6-K
Bank of N.T. Butterfield & Son Ltd (NTB)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of October, 2020
Commission File Number: 001-37877
The Bank of N.T. Butterfield & Son Limited
(Translation of registrant’s name into English)
65 Front Street
Hamilton, HM 12
Bermuda
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F ý Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
DOCUMENTS INCLUDED AS PART OF THIS FORM 6-K
Attached hereto (i) as Exhibit 99.1 is the earnings release, (ii) as Exhibit 99.2 is the financial statements and (iii) as Exhibit 99.3 is the earnings call presentation, all for the three months ended September 30, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: October 28, 2020 | THE BANK OF N.T. BUTTERFIELD & SON LIMITED | |
|---|---|---|
| By: | /s/ Shaun Morris | |
| Name: | Shaun Morris | |
| Title: | General Counsel and Group Chief Legal Officer |
EXHIBIT INDEX
| Exhibit | Description | ||
|---|---|---|---|
| 99.1 | Earnings release - Third quarter 2020 results | ||
| 99.2 | Financial statements - Third quarter 2020 results | ||
| 99.3 | Earnings call presentation - Third quarter 2020 results | 3 | |
| --- |
Document
Butterfield Reports Third Quarter 2020 Results
Financial highlights for the third quarter of 2020:
•Net income of $30.5 million, or $0.61 per share and, core net income1 of $36.5 million, or $0.73 per share
•Return on average common equity of 12.3% and core return on average tangible common equity1 of 16.2%
•Net interest margin of 2.30%
•Completed Channel Islands banking integration
•Board declares a quarterly dividend of $0.44 per share
Hamilton, Bermuda - October 28, 2020: The Bank of N.T. Butterfield & Son Limited ("Butterfield" or the "Bank") (BSX: NTB.BH; NYSE: NTB) today announced financial results for the third quarter ended September 30, 2020.
Net income for the third quarter was $30.5 million, or $0.61 per diluted common share, compared to $34.3 million, or $0.67 per diluted common share for the previous quarter, and $42.4 million, or $0.79 per diluted common share, in the third quarter of 2019. Core net income1 for the third quarter was $36.5 million, or $0.73 per diluted common share, compared to $34.4 million, or $0.67 per diluted common share, in the previous quarter, and $48.8 million, or $0.91 per diluted common share, for the third quarter of 2019.
The core return on average tangible common equity1 for the third quarter of 2020 was 16.2%, compared to 15.5% for the previous quarter, and 22.5% for the third quarter of 2019. The core efficiency ratio1 for the third quarter of 2020 was 68.0%, compared with 66.7% in the previous quarter and 62.1% for the third quarter of 2019.
Michael Collins, Butterfield's Chairman and Chief Executive Officer commented, "During the third quarter of 2020, the Bank performed well as we focused on managing our credit exposures and reducing costs to help offset the revenue impact from lower volumes and interest rates during the pandemic. We have enhanced our risk management and compliance capabilities through previously announced executive and board appointments, while decreasing the expense base through a cost reduction program, which included voluntary separation and redundancy initiatives.
“The cost reduction program increased non-core exit costs this quarter but is expected to lower expenses in 2021 and beyond. In addition, we will continue to provide operational support roles in Butterfield’s service center in Canada for non-client facing positions.
"In recognition of the challenges created by the health crisis, we have been pleased to offer payment relief to qualifying mortgage clients in Bermuda and Cayman for up to six months. These programs have come to an end, but we will continue to provide customers with individual assistance going forward. We are closely monitoring our loan book and proactively communicating with clients to assess their capacity to resume normal payments. We remain confident that our proven business model will continue to produce first quartile absolute and risk-adjusted returns throughout the pandemic and broader interest rate cycle.”
(1) See table "Reconciliation of US GAAP Results to Core Earnings" below for reconciliation of US GAAP results to non-GAAP measures. 1
Net income decreased by $3.8 million in the third quarter of 2020 versus the prior quarter due principally to staff exit costs associated with voluntary separation agreements and redundancies. On a core basis, net income improved by $2.1 million versus the previous quarter. The comparative second quarter of 2020 was impacted by lower economic activity due to COVID-19 related government mandated "shelter-in-place" requirements, which resulted in lower banking fees.
Net interest income (“NII”) for the third quarter of 2020 was $75.3 million, a decrease of $3.8 million compared with NII of $79.1 million in the previous quarter and down $11.0 million from $86.3 million in the third quarter of 2019. Lower global interest rates in the third quarter of 2020 resulted in a decrease in NII compared to both comparative periods.
Net interest margin (“NIM”) for the third quarter of 2020 was 2.30%, a decrease of 18 basis points from 2.48% in the previous quarter and down 22 basis points from 2.52% in the third quarter of 2019. NIM decreased in the third quarter of 2020 compared to the prior quarter due to the impact of continued low market rates across the yield curve and currencies, which impacted interest earning assets and, to a lesser extent, deposit pricing. In addition, the Bank incurred temporary higher interest costs due to the timing gap between issuance of new subordinated debt in the second quarter and the planned redemption of existing tranches in the second half of 2020.
Non-interest income increased to $46.9 million for the third quarter of 2020, compared with $41.7 million in the previous quarter and $46.6 million in the third quarter of 2019. The increase across fee generating business lines versus the prior quarter was due to increased economic activity following the second quarter of 2020, which was impacted by "shelter-in-place" requirements in the Bank's operating jurisdictions. This quarter also included non-recurring loan commitment fee revenue of $1.5 million.
Non-interest expenses were $91.3 million in the third quarter of 2020, compared to $82.0 million in the previous quarter and $90.4 million in the third quarter of 2019. Core non-interest expenses1 were $84.6 million in the third quarter of 2020, compared with $81.9 million in the previous quarter and $84.0 million in the third quarter of 2019. Non-interest expenses were higher in the third quarter of 2020 compared to the prior quarter due to the implementation of the Bank's previously announced efficiency programs, which included voluntary separation and early retirement programs, and redundancies.
The Bank continued its balanced capital return policy. The Board declared a quarterly dividend of $0.44 per common share to be paid on November 30, 2020 to shareholders of record on November 12, 2020. During the third quarter of 2020, Butterfield repurchased 0.7 million common shares under the Bank's current 3.5 million common share repurchase plan authorization.
The current total regulatory capital ratio as at September 30, 2020 was 20.8% as calculated under Basel III, compared to 19.4% as at December 31, 2019. Both of these ratios are significantly above the fully phased Basel III regulatory requirements applicable to the Bank.
(1) See table "Reconciliation of US GAAP Results to Core Earnings" below for reconciliation of US GAAP results to non-GAAP measures.
ANALYSIS AND DISCUSSION OF THIRD QUARTER RESULTS
| Income statement | Three months ended (Unaudited) | |||||
|---|---|---|---|---|---|---|
| (in $ millions) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||
| Non-interest income | 46.9 | 41.7 | 46.6 | |||
| Net interest income before provision for credit losses | 75.3 | 79.1 | 86.3 | |||
| Total net revenue before provision for credit losses and other gains (losses) | 122.2 | 120.8 | 133.0 | |||
| Provision for credit recoveries (losses) | (1.4) | (4.4) | (0.4) | |||
| Total other gains (losses) | 1.5 | 0.7 | 0.5 | |||
| Total net revenue | 122.3 | 117.1 | 133.1 | |||
| Non-interest expenses | (91.3) | (82.0) | (90.4) | |||
| Total net income before taxes | 31.1 | 35.1 | 42.7 | |||
| Income tax benefit (expense) | (0.5) | (0.8) | (0.2) | |||
| Net income | 30.5 | 34.3 | 42.4 | |||
| Net earnings per share | ||||||
| Basic | 0.61 | 0.68 | 0.80 | |||
| Diluted | 0.61 | 0.67 | 0.79 | |||
| Per diluted share impact of other non-core items 1 | 0.12 | — | 0.12 | |||
| Core earnings per share on a fully diluted basis 1 | 0.73 | 0.67 | 0.91 | |||
| Adjusted weighted average number of participating shares on a fully diluted basis (in thousands of shares) | 50,040 | 50,984 | 53,554 | |||
| Key financial ratios | ||||||
| Return on common equity | 12.3 | % | 14.0 | % | 17.8 | % |
| Core return on average tangible common equity 1 | 16.2 | % | 15.5 | % | 22.5 | % |
| Return on average assets | 0.9 | % | 1.0 | % | 1.2 | % |
| Net interest margin | 2.30 | % | 2.48 | % | 2.52 | % |
| Core efficiency ratio 1 | 68.0 | % | 66.7 | % | 62.1 | % |
(1)See table "Reconciliation of US GAAP Results to Core Earnings" below for reconciliation of US GAAP results to non-GAAP measures.
| Balance Sheet | As at | |||
|---|---|---|---|---|
| (in $ millions) | September 30, 2020 | December 31, 2019 | ||
| Cash due from banks | 2,161 | 2,550 | ||
| Securities purchased under agreements to resell | 327 | 142 | ||
| Short-term investments | 807 | 1,218 | ||
| Investments in securities | 4,725 | 4,436 | ||
| Loans, net of allowance for credit losses | 5,035 | 5,143 | ||
| Premises, equipment and computer software, net of accumulated depreciation | 157 | 158 | ||
| Goodwill and intangibles, net | 91 | 97 | ||
| Accrued interest and other assets | 159 | 177 | ||
| Total assets | 13,461 | 13,922 | ||
| Total deposits | 11,891 | 12,442 | ||
| Accrued interest and other liabilities | 384 | 373 | ||
| Long-term debt | 196 | 144 | ||
| Total liabilities | 12,472 | 12,958 | ||
| Common shareholders’ equity | 989 | 964 | ||
| Total shareholders' equity | 989 | 964 | ||
| Total liabilities and shareholders' equity | 13,461 | 13,922 | ||
| Key Balance Sheet Ratios: | September 30, 2020 | December 31, 2019 | ||
| Common equity tier 1 capital ratio1 | 16.6 | % | 17.3 | % |
| Tier 1 capital ratio1 | 16.6 | % | 17.3 | % |
| Total capital ratio1 | 20.8 | % | 19.4 | % |
| Leverage ratio1 | 5.9 | % | 5.9 | % |
| Risk-Weighted Assets (in $ millions) | 4,939 | 4,898 | ||
| Risk-Weighted Assets / total assets | 36.7 | % | 35.2 | % |
| Tangible common equity ratio | 6.7 | % | 6.3 | % |
| Book value per common share (in $) | 19.98 | 18.40 | ||
| Tangible book value per share (in $) | 18.15 | 16.55 | ||
| Non-accrual loans/gross loans | 1.5 | % | 1.0 | % |
| Non-performing assets/total assets | 0.7 | % | 0.4 | % |
| Total coverage ratio | 54.9 | % | 46.8 | % |
(1)In accordance with regulatory capital guidance, the Bank has elected to make use of transitional arrangements which allow the deferral of the January 1, 2020 Current Expected Credit Loss ("CECL") impact of $7.8 million on its regulatory capital over a period of 5 years.
QUARTER ENDED SEPTEMBER 30, 2020 COMPARED WITH THE QUARTER ENDED JUNE 30, 2020
Net Income
Net income for the quarter ended September 30, 2020 was $30.5 million, down $3.8 million from $34.3 million in the prior quarter.
The $3.8 million decrease in net income in the quarter ended September 30, 2020 over the previous quarter was due principally to the following:
•$3.8 million decrease in net interest income before provision for credit losses due to a $3.0 million decrease in interest income from investments and banks driven by continued low global interest rates and a $0.8 million increase in interest expense driven by the full quarter recognition of interest on the June 2020 subordinated debt issuance;
•$5.2 million increase in non-interest income due primarily to a $4.2 million increase in banking income and a $0.9 million increase in foreign exchange revenue, both driven by higher transaction volumes as the Bank's operating jurisdictions emerged from the "shelter-in-place" period. Banking income also benefited from one-time loan commitment fees of $1.5 million;
•$3.0 million decrease in the provision for credit losses driven by elevated provisions recognized in the prior quarter related to loans migrating into the past due and non-performing categories, as well as by slightly improving macroeconomic forecasts;
•$0.8 million increase in total other gains/(losses) due to the net realized gain on the sale of certain floating rate available-for-sale investments;
•$8.4 million increase in staff-related and indirect tax costs due primarily to expenses related to the efficiency programs (voluntary separation and redundancy costs); and
•$0.9 million increase in the remaining non-interest expense items.
Non-Core Items1
Non-core items resulted in expenses, net of gains, of $5.9 million in the quarter ended September 30, 2020 compared to expenses of $0.1 million in the prior quarter. Non-core items for the current period relate to the restructuring program, including voluntary separation, early retirement and redundancy costs, partially offset by a gain due to a distribution from an equity method investment, as a result of the sale of a legacy business interest.
Management does not believe that the expenses, gains or losses identified as non-core are indicative of the results of operations of the Bank in the ordinary course of business.
(1)See table "Reconciliation of US GAAP Results to Core Earnings" below for reconciliation of US GAAP results to non-GAAP measures.
BALANCE SHEET COMMENTARY AT SEPTEMBER 30, 2020 COMPARED WITH DECEMBER 31, 2019
Total Assets
Total assets of the Bank were $13.5 billion at September 30, 2020, a decrease of $0.5 billion from December 31, 2019. The Bank maintained a highly liquid position at September 30, 2020, with its $8.0 billion of cash and demand deposits with banks, reverse repurchase agreements and liquid investments representing 59.6% of total assets, compared with 60.0% at December 31, 2019.
Loans Receivable
The loan portfolio totaled $5.0 billion at September 30, 2020, which was a decrease of $0.1 billion compared with December 31, 2019, due primarily to the repayment of a short-term government facility in the current quarter.
Allowance for credit losses at September 30, 2020 totaled $41.0 million, an increase of $17.5 million from December 31, 2019. The movement was due primarily to the adoption of the new CECL standard and updated macro-economic forecasts which drive forward-looking expected losses.
The loan portfolio represented 37.4% of total assets at September 30, 2020 (December 31, 2019: 36.9%), while loans as a percentage of total deposits increased to 42.3% at September 30, 2020 from 41.3% at December 31, 2019. The increases in both are due principally to a decrease in customer deposits at September 30, 2020 related to expected declines of Euro deposits in the Channel Islands as the deposit book was repriced.
As of September 30, 2020, the Bank had gross non-accrual loans of $74.8 million, representing 1.5% of total gross loans, an increase of $24.4 million from the $50.4 million, or 1.0%, of total loans at December 31, 2019. This increase was driven by a commercial loan in collateral dispute litigation and a few residential mortgages in Bermuda. Butterfield continues to engage proactively with clients who may experience financial difficulty.
Other real estate owned (“OREO”) increased by $0.4 million from December 31, 2019 to $4.2 million at September 30, 2020, as a result of one new foreclosure during the first quarter of 2020.
Investment in Securities
The investment portfolio was $4.7 billion at September 30, 2020, up $0.3 billion from December 31, 2019.
The investment portfolio is made up of high quality assets with 99.8% invested in A-or-better-rated securities. The investment yield decreased to 2.26% as at September 30, 2020 from 2.52% in the previous quarter. Total net unrealized gains on the available-for-sale and held-to-maturity portfolios were $183.2 million, compared with total net unrealized gains of $59.1 million at December 31, 2019, which improved valuations due to continued, lower long-term US dollar interest rates.
Deposits
Average deposits were $11.9 billion in the third quarter of 2020 compared to $11.0 billion in the quarter ended December 31, 2019. The cost of deposits remained constant from the previous quarter.
Average Balance Sheet2
| For the three months ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||
| (in $ millions) | Average<br><br>balance<br><br>($) | Interest<br><br>($) | Average<br><br>rate<br><br>(%) | Average<br><br>balance<br><br>($) | Interest<br><br>($) | Average<br><br>rate<br><br>(%) | Average<br><br>balance<br><br>($) | Interest<br><br>($) | Average<br><br>rate<br><br>(%) |
| Assets | |||||||||
| Cash due from banks and short-term investments | 3,543.6 | 1.0 | 0.11 | 3,358.4 | 1.1 | 0.13 | 4,434.4 | 12.5 | 1.12 |
| Investment in securities | 4,389.6 | 25.0 | 2.26 | 4,426.6 | 27.8 | 2.52 | 4,616.8 | 32.9 | 2.82 |
| Equity securities at fair value | 1.8 | 1.4 | 1.5 | ||||||
| Available-for-sale | 2,273.3 | 11.2 | 1.95 | 2,340.9 | 12.8 | 2.19 | 2,299.7 | 15.4 | 2.66 |
| Held-to-maturity | 2,114.5 | 13.8 | 2.59 | 2,084.4 | 15.1 | 2.90 | 2,315.6 | 17.4 | 2.99 |
| Loans | 5,047.0 | 56.4 | 4.43 | 4,997.4 | 56.4 | 4.53 | 4,529.4 | 59.6 | 5.22 |
| Commercial | 1,684.5 | 20.2 | 4.76 | 1,693.3 | 21.5 | 5.09 | 1,548.8 | 20.5 | 5.26 |
| Consumer | 3,362.6 | 36.2 | 4.27 | 3,304.1 | 34.9 | 4.24 | 2,980.7 | 39.1 | 5.20 |
| Interest earning assets | 12,980.2 | 82.4 | 2.52 | 12,782.3 | 85.3 | 2.68 | 13,580.6 | 105.0 | 3.07 |
| Other assets | 392.3 | 401.3 | 396.0 | ||||||
| Total assets | 13,372.5 | 82.4 | 13,183.7 | 85.3 | 13,976.6 | 105.0 | |||
| Liabilities | |||||||||
| Deposits | 9,571.2 | (4.3) | (0.18) | 9,651.1 | (4.1) | (0.17) | 10,199.7 | (16.7) | (0.65) |
| Long-term debt | 196.4 | (2.7) | (5.53) | 165.8 | (2.1) | (5.00) | 143.4 | (2.0) | (5.42) |
| Interest bearing liabilities | 9,767.6 | (7.0) | (0.29) | 9,816.9 | (6.2) | (0.25) | 10,343.1 | (18.7) | (0.72) |
| Non-interest bearing current accounts | 2,348.0 | 2,166.8 | 2,134.0 | ||||||
| Other liabilities | 255.2 | 274.2 | 311.7 | ||||||
| Total liabilities | 12,370.8 | (7.0) | 12,257.9 | (6.2) | 12,788.9 | (18.7) | |||
| Shareholders’ equity | 1,001.6 | 925.7 | 1,187.7 | ||||||
| Total liabilities and shareholders’ equity | 13,372.5 | 13,183.7 | 13,976.6 | ||||||
| Non-interest-bearing funds net of <br> non-interest earning assets <br> (free balance) | 3,212.6 | 2,965.4 | 3,237.5 | ||||||
| Net interest margin | 75.3 | 2.30 | 79.1 | 2.48 | 86.3 | 2.52 |
(2) Averages are based upon a daily averages for the periods indicated.
Assets Under Administration and Assets Under Management
Total assets under administration for the trust and custody businesses were $100.3 billion and $28.0 billion, respectively, at September 30, 2020, while assets under management were $5.3 billion at September 30, 2020. This compares with $91.7 billion, $30.3 billion and $5.6 billion, respectively, at December 31, 2019.
Reconciliation of US GAAP Results to Core Earnings
The table below shows the reconciliation of net income in accordance with US GAAP to core earnings, a non-GAAP measure, which excludes certain significant items that are included in our US GAAP results of operations. We focus on core net income, which we calculate by adjusting net income to exclude certain income or expense items that are not representative of our business operations, or “non-core”. Core net income includes revenue, gains, losses and expense items incurred in the normal course of business. We believe that expressing earnings and certain other financial measures excluding these non-core items provides a meaningful base for period-to-period comparisons, which management believes will assist investors in analyzing the operating results of the Bank and predicting future performance. We believe that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Bank on the same basis as management.
| Core Earnings | Three months ended | |||||
|---|---|---|---|---|---|---|
| (in $ millions except per share amounts) | September 30, 2020 | June 30, 2020 | September 30, 2019 | |||
| Net income | 30.5 | 34.3 | 42.4 | |||
| Non-core items | ||||||
| Non-core (gains) losses | ||||||
| Distribution from equity method investment | (0.7) | — | — | |||
| Total non-core (gains) losses | (0.7) | — | — | |||
| Non-core expenses | ||||||
| Early retirement program, voluntary separation, redundancies and other non-core compensation costs | 6.7 | 0.1 | 2.8 | |||
| Business acquisition costs | — | — | 3.6 | |||
| Total non-core expenses | 6.7 | 0.1 | 6.4 | |||
| Total non-core items | 5.9 | 0.1 | 6.4 | |||
| Core net income | 36.5 | 34.4 | 48.8 | |||
| Average common equity | 984.6 | 985.0 | 948.4 | |||
| Less: average goodwill and intangible assets | (91.6) | (90.5) | (87.1) | |||
| Average tangible common equity | 893.0 | 894.5 | 861.3 | |||
| Core earnings per share fully diluted | 0.73 | 0.67 | 0.91 | |||
| Return on common equity | 12.3 | % | 14.0 | % | 17.8 | % |
| Core return on average tangible common equity | 16.2 | % | 15.5 | % | 22.5 | % |
| Shareholders' equity | 988.9 | 990.3 | 964.6 | |||
| Less: goodwill and intangible assets | (90.7) | (89.7) | (93.4) | |||
| Tangible common equity | 898.2 | 900.7 | 871.2 | |||
| Basic participating shares outstanding (in millions) | 49.5 | 50.2 | 53.2 | |||
| Tangible book value per common share | 18.15 | 17.94 | 16.38 | |||
| Non-interest expenses | 91.3 | 82.0 | 90.4 | |||
| Less: non-core expenses | (6.7) | (0.1) | (6.4) | |||
| Less: amortization of intangibles | (1.5) | (1.4) | (1.5) | |||
| Core non-interest expenses before amortization of intangibles | 83.1 | 80.5 | 82.5 | |||
| Core revenue before other gains and losses and provision for credit losses | 122.2 | 120.8 | 133.0 | |||
| Core efficiency ratio | 68.0 | % | 66.7 | % | 62.1 | % |
Conference Call Information:
Butterfield will host a conference call to discuss the Bank’s results on Thursday, October 29, 2020 at 10:00 a.m. Eastern Time. Callers may access the conference call by dialing +1 (844) 855 9501 (toll-free) or +1 (412) 858 4603 (international) ten minutes prior to the start of the call. A live webcast of the conference call, including a slide presentation, will be available in the investor relations section of Butterfield’s website at www.butterfieldgroup.com. A replay of the call will be archived on the Butterfield website thereafter.
About Non-GAAP Financial Measures:
Certain statements in this release involve the use of non-GAAP financial measures. We believe such measures provide useful information to investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with US GAAP; however, our non-GAAP financial measures have a number of limitations. As such, investors should not view these disclosures as a substitute for results determined in accordance with US GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. See "Reconciliation of US GAAP Results to Core Earnings" for additional information.
Forward-Looking Statements:
Certain of the statements made in this release are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, capital, ownership or achievements of Butterfield to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements due to a variety of factors, including the impact of the COVID-19 pandemic, the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, worldwide economic conditions and fluctuations of interest rates, a decline in Bermuda's sovereign credit rating, the successful completion and integration of acquisitions or the realization of the anticipated benefits of such acquisitions in the expected time-frames or at all, success in business retention and obtaining new business and other factors. Forward-looking statements can be identified by words such as "anticipate," "assume," "believe," "estimate," "expect," "indicate," "intend," "may," "plan," "point to," "predict," "project," "seek," "target," "potential," "will," "would," "could," "should," "continue," "contemplate" and other similar expressions, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact are statements that could be forward-looking statements.
All forward-looking statements in this disclosure are expressly qualified in their entirety by this cautionary notice, including, without limitation, those risks and uncertainties described in our SEC reports and filings. Such reports are available upon request from Butterfield, or from the Securities and Exchange Commission ("SEC"), including through the SEC’s website at https://www.sec.gov. Any forward-looking statements made by Butterfield are current views as at the date they are made. Except as otherwise required by law, Butterfield assumes no obligation and does not undertake to review, update, revise or correct any of the forward-looking statements included in this disclosure, whether as a result of new information, future events or other developments. You are cautioned not to place undue reliance on the forward-looking statements made by Butterfield in this disclosure. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, and should only be viewed as historical data.
About Butterfield:
Butterfield is a full-service bank and wealth manager headquartered in Hamilton, Bermuda, providing services to clients from Bermuda, the Cayman Islands, Guernsey and Jersey, where our principal banking operations are located, and The Bahamas, Switzerland, Singapore and the United Kingdom, where we offer specialized financial services. Banking services comprise deposit, cash management and lending solutions for individual, business and institutional clients. Wealth management services are composed of trust, private banking, asset management and custody. In Bermuda, the Cayman Islands and Guernsey, we offer both banking and wealth management. In The Bahamas, Singapore and Switzerland, we offer select wealth management services. In the UK, we offer residential property lending. In Jersey, we offer select banking and wealth management services. Butterfield is publicly traded on the New York Stock Exchange (symbol: NTB) and the Bermuda Stock Exchange (symbol: NTB.BH). Further details on the Butterfield Group can be obtained from our website at: www.butterfieldgroup.com.
Investor Relations Contact: Media Relations Contact:
Noah Fields Mark Johnson
Investor Relations Group Head of Communications
The Bank of N.T. Butterfield & Son Limited The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 3816 Phone: (441) 299 1624
E-mail: [email protected] E-mail: [email protected]
8
Document
INDEX TO FINANCIAL STATEMENTS
| Unaudited Consolidated Financial Statements | Page |
|---|---|
| Consolidated Balance Sheets (unaudited) as of September 30, 2020 and December 31, 2019 | 2 |
| Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019 | 3 |
| Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019 | 4 |
| Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019 | 5 |
| Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2020 and 2019 | 6 |
| Notes to the Consolidated Financial Statements (unaudited) | 7 |
The Bank of N.T. Butterfield & Son Limited
Consolidated Balance Sheets (unaudited)
(In thousands of US dollars, except share and per share data)
| As at | ||
|---|---|---|
| September 30, 2020 | December 31, 2019 | |
| Assets | ||
| Cash and demand deposits with banks - Non-interest bearing | 93,952 | 88,031 |
| Demand deposits with banks - Interest bearing | 534,252 | 839,320 |
| Cash equivalents - Interest bearing | 1,532,699 | 1,622,719 |
| Cash due from banks | 2,160,903 | 2,550,070 |
| Securities purchased under agreements to resell | 326,877 | 142,283 |
| Short-term investments | 806,607 | 1,218,380 |
| Investment in securities | ||
| Equity securities at fair value | 7,559 | 7,419 |
| Available-for-sale at fair value | 2,369,713 | 2,220,341 |
| Held-to-maturity (fair value: $2,457,933 (2019: $2,255,987)) | 2,347,341 | 2,208,663 |
| Total investment in securities | 4,724,613 | 4,436,423 |
| Loans | ||
| Loans | 5,076,383 | 5,166,210 |
| Allowance for credit losses | (41,046) | (23,588) |
| Loans, net of allowance for credit losses | 5,035,337 | 5,142,622 |
| Premises, equipment and computer software, net of accumulated depreciation | 157,085 | 158,233 |
| Goodwill | 24,269 | 24,838 |
| Other Intangible assets, net | 66,417 | 71,665 |
| Equity method investments | 13,042 | 14,480 |
| Other real estate owned, net | 4,227 | 3,842 |
| Accrued interest and other assets | 141,368 | 158,739 |
| Total assets | 13,460,745 | 13,921,575 |
| Liabilities | ||
| Deposits | ||
| Non-interest bearing | 2,610,225 | 2,238,256 |
| Interest bearing | 9,280,893 | 10,203,369 |
| Total deposits | 11,891,118 | 12,441,625 |
| Employee benefit plans | 109,817 | 110,347 |
| Accrued interest and other liabilities | 274,542 | 262,360 |
| Total other liabilities | 384,359 | 372,707 |
| Long-term debt | 196,359 | 143,500 |
| Total liabilities | 12,471,835 | 12,957,832 |
| Commitments, contingencies and guarantees (Note 10) | ||
| Shareholders' equity | ||
| Common share capital (BMD 0.01 par; authorized voting ordinary shares 2,000,000,000 and <br> non-voting ordinary shares 6,000,000,000) issued and outstanding: 50,107,614 (2019: 53,005,177) | 501 | 530 |
| Additional paid-in capital | 1,012,902 | 1,081,569 |
| Retained earnings (Accumulated deficit) | 14,628 | (9,237) |
| Less: treasury common shares, at cost: 619,212 (2019: 619,212) | (15,352) | (22,022) |
| Accumulated other comprehensive loss | (23,769) | (87,097) |
| Total shareholders’ equity | 988,910 | 963,743 |
| Total liabilities and shareholders’ equity | 13,460,745 | 13,921,575 |
The accompanying notes are an integral part of these consolidated financial statements.
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Operations (unaudited)
(In thousands of US dollars, except per share data)
| Three months ended | Nine months ended | |||
|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |
| Non-interest income | ||||
| Asset management | 6,804 | 7,370 | 21,988 | 20,961 |
| Banking | 13,352 | 12,130 | 33,710 | 35,351 |
| Foreign exchange revenue | 9,021 | 10,026 | 27,890 | 27,155 |
| Trust | 12,907 | 12,698 | 37,393 | 38,269 |
| Custody and other administration services | 3,550 | 3,645 | 10,415 | 9,392 |
| Other non-interest income | 1,243 | 777 | 4,701 | 3,137 |
| Total non-interest income | 46,877 | 46,646 | 136,097 | 134,265 |
| Interest income | ||||
| Interest and fees on loans | 56,379 | 59,629 | 174,505 | 173,083 |
| Investments (none of the investment securities are intrinsically tax-exempt) | ||||
| Available-for-sale | 11,196 | 15,429 | 38,968 | 45,998 |
| Held-to-maturity | 13,780 | 17,444 | 45,099 | 51,767 |
| Deposits with banks | 1,003 | 12,532 | 11,499 | 30,709 |
| Total interest income | 82,358 | 105,034 | 270,071 | 301,557 |
| Interest expense | ||||
| Deposits | 4,306 | 16,747 | 21,378 | 36,130 |
| Long-term debt | 2,739 | 1,959 | 6,674 | 5,965 |
| Total interest expense | 7,045 | 18,706 | 28,052 | 42,095 |
| Net interest income before provision for credit losses | 75,313 | 86,328 | 242,019 | 259,462 |
| Provision for credit recoveries (losses) | (1,355) | (411) | (10,891) | 552 |
| Net interest income after provision for credit losses | 73,958 | 85,917 | 231,128 | 260,014 |
| Net gains (losses) on equity securities | 200 | 54 | 139 | 710 |
| Net realized gains (losses) on available-for-sale investments | 1,116 | 537 | 1,116 | 1,509 |
| Net gains (losses) on other real estate owned | — | (67) | 71 | 61 |
| Net other gains (losses) | 196 | (1) | 290 | 187 |
| Total other gains (losses) | 1,512 | 523 | 1,616 | 2,467 |
| Total net revenue | 122,347 | 133,086 | 368,841 | 396,746 |
| Non-interest expense | ||||
| Salaries and other employee benefits | 48,306 | 44,272 | 132,902 | 136,503 |
| Technology and communications | 16,345 | 16,320 | 49,021 | 46,119 |
| Professional and outside services | 5,202 | 9,473 | 15,990 | 21,272 |
| Property | 7,543 | 6,060 | 22,032 | 17,169 |
| Indirect taxes | 5,764 | 5,296 | 16,188 | 15,839 |
| Non-service employee benefits expense | 509 | 1,339 | 1,988 | 3,999 |
| Marketing | 630 | 1,580 | 2,880 | 4,915 |
| Amortization of intangible assets | 1,468 | 1,494 | 4,339 | 3,997 |
| Other expenses | 5,495 | 4,577 | 16,037 | 13,213 |
| Total non-interest expense | 91,262 | 90,411 | 261,377 | 263,026 |
| Net income before income taxes | 31,085 | 42,675 | 107,464 | 133,720 |
| Income tax benefit (expense) | (542) | (238) | (2,310) | (534) |
| Net income | 30,543 | 42,437 | 105,154 | 133,186 |
| Earnings per common share | ||||
| Basic earnings per share | 0.61 | 0.80 | 2.07 | 2.50 |
| Diluted earnings per share | 0.61 | 0.79 | 2.06 | 2.48 |
The accompanying notes are an integral part of these consolidated financial statements.
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Comprehensive Income (unaudited)
(In thousands of US dollars)
| Three months ended | Nine months ended | |||
|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |
| Net income | 30,543 | 42,437 | 105,154 | 133,186 |
| Other comprehensive income (loss), net of taxes | ||||
| Net change in unrealized gains and losses on translation of net investment in foreign operations | 528 | (1,345) | (969) | (1,608) |
| Accretion of net unrealized gains and losses on held-to-maturity investments transferred from available-for-sale investments | 228 | 12 | 397 | 38 |
| Net change in unrealized gains and losses on available-for-sale investments | 2,788 | 13,528 | 60,800 | 57,597 |
| Employee benefit plans adjustments | 471 | 1,211 | 3,100 | 2,827 |
| Other comprehensive income (loss), net of taxes | 4,015 | 13,406 | 63,328 | 58,854 |
| Total comprehensive income | 34,558 | 55,843 | 168,482 | 192,040 |
The accompanying notes are an integral part of these consolidated financial statements.
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
| Nine months ended | |||||||
|---|---|---|---|---|---|---|---|
| September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||
| In thousands of<br>US dollars | Number of shares | In thousands of<br>US dollars | Number of shares | In thousands of<br>US dollars | Number of shares | In thousands of<br>US dollars | |
| Common share capital issued and outstanding | |||||||
| Balance at beginning of period | 508 | 54,606,982 | 546 | 53,005,177 | 530 | 55,359,218 | 554 |
| Retirement of shares | (7) | (1,000,000) | (10) | (3,249,200) | (32) | (2,120,000) | (21) |
| Issuance of common shares | — | 181,072 | 2 | 351,637 | 3 | 548,836 | 5 |
| Balance at end of period | 501 | 53,788,054 | 538 | 50,107,614 | 501 | 53,788,054 | 538 |
| Additional paid-in capital | |||||||
| Balance at beginning of period | 1,019,859 | 1,140,393 | 1,081,569 | 1,171,435 | |||
| Share-based compensation | 3,978 | 3,358 | 11,331 | 13,906 | |||
| Share-based settlements | 630 | — | 630 | 240 | |||
| Retirement of shares | (11,565) | (37,245) | (81,123) | (79,082) | |||
| Issuance of common shares, net of underwriting discounts and commissions | — | 45 | 495 | 52 | |||
| Balance at end of period | 1,012,902 | 1,106,551 | 1,012,902 | 1,106,551 | |||
| Retained earnings (Accumulated deficit) | |||||||
| Balance at beginning of period | 12,250 | (48,855) | (9,237) | (92,676) | |||
| Cumulative effect from change in accounting policy (Note 2) | — | — | (7,841) | — | |||
| Net income for period | 30,543 | 42,437 | 105,154 | 133,186 | |||
| Common share cash dividends declared and paid, 0.44 and 1.32 per share (2019: 0.44 and 1.32 per share) | (21,879) | (23,375) | (67,162) | (70,303) | |||
| Retirement of shares | (6,286) | — | (6,286) | — | |||
| Balance at end of period | 14,628 | (29,793) | 14,628 | (29,793) | |||
| Treasury common shares | |||||||
| Balance at beginning of period | (14,517) | 1,619,212 | (60,324) | 619,212 | (22,022) | 1,254,212 | (48,443) |
| Purchase of treasury common shares | (18,693) | — | — | 3,249,200 | (80,771) | 1,485,000 | (53,729) |
| Retirement of shares | 17,858 | (1,000,000) | 37,255 | (3,249,200) | 87,441 | (2,120,000) | 79,103 |
| Balance at end of period | (15,352) | 619,212 | (23,069) | 619,212 | (15,352) | 619,212 | (23,069) |
| Accumulated other comprehensive income (loss) | |||||||
| Balance at beginning of period | (27,784) | (103,079) | (87,097) | (148,527) | |||
| Other comprehensive income (loss), net of taxes | 4,015 | 13,406 | 63,328 | 58,854 | |||
| Balance at end of period | (23,769) | (89,673) | (23,769) | (89,673) | |||
| Total shareholders' equity | 988,910 | 964,554 | 988,910 | 964,554 |
All values are in US Dollars.
The accompanying notes are an integral part of these consolidated financial statements.
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Cash Flows (unaudited)
(In thousands of US dollars)
| Nine months ended | ||
|---|---|---|
| September 30, 2020 | September 30, 2019 | |
| Cash flows from operating activities | ||
| Net income | 105,154 | 133,186 |
| Adjustments to reconcile net income to operating cash flows | ||
| Depreciation and amortization | 45,127 | 35,337 |
| Provision for credit (recoveries) losses | 10,891 | (552) |
| Share-based payments and settlements | 11,961 | 14,146 |
| Net change in equity securities at fair value | (139) | (710) |
| Net realized (gains) losses on available-for-sale investments | (1,116) | (1,509) |
| Net (gains) losses on other real estate owned | (71) | (61) |
| (Increase) decrease in carrying value of equity method investments | (1,374) | (314) |
| Dividends received from equity method investments | 2,812 | 495 |
| Changes in operating assets and liabilities | ||
| (Increase) decrease in accrued interest receivable and other assets | 15,814 | (1,135) |
| Increase (decrease) in employee benefit plans, accrued interest payable and other liabilities | (35,644) | 121,099 |
| Cash provided by (used in) operating activities | 153,415 | 299,982 |
| Cash flows from investing activities | ||
| (Increase) decrease in securities purchased under agreements to resell | (184,594) | (34,580) |
| Short-term investments other than restricted cash: proceeds from maturities and sales | 1,695,099 | 233,928 |
| Short-term investments other than restricted cash: purchases | (1,311,306) | (974,828) |
| Available-for-sale investments: proceeds from sale | 349,699 | 189,940 |
| Available-for-sale investments: proceeds from maturities and pay downs | 401,858 | 249,440 |
| Available-for-sale investments: purchases | (796,758) | (563,007) |
| Held-to-maturity investments: proceeds from maturities and pay downs | 372,398 | 184,374 |
| Held-to-maturity investments: purchases | (518,356) | (420,018) |
| Net (increase) decrease in loans | 32,503 | (26,064) |
| Additions to premises, equipment and computer software | (20,910) | (16,351) |
| Proceeds from sale of other real estate owned | — | 1,102 |
| Gross cash received (disbursed for) from business acquisition | — | 2,815,752 |
| Cash provided by (used in) investing activities | 19,633 | 1,639,688 |
| Cash flows from financing activities | ||
| Net increase (decrease) in deposits | (448,926) | (154,754) |
| Issuance of subordinated capital, net of underwriting fees | 97,647 | — |
| Repayment of long-term debt | (45,000) | — |
| Common shares repurchased | (80,771) | (53,729) |
| Proceeds from stock option exercises | 498 | 57 |
| Cash dividends paid on common shares | (67,162) | (70,303) |
| Cash provided by (used in) financing activities | (543,714) | (278,729) |
| Net effect of exchange rates on cash, cash equivalents and restricted cash | (22,696) | (106,812) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (393,362) | 1,554,129 |
| Cash, cash equivalents and restricted cash: beginning of period | 2,578,902 | 2,070,120 |
| Cash, cash equivalents and restricted cash: end of period | 2,185,540 | 3,624,249 |
| Components of cash, cash equivalents and restricted cash at end of period | ||
| Cash due from banks | 2,160,903 | 3,605,048 |
| Restricted cash included in short-term investments on the consolidated balance sheets | 24,637 | 19,201 |
| Total cash, cash equivalents and restricted cash at end of period | 2,185,540 | 3,624,249 |
| Supplemental disclosure of non-cash items | ||
| Transfer to (out of) other real estate owned | 314 | (397) |
| Initial recognition of right-of-use assets and operating lease liabilities | — | 22,370 |
| Reduction in net loans due to initial adoption of a current expected credit loss model | 7,841 | — |
The accompanying notes are an integral part of these consolidated financial statements.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited)
(In thousands of US dollars, unless otherwise stated)
Note 1: Nature of business
The Bank of N.T. Butterfield & Son Limited (“Butterfield”, the “Bank” or the “Company”) is incorporated under the laws of Bermuda and has a banking license under the Banks 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 bank and wealth manager headquartered in Hamilton, Bermuda. The Bank operates its business through three geographic segments: Bermuda, the Cayman Islands, and the Channel Islands and the United Kingdom ("UK"), where its principal banking operations are located and where it offers specialized financial services. Butterfield offers banking services, comprised of retail and corporate banking, and wealth management, which consists of trust, private banking, and asset management. In the Bermuda and Cayman Islands segments, Butterfield offers both banking and wealth management. In the Channel Islands and the UK segment, the Bank offers wealth management and residential property lending. Butterfield also has operations in the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland, which are included in our Other segment.
The Bank's common shares trade on the New York Stock Exchange under the symbol "NTB" and on the Bermuda Stock Exchange ("BSX") under the symbol "NTB.BH".
Note 2: Significant accounting policies
The accompanying unaudited interim consolidated financial statements of the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and should be read in conjunction with the Bank’s audited financial statements for the year ended December 31, 2019.
In the opinion of Management, these unaudited interim consolidated financial statements reflect all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair statement of the Bank’s financial position and results of operations as at the end of and for the periods presented. The Bank’s results for interim periods are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period, and actual results could differ from those estimates. 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
• Business combinations
New Accounting Standards
Accounting for Financial instruments - Credit losses
Starting on January 1, 2020 the Bank adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326). Accordingly, from the date of adoption, the Bank uses a current expected credit loss model ("CECL") which is based on expected losses. The model used by the Bank up to December 31, 2019 to estimate credit losses was based on incurred losses. The CECL model is applied by the Bank to the measurement of credit losses on financial instruments at amortized cost, including loan receivables and held-to-maturity ("HTM") debt securities. The Bank also applies the CECL model to certain off-balance sheet credit exposures such as undrawn loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In line with Topic 326, the Bank will present credit losses on available-for-sale ("AFS") securities as a valuation allowance rather than as a direct write-down. Changes in expected credit losses are recorded through the respective credit loss allowances on the consolidated balance sheets as well as in the provision for credit losses (or recoveries) in the consolidated statements of operations.
The Bank's purchased credit-impaired (“PCI”) loans outstanding as at January 1, 2020 are now classified as purchased credit deteriorated (“PCD”) loans and both the amortized cost and an allowance for expected credit losses are disclosed and included with other non-PCD loans' figures. The Bank will continue to recognize the amortization of the noncredit discount, if any, as interest income based on the yield of such assets.
The Bank has not restated comparative information previously accounted for under the incurred loss and the PCI models. The total adjustment resulting from the adoption of this methodology on the opening balance of the Bank’s accumulated deficit as at January 1, 2020 was a negative adjustment of $7.8 million relating to the Bank's loan portfolio.
Under the CECL model, the Bank collects and maintains attributes as they relate to its financial instruments that are within scope of CECL including fair value of collateral, expected performance over the lifetime of the instruments and reasonable and supportable assumptions about future economic conditions. The Bank's measurement of expected losses takes into account historical loss information and is primarily based on the product of: the respective instrument’s probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”). For AFS securities, any allowance for credit losses is based on an impairment assessment.
The Bank made the accounting policy election to write off accrued interest receivable on loans that are placed on non-accrual status by reversing the then accrued interest balance against interest income revenue.
Allowance for Current Expected Credit Losses
The Bank maintains allowances for credit losses, which in management’s opinion is adequate to absorb all estimated credit-related losses that are expected in its lending and off-balance sheet credit-related arrangements at the balance sheet date.
Management measures expected credit losses on held-to-maturity and available-for-sale debt securities on a collective basis by major security type when similar risk characteristics exist, or failing that, on an individual basis.
For available-for-sale debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current-loan specific risk characteristics such as differences in underwriting practices, vintage, portfolio mix, delinquency level, term as well as changes in environmental conditions, such as changes in macroeconomic factors and collateral values for periods beyond the reasonable and supportable forecast period.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. The Bank has identified the following portfolio segments: Residential mortgages, Consumers loans (including overdrafts), Commercial loans, Commercial overdrafts, Commercial real estate loans and Credit cards. For Loans and overdrafts, Management uses a probability of default and loss-given-default model to estimate the allowance for credit losses and a loss-rate. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For Credit cards, Management uses a loss rate to estimate expected credit losses.
Expected credit losses are estimated over the contractual term of the loans. The contractual term excludes potential extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that the extension or renewal options included in the original contract will occur or that a troubled debt restructuring will be executed. Credit card receivables do not have stated maturities, therefore establishing a contractual term is performed by using analytical approximation behavior.
New Accounting Pronouncements
The following accounting developments were issued during the nine months ended September 30, 2020 or are accounting standards pending adoption:
In January 2020, the Financial Accounting Standards Board (“FASB”) published ASU 2020-01-Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force). For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for public business entities for periods for which financial statements have not yet been issued. The Bank does not anticipate this ASU to have a material impact.
In February 2020, the FASB published ASU 2020-02- Financial Instrument - Credit Losses (Topic 326) and Leases (Topic 842). Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update). The amendments are effective immediately. The Bank has considered the provisions of these ASUs in its accounting processes and financial statement presentation.
In March 2020, the FASB published ASU 2020-03-Codification Improvements to Financial Instruments. Issue 1: Fair value option Disclosures. The amendments clarify that all entities are required to provide the fair value option disclosures in par 825-10-50-24 through 50-32. Issue 2: Applicability of Portfolio Exception in Topic 820 to Nonfinancial Items. Paragraph 820-10-35-2(g) and 820-10-35-18L are amended to include the phrase nonfinancial items accounted for as derivatives under Topic 815 to be consistent with the previous amendments to Section 820-10-35 that were made by Accounting Standards Update No. 2018-09, Codification Improvements. Issue 3: Disclosures for Depository and Lending Institutions. The amendments clarify that the disclosure requirements in Topic 320 apply to the disclosure requirements in Topic 942 for depository and lending institutions. Issue 4: Cross-reference to Line-of-credit or revolving-Debt arrangements Guidance in Subtopic 470-50. The amendments improve the understandability of the guidance. Issue 5: Cross-reference to Net Asset Value Practical Expedient in Subtopic 820-10. The amendments improve the understandability of the guidance. Issue 6: Interaction of Topic 842 and Topic 326. The amendments clarify that the contractual term of a net investment in a lease determined in accordance with Topic 842 should be the contractual term used to measure expected credit losses under Topic 326.Issue 7: Interaction of Topic 326 and Subtopic 860-20 .The amendments to Subtopic 860-20, Transfers and Servicing - Sales of Financial Assets, clarify that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326. The amendments related to Issue 1, Issue 2, Issue 4, and Issue 5 are conforming amendments. For public business entities, the amendments are effective upon issuance of this final update. The amendment related to Issue 3 is a conforming amendment that affects the guidance in the amendments in Accounting Standards Update 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. That guidance relates to the amendments in 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The effective date of Update 2019-04 for the amendments to Update 2016-01 is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For amendments to Issues 6 and 7, for entities that have adopted the guidance in Update 2016-13, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to opening retained earnings in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13. The Bank has evaluated the impact of this ASU and included it in the current period presentation.
In March 2020, the FASB published ASU 2020-04-Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter Bank Offer Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships. The amendments in this update are effective for all entities upon issuance (March 12, 2020) through December 31, 2022. The Bank does not anticipate this ASU to have a material impact.
In August 2020, the FASB published ASU 2020-06-Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The Board issued this Update to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. Complexity associated with the accounting is a significant contributing factor to numerous financial statement restatements and results in complexity for users attempting to understand the results of applying the current
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
guidance. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity's own equity. The amendments in this update are effective for (1) SEC filers, excluding smaller reporting companies ("SRCs"): fiscal years beginning after December 15, 2021, and interim periods within those fiscal years; (2) SRCs: Fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Bank does not anticipate this ASU to have a material impact.
Note 3: Cash due from banks
| September 30, 2020 | December 31, 2019 | |
|---|---|---|
| Non-interest bearing | ||
| Cash and demand deposits with banks | 93,952 | 88,031 |
| Interest bearing¹ | ||
| Demand deposits with banks | 534,252 | 839,320 |
| Cash equivalents | 1,532,699 | 1,622,719 |
| Sub-total - Interest bearing | 2,066,951 | 2,462,039 |
| Total cash due from banks | 2,160,903 | 2,550,070 |
¹ Interest bearing cash due from banks includes certain demand deposits with banks as at September 30, 2020 in the amount of $197.1 million (December 31, 2019: $439.5 million) that are earning interest at a negligible rate.
Note 4: Short-term investments
| September 30, 2020 | December 31, 2019 | |
|---|---|---|
| Unrestricted | ||
| Maturing within three months | 517,273 | 594,749 |
| Maturing between three to six months | 257,527 | 591,212 |
| Maturing between six to twelve months | 7,170 | 2,584 |
| Total unrestricted short-term investments | 781,970 | 1,188,545 |
| Affected by drawing restrictions related to minimum reserve and derivative margin requirements | ||
| Non-interest earning demand deposits | 999 | 2,270 |
| Interest earning demand and term deposits | 23,638 | 27,565 |
| Total restricted short-term investments | 24,637 | 29,835 |
| Total short-term investments | 806,607 | 1,218,380 |
Note 5: Investment in securities
Amortized Cost, Carrying Amount and Fair Value
On the consolidated balance sheets, equity securities and available-for-sale ("AFS") investments are carried at fair value and held-to-maturity ("HTM") investments are carried at amortized cost.
| September 30, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Amortized<br> cost | Gross<br> unrealized<br> gains | Gross<br> unrealized<br> losses | Fair value | Amortized<br> cost | Gross<br> unrealized<br> gains | Gross<br> unrealized<br> losses | Fair value | |
| Equity securities | ||||||||
| Mutual funds | 5,724 | 2,309 | (474) | 7,559 | 5,724 | 2,142 | (447) | 7,419 |
| Total equity securities | 5,724 | 2,309 | (474) | 7,559 | 5,724 | 2,142 | (447) | 7,419 |
| Available-for-sale | ||||||||
| US government and federal agencies | 2,179,373 | 71,630 | (791) | 2,250,212 | 2,040,171 | 18,617 | (6,342) | 2,052,446 |
| Non-US governments debt securities | 26,139 | 57 | (388) | 25,808 | 26,118 | 82 | (524) | 25,676 |
| Asset-backed securities - Student loans | 13,290 | — | (381) | 12,909 | 13,290 | — | (399) | 12,891 |
| Residential mortgage-backed securities | 78,301 | 2,488 | (5) | 80,784 | 128,952 | 654 | (278) | 129,328 |
| Total available-for-sale | 2,297,103 | 74,175 | (1,565) | 2,369,713 | 2,208,531 | 19,353 | (7,543) | 2,220,341 |
| Held-to-maturity¹ | ||||||||
| US government and federal agencies | 2,347,341 | 110,726 | (134) | 2,457,933 | 2,208,663 | 47,814 | (490) | 2,255,987 |
| Total held-to-maturity | 2,347,341 | 110,726 | (134) | 2,457,933 | 2,208,663 | 47,814 | (490) | 2,255,987 |
¹ For the nine months ended September 30, 2020, and the nine months ended September 30, 2019, impairments recognized in other comprehensive loss for HTM investments were nil.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Investments with Unrealized Loss Positions
The Bank does not believe that the AFS debt securities that were in an unrealized loss position as of September 30, 2020 comprising 17 securities representing 18.1% of the AFS portfolios' carrying value (December 31, 2019: 62 and 40.7%), represent credit losses. Total gross unrealized AFS losses were 0.4% of the fair value of the affected securities (December 31, 2019: 0.8%).
The Bank’s HTM debt securities are comprised of US government and federal agencies securities and have a zero credit loss assumption under the CECL model. HTM debt securities that were in an unrealized loss position as of September 30, 2020, were comprised of 2 securities representing 1.2% of the HTM portfolios’ carrying value (December 31, 2019: 6 and 4.3%). Total gross unrealized HTM losses were 0.5% of the fair value of affected securities (December 31, 2019: 0.5%).
Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. Unrealized losses were attributable primarily to changes in market interest rates, relative to when the investment securities were purchased, and not due to a decrease in the credit quality of the investment securities. The issuers continue to make timely principal and interest payments on the securities. The following describes the processes for identifying credit impairment in security types with the most significant unrealized 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.
Management believes that all the Non-US governments debt securities do not have any credit losses, given the explicit guarantee provided by the issuing government.
Investments in Asset-backed securities - Student loans are composed primarily of securities collateralized 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-collateralization, 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 Residential mortgage-backed securities relate to 2 securities (December 31, 2019: 7) which are rated AAA and possess similar significant credit enhancement as described above. No credit losses were recognized on these securities as the weighted average credit support and the weighted average loan-to-value ratios range from 24% - 25% and 58% - 61%, respectively. Current credit support is significantly greater than any delinquencies experienced on the underlying mortgages.
In the following tables, debt securities with unrealized losses that are not deemed to be credit impaired and for which an allowance for credit losses has not been recorded are categorized 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 amortized cost basis.
| Less than 12 months | 12 months or more | |||||
|---|---|---|---|---|---|---|
| September 30, 2020 | Fair<br>value | Gross<br> unrealized<br> losses | Fair<br>value | Gross<br>unrealized<br>losses | Total<br> fair value | Total gross<br>unrealized<br>losses |
| Available-for-sale securities with unrealized losses | ||||||
| US government and federal agencies | 389,462 | (791) | — | — | 389,462 | (791) |
| Non-US governments debt securities | 201 | (2) | 22,392 | (386) | 22,593 | (388) |
| Asset-backed securities - Student loans | — | — | 12,909 | (381) | 12,909 | (381) |
| Residential mortgage-backed securities | 1,086 | — | 3,954 | (5) | 5,040 | (5) |
| Total available-for-sale securities with unrealized losses | 390,749 | (793) | 39,255 | (772) | 430,004 | (1,565) |
| Held-to-maturity securities with unrealized losses | ||||||
| US government and federal agencies | 28,670 | (134) | — | — | 28,670 | (134) |
| Less than 12 months | 12 months or more | |||||
| December 31, 2019 | Fair<br>value | Gross<br> unrealized<br> losses | Fair<br>value | Gross<br>unrealized<br>losses | Total<br>fair value | Total gross<br>unrealized<br>losses |
| Available-for-sale securities with unrealized losses | ||||||
| US government and federal agencies | 376,262 | (1,786) | 435,999 | (4,556) | 812,261 | (6,342) |
| Non-US governments debt securities | 202 | (1) | 22,246 | (523) | 22,448 | (524) |
| Asset-backed securities - Student loans | — | — | 12,891 | (399) | 12,891 | (399) |
| Residential mortgage-backed securities | 6,038 | (30) | 50,254 | (248) | 56,292 | (278) |
| Total available-for-sale securities with unrealized losses | 382,502 | (1,817) | 521,390 | (5,726) | 903,892 | (7,543) |
| Held-to-maturity securities with unrealized losses | ||||||
| US government and federal agencies | 47,038 | (214) | 46,411 | (276) | 93,449 | (490) |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Investment Maturities
The following table presents the remaining term to contractual maturity of the Bank’s securities. The actual maturities may differ as certain securities offer prepayment options to the borrowers.
| Remaining term to maturity | ||||||
|---|---|---|---|---|---|---|
| September 30, 2020 | Within<br> 3 months | 3 to 12<br> months | 1 to 5<br> years | 5 to 10<br> years | No specific or single<br> maturity | Carrying<br> amount |
| Equity securities | ||||||
| Mutual funds | — | — | — | — | 7,559 | 7,559 |
| Available-for-sale | ||||||
| US government and federal agencies | — | — | — | — | 2,250,212 | 2,250,212 |
| Non-US governments debt securities | — | 201 | 22,392 | 3,215 | — | 25,808 |
| Asset-backed securities - Student loans | — | — | — | — | 12,909 | 12,909 |
| Residential mortgage-backed securities | — | — | — | — | 80,784 | 80,784 |
| Total available-for-sale | — | 201 | 22,392 | 3,215 | 2,343,905 | 2,369,713 |
| Held-to-maturity | ||||||
| US government and federal agencies | — | — | — | — | 2,347,341 | 2,347,341 |
| Total investments | — | 201 | 22,392 | 3,215 | 4,698,805 | 4,724,613 |
| Total by currency | ||||||
| US dollars | — | 201 | 22,392 | 3,215 | 4,698,555 | 4,724,363 |
| Other | — | — | — | — | 250 | 250 |
| Total investments | — | 201 | 22,392 | 3,215 | 4,698,805 | 4,724,613 |
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.
| September 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|
| Pledged Investments | Amortized<br> cost | Fair<br> value | Amortized<br> cost | Fair<br> value | ||
| Available-for-sale | 1,292 | 1,354 | 3,848 | 3,912 | ||
| Held-to-maturity | 2,569 | 2,730 | 5,449 | 5,552 | ||
| Sale Proceeds and Realized Gains and Losses of AFS Securities | Nine months ended | |||||
| --- | --- | --- | --- | --- | --- | --- |
| September 30, 2020 | September 30, 2019 | |||||
| Sale <br>proceeds | Gross <br>realized<br> gains | Gross <br>realized<br>(losses) | Sale <br>proceeds | Gross <br>realized<br> gains | Gross <br>realized<br>(losses) | |
| US government and federal agencies | 349,699 | 1,171 | (55) | — | — | — |
| Corporate debt securities | — | — | — | 64,787 | 49 | (141) |
| Commercial mortgage-backed securities | — | — | — | 124,545 | 901 | (272) |
| Pass-through note | — | — | — | 972 | 972 | — |
| Total | 349,699 | 1,171 | (55) | 190,304 | 1,922 | (413) |
Taxability of Interest Income
None of the investments' interest income have received a specific preferential income tax treatment in any of the jurisdictions in which the Bank owns investments.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 6: Loans
The principal means of securing residential mortgages, personal, credit card and business loans are entitlements over assets and guarantees. Mortgage loans are generally repayable over periods of up to thirty years and personal and business loans are generally repayable over terms not exceeding five years. Government loans are repayable over a variety of terms which are individually negotiated. 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 September 30, 2020 is 4.21% (December 31, 2019: 4.73%). The interest receivable on total loans as at September 30, 2020 is $8.9 million (December 31, 2019: $9.2 million). The interest receivable is included in Accrued interest and other assets on the consolidated balance sheets and is excluded from all loan amounts disclosed in this note.
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. Loans' internal credit ratings are assigned by the Bank's customer relationship managers as well as members of the Bank's jurisdictional and group Credit Committees. The borrowers' financial condition is documented at loan origination and maintained periodically thereafter at a frequency which can be up to monthly for certain loans. The loans' performing status, as well as current economic trends, are continuously monitored. The Bank's jurisdictional and Group Credit Committees meet on a monthly basis. The Bank also has a Group Provisions and Impairments Committee which is responsible for approving significant provisions and other impairment charges.
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. Loans in this category are reviewed by the Bank’s management on at least an annual basis.
A special mention loan shall mean a loan under close monitoring by the Bank’s management on at least a quarterly basis. 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. Loans in this category are under close monitoring by the Bank’s management on at least a quarterly basis.
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. Loans in this category are under close monitoring by the Bank’s management on at least a quarterly basis.
The amortized cost of loans by credit quality classifications and allowance for expected credit losses by class of loans is as follows:
| September 30, 2020 | Pass | Special<br> mention | Substandard | Non-accrual | Total amortized cost | Allowance for expected credit losses | Total net loans |
|---|---|---|---|---|---|---|---|
| Commercial loans | |||||||
| Government | 273,764 | — | — | — | 273,764 | (1,594) | 272,170 |
| Commercial and industrial | 418,672 | 44,472 | 914 | 18,236 | 482,294 | (14,367) | 467,927 |
| Commercial overdrafts | 56,055 | 3,741 | 433 | 3 | 60,232 | (351) | 59,881 |
| Total commercial loans | 748,491 | 48,213 | 1,346 | 18,239 | 816,290 | (16,312) | 799,978 |
| Commercial real estate loans | |||||||
| Commercial mortgage | 609,377 | 83,011 | 2,352 | 4,917 | 699,657 | (1,064) | 698,593 |
| Construction | 10,421 | 37,090 | — | — | 47,511 | (1,183) | 46,328 |
| Total commercial real estate loans | 619,798 | 120,101 | 2,352 | 4,917 | 747,168 | (2,247) | 744,921 |
| Consumer loans | |||||||
| Automobile financing | 22,316 | 60 | — | 128 | 22,504 | (119) | 22,385 |
| Credit card | 66,899 | — | 400 | — | 67,299 | (3,437) | 63,862 |
| Overdrafts | 18,477 | 1,688 | — | 4 | 20,169 | (315) | 19,854 |
| Other consumer1 | 113,403 | 1,122 | 153 | 1,032 | 115,710 | (1,372) | 114,338 |
| Total consumer loans | 221,095 | 2,870 | 553 | 1,165 | 225,682 | (5,243) | 220,439 |
| Residential mortgage loans | 3,081,736 | 74,022 | 81,008 | 50,477 | 3,287,243 | (17,244) | 3,269,999 |
| Total | 4,671,120 | 245,206 | 85,259 | 74,798 | 5,076,383 | (41,046) | 5,035,337 |
1 Other consumer loans’ amortized cost comprises $56 million of cash and portfolio secured lending and $44 million of lending secured by buildings in construction or other collateral.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Evaluation of gross loans for impairment | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31, 2019 | Pass | Special<br> mention | Substandard | Non-accrual | Total amortized<br> cost | General and specific allowances | Total net loans | Individually<br> evaluated | Collectively<br> evaluated |
| Commercial loans | |||||||||
| Government | 370,753 | — | — | — | 370,753 | — | 370,753 | — | 370,753 |
| Commercial and industrial | 469,591 | 57,438 | 1,119 | 7,567 | 535,715 | (7,195) | 528,520 | 48,386 | 487,329 |
| Commercial overdrafts | 23,529 | 4,565 | 451 | 2 | 28,547 | (86) | 28,461 | 2 | 28,545 |
| Total commercial loans | 863,873 | 62,003 | 1,570 | 7,569 | 935,015 | (7,281) | 927,734 | 48,388 | 886,627 |
| Commercial real estate loans | |||||||||
| Commercial mortgage | 581,450 | 71,638 | 2,955 | 3,250 | 659,293 | (1,496) | 657,797 | 9,871 | 649,422 |
| Construction | 91,812 | — | 3,128 | — | 94,940 | — | 94,940 | 3,128 | 91,812 |
| Total commercial real estate loans | 673,262 | 71,638 | 6,083 | 3,250 | 754,233 | (1,496) | 752,737 | 12,999 | 741,234 |
| Consumer loans | |||||||||
| Automobile financing | 21,229 | 78 | — | 155 | 21,462 | (102) | 21,360 | 155 | 21,307 |
| Credit card | 87,250 | — | 424 | — | 87,674 | (445) | 87,229 | — | 87,674 |
| Overdrafts | 5,270 | 2,504 | 50 | 34 | 7,858 | (28) | 7,830 | 34 | 7,824 |
| Other consumer1 | 135,534 | 3,550 | — | 1,063 | 140,147 | (927) | 139,220 | 1,070 | 139,077 |
| Total consumer loans | 249,283 | 6,132 | 474 | 1,252 | 257,141 | (1,502) | 255,639 | 1,259 | 255,882 |
| Residential mortgage loans | 3,019,105 | 80,135 | 82,251 | 38,330 | 3,219,821 | (13,309) | 3,206,512 | 115,535 | 3,104,285 |
| Total | 4,805,523 | 219,908 | 90,378 | 50,401 | 5,166,210 | (23,588) | 5,142,622 | 178,181 | 4,988,028 |
1 Other consumer loans’ amortized cost comprises $74 million of cash and portfolio secured lending and $48 million of lending secured by buildings in construction or other collateral.
Based on the most recent analysis performed, the amortized cost of loans by year of origination and credit quality indicator is as follows:
| September 30, 2020 | Pass | Special<br> mention | Substandard | Non-accrual | Total amortized cost |
|---|---|---|---|---|---|
| Loans by origination year | |||||
| 2020 | 441,383 | 13,535 | — | 50 | 454,968 |
| 2019 | 1,059,601 | 27,918 | — | — | 1,087,519 |
| 2018 | 696,529 | 67,051 | 571 | 1,379 | 765,530 |
| 2017 | 627,705 | 31,616 | 2,748 | 11,913 | 673,982 |
| 2016 | 432,581 | 16,539 | 8,062 | 3,991 | 461,173 |
| Prior | 1,244,924 | 81,838 | 73,045 | 55,326 | 1,455,133 |
| Overdrafts and credit cards | 168,397 | 6,709 | 833 | 2,139 | 178,078 |
| Total amortized cost | 4,671,120 | 245,206 | 85,259 | 74,798 | 5,076,383 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Age Analysis of Past Due Loans (Including Non-Accrual Loans)
The following tables summarize the past due status of the loans. 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. Loans less than 30 days past due are included in current loans.
| September 30, 2020 | 30 - 59 <br>days | 60 - 89 <br>days | More than 90 days | Total past<br> due loans | Total <br>current | Total <br>amortized cost |
|---|---|---|---|---|---|---|
| Commercial loans | ||||||
| Government | — | — | — | — | 273,764 | 273,764 |
| Commercial and industrial | 1,416 | — | 18,186 | 19,602 | 462,692 | 482,294 |
| Commercial overdrafts | — | — | 3 | 3 | 60,229 | 60,232 |
| Total commercial loans | 1,416 | — | 18,189 | 19,605 | 796,685 | 816,290 |
| Commercial real estate loans | ||||||
| Commercial mortgage | 1,951 | 2,066 | 4,403 | 8,420 | 691,237 | 699,657 |
| Construction | — | — | — | — | 47,511 | 47,511 |
| Total commercial real estate loans | 1,951 | 2,066 | 4,403 | 8,420 | 738,748 | 747,168 |
| Consumer loans | ||||||
| Automobile financing | — | 19 | 126 | 145 | 22,359 | 22,504 |
| Credit card | 463 | 237 | 400 | 1,100 | 66,199 | 67,299 |
| Overdrafts | — | — | 4 | 4 | 20,165 | 20,169 |
| Other consumer | 262 | 83 | 1,027 | 1,372 | 114,338 | 115,710 |
| Total consumer loans | 725 | 339 | 1,557 | 2,621 | 223,061 | 225,682 |
| Residential mortgage loans | 5,943 | 3,397 | 63,933 | 73,273 | 3,213,970 | 3,287,243 |
| Total amortized cost | 10,035 | 5,802 | 88,082 | 103,919 | 4,972,464 | 5,076,383 |
| December 31, 2019 | 30 - 59 <br>days | 60 - 89 <br>days | More than 90 days | Total past<br> due loans | Total <br>current | Total <br>amortized <br>cost |
| Commercial loans | ||||||
| Government | — | — | — | — | 370,753 | 370,753 |
| Commercial and industrial | 276 | — | 7,487 | 7,763 | 527,952 | 535,715 |
| Commercial overdrafts | — | — | 2 | 2 | 28,545 | 28,547 |
| Total commercial loans | 276 | — | 7,489 | 7,765 | 927,250 | 935,015 |
| Commercial real estate loans | ||||||
| Commercial mortgage | 445 | — | 3,250 | 3,695 | 655,598 | 659,293 |
| Construction | — | — | 3,128 | 3,128 | 91,812 | 94,940 |
| Total commercial real estate loans | 445 | — | 6,378 | 6,823 | 747,410 | 754,233 |
| Consumer loans | ||||||
| Automobile financing | 53 | 58 | 135 | 246 | 21,216 | 21,462 |
| Credit card | 630 | 221 | 424 | 1,275 | 86,399 | 87,674 |
| Overdrafts | — | — | 34 | 34 | 7,824 | 7,858 |
| Other consumer | 994 | 139 | 1,028 | 2,161 | 137,986 | 140,147 |
| Total consumer loans | 1,677 | 418 | 1,621 | 3,716 | 253,425 | 257,141 |
| Residential mortgage loans | 31,931 | 9,487 | 47,132 | 88,550 | 3,131,271 | 3,219,821 |
| Total amortized cost | 34,329 | 9,905 | 62,620 | 106,854 | 5,059,356 | 5,166,210 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Changes in Allowances For Credit Losses
The increase in the provision for credit losses during the nine months ended September 30, 2020 was primarily attributable to changes in macroeconomic factors, such as GDP forecasts, and changes in the credit ratings of some commercial customers. As per the Bank’s accounting policy, as disclosed in Note 2, the Bank continuously collects and maintains attributes related to financial instruments within the scope of CECL, including current conditions, and reasonable and supportable assumptions about future economic conditions.
| Nine months ended September 30, 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | Commercial<br> real estate | Consumer | Residential<br> mortgage | Total | ||||||||
| Balance at the beginning of period, before change in accounting policy | 7,281 | 1,496 | 1,502 | 13,309 | 23,588 | |||||||
| Cumulative effect from change in accounting policy (Note 2) | 4,109 | 1,026 | 2,506 | 200 | 7,841 | |||||||
| Provision increase (decrease) | 4,953 | (274) | 1,954 | 4,081 | 10,714 | |||||||
| Recoveries of previous charge-offs | 6 | — | 850 | 290 | 1,146 | |||||||
| Charge-offs | (16) | — | (1,574) | (789) | (2,379) | |||||||
| Other | (21) | (1) | 5 | 153 | 136 | |||||||
| Allowances for expected credit losses at end of period | 16,312 | 2,247 | 5,243 | 17,244 | 41,046 | Nine months ended September 30, 2019 | ||||||
| --- | --- | --- | --- | --- | --- | |||||||
| Commercial | Commercial<br> real estate | Consumer | Residential<br> mortgage | Total | ||||||||
| Balance at beginning of period | 6,913 | 4,092 | 802 | 13,295 | 25,102 | |||||||
| Provision increase (decrease) | 652 | (1,637) | 1,278 | (845) | (552) | |||||||
| Recoveries of previous charge-offs | 6 | — | 929 | 407 | 1,342 | |||||||
| Charge-offs | — | — | (1,662) | (288) | (1,950) | |||||||
| Other | — | (1) | 4 | (39) | (36) | |||||||
| General and specific allowances at end of period | 7,571 | 2,454 | 1,351 | 12,530 | 23,906 | |||||||
| Allowances at end of period: individually evaluated for impairment | 5,894 | 515 | 683 | 10,643 | 17,735 | |||||||
| Allowances at end of period: collectively evaluated for impairment | 1,677 | 1,939 | 668 | 1,887 | 6,171 |
Collateral-dependent loans
Management identified that the repayment of certain commercial and consumer mortgage loans is expected to be provided substantially through the operation or the sale of the collateral pledged to the Bank ("collateral-dependent loans"). The Bank believes that for the vast majority of loans identified as collateral-dependent, the sale of the collateral will be sufficient to fully reimburse the loan's carrying amount.
Loan Deferral Program
In response to the COVID-19 pandemic, effective April 1, 2020 the Bank implemented a residential mortgage and consumer loan deferral program for qualified borrowers in the Bermuda and Cayman segments under which principal and interest payments on performing loans were automatically deferred for three months from April 1, 2020 to June 30, 2020 and the loan term extended. Borrowers had the option to notify the Bank if they preferred to continue with regular, scheduled payments i.e. to opt-out. Commercial customers had the option to pay interest only on their monthly loan payments with no penalties. Loans that meet the requirements for deferral under the programs are not considered TDRs or past due as the borrowers were current on their payments and were not experiencing financial difficulty at the time of these modifications.
In addition, the Bank also introduced deferrals on credit card payments for April and May in the Bermuda segment and May and June in the Cayman segment.
The Bank subsequently extended the residential mortgage and personal loan deferral program for a further three months from July 1, 2020 to September 30, 2020, however borrowers had to notify the Bank of their intention to defer principal and interest payments.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Non-Performing Loans
During the nine months ended September 30, 2020, no interest was recognized on non-accrual loans. Non-performing loans at September 30, 2020 include PCD loans, which have all been on non-accrual status since their acquisition. The balances at December 31, 2019 have not been restated to include the $1.8 million amortized cost of PCD loans as at that date. No credit deteriorated loans were purchased during the period.
| September 30, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Non-accrual loans with an allowance | Non-accrual loans without an allowance | Past<br> due more than 90 days and accruing | Total non-<br>performing<br> loans | Non-accrual loans with an allowance | Non-accrual loans without an allowance | Past<br> due more than 90 days and accruing | Total non-<br>performing<br> loans | |
| Commercial loans | ||||||||
| Commercial and industrial | 18,214 | 22 | — | 18,236 | 7,487 | 80 | — | 7,567 |
| Commercial overdrafts | — | 3 | — | 3 | — | 2 | — | 2 |
| Total commercial loans | 18,214 | 25 | — | 18,239 | 7,487 | 82 | — | 7,569 |
| Commercial real estate loans | ||||||||
| Commercial mortgage | 966 | 3,951 | — | 4,917 | 1,019 | 2,231 | — | 3,250 |
| Construction | — | — | — | — | — | — | 3,128 | 3,128 |
| Total commercial real estate loans | 966 | 3,951 | — | 4,917 | 1,019 | 2,231 | 3,128 | 6,378 |
| Consumer loans | ||||||||
| Automobile financing | 122 | 6 | — | 128 | — | 155 | — | 155 |
| Credit card | — | — | 400 | 400 | — | — | 424 | 424 |
| Overdrafts | — | 4 | — | 4 | — | 34 | — | 34 |
| Other consumer | 851 | 181 | — | 1,032 | 676 | 387 | — | 1,063 |
| Total consumer loans | 973 | 191 | 400 | 1,564 | 676 | 576 | 424 | 1,676 |
| Residential mortgage loans | 40,944 | 9,533 | 18,966 | 69,443 | 29,016 | 9,314 | 12,008 | 50,338 |
| Total non-performing loans | 61,098 | 13,700 | 19,366 | 94,164 | 38,198 | 12,203 | 15,560 | 65,961 |
Loans modified in a TDR
As at September 30, 2020, the Bank had no loans that were modified in a TDR during the preceding 12 months that subsequently defaulted (December 31, 2019: nil).,
TDRs entered into during the period
| Nine months ended September 30, 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Number of<br> contracts | Pre-<br>modification<br> recorded <br>loans | Modification: <br>interest<br> capitalization | Post-<br>modification<br> recorded<br> loans | |||||||
| Residential mortgage loans | 1 | 352 | — | 352 | Nine months ended September 30, 2019 | |||||
| --- | --- | --- | --- | --- | ||||||
| Number of<br> contracts | Pre-<br>modification<br> recorded loans | Modification: <br>interest<br> capitalization | Post-<br>modification<br> recorded<br>loans | |||||||
| Residential mortgage loans | 3 | 1,381 | 101 | 1,482 |
TDRs Outstanding
| September 30, 2020 | December 31, 2019 | |||
|---|---|---|---|---|
| Accrual | Non-accrual | Accrual | Non-accrual | |
| Commercial loans | 914 | — | 939 | — |
| Commercial real estate loans | 2,352 | 1,820 | 2,954 | 1,315 |
| Residential mortgage loans | 57,846 | 18,226 | 65,275 | 9,576 |
| Total TDRs outstanding | 61,112 | 20,046 | 69,168 | 10,891 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
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 summarizes the credit exposure of the Bank by geographic region. The exposures amounts disclosed below do not include accrued interest and are gross of allowances for credit losses and gross of collateral held.
| September 30, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Geographic region | Cash due from<br> banks, resell agreements and<br> short-term<br> investments | Loans | Off-balance<br> sheet | Total credit<br> exposure | Cash due from<br> banks, resell agreements and<br> short-term<br> investments | Loans | Off-balance<br> sheet | Total credit<br> exposure |
| Australia | 166,787 | — | — | 166,787 | 170,956 | — | — | 170,956 |
| Bermuda | 40,221 | 2,230,206 | 341,012 | 2,611,439 | 38,059 | 2,253,969 | 347,802 | 2,639,830 |
| Canada | 523,001 | — | — | 523,001 | 553,941 | — | — | 553,941 |
| Cayman | 24,397 | 929,224 | 251,303 | 1,204,924 | 55,360 | 931,434 | 208,404 | 1,195,198 |
| Germany | 80,724 | — | — | 80,724 | — | — | — | — |
| Guernsey | 2 | 734,789 | 205,290 | 940,081 | 4 | 856,453 | 123,376 | 979,833 |
| Ireland | 76,225 | — | — | 76,225 | — | — | — | — |
| Japan | 2,326 | — | — | 2,326 | 16,183 | — | — | 16,183 |
| Jersey | — | 14,736 | 34,410 | 49,146 | — | 7,219 | — | 7,219 |
| Netherlands | 268 | — | — | 268 | 410,461 | — | — | 410,461 |
| Norway | 19,923 | — | — | 19,923 | 1,204 | — | — | 1,204 |
| Saint Lucia | — | 29,175 | — | 29,175 | — | 29,400 | — | 29,400 |
| Switzerland | 5,495 | — | — | 5,495 | 8,015 | — | — | 8,015 |
| The Bahamas | 1,681 | 12,259 | — | 13,940 | 1,607 | 12,859 | — | 14,466 |
| United Kingdom | 1,408,955 | 1,125,994 | 163,612 | 2,698,561 | 1,742,676 | 1,074,876 | 108,599 | 2,926,151 |
| United States | 937,620 | — | — | 937,620 | 898,262 | — | — | 898,262 |
| Other | 6,762 | — | — | 6,762 | 14,005 | — | — | 14,005 |
| Total gross exposure | 3,294,387 | 5,076,383 | 995,627 | 9,366,397 | 3,910,733 | 5,166,210 | 788,181 | 9,865,124 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 8: Customer deposits and deposits from banks
| By Maturity | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Demand | Total <br>demand <br>deposits | Term | Total <br>term <br>deposits | |||||||||||
| September 30, 2020 | Non-interest<br> bearing | Interest <br>bearing | Within 3<br> months | 3 to 6<br> months | 6 to 12<br> months | After 12 months | Total <br>deposits | |||||||
| Demand or less than $100k¹ | 2,610,225 | 6,928,749 | 9,538,974 | 29,858 | 11,718 | 12,458 | 15,306 | 69,340 | 9,608,314 | |||||
| Term - $100k or more | N/A | N/A | — | 1,535,322 | 368,990 | 293,272 | 85,220 | 2,282,804 | 2,282,804 | |||||
| Total deposits | 2,610,225 | 6,928,749 | 9,538,974 | 1,565,180 | 380,708 | 305,730 | 100,526 | 2,352,144 | 11,891,118 | |||||
| Demand | Total <br>demand <br>deposits | Term | Total <br>term <br>deposits | |||||||||||
| December 31, 2019 | Non-interest<br> bearing | Interest <br>bearing | Within 3<br> months | 3 to 6<br> months | 6 to 12<br> months | After 12 months | Total <br>deposits | |||||||
| Demand or less than $100k¹ | 2,238,256 | 7,152,063 | 9,390,319 | 31,666 | 9,355 | 13,497 | 16,478 | 70,996 | 9,461,315 | |||||
| Term - $100k or more | N/A | N/A | — | 2,402,619 | 224,945 | 291,020 | 61,726 | 2,980,310 | 2,980,310 | |||||
| Total deposits | 2,238,256 | 7,152,063 | 9,390,319 | 2,434,285 | 234,300 | 304,517 | 78,204 | 3,051,306 | 12,441,625 |
¹ The weighted-average interest rate on interest-bearing demand deposits as at September 30, 2020 is -0.02% (December 31, 2019: 0.20%).
| By Type and Segment | September 30, 2020 | December 31, 2019 | ||||
|---|---|---|---|---|---|---|
| Payable <br>on demand | Payable on a<br>fixed date | Total | Payable <br>on demand | Payable on a<br>fixed date | Total | |
| Bermuda | 3,505,186 | 703,538 | 4,208,724 | 3,145,859 | 1,265,679 | 4,411,538 |
| Cayman | 3,246,363 | 421,488 | 3,667,851 | 2,995,119 | 479,848 | 3,474,967 |
| Channel Islands and the UK | 2,787,425 | 1,227,118 | 4,014,543 | 3,249,341 | 1,305,779 | 4,555,120 |
| Total deposits | 9,538,974 | 2,352,144 | 11,891,118 | 9,390,319 | 3,051,306 | 12,441,625 |
Note 9: 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. The defined benefit pension plans are in the Bermuda, Guernsey and United Kingdom jurisdictions and the defined benefit post-retirement medical plan is in Bermuda.
The Bank includes an estimate of the 2020 Bank contribution and estimated benefit payments for the next ten years under the pension and post-retirement plans in its audited financial statements for the year-ended December 31, 2019. During the nine months ended September 30, 2020, there have been no material revisions to these estimates.
| Three months ended | Nine months ended | ||||
|---|---|---|---|---|---|
| Line item in the consolidated statements of operations | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |
| Defined benefit pension expense (income) | |||||
| Service cost | Salaries and other employee benefits | 44 | — | 44 | — |
| Interest cost | Non-service employee benefits expense | 995 | 1,236 | 2,955 | 3,766 |
| Expected return on plan assets | Non-service employee benefits expense | (1,898) | (1,857) | (5,639) | (5,657) |
| Amortization of net actuarial (gains) losses | Non-service employee benefits expense | 604 | 608 | 1,806 | 1,834 |
| Amortization of prior service (credit) cost | Non-service employee benefits expense | (34) | 5 | (24) | 15 |
| Settlement (gain) loss | Net other gains (losses) | 367 | — | 518 | — |
| Total defined benefit pension expense (income) | 78 | (8) | (340) | (42) | |
| Post-retirement medical benefit expense (income) | |||||
| Service cost | Salaries and other employee benefits | 17 | 15 | 50 | 44 |
| Interest cost | Non-service employee benefits expense | 818 | 1,185 | 2,453 | 3,555 |
| Amortization of net actuarial (gains) losses | Non-service employee benefits expense | — | 68 | — | 204 |
| Amortization of prior service (credit) cost | Non-service employee benefits expense | 131 | 94 | 393 | 282 |
| Total post-retirement medical benefit expense (income) | 966 | 1,362 | 2,896 | 4,085 |
The components of defined benefit pension expense (income) and post-retirement benefit expense (income) other than the service cost component are included in the line item non-service employee benefits expense in the consolidated statements of income.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 10: Credit related arrangements, repurchase agreements and commitments
Commitments
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 expected credit losses.
The Bank has a facility with 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 utilized facility. At September 30, 2020, $158.8 million (December 31, 2019: $143.6 million) of standby letters of credit were issued under this facility.
| Outstanding unfunded commitments to extend credit | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Commitments to extend credit | 722,840 | 549,049 |
| Documentary and commercial letters of credit | 290 | 355 |
| Total unfunded commitments to extend credit | 723,130 | 549,404 |
| Allowance for credit losses | (177) | — |
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, while 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 recognized in income proportionately over the life of the credit agreements. The following table presents the outstanding financial guarantees. Collateral is shown at estimated market value less selling cost. Where the collateral is cash, it is shown gross including accrued income.
| September 30, 2020 | December 31, 2019 | |||||
|---|---|---|---|---|---|---|
| Outstanding financial guarantees | Gross | Collateral | Net | Gross | Collateral | Net |
| Standby letters of credit | 267,900 | 260,570 | 7,330 | 230,971 | 223,711 | 7,260 |
| Letters of guarantee | 4,597 | 4,561 | 36 | 7,806 | 7,672 | 134 |
| Total | 272,497 | 265,131 | 7,366 | 238,777 | 231,383 | 7,394 |
Repurchase agreements
The Bank utilizes repurchase agreements and resell agreements (reverse repurchase agreements) to manage liquidity. The risks of these transactions include changes in the fair value in the securities posted or received as collateral and other credit related events. The Bank manages these risks by ensuring that the collateral involved is appropriate and by monitoring the value of the securities posted or received as collateral on a daily basis.
As at September 30, 2020, the Bank had 6 open positions (December 31, 2019: 13) in resell agreements with a remaining maturity of less than 30 days involving pools of mortgages issued by US federal agencies. The amortized cost of these resell agreements is $326.9 million (December 31, 2019: $142.3 million) and are included in securities purchased under agreement to resell on the consolidated balance sheets. As at September 30, 2020, there were no positions (December 31, 2019: no positions) which were offset on the consolidated balance sheets to arrive at the carrying value, and there was no collateral amount which was available to offset against the future settlement amount.
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 as at September 30, 2020, a provision of $5.5 million (December 31, 2019: $5.5 million), which has been recorded, is appropriate. 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.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 11: Leases
The Bank enters into operating lease agreements either as the lessee or the lessor, mostly for office and parking spaces as well as for small office equipment. The terms of the existing leases, including renewal options that are reasonably certain to be exercised, extend up to the year 2035. Certain lease payments will be adjusted during the related lease's term based on movements in the relevant consumer price index.
| Three months ended | Nine months ended | |||||
|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||
| Lease costs | ||||||
| Operating lease costs | 1,933 | 1,873 | 6,030 | 4,453 | ||
| Short-term lease costs | 454 | 236 | 968 | 648 | ||
| Sublease income | (290) | (231) | (849) | (239) | ||
| Total net lease cost | 2,097 | 1,878 | 6,149 | 4,862 | ||
| Operating lease income | 206 | 285 | 711 | 873 | ||
| Other information for the period | ||||||
| Right-of-use assets related to new operating lease liabilities | 323 | 26,093 | 323 | 29,486 | ||
| Operating cash flows from operating leases | 2,219 | 1,925 | 6,200 | 4,612 | ||
| Other information at end of period | September 30, 2020 | December 31, 2019 | ||||
| Operating leases right-of-use assets (included in other assets on the balance sheets) | 45,961 | 47,947 | ||||
| Operating lease liabilities (included in other liabilities on the balance sheets) | 44,710 | 48,334 | ||||
| Weighted average remaining lease term for operating leases (in years) | 10.03 | 10.37 | ||||
| Weighted average discount rate for operating leases | 5.25 | % | 5.25 | % | ||
| The following table summarizes the maturity analysis of the Bank's commitments for long-term leases as at December 31, 2019: | ||||||
| Year ending December 31 | Operating Leases | |||||
| 2020 | 8,570 | |||||
| 2021 | 8,312 | |||||
| 2022 | 7,923 | |||||
| 2023 | 7,004 | |||||
| 2024 | 4,324 | |||||
| 2025 & thereafter | 27,194 | |||||
| Total commitments | 63,327 | |||||
| Less: effect of discounting cash flows to their present value | (14,993) | |||||
| Operating lease liabilities | 48,334 |
Note 12: Segmented information
The Bank is managed by the Chairman and Chief Executive Officer (“CEO”) on a geographic basis. The Bank presents four reportable segments, three geographical and one other: Bermuda, Cayman, Channel Islands and the UK, and Other. The Other segment is composed of several operating segments that have been aggregated in accordance with GAAP. Each reportable segment has a managing director who reports to the Chairman and CEO. The Chairman and CEO and the segment managing director have final authority over resource allocation decisions and performance assessment.
The geographic segments reflect this management structure and the manner in which financial information is currently evaluated by the Chairman and CEO. Segment results are determined based on the Bank's management reporting system, which assigns balance sheet and income statement items to each of the geographic segments. The process is designed around the Bank's organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. A description of each reportable segment and table of financial results is presented below.
Accounting policies of the reportable segments are the same as those described in Note 2 of the Bank's audited financial statements for the year ended December 31, 2019. Transactions between segments are accounted for on an accrual basis and are all eliminated upon consolidation. The Bank generally does not allocate assets, revenues and expenses among its business segments, with the exception of certain corporate overhead expenses and loan participation revenue and expenses. Loan participation revenue and expenses are allocated pro-rata based upon the percentage of the total loan funded by each jurisdiction participating in the loan.
The Bermuda segment provides a full range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized businesses through three branch locations and through internet banking, mobile banking, automated teller machines (“ATMs”) and debit cards. Retail services include deposit services, consumer and mortgage lending, credit cards and 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,
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
estate, company management and custody services. Bermuda is also the location of the Bank's head offices and accordingly, retains the unallocated corporate overhead expenses.
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 Channel Islands and the UK segment includes the jurisdictions of Guernsey and Jersey (Channel Islands), and the UK. In the Channel Islands, a broad range of services are provided to private clients and financial intermediaries including private banking and treasury services, internet banking, wealth management and fiduciary services. The UK jurisdiction provides mortgage services for high-value residential properties.
The Other segment includes the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland. These operating segments individually and collectively do not meet the quantitative threshold for segmented reporting and are therefore aggregated as non-reportable operating segments.
| Total Assets by Segment | September 30, 2020 | December 31, 2019 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Bermuda | 5,229,393 | 5,220,016 | ||||||||||||||||||
| Cayman | 4,070,775 | 3,839,074 | ||||||||||||||||||
| Channel Islands and the UK | 4,608,246 | 5,108,357 | ||||||||||||||||||
| Other | 33,347 | 35,148 | ||||||||||||||||||
| Total assets before inter-segment eliminations | 13,941,761 | 14,202,595 | ||||||||||||||||||
| Less: inter-segment eliminations | (481,016) | (281,020) | ||||||||||||||||||
| Total | 13,460,745 | 13,921,575 | Net interest income | Provision for<br> credit recoveries (losses) | Non-interest<br> income | Net revenue<br> before gains<br> and losses | Gains and<br> losses | Total net revenue | Total<br>expenses | Net income | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three months ended September 30, 2020 | Customer | Inter- segment | ||||||||||||||||||
| Bermuda | 38,275 | 135 | (1,604) | 21,838 | 58,644 | 1,613 | 60,257 | 51,399 | 8,858 | |||||||||||
| Cayman | 21,691 | 301 | 40 | 12,520 | 34,552 | 414 | 34,966 | 17,213 | 17,753 | |||||||||||
| Channel Islands and the UK | 15,347 | (436) | 209 | 10,425 | 25,545 | (515) | 25,030 | 20,796 | 4,234 | |||||||||||
| Other | — | — | — | 3,722 | 3,722 | — | 3,722 | 4,024 | (302) | |||||||||||
| Total before eliminations | 75,313 | — | (1,355) | 48,505 | 122,463 | 1,512 | 123,975 | 93,432 | 30,543 | |||||||||||
| Inter-segment eliminations | — | — | — | (1,628) | (1,628) | — | (1,628) | (1,628) | — | |||||||||||
| Total | 75,313 | — | (1,355) | 46,877 | 120,835 | 1,512 | 122,347 | 91,804 | 30,543 | Net interest income | Provision for<br> credit recoveries (losses) | Non-interest<br> income | Net revenue<br> before gains<br> and losses | Gains and<br> losses | Total net revenue | Total<br>expenses | Net income | |||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Three months ended September 30, 2019 | Customer | Inter- segment | ||||||||||||||||||
| Bermuda | 45,279 | 177 | (591) | 22,391 | 67,256 | (47) | 67,209 | 51,186 | 16,023 | |||||||||||
| Cayman | 27,660 | 280 | 228 | 12,548 | 40,716 | 570 | 41,286 | 15,230 | 26,056 | |||||||||||
| Channel Islands and the UK | 13,376 | (457) | (48) | 9,495 | 22,366 | — | 22,366 | 21,691 | 675 | |||||||||||
| Other | 13 | — | — | 5,439 | 5,452 | — | 5,452 | 5,769 | (317) | |||||||||||
| Total before eliminations | 86,328 | — | (411) | 49,873 | 135,790 | 523 | 136,313 | 93,876 | 42,437 | |||||||||||
| Inter-segment eliminations | — | — | — | (3,227) | (3,227) | — | (3,227) | (3,227) | — | |||||||||||
| Total | 86,328 | — | (411) | 46,646 | 132,563 | 523 | 133,086 | 90,649 | 42,437 | |||||||||||
| Net interest income | Provision for<br> credit recoveries (losses) | Non-interest<br> income | Net revenue<br> before gains<br> and losses | Gains and<br> losses | Total net revenue | Total<br>expenses | Net income | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Nine months ended<br>September 30, 2020 | Customer | Inter- segment | ||||||||||||||||||
| Bermuda | 120,745 | 632 | (11,113) | 63,406 | 173,670 | 1,626 | 175,296 | 147,367 | 27,929 | |||||||||||
| Cayman | 72,094 | 835 | 238 | 36,257 | 109,424 | 416 | 109,840 | 47,910 | 61,930 | |||||||||||
| Channel Islands and the UK | 49,173 | (1,467) | (16) | 29,930 | 77,620 | (425) | 77,195 | 61,446 | 15,749 | |||||||||||
| Other | 7 | — | — | 11,446 | 11,453 | (1) | 11,452 | 11,906 | (454) | |||||||||||
| Total before eliminations | 242,019 | — | (10,891) | 141,039 | 372,167 | 1,616 | 373,783 | 268,629 | 105,154 | |||||||||||
| Inter-segment eliminations | — | — | — | (4,942) | (4,942) | — | (4,942) | (4,942) | — | |||||||||||
| Total | 242,019 | — | (10,891) | 136,097 | 367,225 | 1,616 | 368,841 | 263,687 | 105,154 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Net interest income | Provision for<br> credit recoveries (losses) | Non-interest<br> income | Net revenue<br> before gains<br> and losses | Gains and<br> losses | Total net revenue | Total<br>expenses | Net income | ||
|---|---|---|---|---|---|---|---|---|---|
| Nine months ended September 30, 2019 | Customer | Inter- segment | |||||||
| Bermuda | 138,595 | 1,156 | (1,328) | 66,424 | 204,847 | 1,909 | 206,756 | 157,372 | 49,384 |
| Cayman | 87,040 | 609 | 521 | 38,231 | 126,401 | 575 | 126,976 | 45,043 | 81,933 |
| Channel Islands and the UK | 33,787 | (1,765) | 1,359 | 23,177 | 56,558 | — | 56,558 | 53,136 | 3,422 |
| Other | 40 | — | — | 15,927 | 15,967 | (17) | 15,950 | 17,503 | (1,553) |
| Total before eliminations | 259,462 | — | 552 | 143,759 | 403,773 | 2,467 | 406,240 | 273,054 | 133,186 |
| Inter-segment eliminations | — | — | — | (9,494) | (9,494) | — | (9,494) | (9,494) | — |
| Total | 259,462 | — | 552 | 134,265 | 394,279 | 2,467 | 396,746 | 263,560 | 133,186 |
Note 13: 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 negotiated privately between the Bank and the counterparty to the contract and include interest rate contracts and foreign exchange contracts.
The Bank may pursue opportunities to reduce its exposure to credit losses on derivatives by entering into International Swaps and Derivatives Association master agreements (“ISDAs”). Depending on the nature of the derivative transaction, bilateral collateral arrangements may be used as well. When the Bank is engaged in more than one outstanding derivative transaction with the same counterparty, and also has a legally enforceable master netting agreement with that counterparty, the net marked to market exposure represents the netting of the positive and negative exposures with that counterparty. When there is a net negative exposure, the Bank regards its credit exposure to the counterparty as being zero. The net marked to market position with a particular counterparty represents a reasonable measure of credit risk when there is a legally enforceable master netting agreement between the Bank and that counterparty.
Certain of these agreements contain credit risk-related contingent features in which the counterparty has the option to accelerate cash settlement of the Bank's net derivative liabilities with the counterparty in the event the Bank's credit rating falls below specified levels or the liabilities reach certain levels.
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance 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 minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Bank’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain consolidated balance sheet assets and liabilities so that movements in interest rates do not adversely affect the net interest margin. Derivative instruments that are used as part of the Bank’s risk management strategy include interest rate swap contracts that have indices related to the pricing of specific consolidated balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. The Bank uses foreign currency derivative instruments to hedge its exposure to foreign currency risk. Certain hedging relationships are formally designated and qualify for hedge accounting as fair value or net investment hedges. Risk management derivatives comprise fair value hedges, net investment hedges and derivatives not formally designated as hedges as described below.
Fair value hedges includes designated currency swaps that are used to minimize the Bank's exposure to variability in the fair value of available-for-sale investments due to movements in foreign exchange rates. The effective portion of changes in the fair value of the hedging instrument is recognized in current year earnings consistent with the related change in fair value of the hedged items attributable to foreign exchange rates. For fair value hedges, hedging effectiveness of the hedged item and the hedging instrument are assessed and managed at inception and on an ongoing basis using a partial-term last-of-layer method.
Net investment hedges includes designated currency swaps and qualifying non-derivative instruments and are used to minimize 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 recognized 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 minimize the risk of hedge ineffectiveness.
For derivatives designated as net investment hedges, the Bank follows the method based on changes in spot exchange rates. Accordingly:
The change in the fair value of the derivative instrument that is reported in AOCL (i.e., the effective portion) is determined by the changes in spot exchange rates.
The change in the fair value of the derivative instrument attributable to changes in the difference between the forward rate and spot rate are excluded from the measure
of the hedge ineffectiveness and that difference is reported directly in the consolidated statements of operations under foreign exchange revenue.
Amounts recorded in AOCL are reclassified to earnings only upon the sale or substantial liquidation of an investment in a foreign subsidiary.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
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. See Note 20: Accumulated other comprehensive loss for details on the amount recognized into AOCL during the current period from translation gain or loss.
Derivatives not formally designated as hedges are entered into to manage the interest rate risk of fixed rate deposits and foreign exchange risk of the Bank's exposure. Changes in the fair value of derivative instruments not formally designated as hedges are recognized 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 recognized 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.
| September 30, 2020 | Derivative instrument | Number of contracts | Notional <br>amounts | Gross<br> positive<br>fair value | Gross<br> negative<br>fair value | Net <br>fair value |
|---|---|---|---|---|---|---|
| Risk management derivatives | ||||||
| Net investment hedges | Currency swaps | 3 | 65,122 | — | (1,005) | (1,005) |
| Fair value hedges | Currency swaps | 4 | 204,011 | 454 | (455) | (1) |
| Derivatives not formally designated as hedging instruments | Currency swaps | 52 | 1,647,254 | 2,474 | (12,478) | (10,004) |
| Subtotal risk management derivatives | 1,916,387 | 2,928 | (13,938) | (11,010) | ||
| Client services derivatives | Spot and forward foreign exchange | 263 | 1,041,165 | 4,729 | (3,863) | 866 |
| Total derivative instruments | 2,957,552 | 7,657 | (17,801) | (10,144) | ||
| December 31, 2019 | Derivative instrument | Number of contracts | Notional <br>amounts | Gross<br> positive<br>fair value | Gross<br> negative<br>fair value | Net <br>fair value |
| Risk management derivatives | ||||||
| Net investment hedges | Currency swaps | 1 | 9,502 | — | (118) | (118) |
| Derivatives not formally designated as hedging instruments | Currency swaps | 9 | 207,032 | 1,632 | (1,339) | 293 |
| Subtotal risk management derivatives | 216,534 | 1,632 | (1,457) | 175 | ||
| Client services derivatives | Spot and forward foreign exchange | 352 | 3,280,636 | 31,060 | (30,602) | 458 |
| Total derivative instruments | 3,497,170 | 32,692 | (32,059) | 633 |
In addition to the above, as at September 30, 2020 foreign denominated deposits of £205.3 million (December 31, 2019: £251.4 million) and CHF 0.4 million (December 31, 2019: CHF 0.4 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 collateral 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.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Gross fair<br> value<br> recognized | Less: offset<br> applied<br> under master<br> netting<br> agreements | Net fair value<br>presented in the<br> consolidated<br> balance sheets | Less: positions not offset in the consolidated balance sheets | |||||
|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | Gross fair value of derivatives | Cash collateral<br> received / paid | Net exposures | |||||
| Derivative assets | ||||||||
| Spot and forward foreign exchange and currency swaps | 7,657 | (2,291) | 5,366 | — | (405) | 4,961 | ||
| Derivative liabilities | ||||||||
| Spot and forward foreign exchange and currency swaps | 17,801 | (2,291) | 15,510 | — | (1,723) | 13,787 | ||
| Net negative fair value | (10,144) | |||||||
| Gross fair<br> value<br> recognized | Less: offset<br> applied<br> under master<br> netting<br> agreements | Net fair value<br>presented in the<br> consolidated<br> balance sheets | Less: positions not offset in the consolidated balance sheets | |||||
| December 31, 2019 | Gross fair value of derivatives | Cash collateral<br> received / paid | Net exposures | |||||
| Derivative assets | ||||||||
| Spot and forward foreign exchange and currency swaps | 32,692 | (2,233) | 30,459 | — | (3,224) | 27,235 | ||
| Derivative liabilities | ||||||||
| Spot and forward foreign exchange and currency swaps | 32,059 | (2,233) | 29,826 | — | (997) | 28,829 | ||
| Net positive fair value | 633 |
The following tables show the location and amount of gains (losses) recorded in either the consolidated statements of operations or consolidated statements of comprehensive income on derivative instruments outstanding.
| Three months ended | Nine months ended | ||||
|---|---|---|---|---|---|
| Derivative instrument | Consolidated statements of operations line item | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 |
| Spot and forward foreign exchange | Foreign exchange revenue | 436 | 321 | 408 | 33 |
| Currency swaps, not designated as hedge | Foreign exchange revenue | (18,056) | (900) | (10,297) | (244) |
| Total net gains (losses) recognized in net income | (17,620) | (579) | (9,889) | (211) | |
| Derivative instrument | Consolidated statements of comprehensive income line item | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 |
| Currency swaps - net investment hedge | Net change in unrealized gains and (losses) on translation of net investment in foreign operations | (873) | 339 | (888) | 366 |
| Total net gains (losses) recognized in comprehensive income | (873) | 339 | (888) | 366 |
Note 14: 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 of the Bank's audited financial statements for the year ended December 31, 2019.
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 management.
Financial instruments in Level 1 include actively traded redeemable mutual funds.
Financial instruments in Level 2 include government debt securities, corporate debt securities, mortgage-backed securities and other asset-backed securities, 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.
There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the nine months ended September 30, 2020 and the year ended December 31, 2019.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| September 30, 2020 | December 31, 2019 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair value | Total carrying<br>amount / <br>fair value | Fair value | Total carrying<br>amount / <br>fair value | ||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||
| Items that are recognized at fair value on a recurring basis: | |||||||||||
| Financial assets | |||||||||||
| Equity securities | |||||||||||
| Mutual funds | 7,309 | 250 | — | 7,559 | 7,141 | 278 | — | 7,419 | |||
| Total equity securities | 7,309 | 250 | — | 7,559 | 7,141 | 278 | — | 7,419 | |||
| Available-for-sale investments | |||||||||||
| US government and federal agencies | — | 2,250,212 | — | 2,250,212 | — | 2,052,446 | — | 2,052,446 | |||
| Non-US governments debt securities | — | 25,808 | — | 25,808 | — | 25,676 | — | 25,676 | |||
| Asset-backed securities - Student loans | — | — | 12,909 | 12,909 | — | — | 12,891 | 12,891 | |||
| Residential mortgage-backed securities | — | 80,784 | — | 80,784 | — | 129,328 | — | 129,328 | |||
| Total available-for-sale | — | 2,356,804 | 12,909 | 2,369,713 | — | 2,207,450 | 12,891 | 2,220,341 | |||
| Other assets - Derivatives | — | 5,366 | — | 5,366 | — | 30,459 | — | 30,459 | |||
| Financial liabilities | |||||||||||
| Other liabilities - Derivatives | — | 15,510 | — | 15,510 | — | 29,826 | — | 29,826 |
Level 3 Reconciliation
The Level 3 financial instrument, shown as Asset-backed securities - Student loans in the above table, is a federal family education loan program guaranteed student loan security and is valued using a non-binding quote from an external security pricing service.
The table below summarizes realized and unrealized gains and losses for Level 3 assets still held at the reporting date.
| Nine months ended<br>September 30, 2020 | Year ended December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|
| Available-<br> for-sale investments | Available-<br> for-sale investments | ||||||
| Carrying amount at beginning of period | 12,891 | 12,626 | |||||
| Realized and unrealized gains (losses) recognized in other comprehensive income | 18 | 265 | |||||
| Carrying amount at end of period | 12,909 | 12,891 | |||||
| Cumulative gain (loss) recognized in other comprehensive income | (381) | (399) | |||||
| Items Other Than Those Recognized at Fair Value on a Recurring Basis: | |||||||
| --- | --- | --- | --- | --- | --- | --- | --- |
| September 30, 2020 | December 31, 2019 | ||||||
| Level | Carrying<br>amount | Fair<br> value | Appreciation /<br>(depreciation) | Carrying<br>amount | Fair<br> value | Appreciation /<br>(depreciation) | |
| Financial assets | |||||||
| Cash due from banks | Level 1 | 2,160,903 | 2,160,903 | — | 2,550,070 | 2,550,070 | — |
| Securities purchased under agreements to resell | Level 2 | 326,877 | 326,877 | — | 142,283 | 142,283 | — |
| Short-term investments | Level 1 | 806,607 | 806,607 | — | 1,218,380 | 1,218,380 | — |
| Investments held-to-maturity | Level 2 | 2,347,341 | 2,457,933 | 110,592 | 2,208,663 | 2,255,987 | 47,324 |
| Loans, net of allowance for credit losses | Level 2 | 5,035,337 | 5,074,870 | 39,533 | 5,142,622 | 5,161,257 | 18,635 |
| Other real estate owned¹ | Level 2 | 4,227 | 4,227 | — | 3,842 | 3,842 | — |
| Financial liabilities | |||||||
| Term deposits | Level 2 | 2,352,144 | 2,357,814 | (5,670) | 3,051,306 | 3,054,813 | (3,507) |
| Long-term debt | Level 2 | 196,359 | 197,872 | (1,513) | 143,500 | 147,574 | (4,074) |
¹ The current carrying value of OREO is adjusted to fair value only when there is devaluation below carrying value.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 15: Interest rate risk
The following tables set out the assets, liabilities and shareholders' equity 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.
| September 30, 2020 | Earlier of contractual maturity or repricing date | ||||||
|---|---|---|---|---|---|---|---|
| (in $ millions) | Within 3<br> months | 3 to 6<br> months | 6 to 12<br> months | 1 to 5<br> years | After<br> 5 years | Non-interest<br> bearing funds | Total |
| Assets | |||||||
| Cash due from banks | 2,067 | — | — | — | — | 94 | 2,161 |
| Securities purchased under agreement to resell | 327 | — | — | — | — | — | 327 |
| Short-term investments | 542 | 258 | 7 | — | — | — | 807 |
| Investments | 13 | 6 | 34 | 103 | 4,561 | 8 | 4,725 |
| Loans | 4,019 | 54 | 77 | 620 | 224 | 41 | 5,035 |
| Other assets | — | — | — | — | — | 406 | 406 |
| Total assets | 6,968 | 318 | 118 | 723 | 4,785 | 549 | 13,461 |
| Liabilities and shareholders' equity | |||||||
| Shareholders’ equity | — | — | — | — | — | 989 | 989 |
| Demand deposits | 6,929 | — | — | — | — | 2,610 | 9,539 |
| Term deposits | 1,565 | 381 | 306 | 101 | — | — | 2,353 |
| Other liabilities | — | — | — | — | — | 384 | 384 |
| Long-term debt | 25 | — | — | 171 | — | — | 196 |
| Total liabilities and shareholders' equity | 8,519 | 381 | 306 | 272 | — | 3,983 | 13,461 |
| Interest rate sensitivity gap | (1,551) | (63) | (188) | 451 | 4,785 | (3,434) | — |
| Cumulative interest rate sensitivity gap | (1,551) | (1,614) | (1,802) | (1,351) | 3,434 | — | — |
| December 31, 2019 | Earlier of contractual maturity or repricing date | ||||||
| (in $ millions) | Within 3<br> months | 3 to 6<br> months | 6 to 12<br> months | 1 to 5<br> years | After<br> 5 years | Non-interest<br> bearing funds | Total |
| Assets | |||||||
| Cash due from banks | 2,462 | — | — | — | — | 88 | 2,550 |
| Securities purchased under agreement to resell | 142 | — | — | — | — | — | 142 |
| Short-term investments | 622 | 591 | 3 | — | — | 2 | 1,218 |
| Investments | 415 | 23 | 11 | 102 | 3,878 | 7 | 4,436 |
| Loans | 4,025 | 16 | 148 | 292 | 648 | 14 | 5,143 |
| Other assets | — | — | — | — | — | 433 | 433 |
| Total assets | 7,666 | 630 | 162 | 394 | 4,526 | 544 | 13,922 |
| Liabilities and shareholders' equity | |||||||
| Shareholders’ equity | — | — | — | — | — | 964 | 964 |
| Demand deposits | 7,151 | — | — | — | — | 2,239 | 9,390 |
| Term deposits | 2,435 | 234 | 305 | 78 | — | — | 3,052 |
| Other liabilities | — | — | — | — | — | 373 | 373 |
| Long-term debt | 70 | — | — | 73 | — | — | 143 |
| Total liabilities and shareholders' equity | 9,656 | 234 | 305 | 151 | — | 3,576 | 13,922 |
| Interest rate sensitivity gap | (1,990) | 396 | (143) | 243 | 4,526 | (3,032) | — |
| Cumulative interest rate sensitivity gap | (1,990) | (1,594) | (1,737) | (1,494) | 3,032 | — | — |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
Note 16: Long-term debt
On June 27, 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, which were redeemed at face value in January 2014, 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 Series B notes paid a fixed coupon of 5.11% until July 2, 2015 when they became redeemable in whole at the Bank’s option. 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 $15 million of the outstanding 5.11% 2005 Series B Subordinated notes with the balance of $45 million maturing on July 2, 2020.
On May 27, 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, which were redeemed at face value in May 2013, 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 Series B notes pay a fixed coupon of 8.44% until May 27, 2018 when they became 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.
On May 24, 2018, the Bank issued US $75 million of Subordinated Lower Tier II capital notes. The notes were issued at par and due on June 1, 2028. The issuance was by way of a registered offering with US institutional investors. The notes are listed on the Bermuda Stock Exchange (BSX) in the specialist debt securities category. The proceeds of the issue were used, among other, to repay the entire amount of the US $47 million outstanding subordinated notes series 2003-B. The notes issued pay a fixed coupon of 5.25% until June 1, 2023 when they become redeemable in whole at the option of the Bank. The notes were priced at a spread of 2.27% over the 10-year US Treasury yield. The Bank incurred $1.8 million of costs directly related to the issuance of these capital notes. These costs have been capitalized directly against the carrying value of these notes on the balance sheet, and will be amortized over the life of the notes.
On June 4, 2020, the Bank issued US $100 million of Subordinated Lower Tier II capital notes. The notes were issued at par and due on June 15, 2030. The issuance was by way of a registered offering with US institutional investors. The notes are listed on the Bermuda Stock Exchange (BSX) in the specialist debt securities category. The proceeds of the issue were used, among other, to repay the entire amount of the US $45 million outstanding subordinated notes series 2005-B which matured on July 2, 2020. The notes issued pay a fixed coupon of 5.25% until June 15, 2025 when they become redeemable in whole at the option of the Bank. The notes were priced at a spread of 4.43% over the 10-year US Treasury yield. The Bank incurred $2.3 million of costs directly related to the issuance of these capital notes. These costs have been capitalized directly against the carrying value of these notes on the balance sheet, and will be amortized over the life of the notes.
No interest was capitalized during the nine months ended September 30, 2020 and the year ended December 31, 2019.
In the event the Bank would be in a position to redeem long-term debt, priority would go to the redemption of the higher interest-bearing Series, subject to availability relative to the earliest date the Series is redeemable at the Bank's option.
The following table presents the contractual maturity and interest payments for long-term debt issued by the Bank as at September 30, 2020. The interest payments are calculated until contractual maturity using the current London Inter-bank Offered Rate ("LIBOR") and Secured Overnight Financing Rate ("SOFR").
| Interest payments until contractual maturity | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Long-term debt | Earliest date redeemable at the Bank's option | Contractual maturity date | Interest rate until date redeemable | Interest rate from earliest date redeemable to contractual maturity | Principal Outstanding | Within<br> 1 year | 1 to 5<br> years | After<br> 5 years | |
| Bermuda | |||||||||
| 2008 issuance - Series B | May 27, 2018 | May 27, 2023 | 8.44 | % | 3 months US$ LIBOR + 4.929% | 25,000 | 1,309 | 2,287 | — |
| 2018 issuance | June 1, 2023 | June 1, 2028 | 5.25 | % | 3 months US$ LIBOR + 2.255% | 75,000 | 3,938 | 12,143 | 5,206 |
| 2020 issuance | June 15, 2025 | June 15, 2030 | 5.25 | % | 3 months US$ SOFR + 5.060% | 100,000 | 5,308 | 22,314 | 24,758 |
| Total | 200,000 | 10,555 | 36,744 | 29,964 | |||||
| Unamortized debt issuance costs | (3,641) | ||||||||
| Long-term debt less unamortized debt issuance costs | 196,359 |
Note 17: Earnings per share
Earnings per share have been calculated using the weighted average number of common shares outstanding during the period 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 period. Numbers of shares are expressed in thousands.
During the nine months ended September 30, 2020, options to purchase an average of 0.1 million (September 30, 2019: 0.2 million) common shares were outstanding. During the nine months ended September 30, 2020, the average number of outstanding awards of unvested common shares was 0.9 million (September 30, 2019: 1.0 million). Only awards for which the sum of 1) the expense that will be recognized in the future (i.e., the unrecognized expense) and 2) its exercise price, if any, was lower than the average market price of the Bank‘s common shares were considered dilutive and, therefore, included in the computation of diluted earnings per share. An award's unrecognized 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.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Three months ended | Nine months ended | |||
|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |
| Net income | 30,543 | 42,437 | 105,154 | 133,186 |
| Basic Earnings Per Share | ||||
| Weighted average number of common shares issued | 50,366 | 53,972 | 51,459 | 54,646 |
| Weighted average number of common shares held as treasury stock | (619) | (869) | (619) | (1,330) |
| Weighted average number of common shares (in thousands) | 49,747 | 53,103 | 50,840 | 53,316 |
| Basic Earnings Per Share | 0.61 | 0.80 | 2.07 | 2.50 |
| Diluted Earnings Per Share | ||||
| Weighted average number of common shares | 49,747 | 53,103 | 50,840 | 53,316 |
| Net dilution impact related to options to purchase common shares | 49 | 117 | 67 | 123 |
| Net dilution impact related to awards of unvested common shares | 245 | 334 | 257 | 365 |
| Weighted average number of diluted common shares (in thousands) | 50,041 | 53,554 | 51,164 | 53,804 |
| Diluted Earnings Per Share | 0.61 | 0.79 | 2.06 | 2.48 |
Note 18: Share-based payments
The common shares transferred to employees under all share-based payments are either taken from the Bank's common treasury shares or from newly issued shares. All share-based payments are settled by the ultimate parent company which, pursuant to Bermuda law, is not taxed on income. There are no income tax benefits in relation to the issue of such shares as a form of compensation.
In conjunction with the 2010 capital raise, the Board of Directors approved the 2010 Omnibus Plan (the "2010 Plan"). Under the 2010 Plan, 5% of the Bank’s fully diluted common shares, equal to approximately 2.95 million shares, were initially available for grant to certain officers in the form of stock options or unvested shares awards. Both types of awards are detailed below. In 2012 and 2016, the Board of Directors approved an increase to the equivalent number of shares allowed to be granted under the 2010 Plan to 5.0 million and 7.5 million shares, respectively.
In May 2020, the Board of Directors approved the 2020 Omnibus Plan (the "2020 Plan") which replaces the 2010 Plan. Under the 2020 Plan, 3.0 million shares are initially available for grant to employees in the form of stock options or unvested shares awards. Both types of awards are detailed below.
Stock Option Awards
1997 Stock Option Plan
Prior to the capital raise on March 2, 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 and 2020 Plans
Under the 2010 and 2020 Plans, 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 is reduced for all special dividends declared by the Bank. Stock option awards granted under the 2010 and 2020 Plans 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 was granted in the form of time vested options and vested 25% on each of the second, third, fourth and fifth anniversaries of the effective grant date.
In addition to the time 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.
Performance vesting condition
50% of each option award was granted in the form of performance options and would vest (partially or fully) on a “valuation event” date (the date that any of the March 2, 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 realize a predetermined multiple of invested capital (“MOIC”)). On September 21, 2016, it was determined that a valuation event occurred during which a new investor realized a MOIC of more than 200% of the original invested capital of $12.09 per share and accordingly, all outstanding unvested performance options vested.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Changes in Outstanding Stock Option Plans | |||||||
|---|---|---|---|---|---|---|---|
| Number of shares transferable upon exercise (thousands) | Weighted average exercise price () | Weighted average<br> remaining life (years) | Aggregate<br> intrinsic value<br> ($ thousands) | ||||
| Nine months ended September 30, 2020 | 1997 Stock<br> Option Plan | 2010 Stock Option Plan | Total | 1997 Stock Option Plan | 1997 Stock<br> Option Plan | 2010 Stock Option Plan | |
| Outstanding at beginning of period | — | 159 | 159 | — | |||
| Exercised | — | (43) | (43) | — | 263 | ||
| Forfeitures and cancellations | — | (15) | (15) | — | |||
| Outstanding at end of period | — | 101 | 101 | — | — | 0.22 | 988 |
| Vested and exercisable at end of period | — | 101 | 101 | — | — | 0.22 | |
| Number of shares transferable upon exercise (thousands) | Weighted average exercise price () | Weighted average<br> remaining life (years) | Aggregate<br> intrinsic value<br> ($ thousands) | ||||
| Nine months ended September 30, 2019 | 1997 Stock<br> Option Plan | 2010 Stock<br> Option Plan | Total | 1997 Stock Option Plan | 1997 Stock<br> Option Plan | 2010 Stock<br> Option Plan | |
| Outstanding at beginning of period | 25 | 189 | 214 | 64.51 | |||
| Exercised | — | (5) | (5) | — | 88 | ||
| Expiration at end of plan life | (25) | — | (25) | 64.51 | |||
| Outstanding at end of period | — | 184 | 184 | — | — | 0.93 | 3,251 |
| Vested and exercisable at end of period | — | 184 | 184 | — | — | 0.93 |
All values are in US Dollars.
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 connection 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.
The grant date weighted average fair value of unvested share awards granted in the nine months ended September 30, 2020 was $34.51 (December 31, 2019: $35.77). The Bank expects to settle these awards by issuing new shares.
Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s EDIP Plan, shares are 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”) - Years 2013 - 2020
The 2020 ELTIP was approved on February 12, 2020. Under the Bank’s ELTIP plans for the years 2013 through 2020, performance shares as well as time-vested shares were awarded to executive management. The performance shares will generally vest upon the achievement of certain performance targets in the three-year period from the effective grant date. The time-vested shares will generally vest over the three-year period from the effective grant date.
| Changes in Outstanding ELTIP and EDIP awards (in thousands of shares transferable upon vesting) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Nine months ended | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| EDIP | ELTIP | EDIP | ELTIP | |||||
| Outstanding at beginning of period | 251 | 618 | 234 | 697 | ||||
| Granted | 196 | 200 | 166 | 298 | ||||
| Vested (fair value in 2020: $9.5 million, 2019: $18.0) | (123) | (162) | (149) | (389) | ||||
| Resignation | (3) | (6) | (3) | (7) | ||||
| Outstanding at end of period | 321 | 649 | 248 | 599 | Share-based Compensation Cost Recognized in Net Income | |||
| --- | --- | --- | ||||||
| Nine months ended | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| EDIP and<br> ELTIP | EDIP and<br> ELTIP | |||||||
| Cost recognized in net income | 11,331 | 13,906 |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Unrecognized Share-based Compensation Cost | ||||
|---|---|---|---|---|
| September 30, 2020 | December 31, 2019 | |||
| Unrecognized cost | Weighted average years over which it is expected to be recognized | Unrecognized cost | Weighted average years over which it is expected to be recognized | |
| EDIP | 6,761 | 1.94 | 4,744 | 1.71 |
| ELTIP | ||||
| Time vesting shares | 197 | 1.31 | 121 | 0.48 |
| Performance vesting shares | 10,043 | 1.74 | 9,765 | 1.80 |
| Total unrecognized expense | 17,001 | 14,630 |
Note 19: Share buy-back plans
From time to time, the Bank, may seek to repurchase and retire equity securities of the Bank, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, liquidity and capital requirements, contractual restrictions, and other factors.
Common Share Buy-Back Program
On February 15, 2018, the Board approved, with effect on April 1, 2018, the 2018 common share buy-back program, authorizing the purchase for treasury of up to 1.0 million common shares.
On December 6, 2018, the Board approved, with effect from December 10, 2018 to February 29, 2020, a common share buy-back program, authorizing the purchase for treasury of up to 2.5 million common shares.
On December 2, 2019, the Board approved a new $125 million common share repurchase program, authorizing the purchase for treasury of up to 3.5 million common shares through to February 28, 2021. The new program came into effect on December 20, 2019 following the completion of the previous program.
In the nine months ended September 30, 2020, the Bank repurchased and retired 3,249,200 shares.
| Nine months ended | Year ended December 31 | |||
|---|---|---|---|---|
| Common share buy-backs | September 30, 2020 | 2019 | 2018 | Total |
| Acquired number of shares (to the nearest 1) | 3,249,200 | 2,293,788 | 1,254,212 | 6,797,200 |
| Average cost per common share | 24.86 | 35.55 | 38.62 | 31.01 |
| Total cost (in US dollars) | 80,770,793 | 81,534,076 | 48,442,768 | 210,747,637 |
Note 20: Accumulated other comprehensive loss
| Unrealized (losses)<br> on translation of<br> net investment in<br> foreign<br> operations | HTM<br> investments | Unrealized<br> gains (losses)<br> on AFS<br> investments | Employee benefit plans | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Nine months ended September 30, 2020 | Pension | Post-retirement<br> healthcare | Subtotal -<br> employee<br>benefits plans | Total AOCL | |||||
| Balance at beginning of period | (20,818) | (725) | 11,808 | (66,312) | (11,050) | (77,362) | (87,097) | ||
| Other comprehensive income (loss), net of taxes | (969) | 397 | 60,800 | 2,707 | 393 | 3,100 | 63,328 | ||
| Balance at end of period | (21,787) | (328) | 72,608 | (63,605) | (10,657) | (74,262) | (23,769) | ||
| Unrealized (losses)<br> on translation of<br> net investment in<br> foreign<br> operations | HTM<br> investments | Unrealized<br> gains (losses)<br> on AFS<br> investments | Employee benefit plans | ||||||
| Nine months ended September 30, 2019 | Pension | Post- retirement<br> healthcare | Subtotal -<br> employee<br>benefits plans | Total AOCL | |||||
| Balance at beginning of period | (19,866) | (796) | (43,630) | (64,892) | (19,343) | (84,235) | (148,527) | ||
| Other comprehensive income (loss), net of taxes | (1,608) | 38 | 57,597 | 2,341 | 486 | 2,827 | 58,854 | ||
| Balance at end of period | (21,474) | (758) | 13,967 | (62,551) | (18,857) | (81,408) | (89,673) |
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Net Change of AOCL Components | Three months ended | Nine months ended | |||
|---|---|---|---|---|---|
| Line item in the consolidated<br>statements of operations, if any | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |
| Net unrealized gains (losses) on translation of net investment in foreign operations adjustments | |||||
| Foreign currency translation adjustments | N/A | 528 | (9,154) | (969) | (10,016) |
| Gains (loss) on net investment hedge | N/A | — | 7,809 | — | 8,408 |
| Net change | 528 | (1,345) | (969) | (1,608) | |
| Held-to-maturity investment adjustments | |||||
| Amortization of net gains (losses) to net income | Interest income on investments | 228 | 12 | 397 | 38 |
| Net change | 228 | 12 | 397 | 38 | |
| Available-for-sale investment adjustments | |||||
| Gross unrealized gains (losses) | N/A | 3,904 | 14,065 | 61,916 | 59,106 |
| Transfer of realized (gains) losses to net income | Net realized gains (losses) on AFS investments | (1,116) | (537) | (1,116) | (1,509) |
| Net change | 2,788 | 13,528 | 60,800 | 57,597 | |
| Employee benefit plans adjustments | |||||
| Defined benefit pension plan | |||||
| Net loss (gain) on settlement reclassified to net income | Net other gains (losses) | 367 | — | 518 | — |
| Amortization of net actuarial (gains) losses | Non-service employee benefits expense | 604 | 608 | 1,806 | 1,834 |
| Amortization of prior service (credit) cost | Non-service employee benefits expense | (34) | 5 | (24) | 15 |
| Foreign currency translation adjustments of related balances | N/A | (597) | 436 | 407 | 492 |
| Net change | 340 | 1,049 | 2,707 | 2,341 | |
| Post-retirement healthcare plan | |||||
| Amortization of net actuarial (gains) losses | Non-service employee benefits expense | — | 68 | — | 204 |
| Amortization of prior service (credit) cost | Non-service employee benefits expense | 131 | 94 | 393 | 282 |
| Net change | 131 | 162 | 393 | 486 | |
| Other comprehensive income (loss), net of taxes | 4,015 | 13,406 | 63,328 | 58,854 |
Note 21: Capital structure
Authorized Capital
On September 16, 2016, the Bank began trading on the New York Stock Exchange under the ticker symbol "NTB". The offering of 12,234,042 common shares consisted of 5,957,447 newly issued common shares sold by Butterfield and 6,276,595 common shares sold by certain selling shareholders, including 1,595,744 common shares sold by certain of the selling shareholders pursuant to the underwriters’ option to purchase additional shares, which was exercised in full prior to the closing.
The par value of each issued common share and each authorized but unissued common share is BM$0.01 and the authorized share capital of the Bank comprises 2,000,000,000 common shares of par value BM$0.01 each, 6,000,000,000 non-voting ordinary shares of par value BM$0.01 each, 110,200,001 preference shares of par value US$0.01 each and 50,000,000 preference shares of par value £0.01 each.
Dividends Declared
During the nine months ended September 30, 2020, the Bank paid cash dividends of $1.32 (September 30, 2019: $1.32) for each common share as of the related record dates. On October 28, 2020, the Board of Directors declared an interim dividend of $0.44 per common share to be paid on November 30, 2020 to shareholders of record on November 12, 2020.
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 a letter of no objection 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 the BMA's letter of no objection for all dividends declared during the periods presented.
Regulatory Capital
The Bank’s regulatory capital is determined in accordance with current Basel III guidelines as issued by the BMA. Basel III adopts Common Equity Tier 1 ("CET1") as the predominant form of regulatory capital with the CET1 ratio as a new metric. Basel III also adopts the new Leverage Ratio regime, which is calculated by dividing Tier 1 capital by an exposure measure. The Leverage Ratio Exposure Measure consists of total assets (excluding items deducted from Tier 1 capital) and certain off-balance sheet items converted into credit exposure equivalents as well as adjustments for derivatives to reflect credit risk and other risks.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
The Bank is fully compliant with all regulatory capital requirements to which it is subject, and it maintains capital ratios in excess of regulatory minimums as at September 30, 2020 and December 31, 2019. The following table sets forth the Bank's capital adequacy in accordance with the Basel III framework:
| September 30, 2020 | December 31, 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Actual | Regulatory minimum | Actual | Regulatory minimum | |||||
| Capital | ||||||||
| CET 1 capital | 820,517 | N/A | 848,821 | N/A | ||||
| Tier 1 capital | 820,517 | N/A | 848,821 | N/A | ||||
| Tier 2 capital | 205,896 | N/A | 103,243 | N/A | ||||
| Total capital | 1,026,413 | N/A | 952,064 | N/A | ||||
| Risk Weighted Assets | 4,939,173 | N/A | 4,897,851 | N/A | ||||
| Leverage Ratio Exposure Measure | 14,012,810 | N/A | 14,377,474 | N/A | ||||
| Capital Ratios (%) | ||||||||
| CET 1 capital | 16.6 | % | 10.0 | % | 17.3 | % | 10.0 | % |
| Tier 1 capital | 16.6 | % | 11.5 | % | 17.3 | % | 11.5 | % |
| Total capital | 20.8 | % | 16.3 | % | 19.4 | % | 16.3 | % |
| Leverage ratio | 5.9 | % | 5.0 | % | 5.9 | % | 5.0 | % |
Note 22: Business combinations
ABN AMRO (Channel Islands) Limited Acquisition
On April 25, 2019, the Bank announced that it entered into an agreement to acquire all the outstanding shares of ABN AMRO (Channel Islands) Limited (“ABN AMRO Channel Islands”), the Channel Islands-based banking subsidiary of ABN AMRO Bank N.V. via one of the Bank's subsidiaries, Butterfield Bank (Guernsey) Limited. ABN AMRO Channel Islands offers banking, investment management and custody products to three distinct client groups, including trusts, private clients, and funds.
This agreement is part of the Bank's strategy to grow through acquisitions in offshore markets where the Bank already has scale and expertise in order to create an organization with a widened and diversified offering.
On July 15, 2019, the transaction completed as planned and the aggregate purchase price of £160.7 million ($201.1 million) was paid in cash. During 2020, it is expected that ABN AMRO Channel Islands' business and employees will be integrated with the existing Butterfield Guernsey operations and operate under the Butterfield name. In addition to the figures noted below, on July 15, 2019, ABN AMRO Channel Islands had estimated clients' assets under management and custody of $4.7 billion.
The fair value of the net assets acquired and allocation of purchase price is summarized as follows:
| As at July 15, 2019 | |
|---|---|
| Total consideration transferred | 201,107 |
| Assets acquired | |
| Cash due from banks | 3,016,859 |
| Loans | 654,503 |
| Intangible assets - Customer relationships | 24,371 |
| Other assets | 31,674 |
| Total assets acquired | 3,727,407 |
| Liabilities assumed | |
| Deposits | (3,493,239) |
| Other liabilities | (33,061) |
| Total liabilities assumed | (3,526,300) |
| Excess purchase price (Goodwill) | — |
The acquired customer relationships intangible assets have an estimated finite useful life of 15 years.
The Bank incurred legal and professional transaction expenses related to this acquisition in the amount of $5.4 million all of which were incurred and expensed during the year ended December 31, 2019.
For the period beginning on July 15, 2019 (i.e. acquisition date) to December 31, 2019, the amount of revenues and earnings relating to the acquired ABN AMRO Channel Islands operations that were not inextricably merged into the Bank’s operations were $13.7 million and a net income of $1.5 million respectively.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Bank and the acquired ABN AMRO Channel Islands operations, assuming the transaction had been effected on January 1, 2018. 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. The pro forma financial information has been prepared based on the actual results realized by ABN AMRO Channel Islands from January 1, 2019 to July 15, 2019, and results estimated at the time of the acquisition.
| Nine months ended | |
|---|---|
| Unaudited pro forma financial information | September 30, 2019 |
| Total net revenue | 419,459 |
| Total non-interest operating (expense) | (280,803) |
| Pro forma net income post business combination | 138,656 |
Note 23: Related party transactions
Financing Transactions
Certain directors and executives of the Bank, companies in which they are principal owners and/or members of the board, and trusts in which they are involved, have loans and deposits with the Bank. Loans to directors were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements. Loans to executives may be eligible for preferential rates. All of these loans were considered performing loans as at September 30, 2020 and December 31, 2019. Loan balances with directors and executives of the Bank, companies in which they are principal owners and/or members of the board, and trusts in which they are involved were as follows:
| Balance at December 31, 2018 | 97,195 | |||
|---|---|---|---|---|
| Loans issued during the year | 45,602 | |||
| Loan repayments and the effect of changes in the composition of related parties | (104,156) | |||
| Balance at December 31, 2019 | 38,641 | |||
| Loans issued during the period | 21,351 | |||
| Loan repayments and the effect of changes in the composition of related parties | (10,686) | |||
| Balance at September 30, 2020 | 49,306 | |||
| Consolidated balance sheets | September 30, 2020 | December 31, 2019 | ||
| --- | --- | --- | ||
| Deposits | 9,083 | 12,838 | ||
| Three months ended | Nine months ended | |||
| --- | --- | --- | --- | --- |
| Consolidated statement of operations | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 |
| Interest and fees on loans | 384 | 1,027 | 2,335 | 3,271 |
Certain affiliates of the Bank have loans and deposits with the Bank which were made and are maintained in the ordinary course of business on normal commercial terms. Balances with these parties were as follows:
| Consolidated balance sheets | September 30, 2020 | December 31, 2019 | ||
|---|---|---|---|---|
| Loans | 11,242 | 9,888 | ||
| Deposits | 332 | 342 | ||
| Three months ended | Nine months ended | |||
| --- | --- | --- | --- | --- |
| Consolidated statement of operations | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 |
| Interest and fees on loans | 244 | 169 | 498 | 508 |
| Other gains/losses | 712 | — | 712 | — |
| Total non-interest expense | 390 | 385 | 1,060 | 1,269 |
Investments
The Bank holds seed investments in several Butterfield mutual funds, which are managed by a wholly-owned subsidiary of the Bank. These investments are included in equity securities at their fair value and are as follows:
| Consolidated balance sheets | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Equity securities | ||
| Fair value | 7,309 | 7,142 |
| Unrealized gain | 2,309 | 2,142 |
As at September 30, 2020, several Butterfield mutual funds which are managed by a wholly owned subsidiary of the Bank, had loan balances and deposit balances held with the Bank. The Bank also earned asset management revenue and custody and other administration services revenue from funds managed by a wholly-owned subsidiary of the Bank and from directors and executives, companies in which they are principal owners and/or members of the board and trusts in which they are involved, as well as other income from other related parties.
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (unaudited) (continued)
(In thousands of US dollars, unless otherwise stated)
| Consolidated balance sheets | September 30, 2020 | December 31, 2019 | ||||||
|---|---|---|---|---|---|---|---|---|
| Loans | 1 | 16 | ||||||
| Deposits | 20,744 | 3,492 | Three months ended | Nine months ended | ||||
| --- | --- | --- | --- | --- | ||||
| Consolidated statement of operations | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | ||||
| Asset management | 1,264 | 2,581 | 5,900 | 7,806 | ||||
| Custody and other administration services | 245 | 384 | 881 | 1,083 | ||||
| Other non-interest income | — | 243 | 729 | 729 |
Note 24: Subsequent events
On October 28, 2020, the Board of Directors declared an interim dividend of $0.44 per common share to be paid on November 30, 2020 to shareholders of record on November 12, 2020.
34
currentearningsdeck
Third Quarter Earnings Presentation The Bank of N.T. Butterfield & Son Limited October 29, 2020
Forward-Looking Statements Forward-Looking Statements: Certain of the statements made in this release are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, capital, ownership or achievements of Butterfield to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements due to a variety of factors, including the impact of the COVID-19 pandemic, the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, worldwide economic conditions and fluctuations of interest rates, a decline in Bermuda’s sovereign credit rating, the successful completion and integration of acquisitions or the realization of the anticipated benefits of such acquisitions in the expected time-frames or at all, success in business retention and obtaining new business and other factors. Forward-looking statements can be identified by words such as "anticipate," "assume," "believe," "estimate," "expect," "indicate," "intend," "may," "plan," "point to," "predict," "project," "seek," "target," "potential," "will," "would," "could," "should," "continue," "contemplate" and other similar expressions, although not all forward-looking statements contain these identifying words. All statements other than statements of historical fact are statements that could be forward-looking statements. All forward-looking statements in this disclosure are expressly qualified in their entirety by this cautionary notice, including, without limitation, those risks and uncertainties described in our Securities and Exchange Commission (“SEC”) reports and filings. Such reports are available upon request from Butterfield, or from the SEC, including through the SEC’s website at https://www.sec.gov. Any forward- looking statements made by Butterfield are current views as at the date they are made. Except as otherwise required by law, Butterfield assumes no obligation and does not undertake to review, update, revise or correct any of the forward-looking statements included in this disclosure, whether as a result of new information, future events or other developments. You are cautioned not to place undue reliance on the forward-looking statements made by Butterfield in this disclosure. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, and should only be viewed as historical data. About Non-GAAP Financial Measures: This presentation contains non-GAAP financial measures including “core” net income and other financial measures presented on a “core” basis. We believe such measures provide useful information to investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, our non-GAAP financial measures have a number of limitations. As such, investors should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. Reconciliations of these non-GAAP measures to corresponding GAAP financial measures are provided in the Appendix of this presentation. 2
Agenda and Overview Presenters Agenda Butterfield Overview Michael Collins • Overview • Leading Bank in Attractive Markets Chairman and Chief Executive Officer • Third Quarter 2020 Highlights • Strong Capital Generation and Return • COVID-19 Update Michael Schrum • Resilient, Diversified Fee Revenue Model • Financials Group Chief Financial Officer • Efficient, Conservative Balance Sheet • Q&A Ten International Locations Awards 3
Third Quarter 2020 Highlights • Net income of $30.5 million, or $0.61 per share (In US$ millions) vs. Q2 2020 vs. Q3 2019 • Core Net Income** of $36.5 million, or $0.73 per share Q3 2020 $ % $ % • Return on average common equity of 12.3%; core return on average Net Interest Income $ 75.3 $ (3.8) $ (11.0) tangible common equity** of 16.2% Non-Interest Income 46.9 5.2 0.2 • Net Interest Margin of 2.30%, cost of deposits of 0.14% Prov. for Credit Losses (1.4) 3.0 (0.9) • Cash dividend of $0.44 per common share and active share Non-Interest Expenses* (91.8) (9.0) (1.2) repurchases Other Gains (Losses) 1.5 0.8 1.0 • Completed Channel Islands banking integration Net Income $ 30.5 $ (3.8) (11.2) % $ (11.9) (28.0) % • New risk management and banking Executive Management and Non-Core Items** 5.9 (5.9) (0.5) Board additions Core Net Income** $ 36.5 $ 2.1 6.1 % $ (12.4) (25.3) % Core Return on Average Tangible Common Equity** Core Net Income** (In US$ millions) $48.8 22.5% 21.1% $46.2 18.6% $40.8 16.2% $36.5 15.5% $34.4 Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Q3 2019 2020 2019 2020 * Includes income taxes 4 ** See the Appendix for a reconciliation of the non-GAAP measure
COVID-19 Update* Market Segment Update** Customer*** Mortgage Assistance Program Final Deferral Participation Bermuda Cayman Channel Islands Rate Active COVID-19 Cases 4 12 55 April - June (Opt-out) 75% Total COVID-19 Cases 185 225 745 July - September (Opt-in) 34% Deaths 9 1 48 • Bermuda & Cayman principal and interest payment deferral participation rates were 34% at the conclusion of the program on Status Open Partially Open Open September 30, 2020 Commentary on Segments: Active Calling Program for Bermuda Mortgage Deferrals • Bermuda, Cayman, Guernsey & Jersey are open for Customer Outreach** business and reporting a low number of infections 464 Customers (20% of total) - All • Significant testing, contact tracing and mask wearing Borrowers contacted recent vintages with higher LTV profile compliance across jurisdictions Initial Response % of borrowers • Commercial airlines servicing islands but with reduced Able to make payment 92% capacity Request for further concession 6% • Visitors are welcome but tourist numbers are down more Not able to make any payment 2% than 50% versus pre-COVID-19 period • Initial responses suggest high borrower capacity to resume normal payments • Next phase will include individual discussions with borrowers experiencing difficulties * Please see the Appendix for commentary on factors influencing COVID-19 implications 5 ** Data as of October 15, 2020 *** For qualifying customers who were current at March 31, 2020
Financials
Income Statement Net Interest Income Net Interest Margin & Yields Net Interest Income before Provision for Credit Losses - Trend (In US$ millions) (In US$ millions) Q3 2020 vs. Q2 2020 $86.3 Avg. Balance Yield Avg. Balance Yield $79.1 Cash, S/T Inv. & Repos $ 3,543.6 0.11 % $ 185.2 (0.02) % $75.3 Investments 4,389.6 2.26 % (37.0) (0.26) % Loans (net) 5,047.0 4.43 % 49.7 (0.10) % Interest Earning Assets 12,980.2 2.52 % 197.9 (0.16) % Interest Bearing Liabilities 9,767.6 (0.29) % (49.3) (0.04) % Q3 Q4 Q1 Q2 Q3 Net Interest Margin 2.30 % (0.18) % 2019 2020 • Net interest margin (“NIM”) decreased by 18 bps from the previous quarter due to lower global interest rates and a full quarter of interest expense recognized following the Bank’s June 2020 subordinated debt issuance • Elevated and accelerated prepayments resulted in reinvestment at a lower yield • Loan yields of 4.43% down 10 bps in the third quarter of 2020 due to lower yields on floating rate loans 7
Income Statement Non-Interest Income Non-Interest Income Trend (In US$ millions) (In US$ millions) Q3 2020 vs. Q2 2020 $46.6 $46.9 Asset management $ 6.8 $ (0.6) $41.7 Banking 13.4 4.2 FX Revenue 9.0 0.9 Trust 12.9 0.6 Custody and Other 3.6 0.3 Other 1.2 (0.2) Q3 Q4 Q1 Q2 Q3 2019 2020 Total Non-Interest Income $ 46.9 $ 5.2 • Non-interest income up $5.2 million or 12.5% compared to the prior quarter • Transaction volume and fee generation recovered in the third quarter of 2020 compared to the previous quarter, which was negatively impacted by COVID-19 “shelter-in-place” requirements • Non-recurring loan commitment fee of $1.5 million also benefited current quarter banking fees • Fee income ratio of 38.8% in the third quarter of 2020 demonstrates a stable, capital efficient and diversified revenue stream 8
Income Statement Non-Interest Expenses Core Non-Interest Expense Trend* Core Non-Interest Expenses* vs. Q2 2020 (In US$ millions) (In US$ millions) Q3 2020 $ % $84.0 $81.9 $84.6 Salaries & Benefits** $ 42.2 $ 0.7 1.7 % Technology & Comm. 16.3 0.1 0.5 % Property 7.5 0.4 5.1 % 66.7% 68.0% 62.1% Professional & O/S Services 5.2 0.2 4.3 % Indirect Taxes 5.8 0.8 16.9 % Intangible Amortization 1.5 — 2.6 % Marketing 0.6 (0.1) (7.5) % Other 5.5 0.5 9.4 % Total Core Non-Interest Expenses* $ 84.6 $ 2.7 3.3 % Q3 Q4 Q1 Q2 Q3 Non-Core Expenses* 6.7 6.6 > 100 % 2019 2020 Non-Interest Expenses $ 91.3 $ 9.3 11.3 % Core Efficiency Ratio* Core Non-Interest Expenses* • Core non-interest expenses* up 3.3% or $2.7 million in the third quarter of 2020 compared to the prior quarter due to the resumption of domestic activity and within the range previously communicated • Efficiency programs resulted in non-core exit costs and managed role reductions over the next six months of ~100 positions (7.4% of total staff complement) and are expected to lower expenses in 2021 and beyond • Core cost / income ratio* of 68.0% was higher than 66.7% in the prior quarter and within expectations of a mid-60’s efficiency ratio during this period of ultra-low interest rates * See the Appendix for a reconciliation of the non-GAAP measure 9 ** Includes Non-Service Employee Benefits Expense
Capital Requirements and Return Regulatory Capital (Basel III) - Total Capital Ratio*** Leverage Capital 9.6% 20.8% 1.2% 8.0% 1.3% 16.3% 8.4% 13.9% 6.7% Butterfield - Current US Peer Median * Butterfield Current BMA 2020 Required US Peer Median * TCE/TA TCE/TA Ex Cash • Strong capital levels remain well above regulatory requirements 63.8% • TCE/TA ratio of 6.7% conservatively exceeds targeted range of 6.0% to 6.5% Dividend Payout Ratio** 52.9% • TBVPS of $18.15 increased 1.2% in the third quarter 46.4% • Board declared a quarterly dividend of $0.44 per common share 42.8% • Active share repurchase program subject to market conditions • Capital management priorities on dividend sustainability, share repurchases and capacity for strategic M&A, subject to market conditions 2017 2018 2019 2020 YTD * Includes US banks identified by management as a peer group. Please see the Appendix for a list *** In accordance with regulatory capital guidance, the Bank has elected to make use of transitional of these banks 10 arrangements which allow the deferral of the January 1, 2020 CECL impact of $7.8 million on its ** 2020 is based on year-to-date dividend and earnings per share regulatory capital over a period of 5 years. Please see Appendix for further discussion and assumptions
Balance Sheet Total Assets (In US$ millions) Q3 2020 Q4 2019 (In US$ billions) $14.2 Cash & Equivalents $ 2,161 $ 2,550 $13.2 $13.5 Reverse Repos & S/T Investments 1,134 1,361 Investments 4,725 4,436 Loans (net) 5,035 5,143 Other Assets 406 432 Total Assets $ 13,461 $ 13,922 $4.7 $4.4 $4.7 Int. Bearing Deposits $ 9,281 $ 10,203 $4.7 $5.0 $5.0 Non-Int. Bearing Deposits 2,610 2,238 Other Liabilities 581 516 Shareholders’ Equity 989 964 Q3 Q4 Q1 Q2 Q3 Total Liab. & Equity $ 13,461 $ 13,922 2019 2020 Total assets Investments Loans Total Deposits • Deposit balances stable and increased modestly to $11.9 billion (In US$ billions) $12.7 from $11.6 billion in the prior quarter $11.9 $11.6 • Butterfield’s balance sheet remains conservative with low risk density (risk weighted assets/total assets was 36.7%) Q3 Q4 Q1 Q2 Q3 2019 2020 11
Asset Quality Non-Accrual Loans Investment Portfolio (In US$ millions) $73.3 $74.8 Loan Distribution Rating Distribution AA 0.3% A 0.5% $51.9 Consumer Res Mtg 4.4% BBB 0.1% 64.9% Comm’l R/E 14.8% Other Comm’l 10.5% Gov’t AAA 99.1% 5.4% $5.0 billion $4.7 billion Q3 Q4 Q1 Q2 Q3 2019 2020 0.10% Net Charge-Off Ratio • Investment portfolio continues to be very high quality with 99% AAA rated securities, primarily US Government 0.08% guaranteed securities • Manually underwritten mortgage book is comprised of 65% full recourse residential loans in Bermuda, Cayman and the 0.05% UK • Non-accrual loans remained flat at 1.5% of gross loans 0.02% 0.03% versus the prior quarter 0.01% 0.01% 0.00% Q3 Q4 Q1 Q2 Q3 2019 2020 12
Interest Rate Sensitivity Average Balance - Balance Sheet Interest Rate Sensitivity Average Balances (US$Mil) Weighted Average 19.0% Life Q3 2020 vs. Q2 2020 Duration vs. Q2 2020 11.4% 9.3% 9.9% Cash & Reverse 6.4% Repos & S/T Invest. 3,543.6 185.2 < 0.2 N/A N/A AFS 2,273.3 (67.6) 2.5 (0.1) 4.2 (3.1)% HTM** 2,114.5 30.2 2.7 (0.4) 4.0 Total 7,931.4 147.8 -100bps +100bps +200bps NTB US Peer Median * • Consistent with the prior quarter, NII models increase in a down 100 bps rate environment with the assumption of negative rates to be charged on deposits (as is currently the case with Euros), while fixed rate assets would continue to generate revenues • A repositioning of a floating rate portion of the investment portfolio as well as the deployment of excess USD cash (from the Channel Islands acquisition in July 2019) during the quarter resulted in a higher weighted average life in the AFS portfolio • The Bank now has $183 million in unrealized gains in AFS and HTM, which will continue to moderate lower reinvestment yield impact in a continued low rate environment * Includes US banks identified by management as a peer group. Please see the Appendix for a list of these banks. Q2 2020 comparative data is used as Q3 2020 peer information was not widely available at time of publication. ** The HTM portfolio is comprised of securities with negative convexity which typically exhibit higher prepayment speeds when assuming lower future rates. 13
Appendix
Appendix Current Expected Credit Losses (CECL) ACL / Total Loans ACL by Loan Type 0.51% 0.79% 0.81% (In US$ millions) Q3 2020 Q2 2020 Q1 2020 $40.2 $41.0 Loans Commercial $ 16.3 $ 14.9 $ 15.5 $23.9 Commercial Real Estate 2.3 2.2 2.6 Consumer 5.2 5.5 4.6 Residential Mortgage 17.2 17.6 13.5 Total $ 41.0 $ 40.2 $ 36.2 Q3 Q4 Q1 Q2 Q3 2019 2020 ACL ACL / Total Loans CECL Highlights CECL Assumptions • The adoption of CECL is driving reserve build through lifetime losses, • CECL adoption impact: past and current conditions as well as a reasonable and supportable ◦ The adoption of CECL resulted in a ‘Day 1’ increase of forecast $7.8 million • The Bank employs a PD/LGD approach in calculating its expected ◦ Q2 2020 and Q3 2020 reserve build of $4.4 million and losses $1.4 million, respectively ◦ Historical PDs are adjusted using forecasted macro-economic ◦ Consumer and commercial lending are the primary variables such as GDP growth and unemployment rates to reflect contributors to the reserve build the forward-looking lifetime view ◦ The Bank uses both internal data as well as external data sources to derive assumptions used within the expected credit loss 15 calculations
Appendix Customer Deposits Average Deposit Volume and Cost of Deposits Deposit Composition By Currency (In US$ millions) 3,500 6.0% 14.0% 7.7% 20.7% 20.3% 19.0% 3,000 67.0% 71.6% 73.7% 2,500 1.48% 2,000 Q3 Q4 Q1 Q2 Q3 2019 2020 USD / USD Pegged GBP Other De sposits 0.97% 1,500 0.54% 0.78% By Type 0.14% 0.14% 1,000 23.9% 19.4% 19.8% 500 58.2% 59.8% 61.9% 22.0% 0 16.3% 18.7% Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Q3 2019 2020 2019 2020 Bermuda Demand Deposits Bermuda Term Deposits Cayman Demand Deposits Cayman Term Deposits Non-interest bearing demand deposits Interest bearing demand deposits Channel Islands Demand Deposits Channel Islands Term Deposits Term deposits Term deposit cost Overall cost of deposits 16
Appendix Residential Mortgage Loans (US$ Billions) Commercial Loans (US$ Billion) $2.3 $2.5 $2.7 $3.2 $3.3 $1.1 $1.1 $1.2 $1.7 $1.6 25% 32% 37% 47% 45% 48% 48% 48% 57% 52% 23% 22% 21% 9% 14% 3% 22% 18% 52% 18% 18% 10% 2% 46% 2% 2% 4% 42% 42% 34% 34% 31% 33% 32% 31% 2016 2017 2018 2019 Q3 2020 2016 2017 2018 2019 Q3 2020 Commercial and Industrial Bermuda Cayman UK and Channel Islands Commercial Overdrafts Government Commercial Real Estate • Stable loan book balance and composition with 65% in well seasoned Direct Hotel and Restaurant Lending Exposure Limited residential mortgage books $ millions % • Loans are individually underwritten in all markets Hotel Operators $ 185.3 11.9 % • Minimal wholesale or cross border lending outside of current Hotel Construction 30.9 2.0 % jurisdictions Restaurants 6.5 0.4 % Other Commercial and CRE Loans 1,340.8 85.7 % Total Commercial and CRE Loans $ 1,563.5 100.0 % 17
Appendix Balance Sheet Trends (in millions of US Dollars, unless otherwise indicated) 2020 2019 2018 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Assets Cash & Equivalents $ 2,161 $ 2,228 $ 1,978 $ 2,550 $ 3,605 $ 2,011 $ 2,601 $ 2,054 $ 1,259 Reverse Repos & S/T Investments 1,133 1,136 1,240 1,361 855 330 288 80 148 Investments 4,725 4,354 4,538 4,436 4,662 4,524 4,393 4,255 4,576 Loans, Net 5,035 5,018 5,001 5,143 4,673 4,000 3,986 4,044 4,092 Other Assets 406 415 441 432 420 364 374 340 355 Total Assets 13,461 13,151 13,197 $ 13,922 $ 14,216 $ 11,229 $ 11,643 $ 10,773 $ 10,430 Liabilities and Equity Total Deposits $ 11,891 $ 11,616 $ 11,753 $ 12,442 $ 12,663 $ 9,852 $ 10,294 $ 9,452 $ 9,066 Long-Term Debt 196 241 144 144 143 143 143 143 143 Other Liabilities 384 303 320 373 446 305 310 295 349 Total Liabilities $ 12,472 $ 12,160 $ 12,217 $ 12,958 $ 13,252 $ 10,300 $ 10,747 $ 9,891 $ 9,558 Common Equity $ 989 $ 990 $ 981 $ 964 $ 965 $ 929 $ 896 $ 882 $ 872 Total Equity $ 989 $ 990 $ 981 $ 964 $ 965 $ 929 $ 896 $ 882 $ 872 Total Liabilities and Equity $ 13,461 $ 13,151 $ 13,197 $ 13,922 $ 14,216 $ 11,229 $ 11,643 $ 10,773 $ 10,430 Key Metrics TCE / TA 6.7 % 6.9 % 6.8 % 6.3 % 6.2 % 7.7 % 7.1 % 7.5 % 7.7 % CET 1 Ratio 16.6 % 17.0 % 17.5 % 17.3 % 17.4 % 20.1 % 19.3 % 19.6 % 20.2 % Total Tier 1 Capital Ratio 16.6 % 17.0 % 17.5 % 17.3 % 17.4 % 20.1 % 19.3 % 19.6 % 20.2 % Total Capital Ratio 20.8 % 21.2 % 19.8 % 19.4 % 19.6 % 22.7 % 22.0 % 22.4 % 23.3 % Book value per common share 19.98 19.73 19.09 18.40 18.14 17.53 16.81 16.31 15.75 18
Appendix Average Balance Sheet Trends (in millions of US Dollars, unless otherwise indicated) Q3 2020 Q2 2020 Q3 2019 Average Interest Average rate Average Interest Average rate Average Interest Average rate Assets balance ($) ($) (%) balance ($) ($) (%) balance ($) ($) (%) Cash due from banks, reverse repurchase agreements and short-term investments $ 3,543.6 $ 1.0 0.11 % $ 3,358.4 $ 1.1 0.13 % $ 4,434.4 $ 12.5 1.12 % Investment in securities 4,389.6 25.0 2.26 % 4,426.6 27.8 2.52 % 4,616.8 32.9 2.82 % Equity securities at fair value 1.8 1.4 1.5 AFS 2,273.3 11.2 1.95 % 2,340.9 12.8 2.19 % 2,299.7 15.4 2.66 % HTM 2,114.5 13.8 2.59 % 2,084.4 15.1 2.90 % 2,315.6 17.4 2.99 % Loans 5,047.0 56.4 4.43 % 4,997.4 56.4 4.53 % 4,529.4 59.6 5.22 % Commercial 1,684.5 20.2 4.76 % 1,693.3 21.5 5.09 % 1,548.8 20.5 5.26 % Consumer 3,362.6 36.2 4.27 % 3,304.1 34.9 4.24 % 2,980.7 39.1 5.20 % Total interest earning assets 12,980.2 82.4 2.52 % 12,782.3 85.3 2.68 % 13,580.6 105.0 3.07 % Other assets 392.3 401.3 396.0 Total assets $ 13,372.5 $ 13,183.7 $ 13,976.6 Liabilities Interest bearing deposits $ 9,571.2 $ (4.3) (0.18) % $ 9,651.1 $ (4.1) (0.17) % $ 10,199.7 $ (16.7) (0.65) % Customer demand deposits 7,012.4 0.6 0.04 % 7,043.3 2.1 0.12 % 7,091.8 (5.0) (0.28) % Customer term deposits 2,523.8 (4.9) (0.78) % 2,563.9 (6.2) (0.97) % 3,080.6 (11.5) (1.48) % Deposits from banks 35.0 — (0.21) % 43.9 (0.1) (0.79) % 27.3 (0.3) (3.87) % Long-term debt 196.4 (2.7) (5.53) % 165.8 (2.1) (5.00) % 143.4 (2.0) (5.42) % Interest bearing liabilities 9,767.6 (7.0) (0.29) % 9,816.9 (6.2) (0.25) % 10,343.1 (18.7) (0.72) % Non-interest bearing customer deposits 2,348.0 2,166.8 2,134.0 Other liabilities 255.2 274.2 311.7 Total liabilities $ 12,370.8 $ 12,257.9 $ 12,788.9 Shareholders’ equity 1,001.6 925.7 1,187.7 Total liabilities and shareholders’ equity $ 13,372.5 $ 13,183.7 $ 13,976.6 Non-interest bearing funds net of non-interest earning assets (free balance) $ 3,212.6 $ 2,965.4 $ 3,237.5 Net interest margin $ 75.3 2.30 % $ 79.1 2.48 % $ 86.3 2.52 % 19
Appendix Income Statement Trends (in millions of US Dollars, unless otherwise indicated) 2020 2019 2018 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Net Interest Income $ 75.3 $ 79.1 $ 87.6 $ 86.2 $ 86.3 $ 85.2 $ 88.0 $ 87.4 $ 88.3 Non-Interest Income 46.9 41.7 47.6 49.7 46.6 44.2 43.4 45.7 41.3 Prov. for Credit Recovery (Losses) (1.4) (4.4) (5.2) (0.4) (0.4) 0.9 — 1.7 2.8 Non-Interest Expenses* 91.8 82.8 89.1 92.0 90.6 91.9 81.0 83.7 82.6 Other Gains (Losses) 1.5 0.7 (0.6) 0.3 0.5 0.2 1.8 (0.3) 0.7 Net Income $ 30.5 $ 34.3 $ 40.3 $ 43.9 $ 42.4 $ 38.6 $ 52.1 $ 50.9 $ 50.4 Non-Core Items** $ 5.9 $ 0.1 $ 0.5 $ 2.3 $ 6.4 $ 12.5 $ (0.4) $ 0.2 $ (1.2) Core Net Income** $ 36.5 $ 34.4 $ 40.8 $ 46.2 $ 48.8 $ 51.1 $ 51.7 $ 51.1 $ 49.1 Key Metrics Loan Yield 4.43 % 4.53 % 4.80 % 4.95 % 5.22 % 5.67 % 5.67 % 5.56 % 5.54 % Securities Yield 2.26 2.52 2.78 2.77 2.82 2.92 3.07 2.87 2.78 Cost of Deposits 0.14 0.14 0.42 0.50 0.54 0.42 0.38 0.27 0.20 Net Interest Margin 2.30 2.48 2.63 2.59 2.52 3.18 3.31 3.38 3.37 Core Efficiency Ratio** 68.0 66.7 63.8 66.3 62.1 60.3 60.1 61.5 63.2 Core ROATCE** 16.2 15.5 18.6 21.1 22.5 24.6 25.6 25.8 24.9 Fee Income Ratio 38.8 35.8 36.6 36.7 35.2 33.9 33.0 33.9 31.2 Fully Diluted Share Count (in millions of common shares) 50.0 51.0 52.4 53.3 53.6 53.5 54.2 55.4 56.0 * Includes income taxes ** See the reconciliation of non-GAAP measures on pages 23-24 20
Appendix Non-Interest Income & Expense Trends (in millions of US Dollars, unless otherwise indicated) 2020 2019 2018 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Non-Interest Income Asset Management $ 6.8 $ 7.4 $ 7.8 $ 7.8 $ 7.4 $ 6.9 $ 6.7 $ 6.5 $ 6.5 Banking 13.4 9.1 11.2 14.0 12.1 12.1 11.2 12.8 10.6 FX Revenue 9.0 8.1 10.8 9.8 10.0 8.4 8.8 8.6 7.8 Trust 12.9 12.3 12.2 13.0 12.7 13.0 12.6 13.8 13.1 Custody & Other Admin. 3.6 3.3 3.6 3.5 3.6 3.1 2.7 2.4 2.2 Other 1.2 1.5 2.0 1.7 0.8 0.9 1.4 1.6 1.0 Total Non-Interest Income $ 46.9 $ 41.7 $ 47.6 $ 49.7 $ 46.6 $ 44.2 $ 43.4 $ 45.7 $ 41.3 Non-Interest Expense Salaries & Benefits* $ 48.8 $ 41.5 $ 44.6 $ 48.8 $ 45.6 $ 52.1 $ 42.8 $ 43.7 $ 43.8 Technology & Comm. 16.3 16.3 16.4 16.5 16.3 15.2 14.6 14.9 15.6 Professional & O/S Services 5.2 5.0 5.8 6.7 9.5 6.2 5.6 6.1 5.1 Property 7.5 7.2 7.3 7.0 6.1 5.7 5.4 6.1 5.3 Indirect Taxes 5.8 4.9 5.5 5.3 5.3 5.3 5.2 4.7 4.8 Marketing 0.6 0.7 1.6 3.1 1.6 1.7 1.7 2.3 1.5 Intangible Amortization 1.5 1.4 1.4 1.5 1.5 1.2 1.3 1.3 1.4 Other 5.5 5.0 5.5 5.0 4.6 4.3 4.3 4.3 4.9 Total Non-Interest Expense $ 91.3 $ 82.0 $ 88.1 $ 93.9 $ 90.4 $ 91.7 $ 80.9 $ 83.5 $ 82.2 Income Taxes 0.5 0.8 1.0 (1.9) 0.2 0.2 0.1 0.2 0.4 Total Expense incld. Taxes $ 91.8 $ 82.8 $ 89.1 $ 92.0 $ 90.6 $ 91.9 $ 81.0 $ 83.7 $ 82.6 *Includes non-service employee benefits 21
Appendix Core Non-Interest Expense* Trends (in millions of US Dollars, unless otherwise indicated) 2020 2019 2018 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Salaries & Benefits** $ 42.2 $ 41.4 $ 44.1 $ 46.6 $ 42.8 $ 41.1 $ 42.8 $ 43.7 $ 43.8 Technology & Comm. 16.3 16.3 16.4 16.5 16.3 15.2 14.6 14.8 15.4 Professional & O/S Services 5.2 5.0 5.8 6.5 5.9 5.0 5.0 6.0 6.3 Property 7.5 7.2 7.3 7.0 6.1 5.7 5.4 6.1 5.3 Indirect Taxes 5.8 4.9 5.5 5.3 5.3 5.0 5.2 4.7 4.8 Marketing 0.6 0.7 1.6 3.1 1.6 1.7 1.7 2.3 1.5 Intangible Amortization 1.5 1.4 1.4 1.5 1.5 1.2 1.3 1.3 1.4 Other 5.5 5.0 5.5 5.1 4.6 4.3 4.3 4.3 4.8 Total Core Non-Interest Expense $ 84.6 $ 81.9 $ 87.6 $ 91.6 $ 84.0 $ 79.2 $ 80.3 $ 83.1 $ 83.3 Income Taxes 0.5 0.8 1.0 (1.9) 0.2 0.2 0.1 0.2 0.4 Total Core Expense incld. Taxes $ 85.1 $ 82.7 $ 88.6 $ 89.7 $ 84.2 $ 79.4 $ 80.5 $ 83.2 $ 83.7 * See the reconciliation of non-GAAP measures on pages 23-24 ** Includes non-service employee benefits 22
Appendix Non-GAAP Reconciliation (in millions of US Dollars, unless otherwise indicated) 2020 2019 Q3 Q2 Q1 Q4 Q3 Net income A $ 30.5 $ 34.3 $ 40.3 $ 43.9 $ 42.4 Non-core (gains), losses and expenses Non-core (gains) losses Distribution from equity method investment (0.7) — — — — Total non-core (gains) losses B $ (0.7) $ — $ — $ — $ — Non-core expenses Early retirement program, voluntary separation, redundancies and other non-core compensation costs 6.7 0.1 0.4 2.2 2.8 Business acquisition costs — — 0.1 0.1 3.6 Total non-core expenses C $ 6.7 $ 0.1 $ 0.5 $ 2.3 $ 6.4 Total non-core (gains), losses and expenses D=B+C 5.9 0.1 0.5 2.3 6.4 Core net income to common shareholders E=A+D $ 36.5 $ 34.4 $ 40.8 $ 46.2 $ 48.8 Average shareholders' equity 984.6 985.0 973.3 964.8 948.4 Average common equity F 984.6 985.0 973.3 964.8 948.4 Less: average goodwill and intangible assets (91.6) (90.5) (94.2) (95.3) (87.1) Average tangible common equity G 893.0 894.5 879.1 869.5 861.3 Return on equity A/F 12.3 % 14.0 % 16.6 % 18.0 % 17.8 % Core return on average tangible common equity E/G 16.2 % 15.5 % 18.6 % 21.1 % 22.5 % Core earnings per common share fully diluted Adjusted weighted average number of diluted common shares (in thousands) H 50.0 51.0 52.4 53.3 53.6 Earnings per common share fully diluted A/H 0.61 0.67 0.77 0.82 0.79 Non-core items per share D/H 0.12 — 0.01 0.05 0.12 Core earnings per common share fully diluted E/H 0.73 0.67 0.78 0.87 0.91 Core return on average tangible assets Total average assets I $ 13,381.9 $ 13,202.8 $ 13,761.4 $ 13,814.7 $ 13,519.2 Less: average goodwill and intangible assets (91.6) (90.5) (94.2) (95.3) (87.1) Average tangible assets J $ 13,290.3 $ 13,112.3 $ 13,667.2 $ 13,719.4 $ 13,432.1 Return on average assets A/I 0.9 % 1.0 % 1.2 % 1.3 % 1.2 % Core return on average tangible assets E/J 1.1 % 1.1 % 1.2 % 1.3 % 1.4 % 23
Appendix Non-GAAP Reconciliation (cont'd) (in millions of US Dollars, unless otherwise indicated) 2020 2019 Q3 Q2 Q1 Q4 Q3 Tangible equity to tangible assets Shareholders' equity K $ 988.9 $ 990.3 $ 980.5 $ 963.7 $ 964.6 Less: goodwill and intangible assets (90.7) (89.7) (91.2) (96.5) (93.4) Tangible common equity L 898.2 900.7 889.3 867.2 871.2 Total assets M 13,460.7 13,150.7 13,197.4 13,921.6 14,216.3 Less: goodwill and intangible assets (90.7) (89.7) (91.2) (96.5) (93.4) Tangible assets N $ 13,370.1 $ 13,061.0 $ 13,106.2 $ 13,825.1 $ 14,122.9 Tangible common equity to tangible assets L/N 6.7 % 6.9 % 6.8 % 6.3 % 6.2 % Tangible book value per share Basic participating shares outstanding (in millions) O 49.5 50.2 51.4 52.4 53.2 Tangible book value per common share L/O 18.15 17.94 17.31 16.55 16.38 Efficiency ratio Non-interest expenses $ 91.3 $ 82.0 $ 88.1 $ 93.9 $ 90.4 Less: Amortization of intangibles (1.5) (1.4) (1.4) (1.5) (1.5) Non-interest expenses before amortization of intangibles P 89.8 80.6 86.7 92.4 88.9 Non-interest income 46.9 41.7 47.6 49.7 46.6 Net interest income before provision for credit losses 75.3 79.1 87.6 86.2 86.3 Net revenue before provision for credit losses and other gains/losses Q $ 122.2 $ 120.8 $ 135.2 $ 136.0 $ 133.0 Efficiency ratio P/Q 73.5 % 66.7 % 64.1 % 68.0 % 66.9 % Core efficiency ratio Non-interest expenses $ 91.3 $ 82.0 $ 88.1 $ 93.9 $ 90.4 Less: non-core expenses (C) (6.7) (0.1) (0.5) (2.3) (6.4) Less: amortization of intangibles (1.5) (1.4) (1.4) (1.5) (1.5) Core non-interest expenses before amortization of intangibles R 83.1 80.5 86.2 90.1 82.5 Net revenue before provision for credit losses and other gains/losses Q 122.2 120.8 135.2 136.0 133.0 Core efficiency ratio R/Q 68.0 % 66.7 % 63.8 % 66.3 % 62.1 % 24
Appendix Commentary on Factors Influencing COVID-19 Implications The short- and medium/long-term implications of the pandemic on our business, financial condition, liquidity and results of operations will depend on factors such as, but not limited to, the following: • The duration and scope of the pandemic and related economic fallout • The pace and magnitude of the economic recovery in the jurisdictions in which we operate • The continuation of a low interest rate environment, or further reductions in interest rates, over the medium or long term, which would adversely impact our net interest income and net interest margin, as well as increase our reliance on fee businesses • A decrease in tourism in Bermuda and Cayman, with the timing of any recovery being uncertain, which would adversely affect our revenues, including fee income, as well as increase our credit exposure • Increased unemployment and decreased business in the jurisdictions in which we operate • An increase in defaults on our residential mortgage loans • Ratings downgrades, credit deterioration and defaults in many industries, including the hotel/restaurants/hospitality sector, financial services and commercial real estate • A decrease in the rates and yields on US Government guaranteed securities and increased pre-payments in mortgage backed securities we hold, which may lead to a decrease in the quality of our investment portfolio • Significant draws in credit lines, as customers and clients seek to increase liquidity • Volatility of market conditions and increased demands on capital and liquidity, leading the Bank to cease repurchases of its common shares • A reduction in the value of the assets under administration for the trust and custody businesses, which may affect related fee income and/or demand for these services • Heightened cybersecurity, information security and operational risks as a result of remote working arrangements implemented for staff or otherwise • Actions that have been, or may be taken in the future, by governmental authorities in response to the pandemic, such as a suspension of mortgage and other loan payments and foreclosures • Heightened risk of litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions • An increase in our provision for credit losses under CECL due to changes in the macroeconomic environment, including as a result of COVID-19 25
Appendix Peer Group Our peer group includes the following banks, noted by their ticker symbols: • First Republic Bank (FRC) • First Hawaiian, Inc. (FHB) • SVB Financial Group (SIVB) • Bank of Hawaii Corporation (BOH) • East West Bancorp, Inc. (EWBC) • Trustmark Corporation (TRMK) • Cullen/Frost Bankers, Inc. (CFR) • International Bancshares Corporation (IBOC) • Associated Banc-Corp (ASB) • Community Bank System, Inc. (CBU) • Wintrust Financial Corporation (WTFC) • Boston Private Financial Holdings, Inc. (BPFH) • Commerce Bancshares, Inc. (CBSH) • First Financial Bankshares, Inc. (FFIN) • UMB Financial Corporation (UMBF) • Westamerica Bancorporation (WABC) 26