The Bank of N.T. Butterfield & Son Limited
The Bank of N.T. Butterfield & Son Limited
Annual Report 2013
Annual Report 2013
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CORE EARNINGS
CORE EARNINGS
76.6
million
39.5%
NET INCOME
78.2
million
205.5%
CORE CASH RETURN ON
CORE CASH RETURN ON
TANGIBLE COMMON EQUITY
TANGIBLE COMMON EQUITY
10.3%
370 bps
Find out more at
www.butterfieldgroup.com
About Butterfield
Butterfield is a diversified financial services group
operating in six international financial centres.
We are a leading community bank in Bermuda and
the Cayman Islands, and we provide wealth
management services in all of the jurisdictions in
which we operate. We have total assets of $8.9 billion.
We employ 1,133 people around the world. The
parent company, The Bank of N.T. Butterfield & Son
Limited, is a publicly traded company with a primary
share listing on the Bermuda Stock Exchange.
Capital Strength
Total Capital Ratio
Tier 1 Capital Ratio
2009
2010
2011
2012
2013
10.1%
7.2%
21.6%
15.7%
23.5%
17.7%
24.2%
18.5%
23.7%
19.6%
CORE CASH
EARNINGS PER SHARE
Awards
0.11
37.5%
CORE EFFICIENCY RATIO
71.6%
680 bps improvement
Best Private Bank
Bermuda
THE BAHAMAS | BERMUDA | CAYMAN ISLANDS | GUERNSEY | SWITZERLAND | UNITED KINGDOM
1
Chairman & Chief Executive Officer’s
Report to the Shareholders
In 2013, Butterfield had core earnings of $76.6 million, or $0.11 per
Legis Group’s fiduciary client base is an excellent complement to our
share, an increase of 39.5% over 2012. The improvement in earnings
existing book of business. The acquisition—Butterfield’s first since
drove a similar increase in the core cash return on tangible common
2007—allows us to add scale to our international trust business and
equity, which rose to 10.3% from 6.6% last year.
depth to our international trust team without having to expand our
geographic footprint.
Net income in 2013 was $78.2 million, up from $25.6 million in 2012;
last year’s net income having been affected by write-downs of goodwill
Our efforts to enhance and expand our services and deepen client
and downward market valuations of real estate held and used by the
relationships have been recognised with several prestigious awards.
Bank in its operations.
Butterfield was named Bank of the Year – 2013 in our two largest
markets, Bermuda and the Cayman Islands, by industry publication,
The increase in core earnings against a backdrop of ongoing economic
The Banker. Citywealth named Butterfield Trust Company of the Year in
difficulties in key markets was a pleasing result and a validation of the
both Switzerland and the Caribbean, and Private Bank of the Year in
effectiveness of our strategy.
the Caribbean in its 2014 International Financial Centre Awards. Most
recently, Euromoney named Butterfield Best Private Bank in Bermuda.
BUSINESS AND PRODUCT DEVELOPMENT
The Bank remains strategically focused on balancing capital
preservation with appropriate expenditures on initiatives that will
ORGANISATIONAL DESIGN
In 2013, we completed the conversion of our Guernsey and UK
strengthen our core businesses over the long term. To that end,
banking systems to an upgraded, shared platform, complementing an
the Bank introduced new products in 2013 and continued to invest
earlier Bermuda/Cayman conversion. The installation of common core
in technology solutions and organisational realignments that will
banking systems has facilitated the restructuring of operations and the
strengthen our client relationships and further improve our
streamlining of back-office processing.
operating efficiency.
A key objective of restructuring is the creation of business and
Within our community banking markets—Bermuda and the Cayman
support teams with multi-jurisdictional responsibilities. In 2013,
Islands—our priority was enhancing electronic banking services
we built upon our past success in centralising Human Resources,
for clients. We introduced mobile banking applications for leading
Information Technology, Finance, Asset Management and Trust by
smart phones and tablets in both markets simultaneously, leveraging
bringing Operations and Marketing personnel in different jurisdictions
our recent investment in a banking system that is shared by both
together under common reporting lines. The benefits of this kind of
jurisdictions. In Bermuda, we were the first to market with Chip and
restructuring include not only improved operating efficiency and the
PIN credit card technology that will offer consumers and merchants
ability to introduce new products and services to multiple markets
added protection against fraud. In Cayman, we enhanced our suite
more quickly, but also the creation of new leadership opportunities for
of credit cards with the introduction of new cards featuring American
Airlines® AAdvantage® travel rewards.
Butterfield employees around the globe.
Within our Corporate Banking division, our innovative, secured
CAPITAL MANAGEMENT
At year end, Butterfield’s capital position remained very strong, with
deposit product, which is designed to address the liquidity, security
a Tier 1 Capital ratio of 19.6% and a Total Capital ratio of 23.7%, well in
and return preferences of high value, institutional clients, continued to
excess of regulatory requirements.
attract new deposits. At year end, secured deposit balances totalled
$409 million, an increase of 45% over 2012.
During the year, we continued the practice of returning excess capital
that was not deployed for business development initiatives directly
International trust services have been a cornerstone of Butterfield’s
to our shareholders in the form of dividends and through share
wealth management offering for decades, and judiciously expanding
our presence in that business to build non-interest income is a key
buy-back programmes. The Bank declared a special dividend of $0.04
per common and contingent value convertible preference share in
part of the Bank’s overall growth strategy. In January 2014, in keeping
February 2013 and thereafter, interim dividends of $0.01 per common
with that goal, we announced that we had reached an agreement to
and contingent value convertible preference share in the second, third
acquire the trust and fiduciary services business of Legis Group, an
and fourth quarters, totalling $38.5 million. We also repurchased
independent, Guernsey-based financial services company.
4 million common shares and 12,000 preference shares during the year.
2
In addition, in May, Butterfield redeemed $53 million of Series A
Directors and bade farewell to Sheila Lines and Pauline Richards, who
2018 Subordinated Notes, reducing annual interest expenses
retired from the Board in May after five and seven years of service,
by $4 million.
respectively. We thank Sheila and Pauline for their contributions and
dedication to Butterfield during their tenure on the Board.
Core non-interest expenses were reduced by a total of $18.1 million
(6.7%) in 2013 as a result of careful cost management that saw
I look forward to working with my fellow Directors and colleagues as
reductions in technology, communications, professional and outside
we seek to continue to build sustainable value in Butterfield Group by
services expenses, in addition to reductions in costs associated with
delivering leading products and services to our clients, and supporting
the streamlining of operations. The Bank’s core efficiency ratio stood
the communities in which we operate.
at 71.6% at year end, which represents an improvement of 680 basis
points over the 2012 ratio.
BOARD MATTERS
The composition of the Board today is appropriately reflective of
Butterfield’s geography, ownership and business interests. During
2013, we welcomed Wendall Brown and Caroline Foulger as new
Brendan McDonagh
Chairman & Chief Executive Officer
Butterfield Annual Report 2013 3
Community Involvement
At Butterfield, we recognise that our role within the communities in which we operate extends beyond providing financial services. Through our
employees, who volunteer their time and skills to important causes, and through sponsorships and donations, Butterfield supports initiatives and
organisations that are working to enhance prosperity, foster social progress and enrich the quality of the lives of the people in our communities.
In 2013, Butterfield was pleased to provide support to the following organisations and events:
HEALTH & HUMAN SERVICES
AIDS FOUNDATION OF
THE BAHAMAS supporting
the fight against HIV/AIDS:
donation (The Bahamas)
THE BACK UP TRUST
supporting individuals
who suffer from spinal cord
injuries: donation (UK)
BAHAMAS CRISIS CENTRE
providing services to victims
of physical, sexual and
emotional abuse: donation
(The Bahamas)
BERMUDA HOSPITALS
CHARITABLE TRUST Why It
Matters campaign supporting
the construction of the Acute
Care Wing at King Edward VII
Memorial Hospital: $500,000
donation (Bermuda)
BERMUDA BLOOD DONOR
CENTRE: employee
volunteers (blood donations)
(Bermuda)
BILNEY LANE CHILDREN’S
HOME, an orphanage and
foster home for children aged
five to 18: donation (The
Bahamas)
BREAST CANCER
FOUNDATION raising funds
to support the fight against
breast cancer: donation
(Cayman Islands)
CAYMAN HOSPICE CARE
providing specialised nursing
services and bereavement
programmes: donation
(Cayman Islands)
CAYMAN HEART FUND
developing programmes to
reduce and help prevent
cardiovascular disease:
donation (Cayman Islands)
CHILDREN’S EMERGENCY
HOSTEL providing temporary
accommodation, food,
clothing, medical care
and other necessities to
abandoned and neglected
children: donation (The
Bahamas)
ARTS & CULTURAL EVENTS
THE FAMILY CENTRE
strengthening children,
families and systems to
create a healthier community:
Butterfield Hope Award
recipient – March 2013
(Bermuda)
GIVE A CHILD A RIDE
cycling programme raising
funds for the advancement
and education of children
residing in local orphanages:
sponsorship of employee
participation (The Bahamas)
HANDS ON LONDON
distributing donated coats to
100 charitable organisations:
employee volunteers (UK)
LIONS CLUB OF CAYMAN
BRAC supporting a wellness
programme promoting
healthy diets, exercise
and screenings: donation
(Cayman Islands)
MACMILLAN CANCER
SUPPORT providing practical
medical and financial support
for better cancer care:
donation (UK)
THE SUNSHINE LEAGUE
enhancing the lives of foster
children: Butterfield Hope
Award recipient – June 2013
(Bermuda)
THE PRINCESS
MARGARET HOSPITAL:
donation (The Bahamas)
QUEEN ELIZABETH’S
FOUNDATION FOR
DISABLED PEOPLE working
with people with physical
and learning disabilities:
sponsorship and employee
event participation in
fundraising triathlon (UK)
THE RANFURLY HOME FOR
CHILDREN: sponsorship of
employee participation in
Fun, Run, Walk event (The
Bahamas)
THE SALVATION ARMY:
donations (Bermuda and The
Bahamas)
TEEN SERVICES/TEEN
HAVEN assisting in the
empowerment of youth,
by promoting healthy
development through
ongoing education,
counselling and support:
Butterfield Hope Award
recipient – May 2013
(Bermuda)
WOMEN’S RESOURCE
CENTRE providing assistance
to victims of domestic
violence and sexual abuse:
Butterfield Hope Award
recipient – September 2013
(Bermuda)
BERMUDA NATIONAL
GALLERY: Butterfield Hope
Award recipient – October
2013 (Bermuda)
GUERNSEY EISTEDDFOD
annual music, drama, dance
and art festival: sponsorship
(Guernsey)
GUERNSEY YOUTH
THEATRE 2014 production,
Footloose - The Musical:
sponsorship (Guernsey)
GUERNSEY SINFONIETTA
fifth anniversary concert:
sponsorship (Guernsey)
JUNKANOO national cultural
festival of The Bahamas:
sponsorship (The Bahamas)
BERMUDA NATIONAL
TRUST Christmas Walkabout
in St. George’s: sponsorship
(Bermuda)
CAYMAN ARTS FESTIVAL
bringing varied and diverse
performances to the island to
help entertain and educate:
sponsorship (Cayman Islands)
4
MISS JACKIE’S
SCHOOL OF DANCE
FortyTude performance
celebrating 40 years of dance,
with proceeds to the Cayman
Islands Diabetes Foundation:
sponsorship (Cayman Islands)
NATIONAL CHILDREN’S
FESTIVAL OF THE ARTS:
Butterfield Young Musician
of the Year Award presented
to Hannah Fowler (Cayman
Islands)
NATIONAL GALLERY OF
THE CAYMAN ISLANDS Art
of Assemblage Exhibition and
Workshop 2013: sponsorship
(Cayman Islands)
YOUNG MUSICIANS’
ANNUAL CONCERT AT
ST. JAMES: sponsorship
(Guernsey)
EDUCATION & INSTRUCTION
3 TOUCH VOLLEYBALL
CLUB teaching sports skills
to youth aged eight to 16:
sponsorship (Guernsey)
ALPHA PHI ALPHA
FRATERNITY providing
mentoring to local students:
Butterfield Hope Award
recipient – December 2013
(Bermuda)
BAHAMAS CHAMBER OF
COMMERCE education
initiatives: sponsorship (The
Bahamas)
BERMUDA SCHOOL
OF MUSIC providing
music education to island
residents: Butterfield Hope
Award recipient – July 2013
(Bermuda)
BERMUDA SEA CADETS:
summer intern/employee
volunteership and Butterfield
Hope Award recipient –
January 2013 (Bermuda)
HARMONY LEARNING
CENTRE assisting learning
disabled adults in Cayman
Brac: donation (Cayman
Islands)
MUSIC SERVICE WIDER
OPPORTUNITIES
SCHEME providing musical
instruments for local
school children: donation
(Guernsey)
NATIONAL DANCE
FOUNDATION providing
world-class training
opportunities to dancers,
teachers and choreographers:
Butterfield Hope Award
recipient – April 2013
(Bermuda)
BUTTERFIELD
UNDERGRADUATE
SCHOLARSHIP awarded to
Justino Rodriques (Cayman
Islands)
C.A.R.E. LEARNING CENTRE
assisting primary, middle and
senior secondary students
in upgrading their academic
skills: Butterfield Hope Award
Recipient – February 2013
(Bermuda)
CAYMAN NATIONAL
CULTURAL FOUNDATION
Young at Arts programme
providing after-school
instruction in the performing
arts: sponsorship
(Cayman Islands)
OKTOBERFEST STUDENT
MUSIC OUTREACH
PROGRAMME providing
music workshops for local
school children: sponsorship
(Bermuda)
RALEIGH BERMUDA
organising overseas
expeditions for young
people: Butterfield Hope
Award recipient – November
2013 (Bermuda)
THE READING CLINIC
assisting students with
learning difficulties
(particularly dyslexia)
involving the basic language
skills of reading, writing and
spelling: Butterfield Hope
Award recipient – August 2013
(Bermuda)
SAILING TRUST acquisition
of a new Laser boat to be
used in children’s sailing
instruction: sponsorship
(Guernsey)
SIR HARRY D.
BUTTERFIELD
SCHOLARSHIP awarded to
Akeila Richardson (Bermuda)
SIR DUDLEY A. SPURLING
POSTGRADUATE
SCHOLARSHIP awarded to
Kevin Minors (Bermuda)
SPORTING EVENTS
BUTTERFIELD
BERMUDA GRAND
PRIX 2013 cycling
event: title sponsorship
and employee volunteers
(Bermuda)
CLASSIC CHANNEL
REGATTA yacht race:
sponsorship (Guernsey)
LE GRANDE MARE
JUNIOR GOLF competition:
sponsorship (Guernsey)
NATWEST ISLAND
GAMES BERMUDA 2013:
Local event sponsorship
and employee volunteers
(Bermuda)
ST. PATRICK’S DAY 5K
IRISH JOG fundraiser for
the Sunrise Adult Training
Centre: title sponsorship
(Cayman Islands)
Athlete bursaries for six
students (Guernsey)
Athletes’ uniforms
(Cayman Islands)
Butterfiel Annual Report 2013 5
Butterfield Annual Report 2013 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
1,2,4
ALASTAIR BARBOUR*
Retired Partner, KPMG
2,5
WENDALL BROWN*
Chairman & President, BDC 2000
1,2,4
VICTOR DODIG
Senior Executive Vice-President and
Group Head, Wealth Management, CIBC
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
2,4
CAROLINE FOULGER*
Retired Partner, PwC
3,5
OLIVIER SARKOZY
Managing Director and Head of The Carlyle Group’s
Global Financial Services Group
1,3,5
WOLFGANG SCHOELLKOPF*
Managing Partner,
PMW Capital Management
1,3,5
RICHARD VENN
Senior Executive Vice-President,
Advisor to the CEO Office, CIBC
3,4
JOHN WRIGHT*
Retired Bank Chief Executive
PRINCIPAL BOARD COMMITTEES
1. EXECUTIVE COMMITTEE OF THE
BOARD OF DIRECTORS
Supports the Board in fulfilling its overall
governance responsibilities.
3. RISK POLICY &
COMPLIANCE COMMITTEE
Focuses on credit, market and
operational risk.
2. AUDIT COMMITTEE
Oversees Butterfield’s financial reports,
internal financial controls, internal audit
processes and compliance.
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 & Ethics 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
JOHN MARAGLIANO
Executive Vice President
Chief Financial Officer
ROBERT MOORE
Executive Vice President
Head of Group Trust
SHAUN MORRIS
Executive Vice President
General Counsel, Group Chief Legal Officer
MICHAEL NEFF
Executive Vice President
Head of Group Asset Management
OWEN MARTIN
Senior Vice President
Group Internal Audit
Butterfield Annual Report 2013 7
88
Table of Contents
CONTENTS
MANAGEMENT’S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
• Performance Measurement
• About Butterfield
• Business Strategy
• 2013 Overview
• Market Environment
• 2014 Outlook
• Financial Summary
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2013
CONSOLIDATED BALANCE SHEET AND DISCUSSION
OFF BALANCE SHEET ARRANGEMENTS
RISK MANAGEMENT
JURISDICTION AND BUSINESS LINE OVERVIEWS
• Bermuda
• Cayman Islands
• Guernsey
• United Kingdom
• Group Asset Management
• Group Trust
FINANCIAL STATEMENTS
• Management’s Financial Reporting Responsibility
• Independent Auditor’s Report to the Board of Directors and Shareholders
• Consolidated Balance Sheet
• Consolidated Statements of Operations
• Consolidated Statements of Comprehensive Income
• Consolidated Statements of Changes in Shareholders’ Equity
• Consolidated Statements of Cash Flows
• Notes to the Consolidated Financial Statements
SHAREHOLDER INFORMATION
10
10
11
11
12
13
14
15
16
24
33
35
39
40
42
44
46
48
49
50
51
52
54
55
56
57
58
59
105
Butterfield Annual Report 2013 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
Tangible Total Equity/Tangible Asset Ratio (“TE/TA”)
TE/TA is used to determine how much loss the Bank can take before
of our business. Some measures are calculated in accordance with
capital is impacted. The TE/TA ratio is calculated as (Common Equity
GAAP, while other measures do not have a standardised meaning
+ Preferred Equity - Intangible Assets - Goodwill) / Tangible Assets.
under GAAP. Accordingly, these measures, described below, may not
Tangible equity does not include goodwill or intangible assets.
be comparable to similar measures used by other companies. Investors
Tangible assets are the Bank’s total assets from continuing operations
may however find these non-GAAP financial measures useful in analysing
less goodwill and intangibles.
financial performance.
Return on Common Equity (“ROE”)
ROE measures profitability by revealing how much profit is generated
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
with the money invested by common shareholders. ROE is the
TCE/TA ratio is calculated as (Common Equity - Intangible Assets
amount of net income to common shareholders as a percentage of
- Goodwill) / Tangible Assets. Tangible Common Equity does not
average common equity and calculated as Net Income to Common
include the preference shareholders’ equity or goodwill and intangible
Shareholders / Average Common Equity. Net Income is for the full
assets. Tangible Assets are the Bank’s total assets from continuing
fiscal year (before dividends paid to common shareholders but after
operations less goodwill and intangibles.
dividends to preference shareholders). Common equity does not
include the preference shareholders’ equity.
Total Capital Ratio
The Total capital ratio measures the amount of the Bank’s capital in
Core Cash Return on Tangible Common Equity (“CCROTCE”)
CCROTCE measures core cash profitability as a percentage of average
relation to the amount of risk it is taking. All banks must ensure that a
reasonable proportion of their risk is covered by permanent capital.
tangible common equity. CCROTCE is the amount of core income to
Under Basel II, Pillar I, banks must maintain a minimum Total capital
common shareholders excluding amortisation of intangible assets as a
ratio of 8%. In effect, this means that 8% of the risk-weighted assets
percentage of average tangible common equity and calculated as Core
must be covered by permanent or near permanent capital. The risk
Cash Earnings to Common Shareholders / Average Tangible Common
weighting process takes into account the relative risk of various types
Equity. Core Cash Earnings to Common Shareholders is net earnings
of lending. The higher the capital adequacy ratio a bank has, the
to common shareholders for the full fiscal year (before dividends
greater the level of unexpected losses it can absorb before
paid to common shareholders but after dividends to preference
becoming insolvent.
shareholders) adjusted for one-off items not in the ordinary course of
business plus amortisation of intangible assets expensed in the year.
Average Tangible Common Equity does not include the preference
Tier 1 Capital Ratio
The Tier 1 capital ratio is the ratio of the Bank’s core equity capital,
shareholders’ equity or goodwill and intangible assets.
as measured under Basel II, to its total risk-weighted assets (“RWA”).
RWA are the total of all assets held by the Bank weighted by credit risk
10
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 1,100 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.
according to a formula determined by the Regulator. The Bank follows
the Basel Committee on Banking Supervision (“BCBS”) guidelines in
setting formulae for asset risk weights.
Efficiency Ratio
The efficiency ratio is an indicator used to assess operating efficiencies
and demonstrates how efficiently management is controlling expenses
relative to generating revenues. The efficiency ratio is calculated by
Tier 1 Common Ratio
The Tier 1 common ratio is the same as the Tier 1 capital ratio but only
taking the cash non-interest expenses as a percentage of total revenue
before gains and losses and provisions for credit losses and calculated
includes common equity in the numerator and deducts the preference
as (Non-Interest Expenses – Amortisation of Intangible Assets) /
shareholders’ equity.
Return on Assets (“ROA”)
ROA is an indicator of profitability relative to total assets and
demonstrates how efficient management is at using the assets to
generate earnings. The ROA ratio is calculated as Annual Net Income /
Average Total Assets.
Core Return on Average Assets (“CROAA”)
CROAA is an indicator used to assess the core profitability of average
(Non-Interest Income + Net Interest Income Before Provision for
Credit Losses). Cash non-interest expenses exclude income taxes and
amortisation of intangible assets.
Core Efficiency Ratio
The core efficiency ratio is an indicator used to assess core operating
efficiencies relative to generating core revenues. The core efficiency
ratio is calculated by taking the core cash non-interest expenses
as a percentage of total core revenue before gains and losses and
provisions for credit losses and calculated as (Core Non-Interest
total assets and demonstrates how efficiently management is utilising
Expenses – Amortisation of Intangible Assets) / (Core Non-Interest
its assets to generate core net income. CROAA is calculated by taking
Income + Core Net Interest Income Before Provision for Credit
the annualised core net income as a percentage of average total assets
Losses). Core cash non-interest expenses exclude income taxes and
and calculated as Core Net Income / Average Total Assets. Core net
income is the net income adjusted for one-off items not in the ordinary
amortisation of intangible assets.
course of business, annualised.
BUSINESS STRATEGY
Whilst remaining well capitalised with strong liquidity, our strategic
Net Interest Margin (“NIM”)
NIM is a performance metric that examines how successful the Bank’s
focus is on building shareholder value by expanding our share of the
community and private banking markets in jurisdictions in which we
investment decisions are compared to its cost of funding assets
have a meaningful presence and a depth of local market knowledge.
and is expressed as net interest income as a percentage of average
Our strategy also involves leveraging our multi-jurisdictional trust,
interest-earning assets. NIM is calculated as Net Interest Income
custody and asset management offerings to build our wealth
Before Provision for Credit Losses / Average Interest-Earning Assets.
management business from both cross-referrals with existing customers
Net Interest Income is the interest earned on cash and cash
equivalents, investments, loans and other interest-earning assets
and business development through referrals and relationships with
fiduciaries and advisers. We aim to build upon our relationship-
minus the interest paid for deposits, short-term borrowings and
based business approach by delivering exceptional client service
long-term debt. The Average Interest-Earning Assets are calculated
experiences, as well as a wide range of products to meet our clients’
using daily average balances of interest-earning assets.
financial services needs.
Butterfield Annual Report 2013 11
The wide range of products on offer is reflective of our strategy of
ongoing challenges of a changing investment climate, whilst minimising
pursuing opportunities in diversified businesses including community
credit risk in the investment book. Our continued management of
banking, private banking, asset management, custody, corporate
interest rate risk requires us to purchase fixed-rate investments that,
trust and personal trust services. These diverse businesses directly
whilst complying with our credit safety requirements, will experience
contribute to the high level of fee income relative to our total income.
temporary declines in market values when rates start to increase.
Despite the current economic environment reducing the volume of
Rising interest rates will improve the profitability of Butterfield, such
customer activity, our fee income remains at almost 36% of revenue
that these anticipated negative marks are part of our strategy. They
before credit provisions and gains or losses.
will not affect earnings, as they are not credit related, but they will
potentially give rise to negative impacts in equity through “other
Building on our community banking and wealth management strategies
comprehensive income” for available-for-sale (“AFS”) investments.
will also leverage our strong and loyal client base. Unlike many
To minimise the impact on our equity in such circumstances, whilst
banks, Butterfield is almost exclusively funded by our shareholders
implementing proper management of interest rate risk, we increased
and customers. Our core customer deposits have been very stable
the held-to-maturity (“HTM”) portfolio to $334 million at year end.
throughout the credit crisis. In 2013, we focused on these core deposits
and pricing discipline to significantly improve their contribution to
net interest income. This contribution reflects the strength of being a
2013 OVERVIEW
In 2013, the Bank made solid progress streamlining and coordinating
deposit-led organisation even in times of low interest rates.
operations across jurisdictions, focusing on effective expense
management, and continuing with the Share Buy-Back Programme.
To support our strategy, the Bank aligns our management structure
Core earnings improved as a result by $21.7 million to $76.6 million,
to focus on lines of business and central support services with
building on our very strong capital position with Total and Tier 1
increasingly less emphasis on independent management by
capital ratios of 23.7% and 19.6%, respectively. The Board continues to
jurisdiction. However, we remain flexible and nimble in each
monitor capital levels, maintaining a conservative capital management
jurisdiction, with business development and decision making on
philosophy such that Butterfield remains well capitalised. To further
client service-related matters based locally. In addition, we continue
enhance common shareholder returns, the Board declared a fourth
to invest heavily in new technology allowing for new and more flexible
interim dividend of $0.01 per common share and a special dividend of
products, enhanced customer service and a streamlined, more efficient
$0.01 per common share on 25 February 2014. On a going-forward basis,
operation. We expect recent investment in core banking systems in
the Board will continue to assess capital planning options and declare
our two largest markets (Bermuda and Cayman), upgrades in Guernsey
dividends as warranted, subject to regulatory approval.
and the United Kingdom, and the introduction of mobile banking in
Bermuda and Cayman will enhance our strategy by driving additional
revenue opportunities, improving internal controls, and creating new
The Bank’s balance sheet remains strong, with shareholders’
equity ending the year at $802.6 million, of which $183.6 million is
operational efficiencies.
8% preference shareholders’ equity and $619 million is common
and contingent value convertible preference shareholders’ equity
Given the large, loyal customer deposit base enjoyed in our main
(“common equity”). Total assets remained stable, growing slightly by
jurisdictions, and the relatively low volume of lending demand from
$38 million to $8.9 billion. Underlying this stability, cash and loans
our customer base, our investment strategy is more important than
grew by $320 million while investments declined by $289 million. All
is the case for most financial institutions. At 31 December 2013, we
other assets increased by $7 million. Total liabilities increased by
had $4.4 billion of cash and investments representing 50% of total
$92 million as customer deposit levels showed resilience in this low
assets. In recognition of this defining characteristic of Butterfield, we
interest rate environment growing $331 million over 2012, a reflection
maintain a conservative approach to our investments. With the help
of Butterfield’s strategic targeting of certain segments of the deposit
of our investment advisers, we continued to manage our interest rate
market. Bank deposits were down $86 million, other liabilities were
risk, which measures the degree to which our profitability is at risk
down $99 million, and shareholders’ equity declined by $54 million
due to changes in interest rates. Our focused investment strategy has
due mainly to changes in other comprehensive income.
allowed us to improve the profitability of our investments despite the
12
Key accomplishments in 2013 were as follows:
MARKET ENVIRONMENT
The global economic recovery from the recession is expected to
•
•
•
•
•
•
•
Core profitability: The Bank delivered good growth in core net
income, up $21.7 million (39.5%) to $76.6 million from $54.9 million
continue in an inconsistent manner. A few countries are showing clear
signs of growth and improvement, whilst most regions improve slowly
in 2012.
or continue to experience economic challenges. The breadth, depth,
speed, and sustainability of the world’s recovery remains a matter of
Capital: We maintained a strong capital position, with $1.0 billion
of regulatory capital, a Tier 1 capital ratio of 19.6% at
discussion and there is no clear consensus, though most economic
forecasts remain cautiously optimistic the global recovery will show
31 December 2013, and a TCE/TA ratio of 6.8%.
slow and modest improvement.
Investment strategy: NIM remained stable at 264 basis points
compared to 266 basis points in 2012. Underlying this stability,
The United States (“US”) economy experienced modest but broadly
based improvement in 2013. The Federal Reserve’s quantitative easing
earning asset yields declined by 8 basis points as the paydown
stimulus and higher levels of business investment by the corporate
of higher yielding loans more than offset new loan volumes
and commercial sector spurred an increase in gross domestic product
at lower rates and an increase in investment portfolio yields.
(“GDP”). This resulted in improved employment figures further
Liability costs were down due to the retirement of $53 million of
supporting increases in consumer confidence, consumer spending, and
subordinated capital, revised pricing strategies, and higher levels
contributed to continued stabilisation in the housing market. These
of non-interest bearing balances.
advancements, combined with the 2014 budget agreement averting
Expenses: Non-interest expenses decreased by $12.2 million
(4.4%), from $274.8 million in 2012, to $262.6 million in 2013, whilst
the fiscal cliff, provided the Federal Reserve with sufficient evidence to
begin a cautious tapering of the quantitative easing stimulus.
core expenses decreased by $18.1 million from $271.8 million to
The Eurozone remained weak in 2013 with record high unemployment
$253.7 million, an improvement of 6.7%.
and minimal GDP growth. Although signs of improvement were noted
with fourth quarter employment figures, Spain exiting its recession, and
Headcount: Across the Group, headcount on a full-time
equivalency basis, excluding students, was reduced by 98 (8.0%)
lower inflation, the broader European economy remained weak with
few signs of growth or meaningful improvement. In the UK, economic
from 1,231 as at 31 December 2012 to 1,133 at the end of 2013.
signals were slightly better, but still mixed as GDP moved marginally
Deposits: Customer deposits increased by $331 million, whilst
deposit costs decreased by 3 basis points from 33 basis points in
2012 to 30 basis points in 2013.
higher, driven by the services sector and supported by manufacturing
and property values. Unemployment however remained elevated and
mild inflation placed additional pressure on both consumer confidence
and spending.
Loan quality: As at 31 December 2013, the Bank had gross
non-accrual loans of $104.1 million representing 2.5% of total gross
The Bermuda economy remains challenged but showed progress in
some areas during 2013. Unemployment improved from 2012 and the
loans, reflecting an improvement from the $113.4 million, or 2.8%,
decline in GDP slowed. Still, the GDP growth rate remained negative
of total loans at year-end 2012. Net non-accrual loans were
and pressured banking activities in our Bermuda results. The Cayman
$82 million, equivalent to 2.0% of net loans, after specific
Islands experienced GDP growth in 2013 with strength noted in the
provisions of $22.1 million, reflecting a decreased specific
hotel, restaurant, real estate, construction, and business activity
provision coverage ratio of 21.2%, down from 23.6% at
sectors. The consumer price index also showed a modest increase, with
31 December 2012.
higher costs for household goods, clothing, and footwear.
•
Systems: Butterfield completed major banking platform
conversions in Europe and introduced electronic mobile
The mixed economic climate in our two largest operations in 2013
resulted in limited loan demand and more pressure on customers’
banking in Bermuda and Cayman in 2013.
ability to service loan payment obligations. Conversely, our private
•
Ratings: Moody’s at A3, Standard & Poor’s at BBB+; and Fitch at A-.
Butterfield Annual Report 2013 13
banking business in Europe continued to enjoy strong loan demand
With respect to interest rates, long-term rates are beginning to rise
resulting in growth in consumer lending and our high quality, low
above historic lows, but given the central banks’ intent of maintaining
loan-to-value residential mortgage portfolio to high net worth customers.
low interest rates, many financial institutions remain focused on
optimising their business models and adjusting to the current
Amidst this macroeconomic uncertainty, the Bank continues to maintain
economic conditions; Butterfield is no exception.
a highly liquid balance sheet with a low risk investment portfolio and
minimal reliance on wholesale money markets for liquidity.
Our asset and liability management strategy focuses on net interest
2014 OUTLOOK
We are cautiously optimistic that improvements noted in certain areas
income at risk in varying interest rate environments and this means
we position our balance sheet to maximise net interest income over
a three to five-year period. We match our expected investment flows
of the global economy during 2013 will continue. However, the ability
with our maturities and turnover on the liability side of the balance
of economic forecasters to accurately assess the economic future is
sheet, whilst partially neutralising the impact of changing interest rates
challenged by inconsistent trends in terms of the strength, scope, and
in any given reporting period. These investments position us so we
geography of the world’s recovery. As a result, confidence levels in
are not reliant on rising rates to achieve adequate profitability. When
these forecasts remain moderate. Despite the difficulties, there are
higher rates materialise, core profitability should be further improved.
emerging themes that show promise for 2014. Broadly, the US economy
Higher rates will also have a restraining effect on capital levels as they
showed surprising strength in 2013, particularly with respect to GDP
will reduce the market values of our longer-dated securities in our AFS
growth and employment. This strength is expected to continue.
book, partially offset by lower liabilities for future pension and health
costs for employees.
Similarly, the UK showed marked, albeit inconsistent, improvement
over 2012. The UK economy is projected to consolidate those gains
In 2014, our strategy remains relatively unchanged as we continue
with a broader recovery in 2014. In the Eurozone, the economy remains
to focus our attention on the development of our core businesses,
challenged. Despite a growing German economy, the overall Eurozone
which we expect will drive revenue growth. We expect to be able to
remains a basket of economies with inconsistent performance and
continue to improve our efficiency ratio in 2014, based on leveraging
its economic outlook remains weak. In the Eurozone, debt levels
our investments in technology, redesigning processes, and centralising
and unemployment remain stubbornly high, while confidence and
support services. In addition, we aligned our incentive plans more
expectations for a short-term improvement remain low.
closely with business development and targeted financial results.
Whilst various agencies project a decline in Bermuda’s GDP during
Subsequent to year-end, we announced our intention to expand our
2014, they also note progress in the Bermuda economy particularly
in the areas of stable and improving employment, wage levels,
trust and fiduciary services presence in Guernsey—one of our core
markets—through the acquisition of Legis Group’s trust business;
government support for improving the economy, and increases in
Butterfield’s first acquisition in seven years. Legis Group was recently
average hours worked. In the Cayman Islands, GDP is expected to
recognised as one of the leading international finance firms at the
improve from 2013 with continuing strength in hospitality, construction,
Citywealth International Financial Centre Awards and named Guernsey’s
and real estate. Additionally, unemployment is expected to remain
2013 Trust Company of the Year. This transaction, which is expected to
stable, though inflation pressures will continue.
be completed during the first quarter of 2014, will enhance our trust
client base and associated long-term revenues without the need to
expand our geographic footprint.
14
FINANCIAL SUMMARY (in $ thousands, except per share data)
As at 31 December
Cash and cash equivalents
Short-term investments
Investments in debt and equity securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Goodwill and intangible assets
Total assets from continuing operations
Assets of discontinued operations
Total assets
Total deposits
Subordinated capital
Shareholders’ equity
2013
1,730,472
54,981
2,613,643
4,088,225
240,603
19,121
8,870,815
-
8,870,815
7,637,951
207,000
2012
1,542,526
76,213
2,881,704
3,955,960
243,321
22,276
8,833,009
-
8,833,009
7,393,238
260,000
2011
1,902,726
20,280
2,061,639
4,069,419
272,472
46,100
8,517,306
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
9,346,914
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
9,313,282
281,524
9,594,806
8,451,311
283,085
Preference shareholders’ equity
183,606
195,578
200,000
200,000
200,000
Common and contingent value convertible
preference shareholders’ equity
618,955
661,596
629,725
609,289
155,460
For the year ended 31 December
Interest income
Loans
Investments
Deposits with banks
Interest expense
Net interest income before provision for credit losses
Non-interest income
Provision for credit losses
Salaries and other employee benefits
Other non-interest expenses (including income taxes)
Net income (loss) before gains and losses
Other gains (losses)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Non-core items
Core net income (loss)
Dividends and guarantee fee of preference shares
Premium paid on preference shares bought back
Core cash earnings to common shareholders
Common dividends paid
Financial Ratios
Core cash return on average assets
Core cash return on average tangible common equity
Return on common shareholders’ equity
Tier 1 capital ratio
Total capital ratio
Tangible common equity ratio
Tangible total equity / tangible assets
Net interest margin
Efficiency ratio
Core efficiency ratio
187,042
60,875
5,291
(29,399)
223,809
125,963
(14,825)
(131,064)
(132,472)
71,411
6,749
78,160
-
78,160
(1,600)
76,560
(16,990)
(2,756)
62,928
38,531
0.9%
10.3%
9.2%
19.6%
23.7%
6.8%
8.9%
2.64%
74.1%
71.6%
190,691
49,117
4,999
(33,102)
211,705
128,543
(14,190)
(137,433)
(143,352)
45,273
(27,312)
17,961
7,620
25,581
29,300
54,881
(18,000)
(967)
41,921
-
0.6%
6.6%
1.1%
18.5%
24.2%
7.3%
9.5%
2.66%
79.3%
78.4%
188,043
43,816
9,636
(39,246)
202,249
132,349
(13,169)
(145,136)
(141,186)
35,107
4,238
39,345
1,127
40,472
(2,700)
37,772
(21,270)
-
21,869
-
0.4%
3.8%
3.0%
17.7%
23.5%
6.9%
9.3%
2.42%
84.1%
83.6%
181,786
26,161
11,015
(52,937)
166,025
143,264
(40,262)
(153,246)
(143,174)
(27,393)
(180,366)
(207,759)
144
(207,615)
222,400
14,785
(18,000)
-
2,063
-
0.2%
0.6%
(44.3%)
15.7%
21.6%
5.8%
7.9%
1.91%
95.0%
88.2%
195,490
44,166
12,641
(77,589)
174,708
148,473
(102,716)
(151,346)
(135,898)
(66,779)
(147,635)
(214,414)
1,001
(213,413)
234,400
20,987
(9,450)
-
17,363
14,938
0.2%
4.0%
(47.0%)
7.2%
10.1%
0.9%
3.0%
1.90%
87.3%
86.8%
Butterfield Annual Report 2013 15
Per participating share (1) ( $ )
Net income (diluted)
Cash dividends
Net book value
Tangible net book value
Core cash earnings per share (diluted)
Number of employees (2)
Bermuda
Overseas
Total
Other data
Weighted average number of participating
shares on a fully diluted basis (3)
Risk-weighted assets
0.11
0.07
1.13
1.09
0.11
554
579
1,133
0.01
-
1.20
1.16
0.08
624
607
1,231
0.03
-
1.14
1.05
0.04
664
606
1,270
(0.47)
-
1.10
1.00
0.01
732
649
1,381
(2.34)
0.12
1.63
0.93
0.19
761
708
1,469
553,571
4,197,744
556,357
4,275,055
555,615
4,425,639
477,225
4,934,569
95,065
5,734,096
(1) Includes both common and contingent value convertible preference shareholders’ equity.
(2) On a full-time equivalency basis and excluding students.
(3) 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.
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2013
Net Income
The Bank reported net income of $78.2 million for the year ended 31 December 2013, compared to $25.6 million in 2012. Results in both years
were adversely affected by various non-core gains (losses) and expenses. After deduction of preference dividends and guarantee fees
($17.0 million) and the premium paid on preference shares bought back ($2.8 million), the net income available to common shareholders was
$58.4 million ($0.11 per share) in 2013 compared to $6.6 million ($0.01) in 2012.
The following table states reported earnings for 2013 compared to 2012:
(in $ millions)
Non-interest income
Net interest income before provision for credit losses
Total revenue before provision for credit losses and gains and losses
Provision for credit losses
Net gains (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
Premium paid on preference shares bought back
Net earnings attributable to common shareholders
Net earnings per common share
Basic
Diluted
Year ended 31 December
2013
126.0
223.8
349.8
(14.8)
6.7
341.7
(262.6)
79.1
(0.9)
78.2
-
78.2
(17.0)
(2.8)
58.4
0.11
0.11
2012
128.5
211.7
340.2
(14.2)
(27.3)
298.7
(274.8)
23.9
(5.9)
18.0
7.6
25.6
(18.0)
(1.0)
6.6
0.01
0.01
$ change
(2.5)
% change
(1.9%)
12.1
9.6
(0.6)
34.0
43.0
12.2
55.2
5.0
60.2
(7.6)
52.6
1.0
(1.8)
51.8
0.10
0.10
5.7%
2.8%
(4.2%)
124.5%
14.4%
4.4%
231.0%
84.7%
334.4%
(100.0%)
205.5%
5.6%
(180.0%)
784.8%
1000.0%
1000.0%
16
Core Earnings
The following table reconciles the Bank’s US GAAP net income for 2013 and 2012 to core earnings attributable to common shareholders:
Year ended 31 December
(in $ millions)
Net income
Non-core items:
Impairment of fixed assets
Impairment of goodwill and intangible assets
Net gain on sale of affiliate
Additional consideration from previously disposed of entities
Impairment of investment in affiliate
Realised gain on legal settlement
Early retirement programme and redundancies
Onerous leases
Deferred tax valuation allowance and tax adjustments
Net income from discontinued operations
Total one-time items
Core earnings
Preference dividend and guarantee fee
Amortisation of intangible assets
Core cash earnings to common shareholders
Core earnings per common share (1)
EPS impact of non-core items - fully diluted
EPS core earnings - fully diluted
Core cash earnings per share - fully diluted
2013
78.2
-
-
(0.4)
(0.8)
3.8
(13.1)
8.9
-
-
-
(1.6)
76.6
(17.0)
3.4
63.0
-
0.11
0.11
2012
25.6
14.5
18.6
(4.2)
-
-
-
2.2
0.8
5.0
(7.6)
29.3
54.9
(18.0)
5.0
41.9
0.05
0.07
0.08
(1) Premium paid on preference shares bought back was not adjusted as management views the transaction as non-core.
Impairment of Fixed Assets
In 2012, the Bank recognised $14.5 million of write-downs on properties deemed impaired as the carrying value was not considered recoverable.
Impairment of Goodwill and Intangible Assets
In 2012, the Bank’s annual impairment test concluded that the carrying value of goodwill and intangible assets in certain segments was considered
fully impaired due to a continuous period of losses incurred and future estimated profitability being unable to sustain current valuations.
Net Gain on Sale of Affiliate
During December 2013, the Bank sold its 30% interest in Freisenbruch-Meyer Insurance Ltd., a Bermuda-based insurance company, for $3.4 million,
resulting in a gain of $0.4 million.
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.
Additional Consideration from Previously Disposed of Entities
During 2013, the Bank received additional sale consideration for the disposal of Island Heritage of $0.4 million and expense repayments from a
previously disposed of subsidiary of $0.4 million.
Impairment of Investment in Affiliate
At 31 December 2013, the Bank recognised a $3.8 million impairment loss in one of its investments in affiliates as the fair value of the investment in
affiliate was less than the carrying amount.
Realised Gain on Legal Settlement
During the second quarter of 2013, the Bank reached a legal settlement relating to a previously disposed of investment, resulting in a one-off
receipt of $13.1 million.
Butterfield Annual Report 2013 17
Early Retirement Programme and Redundancies
As part of the Bank’s cost reduction programme, incentive packages for redundancies and optional early retirement were offered to eligible
employees. In 2013 and 2012, the cost of this programme, recorded in salaries and other employee benefits, amounted to $8.9 million and
$2.2 million, respectively.
Onerous Leases
The Bank leases certain properties in the normal course of business and certain of the leased premises have been sublet. 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.
Deferred Tax Valuation Allowance and Tax Adjustments
As of 31 December 2012, our UK bank incurred cumulative losses over a three-year period, triggering a $4.1 million write-down of a related
deferred tax asset. Additional UK tax expense adjustments relating to 2011 of $0.9 million were also included in 2012.
Net Income from Discontinued Operations
During 2012, Butterfield sold its Barbados operations for a net gain of $7.2 million. As a result, Barbados is reported as discontinued operations.
Year-to-date net income includes $7.6 million of discontinued operations in 2012.
Revenue
Total revenue before provisions for credit losses and gains and losses for 2013 was $349.8 million, up $9.6 million (2.8%) from 2012. Net interest
income before provisions for credit losses increased from $211.7 million in 2012 to $223.8 million in 2013, an improvement of $12.1 million (5.7%).
This was partially offset by a decrease in non-interest income which was down $2.5 million (1.9%). The increase in net interest income was driven by
higher investment portfolio balances of $199.4 million, an increase in related investment yields of 29 basis points, and a decrease in liability costs
of 8 basis points. These improvements more than offset a decline in loan yields of 9 basis points. The overall NIM remained stable at 264 basis
points compared to 266 basis points in 2012.
DISTRIBUTION OF 2013 TOTAL REVENUES BEFORE
PROVISIONS FOR CREDIT LOSSES AND GAINS AND LOSSES
DISTRIBUTION OF 2013 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 5%
The Bahamas 2%
Guernsey 11%
United Kingdom 7%
Bermuda 56%
Net Interest Income 64%
Banking 9%
Cayman 24%
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, though the trend of non-interest income
generally follows the trend in client asset levels.
Total non-interest income declined from $128.5 million in 2012 to $126.0 million in 2013 and represents 36% of total revenues before provisions for
credit losses and gains and losses, down 2% from 38% in 2012.
18
The following table presents the components of non-interest income for the years ended 31 December 2013 and 2012:
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
2013
18,067
32,490
29,311
30,410
10,232
5,453
125,963
2012
22,323
33,713
26,524
29,122
10,646
6,215
$ change
(4,256)
(1,223)
2,787
1,288
(414)
(762)
128,543
(2,580)
% change
(19.1%)
(3.6%)
10.5%
4.4%
(3.9%)
(12.3%)
(2.0%)
Asset management
Asset management revenues are generally based on the market value of assets managed and the volume of transactions and fees for other
services rendered. We provide asset management services from our offices in Bermuda, the Cayman Islands, Guernsey and the United Kingdom.
Revenues from asset management were $18.1 million in 2013, compared to $22.3 million in 2012. The decrease is due to the full-year impact of the
termination of the Bentley Reid management agreement in the second quarter of 2012, lower fees earned on the Butterfield Money Market Fund
(“BMMF”) owing to lower short-term interest rates, and a decline in balances as clients sought better-yielding alternatives for short-term investments.
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
2013
2,304
1,892
4,196
2012
2,869
1,871
4,740
$ change
(565)
21
(544)
Banking
During 2013, 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, debit cards, and mobile banking in Bermuda and the Cayman Islands, whilst private banking services are offered in
Bermuda, the Cayman Islands, Guernsey and the United Kingdom. Banking revenues reflect loan, transaction, processing, and other fees earned
in these jurisdictions. Banking fee revenues decreased by 3.6% in 2013 to $32.5 million, compared to $33.7 million in 2012, due primarily to loan
prepayment penalty fees 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 84% of the Group’s foreign exchange revenue (2012: 83%). The Bank does not maintain a
proprietary trading book. Foreign exchange income is generated from client-driven transactions and totalled $29.3 million in 2013, compared with
$26.5 million in 2012. The $2.8 million year-on-year increase reflects increasing client activity and related volumes in both retail and institutional
foreign exchange flows.
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. Trust revenues represent 24% of the Bank’s non-interest income, up slightly from 23% in 2012. In 2013, trust revenues totalled $30.4 million,
an increase of $1.3 million or 4.4% over 2012. Revenue growth was supported by structured, proactive business development activities. Improved
new business results were seen in our Switzerland and Bermuda businesses and in institutional trust services, whilst increasing pipelines were also
noted in our Bahamas, Guernsey and Cayman businesses.
Trust assets under administration were $53.3 billion at year-end 2013 compared to $47.1 billion the prior year, an increase of $6.2 billion or 13.1%.
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 2013, revenues were $10.2 million compared to $10.6 million in 2012, down 3.9%, in
Butterfield Annual Report 2013 19
part due to lower transaction volumes and expired mandates. Total custody and other administration assets under administration (which includes
the administered banking services operations provided by our Guernsey business) were $43.7 billion as at 31 December 2013, up from $39.9 billion
the prior year.
Other Non-Interest Income
The components of other non-interest income for the years ended 31 December 2013 and 2012 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
2013
1,068
3,194
1,191
5,453
2012
920
3,062
2,233
6,215
In 2013, we recorded equity pickup income of $1.1 million, an increase of $0.2 million from the prior year. Rental income increased by $0.1 million
to $3.2 million in 2013 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, directors’ fee income, and other miscellaneous income.
Net Interest Income Before Provision for Credit 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.
During the second quarter of 2013, the Bank enhanced its net interest margin calculation by changing its balance sheet averages from monthly to
daily averages and analysing in detail the interest earning balances. Prior periods have been restated for this change in methodology.
The following table presents the components of net interest income for the years ended 31 December 2013 and 2012:
(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
1,794.7
2,655.3
4,014.6
8,464.6
359.3
8,823.9
6,559.5
63.8
228.7
6,852.0
990.9
264.8
8,107.7
716.2
8,823.9
1,612.6
20
2013
Interest
5.3
60.9
187.0
253.2
-
253.2
(20.0)
(0.2)
(9.2)
(29.4)
0.30%
2.29%
4.66%
2.99%
-
2.87%
(0.30%)
(0.31%)
(4.02%)
(0.43%)
(29.4)
(0.36%)
Average
rate
Average
balance
2012
Interest
Average
rate
5.0
49.1
190.7
244.8
-
244.8
0.33%
2.00%
4.75%
3.07%
-
2.92%
(20.5)
(0.33%)
-
(12.6)
(33.1)
-
(4.82%)
(0.51%)
(33.1)
(0.43%)
1,494.4
2,455.9
4,012.1
7,962.4
417.1
8,379.5
6,205.7
1.3
261.3
6,468.3
975.0
212.1
7,655.4
724.1
8,379.5
1,494.1
223.8
2.64%
211.7
2.66%
Net interest income before provisions for credit losses of $223.8 million increased $12.1 million or 5.7% over 2012. Net interest income is largely
generated by the Bank’s Bermuda and Cayman jurisdictions, which account for 83% of total net interest income. Interest income increased by
$8.4 million and was driven by improved investment portfolio performance where an increase in average balances of $199.4 million, combined
with a yield improvement of 29 basis points partially due to a duration extension to approximately five years, generated an increase in investment
income of $11.8 million. Partially offsetting the investment portfolio improvement was a decrease in loan-related interest income, as higher
yielding loans paid down and were replaced by new volumes at lower yields. This reduced overall total loan yields by 9 basis points and drove a
$3.7 million reduction in loan income.
Interest-bearing liability costs decreased by 8 basis points, driving an improvement in interest expense of $3.7 million, largely from the paydown
of $53 million in subordinated capital in May 2013, which was at a rate of 7.59%.
Average free balances for 2013 were $1.6 billion (2012: $1.5 billion) including non-interest-bearing current accounts of $990.9 million
(2012: $975.0 million), shareholders’ equity of $716.2 million (2012: $724.1 million), and net other assets and other liabilities of $95 million
(2012: $205 million). See the Risk Management section for more information on how interest rate risk is managed.
Provision for Credit Losses
The Bank’s net provision for credit losses in 2013 was $14.8 million compared to $14.2 million in 2012. Incremental provisions of $20.6 million were
required principally for the specific reserves pertaining to commercial and residential mortgages, partially offset by recoveries of $5.8 million.
Other Gains (Losses)
The following table represents the components of other gains (losses) for the years ended 31 December 2013 and 2012:
(in $ thousands)
Net trading gains
Net realised (losses) gains on available-for-sale investments
Net realised/unrealised losses on other real estate owned
Impairment of fixed assets
Impairment of intangible assets
Impairment of goodwill
Gain on sale of subsidiary and affiliates
Impairment of investment in affiliate
Net other gains
Other gains (losses)
2013
315
(61)
(5,000)
-
-
-
1,227
(3,800)
14,068
6,749
2012
268
2,028
(2,053)
(14,527)
(9,143)
(9,505)
4,231
-
1,389
(27,312)
Net Trading Gains
A $0.3 million gain was recorded with respect to trading securities in 2013 compared to a gain of $0.3 million in 2012, which relates primarily to the
fair value adjustments of the Bank’s seed capital in shares of the Butterfield Select Funds and the BNY Mellon Butterfield Income Advantage Fund.
Net Realised (Losses) Gains on Available-For-Sale Investments
Net realised losses of $0.1 million (2012: gain of $2.0 million) were recorded on securities sold in the normal course of business as part of our asset
and liability management strategy.
Net Realised / Unrealised Losses on Other Real Estate Owned
Valuation adjustments related to real estate held for sale were $5.0 million compared to $2.1 million in 2012, the increase being largely attributable
to write-downs in the hospitality portfolio.
Impairment of Fixed Assets
The Bank conducts an annual property impairment assessment that determined there were no impairment write-downs required in 2013. The
year-to-year improvement is driven by 2012 write-downs relating to the impairment of foreclosed properties of $6.5 million and a reclassification of
certain Bermuda properties that were being used in the Bank’s operations but are now held for sale. 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
The 2013 annual impairment test of goodwill and intangible assets concluded the carrying value of goodwill and intangible assets was appropriate.
Therefore, no impairments were recorded in 2013 and the favourable improvement of $18.6 million from 2012 is entirely attributable to 2012
impairments for goodwill and intangible assets of $9.5 million and $9.1 million, respectively.
Butterfield Annual Report 2013 21
Gain on Sale of Subsidiary and Affiliates
During December 2013, the Bank sold its 30% interest in Freisenbruch-Meyer Insurance Ltd., a Bermuda-based insurance company, for $3.4 million,
resulting in a gain of $0.4 million. 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.
During 2013, the Bank received additional sale consideration for the disposal of Island Heritage of $0.4 million and expense repayments from a
previously disposed of subsidiary of $0.4 million.
Impairment of Investment in Affiliates
At 31 December 2013, the Bank recognised a $3.8 million impairment loss in one of its investments in affiliates as the decline in the fair value of the
investment was considered other than temporary.
Net Other Gains
Net other gains (losses) were $14.1 million in 2013 compared to net other gains of $1.4 million in 2012. The primary driver of this change is the legal
settlement reached relating to a previously disposed of investment, resulting in a one-off receipt of $13.1 million in 2013.
Non-Interest Expenses
Expense management continued to be a key focus of Butterfield in 2013 as the Bank continues to adapt to the persistently low interest rate
environment. Total non-interest expenses in 2013 were $262.6 million compared to $274.8 million recorded in 2012. These figures include non-core
expenses in 2013 and 2012 of $8.9 million and $3.0 million, respectively. After adjusting for these non-core items, 2013 core expenses were down
$18.1 million or 6.7%. The improvement was driven mainly by salary and compensation-related decreases and other cost saving initiatives.
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 57% of total non-interest expenses.
DISTRIBUTION OF 2013 NON-INTEREST EXPENSES
DISTRIBUTION OF 2013 EXPENSES BY LOCATION
Other Expenses 7%
Marketing 1%
The Bahamas 2%
Amortisation of Intangible Assets 1%
United Kingdom 7%
Switzerland 1%
Non-Income Taxes 5%
Professional and
Outside Services 6%
Property 9%
Guernsey 12
%
Cayman 21
%
Salaries and Other
Employee Benefits 50%
Technology and
Communications 21%
Bermuda 57
%
The following table presents the components of non-interest expenses for the years ended 31 December 2013 and 2012:
(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
Non-core items
Core non-interest expense
22
2013
131,064
54,223
24,309
15,012
13,682
3,358
3,484
17,513
262,645
(8,900)
253,745
2012
137,433
57,715
26,129
15,409
13,158
5,040
3,963
16,048
274,895
(3,000)
271,895
$ change % change
(4.6%)
(6,369)
(3,492)
(1,820)
(397)
524
(1,682)
(479)
1,465
(12,250)
(5,900)
(18,150)
(6.1%)
(7.0%)
(2.6%)
4.0%
(33.4%)
(12.1%)
9.1%
(4.5%)
196.7%
(6.7%)
Salaries and Other Employee Benefits
Total salaries and benefits costs were $131.1 million in 2013, down $6.4 million compared to 2012. 2013 included $8.5 million of early retirement,
redundancy, and other staff-related non-core costs, compared to $2.2 million of non-core personnel costs in 2012. Excluding these non-core costs,
core salaries and benefits costs were down $12.7 million, or 9.4%, driven by staff reductions on a full-time equivalency basis of 98, year-on-year.
Staff count on a full-time equivalency basis at year-end 2013 was 1,133 (excluding students), compared to 1,231 a year ago.
Technology and Communications
Technology and communications costs were $54.2 million in 2013, down $3.5 million from the $57.7 million recorded in 2012 as a result of expense
control measures and IT infrastructure rationalisation initiatives.
Property
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, decreased by
$1.8 million to $24.3 million in 2013 from $26.1 million in 2012. The decrease was due primarily to lower depreciation resulting from the 2012
write-down of certain properties and improved management of property maintenance costs.
Professional and Outside Services
Professional and outside services primarily include consulting, legal, audit, and other professional services. In 2013, the expense was $15.0 million,
down $0.4 million compared to $15.4 million incurred in 2012 from reduced consulting expenditures and other cost control initiatives.
Non-Income Taxes
These taxes reflect taxes levied in the jurisdictions in which we operate, including employee-related payroll taxes, customs duties, and business
licences. In 2013, the expense was $13.7 million, up $0.5 million due to increases in bank licensing fees and payroll taxes associated with
redundancy costs.
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. The estimated lives of these acquired intangible assets are re-evaluated annually and tested for impairment.
The amortisation expense associated with intangible assets was $3.4 million in 2013 compared to $5.0 million in 2012. The lower amortisation levels
were driven by write-downs in 2012.
Marketing
Marketing expenses reflect costs incurred in advertising and promoting our products and services. They totalled $3.5 million in 2013, down
$0.5 million from 2012. Marketing expenses represented 1.0% of total net revenues before gains and losses and provisions for credit losses in 2013
compared to 1.2% in 2012.
Other Non-Interest Expenses
(in $ thousands)
Stationery and supplies
Custodian and 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
2013
1,320
1,647
1,139
2,367
298
1,319
517
1,012
468
564
914
-
2,541
3,407
17,513
2012
1,421
1,417
911
2,456
306
1,488
541
739
492
370
1,021
455
1,417
3,014
16,048
$ change % change
(7.1%)
(101)
230
228
(89)
(8)
(169)
(24)
273
(24)
194
(107)
(455)
1,124
393
1,465
16.2%
25.0%
(3.6%)
(2.61%)
(11.4%)
(4.4%)
36.9%
(4.9%)
52.4%
(10.5%)
(100.0%)
79.3%
13.0%
9.1%
Other non-interest expenses were $17.5 million in 2013, an increase of $1.5 million compared to 2012. This was driven principally by operational
losses experienced in 2013.
Butterfield Annual Report 2013 23
Income Taxes
(in $ thousands)
Income taxes
Non-core items
Core income tax
2013
891
-
891
2012
5,890
(5,000)
890
$ change % change
(84.9%)
(4,999)
5,000
1
100.0%
0.1%
In 2013, income tax expenses netted to $0.9 compared to $5.9 million in 2012. The improvement is driven by 2012 tax activity that includes a
$4.1 million valuation allowance against deferred income tax assets and a $0.9 million tax adjustment booked in our UK business.
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the consolidated balance sheet as reported as at 31 December 2013 and 31 December 2012:
(in $ millions)
Assets
Cash and cash equivalents
Short-term investments, debt and equity securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Goodwill and intangibles
Other assets
Total assets
Liabilities
Total deposits
Total other liabilities
Subordinated capital
Total liabilities
Preference shareholders’ equity
Common and contingent value convertible preference shareholders’ equity
Total shareholders’ equity
2013
2012
$ change % change
1,730
2,669
4,088
241
19
124
8,871
7,638
223
207
8,068
184
619
803
1,543
2,958
3,956
243
22
111
8,833
7,393
323
260
7,976
196
661
857
187
(289)
132
(2)
(3)
13
38
245
(100)
(53)
92
(12)
(42)
(54)
38
12.1%
(9.8%)
3.3%
(0.8%)
(13.6%)
11.7%
0.4%
3.3%
(31.0%)
(20.4%)
1.2%
(6.1%)
(6.4%)
(6.3%)
0.4%
Total liabilities and shareholders’ equity
8,871
8,833
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
4,198
600
8,852
6.8%
15.2%
19.6%
23.7%
4,275
639
8,811
7.3%
14.0%
18.5%
24.2%
The Bank maintains a highly liquid balance sheet and is well capitalised. At 31 December 2013, total cash and cash equivalents, short-term
investments and other investments represented $4.4 billion, or 50.0% of total assets, down from 51.0% at year-end 2012. The Bank’s balance sheet
remains strong; with shareholders’ equity ending the year down $54 million to $803 million, of which $184 million is preference shareholders’
equity and $619 million is common equity.
Total assets grew by $38 million to $8.9 billion, primarily reflecting a $245 million increase in deposits, partially offset by decreases relating
to funding from repurchase agreements of $83 million, a decrease in shareholders’ equity of $54 million due primarily to changes in other
comprehensive income and the redemption of subordinated capital of $53 million.
At 31 December 2013, Butterfield’s capital ratios were strong, but declined from year-end 2012, with the TCE/TA ratio ending 2013 at 6.8%
(2012: 7.3%), whilst the Total capital and Tier 1 capital ratios were 23.7% (2012: 24.2%) and 19.6% (2012: 18.5%), respectively. These ratios are well in
excess of regulatory minimums.
24
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 and for every counterparty for which the Bank places deposits. Those limits are monitored and reviewed by
our Credit Risk Management (“CRM”) division and approved by the Financial Institutions Committee. 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. As at 31 December 2013, cash and cash equivalents and short-term investments were $1.8 billion, compared to $1.6 billion
as at 31 December 2012.
See “Note 4: Cash and Cash Equivalents” and “Note 5: Short-Term Investments” in the 31 December 2013 consolidated financial statements for
additional tables and information.
Investments
Our investment policy requires management to maintain a portfolio of securities that provide the liquidity necessary to cover the Bank’s
obligations as they come due, and mitigate our overall exposure to credit and 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 Committee and monitored 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 (the “Contract”) to Alumina.
As part of this transfer, balance sheet simulation analysis, which includes: interest rate sensitivity, economic value at risk, interest at risk and stress
testing; cash flows and net interest income forecasting; deposit behaviour analysis, and pricing strategies, is performed using in-house technology
and professional services.
Consistent with industry and rating agency designations, the Bank defines investment grade as “BBB” or higher. As at 31 December 2013, 99%
(2012: 99%) of our total investments were investment grade and rated A or better.
31 DECEMBER 2013 INVESTMENT PORTFOLIO BY
LONG-TERM DEBT RATING
31 DECEMBER 2013 INVESTMENT PORTFOLIO BY TYPE
Other 1%
Certificates of Deposit 3%
Asset-Backed Securities
- Student Loans 3%
Mutual Funds 3%
Pass-through Note 1%
A 18%
AA 2%
Debt Securities
Issued by Non-US
Governments 4%
Mortgage-Backed
Securities 6%
Corporate Debt
Securities 14%
AAA 79%
US Government and
Federal Agencies 66%
Butterfield Annual Report 2013 25
The following table presents the carrying value of investments by balance sheet category as at 31 December 2013 and 2012:
(in $ millions)
Trading
Available for sale
Held to maturity
Total investments
2013
53
2,227
334
2,614
2012
62
2,581
239
2,882
$ change
(9)
% change
(14.5%)
(354)
95
(268)
(13.7%)
39.7%
(9.3%)
The investment portfolio was $2.6 billion as at 31 December 2013, compared to $2.9 billion as at 31 December 2012. A net decrease in certificates
of deposit of $0.5 billion was partially reinvested ($0.3 billion) in US government and federal agency securities that totalled $1.7 billion, or 65.7% of
the total investment portfolio. The investment yield improved year-on-year by 29 basis points to 2.29% in 2013, partially due to duration extension
to five years. Total net unrealised losses of the investment portfolio were $57.5 million, compared to an unrealised gain of $48.8 million at year-end
2012. The movement in unrealised losses for the year to date related to the impact of changes in interest rates on the longer duration assets and is
not credit related.
Trading securities, consisting of holdings of non-US government securities, corporate equities and seed capital invested in mutual funds managed
by the Bank, totalled $53 million at year-end 2013, compared to $62 million at year-end 2012. Trading securities primarily reflect the $43 million
seed capital invested by the Bank in the BNY Mellon Butterfield Income Advantage Fund and $5 million invested in other Butterfield Select Funds
totalling $48 million.
Available-for-sale (“AFS”) securities totalled $2.2 billion at year-end 2013, compared to $2.6 billion at year-end 2012. As at 31 December 2013, 62.2%
or $1.4 billion (2012: 45.7% or $1.2 billion) of AFS securities consisted of holdings of mortgage-backed securities implicitly and explicitly guaranteed
by US government agencies. Corporate debt securities totalled $379 million or 17.0%, (2012: 17.6% or $453 million), and certificates of deposit
represented 3.8% or $85 million (2012: 21.8% or $561 million).
The remaining 17% of AFS securities is comprised primarily of commercial mortgage-backed securities (6.4% or $143 million), government
guaranteed student loan-backed securities (3.7% or $83 million), debt securities issued by non-US governments (4.0% or $88 million), residential
mortgage-backed securities (1.4% or $31 million) and one pass-through note (“PTN”) (1.5% or $34 million), which was formerly a structured
investment vehicle (“SIV”).
Held-to-maturity (“HTM”) investments were $334 million as at 31 December 2013 (2012: $239 million) and consisted entirely of mortgage-backed
securities implicitly and explicitly guaranteed 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 2013 consolidated financial statements for additional tables and information.
26
Loans
The loan portfolio stood at $4.1 billion at 31 December 2013, up $0.1 billion from $4.0 billion the year before, due primarily to increases in
commercial loans and mortgages of $68.9 million and an increase in residential mortgages of $52 million. At 31 December 2013, the loan portfolio
represented 46% of total assets, compared to 45% at 31 December 2012, whilst loans as a percentage of customer deposits were 54% (2012: 54%).
Allowance for credit losses at 31 December 2013 totalled $53 million, a decrease of $3.2 million from 2012. The movement in the allowance is
mainly the result of additional provisions of $20.6 million before recoveries of $5.8 million taken during 2013 and net of $23.9 million in charge-offs
and foreign exchange movement. Of the total allowance, the general allowance was $30.7 million (2012: $29.2 million) and the specific allowance
was $22.1 million (2012: $26.7 million), reflecting a specific coverage ratio of 21.2%, compared to 23.6% at 31 December 2012. The decrease in the
coverage ratio reflects the changing mix of non-accrual loans that are more heavily weighted towards well-collateralised residential mortgages.
Gross non-accrual loans totalled $104.1 million at 31 December 2013, down $9.3 million from $113.4 million at 31 December 2012, and represented
2.5% of the total loan portfolio at 31 December 2013, compared to 2.8% in 2012. During 2013, the Bank held other real estate owned (“OREO”)
properties amounting to $27.4 million comprising commercial real estate of $14.2 million (2012: $19.3 million), foreclosed residential properties of
$9.2 million (2012: $7.6 million) and property held for sale reclassified during 2013 of $4 million (2012: $7.5 million).
31 DECEMBER 2013 LENDING BY LOCATION
31 DECEMBER 2013 GROUP LOANS BY TYPE
United Kingdom 12%
Guernsey 14%
Commercial
and Industrial 10%
Government 2%
Commercial Overdrafts 2%
Commercial
Mortgages 18%
Automobile
Financing 1%
Bermuda 51%
Cayman 23%
Credit Cards 2%
Other Consumer 4%
Residential Mortgages 61%
Government
Loans to governments increased by $12 million, primarily as a result of the Bank’s continued investment in the Bermuda economy.
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 real estate 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 $1.3 billion at 31 December 2013 increased by $57 million from the previous year, driven by corporate loan growth partially
offset by repayments of commercial lending facilities.
Residential Mortgages
The residential mortgage portfolio comprises 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 2013, residential mortgages totalled $2.5 billion (or 61.6% of total gross loans), an increase of $52 million from 31 December 2012.
Our Guernsey and United Kingdom offices increased high quality, low loan-to-value residential mortgage lending to high net worth individuals,
secured by high-end properties in London during the year, resulting in a $94 million increase in non-Bermuda residential mortgages in
the portfolio.
Butterfield Annual Report 2013 27
All mortgages were underwritten utilising our stringent credit standards. Residential loans consist of conventional home mortgages and equity
credit lines.
Other Loan Portfolios
We provide loans, as part of our normal banking business, in respect of automobile financing, consumer financing, credit cards, commercial
financing, loans to financial institutions and overdraft facilities to retail, corporate and private banking clients in the jurisdictions in which
we operate.
Our loan portfolio and contractual obligations and arrangements are discussed in more detail in “Note 7: Loans” and “Note 8: Credit Risk
Concentrations” in the 31 December 2013 consolidated financial statements.
Deposits
Deposits are our principal funding source for use in lending, investing 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 typically paid in the first few days of the quarter.
The table below shows the year-end and average customer deposit balances by jurisdiction, comparing 2013 with 2012.
(in $ millions)
Bermuda
Cayman
Guernsey
The Bahamas
United Kingdom
Total deposits
Year ended 31 December
2012 $ change
2013
3,551
295
3,256
2,071
1,291
78
607
7,598
7,267
1,370
1,862
(102)
(79)
331
209
709
70
8
Average balance
2012 $ change
246
3,285
1,791
1,389
62
730
87
(13)
26
(95)
251
7,508
7,257
2013
3,531
1,878
1,376
88
635
Average customer deposits increased by $0.3 billion to $7.5 billion in 2013. On a year-end basis, customer deposits were up $0.3 billion to
$7.6 billion from $7.3 billion at year-end 2012.
Customer demand deposits, which include chequing accounts (both interest-bearing and non-interest-bearing), savings and call accounts, totalled
$5.6 billion, or 74.3% of total customer deposits at year-end 2013, compared to $5.3 billion, or 73.3%, at year-end 2012. Customer term deposits
remained flat at $2 billion compared to the prior year.
The cost of funds on deposits improved from 0.33% in 2012 to 0.30% in 2013 due to disciplined deposit pricing and re-pricing initiatives that
contributed to the improvement in net interest income.
See “Note 11: Customer Deposits and Deposits from Banks” in the 31 December 2013 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 2013, deposits from banks totalled
$40 million, a decrease of $86 million from 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.
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
28
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 2013, the Bank had a net obligation for employee future benefits in the amount of $70.2 million, down $30.9 million from
$101.1 million at year-end 2012 driven by higher interest rates and improved returns on plan assets.
See “Note 12: Employee Future Benefits” in the 31 December 2013 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 $207 million as at 31 December 2013, all issued in US dollars,
compared to $260 million as at 31 December 2012. All but $68.5 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.
The $53 million Series A note was due 2018 with a fixed coupon of 7.59% until 27 May 2013 after which the coupon rate became floating and the
principal became redeemable in whole at the Bank’s option. During May 2013, the Bank exercised its option to redeem all of the Series A notes
outstanding at face value of $53 million.
Subsequent to year-end, the Bank also called a $90 million (35%) tranche bringing the outstanding subordinated debt capital balance to
$117 million from $260 million at the end of 2012.
The following table presents the contractual maturity, interest rates and principal outstanding as at 31 December 2013:
Subordinated capital
(in $ millions)
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
2008 issuance - Series B
Total
Earliest date
redeemable
27 May 2013
2 July 2010
2 July 2015
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
4.81%
5.11%
8.44%
3 months US$ LIBOR + 1.095%
3 months US$ LIBOR + 1.695%
3 months US$ LIBOR + 4.929%
27 May 2018
27 May 2023
Principal
outstanding
47
90
45
25
207
See “Note 19: Subordinated Capital” in the 31 December 2013 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 2013, $25.0 million of repurchase agreements were outstanding compared
to $109.0 million at 31 December 2012. As at 31 December 2013, US government and federal agency investment securities with an amortised cost
of $25.2 million (31 December 2012: $120.9 million) and fair market value of $25.8 million (31 December 2012: $122.4 million) were pledged to
collateralise repurchase agreements maturing within 90 days.
Shareholders’ Equity
Shareholders’ equity decreased during the year ended 31 December 2013 by $54.6 million to $802.6 million.
Butterfield Annual Report 2013 29
Increases totalling $106.1 million include:
•
•
•
•
•
$78.2 million net income for the year
$17.9 million net increase in employee future benefits from the decline in interest rates used to discount the future cash flows, and higher
than expected return on plan assets
$6.5 million of share-based compensation
$0.6 million of share-based settlements for stock options exercised
$2.9 million translation adjustments on foreign operations
These increases were offset by decreases totalling $160.7 million:
•
•
•
•
•
$84.9 million from unrealised losses on AFS securities
$38.5 million of common share dividends
$17.0 million preference share dividends and guarantee fees
$14.7 million from the buy-back and cancellation of preference shares
$5.6 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 Bermuda Monetary Authority issued
a Basel III consultation paper for comments from stakeholders and final rules are expected to be issued in 2015. 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 2013.
As at 31 December 2013, the Bank’s regulatory capital stood at $1.0 billion with the consolidated Tier 1 and Total capital ratios of 19.6% and 23.7%,
respectively (31 December 2012: 18.5% and 24.2%, respectively).
The following table sets forth our capital adequacy as at 31 December 2013 and 31 December 2012 in accordance with the Basel II framework:
(in $ millions)
Capital
Tier 1 capital
Tier 2 capital
Deductions
Total capital
Risk-weighted assets
Cash and cash equivalents and investments
Loans
Other assets
Off-balance sheet items
Operational risk charge
Total risk-weighted assets
Capital ratios (%)
Tier 1 common
Tier 1 total
Total capital
30
Year ended 31 December
2013
2012
824.0
169.0
-
993.0
742.9
2,381.8
345.2
193.6
534.2
4,197.7
15.2%
19.6%
23.7%
792.0
244.0
(3.0)
1,033.0
913.8
2,232.3
350.7
261.7
516.5
4,275.0
14.0%
18.5%
24.2%
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 2013 will be published on the corporate website, www.butterfieldgroup.com, shortly after the
publication of the consolidated financial statements.
Preference Shares
In June 2009, the Bank offered 200,000 of 8.00% non-cumulative perpetual limited voting preference shares, liquidation preference of US $1,000
per share (the “preference shares”) and $200,000,000 in the aggregate. The preference shares are fully and unconditionally guaranteed, with the
full faith and credit of the Government of Bermuda (the “Guarantor”), as to payment of dividends for up to ten years and as to payment of the
liquidation preference on, or in certain circumstances prior to, the ten-year anniversary of the date of issuance (the “Guarantee”).
Dividends on the preference shares are payable quarterly on a non-cumulative basis, only when, as and if declared by our Board of Directors,
on 15 March, 15 June, 15 September and 15 December of each year at a fixed rate equal to 8.00% per annum on the liquidation preference,
commencing on 15 September 2009. In the event that, during the ten-year term of the Guarantee, the Bank does not pay full dividends in respect
of any quarterly dividend period on any preference shares that are then issued and outstanding, the Guarantor has agreed to pay to holders of the
preference shares an amount equal to such unpaid dividends pursuant to the Guarantee.
The Bank may redeem the preference shares at its option, subject to approval of the Bermuda Monetary Authority (“BMA”), in whole or in part,
on the tenth day prior to the ten-year anniversary of the date of issuance (the “Bank Redemption Date”), at a redemption price equal to 100%
of the liquidation preference thereof plus any unpaid dividends for the then-current dividend period to the Guarantee End Date, regardless of
whether any dividends are actually declared for such dividend period. In addition, the Bank may redeem the preference shares prior to the Bank
Redemption Date, at its option, subject to approval of the BMA, in whole or in part, at any time and from time to time, at 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
Butterfield Fulcrum Group (“BFG”, now known as Mitsubishi UFJ Financial Services, or “MUFJ”). 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 fully divested itself of its minority ownership
stake in BFG. The Bank continues to provide MUFJ and its clients with commercial banking, foreign exchange and custody services.
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 (i) US$1.21 per CVCP share plus any declared
but unpaid dividends with respect to the then-current dividend period and (ii) the amount per CVCP share that would be received if such CVCP
share had converted into common shares immediately prior to such liquidation, dissolution or winding up.
The CVCP shares are issued as perpetual securities subject to conversion to common shares and shall not be redeemable by any holders at
any time.
Butterfield Annual Report 2013 31
The holders of the CVCP shares will vote together with the holders of the common shares on all matters upon which the holders of the common
shares are entitled to vote. The CVCP shares shall be entitled to such number of votes based on the number of common shares into which the
CVCP shares are convertible as of the applicable record date.
The class vote of the holders of at least 66.6% of the CVCP shares shall be required for (i) the creation or issuance of shares that are senior to
liquidation, (ii) an amendment of rights of the CVCP shares or (iii) a reclassification, merger, amalgamation or consolidation where the holders of
CVCP shares would not receive the consideration that would be received if such CVCP shares had converted into common shares immediately
prior to such event.
The CVCP shares shall be privately transferable (subject to applicable securities laws and any required regulatory consents) but shall not be
listed on the Bermuda Stock Exchange (“BSX“) or any other stock exchange. The CVCP shares will not be registered under the securities laws of
any jurisdiction. This will result in a limited market for the CVCP shares. 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 2013, there were 7.1 million CVCP shares outstanding with 0.1 million shares converted to common shares at the holders’ option
during the year ended 31 December 2013. As at 31 December 2013, 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 2013 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 2013, the carrying value of the covered loans was $23.7 million (2012: $26.9 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 initially introduced two share buy-back programmes on 1 May 2012 as a means to improve shareholder liquidity and facilitate growth in
share value. Each programme was approved by the Board of Directors for a period of 12 months, in accordance with the regulations of the Bermuda
Stock Exchange. The BSX must be advised monthly of shares repurchased and cancelled by the Bank.
Common Share Buy-Back Programme
The Board approved the 2012 common share buy-back programme on 1 May 2012 with up to six million common shares authorised to be acquired.
On 10 December 2012, the Board approved increasing the number of common shares to be acquired up to ten million.
Effective 1 April 2013, the Board cancelled the 2012 common share buy-back programme and approved the 2013 common share buy-back
programme for the purchase of up to 10 million common shares. On 2 December 2013, the Board increased the total number of common shares
authorised to be purchased for treasury to 15 million.
Total common share buy-backs for the year ending 31 December are as follows:
Acquired number of shares (to the nearest 1)
Average cost per common share
Total cost (in Bermuda dollars)
2013
4,038,482
1.39
5,610,907
2012
7,260,051
1.24
Total
11,298,533
1.29
8,999,061
14,609,968
Preference Share Buy-Back Programme
The Board approved the 2012 preference share buy-back programme on 1 May 2012 with up to 2,000 preference shares authorised to be purchased
for cancellation. On 10 December 2012, the Board approved increasing the number of preference shares to be purchased for cancellation up
to 8,000.
During the second quarter of 2013, the Board approved the 2013 preference share buy-back programme authorising in total the purchase and
cancellation of up to 15,000 preference shares. On 2 December 2013, the Board increased the total number of preference shares authorised to be
repurchased and cancelled to 26,600 preference shares.
32
Total preference share buy-backs for the year ending 31 December are as follows:
Acquired number of shares (to the nearest 1)
Average cost per preference share
Total cost (in Bermuda dollars)
2013
11,972
1,230.26
14,728,624
2012
4,422
Total
16,394
1,218.40
1,227.06
5,387,777
20,116,401
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 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.
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 4.28 million (31 December 2012: 4.15 million) warrants with an exercise price of $3.51
(31 December 2012: $3.61) and an expiration date of 22 June 2019.
Dividends
During the year ended 31 December 2013, the Bank declared cash dividends totalling $38.5 million or $0.07 for each common share and contingent
value convertible preference share on record as of the related record dates.
The Board also declared a fourth interim dividend of $0.01 per common and contingent value convertible preference share and a special dividend
of $0.01 per common and contingent value convertible preference share, both to be paid on 28 March 2014 to shareholders of record on 14 March 2014.
During the years ended 31 December 2013 and 2012, the Bank declared the full 8.00% cash dividends on preference shares in each quarter.
Preference share dividends declared and paid were $15.0 million during 2013 (2012: $16.0 million). Guarantee fees paid to the Government of
Bermuda were $1.9 million during 2013 (2012: $2.0 million).
Cash Flows
Cash and cash equivalents were $1.7 billion as at 31 December 2013, compared to $1.5 billion in the prior year. The increase is described below by
category of operating, investing and financing activities.
For the year ended 31 December 2013, net cash provided by operating activities totalled $119.1 million (2012: $132.9 million). Cash flows from
operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided
by operating activities decreased by $13.8 million from 2012 to 2013, due primarily to an increase in other assets offset by rising core earnings that
generated higher cash earnings compared to the prior year and an increase in trading investments due to the receipt of seed capital from the BNY
Mellon Butterfield Income Advantage Fund.
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 of loan structuring. Net cash provided by investing activities for the year ending 31 December 2013
totalled $55.7 million, compared to cash used in investing activities of $627.4 million in 2012. The $683.1 million increase in cash provided by
investing activities in 2013 was mainly due to reduced investment purchases and sales of AFS securities netting a $918.3 million decrease, offset by
an increase in loan balances of $270.6 million year over year.
Net cash provided by financing activities totalled $4.1 million in 2013, compared to net cash provided by financing activities of $108.9 million
in 2012. The $104.8 million change primarily reflects the $53 million repayment of subordinated debt in 2013, resulting in a net $45 million
decrease, $38.5 million common share dividend payments in 2013, net deposit and repurchase agreement increases of $16.9 million and the
$6.0 million increase of share buy-backs.
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.
Butterfield Annual Report 2013 33
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:
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, it is shown in gross amounts including interest income.
As at 31 December
(in $ millions)
Standby letters of credit
Letters of guarantee
Total
Gross
294.6
12.4
307.0
2013
Collateral
292.2
9.1
301.3
Net
2.4
3.3
5.7
Gross
280.1
11.2
291.3
2012
Collateral
277.3
8.7
286.0
Net
2.8
2.5
5.3
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.
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 2013, $149.2 million (31 December 2012: $137.0 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 2013 consolidated financial statements for terms of subordinated debt arrangements and
interest obligations.
34
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.
We have entered into additional contractual obligations in the normal course of business which are not significant to the amounts above.
RISK MANAGEMENT
Risk Governance
The Group’s risk governance and management structure is illustrated below:
BOARD OF DIRECTORS
RISK POLICY & COMPLIANCE
COMMITTEE
AUDIT COMMITTEE
GROUP RISK COMMITTEE
GROUP ASSET & LIABILITY
COMMITTEE
GROUP CREDIT COMMITTEE
PROVISION & IMPAIRMENTS
COMMITTEE
POLICY DEVELOPMENT
COMMITTEE
JURISDICTIONAL BUSINESS UNITS & OVERSIGHT COMMITTEES
The Board of Directors (the “Board”) has overall responsibility for determining risk strategy, setting the Bank’s risk appetite and ensuring that risk is
monitored and controlled effectively. 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 and Audit Committees are supported in the execution of their respective mandates by the dedicated Audit,
Compliance & Risk Policy Committees for our UK, Guernsey and Caribbean operations, which oversee the sufficiency of local risk management
policies and procedures and the effectiveness of the system of internal controls that are in place. These committees are chaired by non-executive
Directors drawn from our jurisdictional Boards.
The Group executive management team is led by the Chairman & Chief Executive Officer (the “Chairman”) and includes the members of executive
management reporting directly to the Chairman. The executive management team 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”) is comprised of executive and senior management team members and is chaired by the Chief Risk Officer. 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,
Butterfield Annual Report 2013 35
legal and regulatory compliance, operational, interest rate, investment, capital and reputational risks, ensuring that these exposures are consistent
with the risk appetites and tolerance thresholds 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 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.
The Group Asset & Liability Committee (“GALCO”) is comprised of executive and senior management team members and is chaired by the
Chief Financial Officer. The 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.
The Group Credit Committee (“GCC”) is comprised of executive and senior management team members and is chaired by the Chief Risk Officer.
The 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 (FIC), 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 the European Credit Committee, which reviews and approves transactions
within delegated authorities and recommends specific transactions outside of these limits to the Group Credit Committee for approval.
The Provision & Impairments Committee is comprised of executive and senior management team members and is chaired by the Chief Risk
Officer. The committee is responsible for approving significant provisions and other impairment charges. It also oversees the overall credit risk
profile of the Group in regards 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.
The Policy Development Committee is comprised of senior management team members across the Group and is chaired by the Group Head of
Compliance. The 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 and if necessary, the Risk Policy & Compliance Committee of the Board for
approval.
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” 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” 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:
• Making recommendations to the Group Risk Committee regarding the constitution of the Risk Appetite Framework;
•
•
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;
Establishing and communicating policies, procedures and limits to control risks in alignment with these risk strategies;
• Measuring, monitoring and reporting on risk levels;
•
•
Opining on specific transactions that fall outside delegated risk limits;
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 unit 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.
36
Group 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.
Group 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 the prevention of money laundering and terrorist
financing. 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” is provided by our Group Internal Audit function, which performs oversight and ongoing review, and challenge of
the effectiveness of the internal controls that are executed by both the business and Risk Management. 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 (CARP) process.
The Risk Appetite Framework
The Risk Appetite Framework is the cornerstone of our approach to risk management. Developed by executive management and approved
formally by the Board of Directors, it communicates a willingness to take on certain risks in the pursuit of our strategic objectives and defines
those that should be avoided. It also provides management with a clear mandate regarding the amount and type of risk that it may accept and
establishes minimum expectations regarding the practices and behaviours that should be brought to bear in managing the exposures assumed. It
is aligned with the interests of our stakeholders, feeds into our business planning processes, and shapes our discussions on risk matters generally.
Our framework comprises the following elements:
(i). Nine broad categories of risk: credit; market; liquidity; legal & regulatory; governance; process & technology; people; country & political; and
reputational. These represent the various risks that the Group assumes across the entirety of its operations in the pursuit of its
strategic goals.
(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
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.
Our processes and controls are defensive and focus on
detection and prevention.
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.
Security is favoured over reward. Exposures are only
assumed when the risk can be quantified accurately and is
assessed as being acceptable.
Open
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.
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.
Butterfield Annual Report 2013 37
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 Group Risk, executive
management, and the Board of Directors 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:
As at 31 December 2013
Short-term deposits
Long-term deposits and debt
Standard
Moody’s
Fitch
& Poor’s
A2
BBB+
P2
A3
F1
A-
38
Jurisdiction and
Business Line
Overviews
Butterfield Annual Report 2013 39
Bermuda
For more than 150 years, Bermuda has served as home to Butterfield’s
Provisions for credit losses were $12.7 million, up $6.3 million from
headquarters and remains the Bank’s largest jurisdiction in terms of
the prior year due largely to increased impairment of non-performing
number of employees, Banking Centre locations and business volume.
hospitality loans and residential mortgages.
Recognised in 2013 as Bermuda’s Bank of the Year by The Banker and
Bermuda’s Best Private Bank by Euromoney, Butterfield is Bermuda’s
Non-interest income of $62.0 million for the year ended 31 December
largest independent bank, offering a full range of community banking
2013 was down $3.6 million, or 5.5%, reflecting lower revenues of
services and wealth management services, including private banking,
$6.0 million from banking, asset management and custody fees, which
asset management and personal trust. Butterfield also provides
were partially offset by increased foreign exchange revenues of
services to corporate and institutional clients in Bermuda, which
$2.2 million.
include asset management and corporate trust services.
Net income before gains and losses was $33.8 million for the year
2013 due to reduced headcount, a reduction in senior management
ended 31 December 2013, up $8.7 million from $25.1 million in the prior
compensation, savings from technology, and other expense
Non-interest expenses declined by $12.5 million to $152.3 million in
year, despite a $3.8 million drop in revenue, due principally to cost
management initiatives.
management initiatives and higher income from our investment portfolio.
Net gains of $7.0 million during the year were favourable by $19.9 million
Total assets as at 31 December 2013 were $4.6 billion, consistent with
compared to net losses of $13.0 million in 2012, primarily due to one-off
year-end 2012. Customer deposits ended the year at $3.6 billion, up
gains and reduced valuation allowances required on foreclosed
$0.3 billion from year-end 2012, and loan balances ended the year at
properties. Net income after gains and losses was $40.8 million,
$2.1 billion, a decrease of $0.1 billion from year-end 2012.
an increase of $28.7 million from $12.1 million in the prior year.
Net interest income before provisions for credit losses increased by
businesses were $35.6 billion and $31.2 billion, respectively, whilst
$6.1 million to $136.9 million in 2013 due to an increase of $11.2 million
assets under management decreased by $0.3 billion to $2.8 billion
in investment income and $3.3 million in lower subordinated debt
from year-end 2012.
Client assets under administration for the trust and custody
interest expense. This was partially offset by reduced loan revenue of
$8.4 million as a result of prepayments and soft loan demand, which
drove a decline in the loan portfolio.
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
2013
136,900
(12,708)
61,986
186,178
(152,344)
33,834
6,953
40,787
2012
130,780
(6,372)
65,559
189,967
(164,879)
25,088
(12,974)
12,114
$ change
6,120
(6,336)
(3,573)
(3,789)
12,535
8,746
19,927
28,673
% change
4.7%
(99.4%)
(5.5%)
(2.0%)
7.6%
34.9%
153.6%
236.7%
3,551
2,075
4,624
3,256
2,208
4,624
31,198
35,621
27,819
30,062
1,956
805
2,761
2,335
747
3,082
295
(133)
-
3,379
5,559
(379)
58
(321)
9.1%
(6.0%)
-
12.1%
18.5%
(16.2%)
7.8%
(10.4%)
Number of employees
554
624
(70)
(11.2%)
Butterfield Annual Report 2013 41
Cayman Islands
Butterfield is a leading financial services provider in the Cayman
Provisions for credit losses were $3.6 million compared to $1.3 million
Islands, offering a comprehensive range of personal and corporate
in the prior year. The increase of $2.3 million resulted primarily from a
financial services. In addition to our strong retail presence, Butterfield
general provision increase relating to the increase in loans and specific
is also focused on our wealth management offering through an
provisions on certain residential mortgages and commercial loans.
award-winning private banking service, as well as asset management
and trust services.
Non-interest income was $32.2 million, up $1.2 million from the prior
year. The increase was due primarily to higher banking fees driven
Named Bank of the Year in 2013 by The Banker, Butterfield enhanced
by net card revenues, foreign exchange revenues, and trust income,
its client delivery channels through the introduction of mobile banking
partially offset by lower asset management revenues.
and the American Airlines® affinity credit card products during the
year. With three Banking Centres in excellent locations and 13 ATMs
Non-interest expenses decreased $0.2 million, year over year, to
strategically located in Grand Cayman, Butterfield continues to be a
$54.7 million (including $1.1 million in early retirement and severance
leader in the provision of financial services locally.
costs). Improvements were noted in salaries that declined by
Net income before gains and losses for the year ending 31 December
by $0.8 million due to lower outsourcing costs, and marketing costs that
2013 was $25.9 million, up $6.5 million from the prior year. The increase
were lower by $0.1 million. These reductions were largely offset
was due primarily to an improvement in loan and investment income,
by increased government license and work permit fees of $0.7 million
banking fees, foreign exchange and trust revenues, coupled with a
and increased loan administration fees of $0.5 million.
reduction in salaries and technology expenses. Net income for the
year was $25.4 million, an increase of $1.5 million from the prior year.
Total assets at 31 December 2013 were $2.3 billion, up $0.2 billion
$0.5 million due to lower headcount, technology costs, which declined
Net interest income before loan loss provisions was $52.0 million in
increased by $0.2 billion from year-end 2012 to end at $1.0 billion. The
2013, an improvement of $7.4 million compared to 2012. The increase
available-for-sale investments at $0.5 billion at the end of fiscal 2013
was driven primarily by an improvement in loan income of $3.8 million
were down $0.1 billion, year over year.
from year-end 2012, reflecting higher client deposit levels. Net loans
as loans increased by $246 million. Investment income was up
$3.3 million resulting from an average $148 million increase in
Client assets under administration for the trust and custody businesses
available-for-sale securities, but partially offset by a reduction of
were $1.6 billion and $1.3 billion, respectively, whilst assets under
$86 million in floating rate notes. Deposit liability costs were
management were $0.7 billion at year-end 2013.
$0.5 million lower following the maturity of the step-up deposit
product in 2012.
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
2013
51,981
(3,554)
32,175
80,602
(54,674)
25,928
(492)
25,436
2012
44,633
(1,291)
30,940
74,282
(54,829)
19,453
4,497
23,950
$ change
7,348
(2,263)
1,235
6,320
155
6,475
(4,989)
1,486
% change
16.5%
(175.3%)
4.0%
8.5%
0.3%
33.3%
(110.9%)
6.2%
2,071
951
2,309
1,323
1,591
139
541
680
273
1,862
705
2,117
1,417
1,710
176
621
797
297
209
246
192
(94)
(119)
(37)
(80)
(117)
11.2%
34.9%
9.1%
(6.6%)
(7.0%)
(21.0%)
(12.9%)
(14.7%)
(24)
(8.1%)
Butterfield Annual Report 2013 43
Guernsey
In Guernsey, Butterfield offers private banking, lending, asset
Non-interest income decreased $0.3 million to $19.7 million due to
management, custody, administered banking and fiduciary services.
adverse exchange rate fluctuations. Underlying the foreign exchange
fluctuations, improvements in foreign exchange activities and higher
Guernsey posted net income before gains and losses of $7.4 million in
banking services revenues were offset by lower asset management and
2013, compared to $9.8 million in 2012, a decrease of $2.4 million, due
banking services income.
primarily to higher interest and non-interest expenses.
Total expenses at $31.9 million were $1.1 million higher than 2012 due
Net interest income before provisions for credit losses declined by
to increases in technology, property and other expenses.
$1.8 million to $19.8 million in 2013, compared to $21.6 million last
year, attributable to lower yields on our investment portfolio and
Total assets at 31 December 2013 of $1.4 billion were lower than
higher interest expense. This was partially offset by higher loan interest
year-end 2012, driven by lower customer deposit balances that
income from an increase in average loan balances. Interest expense
reduced investment balances.
increased by $1.2 million as a greater proportion of customer deposits
moved towards higher rate, longer-term notice accounts.
Client assets under administration for the trust business were
Provisions for credit losses were $0.1 million compared to
assets under administration for the custody and administered banking
$10.1 billion in 2013, up slightly from $9.9 billion in 2012. Similarly,
$1.0 million in 2012.
businesses were $9.7 billion, up $0.7 billion (7.8%) over 2012. Client
assets under management were lower than the prior year at $0.4 billion
from loss of client mandates.
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
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
2013
19,808
(125)
19,678
39,361
(31,945)
7,416
(378)
7,038
1,291
563
1,438
9,660
10,108
72
352
424
175
2012
21,564
(980)
20,005
40,589
(30,810)
9,779
(31)
9,748
$ change
(1,756)
% change
(8.1%)
855
(327)
(1,228)
(1,135)
(2,363)
87.2%
(1.6%)
(3.0%)
(3.7%)
(24.2%)
(347)
(1,119.2%)
(2,710)
(27.8%)
1,370
533
1,522
8,958
9,905
246
343
589
175
(79)
30
(84)
702
203
(5.8%)
5.6%
(5.5%)
7.8%
2.0%
(174)
9
(165)
(70.7%)
2.6%
(28.0%)
-
-
Butterfield Annual Report 2013 45
United Kingdom
In the UK, Butterfield provides a range of traditional private banking,
Provisions for loan losses improved by $7.0 million as 2013 recorded
lending, treasury and investment management services. This includes
a net recovery of $1.5 million following recoveries from two previously
the provision of family office services to high net worth international
written off facilities. This compares to loan losses of $5.5 million in 2012,
clients through the expertise within the Butterfield Group.
relating to legacy commercial loan facilities.
The UK recorded net income of $4.2 million in 2013, up $28.8 million
Total assets at $828.3 million at year-end 2013 were down $97.1 million
as compared to a loss of $24.6 million in 2012. The improvement is
from $925.4 million at year-end 2012. Loan balances were $497 million
driven largely by 2012 events that included $16.6 million of goodwill
in 2013, stable from year-end 2012. Customer deposit balances at
and intangible write-downs and a $5.0 million one-time tax adjustment.
year-end 2012 of $709.3 million fell by $102.7 million to $606.6 million,
After excluding these 2012 items and adjusting 2013 net income for
due largely to a strategy adopted to focus on high net worth private
$1.1 million of non-core redundancy costs, core earnings were
clients and exit non-core clients.
$5.3 million in 2013 compared to a 2012 loss of $3.0 million, an
improvement of $8.3 million.
Assets under management of $291 million were up $54 million
from $237 million at year-end 2012. Custody client assets under
Net interest income before credit provisions of $14.9 million was
administration at the end of 2013 amounted to $1.5 billion.
up $0.7 million from $14.2 million at year-end 2012. The increase
was due to a revised pricing strategy on customer deposit products,
more reflective of the UK market and higher levels of interest income
collected on past due loans.
46
(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
2013
14,932
1,504
7,384
23,820
(19,841)
3,979
181
4,160
2012
14,197
(5,547)
8,177
16,827
(24,565)
(7,738)
(16,895)
(24,633)
$ change
735
% change
5.2%
7,051
(793)
6,993
4,724
11,717
17,076
28,793
127.1%
(9.7%)
41.6%
19.2%
151.4%
101.1%
116.9%
607
497
828
709
507
925
(102)
(10)
(97)
(14.4%)
(2.0%)
(10.5%)
Assets under administration – custody
1,506
1,662
(156)
(9.4%)
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
97
194
291
97
77
160
237
98
20
34
54
(1)
26.0%
21.3%
22.8%
(1.0%)
Butterfield Annual Report 2013 47
Group Asset Management
Butterfield Asset Management focuses on fulfilling the financial needs
Group Asset Management revenue was $18.1 million in 2013, compared
of those who demand the highest levels of service and expertise. Each
to $22.3 million in 2012. The decrease of $4.2 million is due principally
client has direct access to his or her portfolio manager who is, in turn,
to lower short-term interest rates and their trickle-down effect on
supported by a Group investment discipline designed to leverage
Money Market Fund management fee income. In addition, the prior
resources from across the organisation, including a Core Strategy and
year’s revenue was higher with Bentley Reid’s investment management
Research team based in the United Kingdom.
agreement in the United Kingdom still in effect for the first half of 2012.
The Group provides a broad range of investment services to
Assets under management were $4.2 billion at year-end 2013,
institutional and private clients in Bermuda, the Cayman Islands,
compared to $4.7 billion at the end of 2012. Withdrawals of Money
Guernsey, and the United Kingdom. Principal services include
Market Fund balances during the year were responsible for the
discretionary investment management and managed portfolio services.
$0.5 billion decline, as clients continued to seek out better-yielding
Advisory and self-directed brokerage options are available to clients
alternatives for short-term investments. Assets under discretionary
in Bermuda and the Cayman Islands. The Group also provides money
management increased slightly from year-end 2012 as investors
market and mutual fund offerings in all four jurisdictions. Institutional
returned to the markets.
clients consist primarily of captive insurance companies in Bermuda
and the Cayman Islands. Private clients are high net worth individuals
and their fiduciary vehicles served from all four jurisdictions. Retail and
mass affluent clients are served from Bermuda and the Cayman Islands
as part of Butterfield’s community banking platform.
2013
Other
assets
805
541
352
-
194
1,892
Total AUM
2,761
680
424
40
291
4,196
Butterfield
2012
Other
Funds
2,335
176
246
35
77
2,869
assets
747
Total AUM
3,082
621
343
-
160
1,871
797
589
35
237
4,740
Total assets under management (“AUM”) at 31 December:
Butterfield
Funds
1,956
139
72
40
97
2,304
(in $ millions)
Bermuda
Cayman Islands
Guernsey
The Bahamas
UK
Total
48
Group Trust
Our trust and corporate services specialists deliver fiduciary solutions
Bahamas, Bermuda, the Cayman Islands, Guernsey and Switzerland. To
to meet a range of client needs, including estate and succession
this end, training and continual professional development for our staff
planning, administration of complex asset holdings, and efficient
remained a priority in 2013. Active participation by our personnel in
co-ordination for the affairs of international families; as well as the
their local branches of leading trust industry associations and bodies
pension, employee benefit and other fiduciary requirements of
such as the Society of Trust and Estate Practitioners also assists our
multinational corporations and institutions. Butterfield was recently
employees in remaining at the forefront of their areas of expertise.
recognised as one of the leading international finance firms at the
Citywealth International Financial Centre Awards, receiving two awards:
Trust revenues are derived from a combination of fixed fees, fees
2013 Trust Company of the Year - Caribbean; and Trust Company of the
based on the market values of assets held in trust and fees based
Year - Switzerland.
on time spent in relation to the range of personal trust and company
administration services, and the pension, employee benefit and other
Alongside our traditional strengths in providing services to families
corporate and institutional trust services we provide.
and institutions connected with the United Kingdom, North America,
and Europe, in 2013 we continued to build relationships with clients
In 2013, trust revenues totalled $30.4 million, an increase of 4.4% from
connected to the Asian and Latin American regions.
2012. Significant new business development and growth occurred
in Switzerland, Bermuda, and in our corporate and institutional
Our goal is to deliver consistently reliable service to our clients,
trust services area. In addition, increasing pipelines were noted in
underpinned by the technical expertise and competencies of our
our Bahamas, Guernsey and Cayman businesses. Trust revenues
multi-jurisdictional team, which operates through separately
represented 24.1% of total non-interest income in 2013, up from 22.7%
incorporated trust businesses in our jurisdictions of choice, The
in 2012.
Total Trust assets under administration (“Trust AUA”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
Switzerland
The Bahamas
Total
2013
35,621
1,591
10,108
2,566
3,370
53,256
2012
30,062
1,710
9,905
2,142
3,250
47,069
$ change
5,559
% change
18.5%
(119)
203
424
120
6,187
(7.0%)
2.0%
19.8%
3.7%
13.1%
Butterfield Annual Report 2013 49
Financial
Statements
50
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
25 February 2014
John Maragliano
Executive Vice President & Chief Financial Officer
25 February 2014
Butterfield Annual Report 2013 51
February 25, 2014
Independent Auditor’s Report
To the Board of Directors and Shareholders of
The Bank of N.T. Butterfield & Son Limited
We have audited the accompanying consolidated financial statements of The Bank of N.T. Butterfield &
Son Limited and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013
and 2012, and the related consolidated statements of operations, comprehensive income, changes in
(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)for the years then ended.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the (cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86) internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers, Chartered Accountants, P.O. Box HM 1171, Hamilton HM EX, Bermuda
T: +1 (441) 295 2000, F:+1 (441) 295 1242, www.pwc.com/bermuda
52
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of The Bank of N.T. Butterfield & Son Limited and its subsidiaries at
December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then
ended in accordance with accounting principles generally accepted in the United States of America.
Chartered Accountants
Reference: Independent Auditor’s Report on the Financial Statements of The Bank of N.T. Butterfield & Son Limited
as at December 31, 2013 and 2012 and for the years then ended
February 25, 2013
Page 2 of 2
Butterfield Annual Report 2013 53
Consolidated Balance Sheet
(in thousands of Bermuda dollars)
31 December 2013
31 December 2012
As at
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
Total assets
Liabilities
Customer deposits
Non-interest bearing
Interest bearing
Total customer deposits
Bank deposits
Total deposits
Securities sold under agreement to repurchase
Employee future benefits
Accrued interest
Preference share dividends payable
Other liabilities
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: 549,803,460 (2012: 549,677,803)
Preference share capital (USD 0.01 par; USD 1,000 liquidation preference)
issued and outstanding: 183,606 (2012: 195,578)
Contingent value convertible preference share capital (USD 0.01 par)
issued and outstanding: 7,129,075 (2012: 7,254,732)
Additional paid-in capital
Accumulated deficit
Less: treasury common shares: 8,310,421 shares (2012: 7,066,586 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.
Brendan McDonagh
Chairman & Chief Executive Officer
54
411,124
1,319,348
1,730,472
54,981
53,328
2,226,921
333,394
2,613,643
4,088,225
240,603
19,621
7,086
12,035
12,533
27,407
64,209
8,870,815
1,012,973
6,584,756
7,597,729
40,222
7,637,951
25,535
89,109
3,825
616
104,218
223,303
207,000
8,068,254
5,498
2
71
1,344,755
(460,157)
(10,948)
(76,660)
802,561
8,870,815
367,050
1,175,476
1,542,526
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
8,833,009
918,814
6,347,958
7,266,772
126,466
7,393,238
109,021
103,135
2,795
662
106,984
322,597
260,000
7,975,835
5,496
2
73
1,355,689
(482,796)
(8,767)
(12,523)
857,174
8,833,009
Consolidated Statements of Operations
(in thousands of Bermuda dollars, except per share data)
For the year ended
31 December 2013
31 December 2012
Non-interest income
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
Interest income
Loans
Investments
Deposits with banks
Total interest income
Interest expense
Deposits
Subordinated capital
Securities sold under repurchase agreements
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Net trading gains
Net realised (losses) gains on available for sale investments
Net realised / unrealised losses on other real estate owned
Impairment of fixed assets
Impairment of intangible assets
Impairment of goodwill
Net gain on sales of affiliates and subsidiary
Impairment of investment in affiliate
Net other gains
Total other gains (losses)
Total net revenue
Non-interest expense
Salaries and other employee benefits
Technology and communications
Property
Professional and outside services
Non-income taxes
Amortisation of intangible assets
Marketing
Other expenses
Total non-interest expense
Net income before income taxes from continuing operations
Income tax expense
Net income from continuing operations
Discontinued operations
Income from discontinued operations before income tax expense
Gain on sale of discontinued operations
Income tax expense
Net income from discontinued operations
Net income
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
18,067
32,490
29,311
30,410
10,232
5,453
125,963
187,042
60,875
5,291
253,208
19,973
9,186
240
29,399
223,809
(14,825)
208,984
315
(61)
(5,000)
-
-
-
1,227
(3,800)
14,068
6,749
341,696
131,064
54,223
24,309
15,012
13,682
3,358
3,484
17,513
262,645
79,051
(891)
78,160
-
-
-
-
78,160
0.11
0.11
0.11
0.11
22,323
33,713
26,524
29,122
10,646
6,215
128,543
190,691
49,117
4,999
244,807
20,511
12,573
18
33,102
211,705
(14,190)
197,515
268
2,028
(2,053)
(14,527)
(9,143)
(9,505)
4,231
-
1,389
(27,312)
298,746
137,433
57,715
26,129
15,409
13,158
5,040
3,963
16,048
274,895
23,851
(5,890)
17,961
693
7,240
(313)
7,620
25,581
0.01
0.01
-
-
The accompanying notes are an integral part of these consolidated financial statements.
Butterfield Annual Report 2013 55
Consolidated Statements of Comprehensive Income
(in thousands of Bermuda dollars)
Net income
Other comprehensive (loss) income, net of taxes
Net change in unrealised gains on translation of net investment in foreign operations
Net change in unrealised (losses) gains on available-for-sale investments
Employee future benefits adjustments
Other comprehensive (loss) income
Total comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
For the year ended
31 December 2013
78,160
31 December 2012
25,581
2,855
(84,917)
17,925
(64,137)
14,023
834
43,118
(15,173)
28,779
54,360
56
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended
31 December 2013
31 December 2012
Number of shares
In thousands of
Bermuda dollars
Number of shares
In thousands of
Bermuda dollars
Common share capital issued and outstanding
Balance at beginning of year
Conversion of contingent value preference shares
Balance at end of year
549,677,803
125,657
549,803,460
Preference shares
Balance at beginning of year
Repurchase and cancellation of preference shares
Balance at end of year
Contingent value convertible preference shares
Balance at beginning of year
Conversion to common shares
Balance at end of year
195,578
(11,972)
183,606
7,254,732
(125,657)
7,129,075
Additional paid-in capital
Balance at beginning of year
Stock option plan expense
Share-based compensation settlements
Reduction of carrying value on repurchase of preference shares
Premium paid on repurchase of preference shares
Balance at end of year
Accumulated deficit
Balance at beginning of year
Net income for year
Common share cash dividends declared and paid ($0.07 per share)
Cash dividends declared on preference shares
Preference shares guarantee fee
Balance at end of year
Treasury common shares
Balance at beginning of year
Share-based settlement
Purchase of treasury shares
Share-based compensation settlements
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Other comprehensive (loss) income, net of taxes
Balance at end of year
Total shareholders’ equity
7,066,586
(119,873)
4,038,482
(2,674,774)
8,310,421
5,496
2
5,498
549,468,349
209,454
549,677,803
200,000
(4,422)
195,578
7,464,186
(209,454)
7,254,732
2,163,958
(150,000)
7,260,051
(2,207,423)
7,066,586
2
-
2
73
(2)
71
1,355,689
6,347
(2,553)
(11,972)
(2,756)
1,344,755
(482,796)
78,160
(38,531)
(15,094)
(1,896)
(460,157)
(8,767)
173
(5,611)
3,257
(10,948)
(12,523)
(64,137)
(76,660)
802,561
5,494
2
5,496
2
-
2
75
(2)
73
1,377,556
5,184
(21,662)
(4,422)
(967)
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
The accompanying notes are an integral part of these consolidated financial statements.
Butterfield Annual Report 2013 57
Consolidated Statements of Cash Flows
(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
Increase in carrying value of investments in affiliates
Share-based payments and settlements
Realised gains on legal settlement
Net gain on sales of affiliates and subsidiary
Impairment of investment in affiliate
Net realised / unrealised losses on other real estate owned
Net realised losses (gains) on available-for-sale securities
Provision for credit losses
Changes in operating assets and liabilities
(Increase) decrease in accrued interest receivable
(Increase) decrease in other assets
Increase (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 (decrease) in short-term investments
Net proceeds on sale of affiliate
Net proceeds on sale of subsidiary
Net proceeds on sale of customer relationships intangible assets
Proceeds from legal settlement
Net additions to premises, equipment and computer software
Proceeds from other real estate owned
Net (increase) decrease 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 provided by (used in) investing activities
Cash flows from financing activities
Net increase in demand and term deposit liabilities
Net (decrease) increase in securities sold under agreement to repurchase
Repayment of subordinated capital
Common shares repurchased
Preference shares repurchased
Proceeds from stock option exercise
Cash dividends paid on preference shares
Cash dividends paid on common and contingent value convertible preference shares
Preference shares guarantee fee paid
Cash provided by financing activities
Net effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the 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.
58
For the year ended
31 December 2013
31 December 2012
78,160
-
78,160
44,957
-
-
-
(1,068)
6,520
(13,108)
(1,227)
3,800
5,000
61
14,825
(585)
(24,716)
1,011
(2,965)
110,665
8,464
119,129
21,393
4,598
-
-
13,108
(19,169)
8,619
(133,503)
19,435
(114,588)
387,149
1,073,069
(1,204,440)
55,671
215,800
(83,486)
(53,000)
(5,611)
(14,852)
706
(15,015)
(38,531)
(1,896)
4,115
9,031
187,946
1,542,526
1,730,472
30,410
911
6,719
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)
40,222
109,021
(7,946)
(8,999)
(5,452)
-
(15,989)
-
(2,000)
108,857
25,446
(360,200)
1,902,726
1,542,526
28,620
1,230
13,755
Notes to the Consolidated Financial Statements
(in thousands of Bermuda dollars unless otherwise stated)
NOTE 1: NATURE OF BUSINESS
The Bank of N.T. Butterfield & Son Limited (“Butterfield”, “Bank” or the “Company”) is incorporated under the laws of Bermuda and has a banking
license under the Bank and Deposit Companies Act, 1999 (“the Act”). Butterfield is regulated by the Bermuda Monetary Authority (“BMA”), which
operates in accordance with Basel principles.
Butterfield is a full service community bank and a provider of specialised wealth management services. Services offered include retail, private & corporate
banking, treasury, custody, asset management and personal & institutional trust services. The Bank provides such services from six jurisdictions:
Bermuda, the Cayman Islands, 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:
•
•
•
•
•
•
•
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 impact the VIE economic performance and an obligation to absorb
losses or the right to receive benefits that could potentially be significant to the VIE.
The determination of whether the Bank meets the criteria to be considered the primary beneficiary of a VIE requires a periodic evaluation of all
transactions (such as investments, loans and fee arrangements) with the entity. Entities where the Bank holds 20% to 50% of the voting rights and/or
has the ability to exercise significant influence, other than investments in designated VIEs, are accounted for under the equity method, and the pro rata
share of their income (loss) is included in other non-interest income.
c. Foreign Currency Translation
Assets, liabilities, revenues and expenses denominated in US dollars are translated to Bermuda dollars at par. Assets and liabilities of the parent company
arising from other foreign currency transactions are translated into Bermuda dollars at the rates of exchange prevailing at the balance sheet date. The
resulting gains or losses are included in foreign exchange revenue in the consolidated statement of operations.
The assets and liabilities of foreign currency-based subsidiaries are translated at the rate of exchange prevailing on the balance sheet date, whilst
associated revenues and expenses are translated to Bermuda dollars at the average rates of exchange prevailing throughout the year. Unrealised
translation gains or losses on investments in foreign currency-based subsidiaries are recorded as a separate component of shareholders’ equity within
accumulated other comprehensive loss (“AOCL”). Gains and losses on foreign currency-based subsidiaries are recorded in the consolidated statement of
operations only when realised.
Butterfield Annual Report 2013 59
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
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 AOCL. 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 asset 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, which 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. For AFS investments, the decrease in fair value relating to factors other than credit losses are recognised in AOCL. 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.
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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 forecast for the PTN was created in conjunction with a specialist in analytical cash flow modelling.
Management also performs other analyses to support its cash flow projections to assess the reasonability.
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.
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
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
•
• 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.
Butterfield Annual Report 2013 61
Residential mortgage modifications generally involve a short-term forbearance period after which the missed payments are added to the end of the loan
term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the mortgage
remains unchanged. As the forbearance period usually involves an insignificant payment delay they typically do not meet the reporting criteria for a TDR.
Automobile loans modified in a TDR are primarily comprised of loans where the Bank has lowered monthly payments by extending the term.
Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have, in some cases, already been taken against the
outstanding loan balances.
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:
• management judges the loan to be uncollectible;
•
•
•
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 allowances
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.
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Each portfolio of smaller balance, homogeneous loans, including consumer installment, revolving credit, and most other consumer loans, is collectively
evaluated for impairment. The allowance for credit losses attributed to these loans is established via a process that estimates the probable losses
inherent and incurred in the portfolio, based upon various analyses. Management considers overall portfolio indicators including historical credit
losses; delinquent (defined as loans that are more than 30 days past due), non-performing, and classified loans; trends in volumes and terms of loans;
an evaluation of overall credit quality; the credit process, including lending policies and procedures; and economic, geographical, product, and other
environmental factors.
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
loss (“OCL”), 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
OCL, 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 OCL. 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.
Butterfield Annual Report 2013 63
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 OCL 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.
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
The Bank pledges 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 based primarily 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 OCL 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
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the Bank has rendered all services to the clients and is entitled to collect the fees from the clients, as long as there are no contingencies associated with
the fees.
Banking services fees include primarily 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 costs and only the net amounts are deferred and amortised into interest income.
Dividend and interest income, including amortisation of premiums and discounts, on securities for which cash flows are not considered uncertain are
included in interest income in the consolidated statement of operations. Loans placed on non-accrual status and investments with uncertain cash flows
are accounted for under the cost recovery method, whereby all principal, dividends, interest and coupon payments received are applied as a reduction of
the amortised cost and carrying amount.
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 prices 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.
Butterfield Annual Report 2013 65
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 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.
66
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:
• Commitments to extend credit, which represent undertakings to make credit available in the form of loans or other financing for specific amounts
and maturities, subject to certain conditions.
• Standby letters of credit, which represent irrevocable obligations to make payments to third parties in the event that the customer is unable to meet
its financial obligations.
• Documentary and commercial letters of credit, related primarily to the import of goods by customers, which represent agreements to honour drafts
presented by third parties upon completion of specific activities.
These credit arrangements are subject to the Bank’s normal credit standards and collateral is obtained where appropriate. The contractual amounts for
these commitments set out in the table in Note 13 represent the maximum payments the Bank would have to make should the contracts be fully drawn,
the counterparty default, and any collateral held prove to be of no value. As many of these arrangements will expire or terminate without being drawn
upon or are fully collateralised, the contractual amounts do not necessarily represent future cash requirements. The Bank does not carry any liability for
these obligations.
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 believes 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 it 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.
Butterfield Annual Report 2013 67
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 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 were recognised at their recoverable amount in
other assets in the consolidated balance sheet until dispersed by the Charitable Trust, at which time, donations were recognised in other expenses in the
consolidated statement of operations.
z. New Accounting Pronouncements
Disclosures About Offsetting Assets and Liabilities
In December 2011, the FASB issued an Accounting Standards Update that required entities to disclose information about offsetting and related
arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required
to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and
those which are subject to an agreement similar to a master netting arrangement. The new guidance became effective for all annual and interim periods
beginning 1 January 2013. Additionally, entities are required to provide the disclosures for all comparative periods. In January 2013, the FASB issued
another Accounting Standards Update to clarify the instruments and transactions to which the guidance in the previously issued Accounting Standards
Update would apply. The adoption of the guidance in these Accounting Standards Updates did not have an impact on the Bank’s consolidated financial
position or results of operations since it only amends the disclosure requirements for offsetting financial instruments. See “Note 16: Accounting for
Derivative Instruments and Risk Management” for derivative offsetting disclosures.
Reclassification out of Accumulated Other Comprehensive Loss
In February 2013, the FASB issued an Accounting Standards Update that adds new disclosure requirements for items reclassified out of accumulated
other comprehensive loss. The new guidance was effective for all annual and interim periods beginning 1 January 2013 and was applied prospectively.
The adoption of this guidance did not have an impact on the Bank’s consolidated financial position or results of operations. The new disclosure
requirements of this Accounting Standards Update are included in “Note 23: Accumulated Other Comprehensive Income (Loss).”
Obligations Arising from Joint and Several Liability Arrangement
During February 2013, the FASB issued an Accounting Standards Update concerning the obligations resulting from joint and several liability arrangements
for which the total amount of the obligation is fixed at the reporting date. The objective of the amendment in the update is to provide guidance for the
recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The guidance will require an entity to
measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance
is fixed at the reporting date. The guidance will also require an entity to disclose the nature and amount of the obligation, as well as other information
about the obligations. The amendments will be effective for periods beginning after 15 December 2013, and must be shown for all periods presented
on the balance sheet (i.e., applied retrospectively). This new guidance is not expected to have a material impact on the Bank’s consolidated financial
position or results of operations.
Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Group of Assets
In March 2013, the FASB issued the final guidance related to the release of a cumulative translation adjustment (“CTA”) upon derecognition of
subsidiaries or group of assets within a foreign entity into net income. The guidance clarifies that when a parent ceases to have a controlling financial
interest in a subsidiary or group of assets within a foreign entity and the sale represents the complete or substantially complete liquidation of the
investment in the foreign entity, or when a parent loses its controlling financial interest in an investment in a foreign entity, it should release the CTA into
net income. The standard also requires the release of CTA into net income upon acquiring a controlling interest in a foreign entity that was accounted for
under the equity method prior to obtaining control, and consistent with current GAAP in this area, upon a partial sale of an equity method investment.
The guidance is effective prospectively from 1 January 2014. The adoption of this guidance is not expected to have an impact on the Bank’s consolidated
financial position or results of operations.
Accounting for the Reclassification of Residential Real Estate Collateralised Consumer Mortgage Loans Upon Foreclosure
In January 2014, the FASB published an Accounting Standards Update for the reclassification of residential real estate collateralised consumer mortgage
loans upon foreclosure. The update codifies the consensus reached by the FASB’s Emerging Issues Task Force (“EITF”) at its November 2013 meeting.
The amendments in the update clarify when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to
have received physical possession of residential real estate property collateralising a consumer mortgage loan such that the loan receivable should be
derecognised and the real estate property recognised. The update requires a creditor to reclassify a collateralised consumer mortgage loan to real estate
property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender
to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The update is effective for public business entities for annual periods,
and interim periods within those annual periods, beginning after 15 December 2014. The Bank is assessing the impact of the adoption of this guidance.
68
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 the entire 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.
The Bank determined that the requirements had been met to report the results of the subsidiary sold as discontinued operations effective from the
second quarter in 2012. The following table summarises the results of the Barbados operating segment:
Non-interest income
Net interest income
Provision for credit losses
Revenue before gains
Gains
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
For the year ended
31 December 2013
-
-
-
-
-
-
-
-
-
-
-
31 December 2012
1,701
7,267
(548)
8,420
249
8,669
(7,976)
693
7,240
(313)
7,620
31 December 2013
31 December 2012
Bermuda
Non-
Bermuda
Total
Bermuda
Non-
Bermuda
Total
156,190
90,767
246,957
172,179
44,425
216,604
187
407,052
407,239
163,980
912,296
1,076,276
164,167
1,319,348
1,483,515
143
334,835
334,978
150,303
840,641
990,944
150,446
1,175,476
1,325,922
Total cash and cash equivalents
563,429
1,167,043
1,730,472
507,157
1,035,369
1,542,526
NOTE 5: SHORT-TERM INVESTMENTS
Unrestricted
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
31 December 2013
31 December 2012
Bermuda
Non-
Bermuda
Total
Bermuda
Non-
Bermuda
-
-
-
-
35,420
6,884
3,721
46,025
35,420
6,884
3,721
46,025
-
-
-
-
56,727
7,672
4,761
69,160
Total
56,727
7,672
4,761
69,160
8,842
114
8,956
6,942
111
7,053
Total short-term investments
8,842
46,139
54,981
6,942
69,271
76,213
Butterfield Annual Report 2013 69
NOTE 6: INVESTMENTS
Amortised Cost, Carrying Amounts and Estimated Fair Value
The amortised cost, carrying amounts and fair values are as follows:
31 December 2013
31 December 2012
Gross
Gross
Amortised unrealised unrealised
losses
gains
cost
Carrying
amount /
Fair value
Gross
Amortised unrealised
gains
cost
Gross
unrealised
losses
Carrying
amount /
Fair value
Trading
Debt securities issued
by non-US governments
Mutual funds
Total Trading
3,000
49,799
52,799
546
990
1,536
-
(1,007)
(1,007)
3,546
49,782
53,328
4,301
56,779
61,080
930
511
1,441
-
(736)
(736)
5,231
56,554
61,785
31 December 2013
31 December 2012
Gross
Gross
Amortised unrealised unrealised
losses
gains
cost
Carrying
amount /
Fair value
Gross
Amortised unrealised
gains
cost
Gross
unrealised
losses
Carrying
amount /
Fair value
Available-for-sale
Certificates of deposit
US government and federal agencies
Debt securities issued
by non-US governments
Corporate debt securities guaranteed
by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed
securities - Prime
Pass-through note
Equity securities
Total available-for-sale
83,789
1,430,987
794
9,382
(12)
(56,194)
84,571
1,384,175
558,668
1,156,307
2,706
23,613
(14)
(1,134)
561,360
1,178,786
88,298
184
(28)
88,454
89,609
438
(5)
90,042
-
362,921
85,980
155,374
-
15,888
-
-
-
-
(2,801)
(12,485)
-
378,809
83,179
142,889
32,021
400,980
139,304
130,526
32,917
26,791
-
2,267,057
-
7,216
-
33,464
(2,080)
-
-
(73,600)
30,837
34,007
-
2,226,921
-
30,404
126
2,537,945
5
20,105
-
231
-
242
-
47,340
-
-
(3,203)
(279)
-
-
(73)
(4,708)
32,026
421,085
136,101
130,478
-
30,646
53
2,580,577
31 December 2013
Amortised
cost /
Gross
Gross
Carrying unrealised unrealised
losses
amount
gains
31 December 2012
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
333,394
333,394
91
91
(17,951)
(17,951)
315,534
315,534
239,342
239,342
6,691
6,691
(1,240)
(1,240)
244,793
244,793
(1) For the years ended 31 December 2013 and 31 December 2012, non-credit impairments recognised in AOCL for held-to-maturity investments were $nil.
Pledged AFS Investments
The Bank pledges United States (“US”) government and federal agency investment securities to secure Bank deposit products where the secured party
does not have the right to sell or repledge the collateral. As at 31 December 2013, US government and federal agency investment securities with an
amortised cost of $363.8 million (31 December 2012: $255.7 million) and fair value of $350.7 million (31 December 2012: $262.7 million) were pledged.
As at 31 December 2013, US government and federal agency investment securities with an amortised cost of $25.2 million (31 December 2012:
$120.9 million) and fair value of $25.8 million (31 December 2012: $122.4 million) were pledged to collateralise repurchase agreements maturing
within 90 days.
Pledged HTM Investments
As at 31 December 2013, US government and federal agency investment securities with an amortised cost of $83.0 million (31 December 2012:
$45.7 million) and fair value of $75.1 million (31 December 2012: $44.5 million) were pledged to secure Bank deposit products where the secured party
did not have the right to sell or repledge the collateral.
70
Unrealised Loss Positions
The following tables show the fair value and gross unrealised losses of the Bank’s available-for-sale and held-to-maturity investments with unrealised
losses that are not deemed to be 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.
31 December 2013
Available-for-sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed securities - Prime
Total available-for-sale securities
with unrealised losses
Held-to-maturity
US government and federal agencies
Total held-to-maturity securities
with unrealised losses
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Fair
value
Gross
unrealised
losses
50,464
831,493
42,996
-
58,890
30,837
(12)
(45,956)
(28)
-
(5,619)
(2,080)
-
168,264
-
83,179
83,998
-
-
(10,238)
-
(2,801)
(6,866)
-
Total
fair value
50,464
999,757
42,996
83,179
142,888
30,837
Total gross
unrealised
losses
(12)
(56,194)
(28)
(2,801)
(12,485)
(2,080)
1,014,680
(53,695)
335,441
(19,905)
1,350,121
(73,600)
259,595
(11,740)
41,161
(6,211)
300,756
(17,951)
259,595
(11,740)
41,161
(6,211)
300,756
(17,951)
31 December 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
Asset-backed securities - Student loans
Commercial mortgage-backed securities
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
-
(792)
-
(3,203)
-
(73)
Total
fair value
82,477
257,284
56,797
136,101
92,306
53
Total gross
unrealised
losses
(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)
The Bank does not believe that the investment securities that were in an unrealised loss position as of 31 December 2013, which was comprised of 133
securities, or 65% of the portfolio by fair value, represent an other-than-temporary impairment. Total gross unrealised losses were 5.5% of the fair value of
affected securities and were primarily attributable to changes in market 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.
US government and federal agencies
As at 31 December 2013, gross unrealised losses on securities related to US government and federal agencies were $74.1 million (31 December 2012:
$2.4 million) of which $57.7 million has been in an unrealised loss position for less than 12 months. Overall, management believes that all the securities in
this class do not have any credit losses, given the explicit and implicit guarantees provided by the US federal government.
Butterfield Annual Report 2013 71
Asset-backed securities − Student loans
As at 31 December 2013, gross unrealised losses on student loan asset-backed securities were $2.8 million (31 December 2012: $3.2 million) all of which
related to investments that were in an unrealised loss position for greater than 12 months. Asset-backed securities collateralised by student loans are
composed primarily 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 over-collateralisation,
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.
Commercial mortgage-backed securities
As at 31 December 2013, gross unrealised losses on commercial mortgage-backed securities were $12.5 million (31 December 2012: $0.3 million) of
which $5.6 million has been in an unrealised loss position for less than 12 months and $6.9 million has been in an unrealised loss position for more than
12 months. The Bank’s commercial mortgage-backed securities are predominantly rated “AAA” and possess significant subordination (a form of credit
enhancement for the benefit of senior securities, expressed here as the percentage of pool losses that can occur before a senior asset-backed security will
incur its first dollar of principal loss). No credit losses were recognised on these securities as management does not believe these securities have any credit
losses.
Residential mortgage-backed securities − Prime
As at 31 December 2013, gross unrealised losses on prime residential mortgage-backed securities were $2.1 million (31 December 2012: $nil) all of which
has been in an unrealised loss position for less than 12 months. The Bank’s prime residential mortgage-backed securities are predominantly rated “AAA” and
possess significant subordination (a form of credit enhancement for the benefit of senior securities, expressed here as the percentage of pool losses that can
occur before a senior asset-backed security will incur its first dollar of principal loss). No credit losses were recognised on these securities as management
does not believe these securities have any credit losses.
Contractual Maturities
The following table presents the remaining contractual maturities of the Bank’s securities. For mortgage-backed securities (primarily US government
agencies), management presents the maturity date as the mid-point between the reporting and expected contractual maturity date which is determined
assuming no future prepayments. By using the aforementioned mid-point, this date represents management’s best estimate of the date by which the
remaining principal balance will be repaid given future principal repayments of such securities. The actual maturities may differ due to the uncertainty of the
timing when borrowers make prepayments on the underlying mortgages.
31 December 2013
Within
3 months
3 to 12
months
Remaining term to average contractual maturity
5 to 10
years
Over 10 No specific
years maturity
1 to 5
years
Carrying
amount
Trading
Debt securities issued by non-US governments
Mutual funds
Total trading
-
-
-
-
-
-
1,095
-
1,095
1,482
-
1,482
969
-
969
-
49,782
49,782
3,546
49,782
53,328
Available for sale
28,186
Certificates of deposit
US government and federal agencies
1
Debt securities issued by non-US governments 26,472
-
Corporate debt securities
-
Asset-backed securities - Student loans
-
Commercial mortgage-backed securities
-
Residential mortgage-backed securities - Prime
-
Pass-through note
54,659
Total available-for-sale
56,385
-
31,141
-
-
-
-
-
87,526
-
-
-
119,263
4,783
378,809
562
-
-
-
503,417
310,676
26,058
-
71,320
133,765
8,570
34,007
584,396
954,235
-
-
11,297
9,124
22,267
-
996,923
-
-
-
-
-
-
-
-
-
84,571
1,384,175
88,454
378,809
83,179
142,889
30,837
34,007
2,226,921
Held-to-maturity
US government and federal agencies
Total held-to-maturity
-
-
-
-
-
-
51,144
51,144
282,250
282,250
-
-
333,394
333,394
Total investments
54,659
87,526
504,512
637,022
1,280,142
49,782
2,613,643
Total by currency
US dollars
Other
Total investments
72
17
54,642
54,659
32,132
55,394
87,526
503,416
1,096
504,512
612,839
24,183
637,022
1,279,173
969
1,280,142
49,011
771
49,782
2,476,588
137,055
2,613,643
31 December 2012
Within
3 months
3 to 12
months
Remaining term to average contractual maturity
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
-
-
-
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
Commercial mortgage-backed securities
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
-
-
-
-
-
-
11,003
11,003
228,339
228,339
-
-
239,342
239,342
Total investments
320,123
325,820
624,272
619,927
934,955
56,607
2,881,704
Total by currency
US dollars
Other
Total investments
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
Sale Proceeds and Realised Gains and Losses
During the twelve months ended 31 December 2013, the Bank disposed of:
• US government and federal agency investment securities totalling $117.2 million in sale proceeds, resulting in gross realised gains of $0.3 million
and gross realised losses of $0.6 million;
• Corporate bonds totalling $116.3 million in sale proceeds, resulting in gross realised gains of $0.5 million;
• Asset-backed securities totalling $43.6 million in sale proceeds, resulting in gross realised losses of $0.2 million; and
• Other securities totalling $110.0 million in sale proceeds, resulting in gross realised losses of $0.1 million.
During the twelve months ended 31 December 2012, the Bank disposed of:
• Certificates of deposit totalling $170.1 million in sale proceeds, resulting in gross realised gains of $0.1 million
• US government and federal agency investment 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;
• 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
• Other securities totalling $18.2 million in sale proceeds, resulting in gross realised gains of $0.8 million.
Butterfield Annual Report 2013 73
Total
2,296
2,296
45,146
(2,028)
43,118
-
-
43,118
Gains and Losses on Investments
For the year ended
Available-
31 December 2013
Held-to-
for-sale maturity
Trading
31 December 2012
Held-to-
maturity
Available-
for-sale
Trading
Total
Gains (losses) other than OTTI
recognised in net income
315
(61)
Net gains (losses) recognised in net income
315
(61)
-
-
254
268
2,028
254
268
2,028
Gross unrealised (losses) gains
recorded in OCL
Realised losses (gains)
transferred to net income
Total net (losses) gains recognised in OCL
Non-credit-related impairments
recognised in OCL
Effect of HTM to AFS transfer of investments
Total net (losses) gains recognised in OCL
-
(84,978)
-
(84,978)
-
45,146
-
-
61
(84,917)
-
-
61
(84,917)
-
-
-
-
-
(84,917)
-
-
-
-
-
(84,917)
-
-
-
-
-
(2,028)
43,118
-
-
43,118
-
-
-
-
-
-
-
-
74
NOTE 7: LOANS
The “Bermuda” and “Non-Bermuda” classifications’ purpose is to reflect management segment reporting as described in “Note 15: Segmented
Information.” The composition of the loan portfolio by reporting segment and collateral type 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
31 December 2013 31 December 2012
Non-
Bermuda Bermuda
Non-
Bermuda Bermuda
Total
Total
65,725
129,865
57,851
253,441
(240)
253,201
15,000
270,808
8,083
293,891
(233)
293,658
80,725
400,673
65,934
547,332
(473)
546,859
64,534
121,947
58,973
245,454
(166)
245,288
68,584
4,050
311,949
190,002
81,902
22,929
216,981 462,435
(1,416)
(1,250)
461,019
215,731
417,112
-
417,112
(5,123)
343,958
2,040
345,998
-
761,070
2,040
763,110
(5,123)
495,466
109
495,575
(8,772)
281,456
2,119
283,575
(4,711)
776,922
2,228
779,150
(13,483)
411,989
345,998
757,987
486,803
278,864 765,667
15,618
60,846
10,079
47,396
133,939
(160)
133,779
6,654
16,149
6,311
117,960
147,074
-
147,074
22,272
76,995
16,390
165,356
281,013
(160)
280,853
19,663
58,500
8,488
66,044
152,695
(160)
152,535
6,050
15,446
3,933
25,713
73,946
12,421
94,819 160,863
272,943
120,248
(160)
-
272,783
120,248
1,309,605 1,239,920 2,549,525
(16,295)
(3,070)
(13,225)
1,351,680 1,145,709 2,497,389
(11,673)
(3,930)
(7,743)
1,296,380 1,236,850 2,533,230
1,343,937 1,141,779 2,485,716
Total gross loans
Less specific allowance for credit losses
Less general allowance for credit losses
Net loans
2,114,097 2,026,883 4,140,980
(22,051)
(3,303)
(30,704)
(10,264)
2,074,909 2,013,316 4,088,225
(18,748)
(20,440)
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)
The principal means of securing residential mortgages, personal, credit card and business loans are charges over assets and guarantees. Mortgage loans
are generally repayable over periods of up to thirty years and personal, credit card, business and government loans are generally repayable over terms
not exceeding five years. The effective yield on total loans as at 31 December 2013 is 4.66% (31 December 2012: 4.75%).
Butterfield Annual Report 2013 75
Age Analysis of Past Due Loans (Including Non-Accrual Loans)
The following table summarises the past due status of the loans at 31 December 2013 and 31 December 2012. The aging of past due amounts are
determined based on the contractual delinquency status of payments under the loan and this aging may be affected by the timing of the last business day at
period end. An account is generally considered to be contractually delinquent when payments have not been made in accordance with the loan terms.
31 December 2013
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
30-59
days
-
681
2
683
784
-
784
253
834
10
506
1,603
60-89
days
90 days or
more
Total past
due loans
Total
(1)
current
Total
loans
-
89
1
90
-
529
604
1,133
-
1,299
607
1,906
80,725
399,374
65,327
545,426
80,725
400,673
65,934
547,332
1,386
-
1,386
42,958
-
42,958
45,128
-
45,128
715,942
2,040
717,982
761,070
2,040
763,110
91
482
8
348
929
353
501
258
2,060
3,172
697
1,817
276
2,914
5,704
21,575
75,178
16,114
162,442
275,309
22,272
76,995
16,390
165,356
281,013
Residential mortgage loans
36,355
16,908
62,700
115,963
2,433,562
2,549,525
Total loans
(1) Loans less than 30 days past due are included in current loans.
39,425
19,313
109,963
168,701
3,972,279
4,140,980
31 December 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 card
Overdrafts
Other consumer
Total consumer loans
30-59
days
-
349
17
366
3,852
-
3,852
466
623
3
1,091
2,183
60-89
days
-
2,048
199
2,247
1,190
-
1,190
96
445
37
693
1,271
90 days or
more
Total past
due loans
Total
(1)
current
Total
loans
-
3,022
301
3,323
-
5,419
517
5,936
68,584
306,530
81,385
456,499
68,584
311,949
81,902
462,435
55,584
-
55,584
60,626
-
60,626
716,296
2,228
718,524
776,922
2,228
779,150
425
601
227
1,595
2,848
987
1,669
267
3,379
6,302
24,726
72,277
12,154
157,484
266,641
25,713
73,946
12,421
160,863
272,943
Residential mortgage loans
38,334
21,914
69,551
129,799
2,367,590
2,497,389
Total loans
(1) Loans less than 30 days past due are included in current loans.
44,735
26,622
131,306
202,663
3,809,254
4,011,917
76
Non-accrual loans and accruing loans 90 days or more past due are summarised in the following table:
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
31 December 2013
Non-accrual
loans
Accruing
loans past
due 90 days
Total non-
performing
loans
Non-accrual
loans
31 December 2012
Accruing
loans past
due 90 days
Total non-
performing
loans
520
472
992
9
132
141
529
604
1,133
3,606
292
3,898
-
9
9
3,606
301
3,907
Commercial real estate loans
41,236
1,722
42,958
55,167
417
55,584
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
437
69
221
1,951
2,678
8
432
37
283
760
445
501
258
2,234
3,438
581
-
217
1,984
2,782
57
600
10
76
743
638
600
227
2,060
3,525
Residential mortgage loans
59,166
9,938
69,104
51,506
27,229
78,735
Total non-performing loans
104,072
12,561
116,633
113,353
28,398
141,751
The table below presents information about the credit quality of the Bank’s loan portfolio:
31 December 2013
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial Real Estate
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Pass
Special mention
Substandard
Non-accrual
80,725
393,091
57,569
531,385
570,761
883
571,644
20,794
76,494
14,954
160,959
273,201
-
4,282
7,445
11,727
99,174
-
99,174
1,033
-
1,008
2,295
4,336
-
2,780
448
3,228
49,899
1,157
51,056
8
432
207
151
798
-
520
472
992
41,236
-
41,236
437
69
221
1,951
2,678
Total
gross recorded
investments
80,725
400,673
65,934
547,332
761,070
2,040
763,110
22,272
76,995
16,390
165,356
281,013
Residential mortgage loans
2,383,773
63,979
42,607
59,166
2,549,525
Total loans
3,760,003
179,216
97,689
104,072
4,140,980
Butterfield Annual Report 2013 77
31 December 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 card
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 gross recorded loans
3,579,508
207,876
111,180
113,353
4,011,917
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 mortgage loans which are not well secured and in the process of collection.
The table below presents the gross loans evaluated for impairment:
31 December 2013
Individually Collectively
evaluated
544,690
699,846
278,220
2,483,117
4,005,873
evaluated
2,642
63,264
2,793
66,408
135,107
31 December 2012
Individually
evaluated
5,609
64,739
2,782
59,910
133,040
Collectively
evaluated
456,826
714,411
270,161
2,437,479
3,878,877
Commercial
Commercial Real Estate
Consumer
Residential mortgage loans
Total gross loans evaluated for impairment
78
The table below presents the continuity of the general and specific allowances:
Allowances at beginning of year
Provision taken (released) during the year
Recoveries
Charge-offs
Other
Allowances at end of year
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Commercial
Commercial real estate
18,394
7,041
-
(15,579)
(40)
9,816
6,596
760
2,699
(1,714)
(1)
8,340
31 December 2013
Residential
Consumer mortgage loans
25,527
9,453
49
(3,737)
(135)
31,157
5,440
(2,429)
3,078
(2,676)
29
3,442
31 December
2012
Total
55,957
14,825
5,826
(23,706)
(147)
52,755
Total
55,491
14,190
3,746
(17,770)
300
55,957
473
5,123
160
16,295
22,051
26,732
7,867
4,693
3,282
14,862
30,704
29,225
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-accrual loans and all loans modified in a
troubled debt restructuring (“TDR”) even if full collectability is expected following the restructuring. For the year ended 31 December 2013, the amount
of gross interest income that would have been recorded had impaired loans been current was $5.7 million (2012: $7.7 million). The table below presents
information about the Bank’s impaired loans:
31 December 2013
Gross recorded
Impaired loans with an allowance
Net
loans
Specific
investment allowance
Impaired loans
without an allowance
Gross recorded
investment
Total impaired loans
Gross recorded
Specific
investment allowance
Net
loans
442
169
611
(373)
(100)
(473)
69
69
138
1,728
303
2,031
2,170
472
2,642
(373)
(100)
(473)
1,797
372
2,169
30,277
(5,123)
25,154
32,987
63,264
(5,123)
58,141
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real
estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
208
-
-
128
336
(75)
-
-
(85)
(160)
133
-
-
43
176
Residential mortgage loans
Total impaired loans
52,123
83,347
(16,295)
(22,051)
35,828
61,296
31 December 2012
Impaired loans with an allowance
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Gross recorded
investment
Specific
allowance
1,471
26
1,497
(1,390)
(26)
(1,416)
Net
loans
81
-
81
Commercial real estate loans
52,607
(13,483)
39,124
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
227
-
-
128
355
(75)
-
-
(85)
(160)
152
-
-
43
195
Residential mortgage loans
Total impaired loans
36,064
90,523
(11,673)
(26,732)
24,391
63,791
229
69
221
1,938
2,457
14,285
51,760
437
69
221
2,066
2,793
(75)
-
-
(85)
(160)
362
69
221
1,981
2,633
66,408
135,107
(16,295)
50,113
(22,051) 113,056
Impaired loans
without an allowance
Gross recorded
investment
Total impaired loans
Gross recorded
investment
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
(1,390)
(26)
(1,416)
3,927
266
4,193
64,739
(13,483)
51,256
581
-
217
1,984
2,782
(75)
-
-
(85)
(160)
506
-
217
1,899
2,622
59,910
133,040
(11,673)
(26,732)
48,237
106,308
Butterfield Annual Report 2013 79
The following table presents information about the Bank’s average impaired loan balances and interest income recognised on the impaired loans:
Impaired loans
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total impaired loans
31 December 2013
31 December 2012
Average gross
recorded
investment
Interest income
recognised
Average gross
record
investment
Interest income
recognised
3,744
382
4,126
64,002
509
35
219
2,025
2,788
63,159
134,075
97
-
97
256
-
-
-
4
4
386
743
6,163
3,509
9,672
64,020
782
-
141
1,887
2,810
55,560
132,062
105
-
105
523
-
-
-
-
-
388
1,016
The following table presents information about the Bank’s loans modified in a troubled debt restructuring (“TDR”):
Effect of modification
on recorded investment
Pre-modification Post-modification
outstanding
Changes in the
amount and / (or)
recorded timing of principal or
31 December 2013
Commercial loans
Commercial real estate loans
Consumer loans
Residential mortgage loans
Total loans modified in a TDR
Number of
contracts
3
8
1
18
30
(1)
Recorded
investment
1,785
29,081
115
11,395
42,376
outstanding
recorded
investment
1,911
35,270
117
11,347
48,645
investment
1,911
35,419
117
11,585
49,032
Interest t
interest payments capitalisation
-
-
149
-
-
-
238
-
387
-
(1)The total recorded investment is comprised of $11.3 million of non-accrual loans and $31.0 million of loans on accrual status.
Effect of modification
on recorded investment
31 December 2012
Commercial loans
Commercial real estate loans
Residential mortgage loans
Total loans modified in a TDR
Pre-modification
outstanding
recorded
investment
2,290
24,402
9,185
35,877
Recorded
(1)
investment
2,083
22,854
10,977
35,914
Number of
contracts
3
7
15
25
Post-modification
outstanding
Changes in the
amount and / (or)
recorded timing of principal or
interest payments
-
-
-
-
investment
2,326
24,463
9,926
36,715
Interest
capitalisation
36
61
741
838
(1)The total recorded investment is comprised of $16.2 million of non-accrual loans and $19.7 million of loans on accrual status.
For the year ended 31 December 2013, the Bank has four loans modified in a TDR that subsequently defaulted (i.e., 90 days or more past due
following a modification) with a recorded investment amounting to $3.5 million.
80
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 evaluated primarily by industry and by geographic region of loan origination. In the consumer portfolio, concentrations are evaluated
primarily by products. Credit exposures include loans, guarantees and acceptances, letters of credit and commitments for undrawn lines of credit.
Unconditionally cancellable credit cards and overdraft lines of credit are excluded from the tables below.
The following table summarises the credit exposure of the Bank by business sector. The on-balance sheet exposure amounts disclosed are net of specific
allowances and the off-balance sheet exposure amounts disclosed are gross of collateral held.
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
31 December 2013
Off-balance
sheet
367,162
129,698
4,767
97,184
-
9,849
-
-
608,660
-
608,660
Loans
358,079
258,693
75,780
2,473,662
57,001
789,259
100,019
6,436
4,118,929
(30,704)
4,088,225
Total credit
exposure
725,241
388,391
80,547
2,570,846
57,001
799,108
100,019
6,436
4,727,589
(30,704)
4,696,885
31 December 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
Loans
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
The following table summarises the credit exposure of the Bank by geographic region for cash and cash equivalents, short-term investments, loans
receivable and off-balance sheet exposure. The credit exposure by currency for investments is disclosed in “Note 6: Investments.”
31 December 2013
31 December 2012
`
Cash and cash
equivalents and
short-term
investments
Off-balance
sheet
Total credit
exposure
Loans
Cash and cash
equivalents and
short-term
investments
Off-balance
sheet
Loans
Total credit
exposure
Bermuda
Canada
Cayman
Guernsey
The Bahamas
United Kingdom
United States
Other
Sub-total
General allowance
Total
162,371
47,111
85,959
-
4,932
983,609
474,943
26,528
1,785,453
-
1,785,453
2,331,616
-
589,807
563,669
39,990
593,847
-
-
4,118,929
(30,704)
4,088,225
301,603
-
179,367
84,493
-
43,197
-
-
608,660
-
608,660
2,795,590
47,111
855,133
648,162
44,922
1,620,653
474,943
26,528
6,513,042
(30,704)
6,482,338
170,146
188,908
208,278
-
4,610
773,649
187,683
85,465
1,618,739
-
1,618,739
2,300,661
-
547,779
534,226
47,883
554,636
-
-
3,985,185
(29,225)
3,955,960
335,184
-
194,634
72,961
180
45,717
-
-
648,676
-
648,676
2,805,991
188,908
950,691
607,187
52,673
1,374,002
187,683
85,465
6,252,600
(29,225)
6,223,375
Butterfield Annual Report 2013 81
NOTE 9: PREMISES, EQUIPMENT AND COMPUTER SOFTWARE
The following table summarises land, buildings, equipment and computer software:
Land
Buildings
Equipment
Computer hardware and software in use
Computer software in development
Total
31 December 2013
Accumulated
depreciation
-
(56,423)
(40,893)
(77,460)
-
(174,776)
Net carrying
value
13,290
97,314
6,247
118,196
5,556
240,603
Cost
13,290
153,737
47,140
195,656
5,556
415,379
31 December 2012
Cost
13,290
154,903
47,060
172,511
8,961
396,725
Accumulated
depreciation
-
(52,109)
(37,552)
(63,743)
-
(153,404)
Net carrying
value
13,290
102,794
9,508
108,768
8,961
243,321
Depreciation charged to operating expenses
Buildings (included in property expense)
Equipment (included in property expense)
Computer hardware and software (included in technology & communication expense)
Total depreciation charged to operating expenses
Impairment
Write-off of buildings (included in impairment of fixed assets)
31 December 2013
31 December 2012
4,478
2,100
16,300
22,878
-
6,823
2,735
16,194
25,752
14,527
During the year ended 31 December 2012, the Bank’s intended use of 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
Balance as at 31 December 2011
Impairment
Foreign exchange translation adjustment
Balance as at 31 December 2012
Foreign exchange translation adjustment
Balance as at 31 December 2013
Customer relationship intangible assets
Business segment
Guernsey
6,634
-
315
6,949
137
7,086
United
Kingdom
9,303
(9,505)
202
-
-
-
Total
15,937
(9,505)
517
6,949
137
7,086
31 December 2013
31 December 2012
Accumulated Accumulated
amortisation
(5,146)
(934)
(34,391)
-
-
(40,471)
impairment
-
-
-
-
-
-
Cost
8,342
1,211
42,953
-
-
52,506
Net
carrying
amount
3,196
277
8,562
-
-
12,035
Bermuda - Wealth Management
Cayman
Guernsey
The Bahamas
United Kingdom
Total
82
Accumulated Accumulated
amortisation
(4,590)
(853)
(31,735)
(3,215)
(9,803)
(50,196)
impairment
-
-
-
(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
Customer relationships are initially valued based on the present value of net cash flows expected to be derived solely from the recurring customer base
existing as at the date of acquisition. Customer relationship intangible assets may or may not arise from contracts.
During 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. The carrying amount of the United Kingdom and Bahamas segments’ customer relationship
intangible assets were fully written off as at 31 December 2012 as the carrying amounts were deemed unrecoverable and the present values of net cash
flows expected to be derived for the segments’ recurring customer bases were deemed immaterial.
For the year ended 31 December 2012, intangible asset impairments of $9.1 million were recognised. During the year ended 31 December 2013, the
amortisation expense amounted to $3.4 million (2012: $5.0 million) and the foreign exchange translation adjustment increased the net carrying amount
by $0.1 million (2012: decreased by $0.2 million). The estimated aggregate amortisation expense for each of the succeeding five years
(until 31 December 2018) is $12.0 million.
NOTE 11: CUSTOMER DEPOSITS AND DEPOSITS FROM BANKS
By Maturity
Demand deposits
Demand deposits - Non-interest bearing
Demand deposits - Interest bearing
Sub-total - demand deposits
Customers
1,012,973
4,631,149
5,644,122
Term deposits having a denomination
of less than $100,000
Term deposits maturing within six months
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Sub-total - term deposits having a
denomination of less than $100,000
51,118
16,392
18,205
85,715
Term deposits having a denomination
of $100,000 or more
Term deposits maturing within six months
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Sub-total - term deposits having a denomination
of $100,000 or more
Sub-total - term deposits
Total
1,576,273
94,802
196,817
1,867,892
1,953,607
7,597,729
31 December 2013
Banks
Total
Customers
31 December 2012
Banks
Total
385
11,701
12,086
1,013,358
4,642,850
5,656,208
918,814
4,405,291
5,324,105
567
99,573
100,140
919,381
4,504,864
5,424,245
-
-
-
-
51,118
16,392
18,205
57,377
16,680
20,930
85,715
94,987
45
-
-
45
57,422
16,680
20,930
95,032
16,150
11,986
-
28,136
28,136
40,222
1,592,423
106,788
196,817
1,896,028
1,981,743
7,637,951
1,706,138
81,371
60,171
1,847,680
1,942,667
7,266,772
15,919
10,240
122
1,722,057
91,611
60,293
26,281
26,326
126,466
1,873,961
1,968,993
7,393,238
By Type and Segment
Bermuda
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
The Bahamas
Customers
United Kingdom
Customers
Banks
Total Customers
Total Banks
Total
Payable
on demand
31 December 2013
Payable on a
fixed date
Total
Payable
on demand
31 December 2012
Payable on a
fixed date
Total
2,532,572
494
1,018,417
1,036
3,550,989
1,530
2,364,433
88,169
890,886
249
3,255,319
88,418
1,677,092
10,627
394,338
27,100
2,071,430
37,727
1,468,025
10,643
394,159
26,077
1,862,184
36,720
1,085,862
965
204,646
-
1,290,508
965
1,073,711
1,281
296,255
-
1,369,966
1,281
68,257
9,980
78,237
65,587
4,413
70,000
280,339
-
5,644,122
12,086
5,656,208
326,226
-
1,953,607
28,136
1,981,743
606,565
-
7,597,729
40,222
7,637,951
352,349
47
5,324,105
100,140
5,424,245
356,954
-
1,942,667
26,326
1,968,993
709,303
47
7,266,772
126,466
7,393,238
Butterfield Annual Report 2013 83
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 2013 and 2012:
Accumulated benefit obligation at end of year
Continuity of projected benefit obligation
Opening projected benefit obligation
Service cost
Employee contributions
Interest cost
Benefits paid
Actuarial (gain) loss
Foreign exchange translation adjustment
Closing projected benefit obligation
Continuity of 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
Amounts recognised in the consolidated
balance sheet consist of:
Prepaid benefit cost included in other assets
Accrued pension benefit cost included in
employee future benefits liability
Surplus (deficit) of plan assets over projected
benefit obligation at measurement date
Amounts recognised in Accumulated Other
Comprehensive Loss consist of:
Net actuarial gain (loss), excluding deferred taxes
Past service credit
Deferred income taxes assets (liabilities)
Net amount recognised in Accumulated
Other Comprehensive Loss
31 December 2013
31 December 2012
Post-retirement
Pension plans medical benefit plan
-
160,762
Post-retirement
Pension plans medical benefit plan
-
163,106
167,683
1,553
124
6,971
(7,889)
(2,690)
1,717
167,469
163,701
18,089
10,070
124
(7,889)
2,317
186,412
97,126
930
-
4,215
(3,139)
(10,023)
-
89,109
-
-
3,139
-
(3,139)
-
-
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)
-
-
18,943
-
2,027
-
-
(89,109)
(6,009)
(97,126)
18,943
(89,109)
(3,982)
(97,126)
(36,384)
-
768
(14,904)
21,628
-
(49,261)
-
2,470
(27,169)
28,347
-
(35,616)
6,724
(46,791)
1,178
Effective 31 December 2011, the Bermuda defined benefit pension plan was 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. As a result, effective January 2012, all the participants of the Bermuda defined benefit pension plan are deemed inactive. In accordance
with 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 deemed 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.
84
The following table presents the expense constituents of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan:
Annual benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortisation of past service cost
Amortisation of net actuarial loss
Defined benefit expense
Defined contribution expense
Total benefit expense
Other changes recognised in Other
Comprehensive Income (Loss)
Net gain (loss) arising during the year
Amortisation of past service credit
Amortisation of net actuarial loss
Change in deferred taxes
Foreign exchange adjustment
Total changes recognised in Other
Comprehensive Income (Loss)
For the year ended
31 December 2013
31 December 2012
Post-retirement
Pension plans medical benefit plan
Pension plans
Post-retirement
medical benefit plan
1,553
6,971
(9,076)
-
1,695
1,143
6,042
7,185
11,755
-
1,644
(1,656)
636
12,379
930
4,215
-
(6,719)
2,242
668
-
668
10,023
(6,719)
2,242
-
-
1,687
7,061
(8,145)
-
1,366
1,969
5,593
7,562
(9,864)
-
1,366
955
63
5,546
(7,480)
944
4,205
-
(6,719)
2,074
504
-
504
(3,048)
(6,719)
2,074
-
-
(7,693)
The estimated portion of the net actuarial loss for the pension plans that will be amortised from AOCL into benefit expense over the 2014 fiscal year
is $1.1 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 AOCL into benefit expense over the 2014 fiscal year is $0.9 million for the net actuarial loss and a credit of $6.7 million for the past
service credit.
For the year ended
31 December 2013
31 December 2012
Post-retirement
Pension plans medical benefit plan
Pension plans
Post-retirement
medical benefit plan
Actuarial assumptions used to
determine annual benefit expense
Weighted average discount rate
Weighted average rate of compensation increases(1)
Weighted average expected long-term
rate of return on plan assets
4.20%
3.85%
5.65%
4.40%
N/A
N/A
4.65%
3.95%
5.60%
4.60%
N/A
N/A
Weighted average annual medical cost increase rate
(1) Excludes the inactive Bermuda defined benefit pension plan.
N/A 7.5% to 4.5% in 2027
N/A
7.5% to 4.5% in 2027
Actuarial assumptions used to determine benefit
Weighted average discount rate
Weighted average rate of compensation increases
4.75%
4.30%
5.10%
N/A
4.20%
1.80%
4.40%
N/A
Weighted average annual medical cost increase rate
N/A 7.3% to 4.5% in 2027
N/A
7.5% to 4.5% in 2027
For 2013, 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 $0.9 million increase (2012: $1.1 million increase) and a $0.8 million decrease (2012: $0.9 million), respectively, and on the benefit
obligation a $14.1 million increase (2012: $19.1 million) and a $11.6 million decrease (2012: $15.3 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.
Butterfield Annual Report 2013 85
Investment 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 and investment policy. The asset allocation is diversified and any use of derivatives is limited to hedging purposes only.
The weighted average actual and target asset allocations of the pension plans by asset category are as follows:
Asset category
Debt securities (including debt mutual funds)
Equity securities (including equity mutual funds)
Other
Total
31 December 2013
31 December 2012
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
41%
59%
0%
100%
48%
50%
2%
100%
48%
50%
2%
100%
51%
47%
2%
100%
Fair Value Measurements Of Pension Plans’ Assets
The following table presents the fair value of plans’ assets by category and level of inputs used in their respective fair value determination as
described in Note 2.
31 December 2013
Fair value determination
31 December 2012
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
-
-
-
12,807
-
12,807
Level 2
7,737
54,036
14,978
96,228
517
173,496
Level 3
-
-
-
109
-
109
Total
fair value
7,737
54,036
14,978
109,144
517
186,412
Level 1
-
-
-
10,830
-
10,830
Level 2
9,389
57,491
12,232
70,282
3,477
152,871
Total
fair value
9,389
57,491
12,232
81,112
3,477
163,701
Level 3
-
-
-
-
-
-
At 31 December 2013, 35.6% (2012: 32.9 %) 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 2013, 0.2% and 1.2% (2012: 0.2% and 1.4%) 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 2014 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical benefit plans
are as follows:
Estimated Bank contributions for the year ending 31 December 2014
Estimated benefit payments by year:
2014
2015
2016
2017
2018
2019-2022
Pension plans
4,885
6,800
7,200
7,400
7,500
7,400
36,900
Post-retirement
medical benefit plan
3,298
3,298
3,530
3,768
4,002
4,274
25,596
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets as at
31 December 2013 was $nil (31 December 2012: $137.8 million and $131.9 million).
NOTE 13: CREDIT-RELATED ARRANGEMENTS AND COMMITMENTS
Commitments
As at 31 December 2013, the Bank was committed to expenditures under contract for sourcing and leases of $52.6 million and $21.5 million, respectively
(2012: $75.4 million and $24.7 million, respectively). Rental expense for premises leased on a long-term basis for the year ended 31 December 2013
amounted to $4.9 million (2012: $4.7 million).
86
The following table summarises the Bank’s commitments for sourcing, long-term leases and other agreements:
For the year ending 31 December
2014
2015
2016
2017
2018
2019 & thereafter
Total commitments
Sourcing
18,928
18,456
15,169
-
-
-
52,553
Leases
5,025
4,492
3,537
2,931
2,753
2,770
21,508
Other agreements
2,325
1,763
80
80
40
-
4,288
Total
26,278
24,711
18,786
3,011
2,793
2,770
78,349
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
31 December 2013
Gross
294,572
12,391
306,963
Collateral
292,204
9,088
301,292
Net
2,368
3,303
5,671
Gross
280,089
11,207
291,296
31 December 2012
Collateral
277,259
8,694
285,953
Net
2,830
2,513
5,343
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
Documentary and commercial letters of credit
Total unfunded commitments to extend credit
31 December 2013
299,062
2,635
301,697
31 December 2012
356,122
1,258
357,380
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 2013, $149.2 million (31 December 2012: $137.0 million) of standby letters of credit were issued under this facility.
Legal Proceedings
There are 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.
Butterfield Annual Report 2013 87
NOTE 14: INTEREST INCOME
Loans
The following table presents the components of loan interest income:
Contractual interest earned on mortgages
Contractual interest earned on 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 year-end
Balance of unamortised loan fees as at year-end
For the year ended
31 December 2013
88,292
95,689
183,981
(1,724)
4,785
187,042
(7,354)
7,380
31 December 2012
88,263
100,594
188,857
(2,578)
4,412
190,691
(9,078)
7,452
NOTE 15: SEGMENTED INFORMATION
At 31 December 2013, 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 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, mobile 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 retail, commercial and private banking services. Retail services are offered to individuals and
small to medium-sized businesses through three branch locations and through Internet banking, mobile banking, automated teller machines (“ATMs”)
and debit cards. Retail services include deposit services, consumer and mortgage lending, credit cards and property/auto insurance. 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. Cayman’s wealth management offering comprises investment management, advisory and brokerage services and
Butterfield Trust (Cayman) Limited, which provides trust, estate and company management.
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 fiduciary and ancillary 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
Less: inter-segment eliminations
Total
88
31 December 2013
31 December 2012
4,624,281
2,309,380
1,437,873
2,206
91,758
828,295
9,293,793
(422,978)
8,870,815
4,624,036
2,116,520
1,522,429
1,521
82,712
925,389
9,272,607
(439,598)
8,833,009
For the year ended
31 December 2013
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (deduct): inter-segment
eliminations / transactions
Total from continuing
operations
Net interest income
Inter-
Customer segment
1,496
135,404
1,172
50,809
3
19,805
-
1
170
17
(2,841)
17,773
-
223,809
Provision
for
credit
losses
(12,708)
(3,554)
(125)
-
58
1,504
(14,825)
Revenue
before
gains
Net income
before gains
and losses
Non-
interest
Total and central
income and losses expenses allocations
33,834
61,986
25,928
32,175
7,416
19,678
(670)
1,747
924
5,613
3,979
7,384
71,411
128,583
152,344
54,674
31,945
2,418
4,934
19,841
266,156
186,178
80,602
39,361
1,748
5,858
23,820
337,567
Gains
and
losses
6,953
(492)
(378)
-
-
181
6,264
Net
income
40,787
25,436
7,038
(670)
924
4,160
77,675
-
-
-
(2,620)
(2,620)
(2,620)
-
485
485
223,809
-
(14,825)
125,963
334,947
263,536
71,411
6,749
78,160
For the year ended
31 December 2012
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Add / (deduct): inter-segment
eliminations / transactions
Total from continuing
operations
Net interest income
Customer
129,464
43,413
21,618
1
135
17,074
211,705
Inter-
segment
1,316
1,220
(54)
-
395
(2,877)
-
Provision
for
credit
losses
(6,372)
(1,291)
(980)
-
-
(5,547)
(14,190)
Non-
interest
income
65,559
30,940
20,005
1,442
4,761
8,177
130,884
Revenue
before
gains
and losses
189,967
74,282
40,589
1,443
5,291
16,827
328,399
Net income
before gains
Total
expenses
164,879
54,829
30,810
2,464
5,579
24,565
283,126
and losses
and central
allocations
25,088
19,453
9,779
(1,021)
(288)
(7,738)
45,273
Gains
and
losses
(12,974)
4,497
(31)
-
(2,018)
(16,895)
(27,421)
Net
income
12,114
23,950
9,748
(1,021)
(2,306)
(24,633)
17,852
-
-
-
(2,341)
(2,341)
(2,341)
-
109
109
211,705
-
(14,190)
128,543
326,058
280,785
45,273
(27,312)
17,961
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 2013 89
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 enters into interest 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 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 foreign currency
derivative instruments to hedge its exposure to foreign currency risk. Certain hedging relationships are formally designated and qualify for hedge
accounting as fair value or net investment hedges. Risk management derivatives comprise the following:
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.
Net investment hedges
Foreign currency swaps and qualifying non-derivative instruments designated as net investment hedges are used to minimise the Bank’s exposure to
variability in the foreign currency translation of net investments in foreign operations. The effective portion of changes in the fair value of the hedging
instrument is recognised in AOCL consistent with the related translation gains and losses of the hedged net investment. For net investment hedges,
all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to minimise the risk of hedge
ineffectiveness.
For derivatives designated as net investment hedges, the Bank follows the forward-rate method in measuring the amount of ineffectiveness in a net
investment hedge. According to that method, all changes in fair value, including changes related to the forward-rate component and the time value of
currency swaps, are recorded in the foreign currency translation adjustment account within AOCL. To the extent all terms are not perfectly matched,
any ineffectiveness is measured using the hypothetical derivative method. Ineffectiveness resulting from net investment hedges is recorded in foreign
exchange income. Amounts recorded in AOCL are reclassified to earnings only upon the sale or liquidation of an investment in a foreign subsidiary.
For foreign-currency-denominated debt instruments that are designated as hedges of net investments, the translation gain or loss that is recorded in the
foreign currency translation adjustment account is based on the spot exchange rate between the functional currencies of the respective subsidiary.
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 and foreign exchange risk of the
Bank’s exposure. Changes in the fair value of derivative instruments not formally designated as hedges are recognised in foreign exchange 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 classified 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.
90
The following table shows the notional amounts and related fair value measurements of derivative instruments as at the balance sheet date:
31 December 2013
Risk management derivatives
Fair value hedges of fixed-rate loans
Net investment hedges
Derivatives not formally
designated as hedging instruments
Subtotal risk management derivatives
Client services derivatives
Derivative instrument
Interest rate swaps
Currency swaps
Currency swaps
Spot and forward
foreign exchange
Notional
amounts
-
171,396
168,343
339,739
Positive
fair value
Negative
fair value
Net
fair value
-
-
-
-
-
(10,004)
(9,381)
(19,385)
-
(10,004)
(9,381)
(19,385)
2,871,361
11,246
(10,167)
1,079
Total derivative instruments
3,211,100
11,246
(29,552)
(18,306)
31 December 2012
Risk management derivatives
Fair value hedges of fixed-rate loans
Net investment hedges
Derivatives not formally
designated as hedging instruments
Subtotal risk management derivatives
Derivative instrument
Interest rate swaps
Currency swaps
Currency swaps
Client services derivatives
Spot and forward
foreign exchange
Notional
amounts
8,529
42,523
301,161
352,213
Positive
fair value
Negative
fair value
Net
fair value
-
-
113
113
(89)
(116)
(89)
(116)
(10,779)
(10,984)
(10,666)
(10,871)
2,444,357
14,312
(13,972)
340
Total derivative instruments
2,796,570
14,425
(24,956)
(10,531)
In addition to the above, foreign denominated deposits, totalling $nil at 31 December 2013 (31 December 2012: $133.6 million), were designated as a
hedge of foreign exchange risk associated with the net investment in foreign operations.
The “net amounts” column within the following table represents the aggregate of our net exposure to each counterparty after considering the balance
sheet and disclosure-only netting adjustments. We manage derivative exposure by monitoring the credit risk associated with each counterparty using
counterparty specific credit risk limits, using master netting arrangements and obtaining collateral.
31 December 2013
Derivative assets
Currency swaps and forward foreign
exchange contracts
Derivative liabilities
Currency swaps and forward foreign
exchange contracts
31 December 2012
Derivative assets
Currency swaps and forward foreign
exchange contracts
Derivative liabilities
Currency swaps and forward foreign
exchange contracts
Gross amounts
Gross
amounts
recognised
offset in Net amounts in
consolidated
balance sheet
consolidated
balance sheet
Gross amounts
not offset in
consolidated
balance sheet
Amounts
net of
collateral in
consolidated
balance sheet
Collateral
pledged
11,075
(3,362)
7,713
2,723
-
10,436
4,217
(30,302)
(26,085)
(2,657)
19,210
(9,532)
Gross
amounts
recognised
Gross amounts
offset in
consolidated
balance sheet
Net amounts in
consolidated
balance sheet
Gross amounts
not offset in
consolidated
balance sheet
Amounts net
of collateral in
consolidated
balance sheet
Collateral
pledged
8,963
(982)
7,981
192
-
8,173
2,932
(21,462)
(18,530)
(174)
8,185
(10,519)
Butterfield Annual Report 2013 91
The following table shows the location and amount of gains (losses) recorded in the consolidated statement of operations on derivatives outstanding as
at 31 December 2013 and 2012.
For the year ended
Derivative instrument
Interest rate swaps
Spot and forward foreign exchange
Foreign currency options
Total net gains recognised in net income
Consolidated statement of operations line item 31 December 2013
86
Net other gains
2,030
Foreign exchange revenue
-
Foreign exchange revenue
2,116
31 December 2012
-
1,823
(852)
971
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. Management classifies these items
based on the level of inputs used in their respective fair value determination, 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.
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:
31 December 2013
Fair value
31 December 2012
Fair value
Level 1
Level 2
Level 3
Total
carrying
amount /
fair value
Level 1
Level 2
Level 3
Total
carrying
amount /
fair value
Financial assets
Trading investments
Debt securities issued
by non-US governments
Mutual funds
Total trading
Available-for-sale investments
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
Commercial mortgage-backed securities
Residential mortgage-backed
securities - Prime
Pass-through note
Equity securities
Total available-for-sale
Other assets - Derivatives
Other assets - Fund
Financial liabilities
Other liabilities - Derivatives
92
-
5,842
5,842
3,546
43,940
47,486
-
-
-
3,546
49,782
53,328
-
5,337
5,337
5,231
51,217
56,448
-
-
-
5,231
56,554
61,785
84,571
-
- 1,384,175
-
-
84,571
1,384,175
-
-
561,360
1,178,786
561,360
-
- 1,178,786
-
88,454
-
88,454
-
90,042
-
90,042
-
-
-
-
-
378,809
71,882
142,889
-
-
11,297
-
-
378,809
83,179
142,889
-
-
-
-
32,026
421,085
124,937
130,478
-
-
11,164
-
32,026
421,085
136,101
130,478
-
-
-
-
30,837
-
-
2,181,617
-
34,007
-
45,304
30,837
34,007
-
2,226,921
-
-
-
-
53
- 2,538,767
-
30,646
-
-
30,646
53
41,810 2,580,577
-
-
11,246
-
-
-
11,246
-
-
-
(8,481)
-
-
4,397
(8,481)
4,397
-
(29,552)
-
(29,552)
-
(1,889)
-
(1,889)
There were no transfers between Level 1 and Level 2 during the years ended 31 December 2013 and 31 December 2012.
The following table presents quantitative information about recurring fair value measurements of assets classified within Level 3 of the fair value hierarchy:
Financial instrument type
Asset-backed securities - Student loans
Pass-through note
Valuation technique
Unadjusted third-party priced
Unadjusted third-party priced
31 December 2013
11,297
34,007
The valuation techniques used for the Level 3 assets as presented in the above table, are described as follows:
Unadjusted third-party Price
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.
• Asset-backed securities (“ABS”) – The ABS is a federal family education loan programme 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 market for the security
is illiquid, a Level 2 classification is not supported.
• 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.
Level 3 reconciliation
Carrying amount at beginning of year
Purchases
Proceeds from sales, paydowns and maturities
Accretion recognised in net income
Realised and unrealised gains (losses)
recognised in other comprehensive income
Foreign exchange translation adjustment
Carrying amount at end of year
31 December 2013
Available-
for-sale
investments
41,810
-
(5,542)
1,929
7,107
-
45,304
Closed
ended
fund
4,397
-
(4,111)
-
-
(286)
-
31 December 2012
Closed
ended
fund
6,199
-
(1,154)
-
Available-
for-sale
investments
38,155
-
(4,992)
1,701
6,946
-
41,810
33
(681)
4,397
Items that are recognised at fair value on a non-recurring basis
31 December 2013
Fair value
31 December 2012
Fair value
Other real estate owned
Level 1
-
Level 2
27,407
Level 3
-
Total
carrying
amount /
fair value
27,407
Level 1
-
Level 2
34,360
Level 3
-
Total
carrying
amount /
fair value
34,360
The current carrying value of other real estate owned will be adjusted to fair value only when there is devaluation below cost.
Butterfield Annual Report 2013 93
Items other than those recognised at fair value on a recurring basis
31 December 2013
31 December 2012
Level
Carrying
amount
Fair Appreciation /
(depreciation)
value
Carrying
amount
Fair Appreciation /
(depreciation)
value
Financial assets
Level 1
Cash and cash equivalents
Short-term investments
Level 1
Investments held to maturity Level 2
Loans, net of allowance
for credit losses
Level 2
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Securities sold under
agreement to repurchase
Subordinated capital
Level 2
Level 2
Level 2
Level 2
Level 2
1,730,472
54,981
333,394
1,730,472
54,981
315,534
-
-
(17,860)
1,542,526
76,213
239,342
1,542,526
76,213
244,793
-
-
5,451
4,088,225
4,082,741
(5,484)
3,955,960
3,946,081
(9,879)
5,644,122
1,953,607
40,222
5,644,122
1,955,096
40,222
25,535
207,000
25,543
203,521
-
(1,489)
-
(8)
3,479
5,324,105
1,942,667
126,466
5,324,105
1,944,531
126,466
109,021
260,000
109,021
254,127
-
(1,864)
-
-
5,873
All of the held-to-maturity securities held by the Bank as at 31 December 2013 and 31 December 2012 are classified as Level 2 of the fair value hierarchy.
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.
31 December 2013
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
(in $ millions)
Assets
Cash and deposits with banks
Short-term investments
Investments
Loans
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 sensitivity gap
Cumulative interest rate sensitivity gap
94
1,483
44
347
3,581
-
5,455
-
4,587
1,432
26
-
137
6,182
(727)
(727)
-
7
55
253
-
315
-
57
212
-
-
-
269
-
4
32
19
-
55
-
-
123
-
-
-
123
-
-
496
138
-
634
-
-
215
-
-
70
285
-
-
1,634
27
-
1,661
-
-
-
-
-
-
-
247
-
50
70
384
751
803
1,012
-
-
197
-
2,012
Total
1,730
55
2,614
4,088
384
8,871
803
5,656
1,982
26
197
207
8,871
46
(681)
(68)
(749)
349
(400)
1,661
1,261
(1,261)
-
-
-
31 December 2012
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
(in $ millions)
Assets
Cash and deposits with banks
Short-term investments
Investments
Loans
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
1,326
64
673
3,490
-
5,553
-
4,505
1,576
109
-
90
6,280
-
8
314
180
-
502
-
-
204
-
-
100
304
-
4
43
41
-
88
-
-
108
-
-
-
108
-
-
559
100
-
659
-
-
81
-
-
45
126
Interest rate swaps
8
-
(8)
-
-
-
1,236
94
-
1,330
-
-
-
-
-
25
25
-
217
-
57
51
376
701
857
919
-
-
214
-
1,990
-
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
(719)
(719)
198
(521)
(28)
(549)
533
(16)
1,305
1,289
(1,289)
-
Total
1,543
76
2,882
3,956
376
8,833
857
5,424
1,969
109
214
260
8,833
-
-
-
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 paid a fixed coupon of
5.15% until 27 May 2013 when they became 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. 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. 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 five-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 $78 million outstanding subordinated notes redeemed in May 2008. The notes issued under Series A paid a fixed coupon of
7.59% until 27 May 2013 when they became redeemable in whole at the option of the Bank. In May 2013, the Bank exercised its option to redeem
the Series A note outstanding at face value. The Series B notes pay a fixed coupon of 8.44% until 27 May 2018 when they also become redeemable in
whole at the Bank’s option. The Series B notes were priced at a spread of 4.51% over the 10-year US Treasury yield.
No interest was capitalised during the years 2013 and 2012.
Butterfield Annual Report 2013 95
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2013. The
interest payments are calculated until contractual maturity using the current LIBOR rates.
Interest payments until
contractual maturity
Interest rate
Earliest date
until date
redeemable maturity date redeemable
Contractual
Interest rate from
earliest date
redeemable to contractual
Principal Within 1 to 5 After
maturity outstanding 1 year years 5 years
27-May-2013
2-Jul-2010
2-Jul-2015
27-May-2018
27-May-2018
2-Jul-2015
2-Jul-2020
27-May-2023
5.15%
4.81%
5.11%
8.44%
3 months US$ LIBOR + 2.000%
3 months US$ LIBOR + 1.095%
3 months US$ LIBOR + 1.695%
3 months US$ LIBOR + 4.929%
-
47,000 1,056 3,693
90,000 1,207
-
903
45,000 2,300 5,143 1,529
25,000 2,110 8,037 5,820
207,000 6,673 17,776 7,349
Subordinated capital
Bermuda
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
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. Numbers of shares are expressed in thousands.
Basic earnings per share (1)
Basic earnings per share from continuing operations
Basic earnings per share from discontinued operations
Net income from continuing operations
Less: Preferred dividends declared and guarantee fee
Less: Premium on preferred share buyback
Net income from continuing operations attributable to common shareholders
Net income from discontinued operations
Net income attributable to common shareholders
Weighted average number of common shares issued
Weighted average number of common shares held as treasury stock
Adjusted weighted average number of common shares (in thousands)
Diluted earnings per share (1)
Diluted earnings per share from continuing operations
Diluted earnings per share from discontinued operations
Net (loss) income attributable to common shareholders
Net income from discontinued operations
Net income attributable to common shareholders
For the year ended
31 December 2013
0.11
0.11
-
31 December 2012
0.01
-
0.01
78,160
(16,990)
(2,756)
58,414
-
58,414
556,933
(7,567)
549,366
0.11
0.11
-
58,414
-
58,414
17,961
(18,000)
(967)
(1,006)
7,620
6,614
556,933
(2,515)
554,418
0.01
-
0.01
(1,006)
7,620
6,614
554,418
1,939
556,357
Adjusted weighted average number of common shares issued
Weighted average number of dilutive share-based awards
Adjusted weighted average number of diluted common shares
(1)Due to rounding, earnings per share on continuing and discontinued operations may not sum to earnings per share amount on net income
549,366
4,205
553,571
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 the year ended 31 December 2013, weighted-average options to purchase 31.8 million (31 December 2012: 33.3 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 1.2 million 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.
96
During the year ended 31 December 2013, the weighted-average number of outstanding awards of unvested common shares (see Note 21) was
8.6 million (31 December 2012: 7.2 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’ unrecognised expense is considered to be the proceeds the
employees would need to pay to purchase accelerated vesting of the awards. For purposes 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 $3.51
(31 December 2012: $3.61) for 4.28 million shares of common stock (31 December 2012: 4.15 million) were not included in the computation of earnings
per share for the years ended 31 December 2013 and 2012 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 2013, the Bank has three share-based compensation plans, which are described below.
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 the 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 per cent of the Bank’s fully diluted
common shares, equal to approximately 29.5 million shares, are available for grant to certain officers. In 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. 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 2010 Stock Option 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 option holder’s continued employment with the Bank.
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 performance options would vest. The Bank determined that at 31 December 2013 the performance options granted have
an aggregate fair value of $9.5 million (2012: $9.6 million). If the probability of a valuation event becomes more likely than not, some or all of the
$9.5 million unrecognised expense relating to the performance options will be recognised as an expense.
The table below presents the weighted average fair value of stock options granted:
No options were granted in the year ended 31 December 2013
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
N/A
$0.42
$0.41
$0.62
Performance options
N/A
$0.44
$0.43
$0.66
Butterfield Annual Report 2013 97
The table below presents the number of shares transferable upon exercise of the options outstanding:
For the year ended 31 December 2013
Number of shares transferable
upon exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
2010 Stock
1997 Stock
Option Plan Option Plan
Total
Aggregate
2010 Stock intrinsic value
1997 Stock
1997 Stock
Option Plan Option Plan Option Plan Option Plan ($ thousands)
2010 Stock
Outstanding at
beginning of year
Granted
Exercised
Forfeited / cancelled
Resignation / Retirement
/ Redundancy
Expiration at end of plan life
Outstanding at the
end of the year
Vested and exercisable
at the end of the year
4,577
-
-
(1)
-
(584)
28,750 33,327
-
(596)
(303)
-
(596)
(302)
(44)
-
(44)
(584)
12.77
1.18
15.78
-
12.70
1.17
1.17
1.17
-
-
-
-
-
-
-
3,992
27,808 31,800
12.78
1.18
3.12
6.65
8,636
3,992
6,429 10,421
12.78
1.17
3.12
6.41
For the year ended 31 December 2012
Number of shares transferable
upon exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
1997 Stock
Option Plan
2010 Stock
Option Plan
Total
1997 Stock
Option Plan
2010 Stock
Option Plan
1997 Stock
Option Plan
2010 Stock
Option Plan
Outstanding at
beginning of year
Granted
Exercised
Forfeited / cancelled
Resignation / Retirement
/ Redundancy
Expiration at end of plan life
Outstanding at the
end of the year
Vested and exercisable
at the end of the year
5,269
-
(543)
-
(149)
28,363 33,632
3,100
(5)
(2,605)
3,100
(5)
(2,062)
12.75
1.22
1.25
13.82
1.21
(646)
-
(646)
(149)
-
6.87
1.21
4,577
28,750 33,327
12.81
1.22
3.98
7.64
1,245
4,577
3,598
8,175
12.81
1.21
3.98
7.37
Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s EDIP, shares were awarded to Bank employees and executive management based on time-vesting condition, which states that the
shares will vest equally over a three-year period from the effective grant date, subject to the employee’s continued employment with the Bank.
The table below presents the number of shares transferable upon vesting of the shares:
For the year ended
31 December 2013
Number of shares
transferable upon vesting (thousands)
1,976
1,367
(755)
(8)
(397)
2,183
31 December 2012
Number of shares
transferable upon vesting (thousands)
1,276
1,554
(477)
(377)
-
1,976
Outstanding at beginning of year
Granted
Vested
Forfeited / cancelled
Resignation / Retirement / Redundancy
Outstanding at the end of the year
98
Aggregate
intrinsic value
($ thousands)
-
-
-
-
-
-
2011 and 2012 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:
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 the
three-year period from the effective grant date.
2013 Executive Long-Term Incentive Share Plan (“2013 ELTIP”)
Under the Bank’s 2013 ELTIP, performance shares were awarded to executive management. These shares will vest upon the achievement of certain
performance targets in the three-year period from the effective grant date.
The Board of Directors approved the 2013 Employee Deferred Incentive Plan and the 2013 Executive Long-Term Incentive Share Plan on
26 February 2013.
The table below presents the number of shares transferable upon vesting of the shares:
Outstanding at beginning of year
Granted
Vested
Forfeited / cancelled
Resignation / Retirement / Redundancy
Outstanding at the end of the year
31 December 2013
Number of shares
transferable upon vesting (thousands)
5,231
3,520
(900)
(1,110)
(300)
6,441
For the year ended
31 December 2012
Number of shares
transferable upon vesting (thousands)
2,515
4,056
(928)
(412)
-
5,231
The following table presents the share-based compensation cost that has been charged against net income and the value of share-based settlements.
Share-based compensation plans
Awards granted in year 2010
and after - continuing operations
Awards granted in year 2010
and after - discontinued operations
Total share-based compensation
Share-based settlement plans
Directors’ shares and retainers settlement plan
Total share-based payments
31 December 2013
31 December 2012
Stock option
plan
EDIP
and ELTIP
Stock option
plan
Total
EDIP
and ELTIP
Total
For the year ended
1,486
4,861
6,347
1,398
3,723
5,121
-
1,486
-
4,861
-
6,347
-
1,398
63
3,786
173
6,520
63
5,184
293
5,477
The following table presents the unrecognised expense attributable to each plan.
Unrecognised expense
2010 Stock Option Plan
Time vesting options
Performance vesting options
EDIP
2011, 2012, 2013 ELTIP
Time vesting shares
Performance vesting shares
Total unrecognised expense
31 December 2013
31 December 2012
As at
1,826
9,479
1,614
727
3,978
17,624
3,665
9,608
1,557
1,914
2,358
19,102
Butterfield Annual Report 2013 99
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 initially introduced two share buy-back programmes on 1 May 2012 as a means to improve shareholder liquidity and facilitate growth in
share value. Each programme was approved by the Board of Directors for a period of 12 months, in accordance with the regulations of the BSX.
The BSX must be advised monthly of shares repurchased and cancelled by the Bank.
Common Share Buy-Back Programme
The Board of Directors approved the 2012 common share buy-back programme on 1 May 2012 with up to six million common shares authorised to be
acquired. On 10 December 2012, the Board approved increasing the number of common shares to be acquired up to 10 million.
Effective 1 April 2013, the Board cancelled the 2012 common share buy-back programme and approved the 2013 common share buy-back programme
for the purchase of up to 10 million common shares. On 2 December 2013, the Board increased the total number of common shares authorised to be
purchased for treasury to 15 million.
Total common share buy-backs for the year ending 31 December were as follows:
Acquired number of shares (to the nearest 1)
Average cost per common share
Total cost (in Bermuda dollars)
2013
4,038,482
1.39
5,610,907
2012
Total
7,260,051 11,298,533
1.29
8,999,061 14,609,968
1.24
Preference Share Buy-Back Programme
The Board of Directors approved the 2012 preference share buy-back programme on 1 May 2012 with up to 2,000 preference shares authorised to be
purchased for cancellation. On 10 December 2012, the Board approved increasing the number of preference shares to be purchased for cancellation
up to 8,000.
During the second quarter of 2013, the Board approved the 2013 preference share buy-back programme authorising in total the purchase and
cancellation of up to 15,000 preference shares. On 2 December 2013, the Board increased the total number of preference shares authorised to be
repurchased and cancelled to 26,600 preference shares.
Total preference share buy-backs for the year ending 31 December were as follows:
Acquired number of shares (to the nearest 1)
Average cost per preference share
Total cost (in Bermuda dollars)
2013
11,972
1,230.26
14,728,624
Total
2012
16,394
4,422
1,218.40
1,227.06
5,387,777 20,116,401
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.
NOTE 23: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below presents the changes in Accumulated Other Comprehensive Income (Loss) (“AOCL”) by component for the year ended:
Unrealised losses on
translation of net
investment in foreign
operations
(10,487)
Unrealised
gains (losses)
on available-
for-sale
investments
44,781
2,855
(7,632)
(84,917)
(40,136)
31 December 2013
Balance at beginning of year
Other comprehensive income
(loss), net of taxes
Balance at end of year
Employee future benefits
Post-
retirement
healthcare
1,178
Subtotal -
employee
future
benefits
(46,817)
Total AOCL
(12,523)
5,546
6,724
17,925
(28,892)
(64,137)
(76,660)
Pension
(47,995)
12,379
(35,616)
100
Unrealised losses on
translation of net
investment in foreign
operations
(11,321)
Unrealised
gains (losses)
on available-
for-sale
investments
1,663
834
(10,487)
43,118
44,781
Employee future benefits
Post-
retirement
healthcare
8,871
Subtotal -
employee
future
benefits
(31,644)
Total AOCL
(41,302)
(7,693)
1,178
(15,173)
(46,817)
28,779
(12,523)
Pension
(40,515)
(7,480)
(47,995)
31 December 2012
Balance at beginning of year
Other comprehensive income
(loss), net of taxes
Balance at end of year
The net change in each component of AOCL is as follows:
Line item in the consolidated
statement of operations, if any
For the year ended
31 December 2013
31 December 2012
Net unrealised (loss) gains on translation
of net investment in foreign operations
adjustments
Foreign currency translation adjustments
Net investment hedge gains (losses)
Net change
Available-for-sale investment adjustments
Gross unrealised gains (losses)
arising during the year
Reclassification of realised
gains (losses) to net income
Foreign currency translation
adjustments of related balances
Net change
Employee future benefits adjustments
Net actuarial gain (loss) arising during
the year on defined benefit pension
Net actuarial gain (loss) arising during the
year on post-retirement medical benefits
Amortisation of actuarial gains
(losses) on defined benefit pension
Amortisation of prior period service
credit on post-retirement medical benefits
Amortisation of actuarial gains
(losses) on post-retirement medical benefits
Change in deferred taxes
Foreign currency translation
adjustments of related balances
Net change
N/A
5,963
(3,108)
2,855
(84,139)
Net realised gains on available-for-sale investments
(61)
N/A
N/A
N/A
(717)
(84,917)
11,755
10,023
9,957
(9,123)
834
39,427
2,028
1,663
43,118
(9,864)
(3,048)
Salaries and other employee benefits
1,644
1,366
Salaries and other employee benefits
(6,719)
(6,719)
Salaries and other employee benefits
N/A
N/A
2,242
(1,656)
636
17,925
2,074
955
63
(15,173)
Other comprehensive income (loss)
(64,137)
28,779
NOTE 24: CAPITAL STRUCTURE
Authorised Capital
The Bank’s total authorised share capital as of 31 December 2013 and 2012 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.
Preference Shares
On 22 June 2009, the Bank issued 200,000 Government guaranteed, 8.00% non-cumulative perpetual limited voting preference shares (the
“preference shares”). The issuance price was US$1,000 per share. The preference share buy-backs are disclosed in “Note 22: Share Buy-Back Plans.”
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.
Butterfield Annual Report 2013 101
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 the Government now holds 4,150,774 warrants with an exercise price of $3.61 as at
31 December 2013.
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 (“CVCP”) shares for each right unit exercised amounting to
8,264,157 CVCP shares issued. The CVCP shares have specific rights and conditions attached, which is explained in detail in the prospectus of the
rights offering.
Dividend Declared
During the year ended 31 December 2013, the Bank declared cash dividends totalling $0.07 (2012: nil) for each common share and contingent value
convertible preference share on record as of the related record dates. During the years ended 31 December 2013 and 2012, the Bank declared the full
8.00% cash dividends on preference shares in each quarter.
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 in excess of regulatory minimums as at
31 December 2013 and 31 December 2012. The following table sets forth the Bank’s capital adequacy in accordance with Basel II framework:
Capital
Tier 1 capital
Tier 2 capital
Deductions
Total capital
Weighted Risk Assets
Total weighted risk assets
Capital Ratios (%)
Tier 1 common
Tier 1 Total
Total capital
31 December 2013
31 December 2012
823,577
169,221
-
992,798
792,266
244,225
(2,935)
1,033,556
4,197,744
4,275,055
15.2%
19.6%
23.7%
14.0%
18.5%
24.2%
NOTE 25: INVESTMENT IN AFFILIATES
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.
During December 2013, the Bank sold its 30% interest in Friesenbruch-Meyer Insurance Ltd., a Bermuda-based insurance company, for $3.4 million,
resulting in a gain of $0.4 million.
At 31 December 2013, the Bank recognised a $3.8 million impairment loss in one of its investments in affiliate as the decline in fair value of the
investment was considered other than temporary.
NOTE 26: 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 2013 and 2012.
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.
102
NOTE 27: 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 2013 and 2012, the Bank did not record any unrecognised tax benefits or expenses and has no uncertain tax
positions as at 31 December 2013 and 2012.
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 2013 and 2012. For the years ended 31 December 2013 and 2012, the Bank did not incur any interest or pay any penalties.
The components of income taxes attributable to the Bank’s subsidiaries’ operations were as follows:
Income taxes in consolidated statement of operations
Current tax expense
Deferred tax expense
Total tax expense
31 December 2013
31 December 2012
859
32
891
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:
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
Other - net
Income tax expense (benefit) at effective tax rate
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 assets
Deferred income tax liability
Other
Net deferred income tax asset
For the year ended
31 December 2013
%
-
2
(1)
1
-
-
2
$
-
1,714
(1,116)
587
-
(294)
891
31 December 2012
%
-
4
17
4
-
-
25
$
-
841
4,132
900
-
17
5,890
31 December 2013
31 December 2012
4,173
201
815
10
12
-
5,211
(4,304)
907
(5)
902
5,818
615
510
10
12
(225)
6,740
(5,378)
1,362
-
1,362
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 2013, a valuation allowance of $4.3 million (2012: $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 our projections for growth.
Butterfield Annual Report 2013 103
Operating Loss and Tax Credit Carry Forward
The Bank has net taxable losses carry forwards related to the Bank’s international operations of approximately $20 million, which have an indefinite life.
NOTE 28: RELATED PARTY TRANSACTIONS
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
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 2013 amount to $222.2 million (2012: $225.7 million) resulting in an interest rate benefit to employees of $5.7 million
(2012: $6.2 million).
Certain Directors of the Bank, companies in which they are principal owners, and trusts in which they are involved, have loans with the Bank.
These loans were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements. As at
31 December 2013, related party Director loan balances were $68.6 million (2012: $3.1 million).
On 27 June 2013, the Bank executed a $95 million loan agreement with an investment fund managed by a significant shareholder which provides for
maturity on 30 June 2017. This loan was made in the ordinary course of business on normal commercial terms. At 31 December 2013, $95 million was
outstanding under this agreement. For the year ended 31 December 2013, $1.8 million of interest income has been recognised in the consolidated
statement of operations.
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.
Repurchase Facility Agreement
During 2013, the Bank entered into a repurchase facility agreement for a $225 million line of repurchase facility at market rates and terms with CIBC.
At 31 December 2013, the repurchase agreement balance with CIBC was $25.5 million (2012: $nil).
Financial Instruments With Related Parties
At 31 December 2013, the Bank held $112.1 million (2012: $125.3 million) in cash and cash equivalents with CIBC. As at 31 December 2013 the Bank
held forward foreign exchange contracts with CIBC with a notional amount of $317.1 million (2012: $318.6 million) with unrealised gains of $1.1
million (2012: gain of $0.7 million) and foreign currency swaps with a notional amount of $nil (2012: $89.4 million) with unrealised losses of $nil
(2012: loss of $8.7 million).
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. 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 29: COMPARATIVE INFORMATION
Certain prior-year figures have been reclassified to conform to current year presentation. Cash and cash equivalents and deposits as at 31 December
2012 have been reduced by $109 million with a corresponding reduction in cash flows provided by financing activities.
NOTE 30: SUBSEQUENT EVENTS
On 2 January 2014, the Bank fully redeemed the 2005 issuance Series A subordinated debt for its nominal value of $90 million.
On 13 January 2014, the Bank reached an agreement in principle to acquire the trust and corporate services business of Legis Group, an independent
financial services company based in Guernsey.
On 25 February 2014, the Board of Directors declared a fourth interim dividend of $0.01 per common and contingent value convertible preference
share and a special dividend of $0.01 per common and contingent value convertible preference share, to be paid on 28 March 2014 to shareholders of
record on 14 March 2014.
The Bank has performed an evaluation of subsequent events through to 25 February 2014, the date the financial statements were issued.
104
Shareholder
Information
Butterfield Annual Report 2013 105
DIRECTORS’ AND EXECUTIVE OFFICERS’ SHARE INTERESTS
AND DIRECTORS’ SERVICE CONTRACTS
In accordance with Regulation 6.8(3) of Section IIA of the Bermuda
Stock Exchange Listing Regulations, the total interests in common
shares and contingent value convertible preference shares of the
Bank by all Directors and Executive Officers* at 31 December 2013
was 4,127,901 shares. In addition, this group also has interests in
70 non-cumulative perpetual limited voting preference shares.
As of 31 December 2013, Executive Officers also had interests in
14,600,000 stock options pursuant to the 2010 Stock Option Plan that
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
2013 and, as of that date, there were no other equity securities
issued by the Bank.
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 28 to the Bank’s 31 December 2013 consolidated financial
statements, there are no other contracts of significance subsisting
during or at the end of the financial year ended 31 December 2013 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
106
106
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
Mitsubishi UFJ Fund Services
26 Burnaby Street
Hamilton, HM 11
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
E-mail: bntbshareholders@mitsubishiufjfundservices.com
MEDIA RELATIONS / PUBLICATION REQUESTS
Vice President, Communications, Brand & Public Affairs
Tel: (441) 299 1624
E-mail: mark.johnson@butterfieldgroup.com
INVESTOR RELATIONS
Executive Vice President, Chief Financial Officer
Tel: (441) 298 4758
E-mail: john.maragliano@butterfieldgroup.com
WRITTEN NOTICE OF SHARE REPURCHASE PROGRAMME
— BSX REGULATION 6.38
Common Share Buy-Back Programme: The Board of Directors
approved the 2012 common share buy-back programme on 1 May
2012 with up to 6 million common shares authorised to be acquired.
On 10 December 2012, the Board approved increasing the number
of common shares to be acquired up to 10 million. Effective
1 April 2013, the Board cancelled the 2012 common share buy-back
programme and approved the 2013 common share buy-back
programme for the purchase of up to 10 million common shares. On
2 December 2013, the Board increased the total number of common
shares authorised to be purchased for treasury from 10 million to
15 million.
Preference Share Buy-Back Programme: The Board of Directors
approved the 2012 preference share buy-back programme on 1 May
2012 with up to 2,000 preference shares authorised to be purchased
for cancellation. On 10 December 2012, the Board approved
increasing the number of preference shares to be purchased for
cancellation up to 8,000. During the second quarter of 2013, the
Board approved the 2013 preference share buy-back programme,
authorising in total the purchase and cancellation of up to 15,000
preference shares. On 2 December 2013, the Board increased the
total number of preference shares authorised to be repurchased
and cancelled from 15,000 to 26,600.
During 2013, the Bank repurchased 4,038,482 common shares to
be held as treasury shares at a cost of $5.6 million, and 11,972
preference shares, which were subsequently cancelled, at a cost of
$14.7 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.
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 this way in the 12 months to
31 December 2013.
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 2013, the following were registered holders of 5%
or more of the issued share capital:*
Carlyle Global Financial Services Partners LP, 19.38%
Canadian Imperial Bank of Commerce, 18.85%
Wellcome Trust Investments, 6.89%
Ithan Creek Master Investor (Cayman) LP, 6.79%
Rosebowl Western, 6.79%
*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 Place
12 Albert Panton 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 2013 107
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: info@uk.butterfieldgroup.com
108
Butterfield is committed to environmentally conscious
Butterfield is committed to environmentally conscious
printing. The following savings to our natural resources were
printing. The following savings to our natural resources were
realised in the printing of this Annual Report:
realised in the printing of this Annual Report:
Energy: 8,611,804 BTUs
Energy: 8,611,804 BTUs
Trees: 12
Trees: 12
Wastewater: 19,550 liters
Wastewater: 19,550 liters
Air Emissions: 510 kg
Air Emissions: 510 kg
Solid Waste: 259 kg
Solid Waste: 259 kg
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