Business context and reporting period
The Bank of N.T. Butterfield & Son Limited is a Bermuda-headquartered bank and wealth manager operating across six geographic segments. This Form 20-F covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter report. Financial statements are audited and prepared under U.S. GAAP. Amounts below are in U.S. dollars unless noted; the Bermuda dollar is pegged one-for-one to the U.S. dollar.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total net revenue | $454.7 million | $402.6 million |
| Net interest income before credit provision | $289.7 million | $258.5 million |
| Non-interest income | $157.8 million | $147.5 million |
| Net income | $153.3 million | $115.9 million |
| Net income attributable to common shareholders | $153.3 million | $58.4 million |
| Basic / diluted EPS | $2.82 / $2.76 | $1.20 / $1.18 |
| Net interest margin | 2.73% | 2.45% |
| Efficiency margin / core efficiency ratio | 66.2% / 64.3% | 69.3% / 63.8% |
| Total assets | $10.78 billion | $11.10 billion |
| Net loans | $3.78 billion | $3.57 billion |
| Customer deposits | $9.52 billion | $10.01 billion |
| Cash due from banks | $1.54 billion | $2.10 billion |
| Long-term debt | $117.0 million | $117.0 million |
Cash flow from operations was $241.7 million, investing activities used $168.6 million, and financing activities used $686.3 million. Cash due from banks declined $566.5 million during the year. Year-end liquid cash, short-term investments and securities excluding held-to-maturity securities totaled about $5.3 billion, or 49.1% of assets. Regulatory capital ratios were 18.2% CET1, 18.2% Tier 1 and 19.9% total capital; the leverage ratio was 6.9%. The allowance for credit losses was $35.5 million. Gross non-accrual loans were $43.9 million, or 1.2% of gross loans.
Common dividends declared for 2017 totaled $1.28 per share. The Board subsequently declared a $0.38-per-share fourth-quarter dividend, payable March 9, 2018, subject to required approvals. Trust assets under administration were $95.4 billion and assets under management were $5.0 billion at year-end.
Material changes versus the prior comparable period
- Net income rose 32.3% to $153.3 million. Management-reported core net income, a non-GAAP measure, rose to $158.9 million from $138.6 million.
- Revenue growth reflected higher investment yields and balances, increased loan yields, revised banking fee schedules and asset-management growth. Net interest margin expanded 28 basis points.
- Credit-loss provision was a $5.8 million recovery in 2017, compared with a $4.4 million recovery in 2016. Gross non-accrual loans fell from $48.5 million to $43.9 million.
- Year-end customer deposits decreased about $486 million, primarily as maturing term deposits moved into off-balance-sheet money market funds. Net loans increased 5.8%; total assets decreased 2.9%.
- Shareholders’ equity rose 15.8% to $822.9 million. Common dividends paid increased to $69.7 million from $19.3 million.
- Common-shareholder earnings comparisons are affected by the 2016 redemption of preference shares and associated redemption premium; the preference shares were fully redeemed in December 2016.
Outlook, commentary, risks and unusual items
Management cited prudent expansion in core markets, capital and risk management, and a rising-rate environment as contributors to results. It said rising rates could support net interest income if deposit costs rise more slowly than loan and securities yields; its modeled 100-basis-point rate decrease reduced projected 12-month net interest income by 13.8%. The filing provides no specific earnings or revenue guidance. Management’s stated intention was to pay a quarterly dividend of $0.38 per share, subject to Board and Bermuda Monetary Authority approval.
- Acquisition: The proposed purchase of Deutsche Bank’s Global Trust Solutions business, excluding U.S. operations, remained subject to regulatory approval and was expected to close in the first half of 2018. A separate subsequent-event disclosure describes an agreement announced in February 2018 for Deutsche Bank’s banking and custody business in the Cayman Islands, Guernsey and Jersey, expected to close in the second half of 2018.
- Legal contingency: A U.S. tax-compliance investigation connected to John Doe Summonses remained ongoing. Butterfield recorded a $5.5 million provision; the final outcome and timing were uncertain, and the potential financial impact could exceed the provision.
- Non-GAAP and unusual items: Core net income adjusts GAAP results for items management deems non-core. 2017 adjustments included acquisition, restructuring, tax-review and secondary-offering costs, partly offset by gains, producing a $5.6 million net adjustment to GAAP net income. Investors should consider the GAAP results alongside management’s measure.
- Principal risks: Operations and revenue are concentrated in Bermuda and the Cayman Islands; deposits are the main funding source, and these jurisdictions generally lack a central-bank lender of last resort. Other material exposures include residential real estate and credit quality, interest-rate and investment-valuation risk, regulatory and tax changes, Brexit, cyber and third-party risks, and the potential effects of U.S. tax reform on Bermuda-based insurance clients.
Important facts for investors to verify
- Reconcile the $153.3 million GAAP net income with the $158.9 million non-GAAP core net income and review the company’s adjustment definitions.
- Track deposit retention and the extent to which term deposits transferred to money market funds, as well as the resulting liquidity profile.
- Review credit quality, residential-property exposure, allowance adequacy and the ongoing decline in non-accrual loans.
- Monitor the U.S. tax-compliance investigation, including whether any resolution or penalties exceed the $5.5 million provision.
- Confirm regulatory approvals, timing, purchase terms and integration effects for the announced Deutsche Bank transactions.
- Check future dividend declarations and regulatory approvals; the stated $0.38 quarterly amount is not assured.