Profits fell but core earnings rose for Butterfield Bank in 2012, and that has allowed it to declare a four cent special dividend — the first payment on common shares since dividends were suspended four years ago.The bank’s profit was $25.6 million, a fall of 37 percent on the previous year’s $40.5 million. Butterfield absorbed losses on one-time items of $29.3 million, but managed to raise core earnings by 45.2 percent to $54.9 million.Offering a special dividend to shareholders is seen as a symbolic gesture of thanks to investors who stood by the bank during the past few years, said CEO and chairman Brendan McDonagh.Shortly after the release of Butterfield’s financial statement for the past year, Mr McDonagh emphasised the positives of rising core earnings, the bank’s increasing stability and its special dividend to investors.“Clearly Butterfield is on a journey and it started two or three years ago with the recapitalisation,” he told The Royal Gazette.While the bank has seen an increase in non-performing loans, primarily in residential mortgages, which are $17.5 million higher year-on-year, it said it is working with customers experiencing financial difficulties. Butterfield is closely monitoring its loan portfolio, which up to the end of December had a total of $141.8 million in loans that were past due by 90 days or more. That figure is $13.2 million higher than 2011.Characterising 2012 as a “pleasing year”, Mr McDonagh said that was illustrated by the bank sharing $22 million with investors through its $0.04 special dividend. While the amount might not be what shareholders have historically been used to, Mr McDonagh said: “It’s the right step, putting money back in shareholders hands for being loyal and staying with us.”He said Butterfield was restoring its long-term, sustainable profitability. The bank has a capital ratio of 24.2 percent.“In 2012, the Bank made solid progress, selling non-core holdings, streamlining and coordinating operations across jurisdictions, focusing on effective expense management and instituting a Share Buy-Back Programme,” Mr McDonagh said in a statement, before going into more detail during an interview with this newspaper.The bank’s share buy-back programme, which saw 7.3 million common shares purchased in 2012, will continue.Butterfield reduced operating expenses from $286.6 million to $274.2 million year-on-year. Much of those savings came from lower salaries and employee benefits due to reducing the staff headcount by 60. Other savings were made by introducing office efficiencies, a reduced reliance on outside consultants, and the increasing use online banking, ATMs and call centres by clients.These savings were offset by a $3.8 million increase in technology and communications costs driven by depreciation expenses.Butterfield’s investment portfolio increased $0.8 billion to $2.9 billion. Chief financial officer Brad Rowse said this was largely due to longer-term assets such as a net increase in US government agency securities.The bank has seen a $200 million drop in average customer deposits to $7.2 billion. It also generated a $29.3 million net loss on one-time items. Explaining this, Mr McDonagh said that, as the bank returned to higher levels of profitability, it was looking at its balance sheet and recognising the “true value” of some assets. In doing so, he said: “We had some legacy goodwills and intangibles relating to prior year acquisitions which we believed the value of that goodwill was hard to justify in the current environment. So in agreement with our external auditors and regulators we believe the best thing to do was to recognise that and write off those intangibles and goodwill.”He added: “In Bermuda we have a number of our own properties, which have had an historical value in our balance sheet and based on what we believe is more today’s value we decided we would use our strong capital position to write those down. Those were offset by the one-off gains from the sale of our Barbados subsidiary and the sale of insurance subsidiary Island Heritage.”Regarding the increase in non-performing loans, including residential mortgages, Mr McDonagh said it was a concern but was less of a problem than in many other places due to a number of Bermuda factors.He pointed out there tended to be more family support involved in paying a mortgage, the Island’s properties tended to have “positive value” and therefore homeowners were doing more to hang on to their property, and thirdly there appeared to be a much lower level of personal debt in Bermuda than in other countries.Mr McDonagh said the bank has added resources to it consumer lending team to work with customers to find solutions. “We do not believe it’s in anyone’s interest to go the foreclosure route,” he said.Butterfield’s net revenue before gains (losses) and credit provisions was $339.6 million in 2012, up $4.9 million from $334.7 million in 2011, primarily reflecting a $3.9 million decrease in non-interest income offset by stronger net interest income, up $8.8 million from the prior year.Mr McDonagh said the improvement in the bank’s core earnings had come from “building on our very strong capital position with total and tier 1 capital ratios of 24.2 percent and 18.5 percent respectively”.In a statement released with the end of year figures, he said: “The Board continues to monitor capital levels, maintaining a conservative capital management philosophy such that Butterfield remains well capitalised.“The 6.6 percent core cash return on tangible common equity achieved in 2012 represents an improvement over 2011, but remains below acceptable levels. This is partially a reflection of the continuing economic challenges in our largest markets."The bank stated: “Provisions for credit losses were $14.2 million in 2012, an increase of $1 million from $13.2 million in the prior year, reflecting relatively stable portfolios amidst the ongoing economic challenges in Butterfield’s major markets.”