Business context and reporting period
The Bank of N.T. Butterfield & Son Limited is a Bermuda-headquartered bank and wealth manager operating across six jurisdictions. This Form 20-F covers the fiscal year ended December 31, 2016; it is an annual filing, not a standalone fourth-quarter report. Financial statements are audited under U.S. GAAP and presented in U.S. dollars; the Bermuda dollar is pegged one-for-one to the U.S. dollar.
Butterfield provides retail and corporate banking, trust, private banking and asset management. Bermuda and the Cayman Islands generated about 87% of 2016 net revenue before credit provisions and other gains or losses.
Key financial metrics
Amounts are U.S. dollars unless indicated. “Net revenue” below refers to management’s measure before credit provisions and other gains or losses; core measures are non-GAAP.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue before provisions and other gains/losses | $406.0 million | $379.5 million | +7.0% |
| Net interest income before provisions | $258.5 million | $239.3 million | +8.0% |
| Non-interest income | $147.5 million | $140.2 million | +5.2% |
| GAAP net income | $115.9 million | $77.7 million | +49.2% |
| Net income attributable to common shareholders | $58.4 million | $61.3 million | Down, chiefly due to preference-share redemption premium |
| Diluted GAAP earnings per common share | $1.18 | $1.23 | Down |
| Core net income / core earnings attributable to common shareholders | $138.6 million / $123.0 million | $113.9 million / $97.4 million | +21.7% / +26.2% |
| Net interest margin | 2.45% | 2.48% | Down 3 basis points |
| Core efficiency ratio | 63.8% | 66.0% | Improved |
Reported non-interest expense was $285.9 million versus $285.2 million. Core non-interest expense increased to $263.5 million from $254.8 million, while management’s core efficiency ratio improved as revenue grew faster than core expenses. Return on common equity was 8.9% (10.1% in 2015); core return on average tangible common equity was 20.5% (17.6%).
At year-end, total assets were $11.1 billion, up 8.1%; net loans were $3.57 billion, down 10.7%; and total deposits were $10.03 billion, up 9.3%. Cash due from banks was $2.10 billion. Cash, short-term investments and securities excluding held-to-maturity investments totaled $6.1 billion, or 55.0% of assets. The loan-to-deposit ratio was 35.7%.
Long-term debt was unchanged at $117 million. The debt comprises three subordinated note issues maturing in 2018, 2020 and 2023; $70.2 million was eligible for Tier 2 capital treatment. Shareholders’ equity was $710.7 million, down from $750.4 million, reflecting the preference-share redemption and other comprehensive losses, partly offset by IPO proceeds and earnings.
Basel III capital ratios at year-end were 15.3% CET1, 15.3% Tier 1 and 17.6% total capital; the leverage ratio was 5.8%. Total capital was 19.0% in 2015, reported under the prior Basel II framework, so the comparison is not on the same basis. The CET1 ratio exceeded the stated 2016 minimum of 8.1%.
Operating cash flow was $178.2 million, compared with $155.5 million in 2015. Investing activities used $1.20 billion, mainly for purchases of securities and short-term investments. Financing activities provided $939.6 million, including deposit growth and IPO proceeds, partly offset by preference-share redemption. Cash due from banks decreased $187.2 million during the year.
Material changes versus 2015
- Revenue and net income increased, supported by the April 2016 HSBC Bermuda trust and private-banking investment-management acquisition, organic growth and higher investment balances.
- Customer deposits grew $842 million year over year; the acquisition added $1.6 billion of deposits. The average cost of deposits fell to 12 basis points, aided by repayment of higher-cost UK deposits.
- Net interest margin edged lower as investment yields declined, despite higher net interest income and lower funding costs.
- Net loans fell by $430 million, mainly from repayments, limited new originations and foreign-exchange movements. Gross non-accrual loans improved to $48.5 million, or 1.3% of gross loans, from $65.3 million, or 1.6%.
- Butterfield completed a $288 million IPO, including approximately $126 million of net primary proceeds, and redeemed all preference shares for $212.1 million. The redemption eliminated about $16 million in annual preference dividends and guarantee fees but generated a $41.9 million premium charge affecting common-shareholder earnings.
- The UK deposit-taking, private-banking, investment-management and custody businesses were largely wound down by year-end; the remaining UK operation focuses on residential mortgage lending.
- Total other comprehensive loss was $54.2 million, including losses on available-for-sale securities and employee benefit plans.
Outlook, management commentary and risks
Management described a cautious approach to liquidity and capital and plans to maintain leading banking positions in Bermuda and the Cayman Islands while growing wealth management, including through selective acquisitions. It noted that rising rates could benefit net interest income if deposit costs adjust more slowly than asset yields; its modeled 100-basis-point decline scenario reduced projected 12-month net interest income by 8.9%. No specific earnings or revenue guidance is provided.
The Board stated an intention to pay quarterly dividends of $0.32 per common share, subject to Board and Bermuda Monetary Authority approval; this is not assured guidance. Shareholders received $0.40 per share in dividends during 2016, and a $0.32 fourth-quarter dividend was declared after year-end for payment in March 2017.
- Concentration and credit: Bermuda and Cayman account for most revenue and deposits; residential mortgages represent about 65% of gross loans. Local real-estate valuation data is limited, and property or economic weakness could increase credit losses.
- Liquidity and rates: The Bank relies chiefly on customer deposits, many payable on demand or within six months, and Bermuda, Cayman and Guernsey lack central banks acting as lenders of last resort. Deposit withdrawals, funding competition or rate changes could pressure liquidity or margins.
- Legal contingency: A U.S. tax-compliance investigation remains ongoing. The Bank recorded a $5.5 million provision, but says ultimate fines or penalties could exceed it; U.S. authorities have not confirmed the provision’s adequacy.
- Other risks: Regulatory changes across multiple jurisdictions, Brexit-related uncertainty, U.S. tax-law changes affecting Bermuda’s reinsurance sector, foreign-exchange movements, cyber and third-party service risks, and acquisition integration could affect results.
Management concluded disclosure controls were effective at year-end. As an emerging growth company, Butterfield did not include management’s assessment or auditor attestation of internal control over financial reporting. PwC issued an unqualified audit opinion on the consolidated financial statements.
Most important facts for investors to verify
- Reconcile GAAP common earnings per share ($1.18) with core diluted earnings per share ($2.48), including the $41.9 million preference-redemption premium and other non-GAAP adjustments.
- Track deposit growth, funding costs and deposit concentration in Bermuda and the Cayman Islands, and assess the liquidity profile given limited lender-of-last-resort access.
- Assess the sustainability of improved credit metrics, the adequacy of the $44.2 million loan-loss allowance and exposure to residential and commercial real estate.
- Monitor the U.S. tax investigation and whether its final resolution exceeds the $5.5 million provision.
- Confirm post-wind-down UK profitability, the benefits and integration costs of the HSBC Bermuda acquisition, and the effect of the preference-share redemption on capital and recurring common earnings.
- Check future dividend declarations and regulatory approvals; the stated $0.32 quarterly policy is discretionary and subject to approval.