The Bank of N.T. Butte rfield & So n Limited
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2012 Overview
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Butterfield is committed to environmentally conscious
printing. The following savings to our natural resources were
realised in the printing of this Annual Report:
Energy: 5,874,649 BTUs
Trees: 8
Wastewater: 13,336 liters
Air Emissions: 348 kg
Solid Waste: 177 kg
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As at 31 December 2012
Bermuda
The Bahamas
Cayman Islands
Guernsey
United Kingdom
Switzerland
In depth
Find out more at:
www.butterfieldgroup.com
$8.9 billion
Assets
Two Core Businesses
- Community Banking
- Wealth Management
1,210
Employees
Core Earnings
0 45.2%
Fitch
Efficiency Ratio
improved by
479 bps
Credit Ratings
Moody’s
ROE*
0 281
bps
*Core cash return on tangible
common equity
Standard & Poor’s
Short-Term
F1
Long-Term
Senior
A-
Short-Term
P-1
Long-Term
Senior
A2
Short-Term
A-2
Long-Term
Senior
A-
Capital Strength
Total Capital Ratio
Tier 1 Capital Ratio
11.2%
7.5%
10.1%
7.2%
21.6%
15.7%
23.5%
17.7%
24.2%
18.5%
2008
2009
2010
2011
2012
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Accolades
Six Butterfield employees named to
Citywealth International Financial
Centre Leaders List 2012
Euromoney 2012 Global
Private Banking Survey
Best Private Banking Services Overall
(First in Bermuda, Eighth in Caribbean Region)
Best Relationship Management
(First in Bermuda and Cayman,
Fourth in Caribbean Region)
Best Range of Investment Products
(First in Bermuda)
Best Net-Worth-Specific Services for
Super-Affluent Clientele
(First in Cayman, Third in Caribbean Region)
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Chairman & Chief Executive Officer’s Report to the Shareholders
2
Chairman & Chief Executive Officer’s
Report to the Shareholders
2012 was a year of continued recovery for Butterfield. The Bank’s Board
Given the Bank’s ratios, and against a backdrop of the limited lending
and Management team sought and delivered improved core earnings
and investment opportunities available in the current economic
and Shareholder returns despite ongoing economic challenges in our
environment, your Board determined that it was appropriate to
main jurisdictions and very low interest rates. Whilst we made good
return a portion of the Bank’s capital to Shareholders as income. On
progress in restoring value in the franchise, we continue to pursue
26 February 2013, the Board declared a special dividend of $0.04 per
opportunities to unlock greater value as we move forward.
Common and Contingent Value Convertible Preference Share to be
paid on 22 March 2013 to Shareholders of record on 5 March 2013.
Core earnings for the year ended 31 December 2012 were
$54.9 million, up 45.2% over 2011 on gross revenues that increased by
1.5%. The improved core earnings reflect improvements in both our
IN PURSUIT OF IMPROVED EARNINGS
Butterfield undertook or accelerated a number of initiatives in
efficiency ratio and net interest margin.
2012 that proved beneficial to earnings and which will contribute to
improving the Bank’s sustainable profitability over the long term.
2012 core earnings were offset by significant net one-time charges
of $29.3 million stemming from more conservative valuations of
A 16 basis point increase in the net interest margin was achieved
certain Balance Sheet assets not related to core operations; primarily
principally through a more disciplined investment approach—matching
goodwill, intangible assets and estimates of the market value of real
investment maturities to deposit aging—that resulted in the purchase
property owned and used by the Bank. As a result, 2012 net income
of longer duration, higher-yielding (primarily US Government agency)
was $25.6 million, reduced from $40.5 million in 2011.
securities for the Bank’s portfolio. Butterfield benefits from stability
and predictability in our deposit base, which allows for the effective
In addition to growing core earnings, we improved the capital position
application of such an approach, and also provides us with more
of the Bank in 2012. The Tangible Common Equity Ratio increased by
latitude to widen margins via deposit pricing than is the case for some
28 basis points to 7.17%, the Tier 1 Capital Ratio improved to 18.53%
other financial institutions.
(from 17.70% at year-end 2011), and the Total Capital Ratio ended the
year at 24.18% (up from 23.50% at year-end 2011). Relative to many
The Bank sold its holdings in selected non-core assets, specifically
other banks, our capital position is very strong.
its wholly-owned Barbados subsidiary and its interest in the
Cayman-based Island Heritage insurance company during the year.
Core cash return on tangible common equity rose to 6.56% from 3.75%.
Those transactions generated proceeds of $63.5 million. The capital
Asset growth of $425 million, resulting primarily from increased values
deployed in the ongoing development of our core businesses; those
of securities in the Bank’s investment portfolios, drove improvements
in which we believe we have the scale, market presence and expertise
and Management resources that the sale of those assets freed will be
in Shareholder value. Net book value per Share rose to $1.20 from
to foster material growth going forward.
$1.14 and tangible book value per Share improved from $1.05 to $1.16.
To continue to effect improvements in financial performance whilst
team. During 2012, we reduced non-interest expenses by more than
maintaining strong ratios, the Bank is following a focused strategy for
$12 million. Headcount continues to be reduced across the Group,
the deployment of capital. That strategy involves allocating funds
enabled by changes in technology, process improvements, declines
to initiatives that directly improve the franchise value, and applying
in transaction volumes in some areas owing to the current economic
excess capital and proceeds from the divestiture of non-core holdings
climate, and changes in customer behaviour.
Managing costs remains a key area of focus for the Management
to core businesses and projects that will drive continued growth.
IN THE INTERESTS OF SHAREHOLDERS
As a means of improving trading liquidity and potential returns on
The Bank also continues to seek ways to streamline operations as a
means of managing expenses. During 2012, we made organisational
and process changes to extract efficiencies from the previous
equity, your Board authorised a Share Buy-back Programme in May
centralisation of key functions in the areas of human resources,
2012 and increased the repurchase allowance in December to
project management, information technology, compliance and risk
10 million Common Shares and 8,000 Preference Shares. At year end,
management. We are seeking to reduce duplication of effort and
the Bank had repurchased 7.3 million Common Shares at a cost of
synchronise our policies and procedures to create savings and
$9.0 million, and 4,422 Preference Shares at a cost of $5.4 million.
improve customer service. In our two retail banking jurisdictions,
Butterfield Annual Report 2012 3
Bermuda and Cayman (which now use a common banking technology
financial services in the jurisdiction. Our Guernsey subsidiaries once
platform), we are in the process of rationalising and simplifying our
again sponsored a number of youth and sports-related events to raise
product lineups to ensure customers in both markets have access to
the community profile of the businesses there, and our UK bank made
our best offerings, whilst reducing the costs of back-office processing
a number of donations to charities connected to our private clients
and administration. In 2013, we will complete the installation of a
during the year.
common system supporting our UK and Guernsey banking businesses,
which will provide similar opportunities for operational improvements
I was honoured to have been appointed Butterfield’s Chairman & Chief
Executive Officer in 2012, and I look forward to continuing to work with
my fellow Directors and Management to advance the Bank’s recovery.
I would like to express my appreciation to our customers for their
loyalty to the Bank, our employees for their continued dedication and
hard work, and to the Shareholders for your ongoing support.
Brendan McDonagh
Chairman & Chief Executive Officer
and cost savings.
IN BOARD MATTERS
Three new Directors joined the Board during 2012—Independent,
Non-Executive Director Alastair Barbour, Non-Executive Director
Olivier Sarkozy (as one of Carlyle’s representatives), and
myself—respectively filling the vacancies created by Robert Steinhoff,
James Burr and Robert Mulderig upon their retirements from the Board
in May. In June, sitting Independent, Non-Executive Director Barclay
Simmons was named Vice Chairman.
Bradford Kopp stepped down from the Board upon his resignation as
Butterfield’s Chief Executive Officer in August. Shaun Morris resigned
as a Director upon being appointed the Group’s General Counsel
and Chief Legal Officer, and in that capacity, Mr. Morris now serves as
Secretary to the Board of Directors.
IN THE COMMUNITY
Butterfield’s long-term success and growth is tied to the prosperity
of the jurisdictions we serve. Across the Group in 2012, we supported
worthy causes that helped enrich and improve the lives of people in
our communities. In Bermuda, the Bank focused its corporate giving
efforts through the Butterfield Hope Award, making contributions to
many local charities. Cayman sponsored several health, wellness and
educational initiatives, and was an active member and supporter of
industry-led organisations that foster the ongoing development of
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Board of Directors & Group Executive Management
Butterfield Annual Report 2012 5
Board of Directors
& Principal Board Committees
COMMITTEES INDICATED BY NUMBERS
1
CHAIRMAN
BRENDAN MCDONAGH
Chief Executive Officer,
The Bank of N.T. Butterfield & Son Limited
1,3,5
VICE CHAIRMAN
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
JOHN WRIGHT*
Retired Bank Chief Executive
2,4
ALASTAIR BARBOUR*
Director, RSA Insurance Group plc, Liontrust Asset
Management plc, Standard Life European Private Equity
Trust plc, CATCo Reinsurance Opportunities Fund Ltd,
CATCo Reinsurance Fund Limited and Scottish Equitable
Policyholders Trust Limited
PRINCIPAL BOARD COMMITTEES
1. EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS
Supports the Board in fulfilling its overall governance
responsibilities.
3,4
VICTOR DODIG
Senior Executive Vice-President and
Group Head, Wealth Management, CIBC
2,4
SHEILA LINES*
Retired Chief Executive Officer,
KeyTech Limited
1,2,4
PAULINE RICHARDS*
Chief Operating Officer,
Armour Reinsurance Group Holdings Limited
Director, Wyndham Worldwide Inc.
Former Director and Audit Committee Chair,
Cendant Corporation
4,5
OLIVIER SARKOZY
Managing Director and Head of The Carlyle Group’s
Global Financial Services Group
1,3
WOLFGANG SCHOELLKOPF
Managing Partner,
Lykos Capital Management
2. AUDIT COMMITTEE
Oversees Butterfield’s financial reports, internal financial controls,
internal audit processes and compliance.
3. RISK POLICY & COMPLIANCE COMMITTEE
Focuses on credit, market and operational risk.
4. CORPORATE GOVERNANCE COMMITTEE
Focuses on Directors’ and Board Committee governance,
performance and Directors’ nominations.
5. COMPENSATION & HUMAN RESOURCES COMMITTEE
Focuses on compensation and benefits, employee development
and succession.
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.
*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.
6
Group
Executive Management
BRENDAN MCDONAGH
Chairman & Chief Executive Officer
MICHAEL COLLINS
Senior Executive Vice President
Bermuda
CONOR O’DEA
Senior Executive Vice President
International Banking
DANIEL FRUMKIN
Executive Vice President
Chief Risk Officer
DONNA HARVEY MAYBURY
Executive Vice President
Human Resources
ROBERT MOORE
Executive Vice President
Head of Group Trust
SHAUN MORRIS
General Counsel
Group Chief Legal Officer
MICHAEL NEFF
Executive Vice President
Head of Group Asset Management
BRADLEY ROWSE
Executive Vice President
Chief Financial Officer
JAMES MCPHERSON
Senior Vice President
Group Internal Audit
Butterfield Annual Report 2012 7
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Table
CONTENTS
of Contents
MANAGEMENT’S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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(cid:115)(cid:0) (cid:33)(cid:66)(cid:79)(cid:85)(cid:84)(cid:0)(cid:34)(cid:85)(cid:84)(cid:84)(cid:69)(cid:82)(cid:108)(cid:69)(cid:76)(cid:68)(cid:0)
(cid:115)(cid:0) (cid:34)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83)(cid:0)(cid:51)(cid:84)(cid:82)(cid:65)(cid:84)(cid:69)(cid:71)(cid:89)(cid:0)
(cid:115)(cid:0) (cid:18)(cid:16)(cid:17)(cid:18)(cid:0)(cid:47)(cid:86)(cid:69)(cid:82)(cid:86)(cid:73)(cid:69)(cid:87)(cid:0)
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CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2012
CONSOLIDATED BALANCE SHEET AND DISCUSSION
OFF BALANCE SHEET ARRANGEMENTS
RISK MANAGEMENT
JURISDICTION & GROUP BUSINESS OVERVIEWS
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FINANCIAL STATEMENTS
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(cid:115)(cid:0) (cid:41)(cid:78)(cid:68)(cid:69)(cid:80)(cid:69)(cid:78)(cid:68)(cid:69)(cid:78)(cid:84)(cid:0)(cid:33)(cid:85)(cid:68)(cid:73)(cid:84)(cid:79)(cid:82)(cid:7)(cid:83)(cid:0)(cid:50)(cid:69)(cid:80)(cid:79)(cid:82)(cid:84)(cid:0)(cid:84)(cid:79)(cid:0)(cid:84)(cid:72)(cid:69)(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:0)
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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: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)
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(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)
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SHAREHOLDER INFORMATION
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Butterfield Annual Report 2012 9
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 of our business lines. Some measures are calculated in accordance with GAAP,
while other measures do not have a standardised meaning under GAAP. Accordingly, these measures, described below, may not be comparable to
similar measures used by other companies. Investors may however find these non-GAAP financial measures useful in analysing financial performance.
Core Cash Return on Tangible Common Equity (“CCROTCE”)
CCROTCE measures core cash profitability as a percentage of tangible
Tier 1 Common Ratio
The Tier 1 Common Ratio is the same as the Tier 1 Capital Ratio but
common equity. CCROTCE is the amount of core net income excluding
only includes common equity in the numerator and deducts the
amortisation of intangible assets returned as a percentage of tangible
Preference Shareholders’ equity.
common equity and calculated as Core Cash Net Income / Tangible
Common Equity. Core cash net income is for the full fiscal year
(before dividends paid to Common Shareholders but after dividends
Total Capital Ratio
The Total Capital Ratio measures the amount of the Bank’s capital in
to Preference Shareholders) adjusted for one-off items not in the
relation to the amount of risk it is taking. All banks must ensure that a
ordinary course of business plus amortisation of intangible assets
reasonable proportion of their risk is covered by permanent capital.
expensed in the year. Tangible common equity does not include the
Under Basel II, Pillar I, banks must maintain a minimum Total Capital
Preference Shareholders’ equity or goodwill and intangible assets.
Ratio of 8%. In effect, this means that 8% of the risk-weighted assets
Return on Common Shareholders’ Equity (“ROE”)
ROE measures profitability by revealing how much profit is
must be covered by permanent or near permanent capital. The risk
weighting process takes into account the relative risk of various types
of lending. The higher the Capital Adequacy Ratio a bank has, the
generated with the money invested by Common Shareholders. ROE
greater the level of unexpected losses it can absorb before
is the amount of net income returned as a percentage of Common
becoming insolvent.
Shareholders’ Equity and calculated as Net Income / Average Common
Shareholders’ Equity. Net income is for the full fiscal year (before
dividends paid to Common Shareholders but after dividends to
Preference Shareholders). Common Shareholders’ Equity does not
include the Preference Shareholders’ equity.
Return on Assets (“ROA”)
ROA is an indicator of profitability relative to total assets. ROA
demonstrates how efficient Management is at using its assets to
generate earnings. The ROA ratio is calculated as Annual Net Income /
Average Total Assets.
Tier 1 Capital Ratio
The Tier 1 Capital Ratio is the ratio of the Bank’s core equity capital, as
measured under Basel II, to its total risk-weighted assets (“RWA”). Risk-
weighted assets are the total of all assets held by the Bank weighted
Tangible Common Equity / Tangible Asset Ratio (“TCE/TA”)
TCE/TA is used to determine how much loss the Bank can take before
other forms of capital, other than common equity, are impacted. The
TCE/TA ratio is calculated as (Common Equity - Intangible Assets -
Goodwill) / Tangible Assets. Tangible common equity does not include
the Preference Shareholders’ equity or goodwill and intangible assets.
Tangible assets are the Bank’s total assets from continuing operations
less goodwill and intangibles.
Net Interest Margin (“NIM”)
NIM is a performance metric that examines how successful the Bank’s
investment decisions are compared to its cost of funding assets
and is calculated as (Interest Income – Interest Expenses) / Average
Interest Earning Assets. The daily average was used in calculating the
average balance for deposits to avoid any distortion caused by large
by credit risk according to a formula determined by the Regulator. The
fluctuations at month ends.
Bank follows the Basel Committee on Banking Supervision (“BCBS”)
guidelines in setting formulae for asset risk weights.
10
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.
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 1,200 employees across six jurisdictions. Butterfield offers a full range of community banking services in Bermuda 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
by jurisdiction. However, we remain flexible and nimble in each
jurisdiction, with decision making on client service-related matters
focus is on building Shareholder value by expanding our share of the
based locally. In addition, we have invested heavily—and continue to
community and private banking markets in jurisdictions in which we
invest—in new technology that allows for new and flexible products,
have a meaningful presence and a depth of local market knowledge.
enhanced customer service and a streamlined, more efficient
Our strategy also involves leveraging our multi-jurisdictional trust,
operation. We expect our recent investment in new core banking
custody and asset management offerings to build our wealth
systems in our two largest markets (Bermuda and Cayman), and
management business from both cross-referrals with existing customers
upgrades in progress in Guernsey and the United Kingdom, will help
and business development through referrals and relationships with
drive new revenue opportunities, improved internal control, and
fiduciaries and advisers. We aim to build upon our relationship-
operational efficiencies. Our strategy of moving to centralised support
based business approach by delivering exceptional client service
services and centres of excellence is enhanced by these technological
experiences, as well as a wide range of products to meet our clients’
investments and will drive further efficiencies.
financial services needs.
Given the large, loyal customer deposit base enjoyed in our main
The wide range of products on offer is reflective of our strategy of
jurisdictions, and the relatively low volume of lending demand from
pursuing opportunities in diversified businesses including community
our customer base, our investment strategy is more important than
banking, private banking, asset management, custody, corporate
is the case for most financial institutions. At 31 December 2012, we
trust and personal trust services. Those diverse businesses directly
had $4.6 billion of cash and investments representing 51.5% of total
contribute to the high level of fee income relative to our total income.
Despite the current economic environment reducing the volume of
assets. In recognition of this defining characteristic of Butterfield, we
have adopted a conservative approach to our investments, including
customer activity, our fee income remains at almost 38% of revenue
significantly reducing the list of international banks from whom we
before credit provisions and gains or losses.
will purchase certificates of deposits. With the help of our investment
advisers we continued to manage our Interest Rate Risk, which
Building on our community banking and wealth management strategies
measures the degree to which our profitability is at risk due to changes
will also leverage our strong and loyal client base. Unlike many banks,
in interest rates. Our focused investment strategy has allowed us
Butterfield is almost exclusively funded by our Shareholders and
to improve the profitability of our investments despite the ongoing
customers. Our core customer deposits have been remarkably stable
challenges of a poor and volatile investment climate, whilst minimising
throughout the credit crisis. In 2012, we focused on these core deposits
credit risk in the investment book. Our continued management of
and pricing discipline to significantly improve their contribution to
net interest income. This contribution reflects the strength of being a
Interest Rate Risk requires us to purchase fixed rate investments that,
whilst complying with our credit safety requirements, will experience
deposit-led organisation even in times of low interest rates.
temporary declines in market values when rates start to increase.
Rising interest rates will improve the profitability of Butterfield, such
To support our strategy, our Management structure is aligned to focus
that these anticipated negative marks are part of our strategy. They
on lines of business and central support services with increasingly
will not affect earnings, as they are not credit related, but they will
less emphasis on independent management and support teams
potentially give rise to negative impacts in equity through “Other
Butterfield Annual Report 2012 11
Comprehensive Income” due to accounting rules for Available-For-Sale
Key accomplishments in 2012 were as follows:
(“AFS”) investments. To minimise the impact on our equity in such
circumstances, while implementing proper management of Interest
(cid:115)(cid:0) Core profitability: The Bank delivered good growth in core net
income, up $17.1 million (45.2%) to $54.9 million (7 cents per
Rate Risk, we have increased the Held-to-Maturity (“HTM”) portfolio to
Share) from $37.8 million in 2011.
$239 million at year end.
(cid:115)(cid:0) Capital: We maintained a strong capital position, with over
2012 OVERVIEW
In 2012, the Bank made solid progress, selling non-core holdings,
$1.0 billion of regulatory capital, a Tier 1 Capital Ratio of 18.5% at
31 December 2012, with a TCE/TA ratio of 7.2%, up from 6.9% in 2011.
streamlining and coordinating operations across jurisdictions, focusing
on effective expense management and instituting a Share Buy-Back
Programme. Core earnings improved, as a result, by $17.1 million to
(cid:115)(cid:0)
Investment strategy: We continued our investment strategy for
the deployment of excess liquidity that contributed to our NIM
$54.9 million, building on our very strong capital position with Total
increasing by 16 basis points, from 2.42% in 2011 to 2.58% in 2012,
and Tier 1 Capital Ratios of 24.2% and 18.5% respectively. The Board
despite an environment of continued low interest rates.
continues to monitor capital levels, maintaining a conservative capital
management philosophy such that Butterfield remains well capitalised.
To further enhance Common Shareholder returns, the Board has
declared a special dividend of $0.04 per Share. On a going-forward
(cid:115)(cid:0) Expenses: We reduced non-interest expenses by $12.4 million
(4.3%), from $286.6 million in 2011, to $274.2 million in 2012.
basis, the Board will continue to assess capital planning options and
(cid:115)(cid:0) Headcount: Across the Group, headcount was reduced by 60
declare dividends as warranted, subject to regulatory approval.
(4.7%) from 1,270 as at 31 December 2011 to 1,210 by the end of
2012 on a full-time equivalent basis.
The Bank’s Balance Sheet remains strong, with Shareholders’ equity
ending the year up $27 million at $857 million, of which $196 million
is 8% Preference Shareholders’ equity and $661 million is Common
(cid:115)(cid:0) Deposits: The Bank maintained stable core customer deposits,
whilst decreasing deposit costs by 10 basis points, from 43 basis
and Contingent Value Convertible Preference Shareholders’ equity
points in 2011 to 33 basis points in 2012.
(“common equity”). Total assets grew by $118 million to $8.9 billion,
but when adjusted for the $307 million of assets from discontinued
operations in the prior year, total assets grew by $425 million, primarily
(cid:115)(cid:0) Loan quality: Gross non-accrual loans as a percentage of gross
loans held relatively flat at 2.8% at year-end 2012 compared to
reflecting a $245 million increase in deposits, $109 million of funding
from repurchase agreements, and a $27 million increase in
2.7% at year-end 2011. Net non-accrual loans were $86.6 million,
equivalent to 2.2% of total loans, after specific provisions for such
Shareholders’ equity.
loans of $26.7 million, reflecting an improved specific coverage
ratio of 23.6%, up from 21.3% at 31 December 2011.
Loans and advances to customers decreased from 2011 levels by
$113 million largely reflecting the $226 million repayment of a Bermuda
Government loan offset by loan growth in our European operations,
(cid:115)(cid:0) Systems: We continued preparations for a common technology
system in Europe and have successfully upgraded the UK
principally low loan-to-value residential mortgages secured by prime
system subsequent to year-end, with plans to upgrade Guernsey
Central London property.
by year-end 2013.
Core deposit levels showed resilience in this low interest rate
environment. Total deposits grew $244 million over 2011 to $7.5 billion,
a reflection of Butterfield’s strategy targeting certain segments of the
deposit market.
12
MARKET ENVIRONMENT
In 2012, the economic environment in the United States (“US”)
2013 OUTLOOK
The past few years have tested the ability of market researchers with
improved over the year. Gross Domestic Product (“GDP”) growth
ongoing changes and adjustments to economic forecasts. 2011 was a
remained positive, albeit at an uninspiring rate, the unemployment
year of extreme volatility with investors fleeing to quality, followed by a
rate continued to slowly drift lower, the housing market improved and
year of increasing stability in 2012. Many market participants began to
appears to have returned to a net creator of economic growth, and an
return to the (still volatile) equity markets, comforted by the continued
agreement was reached to avoid the worst of the “fiscal cliff” in early
support of the central banks through bond buying programmes. What
2013. In Europe, the economy remains in a very difficult situation
does that mean for the year ahead? Long-term interest rates are
with weakness in the peripheral economies making its way into the
beginning to rise above historic lows, but given the central banks’
core. With heightened levels of unemployment and the restraints of a
intent of maintaining low interest rates, many financial institutions
common currency, there are indications that Europe will not emerge
remain focused on optimising their business models, adjusting to the
quickly from its credit crisis. Some comfort was taken by the markets
current economic conditions; Butterfield is no exception.
from the European Central Bank’s Outright Monetary Transactions
programme, which removed funding issues earlier in the year. The
Low interest rates are expected to continue in 2013, however, our asset
impacts of the global economic conditions on the economies in which
and liability management strategy focuses on net interest income at
we operate were mixed. Bermuda has continued to experience rising
risk in varying interest rate environments. This means we position our
unemployment, a shrinking population and declining GDP, whilst
Balance Sheet to maximise net interest income over a three to
Cayman began to see encouraging signs of growth, including growth
five-year period with investment flows matching our expected
in air arrivals, population and infrastructure spending. However, in
maturities and turnover on the liability side of the Balance Sheet,
Bermuda the change in government in late 2012 has delivered a
whilst partially neutralising the impact of changing interest rates in any
Government agenda focused on job creation, which is expected to
given reporting period. These investments position us to not be reliant
translate into more policy changes targeted at bringing new business to
on rising rates to achieve adequate profitability. When higher rates
the island. The mixed economic climate in our two largest operations in
occur, core profitability will be further improved. Higher rates will also
2012 resulted in limited loan demand and more pressure on customers’
have a restraining effect on capital levels as it reduces the market value
ability to service loan payment obligations. Conversely, our private
of our longer dated securities in our AFS book, partially offset by lower
banking business in Europe continued to enjoy strong loan demand
liabilities for future pension and health costs for employees.
resulting in growth in our low loan-to-value residential mortgage
portfolio to high net worth customers.
In 2013, our strategy remains relatively unchanged as we continue
to focus our attention on the development of our core businesses,
Amidst this macroeconomic uncertainty, the Bank continues to maintain
which we expect will drive revenue growth. We expect to be able to
a highly liquid Balance Sheet with a low risk investment portfolio and
continue to improve our efficiency ratio in 2013 based on leveraging
minimal reliance on wholesale money markets for liquidity.
our investments in technology, redesigning processes and centralising
support services. Incentive plans have been more closely aligned with
business development and results targets and metrics that reflect
Shareholders’ interests.
Butterfield Annual Report 2012 13
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
Assets of discontinued operations
Total assets
Total deposits
Subordinated capital
Shareholders’ equity
Preference Shareholders’ equity
Common and Contingent Value
2012
1,651,547
76,213
2,881,704
3,955,960
243,321
22,276
-
8,942,030
7,502,259
260,000
2011
1,902,726
20,280
2,061,639
4,069,419
272,472
46,100
307,044
8,824,350
7,256,561
267,755
2010
2,222,934
18,157
2,764,723
3,858,138
257,468
51,435
276,573
9,623,487
7,988,501
282,799
2009
1,932,189
14,881
2,899,668
4,025,981
240,010
62,867
281,524
9,594,806
8,451,311
283,085
2008
2,168,057
17,019
3,789,136
4,235,435
194,256
67,196
268,227
10,911,703
9,570,172
282,296
195,578
200,000
200,000
200,000
-
Convertible Preference Shareholders’ equity
661,596
629,725
609,289
155,460
518,440
For the year ended 31 December
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 (loss) before gains and losses
Net gains (losses)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
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 (1)
Return on Common Shareholders’ equity
Tier 1 Capital Ratio
Total Capital Ratio
Tangible Common Equity Ratio
Net interest margin
Efficiency ratio
Per participating share ($)
Net income (diluted) (1)
Cash dividends (1)
Net book value (1)
Number of employees
Bermuda
Overseas
Total
Other data
Weighted average number of participating
Shares on a fully diluted basis (2)
Risk-weighted assets
2012
211,058
(14,190)
128,543
2011
202,249
(13,169)
132,349
2010
166,025
(40,262)
143,264
2009
174,708
(102,716)
148,473
2008
244,838
(2,753)
209,312
128,543
137,433
142,705
45,273
(27,312)
17,961
7,620
25,581
18,000
7,581
-
132,349
145,136
141,186
35,107
4,238
39,345
1,127
40,472
21,270
19,202
-
143,264
153,246
143,174
(27,393)
(180,366)
(207,759)
144
(207,615)
18,000
(225,615)
-
148,473
151,346
135,898
(66,779)
(147,635)
(214,414)
1,001
(213,413)
9,450
(222,863)
14,938
0.3%
1.1%
18.5%
24.2%
7.2%
2.58%
79.27%
0.4%
3.0%
17.7%
23.5%
6.9%
2.42%
84.06%
0.01
-
1.20
0.03
-
1.14
615
595
1,210
664
606
1,270
(2.2%)
(44.3%)
15.7%
21.6%
6.0%
1.91%
95.03%
(0.47)
-
1.10
732
649
1,381
(2.1%)
(47.0%)
7.2%
10.1%
1.0%
1.90%
87.26%
(2.34)
0.12
1.64
761
708
1,469
173,729
178,194
160,769
112,434
(105,782)
6,652
(2,028)
4,624
-
4,624
57,733
-
0.8%
7.5%
11.2%
4.3%
2.15%
72.42%
0.05
0.52
5.44
803
774
1,577
556,357
4,275,055
555,615
4,425,639
477,225
4,934,569
95,065
96,683
5,734,096
6,199,963
Includes both Common and Contingent Value Convertible Preference Shareholders’ equity.
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.
(1)
(2)
14
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2012
For 2012 and 2011, transactions that were viewed by Management as not being in the normal course of day-to-day business and unusual in nature
were excluded from core earnings as they obscure or distort the analysis of trends. Certain earnings measures, such as core 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
The Bank reported net income of $25.6 million for the year ended 31 December 2012, compared to $40.5 million in 2011. Results in both years
were adversely affected by various non-operating gains and losses. After deduction of Preference dividends ($16.0 million) and the guarantee fee
($2.0 million) on Preference Shares, the net income available to Common Shareholders was $7.6 million ($0.01 per Share) in 2012 compared to
$19.2 million ($0.03 per Share) in 2011.
The following table states reported earnings for 2012 compared to 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 (losses)
Provision for credit losses
Total net revenue
Non-interest expenses
Net income before taxes
Income tax (expense) benefit
Net income from continuing operations
Net income from discontinued operations
Net income
Dividends and guarantee fee of Preference Shares
Net earnings attributable to Common Shareholders
Net earnings per Common Share
- Basic
- Diluted
2012
128.5
211.1
339.6
(27.3)
(14.2)
298.1
(274.2)
23.9
(5.9)
18.0
7.6
25.6
(18.0)
7.6
0.01
0.01
Year ended 31 December
2011
132.4
202.3
334.7
4.2
(13.2)
325.7
(286.6)
39.1
0.3
39.4
1.1
40.5
(21.3)
19.2
0.03
0.03
$ change
(3.9)
% change
(3.0%)
8.8
4.9
(31.5)
(1.0)
(27.6)
12.4
(15.2)
(6.2)
(21.4)
6.5
(14.9)
3.3
(11.6)
(0.02)
(0.02)
4.4%
1.5%
N/A
(7.6%)
(8.5%)
4.3%
(38.9%)
N/A
(54.3%)
N/A
(36.8%)
15.5%
(60.4%)
(66.7%)
(66.7%)
Butterfield Annual Report 2012 15
Core Earnings
The following table reconciles the Bank’s GAAP net income for 2012 and 2011:
(in $ millions)
Net income
Non-core items:
Net income from discontinued operations (1)
Net gain on sale of affiliate (2)
Early retirement programme (3)
Impairment of goodwill and intangible assets (4)
Impairment of fixed assets (5)
Deferred tax valuation allowance and tax adjustments (6)
Onerous leases (7)
Total one-time items
Core earnings
EPS impact of non-core items
EPS core earnings – fully diluted
Year ended 31 December
2012
25.6
(7.6)
(4.2)
2.2
18.6
14.5
5.0
0.8
29.3
54.9
0.05
0.07
2011
40.5
(1.1)
(3.2)
1.6
-
-
-
-
(2.7)
37.8
-
0.03
(1) During the third quarter of 2012, Butterfield sold its wholly-owned Barbados subsidiary, Butterfield Bank (Barbados) Limited, to Trinidad and
Tobago-based First Citizens Bank Limited (“First Citizens”) for a net gain of $7.2 million. As a result, the Barbados segment has been reported
as discontinued operations. The operating results from this business were not material on a per Share basis; however, year-to-date net
income includes $7.6 million of discontinued operations in 2012 and $1.1 million in 2011.
(2)
In the second quarter of 2012, the Bank sold its 27.8% interest in Island Heritage Holdings Ltd., a Cayman-based insurance company, to BF&M
Limited for gross proceeds of $18.5 million, resulting in a gain of $4.2 million. In the second quarter of 2011, the Bank sold its 36% equity
interest on a diluted basis in Butterfield Fulcrum Group Limited (“BFG”) for a gain of $3.2 million.
(3) As part of the Bank’s cost reduction programme, incentive packages for optional early retirement were offered to eligible employees. In 2012
and 2011, the cost of this programme, recorded in salaries and other employee benefits, amounted to $2.2 million and $1.6 million respectively.
(4) The Bank’s annual impairment test concluded that the carrying amount of goodwill and intangible assets of our United Kingdom segment was
considered fully impaired due to a continuous period of losses incurred and future estimated profitability being unable to sustain current
valuations. The intangible asset of the Bahamas segment was impaired as the present value of net cash flows expected to be derived for the
remaining customer base is significantly less than the expectations as at the acquisition date.
(5)
The Bank’s annual property impairment assessment resulted in the impairment of various properties and a write down of $6.5 million was
recorded as the carrying value was not considered recoverable. Additionally at the end of 2012, the Bank changed its commitment with
respect to certain Bermuda properties which were being used in its operations but are now held for sale and, therefore, the properties have
been reclassified to other real estate owned assets in the Consolidated Balance Sheet. The reclassification resulted in an $8 million write
down of the carrying amount to its fair value less cost to sell.
(6) Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to
utilise deferred tax assets. A significant piece of objective negative evidence evaluated with respect to our UK bank was the cumulative
loss incurred over the three-year period ended 31 December 2012. Such objective evidence limits the ability to consider other subjective
evidence such as our projections for future growth. On the basis of this evaluation, as of 31 December 2012, a deferred tax valuation allowance
of $4.1 million was recognised in addition to $0.9 million of tax adjustments related to the prior year.
(7) The Bank leases certain properties in the normal course of business. Certain of the leased premises have been subleased. If the net present
value of the lease obligations exceeds the expected rent receipts, an onerous lease charge is recognised. During 2012, $0.8 million of such
charges were recognised.
16
Revenue
Total revenue before provisions for credit losses and gains and losses for 2012 was $339.6 million, up $4.9 million (1.5%) from $334.7 million in 2011.
Total non-interest income was down $3.9 million (2.9%) from $132.4 million in 2011 to $128.5 million in 2012, which was more than offset by the
$8.8 million increase in net interest income before provisions for credit losses from $202.3 million in 2011 to $211.1 million in 2012. The increase in
net interest income was driven by a 16 basis point increase in the net interest margin, from 2.42% in 2011 to 2.58% in 2012. The efficient deployment
of excess liquidity under our new investment strategy, loan growth and disciplined deposit pricing drove the improvement in the net interest
margin despite the sustained low interest rate environment.
DISTRIBUTION OF 2012 TOTAL REVENUES BEFORE
PROVISIONS FOR CREDIT LOSSES AND GAINS AND LOSSES
DISTRIBUTION OF 2012 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 8%
Asset
Management 6%
The Bahamas 2%
Guernsey 12%
United Kingdom 7%
Bermuda 57%
Net Interest Income 62%
Banking 10%
Cayman 22%
Switzerland N/A
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 $3.9 million from $132.4 million in 2011 to $128.5 million in 2012 and represents 38% of total revenues before
provisions for credit losses and gains and losses for 2012, compared to 40% in 2011.
The following table presents the components of non-interest income for the years ended 31 December 2012 and 2011:
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
2012
22,323
33,713
26,524
29,122
10,646
6,215
128,543
2011
22,942
31,648
30,277
29,451
12,324
5,707
132,349
$ change
(619)
% change
(2.7%)
2,065
(3,753)
(329)
(1,678)
508
(3,806)
6.5%
(12.4%)
(1.1%)
(13.6%)
8.9%
(2.9%)
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 $22.3 million in 2012, compared to $22.9 million in 2011; the $0.6 million decrease is principally a result
of the termination of the management agreement with Bentley Reid in the second quarter of 2012, offset by an increase in fees earned on the
Butterfield Money Market Fund as a result of higher LIBOR rates. Assets under management decreased by $0.9 billion to end at $4.7 billion for 2012
due to the terminated agreement with Bentley Reid and due to a decline in Money Market balances as clients sought better yielding alternatives
for short-term investments.
Butterfield Annual Report 2012 17
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 $ thousands)
Butterfield Funds
Discretionary
Total assets under management
2012
2,869
1,871
4,740
2011
3,375
2,269
5,644
$ change
(506)
% change
(15.0%)
(398)
(904)
(17.5%)
(16.0%)
Banking
During 2012, Butterfield provided a full range of community, commercial and private banking services in select jurisdictions. 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 and the Cayman Islands, 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 increased by 6.5% in 2012 to $33.7 million, compared to $31.6 million in 2011, primarily as a result of loan
prepayment penalty fee revenue received during 2012.
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 83% of the Group’s foreign exchange revenue (2011: 80%). The Bank does not have a proprietary
trading book. Foreign exchange income is thus generated from client-driven transactions and totalled $26.5 million in 2012, compared with
$30.3 million in 2011. The $3.8 million year-on-year decrease reflects declining client volumes, in line with the slowing economic conditions, and
lower margins on institutional transactions as a result of intensifying competition from online platforms.
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 2012, trust revenues totalled $29.1 million, marginally lower than the $29.5 million recorded in 2011 due mainly to substantial one-time
fees in 2011 which did not recur in 2012 and also to the loss of one managed trust company mandate during 2011 offset by an increase in recurring
income through structured, proactive business development activities, with good new business growth in our Switzerland, Guernsey and Bermuda
trust businesses and increasing pipelines in our Bahamas and Cayman businesses. Trust revenues represented 23% of total non-interest income in
2012, up from 22% in 2011. Total Trust assets under administration were $47.1 billion as at 31 December 2012 compared to $43.9 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 2012, revenues were $10.6 million compared to $12.3 million in 2011, down 13.6%,
in part due to lower transaction volumes and expired mandates in our custody business, and partly due to a reduction in administered banking
mandates. Total custody and other administration assets under administration (which includes the administered banking services operations
provided by our Guernsey business) were $39.9 billion as at 31 December 2012, up from $39.1 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 from investments in affiliates
Rental income
Other
Total other non-interest income
Year ended 31 December
2012
920
3,062
2,233
6,215
2011
884
2,889
1,934
5,707
In 2012, we recorded equity pickup income of $0.9 million, which is consistent with the prior year. Rental income increased by $0.2 million to
$3.1 million in 2012 from an increase in rented premises previously occupied by the Bank for its operations. Included in the “Other” category are
maintenance fees from leased premises, Director fee income, and other miscellaneous income.
18
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 2012 and 2011:
(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 agreement to repurchase
Subordinated capital
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
2012
Average
rate
Average
balance
Interest
2011
Average
rate
1,596.7
2,551.5
4,036.0
8,184.2
626.3
8,810.5
5.0
49.1
190.7
244.8
-
244.8
6,305.6
(21.1)
-
(12.6)
(33.7)
-
-
(33.7)
8.4
261.2
6,575.2
975.0
385.6
7,935.8
874.7
8,810.5
1,609.0
0.3%
1.9%
4.7%
3.0%
-
2.8%
(0.3%)
-
(4.8%)
(0.5%)
-
-
(0.4%)
1,946.4
2,452.0
3,952.1
8,350.5
754.2
9,104.7
6,604.1
3.6
278.4
6,886.1
931.1
452.8
8,270.0
834.7
9,104.7
1,464.4
9.6
43.8
188.1
241.5
-
241.5
(28.8)
-
(10.4)
(39.2)
-
-
0.5%
1.8%
4.8%
2.9%
-
2.7%
(0.4%)
-
(3.8%)
(0.6%)
-
-
(39.2)
(0.5%)
211.1
2.58%
202.3
2.42%
Net interest income before provisions for credit losses increased by 4.4% to $211.1 million in 2012 compared to $202.3 million in 2011, of which 61%
(2011: 65%) was generated in Bermuda and 21% (2011: 18%) in the Cayman Islands. Average investment yields of 1.9% on $2.6 billion, combined
with a 0.1% decrease in deposit cost, drove a 16 basis point improvement in the net interest margin to 2.58% in 2012 compared to 2.42% in 2011.
Although average interest-earning assets decreased by $166.3 million to $8.2 billion in 2012, 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
equivalents category. Free balances of $1.6 billion in 2012 (2011: $1.5 billion) include non-interest-bearing current accounts of $1.0 billion
(2011: $0.9 billion) and Shareholders’ equity of $875 million (2011: $835 million) net of other assets and other liabilities. See the Risk Management
section for more information on how interest rate risk is managed.
Provision For Credit Losses
The Bank’s net provisions for credit losses in 2012 were $14.2 million compared to $13.2 million in 2011. The Bank anticipates the difficulties in the
local economies will continue for the foreseeable future and has made prudent provisions in anticipation of a difficult market. The $20.8 million
incremental provisions were required principally for the specific reserves pertaining to commercial and residential exposures offset by a
$2.9 million release in the general provision and recoveries of $3.7 million.
Butterfield Annual Report 2012 19
Net Gains (Losses)
The following table represents the components of net gains (losses) for the years ended 31 December 2012 and 2011:
(in $ thousands)
Net realised / unrealised gains (losses) on trading investments
Net realised gains on available-for-sale investments
Net realised / unrealised losses on Other real estate owned
Gain on sale of affiliates
Impairment of fixed assets
Impairment of intangible assets
Impairment of goodwill
Net other gains (losses)
Total net (losses) gains
2012
268
2,028
(2,053)
4,231
(14,527)
(9,143)
(9,505)
1,389
(27,312)
2011
(919)
2,058
-
3,178
-
-
-
(79)
4,238
Net Realised / Unrealised Gains (Losses) on Trading Investments
A $0.3 million gain was recorded with respect to trading securities in 2012 compared to a loss of $0.9 million in 2011, which relates primarily 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
the BNY Mellon Butterfield Income Advantage Fund, which was launched in 2011.
Net Realised Gains on Available-For-Sale Investments
Net realised gains of $2.0 million (2011: $2.1 million) were recorded on securities sold in the normal course of business as part of our asset and
liability management strategy.
Gain On Sale of Affiliates
In the second quarter of 2012, the Bank sold its 27.8% interest in Island Heritage Holdings Ltd., a Cayman-based insurance company, to BF&M
Limited for gross proceeds of $18.5 million, resulting in a gain of $4.2 million. In the second quarter of 2011, the Bank sold its 36% equity interest
(on a diluted basis) in BFG for a gain of $3.2 million.
Net Realised / Unrealised Losses on Other Real Estate Owned
Valuation adjustments related to real estate held for sale were $2.1 million compared to nil in 2011.
Impairment of Fixed Assets
The Bank’s annual property impairment assessment resulted in the impairment of various properties and a write down of $6.5 million was recorded
as the carrying value was not considered recoverable. Additionally, at the end of 2012, the Bank changed its commitment with respect to certain
Bermuda properties that were being used in its operations but are now held for sale and, therefore, the properties have been reclassified to Other
real estate owned assets in the Consolidated Balance Sheet. The reclassification resulted in an $8 million write down of the carrying amount to its
fair value less cost to sell.
Impairment of Goodwill and Intangible Assets
Annual impairment tests of goodwill and intangible assets concluded that the carrying amount of goodwill and intangible assets of our United
Kingdom segment was considered fully impaired due to a continuous period of losses incurred and future estimated profitability being unable
to sustain current valuations. The intangible asset of the Bahamas segment was impaired as the present value of net cash flows expected to
be derived for the remaining customer base is significantly less than the expectations as at the acquisition date. A $9.1 million impairment of
intangible assets and a $9.5 million impairment of goodwill were recorded in 2012 compared to nil in 2011.
Net Other Gains (Losses)
Net other gains (losses) were $1.4 million in 2012 compared to net other losses of $0.1 million in 2011 and include gains and losses from the sales
of fixed assets and other miscellaneous items.
Non-Interest Expenses
Expense management continued to be a key focus of the Bank in 2012 as the challenging economic conditions and persistently low interest rates
challenged the banking business model. Total non-interest expenses in 2012 were $274.2 million compared to $286.6 million recorded in 2011.
Salary and employee benefits account for 50% of non-interest expenses with technology, communications and property making up 30% combined.
Bermuda expenses (including head office costs) represent the majority of the Group costs at 59% of total non-interest expenses.
20
DISTRIBUTION OF 2012 NON-INTEREST EXPENSES
DISTRIBUTION OF 2012 EXPENSES BY LOCATION
Other Expenses 6%
Marketing 1%
The Bahamas 2%
Amortisation of Intangible Assets 2%
United Kingdom 7%
Switzerland 1%
Non-Income Taxes 5%
Professional and
Outside Services 6%
Property 9%
Guernsey 11
%
Cayman 20
%
Salaries and Other
Employee Benefits 50%
Technology and
Communications 21%
Bermuda 59
%
The following table presents the components of non-interest expenses for the years ended 31 December 2012 and 2011:
(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 expense
Income tax expense (benefit)
Total expenses
2012
137,433
57,715
26,129
15,409
13,158
5,040
3,963
15,401
274,248
5,890
280,138
2011
145,136
$ change % change
(5.3%)
(7,703)
53,929
27,080
18,430
14,029
5,367
4,891
17,766
286,628
(306)
286,322
3,786
(951)
(3,021)
(871)
(327)
(928)
(2,365)
(12,380)
6,196
(6,184)
7.0%
(3.5%)
(16.4%)
(6.2%)
(6.1%)
(19.0%)
(13.3%)
(4.3%)
N/A
(2.2%)
Salaries and Other Employee Benefits
Salaries and other employee benefits decreased by $7.7 million (5.3%) to $137.4 million in 2012 from $145.1 million the prior year. A headcount
reduction of 60 drove a $6.8 million reduction in net salary cost offset by an increase of $0.2 million in salaries for temporary contract workers.
Additionally, overtime declined by $1.3 million, net pension expense fell by $3.2 million, offset by a $1.5 million increase in staff incentive
expense, primarily from vesting of previously issued stock-based compensation, and rising medical costs, up $1.1 million to $7.1 million in 2012.
Headcount at the end of 2012 was 1,210, compared to 1,270 a year ago on a full-time equivalency basis.
Technology and Communications
Technology and communication costs were $57.7 million in 2012, up $3.8 million on the $53.9 million recorded in 2011 as a result of increased
depreciation costs related to system implementation projects that occurred in Bermuda and Cayman during 2011.
Property
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, decreased by
$1.0 million to $26.1 million in 2012 versus $27.1 million in 2011. The decrease was primarily due to improved management of property
maintenance costs.
Professional and Outside Services
Professional and outside services primarily include consulting, legal, audit, and other professional services. In 2012, the expense was $15.4 million,
down $3.0 million compared to $18.4 million incurred in 2011 from the reduction in the use of consultants and other expense management initiatives.
Butterfield Annual Report 2012 21
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 licences. In 2012, we incurred costs of $13.2 million compared to
$14.0 million in 2011; the decrease reflecting lower payroll tax in Bermuda due to a decreased number of employees and decrease in payroll tax
rate part way through 2011.
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 $5.0 million in 2012 compared to $5.4 million in 2011.
Marketing
Marketing expenses reflect costs incurred in advertising and promoting our products and services. They totalled $4.0 million in 2012, down
$0.9 million from 2011 and represent 1.2% of total net revenues before gains and losses and provisions for credit losses in 2012 compared to
1.5% in 2011.
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 other non-interest expenses
2012
1,421
1,417
911
2,456
306
1,488
541
739
492
370
1,021
455
1,417
2,367
15,401
2011
1,750
1,752
1,235
2,830
357
1,615
562
822
639
770
811
426
1,044
3,153
17,766
$ change
(329)
(335)
(324)
(374)
(51)
(127)
(21)
(83)
(147)
(400)
210
29
373
(786)
(2,365)
Other non-interest expenses were $15.4 million in 2012, a decrease of $2.4 million compared to 2011, in part due to lower transaction processing
fees as a result of lower volumes and cost management initiatives resulting in a reduction in items such as stationery and supplies, insurance costs,
and lower operational losses than in the prior year which are included in “other”.
Income Taxes
In 2012, income tax expenses associated with our businesses in taxable jurisdictions, namely Guernsey, Switzerland and the United Kingdom,
netted to $5.9 million compared to a benefit of $0.3 million in 2011. 2012 taxes reflect a tax expense of $5.0 million (2011: $1.2 million benefit) in
the United Kingdom operations and $0.9 million (2011: $0.8 million) in Guernsey. The $5.0 million tax expense in the UK reflects a $4.1 million
valuation allowance against deferred income tax assets in addition to a $0.9 million tax adjustment related to prior year.
22
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the Balance Sheet as reported as at 31 December 2012 and 31 December 2011:
(in $ millions)
Assets
Cash and cash equivalents
Short-term investments
Investments
Loans, net of allowance for credit losses
Premises, equipment and computer software
Goodwill and intangibles
Other assets
Total assets from continuing operations
Assets of discontinued operations
Total assets
Liabilities
Total deposits
Total other liabilities
Subordinated capital
Total liabilities from continuing operations
Liabilities of discontinued operations
Total liabilities
Preference Shareholders’ equity
Common and Contingent Value Convertible Preference Shareholders’ equity
Total Shareholders’ equity
2012
2011
$ change
1,652
76
2,882
3,956
243
22
111
8,942
-
8,942
7,502
323
260
8,085
-
8,085
196
661
857
1,903
20
2,062
4,069
272
46
145
8,517
307
8,824
7,257
197
268
7,722
272
7,994
200
630
830
(251)
56
820
(113)
(29)
(24)
(34)
425
(307)
118
245
126
(8)
363
(272)
91
(4)
31
27
118
(151)
55
449
0.28%
0.86%
0.83%
0.68%
Total liabilities and Shareholders’ equity
8,942
8,824
Capital Ratios
Risk-weighted assets
Tangible common equity (TCE)
Tangible assets (TA)
TCE/TA
Tier 1 Common Ratio
Tier 1 Capital Ratio
Total Capital Ratio
4,275
639
8,920
7.17%
13.96%
18.53%
24.18%
4,426
584
8,471
6.89%
13.10%
17.70%
23.50%
The Bank maintains a highly liquid Balance Sheet and is well capitalised. At 31 December 2012, total cash and cash equivalents, short-term
investments and investments represented $4.6 billion, or 51.5% of total assets, up from 46.8% at year-end 2011 before discontinued operations.
The Bank’s Balance Sheet remains strong, with Shareholders’ equity ending the year up $27 million to $857 million of which $196 million is 8%
Preference Shareholders’ equity and $661 million is common equity. Total assets grew by $118 million to $8.9 billion, but when adjusted for the
$307 million of assets from discontinued operations in the prior year, total assets grew by $425 million primarily reflecting a $245 million increase
in deposits, $109 million of funding from repurchase agreements, and a $27 million increase in Shareholders’ equity. At 31 December 2012,
Butterfield’s capital ratios were strong, having improved from year-end 2011, with the TCE/TA Ratio ending 2012 at 7.17% (2011: 6.89%), whilst the
Total Capital Ratio and Tier 1 Capital Ratio were 24.18% (2011: 23.50%) and 18.53% (2011: 17.70%) respectively. These Ratios are well in excess of
regulatory minimums.
Butterfield Annual Report 2012 23
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 and Treasury bills. Investments of a similar
nature that are either restricted or have a maturity of more than three months but less than 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 new policy more closely reflects the manner in which the Bank manages its liquid assets. As at
31 December 2012, cash and cash equivalents and short-term investments were $1.7 billion, compared to $1.9 billion as at 31 December 2011.
See “Note 4: Cash and cash equivalents” in the 31 December 2012 Consolidated Financial Statements for additional tables and information.
Investments
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
department of the Group Risk Management division.
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 provided 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.
Effective 31 July 2012, the investment advisory business previously conducted by Carlyle Investment Management LLC was transferred to Alumina
Investment Management LLC (“Alumina”) and the Bank agreed to the transfer of its contract to Alumina.
As at 31 December 2012, 99% (2011: 98%) of our total investments were rated investment grade (i.e., rated “BBB” or higher).
31 DECEMBER 2012 INVESTMENT PORTFOLIO BY
LONG-TERM DEBT RATING
31 DECEMBER 2012 INVESTMENT PORTFOLIO BY TYPE
Other 1%
Mutual Funds 2%
A 23%
Certificates of Deposit 19%
Pass Through Notes 1%
Commercial 5%
AA 11%
Asset-backed Securities-
Student Loans 5%
Corporate Debt
Securities Guaranteed
by Non-US Governments 2%
US Government and
Federal Agencies 49%
Corporate Debt Securities 14
%
Debt Securities Issued
by Non-US Governments 3%
AAA 65%
24
The following table presents the carrying value of investments by Balance Sheet category:
(in $ millions)
Trading
Available for sale
Held to maturity
Total investments
2012
62
2,581
239
2,882
As at 31 December
2011
63
$ change
(1)
1,934
647
65
174
2,062
820
Total investments were $2.9 billion as at 31 December 2012, up $0.8 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.
Trading securities, consisting of holdings of non-US government securities, corporate equities and seed money invested in mutual funds managed
by us, totalled $62 million at year-end 2012, compared to $63 million at year-end 2011. Trading securities primarily reflect the $50 million initial
seed money invested by the Bank in BNY Mellon Butterfield Income Advantage Fund and $7 million invested in other Butterfield Select Funds
totalling $57 million, classified as equities in the table below.
Available-for-sale (“AFS”) securities totalled $2.6 billion at year-end 2012, compared to $1.9 billion at year-end 2011. As at 31 December 2012,
45.7% or $1.2 billion (2011: 40.9% or $0.8 billion) of AFS securities consisted of holdings of mortgage-back securities issued by US government and
federal agencies. Corporate debt securities, certain of which are guaranteed by non-US governments totalled 17.6%, or $453 million (2011: 27.2% or
$527 million), and certificates of deposit represented 21.8% or $561 million (2011: 18.4% or $356.5 million). The remaining 15.0% of AFS securities is
comprised primarily of commercial mortgage-backed securities ($130 million), government guaranteed student loan-backed securities
($136 million), debt securities issued by non-US governments ($90 million), and one pass-through note (“PTN”) ($31 million), which was formerly a
structured investment vehicle (“SIV”).
Held-to-maturity (“HTM”) investments were $239 million as at 31 December 2012 (2011: $65 million) and consisted entirely of mortgage-backed
securities issued by US government agencies that Management has no intention to sell before maturity.
Investment Valuation
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 amortised 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 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 2012 Consolidated Financial Statements for additional tables and information.
Loans
The loan portfolio stood at $4.0 billion at 31 December 2012, down $0.1 billion from $4.1 billion the year before, primarily due to the repayment
of a Bermuda Government loan of $226 million and an increase in European mortgages of $180.3 million. At 31 December 2012, the loan portfolio
represented 44.2% of total assets, compared to (47.8%) at 31 December 2011, whilst loans as a percentage of customer deposits were 53.6%
(2011: 57.1%).
Butterfield Annual Report 2012 25
Allowance for credit losses at 31 December 2012 totalled $56.0 million, an increase of $0.5 million from 2011. The movement in the allowance is
mainly the result of additional provisions, before recoveries, of $18.3 million taken during 2012 net of $17.8 million in charge-offs. Of the total
allowance, the general allowance was $29.2 million (2011: $32.0 million) and the specific allowance was $26.7 million (2011: $23.5 million), reflecting
an improved specific coverage ratio of 23.6%, up from 21.3% at 31 December 2011.
Gross non-accrual loans totalled $113.4 million at 31 December 2012, down $3.2 million from $110.1 million at 31 December 2011, and represented
2.8% of the total loan portfolio at 31 December 2012, compared to 2.7% in 2011. During 2012, the Bank held Other Real Estate Owned properties
(“OREO”) amounting to $34.4 million comprising commercial real estate of $19.3 million, foreclosed residential properties of $7.6 million and
property held for sale reclassified during 2012 of $7.5 million.
31 DECEMBER 2012 LENDING BY LOCATION
31 DECEMBER 2012 GROUP LOANS BY TYPE
Commercial
and Industrial 8%
Commercial Overdrafts 2%
Government 2%
United Kingdom 13%
Guernsey 13%
Bermuda 56%
Cayman 18%
Commercial
Mortgages 19%
Automobile
Financing 1%
Credit Cards 2%
Other Consumer 4%
Residential Mortgages 62%
Commercial and Industrial
Government
Loans to governments decreased by $192.1 million, primarily as a result of the repayment of a Bermuda Government loan facility.
Commercial
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 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 loans of $1.2 billion at 31 December 2012 decreased by $33.6 million from the previous year, primarily due to repayments of certain
commercial lending facilities which were offset by advancing corporate loans.
Residential
The residential mortgage portfolio 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 2012, residential mortgages totalled $2.5 billion (or 62.2% of total gross loans), an increase of $166.5 million from 31 December
2011. 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 $180.3 million 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.
26
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 “Note 7: Loans” and “Note 8: Credit Risk
Concentrations” in the 31 December 2012 Consolidated Financial Statements.
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. 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 table below shows the year-end and average customer deposit
balances by jurisdiction, comparing 2012 with 2011:
(in $ millions)
Bermuda
Cayman
Guernsey
The Bahamas
UK
Total average deposits
104
3,260
Year ended 31 December
2012
$ change
2011
3,364
1,862
1,370
70
709
7,375
1,743
7,131
1,334
735
(26)
59
36
11
244
119
Average balance
2012
3,209
1,791
1,389
62
730
7,181
2011 $ change
3,340
1,732
1,465
92
814
(131)
59
(76)
(30)
(84)
7,443
(262)
Customer deposit balances increased $244 million from $7.1 billion as at 31 December 2011 to $7.4 billion as at 31 December 2012. The average
balance of $7.2 billion in 2012 fell compared to 2011 as deposit balances started 2011 higher and ended lower, which reverses in 2012, rising in the
latter part of the year particularly in Bermuda, Cayman and Guernsey.
Customer demand deposits, which include chequing accounts (both interest-bearing and non-interest-bearing), savings and call accounts, totalled
$5.4 billion, or 73.7% of total customer deposits at year-end 2012, compared to $5.0 billion, or 70.0%, at year-end 2011. Customer term deposits
decreased by 9.2% from $2.1 billion at year-end 2011 to $2.0 billion at year-end 2012 as customers moved to demand deposits given the low
interest rate spread on longer-term deposits.
The cost of funds was 0.34% in 2012, down 10 basis points from the 0.44% paid in 2011 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 2012 Consolidated 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. 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 2012, deposits from banks totalled
$126 million, the same as the prior year.
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.
Butterfield Annual Report 2012 27
Effective 31 December 2011, the Bermuda Defined Benefit pension benefits were amended to freeze credited service and final average earnings
for remaining active members. Effective January 2012, all the participants of the Bermuda Defined Benefit Pension Plan are inactive and in
accordance with US GAAP, the net actuarial loss of the Bermuda Defined Benefit Pension Plan is amortised over the estimated average remaining
life expectancy of the inactive participants of 22.8 years. Prior to all Bermuda participants being inactive, the net actuarial loss of the Bermuda
Defined Benefit Pension Plan was amortised to net income over the estimated average remaining service period for active members of 4.5 years.
As at 31 December 2012, the Bank had a substantial obligation for employee future benefits in the amount of $103 million, down $2 million from
$105 million at year-end 2011.
See “Note 12: Employee Future Benefits” in the 31 December 2012 Consolidated 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 $260 million as at 31 December 2012, all issued in US dollars,
compared to $267.8 million as at 31 December 2011. All but $45.0 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 Note had
a face value of $15.0 million which was repurchased for $13.87 million, netting a gain of $1.13 million. On 9 February 2012, the Bank redeemed the
9.29%, £5.0m ($7.9 million) subordinated debt note issued by our United Kingdom operation.
The following table presents the contractual maturity, interest rates and principal outstanding as at 31 December 2012:
Subordinated capital
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
Earliest date
redeemable
27 May 2013
2 July 2010
2 July 2015
2008 issuance - Series A
27 May 2013
2008 issuance - Series B
Total
27 May 2018
Contractual
Interest rate
until date
Interest rate from earliest
date redeemable to
maturity date redeemable
5.15%
27 May 2018
contractual maturity
3 months US$ LIBOR + 2.000%
2 July 2015
2 July 2020
27 May 2018
27 May 2023
4.81%
5.11%
7.59%
8.44%
3 months US$ LIBOR + 1.095%
3 months US$ LIBOR + 1.695%
3 months US$ LIBOR + 4.185%
3 months US$ LIBOR + 4.929%
Principal
outstanding
47,000
90,000
45,000
53,000
25,000
260,000
See “Note 19: Subordinated Capital” in the 31 December 2012 Consolidated Financial Statements for additional 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 pledge investment securities as collateral in a borrowing transaction, agreeing to repurchase the identical
security on a specified later date, generally not more than 90 days, at a price greater than the original sales price. The difference between 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. As at 31 December 2012, $109.0 million of repurchase agreements were outstanding compared
to nil the year before. US government and federal agency investment securities with an amortised cost of $120.9 million and fair market value of
$122.4 million were pledged to secure repurchase agreements at 31 December 2012.
Shareholders’ Equity
Shareholders’ equity increased during the year ended 31 December 2012 by $27.4 million to $857.2 million, reflecting:
(cid:115)(cid:0) $25.6 million net income for the year
(cid:115)(cid:0) $43.1 million from unrealised gains on AFS securities
(cid:115)(cid:0) $5.5 million of Share-based compensation
(cid:115)(cid:0) $0.8 million translation adjustments on foreign operations
28
These increases were offset by:
(cid:115)(cid:0) $15.2 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 dividends and guarantee fee
(cid:115)(cid:0) $5.4 million from the buy-back and cancellation of Preference Shares
(cid:115)(cid:0) $9.0 million from the purchase of Treasury Common 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
to ensure compliance with local regulation. 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 2012.
As at 31 December 2012, the Bank’s regulatory capital stood at $1.0 billion with the consolidated Tier 1 and Total Capital Ratios of 18.5% and 24.2%
respectively (31 December 2011: 17.7% and 23.5% respectively).
The following table sets forth our capital adequacy as at 31 December 2012 and 31 December 2011 in accordance with Basel II framework:
(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
Year ended 31 December
2012
2011
792.3
244.2
(2.9)
1,033.6
913.8
2,232.3
350.7
261.7
516.5
4,275.0
14.0%
18.5%
24.2%
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%
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 2012 will be published on the corporate website, www.butterfieldgroup.com, shortly after the
publication of the Consolidated Financial Statements.
Butterfield Annual Report 2012 29
Preference Shares (See the Offering Memorandum for details)
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.
Contingent Value Convertible Preference Shares (“CVCP Shares”) (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.
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 had agreed to sell its minority ownership position in BFG. 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. 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.
30
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 limited market for the CVCP Shares. CVCP Shares are transferable to Common Shares at the holders’ option by contacting the
Bank’s transfer agent and registrar.
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 2012, there were 7.3 million CVCP Shares outstanding with 0.2 million Shares converted to Common Shares at the holders’
option during the year ended as at 31 December 2012. As at 31 December 2012, 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 2012 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 2012, the carrying value of the covered loans was $26.9 million (2011: $27.9 million) reflecting charge-
offs during the year as approved by the Audit Committee and reviewed by an independent committee of the Board of Directors.
Share Buy-Back Programme
The Bank introduced a Share Buy-Back Programme on 1 May 2012 as a means to improve Shareholder liquidity and facilitate growth in Share value.
Under the Bank’s Share Buy-Back Programme, the Board authorised the buy-back of up to 6 million Common Shares and 2,000 Preference Shares.
On 10 December 2012, the Board approved an increase in the authorised number of Shares to be bought back to 10 million Common Shares and
8,000 Preference Shares. During 2012 the Bank bought back 7.3 million Common Shares to be held as Treasury Shares at an average price of
$1.23 per Share (totalling $9.0 million) and 4,422 Preference Shares which were subsequently cancelled at a cost of $5.4 million.
From time to time, the Bank’s associates, insiders and insiders’ associates as defined by the Bermuda Stock Exchange (“BSX”) regulations may sell
Shares which may result in such Shares being bought back pursuant to the programme, but under BSX regulations such trades must not be
pre-arranged and all buy-backs 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 bought back and cancelled by the Bank and Shares purchased by the Bank’s Stock Option Trust.
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 and an expiration date of 22 June 2019.
Dividends
No Common dividends were declared or paid in 2012 or 2011. Preference Share dividends declared and paid were $16.0 million during 2012
(2011: $16.0 million in relation to the Preference Shares). 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 2012 and 2011.
Subsequent to year end, the Board declared a special dividend of $0.04 per Common Share and Contingent Value Convertible Preference Share to
be paid on 22 March 2013 to Shareholders of record on 5 March 2013.
Cash Flows
Cash and cash equivalents were $1.7 billion as at 31 December 2012, compared to $1.9 billion the prior year. The decrease is described below by
category of operating, investing and financing activities.
For the year ended 31 December 2012, net cash provided by operating activities totalled $132.9 million (2011: $39.4 million). Cash flows from
operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided
by operating activities increased by $93.5 million from 2011 to 2012, due primarily from the $50 million investment of seed money in the new
BNY Mellon Butterfield Income Advantage Fund in 2011, classified as “trading investments” for accounting purposes. However, cash generated
from operating activities before changes in trading investments increased $48.0 million from rising core earnings generating higher cash earnings
compared to the prior year.
Butterfield Annual Report 2012 31
Our investing activities include capital expenditures, loan activities, investment activities, and divesture and acquisition activities. We do not own,
directly or indirectly, any shares of stock or any other equity interest or long-term debt securities of any company, corporation, firm, partnership,
joint venture, association or other entity, except pursuant to the ordinary course of investment activities, the strategic investment in an associated
company or as a result of the ordinary course loan structuring. Net cash used by investing activities for the year ending 31 December 2012 totalled
$627.4 million compared to cash provided by investing activities of $238.0 million in 2011. The $865.4 million decrease in 2012 over 2011 was mainly
due to a $757.7 million net cash used to purchase HTM and AFS investments, compared to $530.6 million in net investment proceeds in 2011,
offset by the movement in loans year over year (2012: net repayment of $137.1 million; 2011: net advances of $261.4 million).
Net cash provided from financing activities totalled $217.9 million in 2012, compared to net cash used in financing of $765.7 million in 2011. The
$983.6 million change reflects the net cash used to fund deposit decreases of $730.6 million in 2011, compared to the $149.2 million increase
in deposits and $109.0 million increase in repurchase agreements in 2012 offset by the $14.4 million of Share buy-backs and $7.9 million of
subordinated debt repayments.
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.
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
280.1
11.2
291.3
Collateral
277.3
8.7
286.0
2012
Net
2.8
2.5
5.3
Gross
321.0
13.1
334.1
Collateral
303.8
9.9
313.7
2011
Net
17.2
3.2
20.4
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. A $150.0 million 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.
32
Effective 1 October 2010, the Bank had retained Carlyle Investment Management LLC, an affiliated company of the Carlyle Group, to provide
Balance Sheet management advisory services, including advisory services on valuation assignments, for an annual fee of $4 million for a three-year
period. Effective 31 July 2012, the investment advisory business previously conducted by Carlyle Investment Management LLC was transferred to
Alumina Investment Management LLC (“Alumina”) and the Bank agreed to the transfer of its contract to Alumina.
The Bank has a facility, by one of its custodians, whereby the Bank may offer up to $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 2012, $137.0 million (2011: $137.1 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” in the 31 December 2012 Consolidated Financial Statements for terms of subordinated debt arrangements
and interest obligations.
The $75.4 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 is 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.
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
Butterfield Annual Report 2012 33
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.
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, Cayman and The Bahamas, 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 Chairman & Chief Executive Officer (“Chairman”) and including the members of Executive
Management reporting directly to the Chairman, 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 Chairman. 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 Chairman. 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 Credit Committees for our
European and Cayman operations, 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 Chairman. The meeting is chaired by the Chief Risk Officer.
34
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:
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 Capital Adequacy & Risk Profile processes.
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.
Butterfield Annual Report 2012 35
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.
(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
Averse
Cautious
Open
DEFINITION
PROFILE
The Group will work to avoid exposure to this risk
given its potential for financial loss, reputational
damage, and/or the loss of customer and / or
investor confidence.
Given the potential for financial loss, reputational
damage, and the loss of customer and/or investor
confidence, the Group will be very selective in the
exposures assumed to this risk and will monitor
it closely.
The Group will consider opportunities to accept
this risk and will accept those that fall within clearly
defined parameters. The risk of loss or reputational
damage is accepted but the exposure can be
estimated reliably and can be managed to a
tolerable level.
Our processes and controls are defensive and
focus on detection and prevention.
Security is favoured over reward. Exposures are
only assumed when the risk can be quantified
accurately and is assessed as being acceptable.
Reward is commensurate with the risk assumed.
Exposures can be estimated reliably and
structures, systems and processes are in
place to manage it.
(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 and
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
36
Standard
Moody’s
Fitch
& Poor’s
A-2
A-
P-1
A2
F1
A-
Negative
Negative
Stable
In
scope
hand
touch
particular
motion
sight
addition
Jurisdiction & Group Business Overviews
Butterfield Annual Report 2012 37
Bermuda
F
F or more than 150 years, Bermuda has served as Butterfield’s
headquarters and remains the Bank’s largest jurisdiction in
terms of number of employees, Banking Centre locations
and business volume. Butterfield is Bermuda’s largest independent
Non-interest income of $65.6 million in 2012 was down 2.3% from 2011,
reflecting lower foreign exchange, custody, and trust revenues, which
were partially offset by increases in asset management fees and higher
than normal loan prepayment fees.
bank, offering a full range of community banking services and wealth
management, including private banking, asset management and
Total expenses were down $12.5 million to $164.2 million in 2012,
personal trust services. Butterfield also provides services to corporate
compared to $176.7 million in 2011. Salary costs declined $5.4 million
and institutional clients in Bermuda, which include asset management
as a result of reduced headcount which ended the year at 615, down
and corporate trust services.
49, partially due to the Bank’s voluntary early retirement programme,
combined with natural attrition and redundancies. Expense savings,
Net income before gains and losses was $25.1 million in 2012, up
principally from expense management initiatives, contributed an
$3.4 million from $21.7 million in 2011. Including net gains and
additional $9.5 million in cost reductions, offset by a $2.4 million
losses—mainly one-time items in respect of fixed asset impairments
increase in technology costs from higher depreciation on system
and write downs and the sale of an affiliate—net income of
upgrades.
$12.1 million for 2012 represented a decrease of $14.3 million
year over year.
Total assets as at 31 December 2012 were $4.7 billion, up $0.2 billion
from 2011. Customer deposits ended the year at $3.4 billion, up
Net interest income fell $2.4 million to $130.1 million in 2012 due to
$0.1 billion from 2011, and loan balances decreased $0.2 billion to
reduced loan volumes and depressed investment yields owing to the
$2.2 billion compared to the prior year, mainly from the repayment of a
historically low interest rates. The net interest margin held steady at
Bermuda Government loan.
3.2%, due primarily to lower deposit costs that offset the lower yields
earned on loans and investments.
Client assets under administration for the trust and custody
businesses were $30.1 billion and $27.8 billion, respectively, whilst
Provisions for credit losses were $6.4 million in 2012, compared to
assets under management declined by $0.3 billion to $3.1 billion.
$1.2 million in 2011; the increase is mainly attributable to the Bank’s
residential mortgage portfolio. An allowance for credit losses of
$37.7 million represents a coverage ratio of 38.9% against
non-performing loans of $96.7 million, which were up $8.0 million from
$88.7 million in 2011. The increase was due to an $11.1 million rise in
non-performing residential mortgages, totalling $45.9 million as at year
end, offset by a decrease of $2.7 million in commercial non-performing
loans to $47.8 million. Non-performing consumer loans improved by
$0.4 million to end the year at $3.0 million.
38
(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
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
2012
130,133
(6,372)
65,559
189,320
2011
132,552
(1,202)
67,080
198,430
$ change
% change
(2,419) (1.8%)
(5,170) (430.1%)
(1,521) (2.3%)
(9,110) (4.6%)
(164,232)
(176,725)
12,493
7.1%
25,088
(12,974)
12,114
21,705
4,753
3,383 15.6%
(17,727) (373.0%)
26,458
(14,344) (54.2%)
3,364
2,208
4,733
3,260
2,456
4,575
104 3.2%
(248) (10.1%)
158 3.5%
27,819
30,062
28,156
29,635
(337) (1.2%)
427 1.4%
2,335
747
3,082
2,653
752
3,405
(318) (12.0%)
(5) (0.7%)
(323) (9.5%)
Number of employees
615
664
(49) (7.4%)
Butterfield Annual Report 2012 39
Cayman Islands
Butterfield is a leading financial services provider in the
Cayman Islands, offering a comprehensive range of personal
and corporate financial services. In addition to our strong
retail presence, Butterfield is also focused on our wealth management
offering through an award winning private banking service as well as
asset management and trust services.
Provisions for credit losses decreased by $2.7 million from reductions
and recovery in provisions in the Cayman loan portfolio of $3.4 million
in 2012 compared to 2011, offset by increased provisioning of
$0.7 million on the Bahamian residential mortgage book in 2012.
Non-interest income of $30.9 million in 2012 was up $0.3 million
compared to the prior year, reflecting improved banking fees and
2012 saw the opening of Butterfield’s new retail branch at Midtown
foreign exchange commissions.
Plaza. In keeping with our commitment to service excellence, the
new Banking Centre offers contemporary, spacious surroundings
Total expenses of $54.8 million were $0.2 million below prior-year
in an excellent location. With three Banking Centres and 12 ATMs
levels from broad-based expense management partially offset by
strategically located around Grand Cayman, Butterfield continues to
increased technology and communications costs arising from increased
be a leader in the provision of financial services.
depreciation and the introduction of a virtual private network system.
Net income before gains and losses of $19.5 million was more than
Total assets at 31 December 2012 were $2.1 billion, up $0.1 billion from
double the prior year’s $9.0 million. The increase primarily reflects a
year-end 2011, reflecting higher corporate client deposit levels.
$7.3 million increase in net interest income and a reduction of
$2.7 million in provisions for credit losses. Net income increased by
Net loans decreased by $16.5 million from year-end 2011, reflecting
$13.0 million to $24.0 million in 2012.
significant principal repayments primarily on residential mortgages.
Net interest income before loan loss provisions was $44.6 million
Client assets under administration for the trust and custody
in 2012, $7.3 million ahead of the prior year, driven primarily by the
businesses were $1.7 billion and $1.4 billion, respectively, whilst
increase in investment income resulting from an average increase
assets under management declined by $0.2 billion to $0.8 billion.
of $152 million in fixed income investments, which contributed to
improved net interest margin of 2.3%, up from 2.0% in 2011.
40
(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
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
2012
44,633
(1,291)
30,940
74,282
2011
37,325
(3,974)
30,651
64,002
$ change
% change
7,308 19.6%
2,683 67.5%
289 0.9%
10,280 16.1%
(54,829)
(54,987)
158 0.3%
19,453
4,497
23,950
9,015
1,956
10,438 115.8%
2,541 129.9%
10,971
12,979 118.3%
1,862
705
2,117
1,743
119 6.8%
722
(17) (2.4%)
1,974 143 7.2%
1,417
1,710
1,226
2,188
191 15.6%
(478) (21.9%)
176
621
797
296
211
760
971
308
(35) (16.6%)
(139) (18.3%)
(174) (17.9%)
(12) (3.9%)
Butterfield Annual Report 2012 41
Guernsey
In Guernsey, Butterfield offers private banking, lending, asset
management, custody, administered banking and fiduciary
services.
Total expenses, at $30.8 million, were $0.6 million higher than 2011,
due mainly to an increase in salary and employee benefit costs, up
8.9% to support increased regional centralisation, and an increase
in technology expense, offset by savings in property, professional
Guernsey posted net income of $9.7 million in 2012, compared to net
services and other expenses.
income of $9.4 million in 2011, an increase of $0.3 million or 3.6%.
Total assets at 31 December 2012 of $1.5 billion were consistent with
Net interest income increased $3.2 million to $21.6 million in 2012,
year-end 2011.
compared to $18.4 million in 2011. Average loan balances increased
$92.1 million, contributing to a 0.32% increase in the net interest
Client assets under administration for the trust, custody and
margin to 1.43% in 2012, up from 1.16% in the prior year.
administered banking businesses were $9.9 billion (2011: $8.2 billion),
Provisions for credit losses of $1.0 million were required in 2012,
respectively reflecting solid growth in the trust business line. Client
compared to $0.6 million last year.
assets under management were consistent with the prior year at
$7.4 billion (2011: $6.7 billion), and $1.5 billion (2011: $1.7 billion),
$0.6 billion.
Non-interest income decreased $1.7 million to $20.0 million, due
to lower foreign exchange, asset management and custody revenue
combined with lower income from administered banking services. This
was offset by a 4.7% increase in revenues from trust services, up
$0.3 million year on year.
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
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
2012
21,564
(980)
20,005
40,589
2011
18,379
(636)
21,665
39,408
$ change
% change
3,185 17.3%
(344) (54.1%)
(1,660) (7.7%)
1,181 3.0%
(30,810)
(30,245)
(565) (1.9%)
9,779
(31)
9,748
1,370
533
1,522
9,163
242
9,405
1,334
453
1,480
616 6.7%
(273) (112.8%)
343 3.6%
36 2.7%
80 17. 7%
42 2.8%
8,958
9,905
8,416
8,242
542
6.4%
1,663 20.2%
246
343
589
173
141
447
588
165
105 74.5%
(104) (23.3%)
1
-
8 4.9%
Butterfield Annual Report 2012 43
United Kingdom
In the UK, Butterfield provides a range of exclusive banking,
lending, treasury and investment management services. This
includes family office services to high net worth international
clients and their advisers from offices in London.
Provisions for credit losses of $5.5 million were required in 2012,
compared to $6.7 million of credit losses last year; both years’
provisions related to legacy commercial loan facilities.
Non-interest income was $8.2 million, down $2.8 million from the prior
During 2011, Butterfield re-focused its business on providing exclusive
year as a result of the cancellation of an investment management
private banking and wealth management services to wealthy clients
agreement with Bentley Reid at the end of the second quarter, and
and their families through the exit of non-core business. As part of
lower customer-led foreign exchange volumes.
the re-focused private banking strategy, the Bank enhanced its credit
offering through the recruitment of a specialist team of experienced
Total expenses, at $24.6 million, were $4.3 million higher than 2011
relationship managers to meet the demand of its clients. The Bank’s
due to the previously noted $5 million income tax expense offset by
lending focus is on providing lending services to wealthy clients
continued cost management initiatives and the reduction in the UK
at modest loan-to-value ratios secured on Prime Central London
headcount year on year.
residential property.
The United Kingdom recorded a net loss of $24.6 million in 2012,
$1.0 billion at 31 December 2011. Loan balances increased $73 million
compared to a loss of $3.3 million in 2011. The majority of the loss was
from $433.6 million, offset by a reduction in investment and cash
a result of one-off impairments of the UK’s goodwill and intangible
balances. Customer deposit balances declined by $25.7 million to end
assets totalling $16.6 million and a deferred tax valuation allowance
the year at $709.3 million.
Total assets stood at $0.9 billion at 31 December 2012, down from
and tax adjustment of $5 million.
Net interest income before credit provisions of $14.2 million was up
$0.6 billion at year-end 2011 following the termination of the Bentley
$1.5 million. The net interest margin climbed 0.20% to 1.52% in 2012
Reid investment services contract. Custody client assets under
from growth of $62 million in average loan balances and the repayment
administration at the end of 2012 amounted to $1.7 billion, up
of subordinated debt in early 2012, offset by lower yields achieved on
$0.4 billion from $1.3 billion at year-end 2011.
Assets under management, totalling $0.2 billion, decreased from
the investment portfolio.
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
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
2012
14,197
(5,547)
8,177
16,827
(24,565)
(7,738)
(16,895)
2011
12,687
(6,724)
10,928
16,891
(20,253)
(3,362)
$ change
% change
1,510 11.9%
1,177
17.5%
(2,751) (25.2%)
(64) (0.4%)
(4,312) (21.3%)
(4,376) (130.2%)
45
(16,940)
N/A
(24,633)
(3,317)
(21,316) (642.6%)
709
507
925
735
434
976
(26) (3.5%)
73 16.8%
(51) (5.2%)
Assets under administration – Custody
1,662
1,276
386 30.3%
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
77
160
237
89
330
309
639
101
(253) (76.7 %)
(149) (48.2%)
(402) (62.9%)
(12) (11.9%)
Butterfield Annual Report 2012 45
Group Asset Management
Butterfield Asset Management focuses on fulfilling the financial
expertise. Each client has direct access to his or her portfolio
needs of those who demand the highest level of service and
manager who is, in turn, supported by a Group investment discipline
Group Asset Management revenue was $22.3 million in 2012,
compared to $22.9 million in 2011. The decrease of $0.6 million was
principally due to the termination of the investment management
agreement with Bentley Reid in the United Kingdom, offset slightly
designed to leverage resources from across the organisation, including
by increased fees earned on the Butterfield Money Market Fund as a
a Core Strategy and Research team based in the United Kingdom.
result of higher LIBOR rates in 2012.
The Group provides a broad range of investment services to
Assets under management decreased by $0.9 billion and 19% to end
institutional and private clients in Bermuda, the Cayman Islands,
at $4.7 billion for 2012 due to the terminated agreement noted above
Guernsey, and the United Kingdom. Principal services include
and due to a decline in Money Market balances as clients sought
discretionary investment management and managed portfolio
better-yielding alternatives for short-term investments. Other trends
services. Advisory and self-directed brokerage options are available to
continued through 2012 where insurance captives moved their assets
clients in Bermuda and the Cayman Islands. The Group also provides
back onshore, away from the Cayman Islands, and private clients were
money market and mutual fund offerings in all four jurisdictions.
reluctant to invest in unstable markets.
Institutional clients primarily consist of captive insurance companies
in Bermuda and the Cayman Islands. Private clients are high net worth
individuals and their fiduciary vehicles served in all four jurisdictions.
Retail and mass affluent clients are served in Bermuda and the
Cayman Islands as part of Butterfield’s community banking platform.
Total assets under management (“AUM”) at 31 December:
Butterfield
Funds
2,335
176
246
35
77
2012
Other
assets
747
621
343
-
160
Total AUM
3,082
Butterfield
Funds
2,653
797
589
35
237
211
141
40
330
2011
Other
assets
752
Total AUM
3,405
760
447
1
309
971
588
41
639
2,869
1,871
4,740
3,375
2,269
5,644
(in $ millions)
Bermuda
Cayman Islands
Guernsey
The Bahamas
UK
Total
46
Group Trust
Our trust and corporate services specialists deliver fiduciary
solutions to meet a range of client needs, including estate
and succession planning, administration of complex asset
holdings, and efficient co-ordination for the affairs of international
We provide both personal and institutional trust services from our
operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey
and Switzerland, with our multi-jurisdictional capability therefore
spanning the world’s leading international trust and fiduciary centres.
families; as well as the pension, employee benefit and other fiduciary
Trust revenues are derived from a combination of fixed fees, fees
requirements of multi-national corporations and institutions.
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
Alongside our traditional strengths in providing services to families
administration services, and the pension, employee benefit and other
and institutions with links to the United Kingdom, North America, and
corporate trust services we provide.
Europe, in 2012 we continued to progress in building relationships
with clients connected to the Asian and Latin American regions.
In 2012, trust revenues totalled $29.1 million, marginally lower than
the $29.5 million recorded in 2011 due mainly to substantial one-time
Our goal is to deliver consistently reliable service to our clients
fees in 2011 which did not recur in 2012, and also to the loss of one
underpinned by the technical expertise and competencies of
managed trust company mandate during 2011 offset by an increase in
our multi-jurisdictional team, which operates through separately
recurring income through structured, proactive business development
incorporated trust businesses in our jurisdictions of choice. To this
activities, with good new business growth in our Switzerland, Guernsey
end, training and continual professional development for our staff
and Bermuda trust businesses and increasing pipelines in our
remained a key priority in 2012. Active participation by our personnel
Bahamas and Cayman businesses. Trust revenues represented 23% of
in their local branches of leading trust industry associations and
total non-interest income in 2012, up from 22% in 2011.
bodies such as the Society of Trust and Estate Practitioners also assists
our employees in remaining at the forefront of their specialisation.
Total Trust assets under administration (“Trust AUA”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
Switzerland
The Bahamas
UK
Total
2012
30,062
1,710
9,905
2,142
3,250
2011
29,635
2,188
8,242
386
3,439
-
47,069
-
43,890
Butterfield Annual Report 2012 47
In
numbers
order
depth
focus
balance
detail
particular
Financial Statements
48
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 judgment 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 Operations 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.
Brendan McDonagh
Chairman & Chief Executive Officer
26 February 2013
Bradley Rowse
Executive Vice President & Chief Financial Officer
26 February 2013
Butterfield Annual Report 2012 49
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(cid:39)(cid:26)(cid:22)(cid:40)(cid:36)(cid:35)(cid:22)(cid:23)(cid:33)(cid:26) (cid:22)(cid:40)(cid:40)(cid:42)(cid:39)(cid:22)(cid:35)(cid:24)(cid:26) (cid:22)(cid:23)(cid:36)(cid:42)(cid:41) (cid:44)(cid:29)(cid:26)(cid:41)(cid:29)(cid:26)(cid:39) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25) (cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40) (cid:22)(cid:39)(cid:26) (cid:27)(cid:39)(cid:26)(cid:26) (cid:27)(cid:39)(cid:36)(cid:34) (cid:34)(cid:22)(cid:41)(cid:26)(cid:39)(cid:30)(cid:22)(cid:33)
(cid:34)(cid:30)(cid:40)(cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:4)
(cid:11)(cid:35) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:30)(cid:35)(cid:43)(cid:36)(cid:33)(cid:43)(cid:26)(cid:40) (cid:37)(cid:26)(cid:39)(cid:27)(cid:36)(cid:39)(cid:34)(cid:30)(cid:35)(cid:28) (cid:37)(cid:39)(cid:36)(cid:24)(cid:26)(cid:25)(cid:42)(cid:39)(cid:26)(cid:40) (cid:41)(cid:36) (cid:36)(cid:23)(cid:41)(cid:22)(cid:30)(cid:35) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:26)(cid:43)(cid:30)(cid:25)(cid:26)(cid:35)(cid:24)(cid:26) (cid:22)(cid:23)(cid:36)(cid:42)(cid:41) (cid:41)(cid:29)(cid:26) (cid:22)(cid:34)(cid:36)(cid:42)(cid:35)(cid:41)(cid:40) (cid:22)(cid:35)(cid:25)
(cid:25)(cid:30)(cid:40)(cid:24)(cid:33)(cid:36)(cid:40)(cid:42)(cid:39)(cid:26)(cid:40) (cid:30)(cid:35) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25) (cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40)(cid:4) (cid:19)(cid:29)(cid:26) (cid:37)(cid:39)(cid:36)(cid:24)(cid:26)(cid:25)(cid:42)(cid:39)(cid:26)(cid:40) (cid:40)(cid:26)(cid:33)(cid:26)(cid:24)(cid:41)(cid:26)(cid:25) (cid:25)(cid:26)(cid:37)(cid:26)(cid:35)(cid:25) (cid:36)(cid:35) (cid:36)(cid:42)(cid:39)
(cid:31)(cid:42)(cid:25)(cid:28)(cid:34)(cid:26)(cid:35)(cid:41)(cid:3) (cid:30)(cid:35)(cid:24)(cid:33)(cid:42)(cid:25)(cid:30)(cid:35)(cid:28) (cid:41)(cid:29)(cid:26) (cid:22)(cid:40)(cid:40)(cid:26)(cid:40)(cid:40)(cid:34)(cid:26)(cid:35)(cid:41) (cid:36)(cid:27) (cid:41)(cid:29)(cid:26) (cid:39)(cid:30)(cid:40)(cid:32)(cid:40) (cid:36)(cid:27) (cid:34)(cid:22)(cid:41)(cid:26)(cid:39)(cid:30)(cid:22)(cid:33) (cid:34)(cid:30)(cid:40)(cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41) (cid:36)(cid:27) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25)
(cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40)(cid:3) (cid:44)(cid:29)(cid:26)(cid:41)(cid:29)(cid:26)(cid:39) (cid:25)(cid:42)(cid:26) (cid:41)(cid:36) (cid:27)(cid:39)(cid:22)(cid:42)(cid:25) (cid:36)(cid:39) (cid:26)(cid:39)(cid:39)(cid:36)(cid:39)(cid:4) (cid:15)(cid:35) (cid:34)(cid:22)(cid:32)(cid:30)(cid:35)(cid:28) (cid:41)(cid:29)(cid:36)(cid:40)(cid:26) (cid:39)(cid:30)(cid:40)(cid:32) (cid:22)(cid:40)(cid:40)(cid:26)(cid:40)(cid:40)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40)(cid:3) (cid:44)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:30)(cid:25)(cid:26)(cid:39)
(cid:30)(cid:35)(cid:41)(cid:26)(cid:39)(cid:35)(cid:22)(cid:33) (cid:24)(cid:36)(cid:35)(cid:41)(cid:39)(cid:36)(cid:33) (cid:39)(cid:26)(cid:33)(cid:26)(cid:43)(cid:22)(cid:35)(cid:41) (cid:41)(cid:36) (cid:41)(cid:29)(cid:26) (cid:12)(cid:36)(cid:34)(cid:37)(cid:22)(cid:35)(cid:46)(cid:47)(cid:40) (cid:37)(cid:39)(cid:26)(cid:37)(cid:22)(cid:39)(cid:22)(cid:41)(cid:30)(cid:36)(cid:35) (cid:22)(cid:35)(cid:25) (cid:27)(cid:22)(cid:30)(cid:39) (cid:37)(cid:39)(cid:26)(cid:40)(cid:26)(cid:35)(cid:41)(cid:22)(cid:41)(cid:30)(cid:36)(cid:35) (cid:36)(cid:27) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25)
(cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40) (cid:30)(cid:35) (cid:36)(cid:39)(cid:25)(cid:26)(cid:39) (cid:41)(cid:36) (cid:25)(cid:26)(cid:40)(cid:30)(cid:28)(cid:35) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:37)(cid:39)(cid:36)(cid:24)(cid:26)(cid:25)(cid:42)(cid:39)(cid:26)(cid:40) (cid:41)(cid:29)(cid:22)(cid:41) (cid:22)(cid:39)(cid:26) (cid:22)(cid:37)(cid:37)(cid:39)(cid:36)(cid:37)(cid:39)(cid:30)(cid:22)(cid:41)(cid:26) (cid:30)(cid:35) (cid:41)(cid:29)(cid:26) (cid:24)(cid:30)(cid:39)(cid:24)(cid:42)(cid:34)(cid:40)(cid:41)(cid:22)(cid:35)(cid:24)(cid:26)(cid:40)(cid:4)
(cid:11)(cid:35) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:22)(cid:33)(cid:40)(cid:36) (cid:30)(cid:35)(cid:24)(cid:33)(cid:42)(cid:25)(cid:26)(cid:40) (cid:26)(cid:43)(cid:22)(cid:33)(cid:42)(cid:22)(cid:41)(cid:30)(cid:35)(cid:28) (cid:41)(cid:29)(cid:26) (cid:22)(cid:37)(cid:37)(cid:39)(cid:36)(cid:37)(cid:39)(cid:30)(cid:22)(cid:41)(cid:26)(cid:35)(cid:26)(cid:40)(cid:40) (cid:36)(cid:27) (cid:22)(cid:24)(cid:24)(cid:36)(cid:42)(cid:35)(cid:41)(cid:30)(cid:35)(cid:28) (cid:37)(cid:36)(cid:33)(cid:30)(cid:24)(cid:30)(cid:26)(cid:40) (cid:42)(cid:40)(cid:26)(cid:25) (cid:22)(cid:35)(cid:25) (cid:41)(cid:29)(cid:26)
(cid:39)(cid:26)(cid:22)(cid:40)(cid:36)(cid:35)(cid:22)(cid:23)(cid:33)(cid:26)(cid:35)(cid:26)(cid:40)(cid:40) (cid:36)(cid:27) (cid:40)(cid:30)(cid:28)(cid:35)(cid:30)(cid:27)(cid:30)(cid:24)(cid:22)(cid:35)(cid:41) (cid:22)(cid:24)(cid:24)(cid:36)(cid:42)(cid:35)(cid:41)(cid:30)(cid:35)(cid:28) (cid:26)(cid:40)(cid:41)(cid:30)(cid:34)(cid:22)(cid:41)(cid:26)(cid:40) (cid:34)(cid:22)(cid:25)(cid:26) (cid:23)(cid:46) (cid:34)(cid:22)(cid:35)(cid:22)(cid:28)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:3) (cid:22)(cid:40) (cid:44)(cid:26)(cid:33)(cid:33) (cid:22)(cid:40) (cid:26)(cid:43)(cid:22)(cid:33)(cid:42)(cid:22)(cid:41)(cid:30)(cid:35)(cid:28) (cid:41)(cid:29)(cid:26)
(cid:36)(cid:43)(cid:26)(cid:39)(cid:22)(cid:33)(cid:33) (cid:37)(cid:39)(cid:26)(cid:40)(cid:26)(cid:35)(cid:41)(cid:22)(cid:41)(cid:30)(cid:36)(cid:35) (cid:36)(cid:27) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25) (cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40)(cid:4) (cid:21)(cid:26) (cid:23)(cid:26)(cid:33)(cid:30)(cid:26)(cid:43)(cid:26) (cid:41)(cid:29)(cid:22)(cid:41) (cid:41)(cid:29)(cid:26) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:26)(cid:43)(cid:30)(cid:25)(cid:26)(cid:35)(cid:24)(cid:26) (cid:44)(cid:26)
(cid:29)(cid:22)(cid:43)(cid:26) (cid:36)(cid:23)(cid:41)(cid:22)(cid:30)(cid:35)(cid:26)(cid:25) (cid:30)(cid:40) (cid:40)(cid:42)(cid:27)(cid:27)(cid:30)(cid:24)(cid:30)(cid:26)(cid:35)(cid:41) (cid:22)(cid:35)(cid:25) (cid:22)(cid:37)(cid:37)(cid:39)(cid:36)(cid:37)(cid:39)(cid:30)(cid:22)(cid:41)(cid:26) (cid:41)(cid:36) (cid:37)(cid:39)(cid:36)(cid:43)(cid:30)(cid:25)(cid:26) (cid:22) (cid:23)(cid:22)(cid:40)(cid:30)(cid:40) (cid:27)(cid:36)(cid:39) (cid:36)(cid:42)(cid:39) (cid:22)(cid:42)(cid:25)(cid:30)(cid:41) (cid:36)(cid:37)(cid:30)(cid:35)(cid:30)(cid:36)(cid:35)(cid:4)
(cid:23)(cid:38)(cid:32)(cid:28)(cid:30)(cid:42)(cid:26)(cid:40)(cid:30)(cid:38)(cid:31)(cid:36)(cid:41)(cid:39)(cid:30)(cid:17)(cid:36)(cid:36)(cid:37)(cid:30)(cid:38)(cid:39)(cid:4) (cid:17)(cid:31)(cid:26)(cid:38)(cid:40)(cid:30)(cid:38)(cid:30)(cid:29) (cid:15)(cid:28)(cid:28)(cid:36)(cid:41)(cid:35)(cid:40)(cid:26)(cid:35)(cid:40)(cid:39)(cid:4) (cid:23)(cid:5)(cid:22)(cid:5) (cid:16)(cid:36)(cid:43) (cid:20)(cid:21) (cid:8)(cid:8)(cid:12)(cid:8)(cid:4) (cid:20)(cid:26)(cid:34)(cid:32)(cid:33)(cid:40)(cid:36)(cid:35) (cid:20)(cid:21) (cid:18)(cid:25)(cid:4) (cid:16)(cid:30)(cid:38)(cid:34)(cid:41)(cid:29)(cid:26)
(cid:24)(cid:14) (cid:3)(cid:8) (cid:1)(cid:10)(cid:10)(cid:8)(cid:2) (cid:9)(cid:13)(cid:11) (cid:9)(cid:7)(cid:7)(cid:7)(cid:4) (cid:19)(cid:14) (cid:3)(cid:8) (cid:1)(cid:10)(cid:10)(cid:8)(cid:2) (cid:9)(cid:13)(cid:11) (cid:8)(cid:9)(cid:10)(cid:9)(cid:4) (cid:42)(cid:42)(cid:42)(cid:5)(cid:37)(cid:42)(cid:28)(cid:5)(cid:28)(cid:36)(cid:34)(cid:6)(cid:27)(cid:30)(cid:38)(cid:34)(cid:41)(cid:29)(cid:26)
50
(cid:13)(cid:27) (cid:31)(cid:21)(cid:18) (cid:12)(cid:21)(cid:14)(cid:29)(cid:18)(cid:21)(cid:27)(cid:24)(cid:17)(cid:18)(cid:29)(cid:30) (cid:27)(cid:19)
(cid:13)(cid:21)(cid:18) (cid:4)(cid:14)(cid:26)(cid:23) (cid:27)(cid:19) (cid:9)(cid:2)(cid:13)(cid:2) (cid:4)(cid:32)(cid:31)(cid:31)(cid:18)(cid:29)(cid:19)(cid:22)(cid:18)(cid:24)(cid:17) (cid:1) (cid:12)(cid:27)(cid:26) (cid:7)(cid:22)(cid:25)(cid:22)(cid:31)(cid:18)(cid:17)
(cid:14)(cid:26)(cid:23)(cid:39)(cid:42)(cid:22)(cid:39)(cid:46) (cid:7)(cid:9)(cid:3) (cid:7)(cid:5)(cid:6)(cid:8)
(cid:10)(cid:28)(cid:22)(cid:26)(cid:22)(cid:27)(cid:26)
(cid:15)(cid:35) (cid:36)(cid:42)(cid:39) (cid:36)(cid:37)(cid:30)(cid:35)(cid:30)(cid:36)(cid:35)(cid:3) (cid:41)(cid:29)(cid:26) (cid:24)(cid:36)(cid:35)(cid:40)(cid:36)(cid:33)(cid:30)(cid:25)(cid:22)(cid:41)(cid:26)(cid:25) (cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:40)(cid:41)(cid:22)(cid:41)(cid:26)(cid:34)(cid:26)(cid:35)(cid:41)(cid:40) (cid:39)(cid:26)(cid:27)(cid:26)(cid:39)(cid:39)(cid:26)(cid:25) (cid:41)(cid:36) (cid:22)(cid:23)(cid:36)(cid:43)(cid:26) (cid:37)(cid:39)(cid:26)(cid:40)(cid:26)(cid:35)(cid:41) (cid:27)(cid:22)(cid:30)(cid:39)(cid:33)(cid:46)(cid:3) (cid:30)(cid:35) (cid:22)(cid:33)(cid:33) (cid:34)(cid:22)(cid:41)(cid:26)(cid:39)(cid:30)(cid:22)(cid:33)
(cid:39)(cid:26)(cid:40)(cid:37)(cid:26)(cid:24)(cid:41)(cid:40)(cid:3) (cid:41)(cid:29)(cid:26) (cid:27)(cid:30)(cid:35)(cid:22)(cid:35)(cid:24)(cid:30)(cid:22)(cid:33) (cid:37)(cid:36)(cid:40)(cid:30)(cid:41)(cid:30)(cid:36)(cid:35) (cid:36)(cid:27) (cid:13)(cid:21)(cid:18) (cid:4)(cid:14)(cid:26)(cid:23) (cid:27)(cid:19) (cid:9)(cid:2)(cid:13)(cid:2) (cid:4)(cid:32)(cid:31)(cid:31)(cid:18)(cid:29)(cid:19)(cid:22)(cid:18)(cid:24)(cid:17) (cid:1) (cid:12)(cid:27)(cid:26) (cid:7)(cid:22)(cid:25)(cid:22)(cid:31)(cid:18)(cid:17) (cid:22)(cid:35)(cid:25) (cid:30)(cid:41)(cid:40)
(cid:40)(cid:42)(cid:23)(cid:40)(cid:30)(cid:25)(cid:30)(cid:22)(cid:39)(cid:30)(cid:26)(cid:40) (cid:22)(cid:41) (cid:13)(cid:26)(cid:24)(cid:26)(cid:34)(cid:23)(cid:26)(cid:39) (cid:8)(cid:6)(cid:3) (cid:7)(cid:5)(cid:6)(cid:7) (cid:22)(cid:35)(cid:25) (cid:7)(cid:5)(cid:6)(cid:6) (cid:22)(cid:35)(cid:25) (cid:41)(cid:29)(cid:26) (cid:39)(cid:26)(cid:40)(cid:42)(cid:33)(cid:41)(cid:40) (cid:36)(cid:27) (cid:41)(cid:29)(cid:26)(cid:30)(cid:39) (cid:36)(cid:37)(cid:26)(cid:39)(cid:22)(cid:41)(cid:30)(cid:36)(cid:35)(cid:40) (cid:22)(cid:35)(cid:25) (cid:41)(cid:29)(cid:26)(cid:30)(cid:39) (cid:24)(cid:22)(cid:40)(cid:29) (cid:27)(cid:33)(cid:36)(cid:44)(cid:40)
(cid:27)(cid:36)(cid:39) (cid:41)(cid:29)(cid:26) (cid:46)(cid:26)(cid:22)(cid:39)(cid:40) (cid:41)(cid:29)(cid:26)(cid:35) (cid:26)(cid:35)(cid:25)(cid:26)(cid:25) (cid:30)(cid:35) (cid:22)(cid:24)(cid:24)(cid:36)(cid:39)(cid:25)(cid:22)(cid:35)(cid:24)(cid:26) (cid:44)(cid:30)(cid:41)(cid:29) (cid:22)(cid:24)(cid:24)(cid:36)(cid:42)(cid:35)(cid:41)(cid:30)(cid:35)(cid:28) (cid:37)(cid:39)(cid:30)(cid:35)(cid:24)(cid:30)(cid:37)(cid:33)(cid:26)(cid:40) (cid:28)(cid:26)(cid:35)(cid:26)(cid:39)(cid:22)(cid:33)(cid:33)(cid:46) (cid:22)(cid:24)(cid:24)(cid:26)(cid:37)(cid:41)(cid:26)(cid:25) (cid:30)(cid:35) (cid:41)(cid:29)(cid:26) (cid:20)(cid:35)(cid:30)(cid:41)(cid:26)(cid:25)
(cid:18)(cid:41)(cid:22)(cid:41)(cid:26)(cid:40) (cid:36)(cid:27) (cid:11)(cid:34)(cid:26)(cid:39)(cid:30)(cid:24)(cid:22)(cid:4)
(cid:5)(cid:21)(cid:14)(cid:29)(cid:31)(cid:18)(cid:29)(cid:18)(cid:17) (cid:3)(cid:16)(cid:16)(cid:27)(cid:32)(cid:26)(cid:31)(cid:14)(cid:26)(cid:31)(cid:30)
Butterfield Annual Report 2012 51
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
Other real estate owned
Other assets
Assets of discontinued operations
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Customers
Banks
Total deposits
Securities sold under agreement to repurchase
Employee future benefits
Accrued interest
Preference Share dividends payable
Other liabilities
Liabilities of discontinued operations
Total other liabilities
Subordinated capital
Total liabilities
Shareholders’ equity
Common Share capital (BMD 0.01 par; authorised Shares 26,000,000,000)
issued and outstanding: 549,677,803 (2011: 549,468,349)
Preference Share capital (USD 0.01 par; USD 1,000 liquidation Preference)
issued and outstanding: 195,578 (2011: 200,000)
Contingent Value Convertible Preference Share capital (USD 0.01 par)
issued and outstanding: 7,254,732 (2011: 7,464,186)
Additional paid-in capital
Accumulated deficit
Less: Treasury Common Shares: 7,066,586 Shares (2011: 2,163,958 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.
p y g
Brendan McDonagh
Chairman & Chief Executive Officer
52
2012
2011
476,071
1,175,476
1,651,547
76,213
61,785
2,580,577
239,342
2,881,704
3,955,960
243,321
18,975
6,949
15,327
18,637
34,360
39,037
-
8,942,030
383,827
1,518,899
1,902,726
20,280
62,591
1,934,259
64,789
2,061,639
4,069,419
272,472
24,094
15,937
30,163
32,582
27,354
60,640
307,044
8,824,350
918,814
904,873
6,456,979
126,466
7,502,259
109,021
103,135
2,795
662
106,984
-
322,597
260,000
8,084,856
5,496
2
73
1,355,689
(482,796)
(8,767)
(12,523)
857,174
8,942,030
6,226,122
125,566
7,256,561
-
104,913
7,865
715
84,767
272,049
470,309
267,755
7,994,625
5,494
2
75
1,377,556
(490,377)
(21,723)
(41,302)
829,725
8,824,350
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 gains (losses) on trading investments
Net realised gains on available-for-sale investments
Net realised / unrealised losses on Other real estate owned
Gain on sale of affiliates
Impairment of fixed assets
Impairment of intangible assets
Impairment of goodwill
Net other gains (losses)
Total other (losses) gains
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 before income taxes from continuing operations
Income tax (expense) benefit
Net income from continuing operations
Discontinued operations
Income from discontinued operations
Gain on sale of discontinued operations
Income tax expense
Net income from discontinued operations
Net income
Cash dividends declared on Contingent Value Convertible Preference Shares
Cash dividends declared on Preference Shares
Preference Shares guarantee fee
Net income attributable to Common Shareholders
Earnings per Common Share
Basic Earnings per Share
Diluted Earnings per Share
Basic Earnings per Share from continuing operations
Diluted Earnings per Share from continuing operations
2012
22,323
33,713
26,524
29,122
10,646
6,215
128,543
190,691
49,117
4,999
244,807
21,158
12,573
18
33,749
211,058
(14,190)
196,868
268
2,028
(2,053)
4,231
(14,527)
(9,143)
(9,505)
1,389
(27,312)
298,099
137,433
57,715
26,129
15,409
13,158
5,040
3,963
15,401
274,248
23,851
(5,890)
17,961
693
7,240
(313)
7,620
25,581
-
(16,000)
(2,000)
7,581
0.01
0.01
-
-
2011
22,942
31,648
30,277
29,451
12,324
5,707
132,349
188,041
43,816
9,636
241,493
28,756
10,486
2
39,244
202,249
(13,169)
189,080
(919)
2,058
-
3,178
-
-
-
(79)
4,238
325,667
145,136
53,929
27,080
18,430
14,029
5,367
4,891
17,766
286,628
39,039
306
39,345
1,401
-
(274)
1,127
40,472
(3,270)
(16,000)
(2,000)
19,202
0.03
0.03
-
-
The accompanying notes are an integral part of these Consolidated Financial Statements.
Butterfield Annual Report 2012 53
Consolidated Statements of Comprehensive Income (Loss)
For the year ended 31 December (in thousands of Bermuda dollars)
Net income
Other comprehensive income (loss)
Net change in unrealised gains on translation of net investment in foreign operations
Net change in unrealised gains on available-for-sale investments
Net change in employee future benefits liability
Other comprehensive income (loss)
Total comprehensive income
The accompanying notes are an integral part of these Consolidated Financial Statements.
2012
25,581
834
43,118
(15,173)
28,779
54,360
2011
40,472
823
19,845
(23,356)
(2,688)
37,784
54
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended 31 December (in thousands of Bermuda dollars)
Common Share capital issued and outstanding
Balance at beginning of year (2012: 549,468,349 Shares; 2011: 549,143,448 Shares)
Conversion of Contingent Value Convertible Preference Shares (2012: 209,454 Shares; 2011: 324,901 Shares)
Balance at end of year (2012: 549,677,803 Shares; 2011: 549,468,349 Shares)
Preference Shares
Balance at beginning of year (2012: 200,000 Shares; 2011: 200,000 Shares)
Repurchase and cancellation of Preference Shares (2012: 4,422 Shares; 2011: nil Shares)
Balance at end of year (2012: 195,578 Shares; 2011: 200,000 Shares)
Contingent Value Convertible Preference Shares
Balance at beginning of year (2012: 7,464,186 Shares; 2011: 7,789,087 Shares)
Conversion to Common Shares (2012: 209,454 Shares; 2011: 324,901 Shares)
Balance at end of year (2012: 7,254,732 Shares; 2011: 7,464,186 Shares)
Additional paid-in capital
Balance at beginning of year
Stock option plan expense
Reduction of additional paid-in capital on transfer of Treasury Shares
Reduction of additional paid-in capital on repurchase and cancellation of Preference Shares
Balance at end of year
Accumulated deficit
Balance at beginning of year
Net income 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
Treasury Common Shares
Balance at beginning of year (2012: 2,163,958 Shares; 2011: 2,401,593 Shares)
Share-based compensation
Purchases of Treasury Shares (2012: 7,260,051 Shares; 2011: nil Shares)
Net transfers of Treasury Shares
Balance at end of year (2012: 7,066,586 Shares; 2011: 2,163,958 Shares)
Accumulated other comprehensive loss
Balance at beginning of year
Other comprehensive income
Balance at end of year
Total Shareholders’ equity
Components of accumulated other comprehensive loss
Cumulative unrealised losses on translation of investment in foreign operations
Cumulative unrealised gains 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.
2012
5,494
2
5,496
2
-
2
75
(2)
73
1,377,556
5,184
(21,662)
(5,389)
1,355,689
(490,377)
25,581
-
(16,000)
(2,000)
(482,796)
(21,723)
293
(8,999)
21,662
(8,767)
(41,302)
28,779
(12,523)
857,174
(10,487)
44,781
(46,817)
(12,523)
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)
(24,127)
356
-
2,048
(21,723)
(38,614)
(2,688)
(41,302)
829,725
(11,321)
1,663
(31,644)
(41,302)
Butterfield Annual Report 2012 55
Consolidated Statements of Cash Flows
For the year ended 31 December (in thousands of Bermuda dollars)
Cash flows from operating activities
Net income
Less: Net income from discontinued operations
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to operating cash flows:
Depreciation and amortisation
Impairment of goodwill
Impairment of intangible assets
Impairment of fixed assets
Decrease in carrying value of investments in affiliates
Share-based payments
Net gain on sale of affiliate
Net realised / unrealised losses on Other real estate owned
Net gain on repayment of sub-debt
Net realised gains of available-for-sale investments
Provision for credit losses
Net change in net assets from discontinued operations
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable
Decrease in other assets
Decrease in accrued interest payable
Decrease in other liabilities and employee future benefits
Net change in trading investments
Cash provided by operating activities from continuing operations
Cash flows from investing activities
Net increase in short-term investments
Net proceeds on sale of affiliate
Net proceeds on sale of subsidiary
Net proceeds on sale of intangible assets
Additions to premises, equipment and computer software
Proceeds from Other real estate owned
Net decrease (increase) in loans
Held-to-maturity investments: proceeds from pay downs
Held-to-maturity investments: purchases
Available-for-sale investments: proceeds from sale
Available-for-sale investments: proceeds from maturities and pay downs
Available-for-sale investments: purchases
Cash (used) provided by investing activities from continuing operations
Cash flows from financing activities
Net increase (decrease) in demand and term deposit liabilities
Net increase in securities sold under agreement to repurchase
Repayment of subordinated capital
Preference Shares repurchased
Common Shares repurchased
Cash dividends paid on Contingent Value Convertible Preference Shares
Cash dividends paid on Preference Shares
Preference Shares guarantee fee paid
Cash provided by (used in) financing activities from continuing operations
Net effect of exchange rates on cash and cash equivalents
Net decrease 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
The accompanying notes are an integral part of these Consolidated Financial Statements.
56
2012
25,581
(7,620)
17,961
46,958
9,505
9,143
14,527
(288)
5,477
(4,231)
2,053
-
(2,028)
14,190
-
5,393
22,813
(5,129)
(4,498)
131,846
1,069
132,915
(55,498)
18,464
41,862
1,428
(17,761)
4,726
137,077
16,127
(191,305)
414,347
1,514,538
(2,511,423)
(627,418)
149,243
109,021
(7,946)
(5,452)
(8,999)
-
(15,989)
(2,000)
217,878
25,446
(251,179)
1,902,726
1,651,547
28,620
1,230
13,755
2011
40,472
(1,127)
39,345
37,930
-
-
-
952
3,923
(3,178)
-
(1,125)
(2,058)
13,170
(130)
(7,883)
12,427
(948)
(8,576)
83,849
(44,422)
39,427
(774)
3,178
-
-
(33,612)
-
(261,370)
-
(64,789)
971,540
1,407,514
(1,783,666)
238,021
(730,562)
-
(13,875)
-
-
(3,270)
(16,000)
(2,000)
(765,707)
6,536
(481,723)
2,384,449
1,902,726
47,051
871
27,354
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 and
corporate banking, treasury, custody, asset management and personal and institutional trust services. The Bank provides such services from six
jurisdictions: Bermuda, 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 Consolidated 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 Consolidated
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:
i.
ii.
iii.
iv.
v.
vi.
vii.
Allowance for credit losses
Fair value and impairment of financial instruments
Impairment of long-lived assets
Impairment of goodwill
Income taxes
Employee future benefits
Share-based payments
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 impacts 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, while
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. 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
Butterfield Annual Report 2012 57
are those with less than three months’ maturity from the date of acquisition and include unrestricted term deposits, certificates of deposit and
Treasury bills.
f. Short-Term Investments
Short-term investments comprise restricted term and demand deposits and unrestricted term deposits and Treasury bills with less than one year but
greater than three months’ maturity from the date of acquisition.
g. Investments
Investments in debt and equity securities are classified as trading, available for sale (“AFS”) or held to maturity (“HTM”).
Investments are classified primarily as AFS when used to manage the Bank’s exposure to interest rate and liquidity movements, as well as to make
strategic longer-term investments. AFS investments are carried at fair value in the Consolidated Balance Sheet with unrealised gains and losses reported
as net increase or decrease to AOCI. 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 Consolidated 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
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. 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 a qualitative determination and consider 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. 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 AOCI. 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. 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 assessment. The assessment 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.
With respect to the Pass-through note investment (“PTN”), Management compares cash flow projections to fair value and amortised cost to determine
if any credit losses exist. Management’s cash flow forecasts for the PTN were 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.
Management’s fair 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.
58
If the assumptions on which Management based its fair valuations change, the Bank may experience additional OTTI or realised losses or gains, and the
period-to-period changes in value could vary significantly.
h. 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.
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 generally 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 troubled debt restructuring (“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 Consolidated 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.
Butterfield Annual Report 2012 59
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.
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.
i. 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 instalment, revolving credit, and most other consumer loans, is collectively
evaluated for impairment. The allowance for credit losses attributed to these loans is established via a process that estimates the probable losses
inherent and incurred in the portfolio, based upon various analyses. Management considers overall portfolio indicators including historical credit
losses; delinquent (defined as loans 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.
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j. Business Combinations, Goodwill and Intangible Assets
All business combinations are accounted for using the purchase method. Identifiable intangible assets (mostly customer relationships) are recognised
separately from goodwill and are initially valued using discounted cash flow calculations and other recognised valuation techniques. Goodwill represents
the excess of the price paid for the acquisition of a business over the fair value of the net assets acquired.
Goodwill is tested annually for impairment at the reporting unit level, or more frequently if events or circumstances indicate there may be impairment.
If the carrying amount of a reporting unit, including the allocated goodwill, exceeds its fair value, goodwill impairment is measured as the excess of
the carrying amount of the reporting unit’s allocated goodwill over the implied fair value of the goodwill. Other acquired intangible assets with finite
lives are amortised on a straight-line basis over their estimated useful lives, not exceeding 15 years. Intangible assets’ estimated lives are re-evaluated
annually and an impairment test is carried out if certain indicators of impairment exist.
k. Premises, Equipment and Computer Software
Land, 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 three 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 five 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.
l. Other Real Estate Owned
Other real estate owned (“OREO”) is comprised of real estate property held for sale and 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. If the carrying value
of the real estate exceeds the property’s fair value at the time of reclassification, an impairment charge is recorded in the Consolidated Statement of
Operations. Subsequent decreases in the property’s fair value and operating expenses of the property are recognised through charges to
non-interest expense.
m. 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.
Butterfield Annual Report 2012 61
n. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (securities financing agreements) are treated as collateralised financing transactions. The obligation to
repurchase is recorded at the value of the cash received on sale adjusted for the amortisation of the difference between the sale price and the agreed
repurchase price. The amortisation of this amount is recorded as an interest expense.
o. Collateral
We pledge assets as collateral as required for various transactions involving security repurchase agreements, deposit products and derivative financial
instruments. Assets that have been pledged as collateral, including those that can be sold or repledged by the secured party, continue to be reported on
the Bank’s Consolidated Balance Sheet.
p. Employee Future Benefits
The Bank maintains trusteed pension plans for substantially all employees as either non-contributory defined benefit plans or defined contribution plans.
Benefits under the defined benefit plans are primarily based on the employee’s years of credited service and average annual salary during the final years
of employment as defined in the plans. The Bank also provides post-retirement medical benefits for certain qualifying active and retired
Bermuda-based employees.
Expense for the defined benefit pension plans and the post-retirement medical benefits plan is comprised of (a) the actuarially determined benefits for
the current year’s service, (b) imputed interest on the actuarially determined liability of the plan, (c) in the case of the defined benefit pension plans,
the expected investment return on the fair value of plan assets and (d) amortisation of certain items over the expected average remaining service life of
employees in the case of the active defined benefit pension plans, estimated average remaining life expectancy of the inactive participants in the case
of the inactive 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 experienced 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 active defined benefit pension plans and post-retirement medical benefits plan and average remaining life expectancy for the inactive
defined benefit pension plans.
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.
q. 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).
r. 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.
62
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.
s. 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.
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 deposits 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 unrestricted term deposits and Treasury bills with less than one year but
greater than three months’ maturity from the date of acquisition. 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.
Trading investments including defined benefit pension plan equity securities and mutual funds
Trading investments include mutual funds and debt securities issued by non-US governments. The fair value of listed equity securities is based upon
quoted market values. Investments in actively traded mutual funds are based on their published net asset values. See “Available-for-sale and held-to-
maturity investments including defined benefit pension plan fixed income securities” below for valuation techniques and inputs of fixed income securities.
Available-for-sale and held-to-maturity investments including defined benefit pension plan fixed income securities
The fair values for available-for-sale investments are generally sourced from third parties. The fair value of fixed income securities is based upon quoted
market values where available, “evaluated bid” prices provided by third-party pricing services (“pricing services”) where quoted market values are not
available, or by reference to broker or underwriter bid indications where pricing services do not provide coverage for a particular security. To the extent
the Bank believes current trading conditions represent distressed transactions, the Bank may elect to utilise internally generated models. The pricing
services use market approaches for valuations using primarily Level 2 inputs (in the vast majority of valuations), or some form of discounted cash flow
analysis, to obtain investment values for a small percentage of fixed income securities. Pricing services indicate that they will only produce an estimate of
fair value if there is objectively verifiable information available to produce a valuation. Standard inputs to the valuations provided by the pricing services
listed in approximate order of priority for use when available include: reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, and reference data. The pricing services may prioritise inputs differently on any given day for any security,
and not all inputs listed are available for use in the evaluation process on any given day for each security evaluation; however, the pricing services
also monitor market indicators and industry and economic events. Information of this nature is a trigger to acquire further corroborating market data.
When these inputs are not available, they identify “buckets” of similar securities (allocated by asset class types, sectors, sub-sectors, contractual cash
flows/structure, and credit rating characteristics) and apply some form of matrix or other modelled pricing to determine an appropriate security value
which represents their best estimate as to what a buyer in the marketplace would pay for a security in a current sale. While the Bank receives values
Butterfield Annual Report 2012 63
for the majority of the investment securities it holds from pricing services, it is ultimately Management’s responsibility to determine whether the values
received and recorded in the financial statements are representative of appropriate fair value measurements. It is common industry practice to utilise
pricing services as a source for determining the fair values of investments where the pricing services are able to obtain sufficient market corroborating
information to allow them to produce a valuation at a reporting date. In addition, in the majority of cases, although a value may be obtained from a
particular pricing service for a security or class of similar securities, these values are corroborated against values provided by other pricing services.
Broker/dealer quotations are used to value fixed maturities where prices are unavailable from pricing services due to factors specific to the security such
as limited liquidity, lack of current transactions, or trades only taking place in privately negotiated transactions. These are considered Level 3 valuations,
as significant inputs utilised by brokers may be difficult to corroborate with observable market data, or sufficient information regarding the specific
inputs utilised by the broker was not available to support a Level 2 classification.
For disclosure purposes, investments held to maturity are fair valued using the same methods described above.
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 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
Derivative contracts can be exchange traded or Over-the-counter (“OTC”) derivative contracts and may include forward, swap and option contracts
relating to interest rates or foreign currencies. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on whether
they are deemed to be actively traded or not. OTC derivatives are valued using market transactions and other market evidence whenever possible,
including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources
where an understanding of the inputs utilised in arriving at the valuations is obtained. Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms and specific risks inherent in the instrument as well as the availability of pricing information
in the market. The Bank generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual
terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade
in liquid markets, such as generic forwards, interest rate swaps and options, model inputs can generally be verified and model selection does not involve
significant Management judgment.
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.
t. 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.
(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.
64
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.
u. Income Taxes
The Bank uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effect
of temporary differences between the Consolidated 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. The effect of a change in tax rates on deferred tax assets and liabilities is recognised in income in the
period that includes the enactment date.
The Bank records net deferred tax assets to the extent the Bank believe these assets will more likely than not be realised. 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. In making such a determination, the Bank considers
all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-
planning strategies, and results of recent operations. In the event the Bank were to determine that the Bank would be able to realise the deferred income
tax assets in the future in excess of their net recorded amount, the Bank would make an adjustment to the deferred tax asset valuation allowance,
which would reduce the provision for income taxes. The Bank records uncertain tax positions on the basis of a two-step process whereby (1) the Bank
determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) where those
tax positions that meet the more-likely-than-not recognition threshold, the Bank recognises the largest amount of tax benefit that is greater than 50
percent likely to be realised upon ultimate settlement with the related tax authority.
Income taxes on the Consolidated Statement of Operations include the current and deferred portions of the income taxes. The Bank recognises interest
accrued and penalties related to unrecognised tax benefits in operating expenses. Income taxes applicable to items charged or credited directly to
Shareholders’ equity are included in such items.
v. 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.
w. 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.
x. 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.
y. 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”). The Charitable Trust came to an end in December 2012 when its remaining assets were transferred to various charities in
Bermuda. As a not-for-profit organisation, the Charitable Trust is not consolidated in the Bank’s Consolidated 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.
z. New Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to amend existing requirements for fair value
measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorised in Level 3 of the fair
value hierarchy, requiring quantitative and qualitative information to be disclosed related to: (1) the valuation processes used, (2) the sensitivity of the
fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial
Butterfield Annual Report 2012 65
asset in a way that differs from the asset’s highest and best use. The guidance requires disclosure of the level in the fair value hierarchy of items that are
not measured at fair value, but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements
of financial assets and liabilities, as well as instruments classified in Shareholders’ equity. The Bank has applied this guidance from 1 January 2012;
however, it impacted disclosure only and did not have an impact on the Bank’s financial condition or results of operations.
In June 2011, the FASB issued an accounting standards update concerning the presentation of comprehensive income in financial statements. This
guidance allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both
options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income
along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the
components of other comprehensive income only as part of the statement of changes in Shareholders’ equity. The guidance does not change the items
that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Bank
applied the guidance from 1 January 2012; however, it did not have an impact on the Bank’s disclosure, financial condition or results of operations.
In September 2011, the FASB issued an accounting standards update to simplify how entities test goodwill for impairment, by allowing an entity the
option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying
amount, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required in FASB Accounting Standards
Codification Topic 350. After assessing the circumstances that should be considered in making the qualitative assessment, if an entity determines that
the fair value of a reporting unit as compared to its carrying value meets the threshold, then performing the two-step impairment step is unnecessary.
In other circumstances, performance of the two-step test is required. The guidance also eliminates the option for an entity to carry forward its detailed
calculation of a reporting unit’s fair value in certain situations. The amendments do not change the current guidance for testing other indefinite-lived
intangible assets for impairment. The Bank adopted this guidance beginning on 1 January 2012. It did not have an impact on the Bank’s consolidated
financial condition or results of operations.
During December 2011, the FASB issued an accounting standard update, “Disclosures about Offsetting Assets and Liabilities”. The amendments
in this update require an entity to disclose information about offsetting and related arrangements to provide users of the Consolidated Financial
Statements with information to understand the extent of offsetting in the statement of financial position. The amendment will allow companies to
continue offsetting certain financial instruments on their Balance Sheets, including certain derivatives and repurchase agreements subject to a master
netting arrangement. Additionally certain industry-specific offsetting guidance for broker-dealers, construction companies and depository and lending
institutions remains unchanged. The disclosure requirements will be effective for periods beginning on or after 1 January 2013, and must be shown for all
periods presented on the Balance Sheet (i.e., applied retrospectively). The impact of this additional accounting update is expected to be primarily
on disclosures.
66
NOTE 3: DISCONTINUED OPERATIONS
On 7 May 2012, the Bank announced its agreement to sell Butterfield Bank (Barbados) Limited, a wholly-owned subsidiary which is all of the Barbados
segment, to First Citizens Bank Limited. The sale was completed on 27 August 2012 with gross proceeds, subject to normal adjustments, of $45
million, resulting in a net gain of $7.2 million included in net income from discontinued operations in the Consolidated Statements of Operations and
Comprehensive Income.
The Bank has determined that the requirements have been met to report the results of the subsidiary sold as discontinued operations effective from the
second quarter in 2012. The Assets and Liabilities have been presented as discontinued operations on the face of the Consolidated Balance Sheet for all
periods presented.
The following summarises the assets and liabilities of Barbados at 31 December 2012 and 2011, which are reported as Assets of discontinued operations
and Liabilities of discontinued operations in the Consolidated Balance Sheet.
Assets
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
Accrued interest
Intangible assets
Other assets
Total assets
Liabilities
Deposits
Accrued interest
Other liabilities
Total liabilities
The following table summarises the results of the Barbados operating segment for the year ended:
Non-interest income
Net interest income
Provision for credit losses
Revenue before gains (losses)
Gains (losses)
Total net revenue
Non-interest expenses
Net income before income taxes
Gain on sale of discontinued operations
Income tax expense
Net income from discontinued operations
NOTE 4: CASH AND CASH EQUIVALENTS
Unrestricted
Non-interest earning
Cash and demand deposits
Interest earning
Demand deposits
Cash equivalents
Sub-total - Interest earning
2012
Non-
Bermuda
Bermuda
Total Bermuda
2011
Non-
Bermuda
Total
172,179
44,425
216,604
176,091
17,823
193,914
109,164
334,835
443,999
150,303
840,641
990,944
259,467
1,175,476
1,434,943
49
489,391
489,440
189,864
1,029,508
1,219,372
189,913
1,518,899
1,708,812
Total cash and cash equivalents
616,178
1,035,369
1,651,547
665,531
1,237,195
1,902,726
Butterfield Annual Report 2012 67
2012
-
-
-
-
-
-
-
-
-
-
-
-
-
2012
1,701
7,267
(548)
8,420
249
8,669
(7,976)
693
7,240
(313)
7,620
2011
76,935
14,534
28,088
177,841
3,643
1,164
3,084
1,755
307,044
269,083
1,040
1,926
272,049
2011
2,897
11,485
(1,156)
13,226
37
13,263
(11,862)
1,401
-
(274)
1,127
NOTE 5: SHORT-TERM INVESTMENTS
Unrestricted
Interest earning
Term deposits maturing within three months
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
Interest earning
Demand deposits
Total restricted short-term investments
2012
Non-
Bermuda
Bermuda
Total
Bermuda
2011
Non-
Bermuda
-
-
-
-
56,727
7,672
4,761
69,160
56,727
7,672
4,761
69,160
-
-
-
-
-
4,630
2,900
7,530
Total
-
4,630
2,900
7,530
6,942
6,942
111
111
7,053
7,053
12,641
12,641
109
109
12,750
12,750
Total short-term investments
6,942
69,271
76,213
12,641
7,639
20,280
NOTE 6: INVESTMENTS
Amortised cost, carrying amounts and estimated fair value
The amortised cost, carrying amounts and fair values are as follows:
2012
2011
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 4,301
56,779
Mutual funds
61,080
Total trading
930
511
1,441
-
(736)
(736)
5,231
56,554
61,785
5,788
56,964
62,752
419
224
643
(236)
(568)
(804)
5,971
56,620
62,591
Available for sale
558,668
Certificates of deposit
US government and federal agencies
1,156,307
Debt securities issued by non-US governments 89,609
Corporate debt securities guaranteed
by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Mortgage-backed securities - Commercial
Pass-through note
Equity securities
Total available for sale
32,021
400,980
139,304
130,526
30,404
126
2,537,945
2,706
23,613
438
5
20,105
-
231
242
-
47,340
(14)
561,360
(1,134) 1,178,786
90,042
(5)
-
-
(3,203)
(279)
-
(73)
32,026
421,085
136,101
130,478
30,646
53
(4,708) 2,580,577
354,847
778,387
87,549
122,987
408,559
149,759
-
33,696
120
1,935,904
2,411
14,419
1,158
38
396
-
-
-
-
18,422
(765)
(2,002)
(49)
(1,377)
(3,706)
(5,413)
-
(6,705)
(50)
(20,067)
356,493
790,804
88,658
121,648
405,249
144,346
-
26,991
70
1,934,259
2012
2011
Amortised
cost /
Gross
Gross
Carrying unrealised unrealised
losses
amount
gains
Amortised
cost /
Gross
Carrying unrealised
gains
Amount
Gross
unrealised
losses
Fair
value
Fair
value
Held to maturity (1)
US government and federal agencies
Total held to maturity
239,342
239,342
6,691
6,691
(1,240)
(1,240)
244,793
244,793
64,789
64,789
228
228
(429)
(429)
64,588
64,588
(1) For the years ended 31 December 2012 and 2011 non-credit impairments recognised in AOCI for held-to-maturity investments was $nil.
Available for sale
As at 31 December 2012, US government and federal agency investment securities classified as available for sale with an amortised cost of $255.7 million
and fair value of $262.7 million were pledged to secure Bank deposit products where the secured party did not have the right to sell or repledge
the collateral.
68
US government and federal agency investment securities with an amortised cost of $120.9 million and fair market value of $122.4 million were pledged
to secure repurchase agreements at 31 December 2012.
Held to maturity
As at 31 December 2012, US government and federal agency investment securities with an amortised cost of $45.7 million were pledged to secure Bank
deposit products where the secured party did not have the right to sell or repledge the collateral.
Unrealised loss positions
The following tables show the fair value and gross unrealised losses of the Bank’s AFS and HTM investments with unrealised losses that are not deemed
to be OTTI, 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.
2012
Less than 12 months
12 months or more
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
Mortgage-backed securities - Commercial
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
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
Fair
value
82,477
191,492
56,797
-
-
-
92,306
-
-
Gross
unrealised
losses
(14)
(342)
(5)
-
-
-
(279)
-
-
Fair
value
-
65,792
-
-
-
136,101
-
-
53
Gross
unrealised
losses
Total
fair value
Total gross
unrealised
losses
-
(792)
-
-
-
(3,203)
-
-
(73)
82,477
257,284
56,797
-
-
136,101
92,306
-
53
(14)
(1,134)
(5)
-
-
(3,203)
(279)
-
(73)
423,072
(640)
201,946
(4,068)
625,018
(4,708)
44,496
(1,240)
44,496
(1,240)
-
-
-
-
44,496
(1,240)
44,496
(1,240)
Less than 12 months
Gross
unrealised
losses
(765)
(1,585)
(49)
(3)
(2,859)
-
-
(50)
Fair
value
-
72,600
-
47,267
124,152
144,346
26,992
-
Gross
unrealised
losses
-
(417)
-
(1,374)
(847)
(5,413)
(6,705)
-
12 months or more
Total
fair value
48,623
216,964
7,749
77,446
341,764
144,346
26,992
70
Total gross
unrealised
losses
(765)
(2,002)
(49)
(1,377)
(3,706)
(5,413)
(6,705)
(50)
Fair
value
48,623
144,364
7,749
30,179
217,612
-
-
70
448,597
(5,311)
415,357
(14,756)
863,954
(20,067)
30,034
30,034
(429)
(429)
-
-
-
-
30,034
30,034
(429)
(429)
Butterfield Annual Report 2012 69
The Bank does not believe that the investment securities that were in an unrealised loss position as of 31 December 2012, which was comprised of
38 securities, or 24% of the portfolio by market value, represent an other-than-temporary impairment. Total gross unrealised losses were only 0.9%
of the market value of affected securities and were primarily attributable to changes in interest rates, relative to when the investment securities were
purchased, and not due to the credit quality of the investment securities. The Bank does not intend to sell the investment securities that were in an
unrealised loss position and it is not more likely than not that the Bank will be required to sell the investment securities before recovery of the amortised
cost bases, which may be at maturity.
The following describes the process for identifying credit impairment in security types with the most significant unrealised losses as of 31 December 2012.
US government and federal agencies
As of 31 December 2012, gross unrealised losses on securities related to United States (“US”) government and federal agencies were $1.1 million
(2011: $2.0 million). 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.
Asset-backed securities − Student loans
As of 31 December 2012, gross unrealised losses on student loan asset-backed securities were $3.2 million (2011: $5.4 million). Asset−backed securities
collateralised by student loans are primarily composed of securities collateralised by Federal Family Education Loan Program (“FFELP loans”). FFELP loans
benefit from a federal government guarantee of at least 97% of defaulted principal and accrued interest, with additional credit support provided in the
form of overcollateralisation, subordination and excess spread, which collectively total in excess of 100%. Accordingly, the vast majority of FFELP
loan−backed securities are not exposed to traditional consumer credit risk.
Contractual maturities
The following table presents the remaining contractual maturities of the Bank’s securities. The remaining contractual principal maturities for the
mortgage-backed securities (primarily US Government agencies) do not consider prepayments. Remaining expected maturities will differ from
contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature.
2012
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
-
-
-
1,382
-
1,382
1,157
-
1,157
1,611
-
1,611
1,081
-
1,081
-
56,554
56,554
Available for sale
255,624
Certificates of deposit
US government and federal agencies
-
Debt securities issued by non-US governments 32,473
Corporate debt securities
guaranteed by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Mortgage-backed securities – Commercial
Pass-through note
Equity securities
Total available for sale
32,026
-
-
-
-
-
320,123
274,357
-
50,081
-
-
-
-
-
-
324,438
31,379
162,545
5,600
-
421,085
2,506
-
-
-
623,115
-
361,476
1,888
-
-
82,825
130,478
30,646
-
607,313
-
654,765
-
-
-
50,770
-
-
-
705,535
-
-
-
-
-
-
-
-
53
53
Carrying
amount
5,231
56,554
61,785
561,360
1,178,786
90,042
32,026
421,085
136,101
130,478
30,646
53
2,580,577
Held to maturity
US government and federal agencies
Total held to maturity
Total investments
Total by currency
US dollars
Other
Total investments
-
-
-
-
-
-
11,003
11,003
228,339
228,339
-
-
239,342
239,342
320,123
325,820
624,272
619,927
934,955
56,607
2,881,704
166,289
153,834
320,123
179,536
146,284
325,820
623,115
1,157
624,272
618,315
1,612
619,927
933,874
1,081
934,955
55,513
1,094
56,607
2,576,642
305,062
2,881,704
70
2011
Within
3 months
Remaining term to earlier of expected or contractual maturity
3 to 12
months
5 to 10
years
1 to 5
years
Over 10 No specific
years maturity
Trading
Debt securities issued by non-US governments
Mutual funds
Total trading
-
-
-
811
-
811
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
174,301
-
64,057
90,882
106,639
-
-
-
435,879
2,026
-
2,026
76,874
82,444
5,333
30,766
257,990
58,183
-
-
511,590
2,106
-
2,106
1,028
-
1,028
-
56,620
56,620
-
452,951
11,519
-
13,106
74,999
26,991
-
579,566
-
255,407
-
-
-
11,164
-
-
266,571
Held to maturity
US government and federal agencies
Total held to maturity
-
-
-
-
-
-
-
-
64,789
64,789
Carrying
amount
5,971
56,620
62,591
356,493
790,804
88,658
121,648
405,249
144,346
26,991
70
1,934,259
64,789
64,789
-
2
-
-
-
-
-
70
72
-
-
Total investments
Total by currency
US dollars
Other
Total investments
140,581
436,690
513,616
581,672
332,388
56,692
2,061,639
-
140,581
140,581
181,875
254,815
436,690
448,777
64,839
513,616
579,566
2,106
581,672
331,360
1,028
332,388
55,407
1,285
56,692
1,596,985
464,654
2,061,639
Sale proceeds and realised gains (losses)
During the twelve months ended 31 December 2012, the Bank disposed of:
(cid:115)(cid:0) Certificates of deposit totalling $170.1 million in sale proceeds, resulting in a gross realised gain of $0.1 million;
(cid:115)(cid:0) US agency securities totalling $60.4 million in sale proceeds, resulting in gross realised gains of $0.5 million and gross realised losses of $0.1 million;
(cid:115)(cid:0) Corporate bonds totalling $165.6 million in sale proceeds, resulting in gross realised gains of $1.0 million and gross realised losses of $0.3 million; and
(cid:115)(cid:0) Other securities totalling $18.2 million in sale proceeds, resulting in a gross realised gain of $0.8 million.
During the year ended 31 December 2011, the Bank disposed of:
(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;
(cid:115)(cid:0) 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) Corporate bonds totalling $88.3 million in sale proceeds, resulting in a gross realised loss of $0.2 million.
Butterfield Annual Report 2012 71
Gains and losses on investments
The following table presents gains and losses on investments:
Year ended
2012
Trading
Available
Held to
for sale maturity
Total
Trading
2011
Available
for sale
Held to
maturity
Gains (losses) other than OTTI recognised in net income 268
2,028
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
268
2,028
Gross unrealised gains recorded in OCI
Realised (gains) losses transferred to net income
Total net gains recognised in OCI
-
-
-
45,146
(2,028)
43,118
-
-
-
-
-
-
-
-
2,296
(919)
2,058
-
-
-
-
-
-
-
-
-
2,296
(919)
2,058
45,146
(2,028)
43,118
-
-
-
21,903
(2,058)
19,845
-
-
-
-
-
-
-
-
Total
1,139
-
-
-
1,139
21,903
(2,058)
19,845
72
NOTE 7: LOANS
The composition of the loan portfolio by collateral exposure at each of the indicated dates was as follows:
Commercial loans
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
Total gross loans
Less: specific allowance for credit losses
Less: general allowance for credit losses
Net loans
31 December 2012
Non-
Bermuda Bermuda
64,534
121,947
58,973
245,454
(166)
245,288
4,050
190,002
22,929
216,981
(1,250)
215,731
Total
68,584
311,949
81,902
462,435
(1,416)
461,019
31 December 2011
Non-
Bermuda Bermuda
Total
256,442
103,922
64,733
425,097
(1,222)
423,875
4,230 260,672
269,742
90,197
620,611
(2,472)
618,139
165,820
25,464
195,514
(1,250)
194,264
495,466
109
495,575
(8,772)
281,456
2,119
283,575
(4,711)
776,922
2,228
779,150
(13,483)
502,110
37,178
539,288
(9,225)
2,814
304,525 806,635
39,992
307,339 846,627
(12,017)
(2,792)
486,803
278,864
765,667
530,063
304,547
834,610
19,663
58,500
8,488
66,044
152,695
(160)
152,535
6,050
15,446
3,933
94,819
120,248
-
120,248
25,713
73,946
12,421
160,863
272,943
(160)
272,783
23,964
59,469
9,147
87,889
180,469
(160)
180,309
5,862
13,800
5,359
121,298
146,319
-
146,319
29,826
73,269
14,506
209,187
326,788
(160)
326,628
1,351,680 1,145,709 2,497,389
(11,673)
(3,930)
(7,743)
1,348,606
(3,184)
982,278 2,330,884
(8,821)
(5,637)
1,343,937 1,141,779 2,485,716
1,345,422
976,641 2,322,063
2,245,404 1,766,513 4,011,917
(26,732)
(29,225)
2,207,746 1,748,214 3,955,960
(16,841)
(20,817)
(9,891)
(8,408)
2,493,460 1,631,450 4,124,910
(23,470)
(32,021)
2,456,195 1,613,224 4,069,419
(13,791)
(23,474)
(9,679)
(8,547)
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 30 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 2012 was 4.72% (2011: 4.76%).
Butterfield Annual Report 2012 73
Age analysis of past due loans (including non accrual loans)
The following table summarises the past due status of the loans at 31 December 2012 and 31 December 2011. The aging of past due amounts are
determined based on the contractual delinquency status of payments under the loan. An account is generally considered to be contractually delinquent
when payments have not been made in accordance with the loan terms.
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
30-59
days
-
349
17
366
3,852
-
3,852
466
623
3
1,091
2,183
38,334
44,735
(1) Loans less than 30 days past due are included in Current.
Commercial loans
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 (2)
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total loans
30-59
days
-
449
-
449
9,866
16,680
26,546
611
1,719
6
1,879
4,215
63,805
95,015
60-89
days
-
2,048
199
2,247
1,190
-
1,190
96
445
37
693
1,271
21,914
26,622
2012
90 days or
more
Total past
due loans
Total
current (1)
Total
loans
-
3,022
301
3,323
55,584
-
55,584
425
601
227
1,595
2,848
69,551
131,306
-
5,419
517
5,936
60,626
-
60,626
987
1,669
267
3,379
6,302
129,799
202,663
68,584
306,530
81,385
456,499
716,296
2,228
718,524
24,726
72,277
12,154
157,484
266,641
2,367,590
3,809,254
68,584
311,949
81,902
462,435
776,922
2,228
779,150
25,713
73,946
12,421
160,863
272,943
2,497,389
4,011,917
2011
60-89
days
90 days or
more
Total past
due loans
Total
current (1)
Total
loans
-
210
26
236
1,280
1,629
2,909
299
449
9
548
1,305
34,350
38,800
-
2,525
4,810
7,335
45,459
-
45,459
633
843
75
1,773
3,324
47,144
103,262
-
3,184
4,836
8,020
56,605
18,309
74,914
1,543
3,011
90
4,200
8,844
145,299
237,077
260,672
266,558
85,361
612,591
750,030
21,683
771,713
28,283
70,258
14,416
204,987
317,944
2,185,585
3,887,833
260,672
269,742
90,197
620,611
806,635
39,992
846,627
29,826
73,269
14,506
209,187
326,788
2,330,884
4,124,910
(1) Loans less than 30 days past due are included in Current.
(2) Delinquency for credit cards was previously driven by reporting cycles rather than actual days past payment due date. Commencing in the third quarter
delinquency is now consistently measured from the date payment is due. The resultant effect of the clarification of cycle reporting resulted in a
disclosure reclassification of $3.9 million from past due credit cards to current credit cards. Prior years have been adjusted to reflect the new measure
of delinquency.
74
Non-accrual loans and accruing loans 90 days or more past due are summarised in the following table:
2012
Accruing
loans past
due 90 days
Total non-
performing
loans
Non-accrual
loans
2011
Accruing
loans past
due 90 days
Total non-
performing
loans
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Non-accrual
loans
3,606
292
3,898
-
9
9
3,606
301
3,907
4,160
5,683
9,843
Commercial real estate loans
55,167
417
55,584
53,599
Consumer loans
Automobile financing
Credit cards
Overdrafts
Other consumer
Total consumer loans
581
-
217
1,984
2,782
57
600
10
76
743
638
600
227
2,060
3,525
983
-
65
1,789
2,837
-
-
-
8
-
844
11
173
1,028
4,160
5,683
9,843
53,607
983
844
76
1,962
3,865
Residential mortgage loans
51,506
27,229
78,735
43,828
17,372
61,200
Total loans
113,353
28,398
141,751
110,107
18,408
128,515
The table below presents information about the credit quality of the Bank’s loan portfolio:
2012
Commercial loans
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 cards
Overdrafts
Other consumer
Total consumer loans
Pass
Special mention
Substandard
Non-accrual
68,584
301,747
72,669
443,000
562,042
493
562,535
23,765
73,352
11,945
154,966
264,028
-
6,078
8,742
14,820
118,203
1,735
119,938
1,183
-
186
3,218
4,587
-
518
199
717
41,510
-
41,510
184
594
73
695
1,546
-
3,606
292
3,898
55,167
-
55,167
581
-
217
1,984
2,782
Total
gross recorded
investments
68,584
311,949
81,902
462,435
776,922
2,228
779,150
25,713
73,946
12,421
160,863
272,943
Residential mortgage loans
2,309,945
68,531
67,407
51,506
2,497,389
Total loans
3,579,508
207,876
111,180
113,353
4,011,917
Butterfield Annual Report 2012 75
Pass
Special mention
Substandard
Non-accrual
2011
Commercial loans
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 cards
Overdrafts
Other consumer
Total consumer loans
260,672
253,443
81,386
595,501
608,555
38,363
646,918
28,843
72,314
14,369
199,412
314,938
Residential mortgage loans
2,198,967
Total loans
3,756,324
-
9,732
3,128
12,860
102,705
1,629
104,334
-
-
72
409
481
45,795
163,470
-
2,407
-
2,407
41,776
-
41,776
-
955
-
7,577
8,532
42,294
95,009
Total
gross recorded
investments
260,672
269,742
90,197
620,611
806,635
39,992
846,627
29,826
73,269
14,506
209,187
326,788
-
4,160
5,683
9,843
53,599
-
53,599
983
-
65
1,789
2,837
43,828
2,330,884
110,107
4,124,910
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
76
2012
Individually Collectively
evaluated
-
-
270,161
2,437,479
2,707,640
evaluated
462,435
779,150
2,782
59,910
1,304,277
2011
Individually
evaluated
620,611
846,627
2,837
51,210
1,521,285
Collectively
evaluated
-
-
323,951
2,279,674
2,603,625
The table below presents the changes in the allowance for credit loan losses:
2012
2011
Residential
Commercial real estate Consumer mortgage
Commercial
Total Commercial
Commercial
real estate
Residential
Consumer mortgage
Total
Allowances at
beginning of year 8,336
Provision taken
during the year
Recoveries
Charge-offs
Other
Allowances at
end of year
(860)
490
(1,490)
120
6,596
17,888
5,735
23,532
55,491
7,311
28,046
5,339
21,024
61,720
7,541
-
(6,630)
(405)
1,327
2,953
(4,678)
103
6,182
303
(4,972)
482
14,190
3,746
(17,770)
300
1,843
546
(1,361)
(3)
1,483
634
(12,280)
5
3,958
2,890
(6,458)
6
5,885
13
(3,412)
22
13,169
4,083
(23,511)
30
18,394
5,440
25,527
55,957
8,336
17,888
5,735
23,532
55,491
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
1,416
13,483
160
11,673
26,732
2,472
12,017
160
8,821
23,470
5,180
4,911
5,280
13,854
29,225
5,864
5,871
5,575
14,711
32,021
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-accrual loans and all loans modified in a TDR
even if full collectability is expected following the restructuring. For the year ended 31 December 2012, the amount of gross interest income would have
been recorded had impaired loans been current was $7.7 million (2011: $6.9 million). The table below presents information about the Bank’s impaired loans:
2012
Impaired loans with an allowance
Gross recorded
Specific
investments allowance
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
1,471
26
1,497
52,607
227
-
128
355
36,064
90,523
(1,390)
(26)
(1,416)
(13,483)
(75)
-
(85)
(160)
(11,673)
(26,732)
Net
loans
81
-
81
39,124
152
-
43
195
24,391
63,791
Impaired loans with an allowance
Gross recorded
investments
Specific
allowance
Net
loans
Impaired loans
without an allowance
Gross recorded
investments
Total impaired loans
Gross recorded
investments
Specific
allowance
Net
loans
3,846
266
4,112
12,132
354
217
1,856
2,427
23,846
42,517
5,317
292
5,609
64,739
581
217
1,984
2,782
59,910
133,040
(1,390)
(26)
(1,416)
(13,483)
3,927
266
4,193
51,256
(75)
-
(85)
(160)
506
217
1,899
2,622
(11,673) 48,237
(26,732) 106,308
Impaired loans
without an allowance
Gross recorded
investments
Total impaired loans
Gross recorded
investments
Specific
allowance
Net
loans
2,164
669
2,833
41,364
240
-
143
383
25,483
70,063
(1,803)
(669)
(2,472)
(12,017)
(75)
-
(85)
(160)
(8,821)
(23,470)
361
-
361
29,347
165
-
58
223
16,662
46,593
4,844
6,056
10,900
21,937
743
65
1,646
2,454
25,727
61,018
7,008
6,725
13,733
63,301
983
65
1,789
2,837
51,210
131,081
(1,803)
(669)
(2,472)
(12,017)
(75)
-
(85)
(160)
(8,821)
(23,470)
5,205
6,056
11,261
51,284
908
65
1,704
2,677
42,389
107,611
Butterfield Annual Report 2012 77
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
Residential mortgage loans
Total impaired loans
The following table presents information about the Bank’s average impaired loan balances and interest income recognised for the year ended
31 December 2012 on the impaired loans:
Average recorded investment
Interest income recognised
Impaired loans
2012
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
6,163
3,509
9,672
64,020
782
-
141
1,887
2,810
55,560
132,062
105
-
105
523
-
-
-
-
-
388
1,016
Effect of modification
on recorded investment
The table presents information about the Bank’s loans modified in a troubled debt restructuring:
2012
Commercial loans
Commercial and industrial
Total commercial loans
Commercial real estate loans
Residential mortgage loans
Total loans
Number of
contracts
Recorded
investment
Pre-modification Post-modification
outstanding
recorded
outstanding
recorded
investment
Changes in the
timing of
principal or
Interest
investment interest payments capitalisation
3
3
7
15
25
2,083
2,083
22,854
10,977
35,914 (1)
2,290
2,290
24,402
9,185
35,877
2,326
2,326
24,463
9,926
36,715
-
-
-
-
-
36
36
61
740
837
(1) The amount is comprised of $16.2 million of non-accrual loans and $19.7 million of loans on accrual status.
Effect of modification
on recorded investment
Pre-modification
outstanding
recorded
investment
Recorded
investment
Post-modification
outstanding
recorded
investment
Changes in the
timing of
principal or
interest payments
Interest
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
Number of
contracts
4
1
5
5
11
21
2011
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Residential mortgage loans
Total loans
(1) The amount is comprised of $12.6 million of non-accrual loans and $20.9 million of loans on accrual status.
The Bank had four loans modified in a TDR from 1 January 2012 to 31 December 2012 that subsequently defaulted (i.e., 90 days or more past due
following a modification) with a recorded investment amounting to $2.9 million.
78
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 by geographic region of loan origination. In the consumer portfolio, concentrations are primarily
evaluated by products. Credit exposures include loans, guarantees and acceptances, letters of credit and commitments for undrawn lines of credit.
Unconditionally cancellable credit cards and overdrafts lines of credit are excluded from the tables below.
The following table summarises the credit exposure of the Bank by business sector. The on-Balance Sheet exposure amounts disclosed are net of specific
allowances and the off-Balance Sheet exposure amounts disclosed is gross of collateral held.
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
277,273
263,723
58,811
2,334,272
65,608
887,178
90,978
7,342
3,985,185
(29,225)
3,955,960
2012
Off-Balance
Sheet
394,858
88,551
28,153
94,430
6,161
36,523
-
-
648,676
-
648,676
Total credit
exposure
672,131
352,274
86,964
2,428,702
71,769
923,701
90,978
7,342
4,633,861
(29,225)
4,604,636
On-Balance
Sheet
330,734
270,089
251,795
2,270,737
199,979
675,848
92,955
9,303
4,101,440
(32,021)
4,069,419
2011
Off-Balance
Sheet
496,753
135,340
-
93,620
2,692
94,029
-
-
822,434
-
822,434
The following table summarises the credit exposure of the Bank by geographic region of loan origination:
Bermuda
Cayman
Guernsey
The Bahamas
United Kingdom
Sub-total
General allowance
Total
On-Balance
Sheet
2,300,661
547,779
534,226
47,883
554,636
3,985,185
(29,225)
3,955,960
2012
Off-Balance
Sheet
335,184
194,634
72,961
180
45,717
648,676
-
648,676
Total credit
exposure
2,635,845
742,413
607,187
48,063
600,353
4,633,861
(29,225)
4,604,636
On-Balance
Sheet
2,571,607
605,500
454,039
8,972
461,322
4,101,440
(32,021)
4,069,419
2011
Off-Balance
Sheet
411,594
172,346
149,387
90
89,017
822,434
-
822,434
Total credit
exposure
827,487
405,429
251,795
2,364,357
202,671
769,877
92,955
9,303
4,923,874
(32,021)
4,891,853
Total credit
exposure
2,983,201
777,846
603,426
9,062
550,339
4,923,874
(32,021)
4,891,853
Butterfield Annual Report 2012 79
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
2012
Accumulated
depreciation
-
(52,109)
(37,552)
(63,743)
-
(153,404)
Cost
13,290
154,903
47,060
172,511
8,961
396,725
Net carrying
amount
13,290
102,794
9,508
108,768
8,961
243,321
Cost
13,371
180,006
47,987
166,250
2,853
410,467
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 buildings (included in impairment of fixed assets)
2011
Accumulated
depreciation
-
(50,728)
(37,212)
(50,055)
-
(137,995)
Net carrying
amount
13,371
129,278
10,775
116,195
2,853
272,472
2012
2011
6,823
2,735
16,194
25,752
14,527
6,489
2,590
9,253
18,332
-
During 2012, the Bank’s intended use for five Bermuda properties changed and therefore the properties were assessed for impairment. The
properties are subsequently held for rental income or possible sale and it was determined that the carrying values were not recoverable based on the
undiscounted cash flow analysis. The carrying amount of the Bermuda segment’s buildings was impaired and was written down by $6.5 million at
31 December 2012 because their respective fair values were lower than the carrying amounts. The fair values of the properties were calculated based
on the market approach and, where applicable, a fair value discount rate was applied.
At the end of 2012, the Bank changed its commitment with respect to certain Bermuda properties which were being used in its operations but are
now contemplated for disposal and therefore the properties have been reclassified as held for sale and included in OREO assets in the Consolidated
Balance sheet. The reclassification resulted in an $8 million write down of the carrying amount to its fair value less cost to sell. The fair value was
based on the discounted cash flow of a projected sale.
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 2010
Foreign exchange translation adjustment
Balance as at 31 December 2011
Impairment
Foreign exchange translation adjustment
Balance as at 31 December 2012
Guernsey
6,672
(38)
6,634
-
315
6,949
United
Kingdom
9,345
(42)
9,303
(9,505)
202
-
Customer relationship intangible assets
2012
2011
Accumulated Accumulated
impairment amortisation
(4,590)
(853)
(31,735)
(3,215)
(9,803)
(50,196)
-
-
-
(2,019)
(7,124)
(9,143)
Cost
8,342
1,211
42,952
5,234
16,927
74,666
Net
carrying
amount
3,752
358
11,217
-
-
15,327
Accumulated Accumulated
amortisation
(4,034)
(773)
(27,542)
(2,867)
(9,454)
(44,670)
impairment
-
-
-
-
-
-
Cost
8,342
1,211
41,010
5,234
19,036
74,833
Bermuda - Wealth Management
Cayman
Guernsey
The Bahamas
United Kingdom
Total
80
Total
16,017
(80)
15,937
(9,505)
517
6,949
Net
carrying
amount
4,308
438
13,468
2,367
9,582
30,163
During the 2012 annual review process, the carrying amount of goodwill relating to the United Kingdom segment was considered fully impaired due to a
continuous period of losses incurred and future estimated profitability being unable to sustain current valuations including the goodwill and the customer
intangible assets and was therefore fully written off.
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 2012 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 originally
purchased customer base existing as at 31 December 2012. The discount rate used for testing is the discount rate implied in the initial purchase
price acquisition.
The carrying amount of the United Kingdom and Bahamas segments’ customer relationship intangible assets were impaired and were fully written off
as at 31 December 2012 as the present value of net cash flows expected to be derived for the recurring customer base is no longer providing positive net
cash flows.
During 2012 and 2011, the Bank did not acquire new customer relationship intangible assets. Intangible asset impairments for the year ended
31 December 2012 of $9.1 million were recognised. During 2012, the amortisation expense amounted to $5.0 million (2011: $5.4 million) and the
foreign exchange translation adjustment decreased the net carrying amount by $0.2 million (2011: increased by $0.07 million). The estimated aggregate
amortisation expense for each of the succeeding five years (until 31 December 2017) is $3.5 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
918,814
4,514,312
5,433,126
2012
Banks
567
99,573
100,140
Total
Customers
2011
Banks
Total
919,381
4,613,885
5,533,266
904,873
4,087,152
4,992,025
-
118,653
118,653
904,873
4,205,805
5,110,678
1,763,515
15,965
1,779,480
1,924,973
6,410
1,931,383
98,051
81,101
1,942,667
10,240
121
26,326
108,291
81,222
1,968,993
119,110
94,887
2,138,970
382
121
6,913
119,492
95,008
2,145,883
Total
7,375,793
126,466
7,502,259
7,130,995
125,566
7,256,561
b) By Type and Location
Bermuda
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
The Bahamas
Customers
United Kingdom
Customers
Banks
Total Customers
Total Banks
Total
2012
Payable
on demand
Payable on a
fixed date
Total
Payable
on demand
2011
Payable on a
fixed date
Total
2,473,454
88,169
1,468,025
10,643
1,073,711
1,281
890,886
249
3,364,340
88,418
2,237,849
110,127
1,021,747
-
3,259,596
110,127
394,159
26,077
1,862,184
36,720
1,319,357
5,692
296,255
-
1,369,966
1,281
1,018,084
2,834
423,436
6,074
316,172
388
1,742,793
11,766
1,334,256
3,222
65,587
4,413
70,000
55,350
3,968
59,318
352,349
47
5,433,126
100,140
5,533,266
356,954
-
1,942,667
26,326
1,968,993
709,303
47
7,375,793
126,466
7,502,259
361,385
-
4,992,025
118,653
5,110,678
373,647
451
2,138,970
6,913
2,145,883
735,032
451
7,130,995
125,566
7,256,561
Butterfield Annual Report 2012 81
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 financial position of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefits, which is
unfunded. The benefit obligations and plan assets are measured as at 31 December 2012 and 2011:
For the year ended
2012
2011
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
Foreign exchange translation adjustment
Closing projected benefit obligation
Change in plan assets
Opening fair value of plan assets
Actual return on plan assets
Employer contribution
Employee contributions
Benefits paid
Foreign exchange translation adjustment
Closing fair value of plan assets
Post-retirement
Pension plans medical benefit plan
-
163,106
Post-retirement
Pension plans medical benefit plan
-
146,897
152,472
1,687
215
7,061
(7,754)
-
-
10,696
3,306
167,683
145,323
9,040
13,439
215
(7,754)
3,438
163,701
91,880
944
-
4,205
(2,951)
-
-
3,048
-
97,126
-
-
2,951
-
(2,951)
-
-
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)
-
-
For the year ended
2012
2011
Post-retirement
Pension plans medical benefit plan
Post-retirement
Pension plans medical benefit plan
Amounts recognised in the Balance Sheet consist of:
Prepaid benefit cost included in other assets
Accrued benefit cost included
in employee future benefits liability
(Deficit) surplus of plan assets over projected
benefit obligation at measurement date
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)
2,026
(6,009)
(3,983)
(49,261)
-
(49,261)
-
5,861
-
(97,126)
(97,126)
(13,010)
(91,880)
(7,149)
(91,880)
(27,169)
28,347
(40,460)
-
(26,195)
35,066
1,178
(40,460)
8,871
Effective 31 December 2011, the Bermuda Defined Benefit pension 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 Bermuda Defined Benefit pension liability of $1.8 million
as at 31 July 2011.
Effective January 2012, all the participants of the Bermuda Defined Benefit pension plan are inactive and in accordance with US GAAP, the net
actuarial loss of the Bermuda Defined Benefit pension plan is amortised over the estimated average remaining life expectancy of the inactive
participants of 22.8 years. Prior to all Bermuda participants being inactive, the net actuarial loss of the Bermuda Defined Benefit pension plan was
amortised to net income over the estimated average remaining service period for active members of 4.5 years.
82
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
2012
2011
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
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)
1,687
7,061
(8,145)
-
1,366
1,969
5,593
7,562
(9,864)
-
-
1,366
(8,498)
944
4,205
-
(6,719)
2,074
504
-
504
(3,048)
-
(6,719)
2,074
(7,693)
2,638
7,355
(9,173)
-
4,027
4,847
5,496
10,343
(15,082)
-
-
4,027
740
4,428
-
(6,158)
935
(55)
-
(55)
(11,349)
3,704
(6,158)
935
(11,055)
(12,868)
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 $1.5 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 $2.4 million
for the net actuarial loss and a credit of $6.7 million for the past service credit.
For the year ended
Pension plans
2012
Post-retirement
medical benefit plan
Pension plans
2011
Post-retirement
medical benefit plan
Actuarial assumptions used to
determine annual benefit expense
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average expected long-term
rate of return on plan assets
Weighted average annual medical cost increase rate
(1) For 2012 excludes the inactive Bermuda Defined Benefit pension plan.
5.60%
N/A
4.65%
3.95% (1)
4.60%
N/A
N/A
7.5% to 4.5% in 2027
5.30%
3.75%
6.35%
N/A
5.50%
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
4.20%
1.80%
N/A
4.40%
N/A
7.5% to 4.5% in 2027
4.65%
1.70%
N/A
4.60%
N/A
7.5% to 4.5% in 2027
For 2012, 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 $1.1 million increase (2011: $1.0 million) and a $0.9 million decrease (2011: $0.8 million) respectively, and on the benefit obligation a
$19.1 million increase (2011: $17.2 million) and a $15.3 million decrease (2011: $13.8 million) respectively.
To develop the expected long-term rate of return on the plan assets assumption for each plan, the Bank considered the historical returns and the
future expectations for returns for each asset class, as well as the target asset allocations of the funds. The weighted average discount rate used
to determine benefit obligations at the end of the year is derived from interest rates on high quality corporate bonds with maturities that match
the expected benefit payments. The expected weighted average annual medical cost increase rate remained unchanged commencing at 7.5% and
reducing to 4.5% by 2027.
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.
Butterfield Annual Report 2012 83
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
2012
2011
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
48%
50%
2%
100%
51%
47%
2%
100%
45%
50%
5%
100%
40%
47%
13%
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:
2012
Fair value determination
2011
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
9,389
57,491
12,232
81,112
3,477
163,701
Level 3
-
-
-
-
-
-
Total
fair value
9,389
57,491
12,232
81,112
3,477
163,701
Level 1
-
-
-
-
-
-
Level 2
5,890
51,295
10,143
74,089
3,521
144,938
Total
fair value
5,890
51,295
10,143
74,474
3,521
145,323
Level 3
-
-
-
385
-
385
At 31 December 2012, 32.9% (2011: 26.3%) 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 2012, 0.2% and 1.4% (2011: 0.2% 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.
Estimated 2012 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical benefit
plans are as follows:
2012
Estimated Bank contributions for 2013
Estimated benefit payments by year:
2013
2014
2015
2016
2017
2018 - 2021
Pension Plans
7,816
6,000
6,200
6,500
6,700
6,800
35,800
Post-retirement
medical benefit plan
3,033
3,033
3,270
3,554
3,790
4,033
24,220
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were
$137.8 million and $131.9 million as at 31 December 2012 (2011: $127.5 million and $114.5 million).
NOTE 13: CREDIT-RELATED ARRANGEMENTS AND COMMITMENTS
Commitments
The Bank was committed to expenditures under contract for sourcing and leases of $75.4 million and $24.7 million respectively as at 31 December 2012
(2011: $112.5 million and $30.2 million respectively). Rental expense for premises leased on a long-term basis for the year ended 31 December 2012
amounted to $4.7 million (2011: $4.6 million).
84
The following table summarises the Bank’s commitments for sourcing, long-term leases and other agreements:
2012
2013
2014
2015
2016
2017
2018 & thereafter
Total commitments
Sourcing
20,883
19,514
19,252
15,769
-
-
75,418
Leases
5,143
5,029
4,447
3,617
2,974
3,555
24,765
Other agreements
4,097
3
1
-
-
-
4,101
Total
30,123
24,546
23,700
19,386
2,974
3,555
104,284
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
280,089
11,207
291,296
2012
Collateral
277,259
8,694
285,953
Net
2,830
2,513
5,343
Gross
320,968
13,147
334,115
2011
Collateral
303,769
9,876
313,645
Net
17,199
3,271
20,470
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income.
The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards
at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of
the allowance for possible loan losses.
The following table presents the unfunded legally binding commitments to extend credit with contractual amounts representing credit risk as follows:
Commitments to extend credit
Commitments to extend credit with terms modified by troubled debt restructuring
Documentary and commercial letters of credit
Total
2012
356,122
-
1,258
357,380
2011
483,020
779
4,520
488,319
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 2012, $137.0 million (2011: $137.1 million) of standby letters of credit were issued under this facility.
On 31 December 2010, the Bank entered a credit line facility of up to $150.0 million with the same custodian. The custodian had the right of set-off
against the scaled market value of the Bank’s investment portfolio. There were no draws on this facility during the year ended 31 December 2011. The
facility expired on 31 December 2011.
Guarantees
As part of the BFG disposal negotiations, the Bank 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 2012.
Butterfield Annual Report 2012 85
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 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
2012
88,263
100,594
188,857
(2,578)
4,412
190,691
(9,078)
7,452
2011
89,446
96,401
185,847
(2,498)
4,692
188,041
(11,656)
7,567
NOTE 15: SEGMENTED INFORMATION
At 31 December 2012, for Management reporting purposes, the operations of the Bank are grouped into the following six business segments based upon
the geographic location of the Bank’s operations: Bermuda, 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 Cayman segment provides a comprehensive range of community and commercial banking services to private and corporate customers through three
locations and through Internet banking, ATMs and debit cards. Wealth management and fiduciary services are also provided.
The Guernsey segment provides a broad range of services to private clients and financial institutions including private banking and treasury services,
Internet banking, administered bank services, wealth management and fiduciary services.
The Switzerland segment provides fiduciary services.
The Bahamas segment provides institutional, corporate and private clients with a range of wealth management & fiduciary services.
The United Kingdom segment provides a broad range of services including private banking and treasury services, Internet banking and wealth
management and fiduciary services to high net worth individuals and privately owned businesses.
The Barbados segment was sold on 27 August 2012 as disclosed in Note 3: Discontinued operations.
Total Assets by Segment
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total assets from continuing operations
Total assets from discontinued operations
Less: inter-segment eliminations
Total
86
2012
4,733,057
2,116,520
1,522,429
1,521
82,712
925,389
9,381,628
-
9,381,628
(439,598)
8,942,030
2011
4,574,921
1,974,338
1,479,901
1,118
77,565
976,451
9,084,294
307,044
9,391,338
(566,988)
8,824,350
For the year ended 2012 Net interest income
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (Less): inter-segment
eliminations / transactions
Total from continuing
operations
Inter-
Customer segment
1,316
1,220
(54)
-
395
(2,877)
-
128,817
43,413
21,618
1
135
17,074
211,058
-
211,058
-
-
For the year ended 2011 Net interest income
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (Less): inter-segment
eliminations / transactions
Total from continuing
operations
Customer
131,671
36,568
18,396
1
1,041
14,572
202,249
-
202,249
Inter-
segment
881
757
(17)
-
264
(1,885)
-
-
-
Provision
for
credit
losses
(6,372)
(1,291)
(980)
-
-
(5,547)
(14,190)
Revenue
before
Non-
interest
gains
income and losses
189,320
65,559
74,282
30,940
40,589
20,005
1,443
1,442
5,291
4,761
16,827
8,177
327,752
130,884
Total
Net income
(loss)
before
gains
expense and losses
25,088
164,232
19,453
54,829
30,810
9,779
(1,021)
2,464
(288)
5,579
(7,738)
24,565
45,273
282,479
Gains
and
losses
(12,974)
4,497
(31)
-
(2,018)
(16,895)
(27,421)
Net
income
(loss)
12,114
23,950
9,748
(1,021)
(2,306)
(24,633)
17,852
-
(2,341)
(2,341)
(2,341)
-
109
109
(14,190)
128,543
325,411
280,138
45,273
(27,312)
17,961
Provision
for
credit
losses
(1,202)
(3,974)
(636)
-
(633)
(6,724)
(13,169)
Non-
interest
income
67,080
30,651
21,665
662
5,114
10,928
136,100
Revenue
before
gains
and losses
198,430
64,002
39,408
663
5,786
16,891
325,180
Net income
(loss)
before
gains
and losses
21,705
9,015
9,163
(1,412)
(2)
(3,362)
35,107
Total
expense
176,725
54,987
30,245
2,075
5,788
20,253
290,073
Gains
and
losses
4,753
1,956
242
-
3
45
6,999
Net
income
(loss)
26,458
10,971
9,405
(1,412)
1
(3,317)
42,106
-
(3,751)
(3,751)
(3,751)
-
(2,761)
(2,761)
(13,169)
132,349
321,429
286,322
35,107
4,238
39,345
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.
Butterfield Annual Report 2012 87
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. 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.
Risk management derivatives comprise:
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 year ended 31 December 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 are being amortised to net income over the remaining life of each individual
loan using the effective interest method.
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.
88
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
8,529
8,529
343,684
343,684
352,213
-
-
113
113
113
(89)
(89)
(89)
(89)
(10,895)
(10,895)
(10,782)
(10,782)
(10,984)
(10,871)
Derivative Instrument
2012
Risk management derivatives
Fair-value hedges
Fixed-rate loans
Subtotal fair-value hedges
Derivatives not formally designated as hedging instruments
Currency swaps
Interest rate swaps
Subtotal not designated as hedges
Subtotal risk management derivatives
Client services derivatives
Subtotal client services derivatives
Derivative Instrument
2011
Risk management derivatives
Fair-value hedges
Fixed-rate loans
Investments
Subtotal fair-value hedges
Derivatives not formally designated as hedging instruments
Currency swaps
Foreign currency options
Interest rate swaps
Interest rate swaps
Subtotal not designated as hedges
Subtotal risk management derivatives
Client services derivatives
Subtotal client services derivatives
Spot and forward
foreign exchange
2,444,357
2,444,357
14,312
14,312
(13,972)
(13,972)
340
340
Total derivative instruments
2,796,570
14,425
(24,956)
(10,531)
Notional
amounts
Positive
fair value
Negative
fair value
Net
fair value
11,436
18,613
30,049
346,453
65,335
411,788
441,837
-
18
18
1,031
3,160
4,191
4,209
(227)
-
(227)
(105)
(651)
(756)
(983)
(227)
18
(209)
926
2,509
3,435
3,226
451
-
451
Spot and forward
foreign exchange
Interest rate caps
5,775,477
37,225
5,812,702
44,207
89
44,296
(43,756)
(89)
(43,845)
Total derivative instruments
6,254,539
48,505
(44,828)
3,677
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
2012
-
1,823
(852)
971
2011
(906)
699
1,092
885
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 reviews the price of each security monthly, comparing market values to expectations and to the prior month’s price. Management’s
expectations are based upon knowledge of prevailing market conditions and developments relating to specific issuers and/or asset classes held in
the investment portfolio. Where there are unusual or significant price movements, or where a certain asset class has performed out-of-line with
expectations, the matter is reviewed by the Group Asset and Liability Committee.
Butterfield Annual Report 2012 89
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.
Items that are recognised at fair value on a recurring basis
2012
Fair value
2011
Fair value
Financial assets
Trading
Debt securities issued by non-US governments
Mutual funds
Total Trading
Available for sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities guaranteed by
non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Mortgage-backed securities - Commercial
Pass-through note
Equity securities
Total available for sale
Level 1
Level 2
Level 3
-
5,337
5,337
5,231
51,217
56,448
-
561,360
- 1,178,786
90,042
-
32,026
-
421,085
-
124,937
-
130,478
-
-
-
-
53
- 2,538,767
-
-
-
-
-
-
-
-
11,164
-
30,646
-
41,810
Total
carrying
amount /
Fair value
Level 1
Level 2
5,231
56,554
61,785
-
5,368
5,368
5,971
51,252
57,223
561,360
1,178,786
90,042
32,026
421,085
136,101
130,478
30,646
53
2,580,577
-
-
-
356,493
790,804
88,658
121,648
-
405,249
-
133,182
-
-
-
-
-
-
70
- 1,896,104
Total
carrying
amount /
Level 3 Fair value
-
-
-
-
-
-
5,971
56,620
62,591
356,493
790,804
88,658
-
-
11,164
-
26,991
-
121,648
405,249
144,346
-
26,991
70
38,155 1,934,259
Other assets - Derivatives
Other assets - Closed ended real estate fund
-
-
14,425
-
-
4,397
14,425
4,397
-
-
48,505
-
-
6,199
48,505
6,199
Financial liabilities
Other liabilities – Derivatives
-
(24,956)
-
(24,956)
-
(44,828)
-
(44,828)
Transfers of securities
2012
2011
Transfers out of Level 1
Transfers in to Level 2
Trading
investments
-
-
Available-for-
sale investments
-
-
Trading
investments
(50,035)
50,035
Available-for-
sale investments
-
-
The transfer out of Level 1 and into Level 2 represents transfers of a mutual fund classified at measurement date based on the level of trading.
The following table presents quantitative information about recurring fair value measurements of assets classified with Level 3 of the fair value
hierarchy as of 31 December 2012:
Financial Instrument Type
Asset-backed securities - Student loans
Pass-through note
Closed ended real estate fund
Valuation Technique
Unadjusted third party priced
Unadjusted third party priced
Net asset value of fund
Fair Value
11,164
30,646
4,397
The valuation techniques used for the Level 3 assets as presented in the above table, are described as follows:
90
Unadjusted third party priced
Prices obtained from third party pricing vendors or brokers that are used to record the fair value of the asset of which the related valuation technique and
significant unobservable inputs are not provided.
(cid:115)(cid:0) Asset-backed securities (“ABS”) – The ABS is a Federal Family Education Loan Program guaranteed student loan security and is valued using a
non-binding broker quote. The fair value provided by the broker is based on the last trading price of similar securities but as the security is trading
illiquidly, a Level 2 classification is not supported.
(cid:115)(cid:0) Pass-through note (“PTN”) – The PTN consists of a pool of floating rate income securities (typically US sub-prime collateralised mortgage
obligations and mortgage-backed securities). The third-party investment manager of the PTN determines the fair value of each underlying security
within the PTN. The investment manager uses a variety of valuation techniques consistent with those disclosed in Note 2. Despite relying on the
fair values provided by the investment manager, Management is still responsible for the final fair valuation used.
Significant increases (decreases) in any of the above inputs in isolation could result in a significantly different fair value measurement. Generally a
change in assumption used for the probability of defaults is accompanied by a directionally similar change in the assumption used for the loss severity.
Net Asset value of fund
The per-share dollar amount of the fund is calculated by dividing the total value of all the assets in its portfolio, less any liabilities, by the number of fund
shares outstanding.
Level 3 reconciliation
2012
2011
Carrying amount at beginning of year
Purchases
Proceeds from sale / Capital distributions
Accretion recognised in net income
Realised and unrealised gains (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
38,155
-
(4,992)
1,701
6,946
-
-
41,810
Closed
ended
property
fund
6,199
-
(1,154)
-
33
-
(681)
4,397
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
Items that are recognised at fair value on a non-recurring basis
2012
Fair value
2011
Fair Value
Other real estate owned
Level 1
-
Level 2
34,360
Level 3
-
Total
carrying
amount /
Fair value
34,360
Level 1
-
Level 2
27,354
Total
carrying
amount /
Level 3 Fair value
27,354
-
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 devaluation below cost.
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
Carrying
amount
1,651,547
76,213
239,342
3,955,960
1,651,547
76,213
244,793
3,946,081
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Subordinated capital
5,433,126
1,942,667
126,466
260,000
5,433,126
1,944,531
126,466
254,127
2012
2011
Fair Appreciation /
(depreciation)
value
Carrying
amount
Fair Appreciation /
(depreciation)
value
-
-
5,451
(9,879)
-
(1,864)
-
5,873
1,902,726
20,280
64,789
4,069,419
1,902,726
20,280
64,588
4,060,193
4,992,025
2,138,970
125,666
267,755
4,992,025
2,142,748
125,666
225,019
-
-
(201)
(9,226)
-
(3,778)
-
42,736
All of the held-to-maturity securities held by the Bank as at 31 December 2012 and 2011 are classified as Level 2 of the fair value hierarchy.
Butterfield Annual Report 2012 91
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 subject to prepayment penalties. Investments are shown based on remaining
contractual maturities. The remaining contractual principal maturities for mortgage-backed securities (primarily US Government agencies) do not
consider prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations
before the underlying mortgages mature.
2012
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
Securities sold under agreement to repurchase
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
1,435
64
673
3,490
-
-
5,662
-
4,614
1,576
109
-
90
6,389
8
(719)
(719)
-
8
314
180
-
-
502
-
-
204
-
-
100
304
-
198
(521)
-
4
43
41
-
-
88
-
-
108
-
-
-
108
(8)
(28)
(549)
-
-
559
100
-
-
659
-
-
81
-
-
45
126
-
533
(16)
-
-
1,236
94
-
-
1,330
-
-
-
-
-
25
25
-
1,305
1,289
217
-
57
51
243
133
701
857
919
-
-
214
-
1,990
-
(1,289)
-
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
1,709
12
451
3,508
-
-
5,680
-
4,205
1,667
-
98
5,970
2
(288)
(288)
-
5
207
117
-
-
329
-
-
265
-
-
265
8
72
(216)
-
3
123
36
-
-
162
-
-
119
-
-
119
(2)
41
(175)
-
-
440
310
-
-
750
-
-
95
-
145
240
(8)
502
327
-
-
784
51
-
-
835
-
-
-
-
25
25
-
810
1,137
194
-
57
47
272
498
1,068
830
905
-
470
-
2,205
-
(1,137)
-
Total
1,652
76
2,882
3,956
243
133
8,942
857
5,533
1,969
109
214
260
8,942
-
-
-
Total
1,903
20
2,062
4,069
272
498
8,824
830
5,110
2,146
470
268
8,824
-
-
-
92
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 paid a fixed coupon of 9.29%
until February 2012 when it became redeemable in whole at the option of the Bank and 10.29% thereafter until February 2017. During February 2012,
the Bank exercised its option to redeem the United Kingdom note outstanding at face value.
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 $60 million in Series B notes due 2020. The issuance was by way of private placement with US institutional
investors. The notes are listed on the BSX in the specialist debt securities category. The notes issued under Series A paid a fixed coupon of 4.81% until
2 July 2010 after which the coupon rate became floating and the principal became redeemable in whole at the Bank’s option. At 31 December 2012,
the Bank has not redeemed any of the notes issued under Series A and effective 2 July 2010 the coupon rate became floating at 3 months US$ 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.
No interest was capitalised during 2012 (2011: $2.8 million).
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2012. The
interest payments are calculated until contractual maturity using the current LIBOR rates.
Interest payments until
contractual maturity
Interest rate
until date
Earliest date
redeemable maturity date redeemable
Contractual
Interest rate from
earliest date
Principal Within 1 to 5 After
redeemable to contractual
maturity outstanding 1 year years 5 years
27 May 2013
2 July 2010
2 July 2015
27 May 2013
27 May 2018
27 May 2018
2 July 2015
2 July 2020
27 May 2018
27 May 2023
5.15% 3 months US$ LIBOR + 2.000%
3 months US$ LIBOR + 1.095%
4.81%
3 months US$ LIBOR + 1.695%
5.11%
3 months US$ LIBOR + 4.185%
7.59%
3 months US$ LIBOR + 4.929%
8.44%
1,757 4,338
47,000
90,000
1,261 2,204
45,000 2,300 6,629
3,211
53,000
9,527
2,110 8,440
25,000
537
-
2,477
1,180
7,602
260,000 10,639 31,138 11,796
Subordinated capital
Bermuda
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
2008 issuance - Series A
2008 issuance - Series B
Total
NOTE 20: EARNINGS PER SHARE
Earnings per Share have 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.
Butterfield Annual Report 2012 93
Basic Earnings per Share (1)
Basic earnings per Share from continuing operations
Basic earnings per Share from discontinued operations
Net income for the year
Less: Preference dividends declared and guarantee fee
Net income from continuing operations attributable for Common Shareholders
Net income from discontinued operations
Net income attributable for Common Shareholders
Weighted average number of participating Shares
Weighted average number of Common Shares held as Treasury stock
Adjusted weighted average number of Common Shares
Diluted Earnings per Share (1)
Diluted earnings per Share from continuing operations
Diluted earnings per Share from discontinued operations
Net income from continuing operations attributable for Common Shareholders
Net income from discontinued operations
Net income attributable for Common Shareholders
Adjusted weighted average number of Common Shares
Weighted average number of dilutive Share-based awards
Adjusted weighted average number of diluted Common Shares
2012
0.01
-
0.01
17,961
(18,000)
(39)
7,620
7,581
556,933
(2,515)
554,418
0.01
-
0.01
(39)
7,620
7,581
554,418
1,939
556,357
2011
0.03
0.03
-
39,345
(21,270)
18,075
1,127
19,202
556,933
(2,283)
554,650
0.03
0.03
-
18,075
1,127
19,202
554,650
965
555,615
(1) Due to rounding, earnings per Share on continuing and discontinued operations may not sum to earnings per Share amount on net.
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 2012, weighted-average options to purchase 33.3 million (2011: 34.5 million) Shares of Common stock (see Note 21), were outstanding. Only
options where the option’s expense that will be recognised in the future and its exercise price was lower than the average market price of the Bank‘s
Common stock were considered dilutive and, therefore, included in the computation of diluted earnings per Share. The dilution effect of such options is a
net increase of 89,835 of the weighted-average number of Common Shares outstanding on a fully diluted basis. The awards’ yet unrecognised expense is
considered to be the proceeds the employees would need to pay to purchase accelerated vesting of the awards.
During 2012 the weighted-average number of outstanding awards of unvested Common Shares (see Note 21) was 7.2 million (2011: 3.8 million). 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 2012 and 2011 because the exercise price was
greater than the average market price of the Bank‘s Common stock.
NOTE 21: SHARE-BASED PAYMENTS
As at 31 December 2012, the Bank has three Share-based compensation plans, which are described below.
Stock Option Plans
1997 Stock Option Plan
Prior to the capital raise on 2 March 2010, the Bank granted stock options to employees and Directors of the Bank that entitle the holder to purchase one
Common Share at a subscription price equal to the market price on the effective date of the grant. Generally, the options granted vest 25 percent at the
end of each year for four years, however as a result of capital raise, the options granted under the Bank’s 1997 Stock Option Plan to employees became
fully vested and options awarded to certain executives were surrendered.
2010 Stock Option Plan
In conjunction with the capital raise, the Board of Directors approved the 2010 Stock Option Plan. Under the Plan, five percent of the Company’s fully
diluted Common Shares, equal to approximately 29.5 million Shares, are available for grant to certain Officers. During May 2012, the Board of Directors
approved an increase to the options allowed to be granted under the 2010 Stock Option Plan to 50 million Shares.
94
Under the 2010 Stock Option 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. Two types of vesting conditions upon which the options will be awarded comprise the Plan, i.e.,:
Time Vesting Condition
50% of each option award is granted in the form of Time Vested Options and vests 25% on each of the second, third, fourth and fifth anniversaries 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 MOIC tiers. In the event of a Valuation Event and the MOIC reaching 200% of the original $1.21 per Share
invested capital, all options would vest.
The Bank determined the performance stock options granted have an aggregate fair value of $9.6 million. If the probability of a Valuation Event becomes
more likely than not, some or all of the $9.6 million unrecognised expense relating to the performance vesting options will be recognised as an expense.
The table below presents the weighted average fair value of stock options granted:
Weighted average fair value of stock options granted in the year ended 31 December 2012
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
$0.42
$0.41
$0.62
Performance Options
$0.44
$0.43
$0.66
The weighted average fair value of stock options granted in the year ended 31 December 2012 was calculated using the Black-Scholes-Merton
option-pricing model for the Time Vested Options and a lattice-based binomial option-pricing model for the Performance Options using the following
weighted average assumptions:
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years)
Time Vested Options
0% for 2010-2013
1.0% for 2014
2.0% for 2015 and later years
0.94% to 1.44%
36% to 38%
6.75 years
Performance Options
0% for 2010-2013
1.0% for 2014
2.0% for 2015 and later years
0% to 2.09%
36% to 38%
8 to 10 years
The projected dividend yield is based on the Bank’s best estimate at grant date. The projected volatilities are based on the historical trading prices of the
Bank’s Common Shares. The risk-free interest rate for periods within the expected life of the option is based on the US Treasuries yield curve in effect at
the time of grant. As the time vested options granted are “plain vanilla” options, the Bank uses one-half of the time between the average vesting date
and the full option term to estimate the expected option life; separate groups of employees that have similar historical exercise behaviour are considered
separately for valuation purposes.
The table below presents the number of Shares transferable upon exercise of the options outstanding at 31 December:
Number of Shares transferable
upon exercise (thousands)
1997 Stock
Option Plan
5,269
-
-
(543)
-
(149)
4,577
4,577
2010 Stock
Option Plan
28,363
3,100
(5)
(2,062)
(646)
-
28,750
3,598
Total
33,632
3,100
(5)
(2,605)
(646)
(149)
33,327
8,175
Weighted
average
exercise
price($)
3.02
1.25
1.21
3.84
1.21
6.87
2.81
7.71
Outstanding at beginning of year
Granted
Exercised
Forfeited / cancelled
Resignations / Retirement / Redundancy
End of plan expiration
Outstanding at end of year
Vested and exercisable at end of year
2012
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
($ thousands)
7.14
5.47
1,245
Butterfield Annual Report 2012 95
Number of Shares transferable
upon exercise (thousands)
1997 Stock
Option Plan
6,274
-
-
(847)
-
(158)
5,269
5,269
2010 Stock
Option Plan
28,034
1,260
-
(25)
(906)
-
28,363
162
Total
34,308
1,260
-
(872)
(906)
(158)
33,632
5,431
Weighted
average
exercise
price ($)
3.26
1.24
-
11.10
1.22
5.84
2.81
12.41
2011
Weighted
average life
remaining
(years)
Aggregate
intrinsic
value
($ thousands)
7.85
4.95
-
Outstanding at beginning of year
Granted
Exercised
Forfeited / cancelled
Resignations / Retirement / Redundancy
End of plan expiration
Outstanding at end of year
Vested and exercisable at end of year
Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s 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
For the year ended
2012
2011
Number of Shares transferable upon
vesting (thousands)
1,276
1,554
(477)
(377)
1,976
Number of Shares transferable upon
vesting (thousands)
-
1,361
(11)
(74)
1,276
Executive Long-Term Incentive Share plan (“ELTIP”)
Under the Bank’s ELTIP, Shares were awarded to Bank employees and Executive Management, based on predetermined vesting conditions. Two types
of vesting conditions upon which the Shares will be awarded comprise the ELTIP Plan, i.e.,:
Time Vesting Condition – 50% of each Share award is granted in the form of Time Vested Shares, vesting equally 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 in three-year period from the effective grant date.
Outstanding at beginning of year
Granted
Vested
Forfeited / cancelled
Outstanding at end of year
For the year ended
2012
2011
Number of Shares transferable upon
vesting (thousands)
2,515
4,056
(928)
(412)
5,231
Number of Shares transferable upon
vesting (thousands)
-
2,560
(10)
(35)
2,515
The Board approved the 2011 Employee Deferred Incentive Plan and the 2012 Executive Long-Term Incentive Share Plan on 28 February 2012.
96
The following table presents the Share-based compensation cost that has been charged against net income and the value of Share-based settlements:
Stock Option
Plans
2012
EDIP
and ELTIP
For the year ended
Stock Option
Plans
Total
Share-based compensation plans – continuing operations
Awards granted in years 2010, 2011 and 2012
Share-based compensation plans – discontinued operations
Awards granted in years 2010, 2011 and 2012
Total Share-based compensation
Share-based settlement plans
Directors’ Shares and retainers settlement plans
Total Share-based payments
1,398
-
1,398
The following table presents the unrecognised expense attributable to each plan:
Unrecognised expense
2010, 2011 and 2012 Stock Option Plan
Time Vesting Options
Performance Vesting Options
2011 and 2012 EDIP
2011 and 2012 ELTIP
Time Vesting Shares
Performance Vesting Shares
3,723
5,121
63
3,786
63
5,184
293
5,477
1,719
(16)
1,703
2012
3,665
9,608
1,557
1,914
2,358
19,102
2011
EDIP
and ELTIP
Total
1,845
3,564
31
1,876
For the year ended
15
3,579
344
3,923
2011
5,731
9,169
915
952
961
17,728
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.
NOTE 22: SHARE BUY-BACK PLANS
The Bank introduced a Share Buy-Back Programme on 1 May 2012 as a means to improve Shareholder liquidity and facilitate growth in Share value.
Under this Programme, up to six million Common Shares and 2,000 Preference Shares may be repurchased. On 10 December 2012, the Board of the Bank
approved increasing the number of Common Shares available for repurchase up to 10 million and the number of Preference Shares up to 8,000.
During 2012 the Bank repurchased 7.3 million Common Shares to be held as Treasury Shares at a cost of $9 million and 4,422 Preference Shares, which
were subsequently cancelled, at a cost of $5.4 million.
From time to time the Bank’s associates, insiders and insiders’ associates as defined by the BSX regulations may sell Shares which may result in such
Shares being repurchased pursuant to the programme, but under BSX regulations such trades must not be pre-arranged and all repurchases must be
made in the open market. Prices paid by the Bank must not, according to BSX regulations, be higher than the last independent trade for a “round lot”,
defined as 100 Shares or more.
The BSX must be advised monthly of Shares repurchased and cancelled by the Bank and Shares purchased by the Bank’s Stock Option Trust.
NOTE 23: CAPITAL STRUCTURE
Authorised capital
The Bank’s total authorised Share capital as of 31 December 2012 and 2011 consisted of (i) 26 billion Common 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.
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.
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. During 2012, the Bank repurchased and cancelled 4,422 Preference Shares for a net
cost of $5.4 million. As at 31 December 2012, 195,578 Preference Shares were outstanding.
Butterfield Annual Report 2012 97
The Preference Share principal and dividend payments are guaranteed by the Government of Bermuda. 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.
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. 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. During 2010, the warrants issued to the Government were adjusted in accordance with the terms of the
guarantee and as a result now holds 4,150,774 warrants with an exercise price of $3.61.
On 11 May 2010 the Bank’s Rights offering was over subscribed with the maximum allowable number of rights of 107,438,016 exercised and
subsequently converted on the ratio of 0.07692 Contingent Value Convertible Preference Shares (“CVCP”) for each right unit exercised amounting to
8,264,157 CVCP issued. The CVCP have specific rights and conditions attached which is explained in detail in the Prospectus of The Rights Offering.
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 2012 and 2011. As at 31 December 2012, the Bank’s regulatory capital stood at $1,034 million (2011: $1,041 million) with risk weighted
assets of $4,275 million (2011: $4,426 million). Consolidated Tier 1 total and Total Capital ratios being 18.5% and 24.2% respectively (2011: 17.7% and
23.5% respectively).
NOTE 24: DISPOSAL OF AFFILIATES
On 8 February 2011, the Bank entered into an agreement with an investor group (comprised of BV Investor Partners, Glen Henderson and Tim Calveley,
“BV Investor Group”) to dispose of its 36% equity interest on a diluted basis in Butterfield Fulcrum Group Limited (“BFG”). The sale was completed in
the second quarter of 2011 and resulted in a gain on sale of $3.2 million.
On 5 April 2012, the Bank sold its 27.76% interest in Island Heritage Holdings Ltd.; a Cayman-based insurance company, to BF&M Limited. The sale was
completed in the second quarter of 2012 with gross proceeds on the sale of $18.5 million, resulting in a gain of $4.2 million.
NOTE 25: 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 2012 and 2011.
The Bank has equitable mortgages in two hospitality-related companies that have been placed under Receivership, and as the Bank is an equity holder at
risk, the hospitality-related companies were considered to be variable interest entities. As the Bank did not have the legal power to direct the activities of
the companies that most significantly impact the company’s economic performance it was considered not to be the primary beneficiary.
NOTE 26: 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 (prior to disposal) and Switzerland are subject to the tax
laws of those jurisdictions.
For the years ended 31 December 2012 and 2011, the Bank did not record any unrecognised tax benefits or expenses and has no uncertain tax positions
as at 31 December 2012 and 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
2012 and 2011. For the years ended 31 December 2012 and 2011, the Bank did not incur any interest or pay any penalties.
98
The components of income taxes attributable to the Bank’s subsidiaries’ operations for the years ended 31 December 2012 and 2011 were as follows:
31 December
Income taxes in Consolidated Statement of Operations
Current tax expense
Deferred tax expense (benefit)
Total tax expense (benefit)
2012
936
4,954
5,890
The reconciliation between the Bank’s effective tax rate on income from continuing operations and the statutory tax rate is as follows:
31 December
Income tax expense at Bermuda corporation tax rate of 0%
Income tax expense in international offices taxed at different rates
Change in valuation allowance
Prior year tax adjustments
Tax loss carried forward
Change in tax rate
Other — net
Income tax expense (benefit) at effective tax rate
$
-
841
4,132
900
-
-
17
5,890
31 December
Deferred income tax asset
Tax loss carried forward
Pension liability
Fixed assets
Allowance for compensated absence
Onerous leases
Other
Deferred income tax asset
Less: valuation allowance
Net deferred income tax asset
Deferred income tax liability
Other
Net deferred income tax asset
$
-
1,742
-
(303)
(1,451)
245
(539)
(306)
2012
%
-
4
17
4
-
-
-
25
2012
5,818
615
510
10
12
(225)
6,740
(5,378)
1,362
-
1,362
2011
789
(1,095)
(306)
2011
%
-
4
-
(1)
(4)
1
(1)
(1)
2011
6,452
747
14
27
11
532
7,783
(1,110)
6,673
(444)
6,229
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing
deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred in the UK bank over the three-year
period ended 31 December 2012. Such objective evidence limits the ability to consider other subjective evidence such as projections for
future growth.
On the basis of this evaluation, as of 31 December 2012, a valuation allowance of $5.4 million has been recognised to record only the portion of the
deferred tax asset that more likely than not will be realised. The amount of the deferred tax asset considered realisable, however, could be adjusted if
estimates of future taxable income during the carry forward period are reduced or increased, or if objective negative evidence in the form of cumulative
losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.
Operating loss and tax credit carry forwards
The Bank has net taxable losses carry forwards related to the Bank’s international operations of approximately $23.4 million, which have an
indefinite life.
NOTE 27: RELATED PARTY TRANSACTIONS
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 2012 amount to $225.7 million (2011: $251.9 million) resulting in an interest rate benefit to employees of $6.2 million
(2011: $6.5 million).
Butterfield Annual Report 2012 99
Interested 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 whom 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. The outstanding loan was repaid during 2012.
Charitable Trust
The Bank historically has provided a loan facility to the Charitable Trust. During December 2012 the carrying value of the loan was repaid and
subsequently the Charitable Trust was terminated.
Financing transactions
Capital transaction
Canadian Imperial Bank of Commerce (“CIBC”) and funds associated with the Carlyle Group each hold approximately 19%, of the Bank’s equity voting
power, along with the right to each designate two persons for nomination for election by the Shareholders as members 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.
Financial instruments with related parties
At 31 December 2012, the Bank held $125.3 million in cash and cash equivalents with CIBC. For the year ended 31 December 2012 the Bank held forward
exchange contracts with CIBC with a notional amount of $284.1 million (unrealised gain of $1.0 million) and foreign currency deposit swaps with CIBC
with a notional amount of $89.4 million (unrealised loss of $8.7 million). As noted in Note 16 the Bank enters into client service forward exchange
contracts to meet the foreign exchange needs of its customers.
Balance Sheet management advisory agreement
From 1 October 2010, the Bank had retained Carlyle Investment Management LLC, an affiliated company of the Carlyle Group, to provide Balance Sheet
management advisory services, including advisory services on valuation assignments, for an annual fee of $4 million for a three-year period. Effective
31 July 2012, the investment advisory business previously conducted by Carlyle Investment Management LLC was transferred to Alumina Investment
Management LLC (“Alumina”) and the Bank agreed to the transfer of its contract to Alumina. The Carlyle Group holds a 15% interest in Alumina and as
Alumina is not considered affiliated with the Carlyle Group, the related-party transaction ceased on the effective date.
NOTE 28: COMPARATIVE INFORMATION
Certain prior-year figures have been reclassified to conform to current year presentation and restated for discontinued operations.
NOTE 29: SUBSEQUENT EVENTS
The Bank has performed an evaluation of subsequent events through to 26 February 2013. Subsequent to year end, the Board declared a special dividend
of $0.04 per Common and Contingent Value Convertible Preference Share to be paid on 22 March 2013 to Shareholders of record on 5 March 2013.
100
In
numbers
addition
brief
touch
essence
scope
balance
Shareholder Information
Butterfield Annual Report 2012 101
Shareholder Information
DIRECTORS’ AND EXECUTIVE OFFICERS’ SHARE INTERESTS
AND DIRECTORS’ SERVICE CONTRACTS
Pursuant to Regulation 6.8(3) of Section IIA of the Bermuda Stock
Exchange Listing regulations, the ownership of Common Shares and
Contingent Value Convertible Preference Shares of the Bank by all
Directors and Executive Officers* at 31 December 2012 was 2,617,914
Shares. In addition, this group owns 120 Non-Cumulative Perpetual
Limited Voting Preference Shares. As of 31 December 2012,
Executive Officers also owned 15,600,000 stock options pursuant
to the 2010 Stock Option Plan to vest in accordance with timelines
established by the Plan. 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 2012.
There are no service contracts with Directors, except for that of
Brendan McDonagh, Chairman & Chief Executive Officer, whose
contract expires on 5 April 2015.
Save for the foregoing contract, and those arrangements described
in Note 27 to the Bank’s 31 December 2012 Consolidated Financial
Statements, there are no other contracts of significance subsisting
during or at the end of the financial year ended 31 December 2012 in
which a Director of the Bank is or was materially interested, either
directly or indirectly.
*As listed on pages 6 and 7 of this Annual Report.
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 KY1-1105
Cayman Islands
Tel: (345) 945 6060
Fax: (345) 945 6061
www.csx.com.ky
SHARE DEALING SERVICE
Butterfield Securities (Bermuda) Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
102
102
SHARE PRICE
Published daily in The Royal Gazette in Bermuda and available on
Bloomberg Financial Markets (symbol: NTB BH).
Also available on the BSX website.
REGISTRAR AND TRANSFER AGENT
Butterfield Fulcrum Group (Bermuda) Limited
26 Burnaby Street
Hamilton, HM 11
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
E-mail: bntbshareholders@bfgl.com
MEDIA RELATIONS / PUBLICATION REQUESTS
Vice President, Communications, Brand & Public Affairs
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
The Bank introduced a Share Buy-Back Programme on 1 May 2012.
Under this Programme, the Board of Directors authorised the
repurchase of up to six million Common Shares and 2,000 Preference
Shares. On 10 December 2012, the Board approved an increase in
the number of Common Shares available for buy-back to 10 million,
and the number of Preference Shares to 8,000.
During 2012, the Bank bought back 7.3 million Common Shares to be
held as Treasury Shares at a cost of $9 million, and 4,422 Preference
Shares, which were subsequently cancelled, at a cost of $5.4 million.
From time to time, the Bank’s associates, insiders and insider’s
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.
In addition, and separate to the above, the Bank’s Stock Option
Trust may from time to time purchase Shares of the Bank through
the BSX to satisfy the Bank’s obligations with respect to the Stock
Option Plan. No Shares were purchased by the Bank’s Stock Option
Trust in the 12 months to 31 December 2012.
The Bank will continue to advise the BSX monthly of Shares
repurchased and cancelled by the Bank and Shares purchased by
the Bank’s Stock Option Trust.
LARGE SHAREHOLDERS
As at 31 December 2012, the following were registered
holders of 5% or more of the issued Share capital:*
Carlyle Global Financial Services Partners LP, 19.34%
Canadian Imperial Bank of Commerce, 18.81%
Wellcome Trust Investments, 6.94%
Ithan Creek Master Investor (Cayman) LP, 6.77%
Rosebowl Western, 6.77%
*Includes Common and Contingent Value Convertible Preference Shares and
excludes Treasury Shares held.
PRINCIPAL OFFICES & SUBSIDIARIES
This list does not include all companies in the Group.
The Bank of N.T. Butterfield & Son Limited
Group Parent Company, Community Banking, Corporate 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
Trust & Fiduciary Services
Managing Director: Martin Pollock
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3980
Fax: (441) 292 1258
E-mail: info@butterfieldgroup.com
THE BAHAMAS
Butterfield Trust (Bahamas) Limited
Trust & Fiduciary Services
Managing Director: Julien Martel
3rd 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
CAYMAN ISLANDS
Butterfield Bank (Cayman) Limited
Community Banking, Corporate Banking,
Private Banking, Asset Management
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 Trust (Cayman) Limited
Trust & Fiduciary Services
Managing Director: Brian Balleine
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: trust.cayman@butterfieldgroup.com
Butterfield Annual Report 2012 103
GUERNSEY
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
Trust & 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
SWITZERLAND
Butterfield Trust (Switzerland) Limited
Trust & Fiduciary 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,
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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