Butterfield 2018 Form 20-F Summary
Business context and reporting period. The Bank of N.T. Butterfield & Son Limited is a Bermuda-headquartered bank and wealth manager, operating principally in Bermuda, the Cayman Islands, and the Channel Islands and UK. This audited annual report covers the fiscal year ended December 31, 2018; it is not a stand-alone fourth-quarter report. Financial statements are prepared under US GAAP, and amounts are in US dollars unless stated otherwise.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total net revenue | $517.8 million | $454.7 million |
| Net interest income before credit-loss provision | $343.0 million | $289.7 million |
| Non-interest income | $168.7 million | $157.8 million |
| Net income | $195.2 million | $153.3 million |
| Diluted earnings per common share | $3.50 | $2.76 |
| Net interest margin | 3.25% | 2.73% |
| Core efficiency ratio (non-GAAP) | 61.5% | 64.3% |
| Cash provided by operating activities | $296.3 million | $242.1 million |
- Net income rose 27.3%. Management attributed the improvement mainly to higher loan and investment yields, increased loan balances, and stronger fee income, including trust fees following the Deutsche Bank Global Trust Solutions acquisition.
- The Bank recorded a $7.0 million net provision recovery for credit losses, versus a $5.8 million recovery in 2017. Other gains and losses were a net loss of $0.9 million. Non-interest expense rose to $321.3 million from $300.3 million.
- Management’s non-GAAP core net income was $197.0 million, up from $158.9 million. Adjustments included acquisition costs, tax-compliance-review costs, and a pension-plan settlement loss, partly offset by a legacy investment liquidation gain. Core measures are management-defined and are not substitutes for GAAP results.
- By reported segment, net revenue was Bermuda $299.4 million, Cayman Islands $152.6 million, Channel Islands and UK $59.0 million, and Other $15.2 million. Bermuda and Cayman together contributed approximately 86%.
- At year-end, total assets were $10.77 billion, net loans $4.04 billion, and total deposits $9.45 billion, including $9.42 billion of customer deposits. Deposits declined 0.9%; management cited withdrawals by several large customers, partly offset by organic growth and acquired deposits. Net loans increased 7.1%, principally with UK residential mortgage growth.
- Cash due from banks was $2.05 billion. Cash, short-term investments, securities purchased under resale agreements, and investment securities represented 59.3% of assets under management’s liquidity measure. Net loans were 42.9% of customer deposits. Investing activities provided $338.6 million and financing activities used $125.2 million; cash and restricted cash increased $512.4 million, including exchange-rate effects.
- Shareholders’ equity was $882.3 million, versus $822.9 million. CET1 and total capital ratios were 19.6% and 22.4%, respectively; the leverage ratio was 7.6%. Long-term debt was $143.3 million. The Bank issued $75 million of subordinated notes at 5.25%, due 2028, and repaid $47 million of earlier notes.
Material changes, outlook, and risks
- Net interest margin improved by 52 basis points as loan and investment yields rose. The average loan yield increased to 5.47%; deposit funding costs also rose, to 18 basis points.
- Unrealized losses on the investment portfolio increased: net unrealized losses were $72.8 million at year-end, primarily reflecting higher longer-term Treasury rates. Accumulated other comprehensive loss increased to $148.5 million, affecting reported equity.
- Butterfield completed the acquisition of Deutsche Bank’s Global Trust Solutions business in March 2018. It also agreed to acquire Deutsche Bank banking and custody operations in the Cayman Islands, Guernsey, and Jersey; customer onboarding was continuing and expected to extend into 2019. Acquisition and integration expenses, higher staffing, technology, cyber-protection, and compliance costs contributed to expense growth.
- Management said, all else equal, rising rates could increase net interest income because asset yields were expected to reprice faster than deposit costs. Its modeled 12-month sensitivity was a 3.7% increase under an immediate 100-basis-point rise and an 8.2% decrease under a 100-basis-point decline. These are scenarios, not earnings guidance. The filing provides no formal earnings forecast.
- The Bank stated an intention to pay quarterly dividends of $0.44 per share, subject to Board and Bermuda Monetary Authority approval. It paid four 2018 quarterly dividends of $0.38 per share, totaling $1.52. A $0.44 dividend was declared in February 2019 for payment in March.
- Key risks include reliance on deposits and several large depositors; concentration in Bermuda and Cayman; residential-property and commercial-credit exposures; interest-rate and securities valuation risk; lack of a central-bank lender of last resort in key jurisdictions; cyber and third-party technology risks; regulatory and tax changes, including Brexit and economic-substance rules; and potential deposit restrictions across subsidiaries.
- A US tax-compliance investigation remains unresolved. The Bank recorded a $5.5 million provision, unchanged from 2017, but said the ultimate resolution and any fines or penalties are uncertain and could exceed that amount.
- PwC gave an unqualified opinion on the consolidated financial statements and internal control over financial reporting. The acquired GTS business, representing approximately 0.3% of assets and 1.3% of revenue, was excluded from the 2018 internal-control assessment and audit scope.
Most important facts for investors to verify
- Whether deposit withdrawals by large customers continue, and how acquired deposits and loan growth affect liquidity and funding costs.
- Whether higher interest rates continue to support net interest margin, while monitoring the securities portfolio’s unrealized losses and interest-rate sensitivity.
- Credit quality, especially non-accrual loans of $48.7 million (1.2% of gross loans), the adequacy of the $25.1 million allowance, and the residential-mortgage concentration.
- Progress, integration costs, and returns from the Deutsche Bank acquisitions, including the banking and custody business onboarding expected in 2019.
- The outcome of the US tax investigation relative to the $5.5 million provision, and whether the proposed $0.44 quarterly dividend receives required approvals.