
plans benefit plan
-
146,897
140,874
2,638
245
7,355
(9,377)
(1,800)
-
13,124
(587)
152,472
143,978
5,458
5,559
245
(9,377)
(540)
145,323
81,114
740
-
4,428
(2,047)
-
(3,704)
11,349
-
91,880
-
-
2,047
-
(2,047)
-
-
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
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
84
For the year ended
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
(Deficit) surplus of plan assets over projected benefit
obligation at measurement date
2011
Post-
retirement
medical
plans benefit plan
Pension
5,861
(13,010)
-
(91,880)
2010
Post-
retirement
medical
benefit plan
-
(81,114)
Pension
plans
7,199
(4,095)
(7,149)
(91,880)
3,104
(81,114)
Amounts recognised in accumulated other
comprehensive income (loss) consist of:
Net actuarial loss
Past service credit
Net amount recognised in accumulated other comprehensive income (loss)
(40,460)
-
(40,460)
(26,195)
35,066
8,871
(29,405)
-
(29,405)
(15,781)
37,520
21,739
Effective 31 December 2011, the Bank’s post-retirement medical benefits were amended to freeze credited service and final average earnings for
remaining active members. The benefits amendment resulted in a further reduction in the post-retirement medical liability of $1.8 million as at
31 July 2011. The benefits amendment is being amortised to the Statement of Operations over the expected average remaining service lifetime of the
active employees in the plan.
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
2011
2010
Post-retirement
Pension plans medical benefit plan
Post-retirement
Pension plans medical benefit plan
Annual benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortisation of past service credit
Amortisation of net actuarial loss
Defined benefit expense
Defined contribution expense
Total benefit expense
2,638
7,355
(9,173)
-
4,027
4,847
5,496
10,343
Other changes recognised in other comprehensive income (loss)
Net (loss) gain arising during the year
Past service credit arising during the year
Amortisation of past service credit
Amortisation of net actuarial loss
Total changes recognised in other
comprehensive income (loss)
(15,082)
-
-
4,027
(11,055)
740
4,428
-
(6,158)
935
(55)
-
(55)
(11,349)
3,704
(6,158)
935
(12,868)
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
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 $5.8 million. The estimated portion of the net actuarial loss and the past service credit for the post-retirement
medical benefit plan that will be amortised from accumulated other comprehensive loss into benefit expense over the next fiscal year is $2.1 million
for the net actuarial loss and a credit of $6.7 million for the past service credit.
Butterfield Annual Report 2011 85
Pension plans
2011
Post-retirement
medical benefit plan
2010
Pension plans
Post-retirement
medical benefit plan
Actuarial assumptions used to
determine annual benefit expense
5.30%
Weighted average discount rate
3.75%
Weighted average rate of compensation increases
Weighted average expected long-term rate of return on plan assets 6.35%
N/A
Weighted average annual medical cost increase rate
5.50%
N/A
N/A
7.5% to 4.5% in 2027
5.85%
3.80%
6.45%
N/A
6.10%
N/A
N/A
7.5% to 4.5% in 2027
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
4.65%
1.70%
N/A
4.60%
N/A
7.5% to 4.5% in 2027
5.30%
3.75%
N/A
5.50%
N/A
7.5% to 4.5% in 2027
For 2011, the effect of a one percentage point increase or decrease in the assumed medical cost increase rate on the aggregate of service and interest
costs is a $1.0 million increase (2010: $2.1 million) and a $0.8 million decrease (2010: $1.6 million), respectively, and on the benefit obligation a
$17.2 million increase (2010: $13.7 million) and a $13.8 million decrease (2010: $11.1 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 in 2011 at 7.5% to 4.5%.
Investments policies and strategies
The pension plans’ assets are managed according to each plan’s Investment Policy Statement which outlines the Purpose of the Plan, Statement of
Objectives and Guidelines & Investment Policy. The asset allocation is diversified and any use of derivatives is limited to hedging purposes only.
The weighted average actual and target asset allocations of the pension plans by asset category are as follows:
Asset category
Debt securities (including debt mutual funds)
Equity securities (including equity mutual funds)
Other
Total
2011
2010
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
45%
50%
5%
100%
40%
47%
13%
100%
46%
52%
2%
100%
46%
47%
7%
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 2.
2011
Fair value determination
2010
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
5,890
51,295
10,143
74,089
3,521
144,938
Level 3
-
-
-
385
-
385
Total
fair value
5,890
51,295
10,143
74,474
3,521
145,323
Level 1
-
-
-
-
-
-
Level 2
8,242
47,912
9,696
74,794
2,957
143,601
Total
fair value
8,242
47,912
9,696
75,171
2,957
143,978
Level 3
-
-
-
377
-
377
At 31 December 2011, 26.3% (2010: 28.7%) of the assets of the pension plans were mutual funds and equity securities managed or administered by
wholly-owned subsidiaries of the Bank. At 31 December 2011, 0.2% and 1.6% (2010: 0.4% and 1.6%) 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.
86
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:
2011
Estimated Bank contributions for 2012
Estimated benefit payments by year:
2012
2013
2014
2015
2016
2017 - 2021
Pension Plans
3,588
5,700
6,000
6,400
7,000
6,900
35,600
Post-retirement
medical benefit plan
2,807
2,807
3,034
3,271
3,555
3,791
22,876
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were
$127.5 million and $114.5 million as at 31 December 2011.
NOTE 13: CREDIT RELATED ARRANGEMENTS AND COMMITMENTS
Commitments
The Bank was committed to expenditures under contract for sourcing and leases of $112.5 million and $30.2 million, respectively, as at 31 December
2011 (2010: $133.2 million and $29.5 million, respectively). Rental expense for premises leased on a long-term basis for the year ended
31 December 2011 amounted to $5.7 million (2010: $5.8 million). The expenditures committed under the other agreements relate to the Balance
Sheet Management Advisory Agreement entered into with Carlyle as disclosed in Note 26: Related Party transactions.
The following table summarises the Bank’s commitments for sourcing, long-term leases and other agreements:
2011
2012
2013
2014
2015
2016
2017 & thereafter
Total commitments
Sourcing
24,886
23,665
22,746
22,566
18,671
-
112,534
Leases
5,971
5,030
4,941
4,424
3,645
6,210
30,221
Other agreements
4,000
3,000
-
-
-
-
7,000
Total
34,857
31,695
27,687
26,990
22,316
6,210
149,755
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, whilst 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:
Standby letters of credit
Letters of guarantee
Total
Gross
321,059
13,388
334,447
2011
Collateral
303,769
9,876
313,645
Net
17,290
3,512
20,802
Gross
386,728
14,115
400,843
2010
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, 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.
Butterfield Annual Report 2011 87
The following table presents the unfunded, legally binding commitments to extend credit with contractual amounts representing credit risk
as follows:
Commitments to extend credit
Commitments to extend credit with terms modified by troubled debt restructuring
Documentary and commercial letters of credit
Total
2011
491,251
779
4,520
496,550
2010
402,567
-
2,131
404,698
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 2011, $137.1 million (2010: $174.5 million) of standby letters of credit were issued under this facility.
Legal Proceedings
There are a number of actions and legal proceedings pending against the Bank and its subsidiaries which arose in the normal course of its business.
Management, after reviewing all actions and proceedings, pending against or involving the Bank and its subsidiaries, considers that the resolution of
these matters would not be material to the consolidated financial position of the Bank.
NOTE 14: INTEREST INCOME
Loans
The following table presents the components of loan interest income:
Mortgages
Other loans
Amortisation of loan premium / discount
Amortisation of fair value hedge
Amortisation of loan origination fees (net of amortised costs)
Total loan interest income
Balance of unamortised fair value hedge as at 31 December
Balance of unamortised loan fees as at 31 December
2011
95,885
104,393
200,278
-
(2,498)
4,693
202,473
(11,656)
7,951
2010
97,667
93,958
191,625
53
-
6,330
198,008
-
7,764
NOTE 15: SEGMENTED INFORMATION
At 31 December 2011, for management reporting purposes, the operations of the Bank are grouped into the following seven business segments
based upon the geographic location of the Bank’s operations: Bermuda, Barbados, Cayman, Guernsey, Switzerland, The Bahamas and the United
Kingdom. Accounting policies of the reportable segments are the same as those described in Note 2.
Bermuda provides a full range of retail, 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. Commercial
banking includes commercial lending and mortgages, cash management, payroll services, remote banking and letters of credit. Treasury services
include money market and foreign exchange activities. Bermuda’s wealth management offering 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.
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 Islands 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.
88
88
Total Assets by Segment
Bermuda
Barbados
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Less: inter-segment eliminations
Total
2011
4,577,775
303,960
1,974,338
1,479,901
1,118
77,565
976,451
9,391,108
(566,999)
8,824,109
2010
5,192,585
273,797
2,036,512
1,617,976
1,191
146,069
1,104,946
10,373,076
(750,016)
9,623,060
For the year ended 2011 Net interest income
Inter-
Customer segment
881
-
757
(17)
-
264
(1,885)
-
131,056
11,485
36,568
18,396
1
1,041
14,573
213,120
Provision
for
credit
losses
(1,202)
(1,156)
(3,974)
(637)
-
(633)
(6,724)
(14,326)
Revenue
before
Non-
gains
interest
income and losses
197,816
67,081
13,225
2,896
64,001
30,650
39,406
21,664
664
663
5,786
5,114
16,893
10,929
337,791
138,997
Total
Net income
(loss)
before
gains
expense and losses
21,090
176,726
1,090
12,135
9,013
54,988
30,245
9,161
(1,411)
2,075
(1)
5,787
(3,360)
20,253
35,582
302,209
Gains
and
losses
4,754
37
1,955
242
-
3
45
7,036
Net
income
(loss)
25,844
1,127
10,968
9,403
(1,411)
2
(3,315)
42,618
615
213,735
-
-
-
(14,326)
(3,751)
135,246
(3,136)
334,655
(3,751)
298,458
615
36,197
(2,761)
4,275
(2,146)
40,472
Bermuda
Barbados
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (less) inter-segment
eliminations / transactions
Total
For the year ended 2010 Net interest income
Bermuda
Barbados
Cayman
Guernsey
Hong Kong*
Malta*
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (less) inter-segment
eliminations / transactions
Total
Customer
113,259
12,921
26,590
12,521
1
5
2
2,270
11,373
178,942
-
178,942
Provision
for
credit
losses
(25,650)
(1,707)
(3,808)
-
-
-
-
(3,669)
(7,136)
(41,970)
Non-
interest
income
71,325
2,948
32,389
23,003
2,119
886
489
5,201
10,027
148,387
Revenue
before
gains
and losses
159,038
14,158
57,152
35,387
2,120
891
491
3,850
12,272
285,359
Inter-
segment
104
(4)
1,981
(137)
-
-
-
48
(1,992)
-
Net income
(loss)
before
gains
and losses
(33,136)
295
7,007
7,762
390
30
(1,668)
(3,962)
(3,816)
(27,098)
Total
expense
192,174
13,863
50,145
27,625
1,730
861
2,159
7,812
16,088
312,457
Gains
and
losses
(149,940)
(151)
(11,600)
(1,433)
(3,639)
(3,790)
-
-
(9,964)
(180,517)
Net
income
(loss)
(183,076)
144
(4,593)
6,329
(3,249)
(3,760)
(1,668)
(3,962)
(13,780)
(207,615)
-
-
-
(41,970)
(4,967)
143,420
(4,967)
280,392
(4,967)
307,490
-
(27,098)
-
(180,517)
-
(207,615)
* Disposed of the subsidiaries on 8 September 2010; disclosed in the 2010 annual financial statements.
Butterfield Annual Report 2011 89
Butterfield Annual Report 2011 89
NOTE 16: 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 may pursue opportunities to reduce its exposure to credit losses on derivatives by entering into International Swaps and Derivatives
Association Master Agreements (“ISDAs”). Depending on the nature of the derivative transaction, bilateral collateral arrangements may be used as
well. When the Bank is engaged in more than one outstanding derivative transaction with the same counterparty, and also has a legally enforceable
master netting agreement with that counterparty, the net marked to market exposure represents the netting of the positive and negative exposures
with that counterparty. When there is a net negative exposure, the Bank regards its credit exposure to the counterparty as being zero. The net
marked to market position with a particular counterparty represents a reasonable measure of credit risk when there is a legally enforceable master
netting agreement between the Bank and that counterparty.
Certain of these agreements contain credit-risk-related contingent features in which the counterparty has the option to accelerate cash settlement
of 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.
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.
Notional amounts
The notional amounts are not recorded as assets or liabilities on the Consolidated Balance Sheet as they represent the face amount of the contract
to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional amounts represent the volume of outstanding
transactions and do not represent the potential gain or loss associated with market risk or credit risk of such instruments. Credit risk is limited to the
positive fair value of the derivative instrument, which is significantly less than the notional amount.
Fair value
Derivative instruments, in the absence of any compensating up-front cash payments, generally have no market value at inception. They obtain
value, positive or negative, as relevant interest rates, exchange rates, equity or commodity prices or indices change, such that previously contracted
derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with the
same remaining period to maturity. The potential for derivatives to increase or decrease in value as a result of the foregoing factors is generally
referred to as market risk. Market risk is managed within clearly defined parameters as prescribed by Senior Management of the Bank. The fair value
is defined as the profit or loss associated with replacing the derivative contracts at prevailing market prices.
Risk management derivatives
The Bank primarily enters into derivative contracts as part of its overall interest rate risk management strategy to minimise significant unplanned
fluctuations in earnings that are caused by interest rate volatility. The Bank’s goal is to manage interest rate sensitivity by modifying the repricing
or maturity characteristics of certain Consolidated Balance Sheet assets and liabilities so that movements in interest rates do not adversely affect
the net interest margin. Derivative instruments that are used as part of the Bank’s interest rate risk management strategy include interest rate swap
contracts that have indices related to the pricing of specific Consolidated Balance Sheet assets and liabilities. Interest rate swaps generally involve
the exchange of fixed and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date.
The Bank uses derivative instruments to hedge its exposure to interest rate risk and foreign currency 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. During the six months ended
30 June 2011, the Bank cancelled its Interest Rate Swaps designated as fair value hedges of loans receivable and therefore discontinued hedge
accounting for these financial instruments. The fair value attributable to the hedged loans are accounted for prospectively and will be amortised to
net income over the remaining life of each individual loan using the effective interest method.
90
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 2011 and 2010, 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 and foreign
exchange risk of the Bank’s non-USD investments in subsidiaries. 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.
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.
2011
Risk management derivatives
Fair value hedges
Fixed-rate loans
Investments
Sub-total fair value hedges
Not designated as hedging instruments
Sub-total not designated as hedges
Sub-total risk management derivatives
Client services derivatives
Sub-total client services derivatives
Total derivative instruments
Derivative instrument
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
Interest rate swaps
Interest rate swaps
Currency swaps
Foreign currency options
Spot and forward
foreign exchange
Interest rate caps
11,436
18,613
30,049
346,453
65,335
411,788
441,837
5,775,477
37,225
5,812,702
6,254,539
-
18
18
1,031
3,160
4,191
4,209
44,207
89
44,296
48,505
(227)
-
(227)
(105)
(651)
(756)
(983)
(43,756)
(89)
(43,845)
(44,828)
(227)
18
(209)
926
2,509
3,435
3,226
451
-
451
3,677
Butterfield Annual Report 2011 91
2010
Risk management derivatives
Fair value hedges
Fixed-rate loans
Investments
Customer deposits
Sub-total fair value hedges
Not designated as hedging instruments
Sub-total not designated as hedges
Sub-total risk management derivatives
Client services derivatives
Sub-total client services derivatives
Derivative instrument
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
Interest rate swaps
Interest rate swaps
Interest rate swaps
Interest rate swaps
Currency swaps
Spot and forward
foreign exchange
Interest rate caps
175,858
34,316
5,447
215,621
360,000
264,843
624,843
840,464
4,842,989
37,435
4,880,424
47
228
-
275
1,481
4,028
5,509
5,784
39,774
389
40,163
(17,151)
-
(26)
(17,177)
(555)
(1)
(556)
(17,104)
228
(26)
(16,902)
926
4,027
4,953
(17,733)
(11,949)
(39,755)
(389)
(40,144)
19
-
19
Total derivative instruments
5,720,888
45,947
(57,877)
(11,930)
The following table shows the location and amount of gains (losses) recorded in the Consolidated Statement of Operations.
Derivative Instrument
Interest rate swaps
Forward foreign exchange
Foreign currency options
Total net gains recognised in net income
Consolidated Statement of Operations line item
Net other gains (losses)
Foreign exchange revenue
Foreign exchange revenue
For the year ended
2011
(906)
699
1,092
885
2010
1,154
1,076
-
2,230
NOTE 17: 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 listed equity shares and actively traded redeemable mutual funds.
Financial instruments in Level 2 include equity securities not actively traded, certificates of deposit, corporate bonds, mortgage-backed securities and
other asset-backed securities, interest rate swaps and caps and forward foreign exchange contracts, and mutual funds not actively traded.
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.
92
Items that are recognised at fair value on a recurring basis
2011
Fair value
2010
Fair value
Financial assets
Level 1
Level 2
Level 3
Total
carrying
amount /
Fair value
Level 1
Level 2
Total
carrying
amount /
Level 3 Fair value
Trading
Debt securities issued by non-US governments
Mutual funds
Total Trading
-
5,368
5,368
5,971
51,252
57,223
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
Pass-through note
Equity securities
Total Available for sale
-
-
-
356,493
790,804
113,032
121,648
-
408,962
-
133,182
-
-
-
-
70
- 1,924,191
-
-
-
-
-
-
5,971
56,620
62,591
-
10,021
10,021
6,511
1,556
8,067
356,493
790,804
113,032
-
-
11,164
26,991
-
38,155
121,648
408,962
144,346
26,991
70
1,962,346
-
-
-
859,146
917,494
132,692
149,720
-
347,470
-
135,632
-
24,342
-
-
77
- 2,566,573
-
-
-
-
-
-
6,511
11,577
18,088
859,146
917,494
132,692
-
-
11,179
33,304
-
149,720
347,470
146,811
57,646
77
44,483 2,611,056
Other assets - Derivatives
Other assets - Closed ended real estate fund
-
-
48,505
-
-
6,199
48,505
6,199
Financial liabilities
Other liabilities – Derivatives
-
(44,828)
-
(44,828)
-
-
-
45,947
-
-
9,044
45,947
9,044
57,877
-
57,877
Consistent with the significant accounting policy in Note 2, the current carrying value of other real estate owned will be adjusted to fair value only
when there is a devaluation below cost.
Transfers of securities
2011
2010
Transfers out of Level 1
Transfers into Level 2
Trading
investments
(50,035)
50,035
Available for
sale investments
-
-
Trading
investments
-
-
Available for
sale investments
-
1,002,803
The transfer out of Level 1 and into Level 2 represents transfers of mutal funds classified at measurement date based on the level of trading.
Level 3 reconciliation
2011
Carrying amount at beginning of year
Purchases
Proceeds from sale / Capital distributions
Accretion 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
for sale
investments
44,483
290
(3,973)
1,776
(4,421)
-
-
38,155
Closed
ended
property
fund
9,044
1,185
(3,765)
-
(251)
-
(14)
6,199
2010
Available
for sale
investments
382,452
-
(103,064)
(3,245)
Closed
ended
property
fund
8,307
-
-
1,020
Trading
investments
296
151
(447)
-
-
-
-
-
(137,093)
(94,567)
-
44,483
-
-
(283)
9,044
Butterfield Annual Report 2011 93
Items other than those recognised at fair value on a recurring basis
Financial assets
Cash and cash equivalents
Short-term investments
Investments held to maturity
Loans, net of allowance for credit losses
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Subordinated capital
2011
2010
Carrying
amount
Fair Appreciation /
(depreciation)
value
Carrying
amount
Fair Appreciation /
(depreciation)
value
1,979,458
34,814
64,789
4,247,260
1,979,458
34,814
64,588
4,241,040
5,163,730
2,236,348
125,362
267,755
5,163,730
2,232,570
125,362
225,019
-
-
(201)
(6,220)
-
3,778
-
42,736
2,429,699
26,392
-
4,043,360
2,429,699
26,392
-
4,043,360
-
-
-
-
5,535,666
2,612,714
79,679
282,799
5,535,666
2,621,188
79,679
244,606
-
(8,474)
-
38,193
NOTE 18: 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, expected 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. Investments are shown based on expected duration, which the
Bank believes is more representative of maturity date than actual contractual maturity.
2011
Earlier of maturity or repricing date
(in $ millions)
Assets
Cash and cash equivalents
Short-term investments
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
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
1,772
15
450
3,534
-
-
5,771
-
4,321
1,712
-
98
6,131
2
(358)
(358)
-
5
209
121
-
-
335
-
-
300
-
-
300
8
43
(315)
-
3
128
53
-
-
184
-
-
132
-
-
132
(2)
50
(265)
-
-
993
368
-
-
1,361
-
-
99
-
145
244
(8)
1,109
844
-
-
253
117
-
-
370
-
-
-
-
25
25
-
345
1,189
207
12
57
54
276
197
803
830
961
-
201
-
1,992
-
(1,189)
-
Total
1,979
35
2,090
4,247
276
197
8,824
830
5,282
2,243
201
268
8,824
-
-
-
94
94
2010
Earlier of maturity or repricing date
(in $ millions)
Assets
Cash and cash equivalents
Short-term investments
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
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
2,269
19
1,139
3,588
-
-
7,015
-
4,569
2,042
-
90
6,701
448
762
762
-
-
14
63
-
-
77
-
-
376
-
-
376
-
1
200
48
-
-
249
-
-
137
-
-
137
-
(299)
463
(339)
(227)
236
-
-
1,115
138
-
-
1,253
-
-
126
-
168
294
(48)
911
1,147
-
-
92
109
-
-
201
-
-
1
-
25
26
(61)
114
1,261
161
6
69
97
262
233
828
809
977
-
303
-
2,089
-
(1,261)
-
Total
2,430
26
2,629
4,043
262
233
9,623
809
5,546
2,682
303
283
9,623
-
-
-
NOTE 19: 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 pay 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 $60 million in Series B notes due 2020. The issuance was by way of private placement with US
institutional investors. The notes are listed on the BSX in the specialist debt securities category. The notes issued under Series A paid a fixed coupon
of 4.81% until 2 July 2010 after which the coupon rate became floating and the principal became redeemable in whole at the Bank’s option. At 31
December 2011, the Bank has not redeemed any of the Notes issues under Series A and effective 2 July 2010 the coupon rate became floating at 3
months US$ LIBOR + 1.095%. The Series B notes pay 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.
During September 2011, the Bank repurchased a portion of the outstanding 5.11% 2005 Series B Subordinated Notes (“the Note”). The face value
of the portion of the Note repurchased was $15 million and the purchase price paid for the repurchase was $13.875 million, which realised a gain of
$1.125 million.
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 pay a fixed coupon of
7.59% until 27 May 2013 when they become redeemable in whole at the option of the Bank. The Series B notes pay 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 2011 amounted to $2.8 million (2010: $3.0 million) and is excluded from interest expense in the Consolidated Statement
of Operations.
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2011. The
interest payments are calculated until contractual maturity using the current LIBOR rates.
Butterfield Annual Report 2011 95
Butterfield Annual Report 2011 95
The following table presents for the remaining subordinated capital issued by the Bank as at 31 December 2011.
Interest rate
until date
Earliest date
redeemable maturity date redeemable
Contractual
Interest payments until
contractual maturity
Interest rate from
earliest date
Principal Within 1 to 5 After
redeemable to contractual
maturity outstanding 1 year years 5 years
Subordinated capital
Bermuda
2003 issuance - Series B 27 May 2013
2 July 2010
2005 issuance - Series A
2005 issuance - Series B
2 July 2015
2008 issuance - Series A 27 May 2013
2008 issuance - Series B 27 May 2018
Subsidiary
Total
27 May 2018
2 July 2015
2 July 2020
27 May 2018
27 May 2023
8 February 2012 8 February 2017
5.15% 3 months US$ LIBOR + 2.000%
4.81% 3 months US$ LIBOR + 1.095%
5.11% 3 months US$ LIBOR + 1.695%
7.59% 3 months US$ LIBOR + 4.185%
8.44% 3 months US$ LIBOR + 4.929%
9.29% 10.29%
1,815
47,000 2,421 5,464
-
90,000 1,470 4,029
45,000 2,300 8,184 3,841
53,000 4,023 10,870 3,779
25,000 2,110 8,440 10,056
399
267,755 13,083 40,179 19,890
759 3,192
7,755
NOTE 20: 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 year. Diluted earnings per Common Share include the dilutive effect resulting from the conversion of Treasury stock.
Numbers of Shares are expressed in thousands.
Basic earnings per Share
Net income (loss) for the year
Less: Preference dividends declared and guarantee fee
Net income (loss) attributable to Common Shareholders
Weighted average number of participating Shares(1)
Weighted average number of Common Shares held as Treasury stock
Adjusted weighted average number of Common Shares
Diluted earnings per Share
Net income (loss) attributable to Common Shareholders
Weighted average number of participating Shares (1)
Weighted average number of Common Shares held as Treasury stock
Weighted average number of dilutive Share-based awards
Adjusted weighted average number of diluted Common Shares
2011
2010
40,472
(21,270)
19,202
556,933
(2,283)
554,650
0.03
(207,615)
(18,000)
(225,615)
479,882
(2,657)
477,225
(0.47)
19,202
(225,615)
556,933
(2,283)
965
555,615
0.03
479,882
(2,657)
-
477,225
(0.47)
(1) The Contingent Value Convertible Preference Shares are classified as participating securities as they are entitled to dividends declared to Common
Shareholders on a 1:1 basis and are therefore included in the basic earnings per Share calculation.
During 2011, weighted-average options to purchase 34.5 million (2010: 26.5 million) Shares of Common stock (see Note 21), were outstanding but
were anti-dilutive and, therefore, not included in the computation of diluted earnings per Share. Each of these options was considered anti-dilutive
because the sum of the option’s expense that will be recognised in the future and its exercise price was greater than the average market price of the
Bank‘s Common stock.
During 2011, the weighted-average number of outstanding awards of unvested Common Shares (see Note 21) was 3.28 million (2010: nil). All
unvested awards of Common Shares were considered dilutive because each award’s unrecognised expense was lower than the average market price
of the Bank‘s Common stock. The awards’ yet unrecognised expense is considered to be the proceeds the employees would need to pay to purchase
accelerated vesting of the awards. For purpose of calculating dilution, such proceeds are assumed to be used by the Bank to buy-back Shares at the
average market price. The weighted-average number of outstanding awards net of the assumed weighted-average number of Shares bought-back is
included in the number of diluted participating Shares.
Warrants issued to the Government of Bermuda in exchange for the Government’s guarantee of the Preference Shares, with an exercise price of $3.61
for 4.15 million Shares of Common stock were not included in the computation of earnings per Share in 2011 and 2010 because the exercise price was
greater than the average market price of the Bank‘s Common stock.
96
NOTE 21: SHARE-BASED PAYMENTS
The following table presents the Share-based compensation cost that has been charged against net income and the value of Share-based
settlements.
Share-based compensation plans
Awards granted in years 2009 and prior
Awards granted in years 2010 and 2011
Total Share-based compensation
Share-based settlement plans
Directors Shares and retainers settlement plans
Total Share-based payments
Unrecognised expense
2010 Stock Option Plan
Time Vesting Options
Performance Vesting Options
2011 EDIP
2011 ELTIP
Time Vesting Shares
Performance Vesting Shares
For the year ended
2011
2010
Stock option
plans
EDIP
and ELTIP
Stock option
plans
Total
EDIP
and ELTIP
1,703
1,703
1,876
1,876
3,579
3,579
344
3,923
2,655
1,305
3,960
3,381
-
3,381
Total
6,036
1,305
7,341
271
7,612
For the year ended 2011
5,731
9,169
915
952
961
17,728
On 22 February 2011, the Board approved the 2010 Employee deferred incentive plan and the 2011 Executive long-term incentive Share plan.
2010 Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s 2010 EDIP Plan, Shares were awarded to Bank employees and Executive Management based on time vesting condition, which states
that the Shares will vest equally over a three-year period from the effective grant date, subject to the employee’s continued employment.
Outstanding at beginning of year
Granted
Vested
Forfeited / cancelled
Outstanding unvested at end of year
2011
Number of Shares transferable
upon vesting (thousands)
-
1,361
(11)
(74)
1,276
2011 Executive long-term incentive Share plan (“ELTIP”)
Under the Bank’s 2011 ELTIP Plan, Shares were awarded to Bank employees and Executive Management, based on predetermined vesting conditions.
The ELTIP Plan comprises two types of vesting conditions upon which the Shares will be awarded, i.e.,:
Time Vesting Condition – 50% of each Share award is granted in the form of Time Vested Shares, vesting over a three-year period from the
effective grant date, subject to the employee’s continued employment; and
Performance Vesting Condition – 50% of each Share award is granted in the form of Performance Shares, vesting upon the achievement of certain
performance targets.
Outstanding at beginning of year
Granted
Vested
Forfeited / cancelled
Outstanding unvested at end of year
2011
Number of Shares transferable
upon vesting (thousands)
-
2,560
(10)
(35)
2,515
Butterfield Annual Report 2011 97
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 the last traded Common Share price when granted and have
a term of 10 years. The Plan comprises two types of vesting conditions upon which the options will be awarded, i.e.,:
Time Vesting Condition – 50% of each option award is granted in the form of Time Vested Options and vests 25% on the 2nd, 3rd, 4th and 5th
anniversary of the effective grant date, subject to the employee’s continued employment; and
Performance Vesting Condition – 50% of each option award is granted in the form of Performance Options and vests on a “Valuation Event”
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 predetermined MOICs. In the event of a Valuation Event and the MOIC
reaching 200%, all options would vest.
No options were exercised during the year ended 31 December 2011.
Weighted average fair value of stock options granted in the year ended 31 December 2011
Weighted average fair value of stock options granted in the year ended 31 December 2010
Time Vested Options
$0.41
$0.62
Performance Options
$0.43
$0.66
The weighted average fair value of stock options granted in the year ended 31 December 2011 was calculated using the Black-Scholes-Merton
option-pricing model for the Time Vested Options and the Monte Carlo method for the Performance Options using the following weighted
average assumptions:
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years)
Time Vested Options
0% for 2010-2012
1.0% for 2013
2.0% for 2014
3.5% for 2015 and later years
2.0% to 2.2%
36%
6.75 years
Performance Options
0% for 2010-2012
1.0% for 2013
2.0% for 2014
3.5% for 2015 and later years
0.0% to 3.6%
36%
8 to 9 years
The projected dividend yield is based on the Bank’s estimate, as the Bank has suspended dividend payments, but expects to start paying dividends in
2013. The projected volatilities are based on the historical trading prices of the Bank’s Common Shares. The risk-free interest rate for periods within
the expected life of the option is based on the US Treasuries yield curve in effect at the time of grant. As the time vested options granted are “plain
vanilla” options, the Bank uses one-half of the time between the average vesting date and the full option term to estimate the expected option life;
separate groups of employees that have similar historical exercise behaviour are considered separately for valuation purposes.
Number of Shares
transferable
upon exercise
(thousands)
34,308
1,260
(1,936)
33,632
5,431
Number of Shares
transferable
upon exercise
(thousands)
12,428
28,137
(6,257)
34,308
6,275
2011
Weighted
average
exercise
price ($)
3.26
1.24
6.79
3.02
12.41
2010
Weighted
average
exercise
price ($)
11.72
1.21
11.04
3.26
12.38
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
($ thousands)
5.91
4.95
-
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
($ thousands)
8.68
5.61
1,069
Outstanding at beginning of year
Granted
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
Outstanding at beginning of year
Granted
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
98
Directors’ Compensation
The Bank’s Non-Executive Directors received their annual retainer compensation in the form of cash or fully vested and unrestricted Bank Shares, or a
combination of the two.
During 2010, a Bank Non-Executive Director received additional compensation in the form of a one-time Shares grant vesting over a two-year period
amounting to $0.25 million. The Bank has recognised $0.2 million compensation expense for the year ended 31 December 2011 related to the time
vesting Shares granted.
NOTE 22: SHARE BUY-BACK PLANS
During the years 2011 and 2010, no Common Shares were purchased.
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 must be advised monthly of Shares repurchased and cancelled by the Bank and Shares purchased by both the Bank’s Stock Option Trust and
the Bank’s Charitable Trust.
NOTE 23: CAPITAL STRUCTURE
Authorised capital
The Bank’s total authorised Share capital as of 31 December 2011 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 adviser 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 adviser.
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 the 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.
Butterfield Annual Report 2011 99
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 under the terms of the 4,279,601 warrants with an exercise price of $7.01 previously issued to the
Government of Bermuda 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 $3.61.
Regulatory capital
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 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 2011. As at 31 December 2011, the Bank’s regulatory capital stood at $1,041 million (2010: $1,067 million) with the consolidated Tier 1
total and Total Capital ratios being 17.7% and 23.5%, respectively (2010: 15.7% and 21.6%, respectively).
NOTE 24: VARIABLE INTEREST ENTITIES
The Bank had no investments in variable interest entities for which it was deemed the primary beneficiary for the years ended 31 December 2011
and 2010.
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 25: INCOME TAXES
The Bank is incorporated in Bermuda, and pursuant to Bermuda law, is 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, 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 2011 and 2010, the Bank did not record any unrecognised tax benefits or expenses and has no uncertain tax
positions as at 31 December 2011.
The Bank records income taxes based on the enacted tax laws and rates applicable in the relevant jurisdictions for each of the years ended
31 December 2011 and 2010. For the year ended 31 December 2011, the Bank recorded net interest received of $0.03 million and penalties payable
of $0.02 million.
The components of income taxes attributable to the Bank’s subsidiaries’ operations for the years ended 31 December 2011 and 2010 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
2011
1,006
(1,039)
(33)
6,755
747
738
27
11
532
8,810
(444)
8,366
2010
(3,676)
1,701
(1,975)
5,797
515
676
30
115
490
7,623
-
7,623
Management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realised.
100
NOTE 26: RELATED PARTY TRANSACTIONS
Butterfield Fulcrum Group Limited (“BFG”)
On 8 February 2011, the Bank entered into an agreement with an investor group (comprised of BV Investor Partners, Glen Henderson and Tim
Calveley, (the “BV Investor Group”)) to dispose of its 36% equity interest on a diluted basis in BFG. The sale was completed in the second quarter of
2011 and resulted in a gain on sale of $3.1 million.
Under the terms of the agreement, the BV Investor Group paid down BFG’s existing debt and revolving credit facility with the Bank and combined
their overall funding requirements with another related entity, FORS Limited (“FORS”), whereby the total loan facilities post-disposition, on
commercial market terms as to interest rate, repayment terms and security, is $45.1 million. A Bank Non-Executive Director is a minority shareholder
of less than 1% of BFG.
As a result of the sale, the Bank paid a dividend of $3.3 million during the third quarter to Contingent Value Convertible Preference Shareholders of
record on 26 July 2011.
In addition, the Bank has guaranteed to purchase services from BFG, on normal commercial market terms, for three years at minimum agreed revenue
levels of $5.5 million, $5.0 million and $4.5 million per annum. In the event there is a shortfall, the Bank is required to pay 38% of the shortfall.
Renegotiations of agreements occurred during the third and fourth quarter of 2011, resulting in an expected shortfall from the revenue guarantees
over the three-year period, whereby the resultant fair value of the liability is estimated at approximately $0.5 million as at 31 December 2011.
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 its employee loan policy at any time after notifying participants. The staff loans
outstanding at 31 December 2011 amount to $251.9 million (2010: $219.0 million) resulting in an interest rate benefit to employees of $6.5 million
(2010: $6.2 million).
Interested and Director transactions
The Bank provides loans and other banking services to the Bank’s Directors, as well as their immediate family members and companies with which
they are affiliated, as described in Section 96 of the Companies Act 1981, in the ordinary course of business the Bank provides these services on
normal commercial terms in respect of interest rates, repayment terms and security.
During the third quarter of 2011, the Bank provided a loan to a trust company controlled by a Bank Non-Executive Director, amounting to $2.45
million. The terms of the loan are market related including comprehensive security provided.
Charitable Trust
The Bank has historically provided a loan facility to the Charitable Trust. At 31 December 2011 and 2010, the carrying value of the loan was
$1.2 million. The Charitable Trust used the Loan to purchase Shares in the Bank: 772,971 of the Bank’s Common Shares and 6,223 of the Bank’s
Contingent Value Preference Shares at 31 December 2011 and 2010.
Financing transactions
Capital transaction
Canadian Imperial Bank of Commerce (“CIBC”) and funds associated with the Carlyle Group each hold approximately 18% of the Bank’s equity
voting power, along with the right to each designate two persons for nomination for election by the Shareholders as member of the Bank’s Board
of Directors.
Liquidity Facility Agreement
During 2010, the Bank entered into a commitment letter for a $500 million line of credit at market rates with CIBC, which was subsequently reduced
to $300 million. The Bank cancelled the credit facility effective 1 March 2011.
Balance Sheet Management Advisory Agreement
The Bank entered into a Balance Sheet management advisory agreement with Carlyle Investment Management LLC, an affiliated company of the
Carlyle Group with an effective date of 1 October 2010. Per the agreement the Carlyle Group has agreed to provide Balance Sheet management
advisory services to the Bank, including advisory services on valuation assessments, for an annual fee of $4 million for a three-year period.
Financial instruments with related parties
At 31 December 2011, the Bank held $15.9 million in cash and cash equivalents with CIBC and CIBC held $1 million in deposits with the Bank. For the
year ended 31 December 2011, the Bank held forward exchange contracts with CIBC with a notional amount of $295.8 million and a net realised loss
amount of $5.7 million. As noted in Note 16, the Bank enters into client service forward exchange contracts to meet the foreign exchange needs of its
customers.
NOTE 27: COMPARATIVE INFORMATION
Certain prior period figures have been reclassified to conform to current period presentation.
NOTE 28: SUBSEQUENT EVENTS
The Financial Statements were available to be issued and subsequent events have been evaluated up to 29 February 2012.
Butterfield Annual Report 2011 101
SHAREHOLDER INFORMATION
DIRECTORS’ AND EXECUTIVE OFFICERS’ SHARE
INTERESTS AND DIRECTORS’ SERVICE CONTRACTS
SHARE DEALING SERVICE
Pursuant to Regulation 6.8(3) of Section IIA of the Bermuda Stock
Exchange Listing regulations, the ownership of Common Shares
and Contingent Value Convertible Preference Shares of the Bank
by all Directors and Executive Officers as at 31 December 2011 was
7,750,255 Shares. In addition, this group owns 140 Non-Cumulative
Perpetual Limited Voting Preference Shares. As of 31 December
2011, Executive Officers also owned 23,470,000 stock options
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 Share
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 2011.
There are no service contracts with Directors, except for that of
Bradford Kopp, President & Chief Executive Officer, whose contract
expires on 1 March 2013.
Save for the foregoing contract, and those arrangements described
in Note 26 to the Bank’s Financial Statements, there are no other
contracts of significance subsisting during or at the end of the
financial year ended 31 December 2011 in which a Director of the
Bank is or was materially interested, either directly or indirectly.
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)
30 Victoria Street
Hamilton, HM 12
P.O. Box HM 1369
Hamilton HM FX
Bermuda
Tel: (441) 292 7212
Fax: (441) 292 7619
www.bsx.com
CAYMAN ISLANDS STOCK EXCHANGE
(Secondary Listing)
Elizabethan Square, 4th Floor
P.O. Box 2408
George Town, Grand Cayman
Cayman Islands
Tel: (345) 945 6060
Fax: (345) 945 6061
www.csx.com.ky
102
Butterfield Securities (Bermuda) Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
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.
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
E-mail: bntbshareholders@bfgl.com
MEDIA RELATIONS / PUBLICATION REQUESTS
Marketing & Corporate Communications
Tel: (441) 299 1624
E-mail: mark.johnson@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 2011.
LARGE SHAREHOLDERS
At 31 December 2011, the following were registered holders of 5% or
more of the issued Share capital:
Canadian Imperial Bank of Commerce, 18.64%
Carlyle Global Financial Services Partners LP, 18.64%
Wellcome Trust Investments, 6.88%
Ithan Creek Master Investor (Cayman) LP, 6.71%
Rosebowl Western, 6.71%
PRINCIPAL OFFICES & SUBSIDIARIES
THE BAHAMAS
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
SWIFT: BNTB BM HM
E-mail: info@butterfieldgroup.com
Mailing Address:
P.O. Box HM 195
Hamilton, HM AX
Bermuda
BERMUDA
Country Head: Michael Collins,
Senior Executive Vice President
Butterfield Asset Management Limited
Investment Management
Managing Director: Michael Neff
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 and Corporate Trust
Managing Director: Martin Pollock
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3980
Fax: (441) 292 1258
E-mail: info@butterfieldgroup.com
Butterfield Bank (Bahamas) Limited
Trust & Fiduciary Services, Wealth Management
Managing Director: Julien Martel
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
CAYMAN ISLANDS
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
Butterfield Annual Report 2010 103
GUERNSEY
SWITZERLAND
Butterfield Bank (Guernsey) Limited
Private Client and Institutional Banking, Credit,
Investment Management, Custody and Custodian
Trustee Services, Administered Banking
Managing Director: John Robinson
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
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
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