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16 April 2008
Alan Thompson, President & Chief Executive Officer, Reports toShareholders at the Annual General Meeting

(Transcript of Mr. Thompson’s Address Follows)

 

GOOD AFTERNOON, LADIES AND GENTLEMEN.


THIS AFTERNOON, I WILL BRIEFLY REVIEW THE OPERATING HIGHLIGHTS OF THE BANK IN 2007.

 

TO PICK UP ON OUR CHAIRMAN’S COMMENTS, I BELIEVE THAT A REVIEW OF OPERATIONS SHOULD NOT BE LIMITED TO JUST THE NUMBERS, IT SHOULD INCLUDE MENTION OF WHAT WE HAVE ACCOMPLISHED IN THE CONTEXT OF ALL OF THE ELEMENTS OF OUR MISSION.

 

AFTER ALL, IT IS THE CHARACTER OF THE INSTITUTION, OUR PLACE IN THE COMMUNITY AND THE QUALITY OF THE PEOPLE WHO WORK HERE THAT ARE THE REASONS BEHIND OUR SUCCESS.


FROM THE VERY BEGINNING – WHEN NATHANIEL T. BUTTERFIELD BEGAN TO USE HIS PERSONAL NETWORK OF INTERNATIONAL BUSINESS CONTACTS TO PROVIDE FINANCING AND INTERNATIONAL CLEARING SERVICES TO CLIENTS AND SUPPLIERS OF HIS DRY GOODS BUSINESS – BANKING THE BUTTERFIELD WAY HAS BEEN ABOUT MAKING THINGS EASIER FOR CUSTOMERS.


BECAUSE THERE IS NOT ALWAYS A CLEAR DISTINCTION BETWEEN CUSTOMERS, SHAREHOLDERS AND EMPLOYEES, THROUGHOUT OUR 150-YEAR HISTORY, BUTTERFIELD BANK HAS TAKEN A BALANCED VIEW
OF OBLIGATIONS TO OUR VARIOUS STAKEHOLDERS.

 

AFTER ALL, STRENGTHENING OUR FRANCHISE TO CREATE VALUE FOR OUR SHAREHOLDERS DEPENDS ON CONTINUING TO BRING WORLD-CLASS SOLUTIONS TO CUSTOMERS, PROVIDING OPPORTUNITIES FOR EMPLOYEES, AND DOING OUR PART TO MAKE OUR COMMUNITIES HEALTHIER, BETTER EDUCATED AND MORE PROSPEROUS.


IT IS THAT VIEW THAT HAS LED US TO WHERE WE ARE TODAY AS AN ORGANISATION OF 1,850 EMPLOYEES IN TEN COUNTRIES WHO ARE FOCUSED ON DEVELOPING CUSTOMER RELATIONSHIPS BASED UPON A DEPTH OF KNOWLEDGE IN THEIR RESPECTIVE FIELDS AND A GENUINE INTEREST IN CUSTOMERS’ FINANCIAL WELL BEING.

INTERNATIONALLY, OUR STRENGTHS INCREASINGLY LIE IN PRIVATE BANKING AND WEALTH MANAGEMENT. WE HAVE ALSO BUILT OUR FUND SERVICES BUSINESS INTO A TOP-TWENTY FIRM IN THE FIELD.


FINANCIALLY, TODAY WE ARE STRONG. OUR BALANCE SHEET IS IN GOOD SHAPE, WITH OUR LOAN TO CUSTOMER DEPOSITS RATIO AT 39.5% AT YEAR END – RELATIVELY CONSERVATIVE BY INTERNATIONAL STANDARDS. AND THE GROUP REMAINS WELL CAPITALISED WITH A TOTAL CAPITAL RATIO OF 13% AND A TIER 1 RATIO OF 8.6%.

IN THE LATTER HALF OF 2007, THE GLOBAL FINANCIAL SYSTEM FACED SEVERE CHALLENGES CONNECTED
TO THE COLLAPSE OF THE U.S. SUBPRIME MORTGAGE MARKET. VENERABLE INSTITUTIONS FROM NORTHERN ROCK IN THE U.K. TO BEAR STEARNS IN THE U.S. HAVE COME CLOSE TO COLLAPSE BECAUSE OF THE TURMOIL IN THE MARKETS.


BUTTERFIELD BANK HAS WEATHERED THE STORM WELL DUE TO A NUMBER OF FACTORS, INCLUDING THE GEOGRAPHIC AND BUSINESS LINE DIVERSITY WE HAVE BUILT INTO OUR OPERATIONS, AND THE BANK’S CONSERVATIVE APPROACH TO LENDING AND INVESTING.


AS AT DECEMBER 31ST 2007, THE BANK’S INVESTMENTS IN U.S. RESIDENTIAL COLLATERALISED MORTGAGE OBLIGATIONS TOTALLED $479 MILLION, WITH A FAIR VALUE OF $371 MILLION, REFLECTING THE GENERAL WIDENING OF CREDIT SPREADS. BASED ON OUR ANALYSIS, WE BELIEVE THE BANK WILL COLLECT ALL AMOUNTS DUE.


DURING THE FIRST HALF OF 2007, THE BANK CEASED FURTHER MARKET PURCHASES OF ASSET BACKED SECURITIES, WHICH PROVED A WISE DECISION.


IN 2007, THERE WAS AN UNREALISED LOSS OF $6.25 MILLION ON A CREDIT DERIVATIVE TRANSACTION
WITH THE BANK’S MONEY MARKET FUND, WHERE THE BANK PROVIDED FINANCIAL SUPPORT TO PROTECT INVESTOR INTERESTS.


WE ARE CAREFULLY MONITORING THE ECONOMIC SITUATION IN THE U.S. AND ITS IMPACT ON OUR BUSINESSES.


OUR BUSINESSES AROUND THE WORLD CONTINUED TO PERFORM IN LINE WITH OR BETTER THAN EXPECTATIONS, WE WERE ABLE TO DELIVER RECORD PROFITS OF $146 MILLION (UP 8.9%) ON RECORD REVENUES OF $470 MILLION (UP OVER 13%).


ASSETS GREW BY 7% TO JUST UNDER $12 BILLION, DRIVEN IN PART BY AN INCREASE IN THE SIZE OF THE LOAN BOOK OF NEARLY 10%. CUSTOMER DEPOSITS WERE ALSO UP BY 7%.

 

ASSETS UNDER ADMINISTRATION GREW BY ALMOST 18% TO REACH $145.7 BILLION. ASSETS UNDER MANAGEMENT ALSO GREW BY NEARLY $2 BILLION TO REACH $11.9 BILLION, THANKS IN PART TO GROWTH IN THE BUTTERFIELD FUNDS OF AROUND $200 MILLION DURING 2007.

 

OUR EFFICIENCY RATIO, WHICH MEASURES NON INTEREST EXPENSES AGAINST REVENUE, DECLINED BY 0.9% VERSUS OUR 2006 FIGURE, THE INCREASE REFLECTING EMPLOYEE-RELATED EXPENSES AND SIGNIFICANT INVESTMENT IN OUR CORE BUSINESSES. ALTHOUGH OUR 2007 RATIO WAS ACCEPTABLE, WE ARE WORKING AT IMPROVING IT GOING FORWARD.

 

ON A DILUTED PER SHARE BASIS, EARNINGS INCREASED BY 15 CENTS YEAR ON YEAR, TAKING THE AUGUST STOCK SPLIT INTO ACCOUNT.

 

THE INCREASE IN SHAREHOLDER VALUE, DEFINED AS THE INCREASE IN SHARE PRICE PLUS REINVESTMENT OF DIVIDENDS, WAS MUCH LOWER IN 2007 THAN IN 2006, AT UNDER 1%, DESPITE OUR RECORD RESULTS AND UNINTERRUPTED DIVIDEND PAYMENTS. THAT’S BECAUSE OUR SHARE PRICE – LIKE MANY FINANCIAL STOCKS – DECLINED DURING THE LAST TWO QUARTERS OF THE YEAR, PERHAPS PARTLY ATTRIBUTABLE TO NEGATIVE MARKET SENTIMENTS TOWARD BANK STOCKS. AS POINTS OF COMPARISON, THE NASDAQ BANK INDEX FOR 2007 WAS DOWN 19.8% AND THE FTSE ALLSHARE BANK INDEX WAS DOWN 16.9% DURING THE YEAR.

 

DESPITE A SLIGHT DIP IN RETURN ON ASSETS IN 2007, YOU CAN SEE CONSISTENT, POSITIVE TRENDS ACROSS ALL MEASURES OF SHAREHOLDER VALUE OVER THE LAST FIVE YEARS, WHICH I BELIEVE IS A STRONG ENDORSEMENT OF OUR STRATEGY OF JUDICIOUS EXPANSION OF OUR CORE BUSINESSES.

 

IN KEEPING WITH THAT STRATEGY, IN 2007, WE ESTABLISHED A NEW TRUST BUSINESS IN GENEVA DURING THE YEAR, ENHANCING OUR PRESENCE IN THE EUROPEAN WEALTH MANAGEMENT MARKET.

 

WE ADDED FURTHER TO OUR PRIVATE CLIENT CAPABILITIES WITH THE ACQUISITION OF BENTLEY REID GROUP WITH OFFICES IN HONG KONG, LONDON AND MALTA. TO HELP US CAPTURE A SHARE OF THE RAPIDLY EXPANDING FAMILY OFFICE BUSINESS INTERNATIONALLY, WE ESTABLISHED BUTTERFIELD INTERNATIONAL PRIVATE OFFICE LIMITED AS A GROUP SUBSIDIARY IN LONDON.

 

HELPING SOLIDIFY OUR PRESENCE AS A LEADING FULL-SERVICE FINANCIAL INSTITUTION IN THE CAYMAN ISLANDS, WE REPLACED OUR WEST SHORE BRANCH WITH A NEW BRANCH AT GOVERNORS SQUARE IN GEORGE TOWN, AND DEDICATED BUTTERFIELD PLACE – OUR NEW SEVEN-STOREY CAYMAN HEADQUARTERS, SET TO OPEN
THIS SPRING.


IN THE CUSTOMER-CENTRIC BUTTERFIELD TRADITION, IN 2007, WE BROUGHT SOME TRULY EXCEPTIONAL PRODUCTS TO THE MARKET. IN BERMUDA, WE INTRODUCED MASTERCARD BLACK, THE FIRST ABOVE-PLATINUM CARD AVAILABLE ON THE ISLAND, AND THE BRITISH AIRWAYS VISA PLATINUM CARD, WHICH HAS BEEN VERY WELL RECEIVED.


IN BARBADOS, WE INTRODUCED ONLINE BANKING SERVICES, SOMETHING THAT OUR CUSTOMERS HAD BEEN ASKING FOR AND WHICH PUTS US IN A MUCH BETTER POSITION TO COMPETE AND BUILD MARKET SHARE.

 

BUTTERFIELD ASSET MANAGEMENT INTRODUCED A NEW FUND – THE SYSTEMATIC EQUITY FUND – THAT INVESTS IN CANADIAN EQUITIES, AND IN CAYMAN, BAM INTRODUCED MACRO EXCHANGE TRADED PORTFOLIOS, OFFERING CUSTOMERS ACCESS TO INTERNATIONAL MARKETS THROUGH A MANAGED PORTFOLIO OF EXCHANGE TRADED FUNDS.

 

TO OFFER OUR CUSTOMERS ACCESS TO THE PRIVATE EQUITY MARKET AT A SIGNIFICANTLY LOWER COMMITMENT THAN IS NORMALLY REQUIRED, WE ALSO INTRODUCED BAM PRIVATE EQUITY PARTNERS I, LIMITED PARTNERSHIP IN COOPERATION WITH THE CARLYLE GROUP.

 

OUR VARIOUS LINES OF BUSINESS – FROM WEALTH MANAGEMENT TO LENDING – BOTH FACILITATE AND BENEFIT FROM INCREASED PROSPERITY IN THE COMMUNITIES IN WHICH WE OPERATE. THEREFORE, WE ARE PLEASED TO HAVE BECOME INVOLVED WITH NEW INITIATIVES DESIGNED TO GIVE BACK TO THE COMMUNITIES WE CALL HOME.


KEY AMONG THESE WAS THE INTRODUCTION OF A NEW MEDICAL SCHOLARSHIP NAMED IN HONOUR OF FORMER BANK CHAIRMAN, DR. JAMES KING. WE ALSO BECAME A FOUNDING MEMBER OF RECYCLE BERMUDA – A GOVERNMENT SPONSORED INITIATIVE TO PROMOTE THE RECYCLING OF TIN, ALUMINIUM AND GLASS.

 

TO CELEBRATE OUR 150TH ANNIVERSARY, WE ALSO RECENTLY ANNOUNCED A PROGRAMME UNDER WHICH WE HAVE EARMARKED $5 MILLION WORTH OF BANK SHARES FOR THE ESTABLISHMENT OF ENDOWMENTS TO SUPPORT THE LONG-TERM FUNDING OF LOCAL CHARITIES. THE SUCCESSFUL RECIPIENTS OF THE ENDOWMENT FUNDS WILL BE ANNOUNCED IN LATE MAY.


FOR ALL OF THESE REASONS – SOLID PERFORMANCE AGAINST A BACKDROP OF FINANCIAL TURMOIL, OUR FOCUS ON MEETING THE NEEDS OF CUSTOMERS AND OUR PRACTICE OF GIVING BACK TO OUR COMMUNITIES – BUTTERFIELD BANK RECEIVED SEVERAL AWARDS FROM INTERNATIONALLY-RECOGNISED AUTHORITIES ON THE BANKING INDUSTRY.


WE RECEIVED “DEAL OF THE YEAR” FROM THE BANKER IN 2007 FOR A 2006 RIGHTS OFFERING WE ARRANGED FOR BERMUDA AVIATION SERVICES. WE WERE THE RECIPIENT OF GLOBAL FINANCE’S “BEST DEVELOPED MARKET BANK” IN 2007, AND IT WAS RECENTLY ANNOUNCED THAT WE AGAIN RECEIVED THIS HONOUR FOR 2008. EUROMONEY NAMED US BEST BANK AND BEST PRIVATE BANK IN BERMUDA, AND BEST PRIVATE BANK IN THE CARIBBEAN REGION.

 

TURNING TO THE SPECIFIC PERFORMANCE OF EACH OF OUR JURISDICTIONS… IN BERMUDA, INCOME WAS UP MODESTLY ON REVENUE INCREASES OF 7.8%. LOANS WERE UP 12.8%, HELPING PUSH ASSETS UP TO OVER $5.5 BILLION. ASSETS UNDER MANAGEMENT WERE UP 18.7%, REFLECTING STRONG PERFORMANCE BY OUR ASSET MANAGEMENT BUSINESS, WHILST ASSETS UNDER ADMINISTRATION INCREASED BY 6.1% TO $53 BILLION.

 

IN THE BAHAMAS, WE ENJOYED STRONG GROWTH IN 2007. ASSETS UNDER ADMINISTRATION GREW BY 40%, PARTLY DUE TO GOOD GROWTH IN OUR INVESTMENT AND PENSION FUND ADMINISTRATION BUSINESS. THE LOAN BOOK INCREASED BY AN IMPRESSIVE 205%, DUE TO STRONG DEMAND FOR INTERNATIONAL MORTGAGE PRODUCTS.
 

IN BARBADOS, INCOME WAS DOWN, REFLECTING SIGNIFICANT INVESTMENT IN THE INFRASTRUCTURE OF
OUR OPERATIONS THERE TO SUPPORT FUTURE BUSINESS GROWTH. REVENUES WERE IN LINE WITH LAST YEAR, WHILE CUSTOMER DEPOSITS WERE UP NEARLY 35% TO $226 MILLION.

 

OUR FUND SERVICES OPERATION IN HALIFAX, CANADA, WHICH SERVES AS A BACK OFFICE PRIMARILY FOR OUR CAYMAN AND BERMUDA FUND SERVICES BUSINESSES, FOCUSED ON HIRING DURING THE YEAR. WE NOW HAVE 37 EMPLOYEES THERE, SIGNIFICANTLY EASING THE PRESSURE ON OUR FUND ADMINISTRATION TEAMS HERE AND IN CAYMAN, MAKING IT EASIER FOR US TO TAKE ON NEW BUSINESS IN THIS AREA.

 

IN CAYMAN, NET INCOME WAS UP BY JUST OVER 7% ON REVENUES THAT INCREASED BY 16%. GROWTH IN THE LOAN BOOK WAS ESSENTIALLY FLAT, WITH COMMERCIAL DEMAND OFFSETTING THE DECLINE IN CONSUMER MORTGAGE DEMAND AS REBUILDING EFFORTS FOLLOWING 2004’S HURRICANE IVAN NEAR COMPLETION. ASSETS UNDER ADMINISTRATION GREW BY OVER 30% TO $53 BILLION, REFLECTING STRONG GROWTH IN OUR FUND ADMINISTRATION BUSINESS.

 

THE GUERNSEY BUSINESSES AGAIN DELIVERED GOOD GROWTH, WITH INCOME UP BY NEARLY 50% ON REVENUE GROWTH OF 28%. PARTICULARLY STRONG PERFORMANCES WERE SEEN IN FUND SERVICES AND INSTITUTIONAL CUSTODY.

 

WITH THE ACQUISITION OF BENTLEY REID GROUP IN LATE OCTOBER, WE EXPANDED OUR WEALTH MANAGEMENT SERVICES TO TWO NEW JURISDICTIONS – HONG KONG AND MALTA. IN HONG KONG, WE PICKED UP A SIGNIFICANT BOOK OF PRIVATE CLIENT BUSINESS – MOSTLY EXPATRIATE CLIENTELE –THAT WILL BE A GOOD FOUNDATION FOR FUTURE GROWTH IN ASIA. THE MALTA OPERATION PROVIDES A NEW TRUST JURISDICTION THAT WE WILL UTILISE TO SERVE OUR PERSONAL AND COMPANY CLIENTS.
 

BENTLEY REID’S U.K. BUSINESSES ARE AN EXCELLENT COMPLEMENT TO OUR LONDON-BASED PRIVATE
BANK.

 

IN SWITZERLAND, WE ESTABLISHED A NEW TRUST SUBSIDIARY IN GENEVA IN LATE 2007, WHICH OFFICIALLY OPENED FOR BUSINESS IN JANUARY THIS YEAR. IT WILL SERVE AS A COUNTERPART TO THE ZURICH-BASED ASSET MANAGEMENT BUSINESS ESTABLISHED IN 2006. THE LATTER GENERATED REVENUES OF $200,000 AND CLIENT ASSETS UNDER ADMINISTRATION OF $77 MILLION DURING 2007.

 

IN THE U.K., WE CONTINUED TO MAKE GOOD PROGRESS. NET INCOME WAS UP MORE THAN 300% ON REVENUES THAT INCREASED SOME 27%. REVENUE GROWTH WAS ATTRIBUTABLE TO GROWTH IN NET INTEREST INCOME, UP 45%, AND REVENUES FROM BANKING AND CLIENT-DRIVEN FOREIGN EXCHANGE, UP 25% AND 63%, RESPECTIVELY. ASSETS UNDER MANAGEMENT WERE ALSO UP SIGNIFICANTLY, TOTALLING $722 MILLION AT YEAR END DUE TO THE ACQUISITION OF BENTLEY REID GROUP.

 

2007 WAS A GOOD YEAR FOR THE BANK AND OUR RESULTS, ONCE AGAIN, VALIDATE THE EFFICIENCY OF OUR STRATEGY. THEREFORE, WE WILL CONTINUE TO PURSUE THE SAME COURSE GOING FORWARD – GROWING OUR CORE BUSINESSES ORGANICALLY AND THROUGH APPROPRIATE ACQUISITIONS AND PARTNERSHIPS.

 

EXPANDING OUR WEALTH MANAGEMENT AND PRIVATE BANKING CAPABILITIES BOTH DOMESTICALLY AND INTERNATIONALLY WILL CONTINUE TO BE A KEY AREA OF FOCUS.

IN TERMS OF SPECIFIC PRIORITIES, WE WILL CONTINUE TO STRIVE TO DELIVER A RETURN ON EQUITY OF AT LEAST 20%.

 

WE WILL CONTINUE TO WORK TO CONTROL COSTS AND HOLD THE EFFICIENCY RATIO AT AN APPROPRIATE LEVEL.
WE WILL ALSO CONTINUE TO FOCUS ON STRENGTHENING OUR TECHNOLOGICAL CAPABILITIES FOR THE
BENEFIT OF EMPLOYEES AND CUSTOMERS.

 

WE WILL CONTINUE TO BUILD IMPROVED GEOGRAPHIC BALANCE INTO OUR FINANCIAL RESULTS, WHILE
ENSURING THAT WE DON’T LET OUR LEADING MARKET POSITIONS IN BERMUDA AND CAYMAN BECOME ERODED.
COMPLEMENTING INVESTMENT IN OUR BUSINESSES, WE WILL ALSO BE DOING WORK TO HELP INCREASE AWARENESS AND RECOGNITION OF THE “BUTTERFIELD” BRAND ACROSS OUR MULTIPLE MARKETS.

 

IN CONCLUSION, I WOULD LIKE TO EXPRESS SINCERE GRATITUDE TO ALL OF THE EMPLOYEES OF BUTTERFIELD BANK GROUP, PAST AND PRESENT. IT IS THANKS TO THE CREATIVITY, CARE AND DEDICATION OF GENERATIONS OF STAFF MEMBERS THAT WE HAVE BEEN ABLE TO CONSISTENTLY DELIVER VALUE TO OUR SHAREHOLDERS.
 

IN MARKING OUR SESQUICENTENNIAL THIS YEAR, I WOULD ALSO LIKE TO THANK OUR BOARD FOR
THEIR VISION AND OVERSIGHT. WITH THEIR SUPPORT AND DIRECTION, THE FUTURE REMAINS BRIGHT
FOR BUTTERFIELD BANK GROUP.

 

– END –

 

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