Butterfield Bank, the Island?s oldest financial services firm, yesterday said profit surged 20 percent last year, as the bank benefited from its highest ever increase in interest income.

Across the group, results varied: Net income in the Bermuda operations slid an estimated 22 percent while operations in the Cayman Islands recorded an 85.3 percent surge in earnings.

And for the first time ever, Butterfield saw the number of employees it has internationally outstrip its staffing in Bermuda. The bank has in recent years expanded its presence in both the Caribbean, particularly in the Cayman Islands, and the UK through several acquisitions.

Overall, Butterfield?s net income in 2005 grew by 20.9 percent to $109.4 million, or $4.23 a share, compared to a profit of $90.5 million in 2004 , or $3.51 a share, the company said in a year-end earnings announcement.

Net interest income of $182.2 million was 23 percent higher while non-interest income contributed nearly half of the bank?s total 2005 revenues, rising ten percent year-on-year to $172.1 million.

A bank?s net interest income is derived from interest it earns on assets such as loans, investments and inter-bank placements.

While it earns interest in some areas, a bank also pays out interest to customers of its interest-bearing deposits. The difference between the interest it earns and pays is net interest income. The rate that a bank earns or pays interest is dependent on whether interest rates, which fluctuate country by country, are high or low. Bermuda banks tend to be significantly influenced by US interest rates, which have been rising since mid-2003.

?We got a benefit? from rising US interest rates, Mr. Thompson said, adding that the bank also saw higher interest income because its loan portfolio grew. Loans generally earn more interest than investments or inter-bank placements because of carrying a higher risk of customer defaults.

The bank saw a 16.6 percent increase in its loan portfolio last year, rising to $3.1 billion. The growth was driven by higher demand across the group. The largest increase came from Bermuda customers, with loans on the Island increasing 20.5 percent. Local consumers borrowed $120 million more through personal loans, mortgages and by adding to credit card debt. Commercial customers borrowed an additional $240 million.

Butterfield said its total return on equity rose 23.6 percent last year, on top of a 21.2 percent improvement in 2004. The bank sets a target of making a 20 percent return, or better, on equity each year, something it has achieved over the past two years.

?My view is that if you are over 20 percent you are an A,? said Mr. Thompson, who took over management of the bank in 2002. ?If you look across banks, the top performing banks are above 20 percent, and we want to be in the top.?

Richard Ferrett, chief financial officer, said the bank?s strong returns reflected ?growth in our customer deposit base and loan portfolio, the successful integration of our acquisitions in 2003 and 2004, and increased revenues generated by our asset management and fund administration business?.

Growth generally leads to higher costs for salary and benefits, and operations as staff added. Butterfield said expansion pushed personnel-related expenses up 13.2 percent in 2005 to $144.3 million. Overall, operating expenses rose to $244.2 million, a 9.8 percent year-on-year increase.

While costs rose, this was offset by higher revenues: Butterfield?s operations generated $344.1 million, a 14.1 percent increase over the $300.1 million recorded in 2004.

This means that revenue outstripped growth in costs sending the company?s efficiency ratio, ameasure of how well a firm has managed its expenses, down to 66.4 percent from 69.1 percent in 2004.

Contributing to higher personnel costs in Bermuda was an increase in the payroll tax rate levied by Government, Butterfield said. It also paid out $6.2 million during the year to maintain or make improvements to its properties on the Island.

The bank?s purchase of the Bermuda Monetary Authority Building on Burnaby Hill last year has no bearing on the company?s earnings, Mr. Ferrett said. The bank is not disclosing what it paid for the property. Mr. Thompson said the bank intends to use the new building to house its private banking business, a lucrative division currently housed in Butterfield?s Front Street headquarters.

Net income last year from Butterfield?s Bermuda operations fell to $52.9 million, less than half the group?s total profit, and 22 percent lower than a year earlier. In 2004, Bermuda net income was $68.7 million, or 75.9 percent of total profit.

Revenue from Bermuda operations was $13.9 million higher in 2005, rising to $200.1 million, or 58 percent of the group?s total for the year. Mr. Thompson said Bermuda contributed less to overall group revenues, on a percentage basis, in 2005 largely due to the surge in business, and profit, recorded by Butterfield?s Cayman operations.

Butterfield?s Cayman Islands operation, the second largest part of the group, saw net income of $45.8 million, an 85.3 percent increase over the year before. In its earnings statement, Butterfield said the Cayman operations? results ? producing a 33 percent return on equity ? reflected ?the robustness of the Cayman economy over the past year after Hurricane Ivan,? the devastating storm that nearly flattened the territory in 2004.

Butterfield added three Bermuda staff last year, bringing staffing to 789. It has 808 staff outside Bermuda, making 2005 the first year that it has had more employees internationally than on the Island. Mr. Thompson said the change ?primarily reflects growth in Cayman?, with that part of the group now having the second largest concentration of staff. Butterfield has 317 employees in the Caymans.

?We hope for all areas to do well? in 2006, Mr. Thompson said. While he expects the Cayman operations to continue to contribute strongly to the group?s profit, it won?t see the growth it saw in 2005. ?The reality is Cayman is not going to sustain an 80 percent improvement in earnings. That is just not sustainable. We think they can retain the same level of profitability but not the same level of growth going forward.

?We continue to be optimistic about Bermuda. The economy continues to be good,? Mr. Thompson said, and predicted that Leopold Joseph, a private UK bank that Butterfield bought in 2004 would produce a profit in 2006. The bank recorded a loss in 2004, and broke even in 2005.

Mr. Ferrett said Butterfield shareholders saw a 31.4 percent increase in value over the year. That means if you owned $100 worth of Butterfield shares on January 1, 2005 by the end of December those shares would be worth $131. 40.

The bank also said yesterday it was raising its quarterly dividend by three cents to 44 cents a share, its first increase in a year. The dividend is to be paid on March 6 to those owning shares by next Thursday. Over the past three years, the Bank has consecutively boosted its dividend payment by three cents a year. The bank also in August awarded shareholders a ?1 for 10? stock issue.

Butterfield investors yesterday reacted favourably to the 2005 results announcement, pushing the share price up $2, or 3.6 percent, to $57, an all-time high, in trading on the Bermuda Stock Exchange. The increase gives Butterfield the highest market capitalisation of any financial services firm to trade on the BSX.

The Bank of Bermuda had a market capitalisation of $1.2 billion when it was targeted in September, 2003 for acquisition by HSBC Plc. It was delisted from the BSX once the HSBC purchase closed in February 2004. At the time, the Bank of Bermuda bid was made by HSBC, Butterfield had an $835 million market capitalisation. Butterfield?s market capitalisation yesterday stood at $1.5 billion.