Company Quick10K Filing
Bank of NT Butterfield & Son
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 55 $1,734
20-F 2019-02-26 Annual: 2018-12-31
20-F 2018-02-26 Annual: 2017-12-31
20-F 2017-02-28 Annual: 2016-12-31
NTB 2018-12-31
Note 1: Nature of Business
Note 2: Significant Accounting Policies
Note 3: Cash Due From Banks
Note 4: Short-Term Investments
Note 5: Investment in Securities
Note 6: Loans
Note 7: Credit Risk Concentrations
Note 8: Premises, Equipment and Computer Software
Note 9: Goodwill and Other Intangible Assets
Note 10: Customer Deposits and Deposits From Banks
Note 11: Employee Benefit Plans
Note 12: Credit Related Arrangements, Repurchase Agreements and Commitments
Note 13: Exit Cost Obligations
Note 14: Loan Interest Income
Note 15: Segmented Information
Note 16: Derivative Instruments and Risk Management
Note 17: Fair Value Measurements
Note 18: Interest Rate Risk
Note 19: Long-Term Debt
Note 20: Earnings per Share
Note 21: Share-Based Payments
Note 22: Share Buy-Back Plans
Note 23: Accumulated Other Comprehensive Loss
Note 24: Capital Structure
Note 25: Income Taxes
Note 26: Business Combinations
Note 27: Related Party Transactions
Note 28: Condensed Financial Statements of The Parent Company Only
Note 29: Subsequent Events
Item 19. Exhibits
EX-1.1 exhibit11to20ffiling-byexl.htm
EX-8 exhibit8to20ffiling-listof.htm
EX-12.1 exhibit121to20ffiling-ceoc.htm
EX-12.2 exhibit122to20ffiling-cfoc.htm
EX-13 exhibit131to20ffiling-ceoc.htm

Bank of NT Butterfield & Son Earnings 2018-12-31

NTB 20F Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
NTB 1,734 10,773 9,891 0 0 0 0 -193 0%
PGC 541 4,871 4,377 166 0 44 118 541 0% 4.6 1%
ESQ 193 732 630 0 0 12 19 153 7.9 2%
MFCB 56 507 113 0 0 0 0 56 0%
BMLP
BBAR
CM
SUPV
RY
IFS

20-F 1 current20fannualfss-q42018.htm 20-F THE BANK OF N.T. BUTTERFIELD AND SON LIMITED Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 20-F
(Mark One)
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from ___________________________ to ___________________________

Commission file number: 001-37877
 
The Bank of N.T. Butterfield & Son Limited
(Exact name of Registrant as specified in its charter)
 
Bermuda
(Jurisdiction of incorporation or organization)

65 Front Street, Hamilton, HM 12 Bermuda
(Address of principal executive offices)
  
Shaun Morris, 65 Front Street, Hamilton, HM 12 Bermuda
Telephone: (441) 295-1111; Fax: (441) 292-4365
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class

Name of each exchange on which registered

voting ordinary shares of par value BM$ 0.01 each

New York Stock Exchange
Bermuda Stock Exchange

 
Bermuda Stock Exchange


Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the
period covered by the annual report.
As of December 31, 2018, there were 55,359,218 shares of the registrant's common stock outstanding.




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
xYes oNo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
oYes xNo
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
xYes oNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
xYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx Accelerated filero Non-accelerated filero

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAPx
International Financial Reporting Standards as issued by the International Accounting Standards Boardo
Othero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the
registrant has elected to follow.
oItem 17 oItem 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
oYes xNo




TABLE OF CONTENTS
Cross Reference Sheet
Explanatory Note
Implications of Being a Foreign Private Issuer
Cautionary Note Regarding Forward-Looking Statements

Information on the Company

Selected Consolidated Financial and Other Data
Risk Factors
Market Information
Dividend Policy
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Statistical Data
Risk Management
Supervision and Regulation
Management
Major Shareholders and Related Party Transactions
Certain Taxation Considerations
Enforcement of Civil Liabilities
Disclosure Control and Procedures
Principal Accountant Fees and Services
Issuer Purchases of Equity Securities
Where You Can Find More Information
Index to the Financial Statements




CROSS REFERENCE SHEET

Form 20-F
 
 
Item Caption
 
Location
 
Page
Part I
 
 
 
 
 
 
Item 1
 
Identity of Directors, Senior Management and Advisors
 
Not Applicable
 
N/A
Item 2
 
Offer Statistics and Expected Timetable
 
Not Applicable
 
N/A
Item 3
 
Key Information
 
Explanatory Note
 
 
 
 
 
Risk Factors
 
 
 
 
 
Selected Consolidated Financial and Other Data
 
Item 4
 
Information on the Company
 
Information on the Company
 
 
 
 
 
Supervision and Regulation
 
Item 4A
 
Unresolved Staff Comments
 
Not Applicable
 
N/A
Item 5
 
Operating and Financial Review and Prospects
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 6
 
Directors, Senior Management and Employees
 
Management
 
 
 
 
 
Major Shareholders and Related Party Transactions

 
Item 7
 
Major Shareholders and Related Party Transactions
 
Major Shareholders and Related Party Transactions

 
Item 8
 
Financial Information
 
Reports of Independent Registered Public Accounting Firms
 
 
 
 
 
Consolidated Financial Statements and Notes to the Consolidated Financial Statements
 
 
 
 
 
Dividend Policy
 
Item 9
 
The Offer and Listing
 
Market Information
 
Item 10
 
Additional Information
 
Management
 
 
 
 
 
Supervision and Regulation
 
Item 11
 
Quantitative and Qualitative Disclosures about Market Risk
 
Risk Management
 
Item 12
 
Description of Securities other than Equity Securities
 
Not Applicable
 
N/A
Part II
 
 
 
 
 
 
Item 13
 
Defaults, Dividend Arrearages and Delinquencies
 
None
 
N/A
Item 14
 
Material Modifications to the Rights of Security Holders and Use of Proceeds
 
Not Applicable
 
N/A
Item 15
 
Controls and Procedures
 
Disclosure Controls and Procedures
 
Item 16A
 
Audit Committee Financial Expert
 
Management - Audit Committee
 
Item 16B
 
Code of Ethics
 
Management - Code of Conduct and Ethics and Whistleblower Policy
 
Item 16C
 
Principal Accountant Fees and Services
 
Principal Accountant Fees and Services
 
Item 16D
 
Exemption from the Listing Standards for Audit Committees
 
Not Applicable
 
N/A
Item 16E
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
Issuer Purchases of Equity Securities
 
Item 16F
 
Changes in Registrant's Certifying Accountant
 
Not Applicable
 
N/A
Item 16G
 
Significant Differences in Corporate Governance Practices
 
Management - Foreign Private Issuer Status
 
Item 16H
 
Mine Safety Disclosure
 
Not Applicable
 
N/A

i


 
 
Item Caption
 
Location
 
Page
Part III
 
 
 
 
 
 
Item 17
 
Financial Statements
 
Consolidated Financial Statements and Notes to the Consolidated Financial Statements
 
Item 18
 
Financial Statements - Prepared Using a Basis of Accounting Other than IFRS
 
N/A
 
N/A
Item 19
 
Exhibits
 
Exhibits
 


ii


EXPLANATORY NOTE

In this report, unless the context indicates otherwise, the term:
"Bank" or "Butterfield" refers to:
The Bank of N.T. Butterfield & Son Limited;
"BMA" refers to:
The Bermuda Monetary Authority;
"Board" refers to:
The Board of Directors of the Bank;
"IPO" refers to:
our initial public offering of 12,234,042 common shares completed on September 21, 2016;
"common shares" refers to:
the voting ordinary shares of par value BM$ 0.01 each in the Bank; and
"we", "our", "us", "the Company" and "the Group" refer to:
the Bank and its consolidated subsidiaries.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this report, references to “BMD”, “BM$”, or “Bermuda Dollars” are to the lawful currency of Bermuda, and “USD”, “US$”, “$” and “US Dollars” are to the lawful currency of the United States of America. The Bermuda Dollar is pegged to the US Dollar on a one‑to‑one basis and therefore, for all periods presented, BM$1.00 = US$1.00.
Certain monetary amounts, percentages and other figures included in this report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
Our consolidated financial statements as of and for the years ended December 31, 2018, 2017 and 2016 have been audited, as stated in the report appearing herein, by PricewaterhouseCoopers Ltd., Bermuda, and are included in this report and are referred to as our audited consolidated financial statements. We have prepared these financial statements in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
We believe that the non‑GAAP measures included in this report provide valuable information to readers because they enable the reader to identify the financial measures we use to track the performance of our business and guide management. Furthermore, these measures provide readers with valuable information regarding our core activities, which allows for a more meaningful evaluation of relevant trends when considered in conjunction with measures calculated in accordance with US GAAP. Non‑GAAP measures used in this report are not a substitute for US GAAP measures and readers should consider the US GAAP measures as well. For more information on non‑GAAP measures, including a reconciliation to the most directly comparable US GAAP financial measures, see “Selected Consolidated Financial Data — Reconciliation of Non‑GAAP Financial Measures”.
INDUSTRY AND MARKET DATA
Some of the discussion contained in this report relies on certain market and industry data obtained from third‑party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications and third‑party forecasts in conjunction with our assumptions about our markets. While we believe the industry and market data to be reliable as of the date of this report, this information is subject to change based on various factors, including those discussed under the headings “Cautionary Note Regarding Forward‑Looking Statements” and “Risk Factors” in this report.
TRADEMARKS AND SERVICE MARKS
We own or have rights to trademarks and service marks for use in connection with the operation of our business. All other trademarks or service marks appearing in this report that are not identified as marks owned by us are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names referred to in this report are listed without the ®, (TM) and (sm) symbols, but we will assert, to the fullest extent under applicable law, our applicable rights in these trademarks, service marks and trade names.



iii


IMPLICATIONS OF BEING A FOREIGN PRIVATE ISSUER

We are a foreign private issuer, and so long as we qualify as a foreign private issuer under the Securities Exchange Act of 1934 (the "Exchange Act"), we will be exempt from certain provisions of the Exchange Act that are applicable to US domestic public companies, including:
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission (the "SEC") of quarterly reports on Form 10‑Q containing unaudited financial and other specified information, or current reports on Form 8‑K, upon the occurrence of specified significant events; and
Regulation Fair Disclosure, or Regulation FD, which regulates selective disclosures of material information by issuers.
We are, however, required to file an annual report on Form 20‑F within four months of the end of each fiscal year. In addition, we have published and intend to continue to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange (the "NYSE"). Press releases related to financial results and material events have been and will continue to be furnished to the SEC on Form 6‑K. However, the information we are required to file with or furnish to the SEC is less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you, were you investing in a U.S. domestic issuer. For additional discussion on our foreign private issuer status, see “Management — Foreign Private Issuer Status”.


iv


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations or assumptions regarding the future of our business, future plans and strategies, our operational results and other future conditions. Forward-looking statements can be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "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. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this annual report and include statements regarding our intentions, beliefs or current expectation concerning, among other things, our results of operations, financial condition, capital and liquidity requirements, prospects, growth, strategies and the industry in which we operate.
There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the "Risk Factors" section of this annual report, which include, but are not limited to, the following:
changes in economic and market conditions;
changes in market interest rates;
our access to sources of liquidity and capital to address our liquidity needs;
our ability to attract and retain customer deposits;
our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
our ability to successfully execute our business plan and implement our growth strategy;
our ability to successfully manage our credit risk and the sufficiency of our allowance for credit loss;
our ability to successfully develop and commercialize new or enhanced products and services;
our ability to transact business in EU countries in the aftermath of Brexit;
damage to our reputation from any of the factors described in this section, in "Risk Factors" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations";
our reliance on appraisals and valuation techniques;
our ability to attract and maintain qualified employees and key executives;
our reliance on third-party vendors;
our reliance on the effective implementation and use of technology;
our ability to identify and address cyber-security risks;
The effect of a material breach of, or interruption to, the security of any of our vendors' systems;
the failure or interruption of our information and communications systems;
the effectiveness of our risk management and internal disclosure controls and procedures;
our ability to maintain effective internal control over financial reporting;
the likelihood of success in, and the impact of, litigation or regulatory actions;
the complex and changing regulatory environment in which we operate, including any changing regulatory requirements and restrictions placed on us by our principal regulator, the BMA, and other regulators, the impacts to us of the enactment of the Tax Cuts and Jobs Act in the US on December 22, 2017 as well as our ability to comply with regulatory schemes in multiple jurisdictions.
These factors should not be construed as exhaustive and should be read with the other cautionary statements in this annual report.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this report speaks only as of the date of such statement. Except to the extent required by applicable law, we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.


v


INFORMATION ON THE COMPANY
Overview
We are a full service bank and wealth manager headquartered in Hamilton, Bermuda. We operate our business through three geographic segments: Bermuda, the Cayman Islands, and The Channel Islands and the UK. We offer banking services, comprised of retail and corporate banking, and wealth management, which consists of trust, private banking, and asset management in both our Bermuda and Cayman Islands segments. The Channel Islands and the UK segment includes the jurisdictions of Guernsey (Channel Islands), and the UK. In the Channel Islands, a broad range of services are provided to private clients and financial institutions including private banking and treasury services, internet banking, wealth management and fiduciary services. The UK jurisdiction provides mortgage services for high-value residential properties. We also have operations in the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland, which we include in our Other segment.
For the year ended December 31, 2018 we generated $517.8 million in net revenue after provision for credit losses and other gains/losses ("Net Revenue"). Our total net revenue by each of our three geographic segments and our non-reportable segment for the years ended December 31, 2018, 2017 and 2016 are as follows:
 
For the year ended
In millions of $
2018
 
2017
 
2016
Net Revenue
 
 
 
 
 
Bermuda segment
$
299.4

 
$
268.7

 
$
228.0

Cayman Islands segment
$
152.6

 
$
133.1

 
$
123.0

Channel Islands and the UK
$
59.0

 
$
46.8

 
$
45.2

Other
$
15.2

 
$
11.6

 
$
9.3

Our Net Revenue for the year ended December 31, 2018 consisted of 56.9% from our Bermuda segment, 29.0% from our Cayman Islands segment, 11.2% from our Channel Islands and the UK segment and 2.9% from our Other segments. As of December 31, 2018, we had $10.8 billion in total assets, $4.0 billion in net loans, $9.4 billion in customer deposits (60% USD deposits, 20% USD-pegged deposits), $96.1 billion of trust assets under administration ("AUA"), and $4.8 billion of assets under management ("AUM").
In our Bermuda and Cayman Islands segments, our bank provides a full range of retail and corporate banking services to individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds. The key products we offer include personal and business deposit services, residential and commercial mortgages, small and medium-sized enterprise and corporate loans, credit and debit card suite, merchant acquiring, mobile / online banking, and cash management.
In all of our segments, we offer wealth management to high net worth and ultra-high net worth individuals, family offices, and institutional and corporate clients. Our wealth management platform has three lines of business: trust, private banking, and asset management.
The trust business line, which utilizes specialists in each of our geographic areas, meets client needs in estate and succession planning, administration of complex asset holdings, and efficient coordination of family affairs. In addition, the business provides pension and employee benefits services for multinational corporations, as well as services that involve administration of and fiduciary responsibility for customized trust structures holding a wide range of asset types including financial assets, property, business assets, and art. As of December 31, 2018, trust AUA totaled $96.1 billion.
Our private banking business line offers access to a suite of services, targeted toward high net worth individuals, trusts, and family offices, that can be customized to each client's needs and preferences and delivered as part of a coordinated strategy by a dedicated private banker. We provide clients in our Bermuda, Cayman Islands, and Channel Islands and the UK segments with an integrated model that combines traditional wealth management with banking, lending, cash management, foreign exchange services, custody and access to asset management and trust professionals within Butterfield. We also provide our clients with immediate access to their account information through the use of internet banking. As of December 31, 2018, total deposits and loans in our private banking business were $3.2 billion and $1.1 billion, respectively.
Our asset management business line provides a broad range of portfolio management services to institutional and private clients. Our target client base includes institutions such as pension funds and captive insurance companies with investable assets over $10 million and private clients such as high net worth individuals, families, and trusts with investable assets over $1 million. Our principal services include discretionary investment management, managed portfolio services, money market, and mutual fund offerings. We also offer advisory and self-directed brokerage options. Over 90% of the business's discretionary investment mandates call for balanced growth to conservative allocations. We focus on delivery of reasonable appreciation with an emphasis on capital preservation. The Bank relies on third parties to provide research and investment management expertise, while our own services are concentrated on portfolio construction and managing client relationships. We also provide customized reporting to meet specific needs of our major clients. As of December 31, 2018 our asset management AUM were $4.8 billion.
From 2014 to 2018, our GAAP net income to common shareholders and our core net income to common shareholders (‘‘Core Net Income to Common’’) had compound annual growth rates (‘‘CAGRs’’) of 16% and 17%, respectively(1). Our earnings generation has allowed us to build capital to return to shareholders and invest strategically, both organically and through acquisitions, to further enhance the growth prospects of our Company. We aim to continue to build excess capital in the future, which we can redeploy into growing our business and return to shareholders.


1


Our History
The origin of The Bank of N.T. Butterfield & Son Limited traces back to 1758, to the founding of the trading firm of Nathaniel Butterfield. In 1858, our company was established as a bank in Bermuda and has been instrumental to the local economy ever since. The Bank was later incorporated under a special act of the local Parliament in 1904. In the 1960s, as international businesses began contributing substantially to Bermuda's economy, we developed services to work to meet their needs. In 1967, we opened offices in the Cayman Islands and by the 1980s had expanded our operations to include retail banking, investment management, and fund administration. In 1973, we opened our Guernsey office in order to provide customers with access to the Pound Sterling currency after Bermuda's departure from the British Sterling zone. In addition to being Bermuda's first bank, we opened the first ATMs in Bermuda in the 1980s and launched Bermuda's first internet banking service in 2001. In 1971, we listed our common shares on the Bermuda Stock Exchange under the ticker symbol "NTB.BH".
In 2016, we listed our common shares on the New York Stock Exchange under the ticker symbol "NTB". In 2008 and 2009, as a result of the global financial crisis, we realized losses attributable primarily to US non-agency mortgage backed securities in our investment portfolio, as well as write-downs on local market hospitality loans. To raise capital to offset these losses, the Bank executed a $200 million preference share offering in June 2009. In 2009 and 2010, we implemented a comprehensive restructuring plan for the Company: we hired a new management team, de-risked our balance sheet, and raised $550 million of common equity from a group of investors that included Carlyle Global Financial Services and related entities (collectively, "The Carlyle Group" or "Carlyle") and Canadian Imperial Bank of Commerce ("CIBC"), as well as existing shareholders. As part of the transaction, we launched a rights offering of $130 million on April 12, 2010, so as to allow the pre-transaction shareholders to participate in the recapitalization of the Company. The rights offering, which closed on May 12, 2010, was fully subscribed to, and the proceeds were used to repurchase shares from the recapitalization investors. As a result, the recapitalization investors' total investment was reduced to $420 million.
Since our restructuring, we have pursued a strategy to focus on our core business in banking and wealth management. We have executed upon our strategy by streamlining the Company's operations through exiting non-core markets, repositioning our balance sheet, investing in efficiency initiatives, and continuing to invest in our core business lines to grow both organically and through acquisitions. By following this strategy, we have improved our financial results, including growing Core Earnings to Common,l every year since 2011 and have been able to initiate a progressive capital return policy for investors. The following items were key steps in executing our strategy:
In 2010, we sold our operations in Hong Kong and Malta, and in 2012, we sold our operations in Barbados as they were no longer consistent with our strategy.
In 2010, we sold $820 million of asset-backed securities to cleanse our investment portfolio.
In 2013, we implemented an annual cash dividend of $0.40 per year plus a $0.10 per year special dividend.
In 2014, we completed two acquisitions, which allowed us to both expand and complement our existing business lines: Legis Group Holdings' Guernsey-based trust and corporate services business, as well as a significant portion of HSBC's corporate and retail banking business in the Cayman Islands.
In April 2015, CIBC sold its 19% ownership stake. We repurchased and retired 8 million shares for a total of $120 million, and The Carlyle Group purchased CIBC's remaining 2.3 million shares and subsequently sold them to other existing investors.
In December 2015, we repositioned our balance sheet to better match the duration of our assets and liabilities and to reclassify a portion of our Available for Sale ("AFS") portfolio as Held to Maturity ("HTM").
In February 2016, we commenced an orderly wind-down ("OWD") of our UK operations. We exited our private banking and asset management operations in our UK segment, but retain our UK high net worth mortgage lending business. The OWD was completed by early 2017 with the change in the business operations to mortgage lending services and the change of name of our UK operations to Butterfield Mortgages Limited. The excess capital in the UK was released early in 2017, which we invested in other areas of our business.
In April 2016, we completed an acquisition of HSBC's Bermuda trust business and private banking investment management operations that added $1.6 billion of deposits to our balance sheet. As part of the transaction, HSBC also entered into an agreement to refer its existing private banking clients to Butterfield.
In September 2016, we successfully completed a $288 million initial public offering and listing on the New York Stock Exchange, through which we raised approximately $126 million in net primary proceeds.
In December 2016, we redeemed and canceled all of our issued and outstanding preference shares, which had a book value of $183 million, removing approximately $16 million of annual preference dividend and guarantee fees. We also repurchased for cancellation the outstanding warrant from the Government of Bermuda, removing a potentially dilutive instrument.
In February 2017, we successfully completed a first follow-on offering of 10,989,163 Common Shares. Following the closing of the offering, The Carlyle Group no longer held any Common Shares and the Investment Agreement between Butterfield and Carlyle was terminated.
In October 2017, we entered into an agreement to acquire Deutsche Bank’s Global Trust Solutions (“GTS”) business, excluding its US operations. Upon completion of the transaction, Butterfield took over the ongoing management and administration of the GTS portfolio, comprising approximately 1,000 trust structures for some 900 private clients in Guernsey, Switzerland, the Cayman Islands and Singapore. This transaction was completed in March 2018.
In February 2018, we entered into an agreement to acquire Deutsche Bank’s banking and custody business in the Cayman Islands, Jersey and Guernsey, which provides services primarily to financial intermediaries and corporate clients. As part of the deal, we also purchased a service company in Mauritius to provide operations and support services to the Cayman and Channel Islands banking and custody businesses.
In May 2018, we issued $75 million aggregate principal amount of 5.25% Fixed to Floating Rate Subordinated Notes due 2028 to repay a portion of our outstanding indebtedness and for other general corporate purposes.
Our Markets
Our two largest segments are Bermuda and the Cayman Islands. As of December 31, 2018, 49% of our total assets were held by our Bermuda segment and 33% by our Cayman Islands segment. Bermuda is our largest segment by number of employees. As of December 31, 2018, our Bermuda segment had $5.4 billion of assets, $46.9 billion of trust AUA and $3.9 billion of AUM, and our Cayman Islands segment had $3.7 billion of assets, $7.7 billion of trust AUA and $0.8 billion of AUM.

2


The charts below provide the geographic distribution of our Net Revenue for the year ended December 31, 2018.
Segment Distribution of Net Revenue
chart-cd003d522e3555ddac2.jpg
2018 Net Revenue: $517.8 million

The Bermuda and Cayman Islands banking markets have historically been characterized by a limited number of participants and significant barriers to entry. In addition, these markets provide us with access to several attractive customer bases: in retail banking, we serve local residents and businesses; in corporate banking, we serve captive insurers, hedge funds, middle-market reinsurers, and other corporates; and in wealth management, we serve private trust clients and ultra-high net worth and high net worth individuals and families.
The international trust market is primarily concentrated in select jurisdictions, including Bermuda, the Cayman Islands, Guernsey, Hong Kong, Jersey, Singapore, and Switzerland. The leading international trust law firms serve as key introducers of clients to Butterfield and are the primary source of new business. Trust clients often hold assets that are international in nature, and as a result, performance of trust businesses is not generally linked to performance of the domestic economies where clients are served.
The private banking market in Bermuda, the Cayman Islands, and Guernsey is composed largely of resident high net worth individuals meeting minimum deposit and/or loan thresholds. Clients are introduced to the private bank through Butterfield's retail banking operation upon reaching the appropriate deposit or loan threshold, Butterfield's trust and asset management arms, as well as through external introducers. Although locally based, private banking clients often hold international assets, and as a result, business performance is not necessarily correlated to the domestic economies where clients are served.
Our asset management business line operates in Bermuda, the Cayman Islands, and Guernsey. As of December 31, 2018, 75% of our AUM was in Bermuda, 17% was in the Cayman Islands, 8% was in Guernsey. In Bermuda and the Cayman Islands, a majority of our institutional and private clients are domestic from a domicile perspective while a majority of our clients in Guernsey are tied to our trust business and are international in nature.
Corporate Information
We are a company incorporated under the laws of Bermuda, incorporated on October 22, 1904, pursuant to the The N.T. Butterfield & Son Bank Act, 1904 (the "Butterfield Act"). We are registered with the Registrar of Companies in Bermuda under registration number 2106. Our registered office and principal executive offices are located at 65 Front Street, Hamilton, HM 12, Bermuda. Our agent for service of process in the United States is C T Corporation System, 111 Eighth Avenue, New York, New York 10011. Our telephone number is (441) 295 1111. We maintain a website at www.butterfieldgroup.com. Neither this website nor the information on or accessible through this website is included or incorporated in, or is a part of, this report.
Summary Risk Factors
Any of the factors set forth under "Risk Factors" may limit our ability to successfully execute our business strategy. Among these important risks are the following:
Adverse economic and market conditions, in particular in Bermuda and the Cayman Islands, have in the past resulted in and could in the future result in lower revenue, lower asset quality, increased provisions and lower earnings.
Unlike geographically more diversified banks, our business is concentrated primarily in Bermuda and the Cayman Islands, and we may be more affected by a downturn in these markets than more diversified competitors.
A decline in the residential real estate market, in particular in Bermuda, could increase the risk of loans being impaired and could have an adverse effect on our business, financial condition or results of operations.
The value of the securities in our investment portfolio may decline in the future.
Fluctuations in interest rates and inflation may negatively impact our net interest margin and our profitability.
We depend primarily on deposits to fund our liquidity needs; if we are unable to effectively manage our liquidity across the jurisdictions in which we operate, our business, financial condition or results of operations could be adversely affected.
We face competition in all aspects of our business, and may not be able to attract and retain wealth management, trust and banking clients at current levels.

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We could fail to attract, retain or motivate highly skilled and qualified personnel, including our senior management, other key employees or members of the Board, which could adversely affect our business;
Our controls and procedures may fail or be circumvented, which could have an adverse impact on our business, financial condition or results of operations.
Volatility levels and fluctuations in foreign currency exchange rates may affect our business, financial position and results of operations.
Our international business model exposes us to different and possibly conflicting regulatory schemes across multiple jurisdictions.
US withholding tax and information reporting requirements imposed under the Foreign Account Tax Compliance Act may apply.
The uncertainty resulting from the vote in June 2016 by the UK electorate in favor of a UK exit from the European Union ("EU"), as well as changes in US legislation, regulation and government policy under the current US administration, could adversely impact our business, financial condition and results of operations.
Cyber-attacks, distributed denial of service attacks and other cyber-security matters, if successful, could have an adverse effect on our business, financial condition or results of operations.
We operate in a complex regulatory environment and legal and regulatory changes could have a negative impact on our business, financial condition or results of operations.
Provisions of Bermuda law and our bye-laws could adversely affect the rights of our shareholders or prevent or delay a change in control.
Bermuda law differs from the laws in effect in the United States and might afford less protection to shareholders.


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Our International Network and Group Structure
The following map presents the several geographic regions in which our business operates:
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The following chart presents our corporate structure, indicating our principal regulated subsidiaries as of December 31, 2018:
butterfieldorgcharta02.jpgBermuda
The Bank itself is licensed in Bermuda to provide banking services and wealth management services. Through its wholly owned Bermuda subsidiary Butterfield Asset Management Limited, it provides asset management services and, through its wholly owned Bermuda subsidiaries Butterfield Trust (Bermuda) Limited, Bermuda Trust Company Limited and Grosvenor Trust Company Limited, it provides corporate trustee, fiduciary and corporate administration services. Bermuda Securities (Bermuda) Limited, a wholly owned subsidiary of the Bank, provides investment advisory and listing sponsor services.
Cayman Islands
Butterfield Bank (Cayman) Limited, a wholly owned subsidiary of the Bank, provides banking services and its wholly-owned subsidiary Butterfield Trust (Cayman) Limited provides trustee, fiduciary and corporate administration services.

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Guernsey
Butterfield Bank (Guernsey) Limited is a wholly owned subsidiary of the Bank and provides private banking, custody and administered banking services. Butterfield Trust (Guernsey) Limited is a wholly owned subsidiary of the Bank and provides trustee and fiduciary services.
Bahamas
Butterfield Trust (Bahamas) Limited is a wholly owned subsidiary of the Bank and provides trust and fiduciary services.
Switzerland
Butterfield Trust (Switzerland) Limited is a wholly owned subsidiary of the Bank and provides investment services and through its wholly owned subsidiary Butterfield Trust (Switzerland) Limited provides trust and fiduciary services.
United Kingdom
Butterfield Mortgages Limited is a wholly owned subsidiary of the Bank and provides residential property lending services.
Singapore
Butterfield (Singapore) Pte. Ltd. is a wholly owned subsidiary of the Bank and provides trust and fiduciary services.
Jersey
Butterfield Bank (Jersey) Limited is a wholly owned subsidiary of the Bank, and provides deposit-taking, investment business and custody services.
Competition
The financial services industry and each of the markets in which we operate are competitive. We face strong competition in gathering deposits, making loans and obtaining client assets for management. We compete, both domestically and internationally, with globally oriented asset managers, retail and commercial banks, investment banking firms, brokerage firms and other investment service firms. Due to the trend toward consolidation in the global financial services industry, our larger competitors tend to have broader ranges of product and service offerings, increased access to capital, and greater efficiency. Larger financial institutions may also have greater ability to leverage increasing regulatory requirements and investment in expensive technology platforms. We also face competition from non-banking financial institutions. These institutions have the ability to offer services previously limited to commercial banks. In addition, non-banking financial institutions are not subject to the same regulatory restrictions as banks, and can often operate with greater flexibility and lower cost structures.
The Bermuda banking segment currently consists of four licensed banks and one licensed deposit-taking institution including one large subsidiary of an international bank, HSBC, and three domestic institutions, including Bermuda Commercial Bank and Clarien Bank. In the Cayman Islands, the Bank is one of six Class 'A' full service retail banks licensed to conduct business with domestic and international clients. There are also five non-retail Class 'A' banks and 135 limited service Class 'B' banks, including Cayman National and subsidiaries of international banks, such as RBC, according to CIMA. In certain interest rate environments, additional significant competition for deposits may be expected to arise from corporate and government debt securities and money market mutual funds. We view HSBC in Bermuda and RBC in the Cayman Islands as our most significant competitors.
In our wealth management business line, we face competition from local competitors, as well as much larger financial institutions, including financial institutions that are not based in the markets in which we operate. Revenues from the trust and wealth management business depend in large part on the level of assets under management, and larger international banks may have higher levels of assets under management.
In our trust business line, we face competition primarily from other specialized trust service providers. There are many trust companies in the main international financial centers, and many of our competitors in this sector offer fund administration and corporate services work alongside private client fiduciary services.
Competition for deposits is also affected by the ease with which customers can transfer deposits from one institution to another. Our cost of funds fluctuates with market interest rates and may be affected by higher rates being offered by other financial institutions. Our management believes that our most direct competition for deposits comes from international and domestic financial services firms that target the same customers as the Bank.
Deposits
We are a deposit-led institution with leading market share in our primary segments: Bermuda and the Cayman Islands. We strive to maintain deposit growth and to maintain a strong liquidity profile through a significant excess of deposits over loans through market cycles.
Our deposits are generated principally by our banking business line, which offers retail and corporate checking, savings, and term deposits through our segments in Bermuda, the Cayman Islands and the Channel Islands. In addition, wealth management, through its private banking business line, also provides deposit services to high net worth and ultra-high net worth clients in those same geographic segments. As of December 31, 2018, our Bermuda, Cayman Islands and Channel Islands and the UK segments contributed $4.5 billion, $3.2 billion and $1.6 billion, respectively, to our total customer deposit base as of December 31, 2018.
Total deposits as of December 31, 2018 were $9.5 billion, down 0.9% over total deposits as of December 31, 2017. Customer demand deposits, which include checking, savings and call accounts, totaled $7.4 billion, or 79.1% of customer deposits, as of December 31, 2018, compared to $7.8 billion, or 82.0%, as of December 31, 2017. Customer term deposits totaled $2.0 billion as of December 31, 2018. The cost of funds on total deposits improved from 11 basis points in 2017 to 18 basis points as of December 31, 2018 as a result of an increase in non-interest bearing deposits and small rate decreases in some jurisdictions.
Lending
We offer a broad set of lending offerings including residential mortgage lending, automobile lending, credit cards consumer financing, and overdraft facilities to our retail customers, and commercial real estate lending, commercial and industrial loans, and overdraft facilities to our commercial and corporate customers. These offerings are provided to our retail, commercial, and private banking clients in our key jurisdictions including Bermuda and the Cayman Islands. We also offer residential mortgage lending through our private banking business in Guernsey and to our high net worth and ultra-high net worth clients in the UK. Our loan portfolio, net of allowance for credit losses stood at $4.0 billion as of December 31, 2018. The loan portfolio represented 37.5% of total assets as of December 31, 2018, and loans, net of allowance for credit losses, as a

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percentage of customer deposits were 42.9%. The effective yield on total loans for the year ended December 31, 2018 was 5.47%, compared to 5.10% for the year ended December 31, 2017.
Residential Mortgage Lending
The residential mortgage portfolio comprises mortgages to clients with whom we are seeking to establish (or already have) a comprehensive financial services relationship. It includes mortgages to individuals and corporate loans secured by way of first ranking charges over the residential property to which each specific loan relates generally on terms which allow for the repossession and sale of the property if the borrower fails to comply with the terms of the loan. As of December 31, 2018, residential mortgages (after specific allowance for credit losses) totaled $2.7 billion (a $165.6 million increase from December 31, 2017), accounting for approximately 65.4% of the Group's total gross loan portfolio (after specific allowance for credit losses) and approximately 66.7% of total non-accrual loans in the Group's loan portfolio.
Consumer Lending
We provide loans, as part of our normal banking business, in respect of automobile financing, consumer financing, credit cards and overdraft facilities to retail and private banking clients in the jurisdictions in which we operate. As of December 31, 2018, non-residential loans to consumers (after specific allowance for credit losses) totaled $180.4 million, accounting for approximately 4.4% of the Group's total gross loan portfolio and approximately 2.1% of total non-accrual loans in the Group's loan portfolio.
Commercial Real Estate Lending
Commercial real estate loans are offered to real estate investors, developers and builders domiciled primarily in Bermuda and the United Kingdom. To manage the Group's credit exposure on such loans, the principal collateral is real estate held for commercial purposes and is supported by a registered mortgage. Cash flows from the properties, primarily from rental income, are generally supported by long-term leases.
As of December 31, 2018, our commercial real estate loan portfolio (after specific allowance for credit losses) totaled $575.0 million, accounting for approximately 14.2% of the Group's total gross loan portfolio and approximately 8.3% of total non-accrual loans in the Group's loan portfolio.
Our commercial real estate loan portfolio is broken down into two categories: commercial mortgage and construction. As of December 31, 2018, commercial mortgages totaled $497.0 million (before allowance for credit losses), and construction loans totaled $78.7 million, accounting for approximately 86.3% and 13.7% of our commercial real estate loan portfolio before allowance for credit losses, respectively.
Other Commercial Lending
The commercial and industrial loan portfolio includes loans and overdraft facilities advanced primarily to corporations and small and medium-sized entities, which are generally not collateralized by real estate and where loan repayments are expected to flow from the operation of the underlying businesses. As of December 31, 2018, the Group's gross other commercial loan portfolio totaled $542.5 million, accounting for approximately 13.4% of the Group's total gross loan portfolio. As of the same date, the Group's gross loans to governments totaled $105.7 million, accounting for approximately 2.6% of our loan portfolio. As of December 31, 2018, other commercial loans accounted for approximately 22.9% of our total non-accrual loans.
Investments
Given the large customer deposit base commanded in our Bermuda and Cayman Islands operations, and the relatively low volume of lending demand from our customer base, our investment strategy is more important than may be the case for most financial institutions. In recognition of this, we maintain what we believe to be a conservative approach to investments, requiring the purchase of mainly fixed-rate investments in order to manage interest rate risk. Our investment portfolio is comprised mainly of securities issued or guaranteed by the US Government or federal agencies. The securities in which we invest are generally limited to securities that are considered investment grade (i.e., "BBB" and higher by S&P's Financial Services LLC or an equivalent credit rating). Effective July 31, 2012, we entered into an agreement with Alumina Investment Management LLC ("Alumina") pursuant to which Alumina provides investment advisory services to us in respect of our US Treasury and agency portfolio.
As of December 31, 2018, the Group held $4.3 billion in investments, representing approximately 39.5% of total assets.
Cash and Liquidity Management
We operate across multiple currency jurisdictions with pervasive multi-currency products. In our deposit taking jurisdictions—Bermuda, the Cayman Islands and Guernsey—there are currently no dedicated central banks, and no deposit insurance scheme infrastructures (such as the Federal Deposit Insurance Corporation in the United States), with the exception of Bermuda, where a deposit insurance scheme has recently been implemented. In addition, we do not have access to borrowing or deposit facilities with the US Federal Reserve or the European Central Bank; therefore, we conservatively manage client deposit balances and the liquidity risk profile of our balance sheets. This involves the retention of significant cash or cash equivalent balances, management of intra-bank counterparty exposure and management of a significant short-dated US Treasury Bill portfolio. As of December 31, 2018, the cash due from banks of $2.1 billion was composed primarily of $1.4 billion in interest earning cash equivalents, which are investments with a less than ninety day duration. The remaining amounts were comprised of non-interest earning and interest earning deposits of $0.1 billion and $0.5 billion, respectively.
Foreign Exchange Services
We provide foreign exchange services in the normal course of business in all jurisdictions. The major contributors to foreign exchange revenues are Bermuda and the Cayman Islands, accounting for 92% and 90% of our foreign exchange revenue for the year ended December 31, 2018 and 2017, respectively. We do not maintain a proprietary trading book. Foreign exchange income is generated from client-driven transactions and totaled $32.9 million during the year ended December 31, 2018, compared to $32.2 million for the comparative period in 2017. The $0.7 million period-over-period increase reflects increased client activity and related volumes in retail and institutional foreign exchange flows, as well as increased unrealized gains on client service derivatives held over period ends.
Administration Services
Through our wholly owned trust subsidiaries, we provide custody administration and settlement services to a wide range of internal and external investment clients dealing in global markets. Our custody service currently offers custody settlement and safekeeping services in 34 markets globally, including major markets and smaller, less-developed markets, with principal markets covered being the United States, Canada, Europe and Japan.
Our custody service offers safekeeping services for physical and book-entry assets. Custody for listed securities is conducted through Bank of New York Mellon ("BNYM"). Hedge funds, mutual funds and Exchange Traded Funds are held by Brown Brothers Harriman ("BBH"). Trading in investment transactions is settled via our global sub-custodians, BNYM and BBH. Custody services are offered from our Bermuda, Cayman Islands and Guernsey segments and complement core wealth management

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services offered by other parts of the Group, and we currently anticipate this business to grow generally proportionally with our wealth management business. Clients of our custody service include a wide range of investment funds and other investment vehicles, corporations and trusts whose related banking requirements are provided by the Bank. As such, the custody client base, in addition to delivering a fee based income, also provides cash balances and foreign exchange transaction flows.
Custody fees comprise a basis point charge on the value of Assets Under Custody ("AUC"), which are subject to a minimum level for smaller, less complex portfolios and charged on a reducing scale as AUC values increase. In addition to these fees, custody clients are charged banking transactions fees based on account activity.
Employees
As of December 31, 2018, we had 1,373 employees on a full-time equivalency basis, which included 1,274 full-time and part-time employees and 99 temporary employees. As of December 31, 2018, we had 572 employees in Bermuda, 277 employees in the Cayman Islands, 331 in the Channel Islands and the UK, and 194 employees in the Other segment. We have not experienced any material employment-related issues or interruptions of services due to labor disagreements and are not a party to any collective bargaining agreements.
Information Technology
We devote significant resources to maintain stable, reliable, efficient and scalable information technology systems. We work with our third-party vendors to monitor and maximize the efficiency of our use of their applications. We use integrated systems to originate and process loans and deposit accounts, which reduces processing time, improves customer experience and reduces costs. Most customer records are maintained digitally. We are also currently executing several initiatives to enhance our online and mobile banking services to further improve the overall client experience.
Since 2011, we have made significant investments to align banking operations, as well as harmonize across the Group for products, services, licensing and hosting locations. Currently, our information technology is operationally divided into two platforms: (i) Bermuda and Cayman and (ii) Guernsey, the United Kingdom and Group Trust. In 2011, our Bermuda and Cayman operations transitioned to a single industry standard banking technology platform utilizing a predominantly outsourced and supported model hosted in Canada. In late 2013, our Guernsey and UK operations were placed under the Group Technology governance structure with a goal to hub core services in a single location Guernsey.
Protecting our systems to ensure the safety of our customers' information is critical to our business. We use multiple layers of protection to control access and reduce risk;  including conducting penetration testing and regular vulnerability scanning on our platforms, systems and applications to reduce the risk that any attacks are successful. To protect against disasters, we have a backup offsite core processing system and recovery plans.
Marketing
Through our Marketing & Communications department, we engage select advertising, branding and promotional companies on an as-needed basis and provide business development and sales support for businesses in all jurisdictions. In support of our banking businesses, we broadly market our products and services through print, broadcast, web and social media advertising in Bermuda and the Cayman Islands. Trust and fiduciary services are marketed primarily to intermediaries through representative attendance at and sponsorship of industry conferences and through print advertising in international trade journals.
Intellectual Property
In the highly competitive banking industry in which we operate, intellectual property is important to the success of our business. We own a variety of trademarks, service marks, trade names and logos and spend time and resources maintaining this intellectual property portfolio. We control access to our intellectual property through license agreements, confidentiality procedures, non-disclosure agreements with third parties, employment agreements and other contractual rights to protect our intellectual property.
Properties
Our corporate headquarters is located at 65 Front Street, Hamilton HM 12, Bermuda. In addition to our corporate headquarters we also maintain offices in the Cayman Islands, Guernsey, Jersey, the United Kingdom, The Bahamas, Switzerland, Singapore, Mauritius and Canada. Additionally we operate four branch locations in Bermuda and three branch locations in the Cayman Islands.
Legal Proceedings
From time to time we are a party to various litigation matters incidental to the conduct and in the ordinary course of our business.
As publicly announced, in November 2013, the US Attorney's Office ("USAO") 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 purpose of these Summonses was to identify US persons who may have been using our banking, trust, or other services to evade their own tax obligations in the United States. The Bank has been cooperating with the US authorities in their ongoing investigation.
Although we are unable to determine the amount of financial consequences, fines and/or penalties resulting from this tax compliance review, we have recorded as of December 31, 2018, a provision of $5.5 million (December 31, 2017: $5.5 million). 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 provision. The provision is included on the consolidated balance sheets under other liabilities and on the consolidated statements of operations under other expenses.



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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Consolidated Financial Information
The following tables present our selected consolidated financial information as of and for the years ended December 31, 2018, 2017, 2016, 2015, and 2014.
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The selected consolidated financial information presented as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been derived from the audited consolidated financial statements of The Bank of N.T. Butterfield & Son Limited included elsewhere in this report. The selected consolidated financial information presented as of December 31, 2016, 2015 and 2014 and for the years ended December 31, 2015 and December 31, 2014 have been derived from the audited consolidated financial statements of The Bank of N.T. Butterfield & Son Limited, which are not included elsewhere in this report.
Statement of Operations Data
 
 
For the year ended
December 31,
(in millions of $, unless indicated otherwise)
 
2018
 
2017
 
2016
 
2015
 
2014
Total interest income
 
367.6

 
305.6

 
274.9

 
262.6

 
265.1

Total interest expense
 
24.6

 
15.9

 
16.4

 
23.3

 
26.6

Net interest income before provisions for credit losses
 
343.0

 
289.7

 
258.5

 
239.3

 
238.5

Provisions for credit losses
 
7.0

 
5.8

 
(4.4
)
 
(5.7
)
 
(8.0
)
Net interest income after provisions for credit losses
 
350.0

 
295.6

 
254.1

 
233.5

 
230.4

Total non-interest income
 
168.7

 
157.8

 
147.5

 
140.2

 
134.8

Total other gains (losses)
 
(0.9
)
 
1.3

 
1.0

 
(9.4
)
 
15.7

Total net revenue
 
517.8

 
454.7

 
402.6

 
364.3

 
381.0

Total non-interest expense
 
321.3

 
300.3

 
285.9

 
285.2

 
273.0

Net income before income taxes from continuing operations
 
196.5

 
154.3

 
116.7

 
79.0

 
108.0

Income tax (expense) benefit
 
(1.3
)
 
(1.1
)
 
(0.7
)
 
(1.3
)
 
0.2

Net income from continuing operations
 
195.2

 
153.3

 
115.9

 
77.7

 
108.2

Net income
 
195.2

 
153.3

 
115.9

 
77.7

 
108.2

Net income to common shareholders
 
195.2

 
153.3

 
58.4

 
61.2

 
91.6

Earnings per common share from continuing operations (in US$)(1)
 
 
 
 
 
 

 
 

 
 

Basic
 
3.55

 
2.82

 
1.20

 
1.25

 
1.67

Diluted(2)
 
3.50

 
2.76

 
1.18

 
1.23

 
1.65

Cash Dividends declared per common share (in BM$)(1)
 
1.52

 
1.28

 
0.40

 
0.50

 
0.50

Dividends declared per preference share (in US$)
 

 

 
80.00

 
80.00

 
80.00

______________________________

(1)
Figures reflect the reverse share split that the Bank effected on September 6, 2016.
(2)
Reflects only "in the money" options and warrants to purchase the common shares as well as certain unvested share awards, which have a dilutive effect. Warrants issued to the Government of Bermuda in exchange for the Government's guarantee of the preference shares are not included in the computation of earnings per share because the exercise price was greater than the average market price of the common shares for the relevant periods. In December 2016, in connection with the preference share redemption, the warrant issued to the Government of Bermuda was repurchased for cancellation by the Bank. Only share awards and options 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 common shares were considered dilutive, and therefore, included in the computation of diluted earnings per share.


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Balance Sheet Data
 
 
As of December 31,
(in millions of $)
 
2018
 
2017
 
2016
 
2015
 
2014
Assets
 
 

 
 

 
 

 
 

 
 

Cash due from banks
 
2,053.9

 
1,535.1

 
2,101.7

 
2,288.9

 
2,063.3

Of which cash and demand deposits with banks — non-interest bearing
 
124.2

 
89.4

 
110.7

 
110.9

 
343.1

Of which demand deposits with banks — interest bearing
 
487.6

 
340.3

 
326.4

 
378.6

 
139.2

Of which cash equivalents — interest bearing
 
1,442.1

 
1,105.5

 
1,664.5

 
1,799.4

 
1,581.0

Securities purchased under agreement to resell
 
27.3

 
178.8

 
148.8

 

 

Short-term investments
 
52.3

 
250.0

 
519.8

 
409.5

 
394.8

Investment in securities
 
4,255.4

 
4,706.2

 
4,400.2

 
3,223.9

 
2,989.1

Of which trading
 
6.5

 
6.8

 
6.3

 
321.3

 
417.4

Of which available-for-sale
 
2,182.7

 
3,317.4

 
3,332.7

 
2,201.3

 
2,233.5

Of which held-to-maturity(1)
 
2,066.1

 
1,382.0

 
1,061.1

 
701.3

 
338.2

Loans, net of allowance for credit losses
 
4,043.9

 
3,776.9

 
3,570.5

 
4,000.2

 
4,019.1

Premises, equipment and computer software
 
158.1

 
164.8

 
167.8

 
183.4

 
215.1

Accrued interest
 
20.9

 
24.9

 
22.8

 
17.5

 
19.2

Goodwill
 
24.0

 
21.5

 
19.6

 
23.5

 
24.8

Intangible assets
 
50.8

 
39.1

 
42.3

 
27.7

 
33.0

Equity method investments
 
14.7

 
14.1

 
13.5

 
12.8

 
12.8

Other real estate owned
 
5.3

 
9.1

 
14.2

 
11.2

 
19.3

Other assets
 
66.7

 
58.7

 
82.5

 
77.1

 
67.8

Total assets
 
10,773.2

 
10,779.2

 
11,103.5

 
10,275.6

 
9,858.4

Liabilities
 
 
 
 
 
 
 
 

 
 

Total customer and bank deposits
 
9,452.2

 
9,536.5

 
10,033.6

 
9,182.1

 
8,671.6

Of which customer deposits — Bermuda — non-interest bearing
 
1,378.5

 
1,840.2

 
1,733.7

 
1,348.9

 
1,021.4

Of which customer deposits — Bermuda — interest bearing
 
3,117.1

 
3,412.6

 
4,213.4

 
2,922.8

 
2,848.7

Of which customer deposits — non-Bermuda — non-interest bearing
 
733.0

 
639.5

 
651.3

 
532.9

 
536.7

Of which customer deposits — non-Bermuda — interest bearing
 
4,189.9

 
3,631.6

 
3,411.4

 
4,363.1

 
4,224.8

Of which bank deposits — Bermuda
 
8.1

 
0.4

 
0.3

 
0.4

 
9.5

Of which bank deposits — non-Bermuda
 
25.7

 
12.0

 
23.5

 
14.1

 
30.4

Securities sold under agreement to repurchase
 

 

 

 

 

Employee future benefits
 
117.2

 
128.8

 
140.0

 
122.1

 
117.9

Accrued interest
 
5.1

 
2.4

 
2.1

 
2.7

 
4.8

Preference share dividends payable
 

 

 

 
0.7

 
0.7

Pending payable for investments purchased
 

 
51.9

 

 

 

Other liabilities
 
173.0

 
119.8

 
100.0

 
100.5

 
97.2

Long-term debt
 
143.3

 
117.0

 
117.0

 
117.0

 
117.0

Total liabilities
 
9,890.8

 
9,956.4

 
10,392.8

 
9,525.2

 
9,009.1

Total shareholders' equity(2)
 
882.3

 
822.9

 
710.7

 
750.4

 
849.4

Of which common share capital(6)
 
0.6

 
0.5

 
0.5

 
0.5(5)

 
0.6

Of which preference share capital(3)
 

 

 

 

 

Of which contingent value convertible preference (CVCP) share capital(4)(6)
 

 

 

 

 

Total liabilities and shareholders' equity
 
10,773.2

 
10,779.2

 
11,103.5

 
10,275.6

 
9,858.4

Common shares outstanding (number)(6)
 
55.4

 
54.7

 
53.3

 
47.3

 
55.0

______________________________
(1)
Fair value of held to maturity debt securities was $2,036.2 million as of December 31, 2018, $1,377.4 million as of December 31, 2017, $1,046.8 million as of December 31, 2016, $701.5 million as of December 31, 2015 and $344.0 million as of December 31, 2014.
(2)
As of December 31, 2018 the number of outstanding awards of unvested common shares was 0.9 million (December 31, 2017: 0.9 million, December 31, 2016: 0.8 million, December 31, 2015: 0.9 million and December 31, 2014: 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) the exercise price, if any, was lower than the average market price of $34.72. A warrant, outstanding until the Bank repurchased it in December 2016, to purchase 0.43 million shares (December 31, 2015: 0.43 million, December 31, 2014: 0.43 million and December 31, 2013: 0.43 million) was excluded

10


from the computation of earnings per share because the exercise price was greater than the average market price of the common shares. Figures reflect the reverse share split that the Bank effected on September 6, 2016.
(3)
Preference share capital in all periods presented was nil, nil, nil, $182,863 and $183,046 as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively, representing $0.01 par value per preference share issued and outstanding as of the respective dates. In December 2016, the Bank redeemed and canceled all outstanding preference shares.
(4)
All CVCP shares were converted to common shares at a 1:1 ratio on March 31, 2015.
(5)
Reflects the repurchase for cancellation of 8,000,000 common shares previously held by CIBC effected on April 30, 2015. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Contingent Value Convertible Preference Shares — Share Buy-Back Program." Figures reflect the reverse share split that the Bank effected on September 6, 2016.
(6)
Figures reflect the reverse share split that the Bank effected on September 6, 2016.
Financial Ratios and Other Performance Indicators
We use a number of financial measures to track the performance of our business and guide our management. Some of these measures are defined by, and calculated in compliance with, applicable banking regulations, but such regulations often provide for certain discretion in defining and calculating the measures. These measures allow management to review our core activities, enabling us and our investors to evaluate relevant trends meaningfully when considered in conjunction with (but not in lieu of) measures that are calculated in accordance with US GAAP. Non-GAAP measures used in this report are not a substitute for US GAAP measures and readers should consider the US GAAP measures as well.
The following table shows certain of our key financial measures for the periods indicated. Because of the discretion that we and other banks and companies have in defining and calculating these measures, care should be taken in comparing such measures used by us with similarly titled measures of other banks and companies, as such measures may not be directly comparable.
Many of these measures are non-GAAP financial measures. We believe that each of these measures is useful for investors in understanding trends in our business that may not otherwise be apparent when relying solely on our GAAP-calculated results. For more information on the non-GAAP financial measures presented below, including a reconciliation to the most directly comparable GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures."
 
 
For the year ended
December 31,
(in %, unless otherwise indicated)
 
2018
 
2017
 
2016
 
2015
 
2014
Return on average common shareholders' equity(1)
 
23.1

 
19.9

 
8.9

 
10.1

 
13.7

Core return on average tangible common equity(2)
 
25.6

 
22.4

 
20.5

 
17.6

 
14.4

Return on assets(3)
 
1.8

 
1.4

 
1.1

 
0.8

 
1.2

Core return on average tangible assets(4)
 
1.8

 
1.5

 
1.3

 
1.1

 
1.2

Net interest margin(5)
 
3.25

 
2.73

 
2.45

 
2.48

 
2.74

Efficiency margin(6)
 
61.8

 
66.2

 
69.3

 
74.0

 
72.0

Core efficiency ratio(7)
 
61.5

 
64.3

 
63.8

 
66.0

 
67.7

Fee income ratio(8)
 
32.5

 
34.8

 
36.7

 
37.5

 
36.9

Common equity Tier 1 capital ratio(9)(10)
 
19.6

 
18.2

 
15.3

 
10.7

 
N/A

Tier 1 common ratio(9)
 
N/A

 
N/A

 
N/A

 
12.0

 
14.6

Tier 1 capital ratio(9)
 
19.6

 
18.2

 
15.3

 
16.2

 
19.0

Total capital ratio(9)
 
22.4

 
19.9

 
17.6

 
19.0

 
22.2

Leverage ratio(9)(10)
 
7.6

 
6.9

 
5.8

 
6.4

 
N/A

Tangible common equity/tangible assets(11)
 
7.5

 
7.1

 
5.9

 
5.1

 
6.2

Tangible total equity/tangible assets(12)
 
7.5

 
7.1

 
5.9

 
6.8

 
8.1

Non-performing assets ratio(13)
 
0.4

 
0.4

 
0.5

 
0.7

 
1.0

Non-accrual ratio(14)
 
1.2

 
1.2

 
1.3

 
1.6

 
1.8

Non-performing loan ratio(15)
 
1.4

 
1.3

 
1.6

 
2.0

 
2.4

Net charge-off ratio(16)
 
0.1

 
0.1

 
0.3

 
0.2

 
0.4

Core earnings attributable to common shareholders(17)(18) (in BM$ million)
 
197.0

 
158.9

 
123.0

 
97.4

 
89.9

Core earnings per common share fully diluted(19)(21) (in BM$)
 
3.53

 
2.86

 
2.48

 
1.95

 
1.61

Common equity per share(20)(21) (in BM$)
 
15.94

 
15.05

 
13.34

 
12.24

 
12.25

______________________________
(1)
Return on average common shareholders' equity ("ROE") measures profitability revealing how much profit is generated with the money invested by common shareholders. ROE represents the amount of net income to common shareholders as a percentage of average common equity and calculated as net income to common shareholders / average common equity. Net income to common shareholders is net income for the full fiscal year, before dividends paid to common shareholders but after dividends to preference shareholders. Average common equity does not include the preference shareholders' equity.
(2)
Core return on average tangible common equity ("Core ROATCE") is a non-GAAP financial measure. Core ROATCE measures core profitability as a percentage of average tangible common equity. Core ROATCE is the amount of core income to common shareholders as a percentage of average tangible common equity and is calculated as core earnings to common shareholders / average tangible common equity. Core earnings to common shareholders is net earnings to common shareholders for the full fiscal year (before dividends paid to common shareholders but after dividends to preference shareholders) adjusted to exclude certain items that are included in the financial results presented in accordance with GAAP. Average tangible common equity does not include the preference shareholders' equity or goodwill and intangible assets. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".

11


(3)
Return on assets ("ROA") is an indicator of profitability relative to total assets and is intended to demonstrate how efficient management is at using the assets to generate earnings. The ROA ratio is calculated as net income / average total assets.
(4)
Core return on average tangible assets ("Core ROATA") is a non-GAAP financial measure. Core ROATA is an indicator used to assess the core profitability of average tangible assets and is intended to demonstrate how efficiently management is utilizing its tangible assets to generate core net income. Core ROATA is calculated by taking the core income as a percentage of average tangible assets and is calculated as core net income / average tangible assets. Core net income is the net income adjusted to exclude certain items that are included in the financial results presented in accordance with GAAP. Core ROATA is a non-GAAP financial measure. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".
(5)
Net interest margin ("NIM") is a performance metric that examines how successful the Bank's investment decisions are compared to its cost of funding assets and is expressed as net interest income as a percentage of average interest-earning assets. NIM is calculated as net interest income before provision for credit losses / average interest-earning assets. Net interest income is the interest earned on cash due from banks, investments, loans and other interest earning assets minus the interest paid for deposits, short-term borrowings and long-term debt. The average interest-earning assets is calculated using daily average balances of interest-earning assets.
(6)
Efficiency margin is a non-GAAP financial measure. Efficiency margin is an indicator used to assess operating efficiencies and is intended to demonstrate how efficiently management is controlling expenses relative to generating revenues. The efficiency margin is calculated by taking the non-interest expenses as a percentage of total net revenue before total other gains (losses) and provisions for credit losses and is calculated as (non-interest expense - amortization of intangible assets) / (total non-interest income + net interest income before provision for credit losses). For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".
(7)
The core efficiency ratio is a non-GAAP financial measure. The core efficiency ratio is an indicator used to assess operating efficiencies and is intended to demonstrate how efficiently management is controlling expenses relative to generating revenues. The core efficiency ratio is calculated by taking the core non-interest expenses as a percentage of total net revenue before provision for credit losses and other gains and losses and is calculated as (core non-interest expenses - amortization of intangible assets) / (core non-interest income + core net interest income before provision for credit losses). Core non-interest expenses excludes certain items that are included in the financial results presented in accordance with GAAP including income taxes and amortization of intangible assets. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".
(8)
The fee income ratio is a measure used to determine the proportion of revenues derived from non-interest income sources. The ratio is calculated as non-interest income / (non-interest income + net interest income after provision for credit losses).
(9)
The total capital ratio measures the amount of the Bank's capital in relation to the amount of risk it is taking. All banks must ensure that a reasonable proportion of their risk is covered by permanent capital. Prior to January 1, 2015, the Bank's regulatory capital was determined in accordance with Basel II guidelines issued by the BMA. Under Basel II, Pillar I, banks must maintain a minimum total capital ratio of 14.46%, inclusive of all capital buffers. In effect, this means that 14.46% of the risk-weighted assets must be covered by permanent or near permanent capital. The risk weighting process takes into account the relative risk of various types of lending. The higher the capital adequacy ratio a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent. Under Basel III as implemented by the BMA for 2018, we must maintain a total capital ratio of 15.6%. The tier 1 capital ratio is the ratio of the Bank's core equity capital, as measured under Basel II, to its total RWA. RWA are the total of all assets held by the Bank weighted by credit risk according to a formula determined by the regulator. The Bank follows the Basel Committee on Banking Supervision ("BCBS") guidelines in setting formulas for asset risk weights. The tier 1 common ratio is equivalent to the tier 1 capital ratio except that it only includes common equity in the numerator and deducts the preference shareholders' equity. Note that the tier 1 common ratio is calculated in the same manner as the common equity tier 1 ("CET1") ratio discussed below, but differs in its inputs based upon RWA calculations under Basel II versus Basel III.
(10)
Effective January 1, 2015, the Bank's regulatory capital is determined in accordance with current Basel III guidelines issued by the BMA. However, the Bank was not required to publish its capital ratios under Basel III until January 1, 2016 as per guidance from the BMA and continued to publish certain ratios under Basel II during 2015. Basel III adopts CET1 as the predominant form of regulatory capital with the CET1 ratio as a new metric. Under Basel III as implemented by the BMA for 2018, we must maintain a minimum CET1 ratio of 9.4%. Basel III also adopts the new Leverage Ratio regime, which is calculated by dividing tier 1 capital by an exposure measure. Under Basel III, banks must maintain a minimum Leverage Ratio of 5.0%. The 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 and other risks.
(11)
The tangible common equity/tangible assets ("TCE/TA") ratio is a non-GAAP financial measure. The TCE/TA ratio is a measure used to determine how significant of an unexpected loss can be incurred by the Bank before other forms of capital, other than common equity, are impacted. The TCE/TA ratio is calculated as (common equity - intangible assets - goodwill) / tangible assets. Tangible common equity does not include the preference shareholders' equity or goodwill and intangible assets. Tangible assets are the Bank's total assets from continuing operations less goodwill and intangibles. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".
(12)
The tangible total equity/tangible assets ("TE/TA") ratio is a non-GAAP financial measure. The TE/TA ratio is a measure used to determine how much loss the Bank can absorb before subordinated debt capital is impacted. The TE/TA ratio is calculated as (total shareholders' equity - intangible assets - goodwill) / tangible assets. Tangible assets are the Bank's total assets from continuing operations less intangible assets and goodwill. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".
(13)
The non-performing assets ("NPA") ratio is an indicator of the credit quality of the Bank's total assets by expressing the non-performing assets as a percentage of total assets. The NPA ratio is calculated as (gross non-accrual loans - specific allowance for credit losses on non-accrual loans + accruing loans past due 90 days + other real estate owned) / total assets.
(14)
The non-accrual ("NACL") ratio is an indicator used to assess the credit performance of the Bank's loan portfolio by calculating the non-accrual loans as a percentage of loans. The NACL ratio is calculated as gross non-accrual loans / gross total loans. Note the reference to gross implies the amounts prior to loan allowances for credit losses.
(15)
The non-performing loan ("NPL") ratio is an indicator used to assess the credit performance of the Bank's loan portfolio by calculating the non-performing loans as a percentage of loans. The NPL ratio is calculated as total gross non-performing loans / total gross loans.
(16)
The net charge-off ("NCO") ratio is an indicator used to assess the net credit loss of the Bank's loan portfolio by calculating the net charge-offs as a percentage of average total loans. The NCO ratio is calculated as net charge-off expense / average total loans. Average total loans is calculated as the average of the month-end asset balances during the relevant period.
(17)
Core net income is a non-GAAP financial measure. Core net income measures net income on a core basis. Core net income is calculated by adjusting net income for income or expense items which are not representative of the ongoing operations of our business. For a reconciliation of core net income to net income, see "— Reconciliation of Non-GAAP Financial Measures".
(18)
Core earnings attributable to common shareholders ("CEACS") is a non-GAAP financial measure. CEACS measures profitability attributable to common shareholders on a core basis. For a reconciliation of CEACS to net income, see "— Reconciliation of Non-GAAP Financial Measures".
(19)
Core net income per common share — fully diluted is a non-GAAP financial measure. Core net income per common share —  fully diluted measures core profitability attributable to common shareholders on a per share basis. For a reconciliation to net income per share, see "— Reconciliation of Non-GAAP Financial Measures".
(20)
Common equity per share is calculated as total common equity / number of common shares issued and outstanding at period end.

12


(21)
Figures reflect the reverse share split that the Bank effected on September 6, 2016.

Net Interest Income
Net interest income is the amount of interest earned on our interest‑earning assets less interest paid on our interest bearing liabilities. The following table shows our net interest income before provision for credit losses for the periods indicated.
 
For the years ended December 31,
 
2018
 
2017
(in millions of $)
Average
balance
($)
 
Interest
($)
 
Average
rate
(%)
 
Average
balance
($)
 
Interest
($)
 
Average
rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash due from banks and short‑term investments
1,977.3

 
24.8

 
1.26
 %
 
2,372.7

 
17.2

 
0.72
 %
Investment in securities
4,578.9

 
124.3

 
2.71
 %
 
4,573.9

 
101.4

 
2.22
 %
Loans
3,995.8

 
218.5

 
5.47
 %
 
3,665.8

 
187.0

 
5.10
 %
Interest earning assets
10,552.0

 
367.6

 
 
 
10,612.4

 
305.6

 
 
Other assets
350.7

 


 
 
 
346.0

 
 
 
 
Total assets
10,902.7

 
367.6

 
 
 
10,958.4

 
305.6

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
7,375.8

 
(17.6
)
 
(0.24
)%
 
7,445.0

 
(10.9
)
 
(0.15
)%
Securities sold under agreement to repurchase
1.6

 

 
(2.11
)%
 

 

 
 %
Long-term debt
133.4

 
(6.9
)
 
(5.21
)%
 
117.0

 
(5.0
)
 
(4.24
)%
Interest bearing liabilities
7,510.8

 
(24.6
)
 
(0.33
)%
 
7,562.0

 
(15.9
)
 
(0.21
)%
Non-interest bearing current accounts
2,231.8

 
 
 
 
 
2,393.1

 
 
 
 
Other liabilities
281.0

 
 
 
 
 
254.4

 
 
 
 
Total liabilities
10,023.7

 
(24.6
)
 
(0.25
)%
 
10,209.6

 
(15.9
)
 
(0.16
)%
Shareholders’ equity
879.0

 
 
 

 
748.9

 
 
 

Total liabilities and shareholders’ equity
10,902.7

 
 
 

 
10,958.4

 
 
 

Non‑interest bearing funds net of non‑interest earning assets (free balance)
3,041.1

 
 
 


 
3,050.3

 
 
 
 
Net interest margin
 
 
343.0

 
3.25
 %
 
 
 
289.7

 
2.73
 %


13


 
For the years ended December 31,
 
2016
 
2015
 
2014
(in millions of $)
Average
balance
($)
 
Interest
($)
 
Average
rate
(%)
 
Average
balance
($)
 
Interest
($)
 
Average
rate
(%)
 
Average
balance
($)
 
Interest
($)
 
Average
rate
(%)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash due from banks and short‑term investments
2,655.3

 
9.8

 
0.37
 %
 
2,407.9

 
6.5

 
0.27
 %
 
1,752.9

 
5.4

 
0.31
 %
Investment in securities
3,940.6

 
77.2

 
1.95
 %
 
3,217.0

 
69.6

 
2.16
 %
 
2,877.8

 
67.7

 
2.35
 %
Loans
3,921.1

 
188.0

 
4.78
 %
 
4,026.7

 
186.5

 
4.63
 %
 
4,075.0

 
192.0

 
4.71
 %
Interest earning assets
10,517.0

 
275.0

 
2.61
 %
 
9,651.6

 
262.6

 
2.72
 %
 
8,705.7

 
265.1

 
3.05
 %
Other assets
343.4

 
 
 
 
 
371.5

 
 
 
 
 
410.8

 
 
 
 
Total assets
10,860.4

 
275.0

 
2.53
 %
 
10,023.1

 
262.6

 
2.62
 %
 
9,116.5

 
265.1

 
2.91
 %
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
7,733.8

 
(11.8
)
 
(0.15
)%
 
7,156.7

 
(18.4
)
 
(0.26
)%
 
6,741.6

 
(20.9
)
 
(0.31
)%
Securities sold under agreement to repurchase
16.0

 
(0.1
)
 
(0.73
)%
 
2.1

 

 
 %
 
22.0

 
(0.1
)
 
(0.38
)%
Long-term debt
117.0

 
(4.5
)
 
(3.84
)%
 
117.0

 
(4.9
)
 
(4.15
)%
 
117.2

 
(5.6
)
 
(4.80
)%
Interest bearing liabilities
7,866.8

 
(16.4
)
 
(0.21
)%
 
7,275.8

 
(23.3
)
 
(0.32
)%
 
6,880.8

 
(26.6
)
 
(0.39
)%
Non-interest bearing current accounts
2,042.5

 
 
 
 
 
1,720.7

 
 
 
 
 
1,211.0

 
 
 
 
Other liabilities
123.7

 
 
 
 
 
196.8

 
 
 
 
 
187.2

 
 
 
 
Total liabilities
10,033.0

 
(16.4
)
 
(0.16
)%
 
9,193.3

 
(23.3
)
 
(0.25
)%
 
8,279.0

 
(26.6
)
 
(0.32
)%
Shareholders’ equity
827.4

 
 
 
 
 
829.8

 
 
 
 
 
837.5

 
 
 
 
Total liabilities and shareholders’ equity
10,860.4

 
 
 
 
 
10,023.1

 
 
 
 
 
9,116.5

 
 
 
 
Non-interest bearing funds net of non-interest earning assets (free balance)
2,650.2

 
 
 
 
 
2,375.8

 
 
 
 
 
1,824.9

 
 
 
 
Net interest margin
 
 
258.6

 
2.45
 %
 
 
 
239.3

 
2.48
 %
 
 
 
238.5

 
2.74
 %

14


Reconciliation of Non-GAAP Financial Measures
The tables below present computations of earnings and certain other financial measures, which exclude certain significant items that are included in the financial results presented in accordance with GAAP.
We focus on core net income in many of these measures and ratios, which we calculate by adjusting net income for income or expense items which are not representative of the ongoing operations of our business, which results in non-core gains, losses and expense measures. Core net income includes revenue, gains, losses and expense items incurred in the normal course of business. We consider the normal course of business to be the general operations of our business lines of banking and wealth management. 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. Non-core items are determined by the Chief Financial Officer in conjunction with the Chief Executive Officer, and approved by our Board of Directors. Consideration is given to whether the expense, gain or loss is a result of exceptional circumstances or other decisions made not in the normal course of business. Items which are not in the normal course of business, such as business acquisition costs or impairment losses, or a result of exceptional circumstances, such as business restructuring costs, are considered non-core. These non-GAAP financial measures based on core net income are also used by management to assess the performance of the Bank's business because management does not consider the activities related to the adjustments to be indications of core operations. 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 that applied by management. Management and the Board utilize these non-GAAP financial measures utilizing core net income as follows:
Preparation of the Bank's operating budgets;
Quarterly financial performance reporting; and
Monthly reporting of consolidated results (management reporting only).
We calculate core net income attributable to common shareholders by deducting preference dividend and guarantee fees from core net income. We calculate core net income per common share by dividing the core net income attributable to common shareholders by the average number of common shares issued and outstanding during the relevant period.
The core efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as core expenses, which is total expenses excluding non-core expense items, minus amortization of intangible assets divided by core revenue before other gains and losses and provision for credit losses, which excludes non-core revenue items or non-core gains or losses. Management uses this ratio to monitor performance regarding the efficiency of expense management and believes this measure provides meaningful information to investors.
Tangible common shareholders' equity ratios and tangible total asset ratios have become a focus of some investors in analyzing the capital position of the Bank absent the effects of intangible assets and preference shareholders' equity. Traditionally, the BMA and other banking regulatory bodies have assessed a bank's capital adequacy based on Tier 1 capital, and from January 1, 2016 onwards, CET1, the calculation of which is codified in the Basel II and Basel III framework, respectively, implemented by the BMA. Because tangible common shareholders' equity and tangible total assets are not formally defined by GAAP, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently. Since analysts and banking regulators may assess the Bank's capital adequacy using tangible common shareholders' equity or tangible assets, the Bank believes that it is useful to provide investors the ability to assess the Bank's capital adequacy on this same basis. The Bank calculates tangible common equity and tangible total assets on a period end basis. The Bank also measures performance relative to core net income over average tangible common shareholders' equity and average tangible assets to monitor performance and efficiency relative to the Bank's capital adequacy.
We believe the non-GAAP financial measures presented in this report provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, these disclosures should not be viewed 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.
The following tables provide: (1) a reconciliation of net income (GAAP) to core net income and core net income attributable to common shareholders (non-GAAP), (2) a computation of core net income attributable to common shareholders per common share fully diluted (non-GAAP), (3) a reconciliation of average and total shareholders' equity (GAAP) to average and total equity and average tangible common equity (non-GAAP), (4) a computation of core return to average tangible common equity (non-GAAP), (5) a reconciliation of average total assets (GAAP) to average tangible assets (non-GAAP), (6) a computation of core return on average tangible assets (non-GAAP), (7) a computation of tangible common equity to tangible assets (non-GAAP), (8) a computation of tangible total equity to tangible assets (non-GAAP), (9) a reconciliation of non-interest expenses (GAAP) to core non-interest expenses (non-GAAP), (10) a computation of the efficiency ratio (non-GAAP), and (11) a computation of the core efficiency ratio (non-GAAP).

15


 
 
For the year ended December 31,
 
(in millions of $, unless otherwise indicated)
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 

 
 

 
 

 
 

 
 

 
Reconciliation of Net Income (GAAP to Core Net Income (non-GAAP))
 
 
 
 
 
 
 
 
 
 
 
Net income
A
195.2

 
153.3

 
115.9

 
77.7

 
108.2

 
Dividends and guarantee fee of preference shares
 

 

 
(15.7
)
 
(16.5
)
 
(16.5
)
 
Premium paid on repurchase/redemption of preference shares(1)
B

 

 
(41.9
)
 

 
(0.1
)
 
Net income to common shareholders
C
195.2

 
153.3

 
58.4

 
61.2

 
91.6

 
Non-core (gains), losses and expenses
 
 
 
 
 
 

 
 

 
 

 
Non-core (gains) losses
 
 
 
 
 
 

 
 

 
 

 
Gain on disposal of a pass-through note investment (formerly a SIV)(2)
 
(1.2
)
 
(2.6
)
 
(0.6
)
 

 
(8.7
)
 
Additional consideration from previously disposed of entities(3)
 

 

 

 

 
(0.3
)
 
Realized gain on private equity investment(4)
 

 

 

 

 
(1.1
)
 
Income tax refund(5)
 

 

 

 

 
(1.0
)
 
Impairment of and gain on disposal of fixed assets (including software)(6)
 

 

 

 
5.1

 
2.0

 
Change in unrealized (gains) losses on certain investments(7)
 

 

 

 
0.7

 
(9.9
)
 
Adjustment to holdback payable for a previous business acquisition(8)
 

 
0.1

 
0.9

 

 
1.2

 
Settlement loss on de-risking on a defined benefit plan(9)
 
1.5

 

 

 

 

 
Total non-core (gains) losses
D
0.3

 
(2.5
)
 
0.3

 
5.8

 
(17.8
)
 
Non-core expenses
 
 
 
 
 
 

 
 

 
 

 
Early retirement program, redundancies and other non-core compensation costs(10)
 

 
0.2

 
1.8

 
8.2

 
2.7

 
Tax compliance review costs(11)
 
0.5

 
2.1

 
1.6

 
3.8

 
10.2

 
Provision in connection with ongoing tax compliance review(12)
 

 

 
0.7

 
4.8

 

 
Business acquisition costs(13)
 
1.0

 
2.0

 
3.2

 
1.0

 
3.1

 
Restructuring charges and related professional service fees(14)
 

 
1.8

 
6.3

 
2.5

 

 
Investigation of an international stock exchange listing costs(15)
 

 

 

 
10.1

 

 
Cost of 2010 legacy option plan vesting and related payroll taxes(16)
 

 

 
8.8

 

 

 
Secondary offering costs (17)
 

 
2.0

 

 

 

 
Total non-core expenses
E
1.5

 
8.1

 
22.4

 
30.4

 
16.0

 
Total non-core (gains), losses and expenses
F=D+E
1.8

 
5.6

 
22.7

 
36.2

 
(1.8
)
 
Core net income
G=A+F
197.0

 
158.9

 
138.6

 
113.9

 
106.4

 
Reconciliation of Return on Equity (GAAP) to Core Return on Average Tangible Common Equity (non-GAAP)
 
 
 
 
 
 
 
 
 
 
 
Core net income attributable to common shareholders(1)
H=C-B+F
197.0

 
158.9

 
123.0

 
97.4

 
89.9

 
Average shareholders' equity
 
843.2

 
771.9

 
826.0

 
791.8

 
849.4

 
Less: average preference shareholders' equity
 

 

 
(168.8
)
 
(182.9
)
 
(183.4
)
 
Average common equity
I
843.2

 
771.9

 
657.2

 
608.9

 
666.0

 
Less: average goodwill and intangible assets
 
(74.6
)
 
(61.4
)
 
(58.6
)
 
(54.8
)
 
(42.1
)
 
Average tangible common equity
J
768.6

 
710.5

 
598.6

 
554.1

 
623.9

 
Return on equity
C/I
23.1

%
19.9

%
8.9

%
10.1

%
13.7

%
Core return on average tangible common equity
H/J
25.6

%
22.4

%
20.5

%
17.6

%
14.4

%
 
 
 
 
 
 
 
 
 
 
 
 


16


 
 
For the year ended December 31,
 
(in millions of $, unless otherwise indicated)
 
2018
 
2017
 
2016
 
2015
 
2014
 
Reconciliation of diluted earnings per share (GAAP) to core earnings per common share fully diluted (non-GAAP)
 
 
 
 
 
 
 
 
 
 
 
Adjusted weighted average number of diluted common shares (in thousands)(18)
K
55.7

 
55.5

 
49.6

 
50.0

 
55.6

 
Earnings per common share fully diluted
C/K
3.50

 
2.76

 
1.18

 
1.23

 
1.65

 
Non-core items per share
(F-B)/K
0.03

 
0.10

 
1.30

 
0.72

 
(0.04
)
 
Core earnings per common share fully diluted
 
3.53

 
2.86

 
2.48

 
1.95

 
1.61

 
Reconciliation of return on average assets (GAAP) to core return on average tangible assets (non-GAAP)
 
 
 
 
 
 

 
 

 
 

 
Total average assets
L
10,851.2

 
10,926.1

 
10,842.6

 
9,967.5

 
9,268.9

 
Less: average goodwill and intangible assets
 
(74.6
)
 
(61.4
)
 
(58.6
)
 
(54.8
)
 
(42.1
)
 
Average tangible assets
M
10,776.6

 
10,864.8

 
10,784.0

 
9,912.7

 
9,226.8

 
Return on average assets
A/L
1.8

%
1.4

%
1.1

%
0.8

%
1.2

%
Core return on average tangible assets
G/M
1.8

%
1.5

%
1.3

%
1.1