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BUTTERFIELD GROUP
UNITED KINGDOM
GUERNSEY
SWITZERLAND
BERMUDA
THE BAHAMAS
CAYMAN ISLANDS
Community Banking
Wealth Management
UK Residential Property Lending
Assets: $10.3 billion
Employees: 1,141
2015
CORE EARNINGS
$113.9
MILLION
7.1%
2015
NET INCOME
$77.7
MILLION
28.1%
2015
CORE CASH RETURN
ON AVERAGE TANGIBLE
COMMON EQUITY
18.4%
2015
CORE CASH EARNINGS
PER SHARE (DILUTED)
$0.20
330 bps
17.6%
2015
CORE EFFICIENCY
RATIO
66.0%
170 bps
IMPROVEMENT
1
CORE EARNINGS (IN $ MILLIONS)
CAPITAL
120
100
80
60
40
20
76.6
54.9
37.8
106.4
113.9
Total Capital Ratio
Tier 1 Capital Ratio
25%
23.5%
24.2%
23.7%
22.2%
19.0%
15%
5%
2011
2012
2013
2014
2015
17.7%
2011
18.5%
2012
19.6%
2013
19.0%
2014
16.2%
2015
AWARDS
The Banker
Bank of the Year 2015
BERMUDA
The Banker
Bank of the Year 2015
CAYMAN ISLANDS
PWM / The Banker
Best Private Bank 2015
BERMUDA
Euromoney
Private Banking Survey -
Award for Succession
Planning Advice & Trusts
GUERNSEY
STEP
Trust Company of the Year
INTERNATIONAL
Global Finance
Best Developed
Market Bank 2015
BERMUDA
Global Finance
Best Private Bank 2015
BERMUDA
Euromoney
Private Banking Survey -
Award for Services for
Super Affluent Clients
CAYMAN ISLANDS
Find out more at
www.butterfieldgroup.com
CHAIRMAN’S LETTER TO THE SHAREHOLDERS
Dear shareholders,
The growth strategy for Butterfield will, therefore, centre on acquisitions of
complementary businesses in markets where we can achieve economies of scale
During 2015, Butterfield’s overall financial and competitive position improved.
to drive strong returns. Previous acquisitions of trust and banking businesses
The Bank’s core businesses produced stable, healthy earnings, contributing to
to complement our existing operations in Guernsey and Cayman have proved
already-strong capital reserves and enabling us to make strategic changes that will
accretive to earnings, and the agreement to acquire HSBC’s private banking trust
enhance the Bank’s capacity for sustainable growth.
and investment management businesses in Bermuda—announced in October and
anticipated to be completed during the second quarter of 2016—is expected to
With a view to returning value to our shareholders over the long term,
similarly benefit the Bank’s bottom line going forward.
your Board effected and oversaw changes in four key areas during the year:
the Bank’s ownership structure; governance structure; growth strategy; and
Subsequent to year end, Butterfield announced the orderly winding down of
business portfolio.
its deposit taking and investment management businesses in London, a highly
competitive market segment in which the Bank does not have sufficient scale
In May, Butterfield repurchased for cancellation the majority of Canadian Imperial
to generate strong returns. The closure of the UK bank will free up capital to be
Bank of Commerce’s 19% ownership stake in Butterfield. 80 million common
deployed to development of our other businesses and markets.
shares were purchased from CIBC and subsequently cancelled, with the balance
of CIBC’s shareholding taken up by the Carlyle Group and other shareholders.
Maximising long-term returns for our shareholders requires striking an optimal
This reduced the number of Butterfield common shares outstanding by 14.0%,
balance between capital preservation, allocating funds to business investment
benefitting our remaining shareholders by increasing their percentage ownership
initiatives, and rewarding shareholders more directly for their ownership in the
in the Bank, which should serve to enhance future investment returns. This
Bank. Your Board declared dividends of $0.01 per common share and $20 per
significant transaction contributed to a reduction of our Tier 1 capital ratio to
preference share from earnings in each quarter of 2015. The Board, however,
16.2% at year-end 2015, a decrease of 280 basis points from year-end 2014, but
decided to forego the declaration of a special dividend from annual earnings,
still comfortably in excess of regulatory minimums.
opting to maintain a capital margin to fund future, opportune investments.
2
2
Concurrently with its full divestment in Butterfield, CIBC ceased to have rights
Outside of the CIBC share repurchase, under the Bank’s buy-back programmes,
to Board representation, and Shawn Beber resigned as a Butterfield Director. In
Butterfield purchased for treasury 2.5 million common shares at a total cost of
other Board changes, Michael Collins joined as an Executive Director upon his
$4.9 million, and for cancellation, 183 preference shares at a cost of $0.2 million.
appointment to the role of Chief Executive Officer at the end of July, and Brendan
McDonagh, Executive Chairman, retired from the Bank and Board in October,
It is the view of your Board that, over time, the integration of acquired businesses,
whereupon I was honoured to take up the Chairmanship at the request of my
particularly wealth businesses that will generate steady, fee-based income to
fellow Directors.
complement banking revenues, rising interest rates and improving economic
conditions will enhance the growth and stability in the Bank’s earnings, enabling
Working closely with Michael and the executive management team, your Board
us to progressively increase cash dividends.
authorised the restructuring of management within several key functions that was
implemented subsequent to year end. The restructuring finalises the alignment
On behalf of my fellow Directors, I thank the management and employees of
of major functions and business lines to Group reporting structures, which will, in
Butterfield who have done an exceptional job running the Bank in a challenging
turn, foster improved communication within the organisation and enable the Bank
regulatory and economic environment. Group wide, Butterfield is fortunate to have
to run more efficiently and respond more effectively to business opportunities
experienced, knowledgeable professionals on staff who dedicate their careers to
and challenges.
meeting the needs of our clients and communities. I also extend my thanks to you,
our shareholders, for your ongoing support.
The current dislocation in the international banking sector, which has seen
several global banks exit our home markets, continues to present a significant
opportunity for Butterfield. It is the view of your Board that the most efficacious
path to enhancing value for shareholders is to build the Bank’s presence in quality
international jurisdictions in which we have expertise and a long history of
success. Echoing the theme of this year’s Annual Report, it is in those markets that
Butterfield, as an independent financial institution, is “in its element” and enjoys
competitive advantages.
Barclay Simmons
Chairman of the Board
CHIEF EXECUTIVE OFFICER’S REPORT
Butterfield continued to execute its strategy in 2015, building wealth management
The Bank incurred non-core charges of $36.2 million, primarily in the fourth
through acquisitions, while growing community banking organically. We took
quarter, which reduced Butterfield’s net income by the same amount. Recognising
decisive steps to address legacy management and structural issues, positioning the
these losses in 2015 addresses legacy issues, including the wind down of our
Bank to deliver an improved run rate in 2016 and beyond.
London bank, US tax compliance remediation, and severance associated with
We had core earnings of $113.9 million for the year, an increase of 7.1% over
to the exploration of US stock exchange listing, which would provide access to
2014. Core cash earnings per share increased to $0.20 from $0.17, and core cash
capital for future trust and wealth management acquisitions. There will be some
return on average tangible common equity improved 330 basis points to 18.4%.
additional expenses associated with these projects, but taking these charges now
Butterfield’s performance improved through acquisitions, organic growth, and cost
allows us to execute our growth strategy, while providing greater predictability of
initiatives, despite historically low interest rates and weak demand for loans in our
earnings and an enhanced run rate going forward.
a senior management restructuring. We also incurred non-core charges related
key markets.
Following our wealth management acquisitions in Guernsey and Cayman, we
losses in 2015 dropping to $5.7 million from $8.0 million the previous year, an
announced the acquisition of HSBC’s private banking trust and investment
encouraging indication of economic recovery in our credit markets. We continue
management businesses in Bermuda. In each of these transactions, we deployed
to invest heavily in “know your client”, anti-money laundering, and tax reporting
capital in jurisdictions where we have scale and a deep understanding of the social
technology and headcount to ensure that, as Butterfield employees, compliance is
and economic landscape.
the most important thing we do every day.
The performance of the loan portfolio improved with the net provision for credit
We have shown a unique ability
to identify, acquire, and integrate
private trust companies, a
sector in which Butterfield has
excelled for over seven decades.
Butterfield’s trust and banking
“Butterfield continued to execute its strategy in 2015,
building wealth management through acquisitions,
while growing community banking organically. ”
After six years with Butterfield,
it was my honour to be
appointed Chief Executive
Officer, and I am pleased to
be part of a leadership team
that is composed of financial
services have been tailored to meet the needs of family office clients, while our
professionals with extensive experience in their respective fields. In 2015, we
culture engenders a work environment that is conducive to hiring and retaining
welcomed Michael Schrum as our Chief Financial Officer and Beth Bauman as our
the best trust professionals in the industry. Butterfield has increased its trust
Group Head of Human Resources. Together, the management team is focused on
and custody assets under administration to over $100 billion by developing and
leveraging Butterfield’s history, culture, and earnings capacity to become a leading
3
acquiring an ultra high net worth client base in Europe, Asia, and Latin America.
independent bank and wealth manager in the highest quality jurisdictions.
We are able to retain these multi-generational family relationships by delivering
exceptional service, management continuity, and fiduciary expertise.
Our success in serving clients and building our core businesses was recognised
during the year with a number of industry accolades, including The Banker’s Bank
Community banking in Bermuda and Cayman also grew during the year with a
of the Year awards in Bermuda and Cayman, the third consecutive year we have
6% increase in deposits, a result of gradually recovering economies and our drive
received these awards. Butterfield was named Private Bank of the Year in Bermuda
to win market share. We will continue to invest in new products designed for
by both PWM/The Banker and Global Finance magazine. Global Finance also
the personal and corporate clients who live and work in these two high quality
named Butterfield Best Bank in Bermuda in its annual listing of the world’s best
international financial centres. Our diverse client base ranges from local families
developed market banks. Additionally, Butterfield Trust was named Trust Company
who have banked with us for generations to global insurers, hedge funds, shipping
of the Year at the prestigious STEP Private Client Awards, underlining Butterfield’s
enterprises, and biotech companies.
leading position in the global trust industry.
With the increase in deposits and limited lending opportunities, our investment
As in previous years, Butterfield was pleased to provide donations and support
portfolio grew by over $200 million. Net interest income was flat in 2015 as
to worthy charities and events in the communities we serve, a complete listing of
our margin declined by 26 basis points due to a restructuring of the portfolio,
which is provided overleaf. We are proud to have been named an Official Supplier
weighting it more heavily in shorter duration securities to take advantage of
and the Official Bermuda Bank of the 2017 America’s Cup, and to be a part of this
expected rate increases over the next few years.
prestigious event and its associated community and youth programmes.
Non-interest income improved to $140.2 million from $134.8 million in 2014. The
In closing, I would like to thank our valued clients for their many years of business
increase was due primarily to higher demand for foreign exchange—another
and all of my colleagues for their dedication to Butterfield.
positive sign of economic stability—and improved trust revenue associated with
the first full-year impact of the Legis trust business acquired in Guernsey in 2014.
Core non-interest operating expenses decreased by $2.0 million, improving our
core efficiency ratio by 170 basis points to 66%. Expense reductions were achieved
through tight control over headcount and a reduction in both property costs and
consulting fees.
Michael Collins
Chief Executive Officer
BUTTERFIELD ANNUAL REPORT 2015 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 people in our communities.
In 2015, Butterfield was pleased to provide support to the following organisations and events:
CULTURAL ORGANISATIONS & EVENTS
Alderney Performing
Arts Festival of music and
dance, featuring talented
performers from near and
far (Guernsey)
Bermuda Chamber of
Commerce Harbour Nights
annual summer street
festival (Bermuda)
Bermuda Festival of the
Performing Arts creating
an international hub for
cultural exchange and
artistic growth by presenting
a schedule of artistic
performances that appeal to
a wide and diverse audience
(Bermuda)
Bermuda International
Film Festival exhibiting a
wide spectrum of foreign
films with the hope that its
programmes will entertain,
enlighten and inspire
film appreciation for all
(Bermuda)
Bermuda National Trust
Christmas Walkabout in St.
George (Bermuda)
Cayman Arts Festival
bringing varied and diverse
performances to Cayman to
help entertain and educate
(Cayman Islands)
Cayman Drama Society
promoting drama, music
and allied arts, and
producing dramatic and
artistic entertainment
(Cayman Islands)
Cayman International
Film Festival promoting
Cayman as a film-making
destination and supporting
Cayman’s aspiring film
makers (Cayman Islands)
Cayman National Cultural
Foundation stimulating,
facilitating and preserving
cultural expression
(Cayman Islands)
Cedarbridge Academy
sponsorship of “Annie”
production (Bermuda)
4
EDUCATION & INSTRUCTION
100 Women in Hedge
Funds Gala supporting
Literacy is For Everyone
(LIFE) and its mission to
significantly increase literacy
levels across the Cayman
Islands (Cayman Islands)
America’s Cup Endeavour
Youth Sailing Programme
enabling students across
Bermuda to learn more
about sailing, science,
technology, engineering,
arts and math (Bermuda)
Bermuda Institute of
Ocean Sciences Risk
Prediction Initiative
(Bermuda)
Butterfield Bursary
Scheme awarded to Evie
Offen and Elise Prince
(Guernsey)
Central Caribbean Marine
Institute creating a hopeful
future for coral reefs
(Cayman Islands)
Butterfield
Undergraduate
Scholarship awarded
to Leanni Tibbetts
(Cayman Islands)
CFA Society Institute
promoting ethical and
professional standards
within the investment
industry (Cayman Islands)
Cayman Islands Chamber
of Commerce supporting
business development
across the Cayman Islands
(Cayman Islands)
Cayman Islands Society of
Professional Accountants
promoting and preserving
the accounting profession
(Cayman Islands)
Community Driven
Development programme
of the Department of Human
Affairs, strengthening
skills, competencies and
abilities of unemployed or
underemployed women
(Bermuda)
Delwood Middle School
(Bermuda)
SPORTS PROGRAMMES & SPORTING EVENTS
2017 America’s Cup
international sailing
competition—Official
Supplier and Official
Bermuda Bank (Bermuda)
Atlantic to Mediterranean
Charity Bike Ride
benefitting the Bermuda
Heart Foundation (Bermuda)
Bermuda Basketball
Association, the governing
body for basketball in
Bermuda (Bermuda)
Butterfield Bermuda
Grand Prix 2015 cycling
event (Bermuda)
Cayman Islands Amateur
Swimming Association
dedicated to the promotion
and development of all
aquatic sports in the
Cayman Islands
(Cayman Islands)
Cayman Islands
Equestrian Federation
providing training,
organising competitions and
working to prevent equine
abuse (Cayman Islands)
Cayman Islands
Gymnastics Foundation
providing scholarships to
young gymnasts to further
their development within
the sport (Cayman Islands)
Cayman Islands Little
League Association
youth t-ball and
baseball programme
(Cayman Islands)
Cayman Islands National
Squash Association, the
governing body of squash
in the Cayman Islands
(Cayman Islands)
Guernsey Air Display
annual air show (Guernsey)
Guernsey Concert Brass,
RGLI commemorative
concert (Guernsey)
Guernsey Eisteddfod
annual music, drama, dance
and art festival (Guernsey)
Guernsey Sinfonietta
(Guernsey)
Junior Batabano student
street parade
(Cayman Islands)
La Vallette Project to
restore storm-damaged
and deteriorating historic
bathing pools (Guernsey)
Duke of Edinburgh
Awards, the world’s leading
youth awards, giving young
people the opportunity to
be the very best they can be
(Bermuda)
Francis Patton Primary
School (Bermuda)
Guernsey Music Centre
Winter Concert and
Liberation Jazz Concert
(Guernsey)
Guernsey Youth &
Community Theatre
promoting, fostering and
facilitating drama and
theatre arts for young
people and the wider
community (Guernsey)
Cayman Islands Sailing
Club providing youth sailing
instruction (Cayman Islands)
Cayman Islands Tennis
Federation promoting
and supporting tennis in
the Cayman Islands, with a
focus on junior tennis
(Cayman Islands)
Classic Channel Regatta
biennial boating regatta
(Guernsey)
Liberation Day
Celebrations marking
the 70th anniversary of
Guernsey’s liberation from
German occupation in WWII
(Guernsey)
Masterworks Museum of
Bermuda Art enriching the
community through art and
education (Bermuda)
National Children’s
Festival of the Arts
Butterfield Young Musician
of the Year Award
(Cayman Islands)
National Gallery of the
Cayman Islands promoting
and encouraging the
appreciation and practice
of the visual arts of and in
the Cayman Islands
(Cayman Islands)
National Trust for the
Cayman Islands protecting
the future of Cayman’s
heritage (Cayman Islands)
Rocquaine Regatta
community day (Guernsey)
St. James Concert and
Assembly Hall (Guernsey)
TEDx Seven Mile Beach,
an independently organised
TED event devoted to
sharing world-changing
ideas (Cayman Islands)
Victor Hugo in Guernsey
Festival celebrating Hugo’s
works written whilst in exile
(Guernsey)
Jordan Prince Williams
School office procedures
training (The Bahamas)
Summer Youth Outreach
Educational Camp
(The Bahamas)
Set Sail Trust providing
opportunities for people to
join in maritime activities
and supporting educational
initiatives for a cross
section of the community
(Guernsey)
Sir Harry D. Butterfield
Scholarship awarded to
Jade Robinson (Bermuda)
Sir Dudley A. Spurling
Postgraduate Scholarship
awarded to Brittany Hassell
(Bermuda)
Young Caymanian
Leadership Awards
working to keep the Island’s
youth on track by providing
them with excellent role
models with whom they can
identify (Cayman Islands)
YouthNet, a school-based
mentoring programme
working to unlock the
potential in Bermuda’s youth
(Bermuda)
Guernsey Sailing Trust
enabling children from all
walks of life to experience
and enjoy sailing (Guernsey)
Insurance Managers
Association of Cayman
(Cayman Islands)
Island Games
team sponsorship
(Cayman Islands)
Kappa Classic Football
Tournament showcasing
the talents of young
footballers aged seven to 12
(Bermuda)
Pilot Gig Club bringing
rowing gig racing to
Bermuda (Bermuda)
St. Patrick’s Day 5K Irish
Jog supporting Special
Olympics Cayman Islands
(Cayman Islands)
HEALTH & HUMAN SERVICES
Action for Children
making life better for
children and their families
(Guernsey)
Bermuda Red Cross
helping vulnerable people
within the community
(Bermuda)
Active Guernsey helping
local people with learning
difficulties go on holidays or
take part in leisure activities
(Guernsey)
Bilney Lane Children’s
Home, an orphanage and
foster home for children
aged five to 18
(The Bahamas)
Age Concern enhancing
the quality of life for older
adults (Bermuda)
Age Concern Guernsey
providing support and social
events for elderly people
(Guernsey)
Bahamas Association for
Social Health managing
a residential substance
dependency treatment and
rehabilitation programme
(The Bahamas)
Bahamas Crisis Centre
providing services to victims
of abuse (The Bahamas)
Bahamas Red Cross
improving the lives of the
most vulnerable — Nepal
earthquake appeal
(The Bahamas)
BBC Children in Need
funding projects for
disadvantaged youth (UK)
Beating Bowel Cancer, the
support and campaigning
charity for everyone affected
by bowel cancer (UK)
Bermuda Cancer &
Health providing early
cancer detection, support
and education services
(Bermuda)
Bermuda Hospitals Board
providing comprehensive
diagnostic, treatment and
rehabilitative services in
response to Bermuda’s full
spectrum of medical and
mental health needs
(Bermuda)
Breast Cancer Foundation
raising funds to support the
fight against breast cancer
(Cayman Islands)
Broomfield Hospital
providing a comprehensive
range of acute and
community-based services
(UK)
Cancer Research UK
funding research and
providing information to the
public to help beat cancer
sooner (UK)
Cat Cuddles promoting and
strengthening the feline-
human bond (UK)
Cayman AIDS Foundation
improving the quality of
life of persons infected
and affected by HIV/AIDS
(Cayman Islands)
Cayman’s ARK supporting
local families in crisis
(Cayman Islands)
Cayman Heart Fund
developing programmes
to reduce and prevent
cardiovascular disease
(Cayman Islands)
Cayman HospiceCare
providing specialised nursing
services and bereavement
programmes
(Cayman Islands)
Cayman Islands Red Cross
protecting human dignity by
helping vulnerable people in
crisis (Cayman Islands)
Cayman Islands Veterans
Association providing
services and support to
ex-servicemen and women
(Cayman Islands)
Cheshire Home providing
individual care and support
for adults living with
severe physical disabilities
(Guernsey)
Children’s Emergency
Hostel providing temporary
accommodation, food,
clothing, medical care
and other necessities to
abandoned and neglected
children (The Bahamas)
Disasters Emergency
Committee, an umbrella
group comprising 13 UK
charities associated with
disaster-related issues—
Nepal earthquake appeal
(UK)
Family Centre
strengthening families and
support systems to create
a healthier Bermuda for
children (Bermuda)
Financial Services Cares
Bahamas Financial Services
Board Hurricane Joaquin
relief campaign
(The Bahamas)
Guernsey Cancer Support
offering support to cancer
patients, carers and family
members (Guernsey)
Guernsey Town Centre
Partnership promoting the
improvement, protection
and preservation of St Peter
Port (Guernsey)
Guernsey Velo Club
defibrillator for Delancey
Park initiative (Guernsey)
Havens Hospices caring for
individuals with life-limiting
illnesses and their families
(UK)
Hurricane Joaquin Food
Supply Donation
(The Bahamas)
International Association
for Suicide Prevention
dedicated to suicide
prevention and to the
alleviation of the effects of
suicide (Cayman Islands)
KATKiDs dedicated to
supporting projects that help
children in Nepal, Southern
Africa and Bermuda—
Nepal earthquake relief
(Bermuda)
Les Bourgs Hospice
providing the highest levels
of compassionate and
professional care to patients
suffering from life-limiting
illnesses (Guernsey)
Lions Club of Tropical
Gardens breast cancer
awareness programme
(Cayman Islands)
Macmillan Cancer
Support providing practical
medical and financial
support for better cancer
care (UK)
Meals On Wheels
delivering meals to seniors
(Cayman Islands)
National Council of
Voluntary Organisations
dedicated to the care,
education, and well-being of
children and families in need
(Cayman Islands)
Nazareth Centre providing
residential care to abused,
abandoned and neglected
children (The Bahamas)
North London Hospice
caring for those with
potentially life-limiting
illnesses (UK)
North Middlesex Hospital
General Charitable Fund
benefitting patients and
staff at the North Middlesex
University Hospital NHS
Trust, providing equipment,
educational aids, furniture
and refurbishment works
(UK)
Norwood Ravenswood
supporting vulnerable
children, families and people
with learning disabilities
(UK)
The Rotary Club of South
East Nassau raising funds
for community projects
and local charities
(The Bahamas)
Royal Commonwealth
Society committed to
improving the lives and
prospects of Commonwealth
citizens across the world
(Cayman Islands)
St Martin-in-the-Fields
Christmas Appeal (UK)
Parkinson’s Society
offering information,
friendship and support to
local people with Parkinson’s
(Guernsey)
The Salvation Army
meeting human needs
and being a transforming
influence in the community
(Guernsey)
Pathways Bermuda
providing adults, adolescents
and family members with
professional addiction
assessments, evaluations,
outpatient services and
access to treatment
(Bermuda)
The Ranfurly Home For
Children providing a safe
haven for orphaned, abused,
neglected or abandoned
children (The Bahamas)
Rotaract Blue, an
organisation of young
people (aged 18 to 30) who
are addressing needs of the
community whilst promoting
international understanding
and peace through a
framework of friendship and
service (Cayman Islands)
Rotary Club of Grand
Cayman community service
club (Cayman Islands)
Rotary Club of Guernsey
raising funds for
community projects and
local charities—Saffery
Champness Walk (Guernsey)
Samaritans working to
alleviate emotional distress
and reduce the incidence of
suicide feelings and suicidal
behaviour (Guernsey)
SCARS working to reduce
the risk of child sexual abuse
and advocating for children
who have been sexually
molested (Bermuda)
Sister Sister breast
cancer support group
(The Bahamas)
Sunshine League providing
holistic and success-driven
programmes and services
for Bermuda’s children and
young people (Bermuda)
Teen Services/Teen
Haven assisting in the
empowerment of Bermuda’s
youth by promoting
healthy development
through ongoing education,
counselling and support
(Bermuda)
WindReach serving people
with a wide range of
physical and intellectual
disabilities (Bermuda)
5
5
BUTTERFIELD ANNUAL REPORT 2015 BOARD OF DIRECTORS & PRINCIPAL BOARD COMMITTEES
COMMITTEES INDICATED BY NUMBERS
1,3,5
CHAIRMAN
BARCLAY SIMMONS*
Chief Executive Officer
ASW Law Ltd.
1,2,4
ALASTAIR BARBOUR*
Retired Partner
KPMG
2,5
WENDALL BROWN*
Chairman & President
BDC 2000 Limited
1
MICHAEL COLLINS
Chief Executive Officer
6
The Bank of N.T. Butterfield & Son Limited
1,2,4
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, Ltd.
1,3,5
RICHARD VENN
Strategic Advisor,
REV Advisory Ltd.
3,4
JOHN WRIGHT*
Retired Chief Executive Officer
Clydesdale & Yorkshire Banks
PRINCIPAL BOARD COMMITTEES
1. EXECUTIVE COMMITTEE OF THE BOARD OF
3. RISK POLICY &
DIRECTORS
COMPLIANCE COMMITTEE
Supports the Board in fulfilling its overall
Focuses on credit, market and
governance responsibilities.
operational risk.
2. AUDIT COMMITTEE
4. CORPORATE GOVERNANCE COMMITTEE
Oversees Butterfield’s financial reports, internal
Focuses on Directors’ and Board Committee
financial controls, internal audit processes
governance, performance and
and compliance.
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 and a Director’s Code of Conduct & Ethics applies to
employees and Directors, respectively, and impose 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.
BOARD OF DIRECTORS & PRINCIPAL BOARD COMMITTEES
GROUP EXECUTIVE COMMITTEE
MICHAEL COLLINS
Chief Executive Officer
MICHAEL SCHRUM
Chief Financial Officer
DANIEL FRUMKIN
Group Chief Risk Officer
ELIZABETH BAUMAN
Group Head of Human Resources
SHAUN MORRIS
General Counsel, Group Chief Legal Officer
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BUTTERFIELD ANNUAL REPORT 2015 TABLE OF CONTENTS
MANAGEMENT’S DISCUSSION & ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION
Performance Measurement
About Butterfield
Business Strategy
2015 Overview
Market Environment
2016 Outlook
Financial Summary
CONSOLIDATED RESULTS OF OPERATIONS AND
DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2015
CONSOLIDATED BALANCE SHEET AND DISCUSSION
OFF BALANCE SHEET ARRANGEMENTS
88
RISK MANAGEMENT
JURISDICTION AND BUSINESS LINE OVERVIEWS
Bermuda
Cayman Islands
Guernsey
United Kingdom
Group Trust
Group Asset Management
FINANCIAL STATEMENTS
Management’s Financial Reporting Responsibility
Independent Auditor’s Report to the
Board of Directors and Shareholders
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Nature of Business
Note 2: Significant Accounting Policies
Note 3: Cash Due From Banks
Note 4: Short-Term Investments
Note 5: Investments in Securities
Note 6: Loans
Note 7: Credit Risk Concentrations
Note 8: Premises, Equipment and Computer Software
Note 9: Goodwill and Other Intangible Assets
Note 10: Customer Deposits and Deposits from Banks
Note 11: Employee Benefit Plans
Note 12: Credit Related Arrangements and Commitments
Note 13: Exit Cost Obligations
Note 14: Loan Interest Income
Note 15: Segmented Information
Note 16: Derivative Instruments and Risk Management
Note 17: Fair Value Measurements
Note 18: Interest Rate Risk
Note 19: Long-Term Debt
Note 20: Earnings Per Share
Note 21: Share-Based Payments
Note 22: Share Buy-Back Plans
Note 23: Accumulated Other Comprehensive Loss
Note 24: Capital Structure
Note 25: Income Taxes
Note 26: Business Combinations
Note 27: Related Party Transactions
Note 28: Comparative Information
Note 29: Subsequent Events
SHAREHOLDER INFORMATION
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TABLE OF CONTENTS
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 consolidated 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 and local economic conditions, success in business
retention and obtaining new business and other factors.
PERFORMANCE MEASUREMENT
We use a number of financial measures to assess the performance of our
business. Some measures are calculated in accordance with GAAP, while other
measures do not have a standardised meaning under GAAP. Accordingly, these
measures, described below, may not be comparable to similar measures used
by other companies. Investors may however find these non-GAAP financial
measures useful in analysing financial performance.
Return on Common Equity (“ROE”)
ROE measures profitability by revealing how much profit is generated with the
money invested by common shareholders. ROE is the amount of net income
to common shareholders as a percentage of average common equity and
calculated as Net Income to Common Shareholders / Average Common Equity.
Net income to common shareholders is net income for the full fiscal year,
before dividends paid to common shareholders but after dividends to
preference shareholders. Average common equity does not include the
preference shareholders’ equity.
Core Cash Return on Average Tangible Common Equity (“CCROTCE”)
CCROTCE measures core cash profitability as a percentage of average
tangible common equity. CCROTCE is the amount of core income to common
shareholders excluding amortisation of intangible assets as a percentage of
average tangible common equity and is calculated as Core Cash Earnings to
Common Shareholders / Average Tangible Common Equity. Core cash earnings
to common shareholders is net earnings to common shareholders for the full
fiscal year (before dividends paid to common shareholders but after dividends
to preference 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 shareholders’
equity or goodwill and intangible assets.
Tangible Total Equity/Tangible Asset Ratio (“TE/TA”)
TE/TA is used to determine how significant of an unexpected loss can be
incurred by the Bank before long-term debt is impacted. The TE/TA ratio
is calculated as (Common Equity + Preferred Equity - Intangible Assets -
Goodwill) / Tangible Assets. Tangible equity does not include goodwill or
intangible assets. Tangible assets are the Bank’s total assets from continuing
operations less goodwill and intangibles.
Tangible Common Equity/Tangible Asset Ratio (“TCE/TA”)
TCE/TA is used to determine how significant of an unexpected loss can be
incurred by the Bank before other forms of capital, other than common equity,
are impacted. The TCE/TA ratio is calculated as (Common Equity - Intangible
Assets - Goodwill) / Tangible Assets. Tangible common equity does not include
the preference shareholders’ equity or goodwill and intangible assets. Tangible
assets are the Bank’s total assets from continuing operations less goodwill
and intangibles.
9
9
Total Capital Ratio
The Total capital ratio measures the amount of the Bank’s capital in 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. Under Basel II, Pillar I,
banks must maintain a minimum Total capital ratio of 14.46%. In effect, this
means that 14.46% of the risk-weighted assets (“RWA”) must be covered by
permanent or near permanent capital. The risk weighting process takes into
account the relative risk of various types of lending. The higher the capital
adequacy ratio a bank has, the greater the level of unexpected losses it can
absorb before becoming insolvent.
Tier 1 Capital Ratio
The Tier 1 capital ratio is the ratio of the Bank’s core equity capital, as
measured under Basel II, to its total RWA. RWA are the total of all assets held
by the Bank weighted by credit risk according to a formula determined by the
Regulator. The Bank follows the Basel Committee on Banking Supervision
(“BCBS”) guidelines in setting formulae for asset risk weights.
BUTTERFIELD ANNUAL REPORT 2015
Tier 1 Common Ratio
The Tier 1 common ratio is the same as the Tier 1 capital ratio but only
includes common equity in the numerator and deducts the preference
shareholders’ equity.
Core Cash Return on Average Tangible Assets (“CCROATA”)
CCROATA is an indicator used to assess the core cash profitability of average
tangible assets and demonstrates how efficiently management is utilising its
tangible assets to generate core cash net income. CCROATA is calculated by
taking the core income to common shareholders excluding amortisation of
intangible assets as a percentage of average tangible assets and is calculated
as Core Cash Earnings to Common Shareholders / Average Tangible Common
Equity. Core net income is the net income adjusted for one-off items not in the
ordinary course of business.
Net Interest Margin (“NIM”)
NIM is a performance metric that examines how successful the Bank’s
investment decisions are compared to its cost of funding assets and is
expressed as net interest income as a percentage of average interest-earning
assets. NIM is calculated as Net Interest Income Before Provision for Credit
Losses / Average Interest-Earning Assets. Net interest income is the interest
earned on cash due from banks, investments, loans and other interest earning
assets minus the interest paid for deposits, short-term borrowings and
long-term debt. The average interest earning assets is calculated using daily
average balances of interest earning assets.
10
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 taking the cash
non-interest expenses as a percentage of total net revenue before provision
for credit losses and other gains and losses and is calculated as (Non-Interest
Expenses – Amortisation of Intangible Assets) / (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 net revenue before provision for credit losses and other gains and
losses and is calculated as (Core Non-Interest Expenses – Amortisation of
Intangible Assets) / (Core Non-Interest Income + Core Net Interest Income
Before Provision for Credit Losses). Core cash non-interest expenses exclude
income taxes and amortisation of intangible assets.
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 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 and Switzerland.
BUSINESS STRATEGY
Whilst remaining well capitalised with strong liquidity, our strategic focus
is on building shareholder value by expanding our share of the community
and private banking markets in jurisdictions in which we have a meaningful
presence and a depth of local market knowledge. Our strategy also involves
leveraging our multi-jurisdictional trust, custody and asset management
offerings to build our wealth management business from both cross-referrals
with existing customers and business development through referrals and
relationships with fiduciaries and advisers. We aim to build upon our
relationship-based business approach by delivering exceptional client service
experiences, as well as a wide range of products to meet our clients’ financial
service needs.
The wide range of products on offer is reflective of our strategy of pursuing
opportunities in diversified businesses including community banking, private
banking, asset management, custody, corporate trust and personal trust
services. These diverse businesses directly contribute to the high level of fee
income at 36.9% of net revenue before provision for credit losses and other
gains or losses.
Building on our community banking and wealth management strategies will
also leverage our strong and loyal client base. Unlike many banks, Butterfield
is almost exclusively funded by our shareholders and customers. Our core
customer deposits have been very stable even throughout the credit crisis. Our
core deposit base includes $1.9 billion of non-interest earning deposits and
together with $750.4 million of equity, the Bank can invest in longer duration
assets and earn a higher yield on over $2.9 billion of assets with very low
interest rate risk. This contribution reflects the strength of being a deposit-led
organisation even in times of low interest rates.
Given the large, loyal customer deposit base enjoyed in our main jurisdictions,
and the relatively low volume of lending demand from our customer base,
our investment strategy is more important than is the case for most financial
institutions. At 31 December 2015, we had $5.9 billion of cash and investment
in securities representing 58% of total assets. In recognition of this defining
characteristic of Butterfield, we maintain a conservative approach to our
investments. With the help of our investment advisers, we continued to
manage our interest rate risk, which measures the degree to which our
profitability is at risk due to changes in interest rates. Our investment strategy
during the recent year was largely positioned to be reactive to an increase in
the target range for the US Federal Funds rate, involving acquiring floating
rate securities, which will be less reactive in price changes and more reactive in
interest earning potential. During the fourth quarter, we repositioned the mix
of our investments between available-for-sale (“AFS”) and held-to-maturity
(“HTM”) in an effort to further reduce the volatility of our other comprehensive
income. Simultaneous to this transfer, we also sold certain lower yielding US
government and federal agency investments out of our AFS portfolio and
acquired highly rated corporate debt securities issued by large US corporations
which carry a higher investment yield. These strategies have resulted in an
investment portfolio which is well positioned for a rising rate environment,
whilst complying with our stringent credit safety requirements.
To support our strategy, the Bank aligns our management structure to focus
on lines of business and central support services to improve consistency in our
approach and delivery of products and services in each operating jurisdiction.
However, we remain flexible and nimble in each jurisdiction, with business
development and decision making on client service-related matters based
locally. In addition, we continue to invest heavily in new technology allowing for
new and more flexible products, enhanced customer service and a streamlined,
more efficient operation.
2015 OVERVIEW
In 2015, the Bank made solid progress in building value for shareholders,
raising the core cash return on average tangible common equity to 18.4%
and core cash EPS (diluted) to $0.20, up substantially from 15.1% and $0.17,
respectively, in 2014. That progress was driven by a continued focus on prudent
expansion within our core businesses and markets, and diligent management of
capital, expenses and risks. The integration of accretive acquisitions completed
in 2014 coupled with our ongoing diligence in the management of our balance
sheet, has translated into the ability to effectively deploy capital, not only to
the share repurchase programme and the payment of common dividends, but
also to the one-off repurchase and retirement of 84 million common shares.
Butterfield has also continued to investigate means to unlock value and provide
liquidity to our shareholders. As a result of our focused strategy, Butterfield is
building a reputable franchise, core earnings are stable and growing, and asset
quality is strong.
Core earnings improved by $7.5 million to $113.9 million, building on our
strong capital position with Total and Tier 1 capital ratios of 19.0% and 16.2%,
respectively. To enhance common shareholder returns, the Board declared a
fourth interim dividend of $0.01 per common share on 19 February 2016. On a
going-forward basis, the Board will continue to assess capital planning options
and declare dividends as warranted, subject to regulatory approval.
The Bank’s balance sheet remains strong, with shareholders’ equity ending the
year at $750.4 million, of which $182.9 million is 8% preference shareholders’
equity and $567.5 million is common shareholders’ equity (“common equity”.)
Total assets increased by $0.4 billion to $10.3 billion, driven by a $0.5 billion
increase in customer deposit levels reinvested in short-term investments
and investments in securities which grew by $0.2 billion, in addition to $0.2
billion remaining in cash due from banks, further enhancing the Bank’s overall
liquidity. Shareholders’ equity decreased by $99.0 million due mainly to the
repurchase and cancellation in 2015 of 80 million shares held by CIBC for a total
of $120 million and the repurchase and cancellation of four million shares held
by two other shareholders for a total of $6 million, offset by net income earned
during 2015 net of dividends to shareholders.
In October 2015, the Bank announced that it had reached an agreement to
acquire Bermuda Trust Company Ltd. and the private banking investment
management operations of HSBC Bank Bermuda Limited. HSBC Bank Bermuda
Limited has also entered into an agreement to refer its existing private banking
clients to the Bank. The transaction is expected to be completed in the first half
of 2016.
In February 2016, the Bank announced the planned wind down of the deposit
taking and investment management businesses in the UK. This wind down is
expected to be completed by year-end 2016.
11
BUTTERFIELD ANNUAL REPORT 2015 Key accomplishments in 2015 were as follows:
• Core profitability: The Bank delivered excellent growth in core net
income, up $7.5 million (7.1%) to $113.9 million from $106.4 million
in 2014.
• Net interest margin: While NIM decreased by 26 basis points to 248
basis points compared to 274 basis points in 2014, the cost of funding
declined by 5 basis points to 21 basis points. The primary driver of the
decrease in NIM was in investment portfolio yields due to an average
decrease in the long-term yield of US treasuries, causing a decline in the
yield of our investment portfolio by 19 basis points to 216 basis points.
• Core expenses: Core non-interest expenses decreased by $2.1 million,
from $257.0 million in 2014, to $254.9 million in 2015 as a result of
lower property costs and professional services costs, slightly offset by
an increase in core salaries and benefits due to higher post-retirement
healthcare costs. The core efficiency ratio improved from 67.7% in
2014 to 66.0% in 2015, reflecting the rate of revenue increase over the
marginal decrease in expenses.
12
• Headcount: Across the Group, headcount on a full-time equivalency
basis, excluding students, decreased slightly by 23 from 1,164 as at
31 December 2014 to 1,141 at the end of 2015 due to certain expired
mandates in administered banking and trust services.
• Deposits: Customer deposits increased by $0.5 billion due to both
organic deposit growth and additional take-on from the acquisition
of HSBC Cayman deposits in November 2014, whilst interest bearing
deposit costs decreased by 5 basis point from 31 basis points in 2014
to 26 basis points in 2015. Together with non-interest bearing deposits
totalling $1.9 billion at 31 December 2015, the average cost of deposits
decreased by 5 basis points to 21 basis points.
• Loan quality: As at 31 December 2015, the Bank had gross non-accrual
loans of $65.3 million representing 1.6% of total gross loans, reflecting
an improvement from the $71.8 million, or 1.8%, of total loans at
year-end 2014. Net non-accrual loans were $46.1 million, equivalent to
1.2% of net loans, after specific provisions of $19.1 million, reflecting an
improved specific provision coverage ratio of 29.3%, up from 26.2% at
31 December 2014.
• Investment grade ratings: Moody’s at A3; Standard & Poor’s at BBB;
and Fitch at A-.
MARKET ENVIRONMENT
The global economy showed signs of recovery alongside indications of
continued weakness, creating continued inconsistency and volatility across
geographic regions. In the United States (“US”), the Federal Reserve increased
its target rate range from zero to 0.25% to 0.25% to 0.50% in December.
Meanwhile, the European Central Bank (“ECB”) cut rates on overnight deposit
facilities further during the fourth quarter to -0.30% and announced an
expansion of its asset purchase programme by €360 billion (initially worth €1.2
trillion) in response to continued weakness across the European region.
In the US, the year saw increased market volatility, but with overarching
indications of improvement. Inflationary measures began to turn the corner
by the fourth quarter after weathering several months of price decreases
caused by a wide-spread depression in commodity and natural resource prices.
Continued strength in the job markets has been an often discussed point of
strength for the US economy, with jobless rates at the lowest they have been
since 2008. Forecasts are for inflation to rise to the target levels of 2.0% over
the medium term due to these strong labour market indicators, as well as
increases in household spending and business fixed investments. As a result
of this, the US Federal Reserve announced the aforementioned first increase in
their target range for federal funds since 2006.
Meanwhile, the Eurozone has weathered another difficult year with some
signs of stabilisation. Continued negative deposit rates and large quantitative
easing programmes by the ECB have been aimed at strengthening the weaker
economies whilst bolstering growth in the stronger economies. The year saw
a relapse in the Greek debt crisis, with the issue coming to a head in July with
a new €86 billion bailout package being approved, which caused temporary
shocks to the value of the Euro. Meanwhile in both the UK and Germany,
domestic demand has taken hold as the main driver of economic growth amidst
positive outlooks. Capital investment from the private sector has also been a
sign of strength, which has continued to grow as a result of growing exports
and continued low interest rates. The UK finished the year with Gross Domestic
Product (“GDP”) growth of 2.4%, down slightly from 2014’s growth rate of
just under 3% as a result of drag from the sluggish Eurozone recovery and
capital market risks associated with downturns in Chinese and other emerging
markets.
During the second half of 2015, the price of oil decreased significantly. The
Bank does not have significant exposures to customers in the oil business
and broadly views the price fall as beneficial to input factors, such as energy
consumption costs for the Bank and its clients.
In Bermuda, we continued to face difficult trading conditions during 2015, with
signs that the economy is on the road to recovery with continued growth in
retail sales, construction expenditures and ultimately GDP. The latest economic
indicators show a year-over-year increase on current account balances of
$62 million to $224 million, driven by a variety of factors, which is positive
news highlighting this growth potential. Bermuda got its first taste of the
2017 America’s Cup while hosting the America’s Cup World Series event in
October. The weekend drove a 44% increase in tourism visitors to the island
for the month of October 2015 relative to October 2014. Tourism continues to
be a focus of the Bermudian domestic economy, and signs of strength include
four hotels undergoing significant rebuilds or renovations, with planning
approval being issued for two new hotel developments. Retail sales have
shown positive signs for Bermuda with increases in customer confidence rising
to the highest levels since 2007. However, the Bermuda economy still faces
medium-term challenges from high unemployment and significant government
debt. Overcoming these challenges is a key focus of the Bermuda Government
and sustainable growth for the Bermudian economy will be driven largely by
successful management over these two areas.
The Cayman Islands experienced GDP growth in 2015 of 1.7%, with strength
noted in the real estate, renting and business services, construction and other
services activity sectors. Tourist arrivals by air and cruise ship continued to
record year-over-year improvements, but at a slower pace than previous
years. The completion and opening of the new 265 room Kimpton Seafire
Hotel in late 2016 will complement the island’s tourist offering. The Owen
Roberts International Airport expansion project is also underway, which, when
completed in 2018, will provide a better overall travel experience for tourists,
business visitors and residents alike. While several significant infrastructure
projects have been deferred, the Cayman Islands Government continues to
record growing surpluses and overall external debt reduction. The consumer
price index showed a modest decrease in 2015 from its higher 2014 levels, with
higher costs for education, clothing and communication offset by lower costs
for transport, driven by lower fuel costs, miscellaneous goods and services and
household equipment. While commercial credits saw declines in 2015, credits
to households reported increases in domestic property, vehicle, education and
technology loans, which plays to the Bank’s strength in the Cayman Islands and
is reflected in the growth of our domestic personal loan book.
a referendum on whether or not to remain in the European Union, a vote
that could have significant repercussions on the UK economy’s future. The
remainder of Europe will likely gain strength from continued economic stimulus
via large scale purchase programmes of European sovereign debt and negative
deposit rates coupled with a weakened Euro. This strength however will have to
overcome growth challenges from several Euro nations such as Spain and Italy,
with continued challenges faced by the Greek government’s austerity measures.
The Euro will ultimately continue to remain threatened by sluggish growth,
Euro scepticism about the continuity of the European Union and ultimately the
currency itself.
Continued development in Bermuda’s hotel sector, alongside increased
consumer confidence, position Bermuda well for modest GDP growth in
2016. However this GDP growth will still have underlying issues caused by
unemployment and the increased costs of servicing government debt. The
expenditure on development of infrastructure in preparation for the 2017
America’s Cup will stimulate demand and we expect modest GDP growth in
Bermuda for 2016.
The mixed economic climate in our two largest operations in 2015 resulted
in limited loan demand and continued pressure on customers’ ability to
service loan payment obligations. Similarly, our private banking business in
Europe experienced limited loan growth due to increased competition and
pricing pressures.
In the Cayman Islands, modest growth in GDP is expected in 2016 with
continued strength in real estate activity, construction, road work and airport
infrastructure projects. Additionally, unemployment is expected to register
a slight improvement, though inflation pressures in categories not directly
impacted by fuel costs will continue.
13
Our asset and liability management strategy focuses on net interest income at
risk in various interest rate environments. We match our expected investment
flows with maturities and expected deposit behaviour on the customer deposit
side of the balance sheet, which neutralises the impact of changing interest
rates in any given reporting period. These investments position us so we are
not reliant on rising rates to achieve adequate profitability. However, as higher
rates materialise, core profitability should be further improved. Higher rates will
also have a restraining effect on capital levels, as they will reduce the market
values of our longer-dated securities in our AFS book, partially offset by lower
liabilities for future pension and health costs for employees.
In 2016, our strategy remains unchanged as we continue to focus our attention
on the development of our core businesses, which we expect will drive
revenue growth and improve our efficiency ratio as we maintain our focus on
cost containment. The long-term success of our growing brand and franchise
continues to be strongly dependent on our ability to provide service excellence
in our core community banking markets and drive further shareholder value
through expansion.
The Bank continues to maintain a cautious stance with a highly liquid balance
sheet with a low-risk investment portfolio and no reliance on wholesale money
markets for liquidity. Total liquid cash and investments, excluding held-to-
maturity investments, made up 50.8% of the Bank’s balance sheet at year-end
2015, which is down slightly from 51.8% at the end of 2014.
2016 OUTLOOK
We remain moderately positive as the global economy for 2016 continues to
recover in key areas from 2015. However, the ability of economic forecasters
to accurately assess the economic future is challenged by inconsistent key
economic indicators, which continue to contribute to volatile market conditions.
The US economy faces the challenge of short-term policy rates continuing to
increase slightly over the forthcoming year. Current market forecasts have
modest rate increases being made in 2016. The end of seven years of near zero
federal rates will herald new challenges for the US economy. The S&P 500
faces continued pricing pressures as a result of an increased US dollar value
relative to a basket of peers. Inflation will be limited due to the increase in the
cost of credit. These factors will have a downside impact on both Bermuda and
Cayman, but domestic factors in both nations will allow them to continue their
GDP growth.
The UK will likely continue to grow its GDP as supported by continued growth
in both consumer spending and business investments. However downward
inflationary pressure will be felt in the UK as a result of continued sluggish
growth in the remainder of Europe, and as a result, the Bank of England is
not likely to match the US Federal Reserve’s interest rate hike until later in
2016. Meanwhile, there are continued expectations that the UK will vote in
BUTTERFIELD ANNUAL REPORT 2015
FINANCIAL SUMMARY
As at 31 December (in $ thousands, except per share data)
2015
Cash due from banks
Short-term investments
Investment in 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
Long-term debt
Shareholders’ equity
Preference shareholders’ equity
Common and contingent value convertible
preference shareholders’ equity
2,288,890
409,482
3,223,930
4,000,155
183,378
51,131
10,275,563
-
10,275,563
9,182,146
117,000
2014
2,063,311
394,770
2,989,111
4,019,128
215,123
57,862
9,858,440
-
9,858,440
8,671,577
117,000
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
182,863
183,046
183,606
195,578
200,000
567,491
666,328
618,955
661,596
629,725
For the year ended 31 December
2015
2014
2013
2012
2011
14
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 before other gains (losses)
Total other gains (losses)
Net income from continuing operations
Net income from discontinued operations
Net income
Non-core items
Core net income
Dividends and guarantee fee of preference shares
Amortisation of intangible assets
Core cash earnings to common shareholders
Common dividends paid
Financial ratios
Core cash return on average tangible assets (1)
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
186,486
69,578
6,517
(23,315)
239,266
140,172
(5,741)
(134,917)
(151,604)
87,176
(9,437)
77,739
-
77,739
36,201
113,939
(16,455)
4,424
101,908
(24,846)
2015
1.2%
18.4%
10.1%
16.2%
19.0%
5.1%
6.8%
2.48%
74.0%
66.0%
191,986
67,757
5,358
(26,614)
238,487
134,830
(8,048)
(129,761)
(143,037)
92,471
15,688
108,159
-
108,159
(1,756)
106,403
(16,546)
4,281
94,138
(27,440)
2014
1.2%
15.1%
13.7%
19.0%
22.2%
6.2%
8.1%
2.74%
72.0%
67.7%
187,042
60,875
5,291
(29,399)
223,809
125,963
(14,825)
(131,064)
(132,472)
71,411
(8,796)
62,615
-
62,615
13,971
76,586
(16,990)
3,358
62,954
(38,531)
2013
0.9%
10.3%
6.8%
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
(26,356)
18,917
7,620
26,537
28,368
54,905
(18,000)
5,040
41,945
-
2012
0.7%
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
11,249
46,356
1,127
47,483
(9,279)
37,772
(21,270)
5,367
22,301
-
2011
0.5%
3.8%
4.1%
17.7%
23.5%
6.9%
9.3%
2.42%
84.1%
83.6%
Per participating share (1) ( $ )
Net income (diluted)
Core cash earnings per share (diluted)
Cash dividends
Net book value
Tangible net book value
Number of employees (2)
Bermuda
Overseas
Total
Other data
2015
0.12
0.20
0.05
1.22
1.11
2015
529
612
1,141
2015
Year-end number of participating shares
463,692
Weighted average number of participating shares on a fully
diluted basis
Risk-weighted assets
500,028
4,305,350
2014
0.16
0.17
0.05
1.22
1.12
2014
537
627
1,164
2013
0.08
0.11
0.07
1.13
1.09
2013
554
579
1,133
2012
0.01
0.08
-
1.20
1.16
2012
624
607
1,231
2011
0.04
0.04
-
1.14
1.05
2011
664
606
1,270
2014
544,162
556,482
4,113,404
2013
548,622
553,571
4,197,744
2012
549,866
2011
554,769
556,357
555,605
4,275,055
4,425,639
(1) Includes both common and, for the years ended prior to 31 March 2015, contingent value convertible preference shareholders’ equity.
The contingent value convertible preference shareholders’ equity was converted to common equity as of 31 March 2015.
(2) On a full-time equivalency basis and excluding students.
CONSOLIDATED RESULTS OF OPERATIONS AND DISCUSSION FOR FISCAL YEAR ENDED 31 DECEMBER 2015
Net Income
The Bank reported net income of $77.7 million for the year ended 31 December 2015, compared to $108.2 million in 2014, with the difference being largely driven
by non-core gains (losses) and expenses, which increased $38.0 million year on year. After deduction of preference dividends and guarantee fees (2015: $16.5
million, 2014: $16.5 million) and the premium paid on preference share buy-backs (2015: nil, 2014: $0.1 million), the net income available to common shareholders
was $61.2 million ($0.12 per share) in 2015 compared to $91.6 million ($0.16 per share) in 2014. Per share amounts were significantly augmented by the repurchase
and cancellation of 84 million shares during the year ended 31 December 2015.
15
The following table states reported earnings for 2015 compared to 2014:
(in $ millions)
Non-interest income
Net interest income before provision for credit losses
Total net revenue before provision for credit losses and other gains (losses)
Provision for credit losses
Total other gains (losses)
Total net revenue
Non-interest expenses
Net income before income taxes
Income tax (expense) benefit
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
2015
140.2
239.3
379.5
(5.7)
(9.5)
364.3
2014
134.8
238.5
373.3
(8.0)
15.7
381.0
(285.3)
(273.0)
79.0
(1.3)
77.7
(16.5)
-
61.2
0.13
0.12
108.0
0.2
108.2
(16.5)
(0.1)
91.6
0.17
0.16
$ change
% change
5.4
0.8
6.2
2.3
(25.2)
(16.7)
(12.3)
(29.0)
(1.5)
(30.5)
-
0.1
(30.4)
(0.04)
(0.04)
4.0%
0.3%
1.7%
(28.8%)
(160.5%)
(4.4%)
4.5%
(26.9%)
(750.0%)
(28.2%)
-
(100.0%)
(33.2%)
(23.5%)
(25.0%)
BUTTERFIELD ANNUAL REPORT 2015
Core Earnings
The following table shows the income statement on a core earnings basis:
(in $ millions)
Non-interest income
Net interest income before provision for credit losses
Total net revenue before provision for credit losses and other gains (losses)
Provision for credit losses
Total other gains (losses)
Total net revenue
Non-interest expenses
Net income before income taxes
Income tax expense
Core net income
Year ended 31 December
2015
140.2
239.3
379.5
(5.7)
(3.7)
370.1
(254.9)
115.2
(1.3)
113.9
2014
134.8
238.5
373.3
(8.0)
(1.1)
364.2
(257.0)
107.2
(0.8)
106.4
$ change
5.4
0.8
6.2
2.3
(2.6)
5.9
2.1
8.0
(0.5)
7.5
The following table reconciles the Bank’s US GAAP net income for 2015 and 2014 to core earnings attributable to common shareholders:
Year ended 31 December
(in $ millions)
Net income
Non-core items:
Impairment of fixed assets (including software)
Gain on disposal of a Pass-through note investment (formerly a SIV)
16
Additional consideration from previously disposed of entities
Realised gain on private equity investment
Early retirement programme, redundancies and other one-off compensation costs
Tax compliance review costs
Provision for settlement amount arising from tax compliance review
Business acquisition costs
Restructuring charges and related professional service fees
One-off income tax refund
Investigation of an international stock exchange listing costs
Change in unrealised gains (losses) on certain investments
Total non-core items
Core earnings
Dividends and guarantee fee of preference shares
Amortisation of intangible assets
Core cash earnings to common shareholders
Core cash earnings per common share (1)
Impact of non-core items on earnings per share - fully diluted
Core cash earnings per share - fully diluted
(1) Premium paid on preference shares bought back was not adjusted as management views the transaction as non-core.
2015
77.7
5.1
-
-
-
8.2
3.8
4.8
1.0
2.5
-
10.1
0.7
36.2
113.9
(16.5)
4.4
101.8
0.07
0.20
2014
108.2
2.0
(8.7)
(0.3)
(1.1)
2.7
10.2
-
4.3
-
(1.0)
-
(9.9)
(1.8)
106.4
(16.5)
4.3
94.2
-
0.17
Impairment of Fixed Assets (Including Software)
In 2015, the Bank recognised $5.1 million of impairment write-downs on the core banking system in the UK related to the orderly wind down of the deposit taking
and investment management businesses.
Early Retirement Programme, Redundancies and Other One-off Compensation Costs
One-off compensation costs includes incentive packages for redundancies, optional early retirement packages and other one-off compensation costs offered to
eligible employees. In 2015 and 2014, the cost amounted to $8.2 million and $2.7 million, respectively. The increase from 2014 to 2015 was largely driven by
one-off compensation paid to three former senior executives who stepped down from their positions during the year.
One-off Project – Tax Compliance Review Costs
As publicly announced, in November 2013, the US Attorney’s Office for the Southern District of New York applied for and secured the issuance of so-called John
Doe Summonses to six US financial institutions with which the Bank had correspondent bank relationships. The Bank has been fully cooperating with the US
Authorities in their ongoing investigation. Specifically, the Bank has conducted an extensive review and account remediation exercise to determine the US tax
compliance status of US person account holders. The review process and results have been shared with the US Authorities. Costs associated with this remediation
exercise during the year ended 31 December 2015 amounted to $3.8 million (2014: $10.2 million), comprised largely of professional fees of $2.8 million (2014 - $6.9
million).
Provision for Settlement Amount Arising from Tax Compliance Review
Although the Bank is unable to determine the amount of financial consequences, fine and/or penalties resulting from this tax compliance review, management
believes that, at this stage, a provision of $4.8 million is appropriate based on the methodology used in similar settlements for other financial institutions. As
the investigation remains ongoing at this time, the timing and terms of the final resolution, including any fines or penalties, remain uncertain and the financial
impact to the Bank could exceed the amount of the provision. In this regard, we note that the US authorities have not approved or commented on the adequacy or
reasonableness of the estimate.
Business Acquisition Costs
During 2015, the Bank expensed $1.0 million relating to the acquisition of the Bermuda Trust Company Ltd. and the private banking investment management
operations of HSBC Bank Bermuda Limited, which included $1.0 million of legal and professional fees. During 2014, the Bank expensed $4.3 million relating to the
acquisitions of Legis and HSBC Cayman, which included $2.8 million of legal and professional fees.
17
Restructuring Charges and Related Professional Service Fees
The Bank incurred costs of $2.5 million relating to the announcement to commence an orderly wind down of the deposit taking and investment management
businesses of Butterfield Bank (UK) Limited. Of this amount, $0.6 million pertained to staff redundancy expenses, $1.5 million pertained to professional services
fees directly related to the orderly wind down, with an additional $0.4 million spent on professional services fees associated with investigating strategic options
prior to approving the orderly wind down.
One-off Project – Investigation of an International Stock Exchange Listing Costs
The Bank incurred $10.1 million in professional and legal fees for the investigation of an international stock exchange listing for its common shares.
Net Change in Unrealised Gains (Losses) on Certain Investments
During the year ended 31 December 2015, the Bank determined that certain investments classified as AFS for its operations in Guernsey and the UK should have
been classified as trading securities since 2011. The net change in unrealised gains (losses) on these securities were $0.7 million of net losses in 2015, and
$9.9 million of net gains in 2014.
REVENUE
Total net revenue before provision for credit losses and other gains and losses for 2015 was $379.5 million, up $6.1 million (1.6%) from 2014. Net interest income
before provision for credit losses increased from $238.5 million in 2014 to $239.3 million in 2015, an improvement of $0.8 million (0.3%). The increase in net
interest income was driven primarily by higher average investment portfolio balances of $339.3 million and a decrease in liability costs driven by a decrease
in interest expense on long-term debt of 7 basis points, which was slightly offset by a decrease in related investment yields of 19 basis points and a decrease
in average loan balances of $48.3 million. The overall NIM decreased by 26 basis points from 274 basis points in 2014 to 248 basis points in 2015. In addition,
non-interest income was up $5.3 million (4.0%) attributable to increased trust revenues earned from the recently acquired Legis Group business, along with new
business growth in asset management, and transaction volume increases in foreign exchange revenue.
BUTTERFIELD ANNUAL REPORT 2015 DISTRIBUTION OF 2015 TOTAL NET REVENUE BEFORE
PROVISION FOR CREDIT LOSSES AND OTHER GAINS AND LOSSES
DISTRIBUTION BY LOCATION OF 2015 TOTAL NET REVENUE BEFORE
PROVISION FOR CREDIT LOSSES AND OTHER GAINS AND LOSSES
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 increased from $134.8 million in 2014 to $140.2 million in 2015. Non-interest income as a percentage of total net revenue before
provision for credit losses and other gains and losses increased slightly from 36.1% in 2014 to 36.9% in 2015.
The following table presents the components of non-interest income for the years ended 31 December:
18
(in $ thousands)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
2015
18,910
35,221
31,896
40,264
9,522
4,359
2014
17,728
34,280
29,379
38,268
10,166
5,009
140,172
134,830
$ change
% change
1,182
941
2,517
1,996
(644)
(650)
5,342
6.7%
2.7%
8.6%
5.2%
(6.3%)
(13.0%)
4.0%
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 UK. Revenues from asset management were $18.9 million
in 2015, compared to $17.7 million in 2014. The increase is mainly due to fees earned upon the launch of a new private equity fund in 2015, and higher fees earned
on the Butterfield Money Market Fund (“BMMF”) owing to higher short-term interest rates. This increase was partially offset by a decline in commissions earned
on lower transaction volumes.
The table that follows shows the changes in the year-end values of clients’ assets under management, sub-divided between those managed for clients on a
discretionary basis and those client funds invested in mutual funds that Butterfield manages:
(in $ millions)
Butterfield Funds
Discretionary
Total assets under management
2015
1,871
1,741
3,612
2014
2,164
1,638
3,802
$ change
(293)
103
(190)
Foreign Exchange Revenue 8%Trust 11%Custody and Other Administration Services 3%Other Non-Interest Income 1%Net Interest Income 63%Banking 9%Asset Management 5%Bermuda 54%Guernsey 11%Cayman 28%The Bahamas 1%Switzerland 1%United Kingdom 5%
Banking
During 2015, 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, 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 UK. Banking revenues
reflect loan, transaction processing, and other fees earned in these jurisdictions. Banking fee revenues increased by 2.7% in 2015 to $35.2 million, compared to
$34.3 million in 2014, due primarily to higher credit card activity and increased wire fees in 2015, which were partially offset by the termination of a tailor-made
banking product for one of our major clients in Guernsey in 2014, decreased electronic banking revenues due to the release of a collections reserve in 2014, and a
large volume of loan exit fees charged in 2014 on repayment of some significant commercial facilities.
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 87% of the Group’s foreign exchange revenue (2014: 86%). The Bank does not maintain a proprietary trading book.
Foreign exchange income is generated from client-driven transactions and totalled $31.9 million in 2015, compared with $29.4 million in 2014. The $2.5 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 fiduciary services from our operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey and Switzerland.
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 28.7% of the Bank’s
non-interest income, up from 28.4% in 2014. In 2015, trust revenues totalled $40.3 million, an increase of $2.0 million or 5.2% over 2014, attributable largely to
the acquisition of the Legis Group business, which closed on 1 April 2014. Revenue growth was supported by structured, proactive business development activities.
Improved new business results were seen in all of our businesses in both personal and institutional fiduciary services.
Trust assets under administration were $81.8 billion at year-end 2015 compared to $84.4 billion the prior year, a decrease of $2.6 billion or 3.0%, which is
attributable largely to unfavourable foreign exchange movements.
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 UK, and other administration services — primarily administered banking — in
Guernsey. In 2015, revenues were $9.5 million, the slight decrease of $0.6 million due to lower transaction volumes and expired mandates. Total assets under
administration for the custody and other administration services business (which includes the administered banking services operations provided by our Guernsey
business) were $39.2 billion as at 31 December 2015, down from $42.5 billion the prior year.
19
Other Non-Interest Income
The components of other non-interest income for the years ended 31 December 2015 and 2014 are set forth in the following table:
(in $ thousands)
Net share of earnings from equity method investments
Rental income
Other
Total other non-interest income
2015
979
1,379
2,001
4,359
2014
834
2,726
1,449
5,009
In 2015, we recorded equity pickup income of $1.0 million, an increase of $0.1 million from the prior year due to higher earnings by investees. Rental income
decreased by $1.3 million to $1.4 million in 2015 due to a reduction in rented properties. Included in the “Other” category are maintenance fees from leased
premises, director’s 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.
BUTTERFIELD ANNUAL REPORT 2015
The following table presents the components of net interest income for the years ended 31 December:
(in $ millions)
Assets
Cash due from banks and short-term investments
Investment in securities
Loans
Interest earning assets
Other assets
Total assets
Liabilities
Deposits
Securities sold under agreement to repurchase
Long-term debt
Interest bearing liabilities
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
20
Non-interest bearing funds net of non-interest earning
assets (free balance)
2015
2014
Average
balance
Interest
Average
rate
Average
balance
Interest
Average
rate
2,407.9
6.5
3,217.0
69.6
4,026.7
186.5
9,651.6
262.6
0.27%
2.16%
4.63%
2.72%
371.5
10,023.1
262.6
2.62%
1,752.9
2,877.8
4,075.0
8,705.7
410.8
9,116.5
7,156.7
(18.4)
(0.26%)
6,741.6
2.1
-
-
117.0
(4.9)
7,275.8
(23.3)
(4.15%)
(0.32%)
1,720.7
196.8
9,193.3
(23.3)
(0.25%)
829.8
10,023.1
2,375.8
22.0
117.2
6,880.8
1,211.0
187.2
8,279.0
837.5
9,116.5
1,824.9
5.4
67.7
192.0
265.1
0.31%
2.35%
4.71%
3.05%
265.1
2.91%
(20.9)
(0.1)
(5.6)
(26.6)
(0.31%)
(0.38%)
(4.80%)
(0.39%)
(26.6)
(0.32%)
Net interest margin
239.3
2.48%
238.5
2.74%
Net interest income before provision for credit losses of $239.3 million increased $0.8 million or 0.3% over 2014. Net interest income is generated largely by the
Bank’s Bermuda and Cayman jurisdictions, which account for 88.6% of total net interest income. Interest income decreased by $2.5 million and was driven by lower
loan income, offset by improved investment portfolio performance and increased income on deposits. Investment income increased by $1.8 million from an increase
of $339.2 million in average balances, which was slightly offset by a yield decrease of 19 basis points. The yield decrease resulted from unfavourable prepayment
speeds on US agency securities despite a shortening of duration to approximately 3.5 years attributable to increased investments in adjustable-rate US agency
securities. Loan interest income was lower by $5.5 million due primarily to a $48.3 million decrease in average balances, and an 8 basis point decrease in yield.
Interest bearing liability costs decreased by 7 basis points, driving an improvement in interest expense of $3.3 million, largely from the long-term debt paydown of
$90 million in January 2014 and lower levels of interest bearing deposit volumes in 2015.
Average free balances for 2015 were $2.4 billion (2014: $1.8 billion) including non-interest bearing current accounts of $1.7 billion (2014: $1.2 billion), shareholders’
equity of $829.8 million (2014: $837.5 million), net of other assets and other liabilities totalling $174.7 million (2014: $223.6 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 2015 was $5.7 million compared to $8.0 million in 2014, a decrease of $2.3 million. Incremental provisions of
$8.6 million were required principally for specific reserves pertaining to commercial, residential mortgages and other consumer loans, partially offset by recoveries
of $2.9 million. This compares to 2014, when the Bank required incremental provisions relating to specific reserves of $10.4 million that were partially offset by
recoveries of $2.3 million.
OTHER GAINS (LOSSES)
The following table represents the components of other gains (losses) for the years ended 31 December:
(in $ thousands)
Net trading gains
Net realised gains (losses) on available-for-sale investments
Net realised / unrealised gains (losses) on other real estate owned
Impairment of fixed assets
Net gain on sale of equity method investments
Net other gains
Other gains (losses)
2015
(562)
(4,407)
277
(5,083)
-
338
(9,437)
2014
10,070
8,680
(1,804)
(1,986)
277
451
15,688
Net Trading Gains
A $0.6 million loss was recorded with respect to trading securities in 2015 compared to net trading gains of $10.1 million in 2014, which relates primarily to the fair
value adjustments of the Bank’s US government and federal agency securities held in the Bank’s operations in the UK and Guernsey. The decline was due primarily
to movements in long-term US treasury rates.
Net Realised Gains (Losses) on Available-For-Sale Investments
Net realised losses of $4.4 million were recorded in 2015 as a result of a strategic repositioning of the investment portfolio which is detailed further in “Investment
in Securities” to follow. The losses were realised as a result of the sale of certain lower yielding investments from our US government and federal agency portfolio.
In 2014, the Bank recorded an $8.7 million net realised gain on the sale of the Bank’s investment in the Avenir Pass-through Note, which was formerly a structured
investment vehicle.
Net Realised / Unrealised Gains (Losses) on Other Real Estate Owned
Valuation adjustments and realised gains and losses related to real estate held for sale were gains of $0.3 million compared to losses of $1.8 million in 2014, the
increase attributable largely to the sale of certain properties in Bermuda and Cayman triggering a small gain relative to valuation losses booked in 2014.
Impairment of Fixed Assets
The Bank conducts annual property impairment assessments on its properties held for sale and rent as well as other fixed assets which resulted in $5.1 million of
write downs in 2015 as a result of an impairment in the UK’s core banking system due to the planned orderly wind down, and $2.0 million in write downs in 2014 to
reflect current market values of properties held for sale and rent.
21
Net Gain on Sale of Equity Method Investments
During 2014, the Bank received $0.3 million of additional sale consideration for the 2012 disposal of Island Heritage Holdings Ltd.
Net Other Gains
Net other gains were $0.3 million in 2015 compared to net other gains of $0.5 million in 2014.
NON-INTEREST EXPENSES
Expense management continued to be a key focus in 2015 as the Bank continues to adapt to the persistently low interest rate environment. Total non-interest
expenses in 2015 were $285.2 million compared to $273.0 million recorded in 2014. These figures include non-core expenses in 2015 and 2014 of $30.5 million and
$16.0 million, respectively. After adjusting for these non-core items, 2015 core expenses were down $2.2 million (0.8%) with an improvement in core efficiency
ratio to 66.0% from 67.7% in 2014.
Salary and employee benefits account for 47.3% of non-interest expenses, with technology and communications and property making up 27.6% combined.
Bermuda expenses include all head office costs.
BUTTERFIELD ANNUAL REPORT 2015 DISTRIBUTION OF 2015 NON-INTEREST EXPENSES
DISTRIBUTION OF 2015 NON-INTEREST
EXPENSES BY LOCATION
The following table presents the components of non-interest expenses for the years ended 31 December:
(in $ thousands)
Salaries and other employee benefits
Technology and communications
Property
Professional and outside services
Non-income taxes
Amortisation of intangible assets
22
Marketing
Restructuring costs
Other non-interest expenses
Total non-interest expenses
Non-core items
Core non-interest expenses
2015
134,917
57,069
21,539
27,638
13,882
4,424
3,919
2,183
19,674
285,245
(30,475)
254,770
2014
129,761
57,119
24,312
24,022
14,175
4,281
3,802
-
15,495
272,967
(16,045)
256,922
$ change
% change
5,156
(50)
(2,773)
3,616
(293)
143
117
4.0%
(0.1%)
(11.4%)
15.1%
(2.1%)
3.3%
3.1%
2,183
-
4,179
12,278
(14,430)
(2,152)
27.0%
4.5%
89.9%
(0.8%)
Salaries and Other Employee Benefits
Total salaries and other employee benefits costs were $134.9 million in 2015, up $5.2 million compared to 2014. Included in 2015’s expenses is $8.7 million of
severance, early retirement and project-related non-core costs, compared to $5.6 million of severance and project-related non-core costs in 2014. Core salaries and
other employee benefits costs were $126.2 million in 2015, up $2.1 million compared to 2014 due to increased post-retirement medical costs resulting from higher
healthcare costs, which were partially offset by a headcount reduction and favourable foreign exchange fluctuations from foreign-denominated subsidiaries. Also
helping offset these costs was a $1.0 million one-time release in 2014 of pension expense from the closure of a defined benefit pension plan. Headcount on a
full-time equivalency basis at year-end was 1,141, down 23 compared to 1,164 a year ago due to certain expired mandates in administered banking and trust
services, as well as a decrease in temporary staffing (included into full-time equivalent) that were involved in the integration of acquisitions in the prior year,
as well as the tax compliance review.
Technology and Communications
Technology and communication costs remained stable at $57.1 million in 2015 and 2014.
Property
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, were $21.5 million in 2015, down
$2.8 million from the $24.3 million recorded in 2014 due primarily to decreased property management and maintenance costs resulting from the sale of hotel
properties in the third quarter of 2014, as well as reduced electrical costs due to ongoing implemented cost savings initiatives.
Bermuda 55Cayman 20Guernsey 14Switzerland 1%The Bahamas 2%United Kingdom 8%Salaries and Other Employee Benefits 47%Technology and Communications 20%Property 8%Professional and Outside Services 10%Non-Income Taxes 5%Amortisation of Intangible Assets 2%Marketing 1%Other Non-Interest Expenses 6%Restructuring Costs 1%%%% Professional and Outside Services
Professional and outside services include primarily consulting, legal, audit, and other professional services. The current year expense of $27.6 million included
$14.0 million of non-core project-related costs with $8.4 million relating to the evaluation of the merits of an international listing of Butterfield common shares
and $2.8 million relating to the internal review and account remediation programme surrounding the historical compliance of our customer data with heightened
international standards for tax compliance and costs associated with the HSBC business acquisition in Bermuda. When excluded, professional fees from our core
business decreased by $0.9 million from reduced consulting expenditures.
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 2015,
the expense was $13.9 million, down $0.3 million mainly due to value-added tax recoveries in the UK. Of the $13.9 million in non-income taxes, $9.6 million was
paid to the Bermuda government agencies for payroll tax, business licences and land taxes, $0.7 million for value-added taxes paid in our UK business and
$3.6 million paid to other governments for business licences, insurance tax and work permit fees.
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 $4.4 million in 2015 compared to $4.3 million in 2014. The higher amortisation levels were driven by an increase in
identifiable, limited life intangible assets acquired in the Legis Group and HSBC Cayman acquisitions completed in 2014.
Marketing
Marketing expenses reflect costs incurred in advertising and promoting our products and services. Marketing expenses totalled $3.9 million in 2015, up
$0.1 million, but remained consistent as a percentage of total net revenue before provision for credit losses and other gains and losses at 1.0%.
Other Non-Interest Expenses
(in $ thousands)
Stationery & supplies
Custodian & handling
Charitable donations
Insurance
Other expenses
Agent commission fees
Cheque processing
Directors’ fees
Dues and subscriptions
Foreign bank charges
General expenses
Maintenance fees for liquidity facility
Registrar and transfer agent fee
Provision for settlement amount arising from tax compliance review
Other
Total other non-interest expenses
23
2015
1,419
1,563
757
2,139
644
1,211
1,245
261
755
50
175
547
4,800
4,108
19,674
2014
1,343
1,753
787
2,230
439
1,328
899
535
572
713
175
707
-
4,014
15,495
$ change
% change
76
(190)
(30)
(91)
205
(117)
346
(274)
183
(663)
5.7%
(10.8%)
(3.8%)
(4.1%)
46.7%
(8.8%)
38.5%
(51.2%)
32.0%
(93.0%)
-
-
(160)
4,800
94
4,179
(22.6%)
100%
2.3%
27.0%
Other non-interest expenses were $19.7 million in 2015, an increase of $4.2 million compared to 2014. This was driven principally by the $4.8 million provision for
fines arising from tax compliance review in 2015 compared to lower operational losses experienced in 2014.
INCOME TAXES
Each jurisdiction in which we operate is subject to different corporate income tax laws. The Bank is incorporated in Bermuda as a local company and therefore,
pursuant to Bermuda law, not obligated to pay any taxes in Bermuda 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 laws applicable in the respective jurisdictions.
In general, Bermuda and Cayman are not subject to corporate income taxes but are required to pay higher rates of non-income taxes (included above) such as
licence fees and payroll taxes.
BUTTERFIELD ANNUAL REPORT 2015 The Bank’s subsidiaries in the UK, Guernsey and Switzerland are subject to the tax laws of those jurisdictions. The corporate tax rate in the UK is 20%, whilst in
Guernsey, the banking profits are subject to a 10% flat corporate tax rate. In 2015, income tax expense netted to $1.3 million compared to an income tax benefit of
$0.2 million in 2014. The movement is due to the write-off of a previously accrued deferred tax asset in 2015 compared to a tax refund received in 2014.
CONSOLIDATED BALANCE SHEET AND DISCUSSION
The following table shows the balance sheet as reported as at 31 December:
2015
2014
$ change
% change
(in $ millions)
Assets
Cash due from banks
Short-term investments
Investment in 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
Long-term debt
Total liabilities
24
Preference shareholders’ equity
Common and contingent value convertible preference shareholders’ equity
Total shareholders’ equity
2,289
409
3,224
4,000
183
51
120
2,063
395
2,989
4,019
215
58
119
10,276
9,858
9,182
227
117
9,526
183
567
750
8,672
220
117
9,009
183
666
849
226
14
235
(19)
(32)
(7)
1
418
510
7
-
517
11.0%
3.5%
7.9%
(0.5%)
(14.9%)
(12.1%)
0.8%
4.2%
5.9%
3.2%
-
5.7%
-
-
(99)
(99)
418
(14.9%)
(11.7%)
4.2%
Total liabilities and shareholders’ equity
10,276
9,858
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
2015
4,305
516
10,225
5.1%
12.0%
16.2%
19.0%
2014
4,113
608
9,800
6.2%
14.6%
19.0%
22.2%
The Bank maintains a highly liquid balance sheet and is well capitalised. At 31 December 2015, total cash due from banks, short-term investments and investment
in securities (excluding held-to-maturity investments) represented $5.2 billion, or 50.8% of total assets, down slightly from 51.8% at year-end 2014 due to a
decrease in available-for-sale securities to fund an increase in held-to-maturity investments. The Bank’s balance sheet remains strong with shareholders’ equity
ending the year at $750.4 million down from $849.4 million at year-end 2014 due primarily to the repurchase and cancellation of 84 million common shares. Of the
2015 shareholders’ equity, $182.9 million is preference shareholders’ equity and $567.5 million is common equity.
Total assets grew by $0.4 billion to $10.3 billion, primarily reflecting a $0.5 billion increase in customer deposit levels reinvested in short-term investments and
investment in securities, which grew by $0.2 billion, with an additional $0.2 billion remaining in cash due from banks.
At 31 December 2015, Butterfield’s capital ratios were strong, but declined from year-end 2014 because of balance sheet growth and the repurchase and
cancellation of 84 million shares from CIBC and other shareholders, which is discussed in greater detail in the “Shareholders’ Equity” section to follow. The TCE/TA
ratio ended 2015 at 5.1% (2014: 6.2%), whilst the Total capital ratio and Tier 1 capital ratios were 19.0% (2014: 22.2%) and 16.2% (2014: 19.0%), respectively.
These ratios are well in excess of regulatory minimums.
CASH DUE FROM BANKS AND SHORT-TERM INVESTMENTS
The Bank only places deposits with highly-rated institutions and ensures there is appropriate geographic and sector 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 due from banks 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. From August 2014, certificates of deposits with less than one year but greater than three
months’ maturity from the date of acquisition are designated as short-term investments as the investments are highly liquid and subject to a very low risk of change
in fair value. As at 31 December 2015, cash due from banks and short-term investments were $2.7 billion, compared to $2.5 billion as at 31 December 2014. The
increase was due to a $0.5 million increase in customer and bank deposits in 2015 that were partially invested in investments with the remainder being held in cash
due from banks, and also due to a regulatory requirement in the UK to increase intraday cash buffer levels.
See “Note 3: Cash Due from Banks” and “Note 4: Short-Term Investments” in the 31 December 2015 consolidated financial statements for additional tables
and information.
INVESTMENT IN SECURITIES
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 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.
Consistent with industry and rating agency designations, the Bank defines investment grade as “BBB” or higher. As at 31 December 2015, 99.8% (2014: 99.8%) of
our total investments were investment grade. Of these securities, 93.1% (2014: 99.8%) are rated “A” or higher.
25
31 DECEMBER 2015 INVESTMENT PORTFOLIO BY
LONG-TERM DEBT RATING
31 DECEMBER 2015 INVESTMENT PORTFOLIO BY TYPE
The following table presents the carrying value of investment in securities by balance sheet category as at 31 December:
(in $ millions)
Trading
Available-for-sale
Held-to-maturity
Total investment in securities
2015
321
2,201
702
3,224
2014
417
2,234
338
2,989
$ change
% change
(96)
(33)
364
235
(23.0%)
(1.5%)
107.4%
7.9%
BUTTERFIELD ANNUAL REPORT 2015US Government andFederal Agencies 74%Debt Securities Issued by Non-USGovernments 1%Corporate Debt Securities 16%CommercialMortgage-Backed Securities 5%Asset-Backed Securities- Student Loans 1%AAA 84%AA 1%A 8%BBB 7%Residential Mortgage-Backed Securities - Prime 3%
The investment portfolio was $3.2 billion as at 31 December 2015, compared to $3.0 billion as at 31 December 2014. The increased portfolio size was due to
purchases of liquid US government and federal agency securities using cash provided by the increased deposit base primarily as a result of acquisitions and organic
business growth. New investments were placed primarily in US government and federal agency securities that totalled $2.4 billion, based upon carrying value, or
74.0% of the total investment portfolio, as of 31 December 2015. Certificates of deposit of $37.7 million were reinvested in sovereign debt classified as
short-term investments. The investment yield decreased year-on-year by 19 basis points to 2.16% in 2015 due primarily to $76.4 million of corporate bond
maturities early in the year, and unfavourable prepayment speeds on US agency securities, despite a strategic shortening of duration to 3.5 years. These maturities
were reinvested in lower yielding but higher quality US federal agency securities, and during the fourth quarter, higher yielding corporate bonds. However these
higher yielding assets were invested late in the year, and accordingly did not materially impact the yield. Total net unrealised gains of the investment portfolio were
$0.5 million, compared to net unrealised gains of $9.9 million at year-end 2014. The movement in unrealised gains for the year was primarily driven by an increase
in longer-term US treasury interest rates. The 10-year treasury rate was 2.27% as at 31 December 2015 compared to 2.17% the year before.
Trading securities totalled $321.3 million at year-end 2015, compared to $417.4 million at year-end 2014. As at 31 December 2015, trading securities consisted of
86.9% or $279.3 million (2014: 74.9%, or $312.5 million) of holdings of securities issued by the US government and federal agencies, debt securities issued by
non-US governments of 2.3%, or $7.5 million (2014: 1.8%, or $7.7 million), guaranteed student loan-backed securities of 8.8%, or $28.3 million (2014: 12.6%, or
$52.6 million), holdings of real estate mutual funds and seed capital invested in mutual funds managed by the Bank of 2.0%, or $6.2 million (2014: 1.7%, or
$6.9 million), and certificates of deposit of $nil (2014: 9.0%, or $37.7 million).
Available-for-sale (“AFS”) securities totalled $2.2 billion at year-end 2015, compared to $2.2 billion at year-end 2014. As at 31 December 2015, 63.8% or
$1.4 billion (2014: 70.5%, or $1.6 billion) of AFS securities consisted of holdings of securities issued by the US government and federal agencies. The US government
guarantees 35.8% or $502.5 million (2014: 5.8%, or $91.9 million) of these securities. Corporate debt securities represented 23.0%, or $506.1 million (2014:
17.9% or $399.3 million) of the AFS portfolio. As of 31 December 2015, the remaining 13.2%, or $290.7 million of AFS securities (2014: 11.6% or $258.9 million)
was comprised primarily of commercial mortgage-backed securities of 6.8%, or $148.7 million (2014: 6.8%, or $151.2 million), guaranteed student loan-backed
securities of 0.6%, or $12.2 million (2014: 0.5%, or $12.2 million), debt securities issued by non-US governments of 1.3%, or $29.6 million (2014: 1.4%, or
$30.7 million) and residential mortgage-backed securities of 4.6%, or $100.2 million (2014: 2.9%, or $64.8 million). Corporate debt securities increased as a
percentage of the overall AFS portfolio as part of the strategic repositioning of the investment portfolio in order to diversify the asset classes in the portfolio.
Held-to-maturity (“HTM”) investments were $701.3 million as at 31 December 2015 (2014: $338.2 million) and consisted entirely of mortgage-backed securities
issued by US federal agencies that management does not intend to sell before maturity. The increase in the HTM portfolio was also related to the strategic
repositioning of the investment portfolio in order to reduce valuation volatility.
26
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.
As detailed previously, management made a strategic repositioning of the investment portfolio during the year, which resulted in the sale of AFS securities
triggering realised losses of $4.4 million. The securities sold were primarily long duration, fixed income securities which were highly sensitive to interest rate risk
and were sold in the lead-up to the announcement for a rate rise in the US. Management does not have the intention to sell any further securities which are in an
unrealised loss position, and accordingly, management has concluded that this sale does not result in an OTTI for any remaining securities in a loss position as at
31 December 2015.
See “Note 5: Investments In Securities” in the 31 December 2015 consolidated financial statements for additional tables and information.
LOANS
The loan portfolio remained stable at $4.0 billion at 31 December 2015, compared to 2014, due primarily to significant prepayments on the commercial and
residential mortgage portfolio and unfavourable foreign exchange rate movements offset by growth related to the acquisition of the HSBC Cayman loan portfolio in
November 2014.
During the year, gross loans written totalled $767.3 million offset by pay downs of $734.8 million.
The loan portfolio represented 38.9% of total assets at 31 December 2015 (2014: 40.8%), whilst loans as a percentage of customer deposits decreased from
46.6% at year-end 2014 to 43.6% in 2015.
Allowance for credit losses at 31 December 2015 totalled $49.3 million, an increase of $1.8 million from the prior year. The movement in the allowance was
mainly the result of additional provisions of $8.6 million (including recoveries of $2.9 million) recorded during the year, and $6.8 million in charge-offs and foreign
exchange movements. Of the total allowance, the general allowance was $30.2 million (2014: $28.7 million) and the specific allowance was $19.1 million (2014:
$18.8 million), reflecting a specific coverage ratio of 29.3%, compared to 26.2% at 31 December 2014. The improvement in the specific coverage ratio reflects the
resolution of several large commercial loans, as well as several large value residential mortgages, which in turn amplifies the coverage ratio on the more diversified
and less concentrated remaining balance.
Gross non-accrual loans totalled $65.3 million at 31 December 2015, down $6.5 million from $71.8 million at 31 December 2014, and represented 1.6% of the
total loan portfolio at 31 December 2015, compared to 1.8% in 2014. During 2015, the Bank held other real estate owned properties (“OREO”) amounting to
$11.2 million (2014: $19.3 million) comprising commercial real estate of $6.7 million (2014: $9.2 million), foreclosed residential properties of $4.5 million
(2014: $6.7 million) and property held for sale reclassified during 2015 of $nil (2014: $3.4 million).
31 DECEMBER 2015 LENDING BY LOCATION
31 DECEMBER 2015 GROUP LOANS BY TYPE
Government
Loans to governments showed a $111.7 million increase from 2014, due primarily to new government lending in Bermuda offsetting repayments in the Cayman
portfolio.
27
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 real estate loans are offered to real estate investors, developers and builders domiciled primarily in Bermuda and the UK. 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. The portfolio has decreased by $39.7 million to $676.0 million due primarily to repayments of loans in our European jurisdictions.
Commercial loans of $383.9 million at 31 December 2015 decreased by $64.5 million from the previous year, driven by repayments of commercial lending facilities
principally in Cayman and Bermuda.
Residential
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.
All mortgages were underwritten utilising our stringent credit standards. Residential loans consist of conventional home mortgages and equity credit lines.
At 31 December 2015, residential mortgages totalled $2.5 billion (or 62.6% of total gross loans), a $25.5 million increase from 31 December 2014. This increase
was mainly attributed to new volume levels in the UK residential mortgage portfolio, which offset reductions in the residential mortgages portfolio across the
remaining jurisdictions and unfavourable foreign exchange movements within the portfolio.
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. At 31 December 2015, other
BUTTERFIELD ANNUAL REPORT 2015Credit Cards 2%Commercial Overdrafts 1% Government 6%Other Consumer 3%Residential Mortgages 63%Commercial Real Estate 17%Commercial and Industrial 8%Bermuda 52%United Kingdom 10%Cayman 27%Guernsey 11% consumer loans totalled $227.5 million (or 5.6% of total gross loans), a $50.4 decrease from 31 December 2014. The decrease was due to repayments and
expiration of loan facilities without sufficient new loan origination.
Our loan portfolio and contractual obligations and arrangements are discussed in more detail in “Note 6: Loans” and “Note 7: Credit Risk Concentrations” in the
31 December 2015 consolidated financial statements.
DEPOSITS
Deposits are our principal funding source for use in lending, investments and liquidity. Butterfield is a deposit-led Bank and does not require the use of wholesale
or institutional markets 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 fund and insurance clients to meet quarter-end cyclical cash flow requirements.
The table below shows the year-end and average customer deposit balances by jurisdiction, comparing 31 December 2015 and 2014:
(in $ millions)
Bermuda
Cayman
Guernsey
The Bahamas
UK
Total customer deposits
As at 31 December
Average balance
2015
4,272
3,013
1,245
40
598
9,168
2014
3,870
2,591
1,496
61
614
8,632
$ change
2015
402
422
4,013
2,804
(251)
1,366
(21)
(16)
536
66
611
8,860
2014
3,758
2,018
1,440
78
621
7,915
$ change
255
786
(74)
(12)
(10)
945
Average customer deposits increased by $0.9 billion to $8.9 billion in 2015. On a year-end basis, customer deposits were up $0.6 billion to $9.2 billion from
$8.6 billion at year-end 2014.
28
Customer demand deposits, which include chequing accounts (both interest bearing and non-interest bearing), savings and call accounts, totalled $7.7 billion, or
83.5% of total customer deposits at year-end 2015, compared to $6.7 billion, or 78.1%, at year-end 2014. Customer term deposits declined by $0.4 billion to
$1.5 billion compared to the prior year. The cost of funds on deposits improved from 26 basis points in the full year ended 2014 to 21 basis points in 2015 as a
result of an increase in average non-interest bearing deposits by $0.5 billion to $1.7 billion.
See “Note 10: Customer Deposits and Deposits from Banks” in the 31 December 2015 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 2015, deposits from banks totalled $14.5 million, a decrease of $25.4 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 healthcare 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 pension and post-retirement healthcare 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 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.
Effective 30 September 2014, the defined benefit pension benefits of the Bank’s Guernsey operations were amended to freeze credited service and final average
earnings for remaining active members. The benefits amendment resulted in a further reduction in the Guernsey defined benefit pension liability of $4.6 million as
at 30 September 2014.
Effective October 2014, all the participants of the Guernsey defined benefit pension plan are inactive and in accordance with US GAAP, the net actuarial loss of the
Guernsey defined benefit pension plan will be amortised over the estimated average remaining life expectancy of the inactive participants of 39 years. Prior to all
Guernsey participants being inactive, the net actuarial loss of the Guernsey defined benefit pension plan was amortised to net income over the estimated average
remaining service period for active members of 15 years.
For the year ended 31 December 2014, numerous changes in the plan provisions were made to align the plan provisions with the administrative practices of
the Bank resulting in a further increase in the Bermuda defined benefit post-retirement healthcare plan liability of $7.9 million. The Bank amortises prior service
credit resulting from plan amendments that occurred when plan members were active employees, on a linear basis over the expected average remaining service
period (to full eligibility) of active members expected to receive benefits under the plan. Such remaining service periods are as follow: 3.1 years for the 2010
plan amendments and 4.6 years for the 2011 plan amendments. Plan amendments occurring in 2014 resulted in the recognition of new prior service cost on
31 December 2014 on a plan for which substantially all members are now inactive and, in accordance with US GAAP, the Bank has elected to amortise this new
prior service cost on a linear basis over 21 years, which is the average remaining life expectancy of members eligible for benefits under the plan at the time of the
amendments.
As at 31 December 2015, the Bank had a net obligation for employee future benefits in the amount of $106.0 million, down $3.5 million (3.3%) from $109.5 million
at year-end 2014. The increase was driven by valuation changes caused by discount factor changes relating to interest rate fluctuations slightly offset by increased
healthcare costs.
See “Note 11: Employee Benefit Plans” in the 31 December 2015 consolidated financial statements for additional tables and information.
LONG-TERM DEBT, INTEREST PAYMENTS AND MATURITIES
We have outstanding issuances of long-term debt with a carrying value of $117.0 million as at 31 December 2015 and 31 December 2014, all issued in US dollars.
As of 31 December 2015, $89.0 million of our outstanding long-term debt is eligible for inclusion in our Tier 2 regulatory capital base and is limited to 50% of Tier 1
Capital, down from $102.1 million at year-end 2014.
The $90 million Series A note had a contractual maturity date in 2015 with 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. During January 2014, the Bank exercised its option to redeem all of the Series A notes
outstanding at face value of $90 million.
The following table presents the contractual maturity, interest rates and principal outstanding as at 31 December 2015:
29
Long-term debt
(in $ millions)
2003 issuance - Series B
2005 issuance - Series B
2008 issuance - Series B
Total
Earliest date
redeemable at the
Bank’s option
Contractual
maturity date
Interest rate
until date
redeemable
Interest rate
from earliest date
redeemable to
contractual maturity
Principal
outstanding
(in $ millions)
27 May 2013
27 May 2018
2 July 2015
2 July 2020
27 May 2018
27 May 2023
5.15%
5.11%
8.44%
3 months US$ LIBOR + 2.000%
3 months US$ LIBOR + 1.695%
3 months US$ LIBOR + 4.929%
47
45
25
117
See “Note 19: Long-Term Debt” in the 31 December 2015 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 2015 and 31 December 2014, there were no repurchase agreements outstanding.
BUTTERFIELD ANNUAL REPORT 2015
SHAREHOLDERS’ EQUITY
Shareholders’ equity decreased during the year ended 31 December 2015 by $99.0 million to $750.4 million.
Increases totalling $88.2 million include:
• $77.7 million net income for the year
• $1.6 million net decreases in employee benefit plan adjustments
• $7.7 million of share-based compensation
• $0.8 million of share-based settlements for stock options exercised
• $0.4 million from accretion of net unrealised losses on HTM investments transferred from AFS investments
These increases were offset by decreases totalling $187.2 million:
• $126.0 million from the purchase and cancellation of common shares
• $11.8 million from net change in unrealised gains (losses) on AFS investments
• $24.8 million of common share dividends
• $4.9 million from the purchase of treasury common shares
• $0.2 million from the purchase and cancellation of preference shares
• $16.5 million of preference share dividends and guarantee fees
• $3.0 million translation adjustments on foreign operations
On 30 April 2015, Butterfield repurchased and cancelled 80,000,000 shares held by CIBC for $1.50 per share, for a total of $120.0 million. The remaining CIBC
shareholding in Butterfield (representing 23,434,232 shares) was taken up by Carlyle Global Financial Services, L.P. at $1.50 per share and subsequently sold to
other investors.
On 13 August 2015, Butterfield repurchased and cancelled 4,000,000 shares held by two shareholders for $1.49 per share, for a total of $6.0 million.
30
CAPITAL RESOURCES
The Bank manages its capital both on a total Group basis and, where appropriate, on a legal entity basis. The Finance function 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’s regulatory capital is determined in accordance with guidelines issued by our lead regulator, the Bermuda Monetary Authority (“BMA”), which are
based on the risk-based capital adequacy framework (“Basel II Framework”) developed by the Basel Committee on Banking Supervision (“BCBS”) and has been
endorsed by the central bank governors and heads of bank supervision of the G10 countries. The Bank is fully compliant with all regulatory capital requirements
and maintains capital ratios well in excess of regulatory minimums as at 31 December 2015.
As at 31 December 2015, the Bank’s regulatory capital stood at $818.3 million with the consolidated Tier 1 and Total capital ratios of 16.2% and 19.0%,
respectively (2014: 19.0% and 22.2%, respectively).
The following table sets forth our capital adequacy as at 31 December 2015 and 2014 in accordance with the Basel II framework:
(in $ millions)
Capital
Tier 1 capital
Tier 2 capital
Total capital
Risk Weighted Assets
Cash due from banks 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
2015
699.2
119.1
818.3
1,004.6
2,201.7
278.5
216.2
604.3
4,305.3
12.0%
16.2%
19.0%
2014
781.7
130.8
912.5
683.2
2,364.9
314.0
177.7
573.6
4,113.4
14.6%
19.0%
22.2%
Under Basel II Pillar III (market disclosure) the Bank publishes further information about the risks to which it is exposed. The Bank’s Pillar III disclosures for
the year ended 31 December 2015 will be published on the corporate website, www.butterfieldgroup.com, shortly after the publication of the consolidated
financial statements.
31
Effective 1 January 2015, the BMA implemented the capital reforms proposed by the BCBS and referred to as the Basel III regulatory framework. Basel III aims to
raise the quality, consistency and transparency of the capital base, limit the build-up of excess leverage and increase capital requirements for the banking sector.
Basel III adopts Common Equity Tier 1 (“CET1”) capital as the predominant form of regulatory capital with the CET1 ratio as a new metric. Basel III also adopts the
new Leverage Ratio and Liquidity Coverage Ratio (“LCR”) regimes.
The Basel III regulatory framework adopts a phased implementation approach for Bermuda banks with full implementation on 1 January 2019, consistent with
BCBS recommendations. When fully phased-in, the Bank will be subject to the following requirements:
• CET1 ratio of at least 7.0% of risk-weighted assets (“RWA”), inclusive of a minimum CET1 ratio of 4.5% and the new capital conservation buffer of 2.5%;
• Tier 1 capital of at least 8.5% of RWA, inclusive of the 2.5% capital conservation buffer;
• Total capital of at least 10.5% of RWA, inclusive of the 2.5% capital conservation buffer;
• The Bank is considered to be a Domestic Systemically Important Bank (“D-SIB”) and will be subject to a 3% surcharge composed of CET1-eligible capital
implemented by the BMA effective 30 September 2015. This is based upon its assessment of the extent to which the Bank (individually and collectively with
the other Bermuda banks) poses a degree of material systemic risk to the economy of Bermuda due to its role in deposit taking, corporate lending, payment
systems and other core economic functions;
• Counter-cyclical buffer of up to 2.5% composed of CET1-eligible capital may be implemented by the BMA when macroeconomic indicators provide an
assessment of excessive credit or other pressures building in the banking sector;
• Leverage ratio must be at 5.0% or higher; and
• LCR with a minimum requirement of 100%, subject to the phase in rules.
We expect, based on our understanding of the current BMA guidelines for capital adequacy, that Basel III will result in lower CET1 capital and higher RWA as
compared to Basel II. As at 31 December 2015, the Bank maintained ratios in excess of the required regulatory minimums, with a pro-forma CET1 ratio of 10.7%.
BUTTERFIELD ANNUAL REPORT 2015
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 by the BMA, in whole or in part, on the tenth day prior to the ten-year anniversary of
the date of issuance (the “Bank Redemption Date”), at a redemption price equal to 100% of the liquidation preference thereof plus any unpaid dividends for the
then-current dividend period to the Guarantee End Date, regardless of whether any dividends are actually declared for such dividend period.
CONTINGENT VALUE CONVERTIBLE PREFERENCE SHARES (“CVCP shares”) (see the Rights Offering Prospectus for details)
On 31 March 2015, all remaining issued and outstanding CVCP shares were converted to common shares at a conversion ratio of 1:1.
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 BSX. The BSX is advised monthly of shares
purchased pursuant to each programme.
Common Share Buy-Back Programme
Effective 1 April 2014, the Board approved the 2014 common share buy-back programme authorising the purchase for treasury of up to 15 million common shares.
32
On 26 February 2015, the Board approved, with effect from 1 April 2015, the 2015 common share buy-back programme, authorising the purchase for treasury of up
to eight million common shares.
On 19 February 2016, the Board approved, with effect from 1 April 2016, the 2016 common share buy-back programme, authorising the purchase for treasury of up
to eight million common shares.
Total common share buy-backs for the year ending 31 December are as follows:
Acquired number of shares (to the nearest 1)
2,503,707
8,567,340
4,038,482
7,260,051
22,369,580
Average cost per common share
Total cost (in Bermuda dollars)
1.94
1.99
1.39
1.24
1.63
4,862,248
17,018,412
5,610,907
8,999,061
36,490,628
2015
2014
2013
2012
Total
On 30 April 2015, Butterfield repurchased and cancelled 80,000,000 shares held by CIBC for $1.50 per share, for a total of $120.0 million. The remaining CIBC
shareholding in Butterfield (representing 23,434,232 shares) was taken up by Carlyle Global Financial Services, L.P. at $1.50 per share and subsequently sold to
other investors.
On 13 August 2015, Butterfield repurchased and cancelled 4,000,000 shares held by two shareholders for $1.49 per share, for a total of $6.0 million.
Preference Share Buy-Back Programme
On 28 April 2014, the Board approved the 2014 preference share buy-back programme, authorising the purchase and cancellation of up to 26,600
preference shares.
On 26 February 2015, the Board approved, with effect from 5 May 2015, the 2015 preference share buy-back programme, authorising the purchase and
cancellation of up to 5,000 preference shares.
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)
2015
183
1,151.55
210,734
2014
560
1,172.26
656,465
2013
11,972
2012
4,422
Total
17,137
1,230.26
1,218.40
1,224.46
14,728,624
5,387,777
20,983,600
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 each programme, provided no more than any such person’s pro-rata share of the listed securities is repurchased. Pursuant to the
BSX regulations, all repurchases made by any issuer pursuant to a securities repurchase programme must be made: (1) in the open market and not by private
agreement; and (2) for a price not higher than the last independent trade for a round lot of the relevant class of securities.
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 4.32 million (2014: 4.30 million) warrants with an exercise price of $3.47 (2014: $3.49) with an expiration date of 22 June 2019.
Dividends
During the year ended 31 December 2015, the Bank declared cash dividends totalling $24.8 million or $0.05 for each common share and CVCP share on record as
of the related record dates (2014: $27.4 million or $0.05 for each common share and CVCP share on record). The CVCP shares were all converted to common shares
on 31 March 2015.
The Board also declared a fourth interim dividend of $0.01 per common share to be paid on 24 March 2016 to shareholders of record on 11 March 2016.
During the years ended 31 December 2015 and 2014, the Bank declared the full 8.00% cash dividends on preference shares in each quarter. Preference share
dividends declared and paid were $14.6 million during 2015 (2014: $14.7 million). Guarantee fees paid to the Government of Bermuda were $1.8 million during
2015 (2014: $1.8 million).
CASH FLOWS
Cash due from banks was $2.3 billion as at 31 December 2015, compared to $2.1 billion in the prior year. The increase is described below by category of operating,
investing and financing activities.
For the year ended 31 December 2015, net cash provided by operating activities totalled $155.5 million (2014: $143.8 million). Cash flows from operating activities
are generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided by operating activities increased by
$11.7 million from 2014 to 2015, due primarily to an increase in other liabilities and employee benefit plans, and the movement in net realised gains (losses) on AFS
investments, offset by a decrease in net income that generated lower cash earnings compared to the prior year, and an increase in other assets.
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 origination. Net cash used in investing activities for the year ending 31 December 2015 totalled $325.8 million, compared to cash used in investing activities
of $258.7 million in 2014. The $67.1 million increase in cash used in investing activities in 2015 was mainly attributable to a $315.4 million decrease in purchases of
short-term investments, a $237.5 million increase in proceeds from maturities and pay-downs on AFS investments, and a $108.3 million increase in proceeds from
sales on AFS investments, which was partially offset by a $217.9 million increase in purchases of AFS investments, a decrease in loans movement of $181.9 million
and the $310.6 relative decrease from the deposits acquired in the HSBC acquisition in Cayman in 2014.
Net cash provided by financing activities totalled $426.9 million in 2015, compared to net cash provided by financing activities of $461.7 million in 2014. The
$34.8 million decrease is mainly due to a $39.1 million decrease in deposit growth, a $113.8 million increase in common shares repurchased attributable to the
share repurchase and cancellation of the majority of CIBC’s shareholding and repurchases from two other shareholders, which was partially offset by a $90.0 million
decrease in repayment of long-term debt due to the redemption of the $90 million Series A note in 2014 and a $25.5 million decrease in securities sold under
agreement to repurchase.
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.
33
BUTTERFIELD ANNUAL REPORT 2015 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 arrangements 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.
(in $ millions)
Standby letters of credit
Letters of guarantee
Total
2015
Gross
Collateral
258.9
9.1
268.0
257.2
8.4
265.6
2014
Gross
Collateral
225.7
10.2
235.9
224.2
7.6
231.8
Net
1.7
0.7
2.4
Net
1.5
2.6
4.1
34
Contractual Obligations (Including Long-term debt)
We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.
These credit arrangements are subject to our normal credit standards and collateral is obtained where appropriate. Substantially all of our commitments to extend
credit are contingent upon clients maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain
commitments to extend credit in determining the level of the allowance for possible loan losses.
The Bank 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 2015,
$123.7 million (2014: $91.8 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 long-term 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 long-term debt are based on principal payment dates.
See “Note 19: Long-term Debt” in the 31 December 2015 consolidated financial statements for terms of long-term debt arrangements and interest obligations.
We also have an outstanding contractual obligation relating to an eight-year agreement entered into in October 2008 with global technology service provider
Hewlett Packard (“HP”) to supply technology infrastructure and application development management, information security and technical support for our
locations in Bermuda and the Cayman Islands. Under our agreement with HP, server management and maintenance, technology field support, application support
and development and help desk functions are managed by HP. Our remaining payment obligations to HP under this agreement amounted to $16.3 million as of
31 December 2015 (2014: $33.1 million).
We have entered into additional contractual obligations in the normal course of business which are not significant.
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 and Compliance Committee: This sub-committee of the Board 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.
35
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 and Compliance and Audit Committees are supported in the execution of their respective mandates by the dedicated Audit, Compliance and
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 Chief Executive Officer (the “CEO”) and includes the members of executive management reporting directly
to the CEO. 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 (“CRO”). It provides
a forum for the strategic assessment of risks assumed across the Group as a whole based on an integrated view of credit, market, liquidity, legal and regulatory
compliance, operational, interest rate, investment, capital and reputational risks, ensuring that these exposures are consistent with the risk appetites and 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 and 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.
BUTTERFIELD ANNUAL REPORT 2015
The Group Credit Committee (“GCC”) is comprised of executive and senior management and is chaired by the CRO. 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 Provisions and Impairments Committee is comprised of executive and senior management team members and is chaired by the CRO. 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 Operational
Risk. 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 and 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:
36
• 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; and
• 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 CRO.
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.
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 challenges the effectiveness of
the internal controls that are executed by both the business and Risk Management.
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 and regulatory; governance; process and technology; people; country and 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 following table, with each appetite designed to convey a clear strategic direction in terms of the risk/reward profile assumed:
APPETITE
Averse
Cautious
Open
DEFINITION
PROFILE
The Group will work to avoid exposure to this risk given its
potential for financial loss, reputational damage, and/or the
loss of customer and/or investor confidence.
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.
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.
Security is favoured over reward. Exposures are only assumed
when the risk can be quantified accurately and is assessed as
being acceptable.
37
Reward is commensurate with the risk assumed. Exposures can
be estimated reliably and structures, systems and processes are
in place to manage it.
(iii) A statement of our governing principles relating to each risk category. This establishes the characteristics of the risks that the Bank is willing to assume
and the management behaviours that we should exhibit when doing so.
Specific performance measures and tolerance thresholds in respect of each risk category, combining quantitative and qualitative targets (which are designed
to reflect both forward looking as well as historical perspectives), are designed to provide executive management and the Board with an indication of the
“direction” of our exposure relative to our declared risk appetite and an early warning of material adverse developments requiring remedial action. The measures
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.
BUTTERFIELD ANNUAL REPORT 2015
38
JURISDICTION AND
BUSINESS LINE OVERVIEWS
39
BUTTERFIELD ANNUAL REPORT 2015 4040
40
BERMUDA
For more than 150 years, Bermuda has served as home
to Butterfield’s headquarters and remains the Bank’s
largest jurisdiction in terms of number of employees,
Banking Centre locations and business volume. In 2015,
Butterfield was named the Official Bermuda Bank of
the 2017 America’s Cup. Recognised in 2013, 2014 and
2015 as Bermuda’s Bank of the Year by The Banker,
Butterfield is Bermuda’s largest independent bank,
offering a full range of community banking services and
wealth management services, including private banking,
asset management and personal trusts. Butterfield also
provides services to corporate and institutional clients
in Bermuda, which includes asset management and
corporate trust services.
Net income before other gains and losses was
$43.0 million at 31 December 2015, down $10.3 million
from $53.3 million in the prior year, due principally to
increased project-related professional fees, increased
severance and early retirement costs, a provision in
connection with an ongoing US regulatory compliance
matter, partially offset by lower provisions for
credit losses.
Other losses of $2.5 million during the year were
unfavourable by $9.4 million compared to net gains
of $6.9 million in 2014. Other losses in 2015 were due
primarily to realised losses upon the sale of certain
AFS investments of $2.8 million due to the strategic
repositioning of the investment portfolio partially offset
by decreased valuation allowances taken on foreclosed
properties. In 2014, an $8.7 million gain was recorded
from the sale of a pass-through note. Net income after
gains and losses was $40.5 million, a decrease of
$19.7 million from $60.2 million in the prior year.
Net interest income before provision for credit losses
increased by $0.4 million to $145.1 million in 2015. The
increase was driven primarily by investment income
that increased by $1.5 million due to a higher volume of
investments, deposit income that increased by
$0.2 million due to a greater volume of deposits placed,
lower deposit interest expense of $0.6 million due to a
lower volume of interest bearing deposits, and lower
long-term debt interest expense of $0.8 million due to
one tranche of long-term debt rolling over into a lower
interest rate. This was partially offset by lower loan
interest income of $2.7 million from lower loan volumes.
Provision for credit losses was $3.6 million, down
$2.8 million from the prior year, which resulted primarily
from large provisions for commercial loans and residential
mortgages that were taken in 2014, compared to much
lower required provisions in 2015, combined with
increased recoveries, which were partially offset by
unfavourable growth in new loans written and some
quicker than expected prepayments in 2015.
Non-interest income increased by $0.4 million to
$61.0 million in 2015, due primarily to increased asset
management revenue from increased money market
fund rates and other one-time fees, increased banking
revenues resulting primarily from increased electronic
banking revenues, which was partially offset by
decreased rental income from the sale of hotel properties
in 2014 and decreased foreign exchange and trust
revenues due to decreased volumes.
Operating expenses increased by $13.8 million to
$159.5 million in 2015 due to higher project-related
professional fees, increased salaries and other benefits
expense relating to increased severance and
post-retirement medical expense partially offset by
reduced headcount and incentive compensation, a
provision in connection with an ongoing US regulatory
compliance matter, and increased non-income taxes
from higher payroll taxes, partially offset by decreased
property management and maintenance costs resulting
from the sale of hotel properties in 2014 as well as cost
savings initiatives resulting in lower electrical costs.
Total assets as at 31 December 2015 were $5.1 billion,
up $0.3 billion from year-end 2014. Customer deposits
ended the year at $4.3 billion, up $0.4 billion from
year-end 2014 from organic customer growth, and loan
balances ended the year at $2.1 billion, up $0.1 billion from
year-end 2014 primarily from a growth in government lending.
Client assets under administration for the trust and
custody businesses were $32.1 billion and $29.4 billion,
respectively, whilst assets under management were
$2.1 billion. This compares with $33.7 billion, $29.8 billion
and $2.3 billion, respectively, at 31 December 2014.
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I
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N
A
L
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A
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other 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
2015
2014
$ change
% change
145,088
(3,625)
61,050
202,513
144,692
(6,425)
60,692
198,959
(159,474)
(145,696)
43,039
(2,503)
40,536
4,272
2,097
5,114
53,263
6,908
60,171
3,870
2,031
4,797
396
2,800
358
3,554
(13,778)
(10,224)
(9,411)
(19,635)
402
66
317
29,367
32,064
29,824
33,650
(457)
(1,586)
1,644
479
2,123
1,893
404
2,297
(249)
75
(174)
0.3%
(43.6%)
0.6%
1.8%
9.5%
(19.2%)
(136.2%)
(32.6%)
10.4%
3.2%
6.6%
(1.5%)
(4.7%)
(13.2%)
18.6%
(7.6%)
4141
41
Number of employees
529
537
(8)
(1.5%)
BUTTERFIELD ANNUAL REPORT 2015 42
42
CAYMAN ISLANDS
Butterfield in the Cayman Islands offers a comprehensive
range of personal and corporate financial services. In
addition to our strong retail presence, Butterfield is
focused on the provision of wealth management services
including private banking, asset management and
trust services.
Named Bank of the Year in the Cayman Islands in 2013,
2014 and 2015 by The Banker, Butterfield continued to
enhance its client delivery channels including online and
mobile banking, and introduced new American Airlines
affinity credit card products in the market. With three
Banking Centres in excellent locations and 13 ATMs
strategically located in Grand Cayman, Butterfield
continues to be a leading provider of financial
services locally.
Net income before other gains and losses at
31 December 2015 was $47.9 million, up $14.4 million
from $33.5 million in 2014. The increase was due
primarily to increases in interest income on loans and
investments and non-interest income led by
volume-driven foreign exchange income, banking,
trust and asset management fees, partially offset by
increased amortisation of intangible assets.
Net interest income before provision for credit
losses was $66.9 million in 2015, an improvement of
$7.6 million compared to 2014. The increase was
driven primarily by an improvement in loan income of
$4.3 million from a $104.0 million increase in average
loans attributable largely to the acquisition of loans and
deposits from HSBC Bank (Cayman) Limited in the fourth
quarter of 2014. Investment income was up $3.5 million,
resulting from an average increase of $204.3 million in
fixed rate AFS securities and $217.5 million in floating
rate notes. Deposit liability costs increased from
$1.9 million in 2014 to $2.1 million in 2015 on growth
in average customer deposits of $785.8 million.
Provision for credit losses of $0.5 million in 2015 was
$0.1 million lower than provision for credit losses in 2014.
Non-interest income was $39.5 million, up
$6.0 million year over year. The increase was due
primarily to volume-driven increases in foreign exchange
and banking fees led by wire transfer, account service
charges and card volumes, along with asset management
and trust fees. These increases were partially offset by
lower rental income.
Other losses at 31 December 2015 were $0.8 million,
an increase of $0.8 million from the prior year, which
resulted primarily from investment sales as a part of
the strategic repositioning of the investment portfolio,
partially offset by the gain on the sale of Butterfield
House, a building formerly occupied by the Bank.
Operating expenses decreased $0.7 million, year over
year, to $58.1 million, driven primarily by acquisition
integration and other project costs in 2014, along with
lower technology and communication costs in the current
year, which were partially offset by increased salary and
employee benefit costs and amortisation of intangible
assets following the acquisition of loans and deposits
from HSBC Bank (Cayman) Limited in the fourth quarter
of 2014.
Total assets at 31 December 2015 were $3.3 billion, up
$0.4 billion from year-end 2014, reflecting higher client
deposit levels, in addition to the acquisition of loans and
deposits from HSBC Cayman in November 2014. Net
loans remained flat from year-end 2014 to end the year
at $1.1 billion. The AFS investments, at $1.0 billion at the
end of fiscal 2015, were up $0.2 billion, year over year.
Client assets under administration for the trust and
custody businesses were $3.5 billion and $2.0 billion,
respectively, whilst assets under management were
$0.9 billion at year end. This compares with $3.4 billion,
$1.5 billion and $0.8 billion, respectively, at 31 December 2014.
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A
E
S
N
A
E
B
B
I
R
A
C
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other 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
2015
2014
$ change
% change
66,925
59,370
7,555
(466)
(557)
91
39,508
33,515
5,993
105,967
92,328
13,639
(58,115)
(58,829)
714
47,852
33,499
14,353
12.7%
(16.3%)
17.9%
14.8%
(1.2%)
42.8%
(793)
36
(829)
(2302.8%)
47,059
33,535
13,524
40.3%
3,013
1,065
3,282
2,591
422
1,104
2,864
(39)
418
16.3%
(3.5%)
14.6%
43
43
2,008
3,463
1,464
544
3,432
31
37.2%
0.9%
83
768
851
293
111
696
807
293
(28)
72
44
(25.2%)
10.3%
5.5%
-
-
BUTTERFIELD ANNUAL REPORT 2015 GUERNSEY
In Guernsey, Butterfield offers private banking, lending,
asset management, custody, administered banking and
fiduciary services.
Provision for credit losses was $0.1 million, compared to
$0.2 million in 2014.
Guernsey’s results also include the Legis Group; this
acquisition having closed on 1 April 2014. The acquisition
was undertaken to expand our market presence and
widen the range of corporate and institutional trust
services for private clients and institutional and
corporate clients.
Guernsey posted net income before gains and losses of
$2.8 million in 2015, compared to $5.1 million in 2014.
The year-on-year reduction is due mainly to increased
expenses, primarily salaries and benefits, as a result
of the full year of increased full-time headcount from
the Legis transaction, as well as adverse exchange rate
movements affecting revenues.
Other losses of $1.1 million during the year were up by
$5.5 million compared to net gains of $4.4 million in
2014, due primarily to valuation changes on certain US
government and federal agency securities. Net income
after gains and losses was $1.7 million, a decrease of
$7.8 million from $9.6 million in the prior year.
Net interest income before provision for credit losses
decreased by $1.5 million to $16.6 million in 2015,
compared to $18.1 million in 2014, primarily due to lower
interest income earned on investments from lower yields,
as well as adverse exchange rate movements.
44
44
Non-interest income decreased $0.6 million to
$26.2 million in 2015, attributable to lower banking
revenue from the termination of a tailor-made banking
product for one of our major clients in 2014, and adverse
exchange rate movements offset by increased trust
revenues as a result of new business growth and the
impact of the Legis transaction in the prior year.
Operating expenses at $39.9 million were $0.3 million
higher than 2014 due to higher staff expenses from
headcount increases, offset by favourable exchange rate
movements and lower amortisation, as intangibles
from a previous acquisition were fully amortised by
year-end 2014.
Total assets of $1.4 billion as at 31 December 2015 were
down from $1.6 billion at year-end 2014.
Client assets under administration for the trust and
custody businesses were $31.3 billion and $6.3 billion,
respectively, whilst assets under management were
$0.4 billion at 31 December 2015. This compares with
$41.0 billion, $9.2 billion and $0.4 billion, respectively,
at 31 December 2014.
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A
H
C
H
S
I
L
G
N
E
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other 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
2015
16,598
(103)
26,171
42,666
2014
18,061
(154)
26,814
44,721
(39,872)
(39,580)
2,794
(1,066)
1,728
1,245
433
1,391
5,141
4,432
9,573
1,496
527
1,639
$ change
% change
(1,463)
51
(643)
(2,055)
(292)
(2,347)
(5,498)
(7,845)
(8.1%)
(33.1%)
(2.4%)
(4.6%)
0.7%
(45.7%)
(124.1%)
(81.9%)
(251)
(94)
(248)
(16.8%)
(17.8%)
(15.1%)
45
45
6,253
31,339
9,247
41,016
(2,994)
(9,677)
(32.4%)
(23.6%)
55
355
410
203
46
355
401
211
9
-
9
19.6%
-
2.2%
(8)
(3.8%)
BUTTERFIELD ANNUAL REPORT 2015
UNITED KINGDOM
In the UK in 2015, Butterfield provided a range of
traditional private banking, lending, treasury and
investment management services, inclusive of the
provision of family office services to high net worth
international clients through the expertise within the
Butterfield Group. Subsequent to year end, the Bank
announced the orderly wind down of the deposit-taking
and investment management business in the UK.
The UK recorded a net loss of $12.0 million in 2015,
down $17.2 million from net income of $5.2 million in
2014. Costs associated with the orderly wind down of
the UK’s operations, inclusive of impairment charges and
other restructuring charges, as well as lower net interest
income attributable primarily to lower loan balances,
accounts for the majority of the decrease.
Other losses of $5.1 million were down $9.4 million from
gains in the prior year of $4.3 million, due primarily to the
impairment of the core banking system as a result
of the orderly wind down of the UK’s operations,
compared to a change in unrealised gains recorded in
2014 pertaining to certain US government and federal
agency securities.
Net interest income before provision for credit losses of
$10.5 million was down $5.7 million from $16.2 million
in 2014. The decrease was due primarily to reduced loan
interest income, which resulted from the combination
of a reduction in commercial loan balances with a
corresponding decrease in average interest rates earned
on loans, as well as adverse exchange rate movements.
Provision for credit losses was $1.5 million in 2015
compared to $0.9 million in 2014. Additional provisions
of $1.7 million were raised on two commercial loan
facilities and were offset by a $0.2 million recovery on a
commercial facility that was written off in 2014.
Operating expenses at $22.3 million in 2015 were
$0.1 million higher than in 2014, due primarily to
restructuring charges of $2.2 million recorded in 2015, as
well as a $0.2 million increase in professional and outside
services fees, which were slightly offset by reductions
in salaries and other employee benefits from a drop in
headcount, a decrease in non-income taxes from a
value-added tax recovery, a decrease in rental expense,
as well as favourable foreign exchange movements.
Total assets at year-end 2015 were consistent with
year-end 2014 at $0.8 billion. Loan balances and
customer deposit balances both remained flat from
the year-end 2014 position at $0.4 billion and
$0.6 billion, respectively.
Custody client assets under administration at the end of
2015 amounted to $1.6 billion, down from $1.9 billion at
31 December 2014. Assets under management were
$0.2 billion at 31 December 2015, down from $0.3 billion
at 31 December 2014.
46
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E
M
A
H
T
R
E
V
I
R
(in $ thousands)
Net interest income
Provision for credit losses
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other gains (losses)
Net income
As at 31 December
(in $ millions)
Customer deposits
Loans, net of allowance for credit losses
Total assets
2015
10,531
(1,547)
6,307
15,291
(22,251)
(6,960)
(5,076)
(12,036)
2014
16,213
(912)
7,717
23,018
(22,164)
854
4,312
5,166
$ change
% change
(5,682)
(635)
(1,410)
(7,727)
(87)
(7,814)
(9,388)
(17,202)
(35.0%)
69.6%
(18.3%)
(33.6%)
0.4%
(915.0%)
(217.7%)
(333.0%)
598
404
788
614
357
833
(16)
47
(45)
(2.6%)
13.2%
(5.4%)
47
47
Assets under administration – Custody
1,573
1,920
(347)
(18.1%)
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
70
139
209
80
88
183
271
85
(18)
(44)
(62)
(20.5%)
(24.0%)
(22.9%)
(5)
(5.9%)
BUTTERFIELD ANNUAL REPORT 2015
48
GROUP TRUST
Our trust and corporate services specialists deliver solutions to meet a range of client needs, including estate and succession planning, administration of complex
asset holdings, and efficient co-ordination for the affairs of international families; as well as the pension, employee benefit and other fiduciary requirements of
multinational corporations and institutions.
Alongside our traditional strengths in providing services to families and institutions connected with the UK, North America, and Europe, in 2015 we continued to
build relationships with clients connected to the Asian, Middle East and Latin American regions.
Our goal is to deliver consistently reliable service to our clients underpinned by the technical expertise of our multi-jurisdictional team, which operates through
separately incorporated trust businesses in our jurisdictions of choice: The Bahamas, Bermuda, the Cayman Islands, Guernsey and Switzerland. To this end, training
and continual professional development for our staff remained a priority in 2015. Active participation in the local branches of leading trust industry associations
and bodies such as the Society of Trust and Estate Practitioners (STEP), the worldwide professional association for those advising families across generations, also
assists our employees in remaining at the forefront of their specialisations.
Our multi-jurisdictional expertise in trust and fiduciary services has been recognised by a number of prestigious wealth services industry awards in 2015. Butterfield
Trust was named Trust Company of the Year at the tenth annual STEP Private Client Awards. STEP Private Client Awards are highly respected in the industry, with
nominees put through a rigorous, practitioner-led judging process. Winners are considered by STEP to be the best in the industry in their areas of specialisation.
Butterfield won recognition from the UK-based publisher of wealth-management industry news and directories, Citywealth by being named Best Trust Company –
Caribbean and runner up in the category of Best Trust Company – Switzerland at Citywealth’s International Financial Centre Awards in January 2016. This followed
our successes as runners up in the categories of Best Trust Company – Caribbean and Best Trust Company – Guernsey in last year’s awards.
Butterfield also won awards in 2015 in respect of Succession Planning Advice and Trusts in Guernsey, and for Net-Worth-Specific Services for Super Affluent Clients
in the Cayman Islands, in the Euromoney Private Banking and Wealth Management Awards. The Euromoney awards are decided by a vote of private banking
professionals from around the globe and recognise recipients offering the leading private wealth services and products in their respective markets. Euromoney
magazine is considered the preeminent journal of the international finance community.
Butterfield Trust was also named as one of eprivateclient’s Top 25 Trust Companies for 2015. eprivateclient is a leading provider of specialist news, analysis and
comparative data for the international wealth industry.
Butterfield Trust was a prominent participant in international fiduciary services industry events through sponsorship of leading events such as the 2015 STEP Asia
conference, which took place in Singapore in October, the inaugural Transcontinental Trusts Conference in Bermuda in April and the International Bar Association’s
20th Wealth Transfer Conference in London in March 2015.
In 2015, trust revenues totalled $40.3 million, an increase of 5.2% from 2014, attributable to the full-year effect of the 2014 acquisition of the Legis Group’s trust
and corporate administration business in Guernsey, and also to strong new business results. Close relationships with our clients and their advisers, as well as
structured, proactive business development activities led to an increase in new business in both personal and institutional fiduciary services in all of our businesses.
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 the pension, employee benefit and other corporate and institutional trust services we provide.
Trust revenues represented 28.7% of total non-interest income in 2015, up from 28.4% in 2014.
Total Trust assets under administration (“Trust AUA”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
Switzerland
The Bahamas
Total
2015
32,064
3,463
31,339
10,752
4,211
81,829
2014
33,650
3,432
41,016
3,097
3,203
84,398
$ change
(1,586)
31
(9,677)
7,655
1,008
(2,569)
% change
(4.7%)
0.9%
(23.6%)
247.2%
31.5%
(3.0%)
GROUP ASSET MANAGEMENT
Butterfield Asset Management focuses on fulfilling the financial needs of those who demand the highest levels of service and expertise. Each client has direct
access to his or her portfolio manager who is, in turn, supported by a Group investment discipline designed to leverage resources from across the organisation.
The Group provides a broad range of investment services to institutional and private clients in Bermuda, the Cayman Islands, Guernsey, and the UK. Principal
services include discretionary investment management and managed portfolio services. Advisory and self-directed brokerage options are available to clients in
Bermuda and the Cayman Islands. The Group also provides money market and mutual fund offerings in all four jurisdictions. Institutional 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 in Bermuda and the Cayman Islands as part of Butterfield’s community banking platform. Subsequent to
year end, the Bank announced the orderly wind down of the UK investment management business, which is now underway.
Group Asset Management revenue was $18.9 million in 2015, compared to $17.7 million in 2014. The increase of $1.2 million is mainly due to the fees earned from
the launch of the BAM Private Equity II Fund as well as new business growth.
Assets under management were $3.6 billion at year-end 2015, compared to $3.8 billion at the end of 2014. The decrease of $0.2 billion is due primarily to
the withdrawals of Money Market Fund balances as clients seek better-yielding alternatives for short-term investments. This is partly offset by an increase in
discretionary clients.
Total Assets under Management (“AUM”) at 31 December:
(in $ millions)
Bermuda
Cayman Islands
Guernsey
The Bahamas
UK
Total
2015
2014
Butterfield Funds
Other assets
Total AUM
Butterfield Funds
Other assets
Total AUM
1,644
479
2,123
83
55
19
70
768
355
851
410
-
19
139
209
1,893
111
46
26
88
404
696
355
-
183
2,297
807
401
26
271
49
49
1,871
1,741
3,612
2,164
1,638
3,802
BUTTERFIELD ANNUAL REPORT 2015
50
FINANCIAL
STATEMENTS
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 Group Head of 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 Audit 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 statements of operations of the Bank, and regular meetings with the senior management of the Bank. Such regular reviews are intended to satisfy
the Bermuda Monetary 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.
51
Michael Collins
Chief Executive Officer
22 February 2016
Michael Schrum
Chief Financial Officer
22 February 2016
BUTTERFIELD ANNUAL REPORT 2015 22 February 2016
Independent Auditor’s Report
To the Board of Directors and Shareholders of
The Bank of N.T. Butterfield & Son Limited
52
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, of comprehensive income, of changes in shareholders’ equity and of cash flows present fairly,
in all material respects, the financial position of The Bank of N.T. Butterfield & Son Limited and its
subsidiaries at 31 December 2015 and 2014, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
Chartered Professional Accountants
PricewaterhouseCoopers Ltd., Chartered Professional Accountants, P.O. Box HM 1171, Hamilton HM EX, Bermuda
T: +1 (441) 295 2000, F: +1 (441) 295 1242, www.pwc.com/bermuda
CONSOLIDATED BALANCE SHEETS
(in thousands of Bermuda dollars, except per share data)
As at
31 December 2015
31 December 2014
Assets
Cash and demand deposits with banks
Cash equivalents
Cash due from banks
Short-term investments
Investment in securities
Trading
Available-for-sale
Held-to-maturity
Total investment in securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Accrued interest
Goodwill
Intangible assets
Equity method investments
Other real estate owned
Other assets
Total assets
Liabilities
Customer deposits
Non-interest bearing
Interest bearing
Total customer deposits
Bank deposits
Total deposits
Employee benefit plans
Accrued interest
Preference share dividends payable
Other liabilities
Total other liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Common share capital (BMD 0.01 par; authorised shares 26,000,000,000)
issued and outstanding: 472,932,535 (2014: 550,023,138)
Preference share capital (USD 0.01 par; USD 1,000 liquidation preference)
issued and outstanding: 182,863 (2014: 183,046)
Contingent value convertible preference share capital (USD 0.01 par)
issued and outstanding: nil (2014: 6,909,397)
Additional paid-in capital
Accumulated deficit
Less: treasury common shares, at cost: 9,240,317 shares (2014: 12,770,604)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Barclay Simmons
Chairman of the Board
489,524
1,799,366
2,288,890
409,482
321,299
2,201,349
701,282
3,223,930
4,000,155
183,378
17,460
23,462
27,669
12,786
11,206
77,145
10,275,563
1,881,745
7,285,923
9,167,668
14,478
9,182,146
122,135
2,744
654
100,530
226,063
117,000
9,525,209
4,729
2
-
1,221,088
(368,618)
(16,350)
(90,497)
750,354
10,275,563
482,286
1,581,025
2,063,311
394,770
417,385
2,233,549
338,177
2,989,111
4,019,128
215,123
19,241
24,821
33,041
12,838
19,300
67,756
9,858,440
1,558,122
7,073,549
8,631,671
39,906
8,671,577
117,897
4,754
655
97,183
220,489
117,000
9,009,066
5,500
2
69
1,348,465
(405,056)
(22,086)
(77,520)
849,374
9,858,440
53
BUTTERFIELD ANNUAL REPORT 2015
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Bermuda dollars, except per share data)
Year ended
31 December 2015
31 December 2014
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
Long-term debt
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 gains (losses) on available-for-sale investments
Net realised / unrealised gains (losses) on other real estate owned
54
Impairment of fixed assets
Net gain on sale of equity method investments
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
Restructuring costs
Other expenses
Total non-interest expense
Net income before income taxes
Income tax benefit (expense)
Net income
Earnings per common share
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of these consolidated financial statements.
18,910
35,221
31,896
40,264
9,522
4,359
140,172
186,486
69,578
6,517
262,581
18,446
4,861
8
23,315
239,266
(5,741)
233,525
(562)
(4,407)
277
(5,083)
-
338
(9,437)
364,260
134,917
57,069
21,539
27,638
13,882
4,424
3,919
2,183
19,674
285,245
79,015
(1,276)
77,739
0.13
0.12
17,728
34,280
29,379
38,268
10,166
5,009
134,830
191,986
67,757
5,358
265,101
20,903
5,628
83
26,614
238,487
(8,048)
230,439
10,070
8,680
(1,804)
(1,986)
277
451
15,688
380,957
129,761
57,119
24,312
24,022
14,175
4,281
3,802
-
15,495
272,967
107,990
169
108,159
0.17
0.16
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Bermuda dollars)
Net income
Year ended
31 December 2015
31 December 2014
77,739
108,159
Other comprehensive income (loss), net of taxes
Net change in unrealised gains and losses on translation of net investment in foreign operations
Accretion of net unrealised losses on held-to-maturity investments transferred from available-for-sale investments
Net change in unrealised gains and losses on available-for-sale investments
Employee benefit plans adjustments
Other comprehensive (loss), net of taxes
(3,139)
365
(11,793)
1,590
(12,977)
Total comprehensive income
64,762
(2,874)
-
40,085
(47,143)
(9,932)
98,227
The accompanying notes are an integral part of these consolidated financial statements.
55
BUTTERFIELD ANNUAL REPORT 2015
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
31 December 2015
31 December 2014
For the year ended
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
Retirement of shares
Balance at end of year
550,023,138
6,909,397
(84,000,000)
472,932,535
Preference shares
Balance at beginning of year
Repurchase and cancellation of preference shares
Balance at end of year
183,046
(183)
182,863
Contingent value convertible preference shares
Balance at beginning of year
Conversion to common shares
Balance at end of year
6,909,397
(6,909,397)
-
Additional paid-in capital
Balance at beginning of year
Share-based compensation
Share-based settlements
Reduction of carrying value on repurchase of preference shares
Premium paid on repurchase of preference shares
Retirement of shares
Balance at end of year
56
Accumulated deficit
Balance at beginning of year
Reclassification from accumulated other comprehensive loss
Net income for year
Common share cash dividends declared and paid,
$0.05 per share (2014: $0.05 per share)
Cash dividends declared on preference shares,
$80.00 per share (2014: $80.00 per share)
Preference shares guarantee fee
Balance at end of year
Treasury common shares
Balance at beginning of year
Purchase of treasury common shares
Share-based settlements
Balance at end of year
12,770,604
2,503,707
(6,033,994)
9,240,317
Accumulated other comprehensive loss
Balance at beginning of year
Reclassification to accumulated deficit
Other comprehensive income (loss), net of taxes
Balance at end of year
Total shareholders’ equity
5,500
69
(840)
4,729
2
-
2
69
(69)
-
1,348,465
7,703
(9,749)
(183)
(28)
(125,120)
1,221,088
(405,056)
-
77,739
(24,846)
(14,631)
(1,824)
(368,618)
(22,086)
(4,862)
10,598
(16,350)
(77,520)
-
(12,977)
(90,497)
750,354
The accompanying notes are an integral part of these consolidated financial statements.
Number of shares
549,803,460
219,678
-
550,023,138
183,606
(560)
183,046
7,129,075
(219,678)
6,909,397
8,310,421
8,567,340
(4,107,157)
12,770,604
In thousands of
Bermuda dollars
5,498
2
-
5,500
2
-
2
71
(2)
69
1,344,755
8,869
(4,503)
(560)
(96)
-
1,348,465
(460,157)
(9,072)
108,159
(27,440)
(14,712)
(1,834)
(405,056)
(10,948)
(17,018)
5,880
(22,086)
(76,660)
9,072
(9,932)
(77,520)
849,374
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Bermuda dollars)
For the year ended
31 December 2015
31 December 2014
Cash flows from operating activities
Net income
Adjustments to reconcile net income from continuing operations to operating cash flows
Depreciation and amortisation
Impairment of fixed assets
Increase in carrying value of equity method investments
Share-based payments and settlements
Fair value adjustments of a contingent payment
Net realised (gains) losses on available-for-sale investments
Equity pick up on private equity partnership investment
Net (gains) losses on other real estate owned
Loss on sale of premises and equipment
Net gain on sales of equity method investments
Provision for credit losses
Changes in operating assets and liabilities
Decrease in accrued interest receivable
(Increase) in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in other liabilities and employee benefit plans
Cash provided by operating activities from operations
Cash flows from investing activities
Net increase in short-term investments
Net change in trading investments
Available-for-sale investments: proceeds from sale
Available-for-sale investments: proceeds from maturities and pay downs
Available-for-sale investments: purchases
Held-to-maturity investments: proceeds from maturities and pay downs
Held-to-maturity investments: purchases
Net (increase) decrease in loans
Net additions to premises, equipment and computer software
Proceeds from sale of other real estate owned
Equity method investments: net proceeds on sale, dividends received and return on capital
Net amounts received for assuming deposits acquired from another bank
Purchase of subsidiary
Cash used in investing activities
Cash flows from financing activities
Net increase in demand and term deposit liabilities
Net decrease in securities sold under agreement to repurchase
Repayment of long-term debt
Common shares repurchased
Preference shares repurchased
Proceeds from stock option exercises
Cash dividends paid on common and contingent value convertible preference shares
Cash dividends paid on preference shares
Preference shares guarantee fee paid
Cash provided by financing activities
Net effect of exchange rates on cash due from banks
Net increase in cash due from banks
Cash due from banks at beginning of year
Cash due from banks at end of year
Supplemental disclosure of cash flow information
Cash interest paid
Cash income tax paid
Non-cash items
Transfer to other real estate owned
Transfer of available-for-sale investments to held-to-maturity investments
The accompanying notes are an integral part of these consolidated financial statements.
77,739
50,069
5,083
(980)
7,913
(143)
4,407
(224)
(277)
28
-
5,741
1,417
(10,259)
(1,907)
16,932
155,539
(28,358)
96,086
238,756
435,827
(1,018,759)
26,965
(50,283)
(36,876)
(1,477)
11,238
1,032
-
-
(325,849)
598,578
-
-
(130,822)
(211)
640
(24,846)
(14,631)
(1,824)
426,884
(30,995)
225,579
2,063,311
2,288,890
21,408
596
3,400
340,969
57
108,159
45,116
1,986
(834)
9,049
1,070
(8,680)
(458)
1,804
-
(277)
8,048
594
(3,955)
1,040
(18,885)
143,777
(343,773)
134,905
130,453
198,311
(800,865)
12,426
(18,073)
145,023
(6,128)
12,389
806
310,578
(34,757)
(258,705)
637,705
(25,535)
(90,000)
(17,018)
(656)
1,198
(27,440)
(14,673)
(1,834)
461,747
(13,980)
332,839
1,730,472
2,063,311
27,654
985
6,086
-
BUTTERFIELD ANNUAL REPORT 2015
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
licence 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 in Bermuda and Cayman and a provider of specialised wealth management services in all its jurisdictions.
Services offered include retail, private and corporate banking, treasury, custody, asset management and personal and institutional trust services. The
Bank provides such services from six jurisdictions: Bermuda, Cayman, Guernsey, Switzerland, The Bahamas and the United Kingdom. The Bank holds all
applicable licenses required in the jurisdictions in which it operates.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation and Use of Estimates and Assumptions
The accounting and financial reporting policies of the Bank and its subsidiaries conform to generally accepted accounting principles in the United States
of America (“GAAP”). The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the year, and actual results could differ from those estimates.
Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are
inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas
could have a material impact on the future financial condition and results of operations. Management believes that the most critical accounting policies
upon which the financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:
•
•
•
•
•
•
Allowance for credit losses
Fair value and impairment of financial instruments
Impairment of long-lived assets
Impairment of goodwill
Employee benefit plans
Share-based payments
58
b. Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-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 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. During the periods under review, the Bank had no interests in VIEs
where the Bank was considered the primary beneficiary.
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 United States (“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 statements of operations.
The assets and liabilities of foreign currency-based subsidiaries are translated at the rate of exchange prevailing on the balance sheet date, while
associated revenues and expenses are translated to Bermuda dollars at the average rates of exchange prevailing throughout the year. Unrealised
translation gains or losses on investments in foreign currency- based subsidiaries are recorded as a separate component of Shareholders’ equity within
accumulated other comprehensive loss (“AOCL”). Gains and losses on foreign currency based subsidiaries are recorded in the consolidated statements of
operations when the Bank ceases to have a controlling financial interest in a foreign currency-based subsidiary.
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 sheets because the Bank is not the beneficiary of these assets.
e. Cash Due From Banks
Cash due from banks includes 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. From August 2014, certificates of deposit with less than one year but greater than
three months’ maturity from the date of acquisition are designated as short-term investments, as the investments are highly liquid and subject to an
insignificant risk of change in fair value.
g. Investments
Investments are classified as trading, available-for-sale (“AFS”) or held-to-maturity (“HTM”).
Investments are classified as trading when management has the intent to sell these investments either for profit or to invest the cash received by taking
customer deposits in foreign currencies. Debt and equity securities classified as trading investments are carried at fair value in the consolidated balance
sheets, with unrealised gains and losses included in the consolidated statements of operations as net realised / unrealised gains (losses) on trading
investments. Investments are classified primarily as AFS when used to manage the Bank’s exposure to interest rate and liquidity movements, as well as
to make strategic longer-term investments. AFS investments are carried at fair value in the consolidated balance sheets with unrealised gains and losses
reported as net increase or decrease to AOCL. 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 sheets. 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 statements 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 statements 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 private equity for which the Bank does not have sufficient rights or ownership interests to follow the
equity method of accounting. 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.
59
Equity method investments, which include 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.
With respect to the pass-through note investment (“PTN”), prior to its redemption in 2014, management compared cash flow projections to fair value
and amortised cost to determine if any credit losses existed. Management’s cash flow forecasts for the PTN were created in conjunction with a specialist
in analytical cash flow modelling. Management also performed other analyses to support its cash flow projections to assess the reasonability.
BUTTERFIELD ANNUAL REPORT 2015
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, fair value adjustments arising from
hedge accounting 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.
Acquired loans
Acquired loans are recorded at fair value at the date of acquisition. No allowance for credit losses is recorded on the acquisition date as the fair value of
the acquired assets incorporates assumptions regarding credit risk. Acquired loans with evidence of credit quality deterioration for which it is probable
that the Bank will not receive all contractually required payments receivable are accounted for as purchased credit-impaired loans. Generally, acquired
loans that meet the Bank’s definition for non-accrual status are considered to be credit-impaired.
The excess of the cash flows expected to be collected on purchased credit-impaired loans, measured as of the acquisition date, over the estimated fair
value is referred to as the accretable yield and is recognised in interest income over the remaining life of the loan using an effective yield methodology.
The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-
accretable difference, which is included as a reduction of the carrying amount of the purchased credit-impaired loans.
The Bank evaluates at each balance sheet date the estimated cash flows and corresponding carrying value of purchased credit-impaired loans in the same
manner as for the measurement of impaired loans, as is described below. The Bank evaluates at each balance sheet date whether the carrying value of its
purchased credit-impaired loans has decreased and if so, recognises an allowance for credit losses in its consolidated statements of operations. For any
increases in cash flows expected to be collected, the Bank adjusts any prior recorded allowance for purchased credit-impaired loans first, and then the
amount of accretable yield recognised on a prospective basis over the purchased credit-impaired loan’s remaining life. Purchased credit-impaired loans
are not considered non-performing and continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of
cash flows expected to be collected.
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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 original 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 returned to accrual status when:
•
•
none of the principal or accrued interest is past due (with certain exceptions as noted below) and the Bank expects repayment of the
remaining contractual obligation; or
when the loan becomes well secured and in the process of collection.
Loans modified in a troubled debt restructuring (“TDR”)
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession from
originally agreed terms. If a restructuring is considered a TDR, the Bank is required to make certain disclosures in the notes of the consolidated financial
statements and individually evaluate the restructured loan for impairment. The Bank employs various types of concessions when modifying a loan that it
would not otherwise consider which may include extension of repayment periods, interest rate reductions, principal or interest forgiveness, forbearance,
and other actions intended to minimise economic loss and to avoid foreclosure or repossession of collateral.
Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines
to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR
often involve extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a
new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.
Residential mortgage modifications generally involve a short-term forbearance period after which the missed payments are added to the end of the loan
term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the mortgage
remains unchanged. As the forbearance period usually involves an insignificant payment delay they typically do not meet the reporting criteria for a TDR.
Automobile loans modified in a TDR are primarily comprised of loans where the Bank has lowered monthly payments by extending the term.
When a loan undergoes a TDR, the determination of the loan’s accrual versus non-accrual status following the modification depends on several
factors. As with the risk rating process, the accrual status decision for such a loan is a separate and distinct process from the loan’s TDR analysis and
determination. Management considers the following in determining the accrual status of restructured loans:
•
•
If the loan was appropriately on accrual status prior to the restructuring, the borrower has demonstrated performance under the previous
terms, and the Bank’s credit evaluation shows the borrower’s capacity to continue to perform under the restructured terms (both principal
and interest payments), it is likely that the appropriate conclusion is for the loan to remain on accrual at the time of the restructuring. This
evaluation must include consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date
on which the loan was restructured. A sustained period of repayment performance generally would be a minimum of six months and would
involve payments of cash or cash equivalents; or
If the loan was on non-accrual status before the restructuring, but the Bank’s credit evaluation shows the borrower’s capacity to meet
the restructured terms, the loan would likely remain as non-accrual until the borrower has demonstrated a reasonable period of sustained
repayment performance. As noted above, this period generally would be at least six months (thereby providing reasonable assurance as to the
ultimate collection of principal and interest in full under the modified terms). Sustained performance before the restructuring may be taken
into account.
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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.
A loan that had previously been modified in a TDR and is subsequently refinanced under current underwriting standards at a market rate with no
concessionary terms is accounted for as a new loan and is no longer reported as a TDR.
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 more than 30 days 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.
BUTTERFIELD ANNUAL REPORT 2015
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 generally 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, 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 instalment, revolving credit, and most other consumer loans, is collectively
evaluated for impairment. The allowance for credit losses attributed to these loans is established via a process that estimates the probable losses
inherent and incurred in the portfolio, based upon various analyses. Management considers overall portfolio indicators including historical credit
losses; delinquent (defined as loans that are more than 30 days past due), non-performing, and classified loans; trends in volumes and terms of loans;
an evaluation of overall credit quality; the credit process, including lending policies and procedures; and economic, geographical, product, and other
environmental factors.
j. Business Combinations, Goodwill and Intangible Assets
All business combinations are accounted for using the acquisition method. Identifiable intangible assets (mostly customer relationships) are recognised
separately from goodwill and are initially valued at fair value using discounted cash flow calculations and other recognised valuation techniques.
Goodwill represents the excess of the fair value of the consideration paid for the acquisition of a business over the fair value of the net assets acquired.
Contingent purchase consideration was measured at its fair value and recorded on the purchase date. Any subsequent changes in the fair value of a
contingent consideration liability will be recorded through the consolidated statements of operations.
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 is carried at cost. 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 initially 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 statements
of operations. Subsequent decreases in the property’s fair value below the new cost basis are recorded through the use of a valuation allowance.
Subsequent increases in the fair value of a property may be used to reduce the allowance but not below zero. Any operating expenses of the property are
recognised through charges to non-interest expense.
m. Derivatives
All derivatives are recognised on the consolidated balance sheets 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); a hedge of an exposure
to foreign currency risk of a net investment in a foreign operation (a net investment hedge); or an instrument that is held for trading or non-hedging
purposes (a trading or non-hedging derivative 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.
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”) and the ineffective portion is recorded in current year earnings. That is, ineffectiveness from a derivative that
overcompensates for changes in the hedged cash flows is recorded in earnings. However, the ineffectiveness from a derivative that under compensates is
not recorded in 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. 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 (“CTA”) account within OCL.
Changes in the fair value of trading and non-hedging derivative 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 objectives and strategies
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 sheets or specific firm commitments or forecasted transactions.
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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.
For those hedge relationships that are terminated, hedge designations that are elected to be removed, forecasted transactions that are no longer
expected to occur, or the hedge relationship ceases to be highly effective, 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 designation. For fair value hedges, any changes to the carrying
value of the hedged item prior to the discontinuance remain as part of the basis of the asset or liability. When a cash flow hedge is discontinued, the net
derivative gain (loss) remains in AOCL unless it is probable that the forecasted transaction will not occur in the originally specified time period.
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 sheets under the same line items as non-pledged assets of the same type.
p. Employee Benefit Plans
The Bank maintains trusteed pension plans for substantially all employees as either non-contributory defined benefit plans or defined contribution plans.
Benefits under the defined benefit plans are primarily based on the employee’s years of credited service and average annual salary during the final years
of employment as defined in the plans. The Bank also provides post-retirement medical benefits for certain qualifying active and retired Bermuda-based
employees.
Expense for the defined benefit pension plans and the post-retirement medical benefits plan is comprised of (a) the actuarially determined benefits for
the current year’s service, (b) imputed interest on the actuarially determined liability of the plan, (c) in the case of the defined benefit pension plans,
the expected investment return on the fair value of plan assets and (d) amortisation of certain items over the expected average remaining service life of
employees in the case of the active defined benefit pension plans, estimated average remaining life expectancy of the inactive participants in the case
BUTTERFIELD ANNUAL REPORT 2015 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 experience gains and losses, changes
in assumptions, plan amendments and the change in the net pension asset or post-retirement medical benefits liability arising on adoption of revised
accounting standards.
For each of the defined benefit pension plans and for the post-retirement medical benefits plan, the asset and liability recognised for accounting
purposes are reported in other assets and employee benefit plans respectively. The actuarial gains and losses, transition obligation and prior 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 statements 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 statements 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, custody and other administration services fees include fees for private and institutional trust, executorship, and custody services. Asset
management fees include fees for investment management, investment advice and brokerage services. Fees are recognised as revenue over the period
of the relationship or when the Bank has rendered all services to the clients and is entitled to collect the fee from the client, as long as there are no
contingencies associated with the fees.
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Banking services fees primarily include fees for letters of credit and other financial guarantees, compensating balances, overdraft facilities and other
financial services-related products, as well as credit card fees. Letters of credit and other financial guarantees fees are recognised as revenue over the
period in which the related guarantee is outstanding. Credit card fees are comprised of merchant discounts, late fees and membership fees, net of
interchange and rewards costs. Credit card fees are recognised in the period in which the service is provided. All other fees are recognised as revenue in
the period in which the service is provided.
Foreign exchange revenue includes fees earned on currency exchange transactions, which are recognised when such transactions occur, as well as gains
and losses recognised when translating financial instruments held or due in currencies other than the local functional currency at the rates of exchange
prevailing at the balance sheet date.
Loan interest income includes the amortisation of deferred non-refundable loan origination and commitment fees. These fees are recognised as an
adjustment of yield over the life of the related loan. 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 statements 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 AFS, and derivative assets and liabilities are recognised in the consolidated balance sheets 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 marketplace 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 due from banks
The carrying amount of cash and demand deposits with banks, being short-term in nature, is deemed to approximate 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, certificates of deposit 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 and defined benefit pension plan equity securities and mutual funds
Trading investments include equities, mutual funds and debt securities issued by both US and 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 “AFS and
HTM investments and defined benefit pension plan fixed income securities” below for valuation techniques and inputs of fixed income securities.
AFS and HTM investments and defined benefit pension plan fixed income securities
The fair values for AFS 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 typically use
market approaches for valuations using primarily Level 2 inputs (in the vast majority of valuations), or some form of discounted cash flow analysis.
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. When these inputs are not
available, pricing services 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.
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. 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.
Broker/dealer quotations are used to value investments with 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.
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BUTTERFIELD ANNUAL REPORT 2015
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.
OREO
OREO assets are carried at the lower of cost or fair value less estimated costs to sell. The determination of fair value, which aims at estimating the
realisable value of the properties, is based either on third-party appraisals, when available, or on internal valuation models. 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.
Long-term debt
The fair value of the long-term debt 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.
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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.
Goodwill
The fair value of reporting units for which goodwill is recognised is determined when an impairment assessment is performed by discounting estimated
future cash flows using discount rates reflecting valuation-date market conditions and risks specific to the reporting unit.
t. 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 estimated costs to sell.
u. 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; and,
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 12 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.
v. 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 statements of operations include the current and deferred portions of the income taxes. The Bank recognises accrued
interest and penalties related to income taxes in operating expenses. Income taxes applicable to items charged or credited directly to shareholders’
equity are included in such items.
w. Consolidated Statements of Cash Flows
For the purposes of the consolidated statements of cash flows, cash due from banks 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.
x. 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.
67
y. New Accounting Pronouncements
The following accounting developments were issued during the year ended 31 December 2015:
In February 2015, the Financial Accounting Standards Board (“FASB”) published Accounting Standards Update No. 2015-02 Consolidation (Topic 810)
which provides amendments to the current consolidation analysis which affect reporting entities that are required to evaluate whether they should
consolidate certain legal entities. All legal entities are subject to re-evaluation under the revised consolidation model. Specifically, the amendments:
modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; eliminate
the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved
with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception for entities required to comply
with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money
market funds. The update is effective for public business entities for annual periods, and interim periods within those fiscal years, beginning after 15
December 2015. Early adoption is permitted, including adoption in an interim period. The Bank has early adopted this guidance and has applied a full
retrospective adoption approach. There has not been a material impact on the Bank’s consolidated financial position or results of operations.
In April 2015, FASB published Accounting Standards Update No. 2015-03 Interest - Imputation of Interest (Subtopic 835-30) which requires that debt
issuance costs related to a recognised debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt
liability. The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after 15 December
2015. Early adoption is permitted for financial statements that have not been previously issued. The Bank has assessed the adoption of this guidance
based upon its current balance of debt issuance costs and determined that the adoption of this guidance is not expected to have an impact on the Bank’s
consolidated financial position.
In April 2015, FASB published Accounting Standards Update No. 2015-05 Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) to
provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a
software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software
licenses. If not, the arrangement should be accounted for as a service contract. The update is effective for public business entities for annual periods,
and interim periods within those annual periods, beginning after 15 December 2015. Early adoption is permitted. The Bank is assessing the impact of the
adoption of this guidance.
BUTTERFIELD ANNUAL REPORT 2015 In April 2015, FASB published Accounting Standards Update No. 2015-07 Fair Value Measurement (Topic 820), which removes the requirement to
categorise within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Current
US GAAP requires that investments for which fair value is measured at net asset value (or its equivalent) using the practical expedient in Topic 820
be categorised within the fair value hierarchy using criteria that differs from the criteria used to categorise other fair value measurements within the
hierarchy. Under the amendments in this update, investments for which fair value is measured at net asset value per share (or its equivalent) using the
practical expedient should not be categorised in the fair value hierarchy. The update is effective for public business entities for fiscal years, and interim
periods within those fiscal years, beginning after 15 December 2015 and should be applied retrospectively to all periods presented. Early application is
permitted. The Bank is assessing the impact of the adoption of this guidance.
In July 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-12, (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan
Investment Disclosures, (Part III) Measurement Date Practical Expedient. The ASU (1) requires a pension plan to use contract value as the only measure
for fully benefit-responsive investment contracts, (2) simplifies and increases the effectiveness of the investment disclosure requirements for employee
benefit plans, and (3) provides benefit plans with a measurement-date practical expedient which provides guidance for when a benefit plan’s fiscal
year end does not coincide with the end of a calendar month. The Bank does not have a fully benefit responsive investment contract, and the Bank’s
benefit plans each have a fiscal year coinciding with a month end, and accordingly the Bank has concluded that Part I and Part III are not applicable. The
amendments in all three parts of this Update are effective for fiscal years beginning after 15 December 2015. Earlier application is permitted. The Bank
has concluded that its current disclosures meet the requirements as directed under Part II, and therefore the adoption of this guidance is not expected to
have an impact on the Bank’s consolidated financial statements.
In August 2015, FASB published Accounting Standards Update No. 2015-14 Revenue from Contracts with Customers (Topic 606) which defers the
effective date of Accounting Standards Update No. 2014-09 for all entities by one year. Public business entities should apply the guidance in Update
2014-09 to annual reporting periods beginning after 15 December 2017, including interim reporting periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after 15 December 2016, including interim reporting periods within that
reporting period.
NOTE 3: CASH DUE FROM BANKS
68
Unrestricted
Non-interest earning
31 December 2015
Non-
Bermuda
Bermuda
31 December 2014
Total Bermuda
Non-
Bermuda
Total
Cash and demand deposits with banks
31,199
79,696
110,895
23,609
116,056
139,665
Interest earning (1)
Demand deposits with banks
Cash equivalents
Sub-total - Interest earning
130,589
691,439
822,028
248,040
1,107,927
1,355,967
378,629
1,799,366
2,177,995
203,572
469,388
672,960
139,049
1,111,637
1,250,686
342,621
1,581,025
1,923,646
Total cash due from banks
(1) Interest earning cash due from banks includes certain demand deposits with banks as at 31 December 2015 in the amount of $306.9 million
(31 December 2014: $311.6 million) that are earning interest at a negligible rate.
2,288,890
1,435,663
1,366,742
853,227
696,569
2,063,311
NOTE 4: SHORT-TERM INVESTMENTS
Unrestricted term deposits, certificate of
deposits and treasury bills
Maturing within three months
Maturing between three to six months
Maturing between six to twelve months
Total unrestricted short-term investments
Affected by drawing restrictions related to minimum
reserve and derivative margin requirements
Interest earning demand deposits
Total short-term investments
31 December 2015
31 December 2014
Bermuda
Non-
Bermuda
Total Bermuda
Non-
Bermuda
Total
-
99,810
-
99,810
104,249
192,118
796
297,163
104,249
291,928
796
396,973
-
-
-
-
144,632
223,563
15,694
383,889
144,632
223,563
15,694
383,889
12,509
112,319
-
297,163
12,509
409,482
9,141
9,141
1,740
385,629
10,881
394,770
NOTE 5: INVESTMENTS IN SECURITIES
Amortised Cost, Carrying Amount and Fair Value
On the consolidated balance sheets trading and available-for-sale (“AFS”) investments are carried at fair value and held-to-maturity (“HTM”)
investments are carried at amortised cost.
31 December 2015
Gross
Amortised unrealised unrealised
Gross
cost
gains
losses Fair value
Gross
Amortised unrealised
gains
31 December 2014
Gross
unrealised
losses
cost
-
278,500
-
2,347
-
(1,504)
-
279,343
37,724
311,061
7,483
28,845
5,739
320,567
6
-
903
3,256
-
(560)
(460)
(2,524)
7,489
28,285
6,182
321,299
7,600
52,847
6,793
416,025
19
3,448
52
-
1,037
4,556
-
(2,002)
-
(250)
(944)
(3,196)
Fair value
37,743
312,507
7,652
52,597
6,886
417,385
1,399,456
8,812
(3,769) 1,404,499
1,570,665
13,694
(8,996)
1,575,363
29,275
505,139
13,291
153,046
300
3,779
-
9
-
(2,774)
(1,130)
(4,329)
29,575
506,144
12,161
148,726
30,654
391,059
13,290
154,211
144
9,393
-
33
(125)
(1,163)
(1,064)
(3,075)
30,673
399,289
12,226
151,169
Trading
Certificates of deposit
US government and federal agencies
Debt securities issued by
non-US governments
Asset-backed securities - Student loans
Mutual funds
Total trading
Available-for-sale
US government and federal agencies
Debt securities issued
by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed
securities - Prime
Total available-for-sale
101,382
2,201,589
-
12,900
(1,138)
100,244
(13,140) 2,201,349
65,167
2,225,046
264
23,528
(602)
(15,025)
64,829
2,233,549
Held-to-maturity (1)
US government and federal agencies
Total held-to-maturity
(1) For the years ended 31 December 2015 and 2014, non-credit impairments recognised in accumulated other comprehensive loss (“AOCL”) for HTM
investments were $nil.
701,495
701,495
701,282
701,282
338,177
338,177
(5,152)
(5,152)
5,365
5,365
6,330
6,330
(518)
(518)
343,989
343,989
69
BUTTERFIELD ANNUAL REPORT 2015
Investments with Unrealised Loss Positions
In the following tables, debt securities with unrealised losses that are not deemed to be other-than-temporarily-impaired (“OTTI”) are categorised as
being in a loss position for “less than 12 months” or “12 months or more” based on the point in time that the fair value most recently declined below the
amortised cost basis.
31 December 2015
Available-for-sale securities
with unrealised losses
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
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 securities
with unrealised losses
US government and federal agencies
70
31 December 2014
Available-for-sale securities
with unrealised losses
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
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 securities
with unrealised losses
US government and federal agencies
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Gross
unrealised
losses
Fair
value
Total
fair value
Total gross
unrealised
losses
364,939
-
253,991
-
-
90,220
(865)
-
(1,480)
-
-
(660)
177,224
-
38,706
12,160
147,822
10,024
(2,904)
-
(1,294)
(1,130)
(4,329)
(478)
542,163
-
292,697
12,160
147,822
100,244
(3,769)
-
(2,774)
(1,130)
(4,329)
(1,138)
709,150
(3,005)
385,936
(10,135)
1,095,086
(13,140)
217,768
(2,138)
241,855
(3,014)
459,623
(5,152)
Less than 12 months
Gross
unrealised
losses
Fair
value
12 months or more
Gross
unrealised
losses
Fair
value
Total
fair value
Total gross
unrealised
losses
281,469
22,588
8,090
-
-
-
(2,294)
(125)
(8)
-
-
-
263,586
-
38,845
12,226
150,216
18,116
(6,702)
-
(1,155)
(1,064)
(3,075)
(602)
545,055
22,588
46,935
12,226
150,216
18,116
(8,996)
(125)
(1,163)
(1,064)
(3,075)
(602)
312,147
(2,427)
482,989
(12,598)
795,136
(15,025)
-
-
60,556
(518)
60,556
(518)
The Bank does not believe that the investment securities that were in an unrealised loss position as of 31 December 2015, which were comprised of
99 securities representing 54% of the portfolio’s fair value, represent an OTTI. Total gross unrealised losses were 1.1% of the fair value of affected
securities and were attributable primarily 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. Due to a strategic change in the investment portfolio composition during the year ended 31
December 2015, several AFS securities were sold while being in an unrealised loss position. The Bank considers this to be a one-time event, and has
determined that it is more likely than not that the Bank will not be required to sell any of the remaining investment securities before recovery of the
amortised cost basis.
The following describes the processes for identifying credit impairment in security types with the most significant unrealised losses as shown in the
preceding tables.
Management believes that all the US government and federal agencies securities do not have any credit losses, given the explicit and implicit
guarantees provided by the US federal government.
The unrealised losses in corporate debt securities relate primarily to one debt security issued by a US government-sponsored enterprise and is
implicitly backed by the US federal government. Management believes that the value of this security will recover and the current unrealised loss
position is a result of interest rate movements.
Investments in asset-backed securities - student loans are composed primarily of securities collateralised by Federal Family Education Loan
Program loans (“FFELP loans”). FFELP loans benefit from a US 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.
Investments in commercial mortgage-backed securities are predominantly senior securities rated “AAA” and possess significant subordination,
a form of credit enhancement expressed hereafter as the percentage of pool losses that can occur before the senior securities held by the Bank will
incur its first dollar of principal loss. No credit losses were recognised on these securities as credit support and loan-to-value ratios (“LTV”) range
from 5% - 36% and 24% - 61%, respectively. Current credit support is significantly greater than any delinquencies experienced on the underlying
mortgages.
Investments in residential mortgage-backed securities - prime are predominantly rated “AAA” and possess significant credit enhancement as
described above. No credit losses were recognised on these securities as there are no delinquencies over 30 days on the underlying mortgages and
the weighted average credit support and LTV ratios range from 8% - 16% and 58% - 69%, respectively.
Investments’ 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 2015
Trading
US government and federal agencies
Debt securities issued by
non-US governments
Asset-backed securities - Student loans
Mutual funds
Total trading
Available-for-sale
US government and federal agencies
Debt securities issued by
non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed
securities - Prime
Total available-for-sale
Held-to-maturity
US government and federal agencies
Total investments
Total by currency
US dollars
Other
Total investments
Remaining term to average contractual maturity
Within
3 months
3 to 12
months
1 to 5
years
5 to 10
years
Over 10 No specific
years maturity
Carrying
amount
-
24,874
8,497
53,248
192,724
-
279,343
7,489
-
-
7,489
-
-
-
24,874
-
28,285
-
36,782
-
-
-
53,248
-
-
-
192,724
-
-
6,182
6,182
7,489
28,285
6,182
321,299
71
-
-
126,163
202,385
1,075,951
-
60,493
-
-
-
60,493
1,360
55,649
-
-
-
57,009
5,399
351,296
-
-
22,816
38,706
-
42,532
-
-
12,161
106,194
-
482,858
-
306,439
100,244
1,294,550
-
-
-
-
-
-
-
1,404,499
29,575
506,144
12,161
148,726
100,244
2,201,349
-
67,982
-
81,883
-
519,640
45,664
405,351
655,618
2,142,892
-
6,182
701,282
3,223,930
67,982
-
67,982
81,883
-
81,883
519,640
-
519,640
405,351
-
405,351
2,142,892
-
2,142,892
5,903
279
6,182
3,223,651
279
3,223,930
BUTTERFIELD ANNUAL REPORT 2015
31 December 2014
Trading
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Asset-backed securities - Student loans
Mutual funds
Total trading
Within
3 months
18,246
-
-
-
-
18,246
Available-for-sale
US government and federal agencies
Debt securities issued by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed securities - Prime
Total available-for-sale
-
-
8,090
-
-
-
8,090
Remaining term to average contractual maturity
3 to 12
months
19,497
-
-
-
-
19,497
-
1,360
121,930
-
-
-
123,290
1 to 5
years
-
34,479
7,652
52,597
-
94,728
65,826
6,724
230,424
-
-
-
302,974
5 to 10 Over 10 No specific
years maturity
years
Carrying
amount
-
49,262
-
-
-
49,262
286,507
22,589
38,845
-
43,128
6,448
397,517
-
228,766
-
-
-
228,766
1,223,030
-
-
12,226
108,041
58,381
1,401,678
-
-
-
-
6,886
6,886
37,743
312,507
7,652
52,597
6,886
417,385
-
-
-
-
-
-
-
1,575,363
30,673
399,289
12,226
151,169
64,829
2,233,549
Held-to-maturity
US government and federal agencies
Total investments
Total by currency
US dollars
Other
Total investments
-
26,336
-
142,787
-
397,702
48,820
495,599
289,357
1,919,801
-
6,886
338,177
2,989,111
13,088
13,248
26,336
123,290
19,497
142,787
397,702
-
397,702
495,599
-
495,599
1,919,801
-
1,919,801
6,037
849
6,886
2,955,517
33,594
2,989,111
72
Pledged Investments
The Bank pledges certain US government and federal agencies investment securities to further secure the Bank’s issued customer deposit products. The
secured party does not have the right to sell or repledge the collateral. The amounts of investments pledged are as follows:
Classified as available-for-sale
Classified as held-to-maturity
Sale Proceeds and Realised Gains and Losses of AFS Securities
31 December 2015
Amortised
cost
304,493
372,546
Fair
value
307,513
372,868
31 December 2014
Amortised
cost
381,434
107,837
Fair
value
383,665
110,175
Year ended
31 December 2015
31 December 2014
Sale
Certificates of deposit
US government and federal agencies
Debt securities issued by non-US governments
Residential mortgage-backed securities - Prime
Pass-through note
Net realised gains (losses) recognised in net income
(1)During 2015, certain investments were transferred out of the AFS categorisation and into HTM. The transfers were recorded at fair value of the
securities on the date of transfer. The related net unrealised losses of $2.7 million that was recorded in AOCI will be accreted over the remaining life of
the transferred investments using the effective interest rate method.
Sale
Realised
proceeds gains (losses)
-
(4,465)
-
(270)
328
(4,407)
-
232,372
-
6,056
328
238,756
Transfers to
HTM (1)
-
340,969
-
-
-
340,969
Realised
proceeds gains (losses)
-
(52)
-
-
8,732
8,680
-
96,031
-
-
34,422
130,453
NOTE 6: LOANS
The “Bermuda” and “Non-Bermuda” classifications’ purpose is to reflect management segment reporting as described in Note 15: Segmented information.
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total gross 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 gross 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 gross consumer loans
Less specific allowance for credit losses on consumer loans
Total consumer loans after specific allowance for credit losses
Residential mortgage loans
Less specific allowance for credit losses on residential mortgage loans
Total residential mortgage loans after
specific allowance for credit losses
Total gross loans
Less specific allowance for credit losses
Less general allowance for credit losses
Net loans
31 December 2015
Non-
Bermuda Bermuda
Total
31 December 2014
Non-
Bermuda Bermuda
Total
202,776
121,466
34,997
359,239
(590)
358,649
22,402
221,243
5,736
249,381
-
249,381
225,178
342,709
40,733
608,620
(590)
608,030
66,708
137,053
48,107
251,868
(352)
251,516
113,484
46,776
251,392 388,445
59,301
561,230
(417)
560,813
11,194
309,362
(65)
309,297
415,747
5,396
421,143
(727)
249,622
8,211
257,833
(2,224)
665,369
13,607
678,976
(2,951)
415,315
-
415,315
(770)
281,663
20,617
302,280
(1,052)
696,978
20,617
717,595
(1,822)
420,416
255,609
676,025
414,545
301,228
715,773
12,308
59,119
4,750
32,022
108,199
(274)
107,925
7,556
19,839
8,165
84,062
119,622
-
119,622
19,864
78,958
12,915
116,084
227,821
(274)
227,547
12,639
58,500
12,935
43,679
127,753
(355)
127,398
20,355
7,716
79,184
20,684
21,143
8,208
113,941
157,620
150,549 278,302
(355)
277,947
-
150,549
73
1,243,221 1,290,819 2,534,040
(15,290)
(13,411)
(1,879)
1,270,867 1,238,616 2,509,483
(16,217)
(14,771)
(1,446)
1,229,810 1,288,940 2,518,750
1,256,096 1,237,170 2,493,266
2,131,802 1,917,655 4,049,457
(19,105)
(4,103)
(30,197)
(10,021)
2,096,624 1,903,531 4,000,155
(15,002)
(20,176)
2,065,803 2,000,807 4,066,610
(18,811)
(28,671)
2,030,563 1,988,565 4,019,128
(16,248)
(18,992)
(2,563)
(9,679)
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, business and government loans are generally repayable over terms not exceeding
five years. Amounts owing on credit cards are revolving and typically a minimum amount is due within 30 days from billing. The effective yield on total
loans as at 31 December 2015 is 4.57% (31 December 2014: 4.51%).
BUTTERFIELD ANNUAL REPORT 2015
Age Analysis of Past Due Loans (Including Non-Accrual Loans)
The following tables summarise the past due status of the loans as at 31 December 2015 and 2014. 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.
31 December 2015
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
60-89
days
More than
90 days
Total past
due loans
Total
current (1)
Total
loans
-
11
-
11
1,133
-
1,133
194
1,459
-
832
2,485
-
14
-
14
-
-
-
81
337
-
979
1,397
-
608
25
633
6,658
-
6,658
78
132
538
1,231
1,979
-
633
25
658
7,791
-
7,791
353
1,928
538
3,042
5,861
225,178
342,076
40,708
607,962
225,178
342,709
40,733
608,620
657,578
13,607
671,185
665,369
13,607
678,976
19,511
77,030
12,377
113,042
221,960
19,864
78,958
12,915
116,084
227,821
Residential mortgage loans
40,793
8,911
65,343
115,047
2,418,993
2,534,040
Total gross loans
(1)Loans less than 30 days past due are included in current loans.
44,422
10,322
74,613
129,357
3,920,100
4,049,457
74
31 December 2014
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
60-89
days
More than
90 days
Total past
Total
due loans current(1)
Total
loans
-
357
-
357
909
-
909
165
753
-
856
1,774
-
29
-
29
1,001
-
1,001
19
384
-
270
673
-
1,776
61
1,837
9,054
-
9,054
152
202
10
1,653
2,017
-
2,162
61
2,223
10,964
-
10,964
336
1,339
10
2,779
4,464
113,484
386,283
59,240
559,007
686,014
20,617
706,631
20,019
77,845
21,133
154,841
273,838
113,484
388,445
59,301
561,230
696,978
20,617
717,595
20,355
79,184
21,143
157,620
278,302
Residential mortgage loans
29,577
15,889
80,812
126,278
2,383,205
2,509,483
Total gross loans
(1)Loans less than 30 days past due are included in current loans.
32,617
17,592
93,720
143,929
3,922,681
4,066,610
Loans’ Credit Quality
The four credit quality classifications set out in the following tables are defined below and describe the credit quality of the Bank’s lending portfolio.
These classifications each encompass a range of more granular, internal credit rating grades assigned.
Pass
Special mention
Substandard
Non-accrual (1)
31 December 2015
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
213,928
333,853
36,017
583,798
542,195
13,607
555,802
19,378
78,826
11,618
112,426
222,248
11,250
4,133
4,493
19,876
86,285
-
86,285
388
-
54
1,308
1,750
Residential mortgage loans
2,391,723
42,578
Total gross recorded loans
(1)Excludes purchased credit-impaired loans.
3,753,571
150,489
Total
gross recorded
investments
225,178
342,709
40,733
608,620
665,369
13,607
678,976
19,864
78,958
12,915
116,084
227,821
-
617
26
643
10,260
-
10,260
98
-
11
1,294
1,403
52,946
2,534,040
65,252
4,049,457
-
4,106
197
4,303
26,629
-
26,629
-
132
1,232
1,056
2,420
46,793
80,145
31 December 2014
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 (1)
75
Total
gross recorded
investments
98,484
381,560
55,439
535,483
544,832
20,617
565,449
19,615
78,982
20,933
153,226
272,756
15,000
4,254
3,452
22,706
91,500
-
91,500
564
-
167
1,917
2,648
-
1,898
304
2,202
48,373
-
48,373
-
202
-
714
916
-
733
106
839
12,273
-
12,273
176
-
43
1,763
1,982
113,484
388,445
59,301
561,230
696,978
20,617
717,595
20,355
79,184
21,143
157,620
278,302
Residential mortgage loans
2,344,836
49,819
58,124
56,704
2,509,483
Total gross recorded loans
(1)Excludes purchased credit-impaired loans.
3,718,524
166,673
109,615
71,798
4,066,610
Quality classification definitions
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.
BUTTERFIELD ANNUAL REPORT 2015
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.
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.
A non-accrual loan shall mean either 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.
Non-Performing Loans
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
76
31 December 2015
31 December 2014
Past due more
than 90 days
Non-
accrual (1) and accruing (1)
Total non-
performing
loans
Past due more
than 90 days
Non-
accrual(1) and accruing (1)
Total non-
performing
loans
617
26
643
-
10
10
617
36
653
733
106
839
1,057
4
1,061
1,790
110
1,900
10,260
737
10,997
12,273
779
13,052
98
-
11
1,294
1,403
-
132
527
85
744
98
132
538
1,379
2,147
176
-
43
1,763
1,982
-
202
-
255
457
176
202
43
2,018
2,439
Residential mortgage loans
52,946
12,760
65,706
56,704
23,443
80,147
Total non-performing loans
(1)Excludes purchased credit-impaired loans.
Gross Loans Evaluated For Impairment
65,252
14,251
79,503
71,798
25,740
97,538
Commercial
Commercial real estate
Consumer
Residential mortgage
Total gross loans evaluated for impairment
Changes in General and Specific Allowances For Credit Losses
31 December 2015
Individually Collectively
evaluated
595,013
640,957
225,939
2,417,864
3,879,773
evaluated
13,607
38,019
1,882
116,176
169,684
31 December 2014
Individually
evaluated
839
33,898
2,068
105,777
142,582
Collectively
evaluated
560,391
683,697
276,234
2,403,706
3,924,028
Allowances at beginning of year
Provision taken
Recoveries
Charge-offs
Other
Allowances at end of year
Year ended 31 December 2015
Commercial
7,831
440
788
(318)
(18)
8,723
Commercial
real estate
5,920
1,027
182
(513)
(104)
6,512
Consumer
2,797
586
1,455
(2,031)
(44)
2,763
Residential
mortgage
30,934
3,688
427
(3,701)
(44)
31,304
Allowances at end of year: individually evaluated for impairment
Allowances at end of year: collectively evaluated for impairment
590
8,133
2,951
3,561
274
2,489
15,290
16,014
Total
47,482
5,741
2,852
(6,563)
(210)
49,302
19,105
30,197
Allowances at beginning of year
Provision taken (released)
Recoveries
Charge-offs
Other
Allowances at end of year
Year ended 31 December 2014
Commercial
8,340
282
67
(838)
(20)
7,831
Commercial
real estate
9,816
2,789
-
(6,621)
(64)
5,920
Consumer
3,442
(686)
1,983
(1,895)
(47)
2,797
Residential
mortgage
31,157
5,663
274
(6,113)
(47)
30,934
Allowances at end of year: individually evaluated for impairment
Allowances at end of year: collectively evaluated for impairment
417
7,414
1,822
4,098
355
2,442
16,217
14,717
Total
52,755
8,048
2,324
(15,467)
(178)
47,482
18,811
28,671
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 original 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. During the year ended 31 December 2015, the
amount of gross interest income that would have been recorded had impaired loans been current was $3.1 million (31 December 2014: $5.2 million). The
tables below present information about the Bank’s impaired loans:
Impaired loans with an allowance
Gross recorded
investment of impaired
Total impaired loans (1)
Gross recorded
Specific
Net loans without Gross recorded
investment allowance loans an allowance
Specific
investment allowance
599
-
599
(590)
-
(590)
9
-
9
1,096
26
1,122
1,695
26
1,721
(590)
-
(590)
31 December 2015
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
31 December 2014
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Consumer loans
Automobile financing
Overdrafts
Other consumer
Total consumer loans
6,127
(2,951)
3,176
17,198
23,325
(2,951) 20,374
77
-
-
366
366
-
-
(274)
(274)
-
-
92
92
Residential mortgage loans
42,145
(15,290)
26,855
Total impaired loans
49,237
(1)Excludes purchased credit-impaired loans.
(19,105)
30,132
98
11
1,008
1,117
39,283
58,720
98
11
1,374
1,483
-
-
(274)
(274)
98
11
1,100
1,209
81,428
(15,290) 66,138
107,957
(19,105) 88,852
Impaired loans with an allowance
Gross recorded
Specific
Gross recorded
investment of impaired
Net loans without
investment allowance loans
an allowance
Total impaired loans(1)
Gross recorded
investment
Specific
allowance
575
-
575
(417)
-
(417)
158
-
158
158
106
264
733
106
839
(417)
-
(417)
5,854
(1,822)
4,032
28,044
33,898
(1,822)
32,076
-
-
515
515
-
-
(355)
(355)
-
-
160
160
Residential mortgage loans
45,673
(16,217)
29,456
Total impaired loans
52,617
(1)Excludes purchased credit-impaired loans.
(18,811)
33,806
176
43
1,344
1,563
29,764
59,635
176
43
1,859
2,078
-
-
(355)
(355)
176
43
1,504
1,723
75,437
(16,217)
59,220
112,252
(18,811)
93,441
Net
loans
1,105
26
1,131
Net
loans
316
106
422
BUTTERFIELD ANNUAL REPORT 2015
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Average Impaired Loan Balances and Related Recognised Interest Income
31 December 2015
31 December 2014
Average gross
recorded
investment
Interest income
recognised (1)
Average gross
recorded
investment
Interest income
recognised
(1)
1,214
66
1,280
-
-
-
1,452
289
1,741
-
-
-
28,612
311
48,581
675
137
-
27
1,617
1,781
-
-
-
2
2
307
35
132
1,963
2,437
70,923
123,682
-
-
-
5
5
1,021
1,701
Residential mortgage loans
78,433
1,442
Total impaired loans
(1)All interest income recognised on impaired loans relates to loans previously modified in a TDR.
110,106
1,755
Loans modified in a TDR
78
TDRs entered into during
the year ended 31 December 2015
Pre-modification Effects of modifications Post-modification TDRs outstanding as at
Commercial loans
Commercial real estate loans
Consumer loans
Residential mortgage loans
Total loans modified in a TDR
Number of
contracts
1
-
-
20
21
recorded
investment
1,000
-
-
13,283
14,283
Amount of
repayments
-
-
-
-
-
Interest
capitalisation
87
-
-
1,081
1,168
recorded 31 December 2015
investment
1,087
-
-
14,364
15,451
Accrual
1,078
13,065
80
28,482
42,705
Non-accrual
-
1,608
-
7,175
8,783
TDRs entered into during
the year ended 31 December 2014
Pre-modification Effects of modifications Post-modification TDRs outstanding as at
Commercial real estate loans
Consumer loans
Residential mortgage loans
Total loans modified in a TDR
Number of
contracts
-
-
20
20
recorded
investment
-
-
13,857
13,857
Amount of
repayments
-
-
-
-
Interest
capitalisation
-
-
259
259
recorded 31 December 2014
investment
-
-
14,116
14,116
Accrual
21,625
96
18,733
40,454
Non-accrual
4,297
-
4,613
8,910
As at 31 December 2015, the Bank has one loan (31 December 2014: four loans) that was modified in a TDR during the preceding 12 months that
subsequently defaulted (i.e., 90 days or more past due following a modification) with a recorded investment of $0.8 million (31 December 2014: $2.4
million).
Purchased Credit-Impaired Loans
(1)
Non-
Year ended
31 December 2015
Year ended
31 December 2014
Non-
Contractual accretable Carrying Accretable Contractual accretable
principal difference
-
(3,804)
principal difference
(3,804)
-
amount
7,216
-
11,020
-
-
11,001
yield (1)
Carrying
amount
-
7,197
Accretable
(1)
yield
-
-
Balance at beginning of year
Purchases
Advances and increases in cash
flows expected to be collected
Reductions resulting from repayments
Reductions resulting from charge-offs
Accretion
Balance at end of year
(1)The accretable yield represents the excess of a loan’s cash flows expected to be collected over the loan’s initial carrying amount.
631
107
818
-
(2,248)
150
(1,554)
(907)
-
8,709
150
(1,447)
(89)
-
5,830
-
-
-
-
(3,804)
19
-
-
-
11,020
(631)
107
-
(107)
(631)
-
19
-
-
-
7,216
-
-
-
-
-
NOTE 7: 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.
Business sector
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 2015
Off-balance
sheet
320,934
107,545
102,782
95,956
978
15,891
14,854
-
658,940
-
658,940
Total credit
exposure
564,710
337,921
326,481
2,628,165
37,277
648,439
140,325
5,974
4,689,292
(30,197)
4,659,095
Loans
243,776
230,376
223,699
2,532,209
36,299
632,548
125,471
5,974
4,030,352
(30,197)
4,000,155
31 December 2014
Off-balance
sheet
299,934
113,432
-
75,224
570
5,703
275
-
495,138
-
495,138
Total credit
exposure
607,769
361,561
113,484
2,558,499
70,868
716,608
107,813
6,335
4,542,937
(28,671)
4,514,266
Loans
307,835
248,129
113,484
2,483,275
70,298
710,905
107,538
6,335
4,047,799
(28,671)
4,019,128
79
BUTTERFIELD ANNUAL REPORT 2015
The following table summarises the credit exposure of the Bank by geographic region for cash due from banks, short-term investments, loans
receivable and off-balance sheet exposure. The credit exposure by currency for investments is disclosed in Note 5: Investments In Securities.
31 December 2015
31 December 2014
Geographic
region
Australia
Barbados
Belgium
Bermuda
Canada
Cayman
Guernsey
Japan
Cash and cash
equivalents and
short-term
investments
14,187
-
3,352
22,009
340,037
19,086
1
23,424
999
New Zealand
-
Saint Lucia
3,659
Sweden
3,905
Switzerland
The Bahamas
3,196
United Kingdom 1,103,088
1,161,106
United States
323
Other
2,698,372
Sub-total
General allowance
-
2,698,372
Total
Loans
-
11,250
-
2,269,635
-
713,468
434,531
-
-
65,285
-
-
28,736
507,447
-
-
4,030,352
(30,197)
4,000,155
Off-balance
sheet
-
-
-
371,687
-
207,139
53,750
-
-
-
-
-
-
26,364
-
-
658,940
-
658,940
Total credit
exposure
14,187
11,250
3,352
2,663,331
340,037
939,693
488,282
23,424
999
65,285
3,659
3,905
31,932
1,636,899
1,161,106
323
7,387,664
(30,197)
7,357,467
Cash and cash
equivalents and
short-term
investments
7,521
-
-
18,486
16,648
196,746
1,741
32,464
3,384
-
2,419
7,954
4,423
1,300,686
864,361
1,248
2,458,081
-
2,458,081
Off-balance
sheet
-
-
-
263,407
-
145,796
70,976
-
-
-
-
-
-
14,959
-
-
495,138
-
495,138
Loans
-
15,000
-
2,269,748
-
692,496
527,560
-
-
55,883
-
-
31,809
455,303
-
-
4,047,799
(28,671)
4,019,128
Total credit
exposure
7,521
15,000
-
2,551,641
16,648
1,035,038
600,277
32,464
3,384
55,883
2,419
7,954
36,232
1,770,948
864,361
1,248
7,001,018
(28,671)
6,972,347
NOTE 8: PREMISES, EQUIPMENT AND COMPUTER SOFTWARE
80
Category
Land
Buildings
Equipment
Computer hardware and software in use
Computer software in development
Total
Cost
9,008
135,684
31,108
174,162
4,648
354,610
31 December 2015
Accumulated
depreciation
-
(55,030)
(27,620)
(88,582)
-
(171,232)
Net carrying
value
9,008
80,654
3,488
85,580
4,648
183,378
31 December 2014
Cost
11,569
147,421
36,956
166,896
6,238
369,080
Accumulated
depreciation
-
(58,141)
(32,678)
(63,138)
-
(153,957)
Net carrying
value
11,569
89,280
4,278
103,758
6,238
215,123
Depreciation charged to operating expenses
Buildings (included in Property expense)
Equipment (included in Property expense)
Computer hardware and software
(included in Technology and communication expense)
Total depreciation charged to operating expenses
Impairment of buildings’ carrying value
(included in Impairment of fixed assets)
Year ended
31 December 2015
4,183
1,605
31 December 2014
4,434
1,728
19,076
24,864
-
18,588
24,750
1,986
During the year ended 31 December 2014, the Bank’s intended use of three Bermuda properties changed and therefore the properties were assessed
for impairment. The carrying amounts of the Bermuda segment’s buildings were impaired by $1.2 million during 2014 because their respective fair
values were lower than the carrying amounts.
At the end of 2014, the Bank changed its commitment with respect to a Bermuda property which was being used in its operations but is now
contemplated for disposal and therefore the property has been reclassified as held for sale and included in OREO assets in the consolidated balance
sheet. The reclassification resulted in an $0.8 million write down during 2014 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.
During the year ended 31 December 2015, the Bank sold four Bermuda properties and one Cayman property which were classified as premises,
equipment and computer software as at 31 December 2014. The properties were sold for total proceeds of $11.2 million and a gain of $0.5 million,
which is recognised on the consolidated statements of operations under net realised / unrealised gains (losses) on other real estate owned. For the
Cayman property, the Bank has entered into a leaseback agreement for two floors with lease payments of $0.4 million per year for three years.
During the year ended 31 December 2015, the Bank recognised impairment of $5.1 million regarding the core banking system in the UK as described
in Note 13: Exit Cost Obligations.
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Guernsey segment
Balance at beginning of year
Acquisitions during the year (see Note 26)
Foreign exchange translation adjustment
Balance at end of year
Customer Relationship Intangible Assets
For the year ended
31 December 2015
24,821
-
(1,359)
23,462
31 December 2014
7,086
19,291
(1,556)
24,821
Business Segment
Bermuda
Cayman
Guernsey
Total
31 December 2015
Accumulated Net carrying
amount
2,084
10,364
15,221
27,669
amortisation
(6,258)
(1,960)
(43,199)
(51,417)
Cost
8,342
12,324
58,420
79,086
31 December 2014
Accumulated Net carrying
amount
amortisation
2,640
(5,702)
11,186
(1,138)
19,215
(39,205)
33,041
(46,045)
Cost
8,342
12,324
58,420
79,086
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. See Note 26: Business
Combinations for details of acquisitions of customer relationship intangible assets that occurred during the year ended 31 December 2014.
81
During the year ended 31 December 2015, the Bank did not acquire any new customer intangible assets (31 December 2014: $26.6 million), the
amortisation expense amounted to $4.4 million (31 December 2014: $4.3 million) and the foreign exchange translation adjustment decreased the
net carrying amount by $0.9 million (31 December 2014: decreased by $1.3 million). The estimated aggregate amortisation expense for each of the
succeeding five years is $4.4 million.
BUTTERFIELD ANNUAL REPORT 2015
NOTE 10: CUSTOMER DEPOSITS AND DEPOSITS FROM BANKS
By Maturity
Demand deposits
Demand deposits - Non-interest bearing
Demand deposits - Interest bearing
Total demand deposits
Customers
31 December 2015
Banks
Total
Customers
31 December 2014
Banks
Total
1,881,745
5,772,898
7,654,643
403
10,176
10,579
1,882,148
5,783,074
7,665,222
1,558,122
5,179,522
6,737,644
408
26,512
26,920
1,558,530
5,206,034
6,764,564
Term deposits having a denomination
of less than $100 thousand
Term deposits maturing within six months
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Total term deposits having a denomination
of less than $100 thousand
50,251
14,273
16,257
80,781
202
-
-
202
50,453
14,273
16,257
57,451
18,310
18,492
80,983
94,253
82
-
-
82
57,533
18,310
18,492
94,335
Term deposits having a denomination of
$100 thousand or more
Term deposits maturing within six months(1)
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Total term deposits having a denomination
of $100 thousand or more
1,230,789
138,973
62,482
3,697
-
-
1,234,486
138,973
62,482
1,445,072
294,175
60,527
9,368
3,536
-
1,454,440
297,711
60,527
1,432,244
3,697
1,435,941
1,799,774
12,904
1,812,678
Total term deposits
1,513,025
3,899
1,516,924
1,894,027
12,986
1,907,013
Total deposits
8,671,577
(1)As at 31 December 2015, $192 million (2014: $nil) of the term deposits having a denomination of $100 thousand or more, bear a special interest rate of 0%.
9,167,668
9,182,146
8,631,671
14,478
39,906
82
The weighted-average interest rate on interest-bearing demand deposits as at 31 December 2015 is 0.10% (31 December 2014: 0.16%).
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 deposits
Payable
on demand
31 December 2015
Payable on a
fixed date
Total
Payable
on demand
31 December 2014
Payable on a
fixed date
Total
3,739,829
403
531,877
-
4,271,706
403
2,914,440
9,508
955,683
-
3,870,123
9,508
2,596,642
9,365
416,489
3,899
3,013,131
13,264
2,153,500
15,797
437,259
12,986
2,590,759
28,783
996,343
669
248,866
-
1,245,209
669
1,350,377
1,307
145,132
-
1,495,509
1,307
36,078
3,602
39,680
53,317
7,514
60,831
285,751
142
7,654,643
10,579
7,665,222
312,191
-
1,513,025
3,899
1,516,924
597,942
142
9,167,668
14,478
9,182,146
266,010
308
6,737,644
26,920
6,764,564
348,439
-
1,894,027
12,986
1,907,013
614,449
308
8,631,671
39,906
8,671,577
NOTE 11: EMPLOYEE BENEFIT PLANS
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 relevant 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 independent actuaries.
Bermuda Defined Benefit Post-Retirement Healthcare Plan
For the year ended 31 December 2014 numerous changes in the plan provisions were made to align the plan provisions with the administrative
practices of the Bank resulting in a further increase in the Bermuda defined benefit post-retirement healthcare plan liability of $7.9 million.
The Bank amortises prior service credit resulting from plan amendments that occurred when plan members were active employees, on a linear basis
over the expected average remaining service period (to full eligibility) of active members expected to receive benefits under the plan. Such remaining
service periods are as follow: 3.1 years for the 2010 plan amendments and 4.6 years for the 2011 plan amendments. Plan amendments occurring
in 2014 resulted in the recognition of new prior service cost on 31 December 2014 on a plan for which substantially all members are now inactive
and, in accordance with US GAAP, the Bank has elected to amortise this new prior service cost on a linear basis over 21 years, which is the average
remaining life expectancy of members eligible for benefits under the plan at the time of the amendments.
Guernsey Defined Benefit Pension Plan
Effective 30 September 2014, the defined benefit pension benefits of the Bank’s Guernsey operations were amended to freeze credited service and
final average earnings for remaining active members. The benefits amendment resulted in a further reduction in the Guernsey defined benefit pension
liability of $4.59 million as at 30 September 2014.
Effective October 2014, all the participants of the Guernsey defined benefit pension plan are inactive and in accordance with US GAAP, the net
actuarial loss of the Guernsey defined benefit pension plan will be amortised over the then estimated average remaining life expectancy of the
inactive participants of 39 years. Prior to all of the Guernsey participants being inactive, the net actuarial loss of the Guernsey defined benefit
pension plan was amortised to net income over the estimated average remaining service period for active members of 15 years.
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 Bank measures the benefit obligations and plan assets annually on each 31 December and therefore, the most recent measurement
date is 31 December 2015.
Accumulated benefit obligation at end of year
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Service cost
Employee contributions
Interest cost
Benefits paid
Plan amendment
Settlement and curtailment of liability
Actuarial (gain) loss
Foreign exchange translation adjustment
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Employee contributions
Plan settlement
Benefits paid
Foreign exchange translation adjustment
Fair value of plan assets at end of year
Amounts recognised in the consolidated
balance sheets consist of:
Prepaid benefit cost included in other assets
Accrued pension benefit cost included in
employee benefit plans liability
Surplus (deficit) of plan assets over projected
benefit obligation at measurement date
31 December 2015
31 December 2014
Post-retirement
Pension plans medical benefit plan
-
166,815
Post-retirement
Pension plans medical benefit plan
-
188,890
83
188,890
-
-
6,958
(7,573)
-
(2,509)
(14,157)
(4,794)
166,815
194,007
687
808
-
(2,424)
(7,573)
(5,544)
179,961
16,174
(3,028)
13,146
114,640
341
-
4,745
(2,871)
-
-
2,252
-
119,107
-
-
2,871
-
-
(2,871)
-
-
167,469
1,203
99
7,760
(8,771)
-
(4,662)
31,604
(5,812)
188,890
186,412
18,451
4,172
99
-
(8,771)
(6,356)
194,007
89,109
825
-
4,503
(3,590)
7,901
-
15,892
-
114,640
-
-
3,590
-
-
(3,590)
-
-
-
8,374
-
(119,107)
(3,257)
(114,640)
(119,107)
5,117
(114,640)
BUTTERFIELD ANNUAL REPORT 2015
As at 31 December 2015, the pension plans of the Guernsey and United Kingdom subsidiaries were in a surplus position (i.e., net surplus presented
in other assets in the consolidated balance sheets) while the pension plan of the Bermuda operations was in a deficit position with projected benefit
obligations of $88.0 million and plan assets of $85.0 million.
Year ended
31 December 2015
31 December 2014
Post-retirement
Pension plans medical benefit plan
Post-retirement
Pension plans medical benefit plan
Amounts recognised in accumulated
other comprehensive loss consist of:
Net actuarial loss, excluding deferred taxes
Prior service credit, net of prior service cost
Deferred income taxes assets
Net amount recognised in accumulated
other comprehensive loss
Annual Benefit Expense
Expense component
Service cost
Interest cost
Expected return on plan assets
Amortisation of prior service credit
Amortisation of net actuarial losses
Loss on settlement
Defined benefit expense (income)
Defined contribution expense
Total benefit expense (income)
Other Changes Recognised in Other
Comprehensive (Loss) Income
Net gain (loss) arising during the year
Prior service cost arising during the year
Amortisation of prior service credit
Amortisation of net actuarial losses
Change in deferred taxes
Foreign exchange adjustment
Total changes recognised in other
comprehensive (loss) income
84
(46,696)
-
365
(46,331)
-
6,958
(9,585)
-
1,607
101
(919)
6,907
5,988
5,096
-
-
1,703
(391)
430
6,838
(28,779)
665
-
(28,114)
341
4,745
-
(6,343)
3,347
-
2,090
-
2,090
(2,252)
-
(6,343)
3,347
-
-
(5,248)
(53,970)
-
801
(29,874)
7,008
-
(53,169)
(22,866)
1,203
7,760
(10,653)
-
1,058
-
(632)
6,892
6,260
(18,947)
-
-
1,058
83
253
825
4,503
-
(6,719)
922
-
(469)
-
(469)
(15,892)
(7,901)
(6,719)
922
-
-
(17,553)
(29,590)
The estimated portion of the net actuarial loss for the pension plans that will be amortised from AOCL into benefit expense over the 2016 full fiscal
year is $1.7 million. The estimated portion of the net actuarial loss and the prior service credit for the post-retirement medical benefit plan that will
be amortised from AOCL into benefit expense over the 2016 full fiscal year is $2.6 million for the net actuarial loss and a credit of $6.3 million for the
net prior service credit.
Actuarial Assumptions
31 December 2015 31 December 2014
Post-retirement
Pension plans medical benefit plan
Pension plans
Post-retirement
medical benefit plan
Year ended
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
Weighted average annual medical cost
increase rate (sensitivity shown below)
(1)Excludes the inactive Bermuda defined benefit pension plan.
Actuarial assumptions used to determine
benefit obligations at end of year
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average annual medical
cost increase rate (sensitivity shown below)
3.80%
2.20%
5.10%
4.20%
N/A
N/A
4.75%
4.30%
5.80%
5.10%
N/A
N/A
N/A 7.1% to 4.5% in 2027
N/A
7.3% to 4.5% in 2027
4.20%
2.30%
4.70%
N/A
3.80%
2.80%
4.20%
N/A
N/A 8.0% to 4.5% in 2035
N/A
7.1% to 4.5% in 2027
Post-retirement medical benefit plan sensitivity to trend rate assumptions
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 as follows:
a. One percent increase in trend rate
i. Effect on total service cost and interest cost components for the year
ii. Effect on benefit obligation at year-end
b. One percent decrease in trend rate
i. Effect on total service cost and interest cost components for the year
ii. Effect on benefit obligation at year-end
N/A
N/A
N/A
N/A
909
18,792
(781)
(15,496)
N/A
N/A
N/A
N/A
952
20,339
(771)
(16,514)
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 assets. 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.
Investments Policies and Strategies
The pension plans’ assets are managed according to each plan’s investment policy statement, which outlines the purpose of the plan, statement of
objectives and guidelines and investment policy. The asset allocation is diversified and any use of derivatives is limited to hedging purposes only.
Weighted average actual and target asset
allocations of the pension plans by asset category
Debt securities (including debt mutual funds)
Equity securities (including equity mutual funds)
Other
Total
31 December 2015
31 December 2014
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
42%
58%
0%
100%
53%
47%
0%
100%
49%
45%
6%
100%
50%
48%
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:
85
31 December 2015
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
-
-
-
11,845
-
11,845
Level 2
7,532
68,166
-
91,702
716
168,116
Level 3
-
-
-
-
-
-
31 December 2014
Fair value determination
Level 1
-
-
-
12,747
-
12,747
Level 2
7,707
62,466
17,342
92,962
783
181,260
Total
fair value
7,707
62,466
17,342
105,709
783
194,007
Level 3
-
-
-
-
-
-
Total
fair value
7,532
68,166
-
103,547
716
179,961
At 31 December 2015, 34.8% (31 December 2014: 35.9%) 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 2015, 0.3% and 1.2% (31 December 2014: 0.3% and 1.1%) 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.
BUTTERFIELD ANNUAL REPORT 2015
Estimated 2016 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 full year ending 31 December 2016
Estimated benefit payments by year:
2016
2017
2018
2019
2020
2021-2024
Pension plans
592
7,400
7,400
7,400
7,400
7,400
37,000
Post-retirement
medical benefit plan
4,183
4,183
4,496
4,822
5,167
5,511
32,986
NOTE 12: CREDIT RELATED ARRANGEMENTS AND COMMITMENTS
Commitments
As at 31 December 2015, the Bank was committed to expenditures under contract for sourcing and leases of $16.3 million and $20.0 million,
respectively (31 December 2014: $33.1 million and $20.0 million, respectively). Rental expense for premises leased on a long-term basis for the year
ended 31 December 2015 amounted to $4.8 million (31 December 2014: $5.3 million).
The following table summarises the Bank’s commitments for sourcing, long-term leases and other agreements:
Year ending 31 December
2016
2017
2018
2019
2020
2021 & thereafter
Total commitments
86
Sourcing
16,312
-
-
-
-
-
16,312
Leases
5,235
4,212
3,346
2,523
2,382
2,294
19,992
Other
2,376
536
497
458
458
458
4,783
Total
23,923
4,748
3,843
2,981
2,840
2,752
41,087
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:
31 December 2014
Collateral
224,158
Standby letters of credit
7,594
Letters of guarantee
231,752
Total
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income.
Collateral
257,200
8,418
265,618
Gross
258,851
9,137
267,988
Gross
225,718
10,227
235,945
Net
1,651
719
2,370
31 December 2015
Net
1,560
2,633
4,193
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:
Commitments to extend credit
Documentary and commercial letters of credit
Total unfunded commitments to extend credit
31 December 2015
390,497
455
390,952
31 December 2014
257,266
1,927
259,193
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 2015, $123.7 million (31 December 2014: $91.8 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 in the aggregate not be material to the consolidated financial position of the Bank, except as noted in the following paragraphs.
As publicly announced, in November 2013, the US Attorney’s Office for the Southern District of New York applied for and secured the issuance of
so-called John Doe Summonses to six US financial institutions with which the Bank had correspondent bank relationships. The Bank has been fully
cooperating with the US authorities in their ongoing investigation. Specifically, the Bank has conducted an extensive review and account remediation
exercise to determine the US tax compliance status of US person account holders. The review process and results have been shared with the US authorities.
Management believes that, at this stage, a provision of $4.8 million, which has been recorded as of 31 December 2015, is appropriate based on the
methodology used in similar settlements for other financial institutions. As the investigation remains ongoing at this time, the timing and terms of the
final resolution, including any fines or penalties, remain uncertain and the financial impact to the Bank could exceed the amount of the provision. In this
regard, we note that the US authorities have not approved or commented on the adequacy or reasonableness of the estimate. The provision is included
on the consolidated balance sheets under other liabilities and on the consolidated statements of operations under other expenses.
Pending business acquisition
In October 2015, the Bank announced that it had reached an agreement to acquire Bermuda Trust Company Ltd. and the private banking investment
management operations of HSBC Bank Bermuda Limited. HSBC Bank Bermuda Limited has also entered into an agreement to refer its existing private
banking clients to the Bank. The transaction is expected to be completed in the first half of 2016.
87
NOTE 13: EXIT COST OBLIGATIONS
During December 2015, the Bank agreed to commence an orderly wind-down of the deposit taking and investment management businesses in the United
Kingdom segment as reflected in management segment reporting described in Note 15: Segmented Information. In making this determination, the Bank
considered the increasing regulatory pressure along with periods of negative profitability and made the determination that an orderly wind-down of
the deposit taking and investment management businesses in the United Kingdom was prudent for Butterfield as a group. The orderly wind-down is
expected to be completed over the next 12 months. Certain expenses and related liabilities have been recognised during and as of the year ended 31
December 2015 pertaining to this orderly wind-down plan. The table below presents information about these liabilities and expenses:
Staff redundancy expenses
Professional services
Lease termination expenses
Other expenses
Total
Total costs
expected
to be incurred
3,955
4,125
2,210
1,620
11,910
Year ended 31 December 2015
Exit cost
liability as at
Amounts 31 December
2015
634
1,549
-
-
2,183
paid
-
-
-
-
-
Expense
recognised
634
1,549
-
-
2,183
The amounts expensed above are all included in the consolidated statements of operations as “Restructuring costs” under non-interest expenses.
Related to this orderly wind-down, it was determined that the core banking system utilised in the operations of the United Kingdom segment was
impaired (currently held under “Premises, equipment and computer software” on the consolidated balance sheets). This determination was based upon
the realisable value of this software upon completion of the orderly wind-down. A total of $5.1 million was incurred and expensed during the year ended
31 December 2015 and is included as “Impairment of fixed assets” on the consolidated statements of operations.
BUTTERFIELD ANNUAL REPORT 2015
NOTE 14: LOAN INTEREST INCOME
Contractual interest
Contractual interest earned on mortgages
Contractual interest earned on other loans
Subtotal contractual interest earned
Amortisation
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
Year ended
31 December 2015
104,194
79,506
183,700
31 December 2014
106,321
82,395
188,716
(1,471)
4,257
186,486
(4,335)
8,107
(1,548)
4,818
191,986
(5,806)
7,526
NOTE 15: SEGMENTED INFORMATION
As at 31 December 2015, for Management reporting purposes, the operations of the Bank are grouped into the following six business segments based
upon the geographic location of the Bank’s operations: Bermuda, Cayman, Guernsey, Switzerland, The Bahamas and the United Kingdom. Accounting
policies of the reportable segments are the same as those described in Note 2.
Bermuda provides a full range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized
businesses through five branch locations and through Internet banking, mobile 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.
88
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, 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. As described in Note 13, during December 2015, the
Bank agreed to commence an orderly wind-down plan of the deposit taking and investment management businesses in the United Kingdom segment.
Total Assets by Segment
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total assets before inter-segment eliminations
Less: inter-segment eliminations
Total
31 December 2015
5,113,718
3,282,319
1,391,126
2,713
49,434
788,433
10,627,743
(352,180)
10,275,563
31 December 2014
4,797,235
2,863,624
1,639,334
2,000
70,265
832,591
10,205,049
(346,609)
9,858,440
Net interest income
Inter-
Customer segment
2,600
608
(427)
-
116
(2,897)
-
-
-
Year ended
31 December 2015
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Inter-segment eliminations
Total
142,488
66,317
17,025
-
8
13,428
239,266
-
239,266
Net interest income
Inter-
segment
3,164
928
(1,242)
-
166
(3,016)
-
-
-
Year ended
31 December 2014
Bermuda
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total before eliminations
Inter-segment eliminations
Total
Customer
141,528
58,442
19,303
-
(15)
19,229
238,487
-
238,487
Provision
for
credit
losses
(3,625)
(466)
(103)
-
-
(1,547)
(5,741)
-
(5,741)
Provision
for
credit
losses
(6,425)
(557)
(154)
-
-
(912)
(8,048)
-
(8,048)
Total
Revenue
before
gains
Net income
Non-
before
gains
interest
income and losses expenses and losses
43,039
61,050
47,852
39,508
2,794
26,171
100
3,420
5,295
351
(6,960)
6,307
87,176
141,751
-
(1,579)
87,176
140,172
159,474
58,115
39,872
3,320
5,068
22,251
288,100
(1,579)
286,521
202,513
105,967
42,666
3,420
5,419
15,291
375,276
(1,579)
373,697
Non-
interest
income
60,692
33,515
26,814
2,486
5,492
7,717
136,716
(1,886)
134,830
Revenue
before
gains
and losses
198,959
92,328
44,721
2,486
5,643
23,018
367,155
(1,886)
365,269
Net income
before
gains
and losses
53,263
33,499
5,141
(381)
95
854
92,471
-
92,471
Total
expenses
145,696
58,829
39,580
2,867
5,548
22,164
274,684
(1,886)
272,798
Gains
and
losses
(2,503)
(793)
(1,066)
-
1
(5,076)
(9,437)
-
(9,437)
Gains
and
losses
6,908
36
4,432
-
-
4,312
15,688
-
15,688
Net
income
40,536
47,059
1,728
100
352
(12,036)
77,739
-
77,739
Net
income
60,171
33,535
9,573
(381)
95
5,166
108,159
-
108,159
NOTE 16: DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
The Bank uses derivatives for risk management purposes and to meet the needs of its customers. The Bank’s derivative contracts principally involve over-
the-counter (“OTC”) transactions that are privately negotiated between the Bank and the counterparty to the contract and include interest rate contracts
and foreign exchange contracts.
89
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 sheets 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
statements 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 sheets as they represent the face amount of the contract
to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional amounts represent the volume of outstanding
transactions and do not represent the potential gain or loss associated with market risk or credit risk of such instruments. Credit risk is limited to the
positive fair value of the derivative instrument, which is significantly less than the notional amount.
Fair Value
Derivative instruments, in the absence of any compensating up-front cash payments, generally have no market value at inception. They obtain value,
positive or negative, as relevant interest rates, exchange rates, equity or commodity prices or indices change. 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
BUTTERFIELD ANNUAL REPORT 2015
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 in foreign operations, the translation gain or
loss that is recorded in AOCL is based on the spot exchange rate between the reporting currency of the Bank and the functional currency of the
respective subsidiary.
90
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
Banks’ 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 foreign exchange 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 sheets 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.
The following table shows the notional amounts and related fair value measurements of derivative instruments as at the balance sheet date:
31 December 2015
Risk management derivatives
Net investment hedges
Derivatives not formally designated as
Derivative instrument
Currency swaps
hedging instruments
Currency swaps
Subtotal risk management derivatives
Notional
amounts
77,670
77,881
155,551
Gross
positive
fair value
Gross
negative
fair value
Net
fair value
4,122
273
4,395
-
(95)
(95)
Client services derivatives Spot and forward
foreign exchange
2,572,525
16,426
(15,961)
Total derivative instruments
2,728,076
20,821
(16,056)
4,122
178
4,300
465
4,765
31 December 2014
Risk management derivatives
Net investment hedges
Derivatives not formally designated
Derivative instrument
Currency swaps
as hedging instruments
Currency swaps
Subtotal risk management derivatives
Client services derivatives
Spot and forward
foreign exchange
Notional
amounts
114,759
113,981
228,740
Gross
positive
fair value
1,095
284
1,379
Gross
negative
fair value
Net
fair value
(3,559)
(2,464)
(1,749)
(5,308)
(1,465)
(3,929)
2,424,176
20,856
(20,500)
356
Total derivative instruments
2,652,916
22,235
(25,808)
(3,573)
In addition to the above, as at 31 December 2015, foreign denominated deposits of $39.4 million (31 December 2014: $15.7 million), were designated as
a hedge of foreign exchange risk associated with the net investment in foreign operations.
We manage derivative exposure by monitoring the credit risk associated with each counterparty using counterparty-specific credit risk limits, using
master netting arrangements where appropriate, and obtaining collateral. The Bank elected to offset in the consolidated balance sheets certain gross
derivative assets and liabilities subject to netting agreements.
The Bank also elected not to offset certain derivative assets or liabilities and all collaterals received or paid that the Bank or the counterparties could
legally offset in the event of default. In the tables below, these positions are deducted from the net fair value presented in the consolidated balance
sheets in order to present the net exposures.The collateral values presented in the following table are limited to the related net derivative asset or liability
balance and, accordingly, do not include excess collateral received or paid.
Less: positions not offset in the
consolidated balance sheets
Net fair value
Less: offset
applied under
Gross
presented in
fair value master netting the consolidated
balance sheets
agreements
recognised
Gross
fair value
Cash
collateral
of derivatives received / paid
Net exposures
91
20,821
(7,127)
13,694
(78)
(232)
13,384
16,056
(7,127)
8,929
4,765
(78)
(148)
8,703
Less: positions not offset in the
consolidated balance sheets
Gross
fair value
recognised
Less: offset
applied under
master netting
agreements
Net fair value
presented in
the consolidated
balance sheets
Gross
fair value
Cash
collateral
of derivatives received / paid
Net exposures
31 December 2015
Derivative assets
Spot and forward foreign
exchange and currency swaps
Derivative liabilities
Spot and forward foreign
exchange and currency swaps
Net positive fair value
31 December 2014
Derivative assets
Spot and forward foreign
exchange and currency swaps
22,235
(5,384)
16,851
Derivative liabilities
Spot and forward foreign
exchange and currency swaps
25,808
(5,384)
Net negative fair value
20,424
(3,573)
-
-
(3,411)
13,440
(5,073)
15,351
BUTTERFIELD ANNUAL REPORT 2015
The following table shows the location and amount of gains (losses) recorded in the consolidated statements of operations on derivative
instruments outstanding:
Derivative instrument
Spot and forward foreign exchange
Total net losses recognised in net income
Consolidated statements of operations line item 31 December 2015
(228)
Foreign exchange revenue
(228)
31 December 2014
(332)
(332)
Year ended
NOTE 17: FAIR VALUE MEASUREMENTS
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 type 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 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, forward foreign exchange contracts, and mutual funds not actively traded.
Financial instruments in Level 3 include asset-backed securities for which the market is relatively illiquid and for which information about actual trading
prices is not readily available.
31 December 2015
Fair value
Level 1
Level 2
Level 3
Total
carrying
amount /
fair value
31 December 2014
Fair value
Level 1
Level 2
Level 3
Total
carrying
amount /
fair value
92
Items that are recognised at fair
value on a recurring basis:
Financial assets
Trading investments
Certificates of deposit
US government and federal agencies
Debt securities issued
Asset-backed securities - Student loans
Mutual funds
Total trading
Available-for-sale investments
US government and federal agencies
Debt securities issued
by non-US governments
Corporate debt securities
Asset-backed securities - Student loans
Commercial mortgage-backed securities
Residential mortgage-backed securities - Prime
Total available-for-sale
Other assets - Derivatives
Financial liabilities
Other liabilities - Derivatives
-
-
-
-
5,903
5,903
-
279,343
7,489
28,285
279
315,396
-
-
-
-
-
-
-
279,343
7,489
28,285
6,182
321,299
-
-
-
-
6,038
6,038
37,743
312,507
7,652
52,597
848
411,347
-
-
-
-
-
-
37,743
312,507
7,652
52,597
6,886
417,385
- 1,404,499
-
1,404,499
1,575,363
- 1,575,363
-
-
-
-
-
-
-
-
29,575
506,144
-
148,726
100,244
2,189,188
13,694
8,929
-
-
12,161
-
-
12,161
-
-
29,575
506,144
12,161
148,726
100,244
2,201,349
13,694
-
-
-
-
-
-
-
-
30,673
399,289
-
151,169
64,829
2,221,323
16,851
-
-
12,226
-
-
30,673
399,289
12,226
151,169
64,829
12,226 2,233,549
-
-
16,851
20,424
8,929
-
20,424
There were no transfers between Level 1 and Level 2 during the year ended 31 December 2015 and 2014.
The Level 3 Asset-backed securities - Student loans 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.
Significant increases (decreases) in any of the preceding 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
Proceeds from sales, paydowns and maturities
Accretion recognised in net income
Realised and unrealised gains (losses) recognised in other comprehensive income
Realised and unrealised gains recognised in net income
Carrying amount at end of year
Items Other Than Those Recognised at Fair Value on a Recurring Basis:
31 December 2015
12,226
-
-
(65)
-
12,161
31 December 2014
45,304
(36,439)
915
(6,286)
8,732
12,226
31 December 2015
31 December 2014
Level
Carrying
amount
Fair Appreciation /
(depreciation)
value
Fair Appreciation /
(depreciation)
value
2,288,890
409,482
701,282
2,288,890
409,482
701,495
-
-
213
Carrying
amount
2,063,311
394,770
338,177
2,063,311
394,770
343,989
Financial assets
Cash due from banks
Short-term investments
Level 1
Level 1
Investments held-to-maturity Level 2
Loans, net of allowance
for credit losses
Other real estate owned (1)
Level 2
Level 2
4,000,155
11,206
3,996,443
11,206
(3,712)
-
4,019,128
19,300
4,015,764
19,300
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits from banks
Long-term debt
6,737,644
1,894,027
39,906
117,000
(1)The current carrying value of OREO is adjusted to fair value only when there is devaluation below carrying value.
7,654,643
1,514,126
14,478
116,606
7,654,643
1,513,025
14,478
117,000
-
(1,101)
-
394
Level 2
Level 2
Level 2
Level 2
6,737,644
1,895,558
39,906
115,936
-
-
5,812
(3,364)
-
-
(1,531)
-
1,064
NOTE 18: INTEREST RATE RISK
The following tables set 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 these tables 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.
93
31 December 2015
Earlier of contractual maturity or repricing date
(in $ millions)
Assets
Cash due from banks
Short-term investments
Investments
Loans
Other assets
Total assets
Liabilities and shareholders’ equity
Shareholders’ equity
Demand deposits
Term deposits
Other liabilities
Long-term debt
Total liabilities and shareholders’ equity
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
2,178
117
871
3,735
-
6,901
-
5,783
989
-
92
6,864
37
37
-
291
79
84
-
454
-
-
296
-
-
296
158
195
-
1
19
53
-
73
-
-
153
-
-
153
(80)
115
-
-
620
67
-
687
-
-
79
-
25
104
583
698
-
-
1,629
47
-
1,676
-
-
-
-
-
-
1,676
2,374
111
-
6
14
354
485
750
1,882
-
227
-
2,859
(2,374)
-
Total
2,289
409
3,224
4,000
354
10,276
750
7,665
1,517
227
117
10,276
-
-
BUTTERFIELD ANNUAL REPORT 2015
31 December 2014
Earlier of contractual maturity or repricing date
(in $ millions)
Assets
Cash due from banks
Short-term investments
Investments
Loans
Other assets
Total assets
Liabilities and shareholders’ equity
Shareholders’ equity
Demand deposits
Term deposits
Other liabilities
Long-term debt
Total liabilities and shareholders’ equity
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
1,923
155
422
3,685
-
6,185
-
5,142
1,168
-
47
6,357
(172)
(172)
-
224
37
133
-
394
-
64
344
-
-
408
-
16
105
20
-
141
-
-
316
-
45
361
(14)
(186)
(220)
(406)
-
-
470
112
-
582
-
-
79
-
25
104
478
72
-
-
1,948
45
-
1,993
-
-
-
-
-
-
1,993
2,065
140
-
7
24
392
563
849
1,559
-
220
-
2,628
(2,065)
-
Total
2,063
395
2,989
4,019
392
9,858
849
6,765
1,907
220
117
9,858
-
-
NOTE 19: LONG-TERM DEBT
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.
94
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. During January
2014, the Bank fully redeemed the 2005 issuance Series A subordinated debt for its nominal value of $90 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 $78 million outstanding subordinated notes redeemed in May 2008. The notes issued under Series A paid a fixed coupon of 7.59% until
27 May 2013 when they became redeemable in whole at the option of the Bank. In May 2013, the Bank exercised its option to redeem the Series A note
outstanding at face value. The Series B notes pay a fixed coupon of 8.44% until 27 May 2018 when they also become redeemable in whole at the Bank’s
option. The Series B notes were priced at a spread of 4.51% over the 10-year US Treasury yield.
No interest was capitalised during the years ended 31 December 2015 and 2014.
The following table presents the contractual maturity and interest payments for long-term debt issued by the Bank as at 31 December 2015. The interest
payments are calculated until contractual maturity using the current LIBOR rates.
Earliest date
redeemable
at the Bank’s
Interest rate
until date
option maturity date redeemable
Contractual
Interest payments until
contractual maturity
Interest rate from
earliest date
redeemable to contractual
Principal Within 1 to 5 After
maturity outstanding 1 year years 5 years
27-May-2018
2-Jul-2020
27-May-2023
5.15% 3 months US$ LIBOR + 2.000%
5.11% 3 months US$ LIBOR + 1.695%
8.44% 3 months US$ LIBOR + 4.929%
47,000 1,248
45,000 1,056
25,000
2,110
117,000 4,414 12,497
-
1,862
3,949
-
6,686 3,506
3,506
Long-term debt
Bermuda
2003 issuance - Series B 27-May-2013
2005 issuance - Series B
2-Jul-2015
2008 issuance - Series B 27-May-2018
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
Net income
Less: Preference dividends declared and guarantee fee
Less: Premium on preference share buyback
Net income attributable for 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
Net income attributable for common shareholders
Adjusted weighted average number of common shares issued
Net dilution impact related to options to purchase common shares
Net dilution impact related to awards of unvested common shares
Adjusted weighted average number of diluted common shares (in thousands)
Year ended
31 December 2015
0.13
31 December 2014
0.17
77,739
(16,455)
(28)
61,256
500,009
(10,788)
489,221
0.12
61,256
489,221
4,718
6,089
500,028
108,159
(16,546)
(96)
91,517
556,933
(9,336)
547,597
0.16
91,517
547,597
3,927
4,958
556,482
95
Prior to their conversion into common shares on 31 March 2015, outstanding contingent value convertible preference (“CVCP”) shares were classified
as participating securities as they were entitled to dividends declared to common shareholders on a 1:1 basis and were therefore included in the basic
earnings per share calculation.
During the year ended 31 December 2015, options to purchase an average of 29.0 million (31 December 2014: 31.1 million) shares of common stock,
were outstanding. During the year ended 31 December 2015, the average number of outstanding awards of unvested common shares was 9.2 million
(31 December 2014: 9.5 million). Only awards for which the sum of 1) the expense that will be recognised in the future (i.e., the unrecognised
expense) and 2) its exercise price, if any, 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. An award’s unrecognised expense is also 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 common shares at the average market price. The weighted-average number of outstanding awards, net of the assumed
weighted-average number of common 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
$3.47 (31 December 2014: $3.49) for 4.32 million shares of common stock (31 December 2014: 4.30 million) were not included in the computation of
earnings per share as at 31 December 2015 and 2014 because the exercise price was greater than the average market price of the Bank‘s common stock.
BUTTERFIELD ANNUAL REPORT 2015
NOTE 21: SHARE-BASED PAYMENTS
Stock Option Plans
1997 Stock Option Plan
Prior to the capital raise on 2 March 2010, the Bank granted stock options to employees and Directors of the Bank that entitle the holder to purchase one
common share at a subscription price equal to the market price on the effective date of the grant. Generally, the options granted vest 25 percent at the
end of each year for four years, however as a result of the 2010 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 price of the most recently traded common share when
granted and have a term of 10 years. The subscription price will be reduced for all special dividends declared by the Bank.
The 2010 Stock Option Plan will vest based on two specific types of vesting conditions (i.e., time and performance conditions) as detailed below:
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.
Performance vesting condition
50% of each option award is granted in the form of performance options and vests (partially or fully) on a “valuation event” date (date any of the 2
March 2010 new investors transfers at least 5% of the total number of common shares or the date that there is a change in control and any of the new
investors realises a predetermined multiple of invested capital (“MOIC”)). 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. As at 31 December 2015 the grant date fair value not yet recognised in expenses of
outstanding performance options is $8.7 million (31 December 2014: $8.9 million). If the probability of a valuation event becomes more likely than not,
some or all of the unrecognised expense relating to the performance options will be recognised as an expense.
96
In addition to the time and performance vesting conditions noted above, the options will generally vest immediately:
•
•
•
by reason of the employee’s death or disability;
upon termination, by the Bank, of the holder’s employment, unless if in relation with the holder’s misconduct; or
in limited circumstances and specifically approved by the Board, as stipulated in the holder’s employment contract.
In the event of the employee’s resignation, any unvested portion of the awards shall generally be forfeited and any vested portion of the options shall
generally remain exercisable during the 90-day period following the termination date or, if earlier, until the expiration date, and any vested portion of the
options not exercised as of the expiration of such period shall be forfeited without any consideration therefore.
Weighted average fair value of stock options granted
Year ended 31 December 2012 (most recent year during which options were granted)
Year ended 31 December 2011
Time vested options Performance vested options
$0.44
$0.43
$0.42
$0.41
The weighted average fair value of stock options granted in the years ended 31 December 2012 and 2011 was calculated using the Black-Scholes-Merton
option-pricing model for the time vested options and a lattice-based binomial option-pricing model for the performance options using the following
weighted average assumptions:
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years)
1.0% for 2014
Time vested options Performance vested options
0% for 2011-2013 0% for 2011-2013
1.0% for 2014
2.0% for 2015 and later years 2.0% for 2015 and later years
0% to 2.09%
36% to 38%
8 to 10 years
0.94% to 1.44%
36% to 38%
6.75 years
Changes in Outstanding Stock Options
Number of shares transferable
upon exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
Year ended
31 December 2015
Outstanding at
beginning of year
Exercised
Forfeitures and cancellations
Resignations, retirements,
redundancies
Outstanding at end of year
Vested and exercisable
at end of year
Year ended
31 December 2014
Outstanding at
beginning of year
Exercised
Forfeitures and cancellations
Resignations, retirements,
redundancies
Expiration at end of plan life
Outstanding at end of year
Vested and exercisable
at end of year
1997 Stock
2010 Stock
Option Plan Option Plan
Aggregate
1997 Stock
2010 Stock intrinsic value
1997 Stock
Option Plan Option Plan Option Plan Option Plan ($ thousands)
2010 Stock
Total
3,525
-
(1,349)
-
2,176
26,780 30,305
(554)
(24) (1,373)
(554)
(132)
(132)
26,070 28,246
13.07
-
12.33
-
13.52
2,176
12,423 14,599
13.52
1.17
1.15
1.15
1.15
1.16
1.16
1.78
1.78
4.67
20,594
4.94
Number of shares transferable Weighted average Weighted average
upon exercise (thousands)
exercise price ($)
remaining life (years)
1997 Stock
Option Plan
2010 Stock
Option Plan
Total
1997 Stock
Option Plan
2010 Stock
Option Plan
1997 Stock
Option Plan
2010 Stock
Option Plan
Aggregate
intrinsic value
($ thousands)
3,992
-
(436)
-
(31)
3,525
27,808 31,800
(1,027)
(1,027)
(437)
(1)
-
-
-
(31)
26,780 30,305
3,525
8,677 12,202
12.83
-
10.86
-
13.76
13.07
13.07
1.17
1.16
1.16
1.16
-
1.17
1.17
2.38
2.38
5.66
5.65
22,233
97
Share Based Plans
Recipients of unvested share awards are entitled to the related common shares at no cost, at the time the award vests. Recipients of unvested shares
may be entitled to receive additional unvested shares having a value equal to the cash dividends that would have been paid had the unvested shares
been issued and vested. Such additional unvested shares granted as dividend equivalents are subject to the same vesting schedule and conditions as
the underlying unvested shares.
Unvested shares subject only to the time vesting condition generally vest upon retirement, death, disability or upon termination, by the Bank, of
the holder’s employment unless if in relation with the holder’s misconduct. Unvested shares subject to both time vesting and performance vesting
conditions remain outstanding and unvested upon retirement and will vest only if the performance conditions are met. Unvested shares can also
vest in limited circumstances and if specifically approved by the Board, as stipulated in the holder’s employment contract. In all other circumstances,
unvested shares are generally forfeited when employment ends.
Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s EDIP Plan, shares were awarded to Bank employees and executive management based on the time vesting condition, which states
that the shares will vest equally over a three-year period from the effective grant date.
Executive Long-Term Incentive Share Plan (“ELTIP”)
2012 and 2011 ELTIP
Under the Bank’s 2012 and 2011 ELTIP, shares were awarded to Bank employees and executive management, based on predetermined vesting
conditions. Two types of vesting conditions upon which the shares were awarded comprise the ELTIP: 1) 50% of each share award were granted in
the form of time vested shares, generally vesting equally over a three-year period from the effective grant date; and 2) 50% of each share award
were granted in the form of performance shares, generally vesting upon the achievement of certain performance targets in the three-year period from
the effective grant date.
2015, 2014 and 2013 ELTIP
The 2015 ELTIP was approved on 11 February 2015. Under the Bank’s 2015, 2014 and 2013 ELTIP, performance shares were awarded to executive
management. These shares will generally vest upon the achievement of certain performance targets in the three-year period from the effective
grant date.
BUTTERFIELD ANNUAL REPORT 2015
Number of shares transferable upon vesting of the ELTIP and EDIP shares (in thousands of shares)
Outstanding at beginning of year
Granted
Vested
Resignations, retirements, redundancies
Outstanding at end of year
Share-based Compensation Cost Recognised in Net Income
Year ended
31 December 2015 31 December 2014
ELTIP
EDIP ELTIP EDIP
6,441
2,183
7,062
2,660
2,550
1,510
2,530
1,739
(1,852)
(1,029)
(3,220)
(2,071)
(77)
(311)
(4)
(73)
7,062
2,660
6,061
2,255
Share-based compensation cost
Unrecognised Expense Attributable to Each Plan
2010 Stock Option Plan
Time vesting options
Performance vesting options
EDIP
ELTIP
Time vesting shares
Performance vesting shares
Total unrecognised expense
98
Year ended
31 December 2015
Stock option
plans
521
EDIP
and ELTIP
7,182
31 December 2014
EDIP
and ELTIP
6,954
Stock option
plans
1,915
Total
7,703
Total
8,869
31 December 2015
31 December 2014
8
8,689
2,098
21
3,432
14,248
477
8,864
1,900
129
4,165
15,535
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 purchased pursuant to each programme.
Common Share Buy-Back Programme
Effective 1 April 2014, the Board approved the 2014 common share buy-back programme authorising the purchase for treasury of up to 15 million
common shares.
On 26 February 2015, the Board approved, with effect from 1 April 2015, the 2015 common share buy-back programme, authorising the purchase for
treasury of up to eight million common shares.
Common share buy-backs
Acquired number of shares (to the nearest 1)
Average cost per common share
Total cost (in Bermuda dollars)
Years ended
2015
2,503,707
1.94
4,862,248
2014
8,567,340
1.99
17,018,412
2013
4,038,482
1.39
5,610,907
2012
7,260,051
1.24
8,999,061
Total
22,369,580
1.63
36,490,628
Preference Share Buy-Back Programme
On 28 April 2014, the Board approved the 2014 preference share buy-back programme, authorising the purchase and cancellation of up to 26,600 preference shares.
On 26 February 2015, the Board approved, with effect from 5 May 2015, the 2015 preference share buy-back programme, authorising the purchase for
cancellation of up to 5,000 preference shares.
Preference share buy-backs
Acquired number of shares (to the nearest 1)
Average cost per preference share
Total cost (in Bermuda dollars)
2015
183
1,151.55
210,734
Years ended
2014
560
1,172.26
656,465
2013
11,972
1,230.26
14,728,624
2012
4,422
1,218.40
5,387,777
Total
17,137
1,224.46
20,983,600
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 each programme, provided no more than any such person’s pro-rata share of the listed securities is repurchased.
Pursuant to the BSX regulations, all repurchases made by any issuer pursuant to a securities repurchase programme must be made: (1) in the open
market and not by private agreement; and (2) for a price not higher than the last independent trade for a round lot of the relevant class of securities. See
Note 24, in which certain large one-time share buy-backs transactions are described.
NOTE 23: ACCUMULATED OTHER COMPREHENSIVE LOSS
The table below presents the changes in AOCL by component for the year ended:
Unrealised (losses)
on translation of
net investment in
HTM
31 December 2015 foreign operations investments
Balance at
beginning of year
Transfer of AFS
investments to
HTM investments
Other comprehensive
income (loss),
net of taxes
(10,506)
(2,715)
-
-
(3,139)
(13,645)
365
(2,350)
Balance at end of year
Employee benefit plans
Unrealised gains
(losses) on AFS
investments
Subtotal -
employee
healthcare benefits plans
Post-retirement
Pension
Total AOCL
9,021
(53,169)
(22,866)
(76,035)
(77,520)
2,715
-
-
-
-
(11,793)
(57)
6,838
(46,331)
(5,248)
(28,114)
1,590
(74,445)
(12,977)
(90,497)
Unrealised (losses)
on translation of
net investment in
foreign operations
HTM
investments
Employee benefit plans
Unrealised gains
(losses) on AFS
investments
Post-retirement
healthcare
Subtotal -
employee
benefits plans
Pension
Total AOCL
31 December 2014
Balance at
beginning of year
Other comprehensive
income (loss),
net of taxes
Reclassification to
accumulated deficit
Balance at end of year
(7,632)
(2,874)
-
(10,506)
-
-
-
-
(40,136)
(35,616)
6,724
(28,892)
(76,660)
99
40,085
(17,553)
(29,590)
(47,143)
(9,932)
9,072
9,021
-
(53,169)
-
(22,866)
-
(76,035)
9,072
(77,520)
BUTTERFIELD ANNUAL REPORT 2015
Net Change of AOCL Components
Line item in the consolidated
statements of operations, if any
Year ended
31 December 2015
31 December 2014
Net unrealised gains (losses) on translation of net
investment in foreign operations adjustments
Foreign currency translation adjustments
Gains on net investment hedge
N/A
N/A
Net change
Held-to-maturity investment adjustments
Net unamortised losses transferred
from AFS during the year
Amortisation of net losses to net income
Foreign currency translation
N/A
Interest income on investments
adjustments of related balances
N/A
Net change
Available-for-sale investment adjustments
Gross unrealised gains (losses)
arising during the year
Net unrealised losses transferred
to HTM during the year
Transfer of realised (gains)
losses to net income
Foreign currency translation
adjustments of related balances
Net change
Employee benefit plans adjustments
Defined benefit pension plan
Net actuarial gain (loss)
Amortisation of actuarial losses
Change in deferred taxes
Foreign currency translation
100
N/A
N/A
Net realised gains (losses) on AFS investments
N/A
N/A
Salaries and other employee benefits
N/A
adjustments of related balances
N/A
Net change
Post-retirement healthcare plan
Net actuarial (loss)
Prior service cost
Amortisation of net actuarial losses
Amortisation of prior service credit
Net change
Other comprehensive (loss), net of taxes
N/A
N/A
Salaries and other employee benefits
Salaries and other employee benefits
(9,723)
6,584
(3,139)
(2,715)
378
(13)
(2,350)
(16,337)
2,715
4,407
137
(9,078)
5,096
1,703
(391)
430
6,838
(2,252)
-
3,347
(6,343)
(5,248)
(12,977)
(10,574)
7,700
(2,874)
-
-
-
-
48,703
-
(8,680)
62
40,085
(18,947)
1,058
83
253
(17,553)
(15,892)
(7,901)
922
(6,719)
(29,590)
(9,932)
NOTE 24: CAPITAL STRUCTURE
Authorised Capital
The Bank’s total authorised share capital as of 31 December 2015 and 2014 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.
On 30 April 2015, Butterfield repurchased and cancelled 80,000,000 shares held by CIBC for $1.50 per share, for a total of $120 million. The remaining
CIBC shareholding in Butterfield (representing 23,434,232 shares) was taken up by Carlyle Global Financial Services, L.P. at $1.50 per share and
subsequently sold to other investors.
On 13 August 2015, Butterfield repurchased and cancelled 4,000,000 shares held by two shareholders for $1.49 per share, for a total of $5.96 million.
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 BMA, the Bank may redeem, in whole or in part, any preference shares at the
time issued and outstanding, at a redemption price equal to the liquidation preference plus any unpaid dividends at the time.
Holders of preference shares will be entitled to receive, on each preference share only when, as and if declared by the Board of Directors, non-cumulative
cash dividends at a rate per annum equal to 8.00% on the liquidation preference of US $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 4,320,613 warrants with an exercise price of $3.47 as at 31 December 2015.
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 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 are explained in detail in the prospectus of the rights offering. On 31 March 2015, all remaining CVCP
shares were converted to common shares at a ratio of 1:1.
Dividends Declared
During the year ended 31 December 2015, the Bank declared cash dividends totalling $0.05 (31 December 2014: $0.05) for each common share and
CVCP share on record (CVCP shares were all converted to common shares on 31 March 2015) as of the related record dates. During the years ended
31 December 2015 and 2014, the Bank declared the full 8.00% cash dividends on preference shares in each quarter.
The Bank is required to comply with Section 54 of the Companies Act 1981 issued by the Government of Bermuda (the “Companies Act”) each time
a dividend is declared or paid by the Bank and also obtain prior written approval from the BMA pursuant to the Banks and Deposit Companies Act
1999 for any dividends declared. The Bank has complied with Section 54 and has obtained BMA approval for all dividends declared during the periods
under review.
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 BMA
published final rules, effective 1 January 2009, with respect to the implementation of the Basel II framework. From this date the Bank has calculated its
capital requirement on the Standardised approach under Basel II requirements.
Effective 1 January 2015, the BMA adopted capital and liquidity regulatory requirements consistent with Basel III, a framework released by the
Basel Committee on Banking Supervision. The finalisation of the implementation is subject to ongoing consultation with the BMA regarding the
implementation and interpretation of these new rules. The Bank is assessing the impact of the adoption of this guidance. The impact will likely increase
capital requirements further and the Bank maintains adequate capital buffers to meet these requirements.
101
The Bank is fully compliant with all regulatory capital requirements and maintains capital ratios in excess of regulatory minimums as at 31 December
2015 and 2014. The following table sets forth the Bank’s capital adequacy in accordance with Basel II framework:
Capital
Tier 1 capital
Tier 2 capital
Total capital
Risk Weighted Assets
Capital Ratios (%)
Tier 1 common
Tier 1 Total
Total capital
31 December 2015
Regulatory
Actual minimum
699,173
119,163
818,336
N/A
N/A
N/A
31 December 2014
Actual
781,743
130,788
912,531
Regulatory
minimum
N/A
N/A
N/A
N/A
4,305,350
N/A
4,113,404
12.0%
16.2%
19.0%
N/A
4.0%
14.46%
14.6%
19.0%
22.2%
N/A
4.0%
14.64%
NOTE 25: INCOME TAXES
The Bank is incorporated in Bermuda, and pursuant to Bermuda law is not taxed on either income or capital gains. The Bank’s subsidiaries in the Cayman
Islands and The Bahamas are not subject to any taxes in their respective jurisdictions on either income or capital gains under current law applicable in the
respective jurisdictions. The Bank’s subsidiaries in the United Kingdom, Guernsey, and Switzerland are subject to the tax laws of those jurisdictions.
For the years ended 31 December 2015 and 2014, the Bank did not record any unrecognised tax benefits or expenses and has no uncertain tax positions
as at 31 December 2015 and 2014.
BUTTERFIELD ANNUAL REPORT 2015
The Bank records income taxes based on the enacted tax laws and rates applicable in the relevant jurisdictions for the years ended 31 December 2015
and 2014. For the years ended 31 December 2015 and 2014, the Bank did not incur any interest or pay any penalties.
Income taxes in consolidated statements of operations
Current tax expense (benefit)
Deferred tax expense
Total tax expense (benefit)
31 December 2015
819
457
1,276
31 December 2014
(169)
-
(169)
Year ended
Reconciliation Between the Effective Income Tax Rate and the Statutory Income Tax Rate
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
Other - net
Income tax expense (benefit) at effective tax rate
Deferred income taxes
Deferred income tax asset
Tax loss carried forward
Pension liability
Fixed assets
Allowance for compensated absence
Onerous leases
Deferred income tax asset before valuation allowance
102
Less: valuation allowance
Net deferred income tax assets
Deferred income tax liability
Other
Net deferred income tax asset
Year ended
31 December 2015
%
-
(1)
1
-
2
2
$
-
(904)
466
80
1,634
1,276
31 December 2014
%
-
2
(2)
(1)
1
-
$
-
1,501
(1,429)
(956)
715
(169)
31 December 2015 31 December 2014
2,540
365
741
9
11
3,666
(3,105)
561
-
561
2,641
800
1,067
10
11
4,529
(3,068)
1,461
-
1,461
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 year ended 31
December 2015. 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 2015, a valuation allowance of $3.1 million (31 December 2014: $3.1 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.
The Bank has net taxable loss carry forwards related to the Bank’s international operations of approximately $13.6 million (31 December 2014:
$12.3 million), which have an indefinite life.
NOTE 26: BUSINESS COMBINATIONS
Legis Acquisition
On 1 April 2014, the Bank via one of its subsidiaries, Butterfield Trust (Guernsey) Limited (“BTGL”), acquired all of the outstanding common shares
of Legis T & C Holdings Limited (“Legis”) for a maximum purchase price of up to $39.6 million. Legis is a Guernsey-based trust and corporate services
business. The acquisition was undertaken to enhance the Bank’s market presence and widen the Bank’s range of corporate and institutional trust services
for private clients and institutional and corporate clients.
The acquisition date fair value of the cash consideration transferred amounted to $34.8 million comprising cash settlement of $31.9 million paid on 1
April 2014 and a contingent consideration of $2.9 million. The contingent consideration is dependent on revenue performance and representation and
warranties being met. The undiscounted contingent consideration ranges from $2.3 million to $5.4 million. The fair value is calculated as the discounted
amount payable based on various case scenarios with equal probabilities assigned to the payouts being made under each scenario.
The fair value of the net assets acquired and allocation of purchase is summarised as follows:
Total consideration transferred
Assets acquired
Cash due from banks
Intangible assets
Other assets
Total assets acquired
Liabilities acquired
Excess purchase price (Goodwill)
As at 1 April 2014
34,757
1,466
15,466
158
17,090
1,624
19,291
The final consideration payable may differ from the initial estimated liability with any changes in the liability recorded in other gains (losses) in the
consolidated statements of operations until the liability is settled. Subsequent to the acquisition date, and primarily as a result of the change in payment
probabilities as estimates were updated for actual results, the estimated fair value of the contingent consideration liability increased to $3.7 million as at
31 December 2014. At 31 December 2015, the estimated fair value of the contingent consideration liability was down to $2.7 million primarily as a result
of payments made, as well as changes in expected payments to be made in accordance with the terms of the acquisition. The contingent consideration is
included in other liabilities in the consolidated balance sheets.
The purchase price paid by the Bank was for intangible assets in the form of customer relationships of $15.5 million with an estimated finite useful life of
15 years and resulting goodwill of $19.3 million. Goodwill is made up of expected cash flows to be derived from new business and expected synergies
resulting from leveraging existing support services and infrastructure within the Bank.
The Bank incurred transaction expenses, comprising legal and professional fees, related to the Legis acquisition in the amount of $1.2 million, which were
expensed during the year ended 31 December 2014.
Effective 1 April 2014, the operating results of Legis are included in the consolidated financial statements. For the year ended 31 December 2015, net
revenue of $7.8 million (31 December 2014: $6.4 million) and operating expenses of $6.2 million (31 December 2014: $4.9 million) from the Legis
business are included in the consolidated financial statements.
103
The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Bank and Legis,
assuming the transaction had been effected on 1 January 2014. The unaudited pro forma data is for informational purposes only and does not necessarily
represent results that would have occurred if the transaction had taken place on the basis assumed above. No unaudited pro forma data is prepared
for the year ended 31 December 2015 as the operating results of Legis were fully integrated throughout the year and are included in the consolidated
statements of operations.
For the year ended 31 December 2014
Total net revenue
Total non-interest operating expense (including income tax expense)
Pro forma net income post business combination
373,554
273,750
99,804
HSBC Acquisition
On 7 November 2014, the Bank via one of its subsidiaries, Butterfield Bank (Cayman) Limited (“BNTB Cayman”), acquired substantially all the retail loans
and deposits of HSBC Bank (Cayman) Limited (“HSBC Cayman”) for a cash purchase price of $5.3 million. The acquisition was undertaken to enhance
the Bank’s market presence and expand its community banking customer base in the Cayman Islands. The acquisition was accounted for as a business
combination as the Bank acquired substantially all the loans and deposits of HSBC Cayman and deemed to obtain control over the business.
Disclosure of the unaudited pro forma financial information to present a summary of the combined results of the Bank and HSBC Cayman acquisition is
impracticable for the year ended 31 December 2014. The disclosure is impracticable as the Bank did not acquire the legal entity and therefore does not
have access to the historical revenue and expense data as it relates to the loans and deposits acquired. No unaudited pro forma data is prepared for the
year ended 31 December 2015 as the operating results of HSBC Cayman were fully integrated throughout the year and are included in the consolidated
statements of operations.
BUTTERFIELD ANNUAL REPORT 2015
The fair value of the net assets aquired and allocation of purchase is summarised as follows:
Total consideration transferred
Assets acquired
Cash due from banks
Loans
Performing loans
Residential mortgages(a)
Government loans(a)
Commercial loans(a)
Other loans(a)
Purchased credit impaired loans - residential mortgages(a)
Accrued interest receivable
Total tangible assets acquired
Liabilities assumed
Deposits
Accrued interest payable
Total tangible liabilities assumed
Intangible assets(b)
As at 7 November 2014
Acquisition Fair value
value
adjustment
Fair
value
5,341
315,919
-
315,919
112,491
20,000
1,721
4,175
11,001
522
465,829
465,810
19
465,829
(1,784)
(120)
(21)
(43)
(3,804)
-
(5,772)
110,707
19,880
1,700
4,132
7,197
522
460,057
-
-
-
465,810
19
465,829
-
11,113
11,113
Excess purchase price (Goodwill)
-
(a)Adjustment reflects the fair value adjustments based on the Bank’s evaluation of the acquired loan portfolio. When assessing the fair value adjustment,
the Bank has considered prepayments for purchased credit impaired loans by estimating the future cash flows of liquidated collateral.
(b)Estimated finite useful life of 15 years.
104
The Bank incurred transaction expenses, comprising legal and professional fees, related to the HSBC Cayman acquisition in the amount of $1.6 million,
which was expensed during the year ended 31 December 2014.
NOTE 27: RELATED PARTY TRANSACTIONS
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 2015 amount to $207.2 million (31 December 2014: $208.0 million) resulting in an interest rate benefit to employees of $5.4 million
(31 December 2014: $6.4 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 2015, related
party Director loan balances were $61.1 million (31 December 2014: $58.0 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 2015, $nil (31 December
2014: $65.7 million) was outstanding under this agreement. For the year ended 31 December 2015, $1.0 million (31 December 2014: $2.7 million) of
interest income has been recognised in the consolidated statements of operations.
Capital Transaction
Investments partnerships associated with the Carlyle Group hold approximately 23% of the Bank’s equity voting power along with the right to designate
two persons for nomination for election by the shareholders as members of the Bank’s Board of Directors. Prior to 30 April 2015, Canadian Imperial Bank
of Commerce (“CIBC”) held approximately 19% of the Bank’s equity voting power. On 30 April 2015, the Bank completed the transaction with CIBC to
repurchase for cancellation approximately 77% of CIBC’s shares for $1.50 per share, or a total of $120 million, representing 80,000,000 common shares.
The remaining 23% of CIBC’s shareholding in Butterfield (representing 23.4 million shares) were taken up by Carlyle Global Financial Services, L.P. and
subsequently sold to other investors.
Financial Transactions With Related Parties
The Bank holds seed investments in several Butterfield mutual funds, which are managed by a wholly-owned subsidiary of the Bank. As at 31 December
2015, these investments have a fair value of $5.0 million with an unrealized gain of $0.9 million (31 December 2014: $5.0 million and $1.0 million
respectively) and were included in trading investments at their fair value. During the year-ended 31 December 2015, the Bank earned $6.4 million (2014:
$4.3 million) in asset management revenue from funds managed by a wholly-owned subsidiary of the Bank.
At 31 December 2014, the Bank held $239.3 million in cash due from banks with CIBC. As at 31 December 2014, the Bank held forward exchange
contracts with CIBC with a notional amount of $372.9 million with unrealised losses of $6.2 million. From 30 April 2015 onward, CIBC was no longer
considered a related party to the Bank.
Repurchase Facility Agreement
During 2013, the Bank entered into a repurchase agreement with CIBC for a $225 million line at market rates and terms. From 30 April 2015 onward,
CIBC was no longer considered a related party to the Bank. As at 31 December 2014 and since that time, the repurchase agreement balance with CIBC
was $nil.
NOTE 28: COMPARATIVE INFORMATION
Certain prior year figures have been reclassified or revised to conform to current year presentation.
During the year ended 31 December 2015, the Bank determined that certain investments classified as AFS for its operations in Guernsey and the United
Kingdom should have been classified as trading securities since 2011. There is no impact to comprehensive income or total shareholders’ equity in
previous years as a result of this mis-classification. The Bank has revised the relevant 2014 amounts presented in the comparative year’s results, and
presented the accumulated effect of these revised classifications prior to 2014 as an increase of $9.1 million to accumulated deficit and a corresponding
decrease to accumulated other comprehensive loss on 1 January 2014. Included in the $9.1 million amount are amounts of $15.5 million unrealised
losses, $0.9 million unrealised gains and $5.5 million unrealised gains relating to 2013, 2012 and 2011, respectively. Further, the 2014 revisions include
an increase and corresponding decrease of $9.8 million to net income and other comprehensive loss respectively as well as the re-classification of
$410.5 million of investments from AFS to trading.
NOTE 29: SUBSEQUENT EVENTS
Subsequent to year-end, the Bank’s subsidiary operating in the United Kingdom announced plans to commence an orderly wind-down of the deposit
taking and investment management businesses of Butterfield Bank (UK) Limited. As the announcement of the orderly wind-down was more likely than
not as of 31 December 2015, certain expenses relating to this were accrued for and expensed at 31 December 2015, as seen in Note 13: Exit Cost Obligations.
105
On 19 February 2016, the Board of Directors declared a fourth interim dividend of $0.01 per common share to be paid on 24 March 2016 to shareholders
of record on 11 March 2016.
On 19 February 2016, the Board approved, with effect from 1 April 2016, the 2015 common share buy-back programme, authorising the purchase for
treasury of up to eight million common shares.
The Bank has performed an evaluation of subsequent events through to 22 February 2016, the date the consolidated financial statements were approved
for issuance.
BUTTERFIELD ANNUAL REPORT 2015 106
SHAREHOLDER
INFORMATION
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 of the Bank
held by all Directors and Executive Officers* at 31 December 2015 was 5,598,576
shares. In addition, this group also has interests in 50 non-cumulative perpetual
MEDIA RELATIONS / PUBLICATION REQUESTS
Mark Johnson
Vice President, Communications, Brand & Public Affairs
Tel: (441) 299 1624
E-mail: mark.johnson@butterfieldgroup.com
limited voting preference shares. As of 31 December 2015, Executive Officers
also had interests in 10,790,000 stock options pursuant to the 2010 Stock Option
INVESTOR RELATIONS
Michael Schrum
Plan that vest in accordance with timelines established by the Plan. None of the
Executive Vice President, Chief Financial Officer
Directors or Executive Officers had any interest in any debt securities issued by the
Tel: (441) 298 4758
Bank or its subsidiaries as at 31 December 2015 and, as of that date, there were
E-mail: michael.schrum@butterfieldgroup.com
no other equity securities issued by the Bank.
Save for those arrangements described in Note 27 to the Bank’s
31 December 2015 consolidated financial statements, there are no contracts
WRITTEN NOTICE OF SHARE REPURCHASE PROGRAMME
— BSX REGULATION 6.38
The Bank renewed the Common Share Repurchase Programme for a twelve-month
of significance subsisting during or at the end of the financial year ended
period, with effect from 1 April 2016, authorising the purchase for treasury of up to
31 December 2015 in which a Director of the Bank is or was materially
eight million common shares.
interested, either directly or indirectly.
Under the Bank’s share buy-back programmes, the total shares acquired or
*As listed on pages 6 and 7 of this Annual Report. Please note that the
purchased for cancellation during the year ended 31 December 2015 amounted to
composition of the Group Executive Committee presented on page 7 reflects
2.5 million common shares to be held as treasury shares at an average cost of $1.94
revisions to membership that were effected subsequent to the year-ended
per share (total cost of $4.9 million) and 183 preference shares at an average cost of
31 December 2015. The figure as presented above includes three former members
$1,152 per share (total cost of $0.2 million).
From time to time, the Bank’s associates, insiders and insiders’ associates as
defined by the BSX regulations may sell shares, which may result in such shares
being repurchased pursuant to the Programme, but under BSX regulations, such
trades must not be pre-arranged and all repurchases must be made in the open
market. Prices paid by the Bank must not, according to BSX regulations, be higher
than the last independent trade for a “round lot” defined as 100 shares or more.
The Bank will advise the BSX monthly of shares repurchased and cancelled by
107
the Bank.
LARGE SHAREHOLDERS
As at 31 December 2015, the following were registered holders of 5% or more of
the issued share capital:*
Carlyle Global Financial Services Partners LP, 21.42%
Wellcome Trust Investments, 7.95%
Ithan Creek Master Investor (Cayman) LP, 7.29%
Rosebowl Western Ltd, 5.70%
Wyndham Holdings Inc., 5.17%
*Excludes treasury shares held.
of the Group Executive Committee who have retired or are no longer included on
the Group Executive Committee.
EXCHANGE LISTING
The Bank’s Shares are listed on the Bermuda Stock Exchange (BSX), which is
located at:
BERMUDA STOCK EXCHANGE
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
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
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
MUFG Fund Services (Bermuda) Limited
The Belvedere Building
69 Pitts Bay Road
Pembroke, HM 08
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
E-mail: bntbshareholders2@mfsadmin.com
BUTTERFIELD ANNUAL REPORT 2015
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
Butterfield Asset Management Limited
Investment Management
Managing Director: Michael Neff
65 Front Street
108
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
Rosebank Centre
11 Bermudiana Road
Hamilton, HM 08
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: Timothy Colclough
3rd Floor, Montague Sterling Centre,
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*
UK Residential Property Lending
Chief Executive Officer: Cameron Marr
99 Gresham Street
London, EC2V 7NG
United Kingdom
Tel: (44) 207 776 6700
Fax: (44) 207 776 6701
E-mail: info@uk.butterfieldgroup.com
*The deposit taking and investment management
businesses of Butterfield Bank (UK) Limited are being
wound down.
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
(retiring 26 April 2016)
Managing Director Designate: Michael McWatt
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
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
GUERNSEY
Butterfield Bank (Guernsey) Limited
Private Client and Institutional Banking, Credit,
Investment Management, Custody and Custodian
Trustee Services, Administered Banking
Managing Director: Richard Saunders
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 is committed to environmentally conscious printing. The
following savings to our natural resources were realised in the printing
of this Annual Report:
Energy: 5,000,000 BTUs
Trees: 11
Wastewater: 19,120 litres
Air Emissions: 422.7 kg
Solid Waste: 153.3 kg
The Bank of N.T. Butterfield & Son Limited
65 Front Street, Hamilton, Bermuda
www.butterfieldgroup.com