ANNUAL REPORT 2020
THE BANK OF N.T. BUTTERFIELD & SON LIMITED
A
N
N
U
A
L
R
E
P
O
R
T
2
0
2
0
Banking, trust,
investments,
by
.
Established as Bermuda’s first bank in 1858, Butterfield today offers a range of community banking and
bespoke financial services from eight leading international financial centers, supported by centralized
service centers in Canada and Mauritius. The Butterfield team comprises 1,314 employees
working together to help our clients manage their wealth and protect it for future generations,
while creating sustainable, long-term value for our shareholders.
Vision
To be the leading independent offshore bank
and trust company.
Mission
To build relationships and wealth.
Values
APPROACHABLE
We commit to
personal service.
COLLABORATIVE
We collaborate for
effective teamwork.
EMPOWERED
We foster
individual initiative.
IMPACTFUL
We celebrate
collective success.
Locations
The Bahamas
Bermuda
Jersey United Kingdom
Cayman Islands
Canada*
Switzerland
Mauritius*
Singapore
Guernsey
*Non-client-facing service center.
Results
Core Net Income* (millions)
$197.0
$197.9
$158.9
$154.5
$123.0
Core Return on Average Tangible
Common Equity*
25.6%
23.4%
22.4%
20.5%
17.3%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
Total Assets (millions)
$16,000
$14,000
$13,922
$14,739
$12,000
$11,103
$10,779
$10,773
$10,000
$8,000
$6,000
$4,000
$2,000
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
17.6%
15.3%
15.3%
19.9%
18.2%
18.2%
Capital**
22.4%
19.6%
19.6%
19.4%
17.3%
17.3%
19.8%
16.1%
16.1%
5.8%
6.9%
7.6%
5.9%
5.3%
$250
$200
$150
$100
$50
25.0%
20.0%
15.0%
10.0%
5.0%
2016
2017
2018
2019
2020
Tier 1 Capital Ratio
Total Capital Ratio
Common Equity Tier 1 Capital Ratio
Leverage Ratio
Awards
Ratings
The
Banker
BANK OF
THE YEAR
BERMUDA
2020
Global
Finance
PWM
The Banker
BEST
PRIVATE BANK
BERMUDA
2020
Global
Finance
OUTSTANDING
CRISIS
LEADERSHIP
BEST PRIVATE
BANK FOR
ENTREPRENEURS
2020
CARIBBEAN
2020
Global
Finance
BEST BANK
IN BERMUDA
2021
Global
Finance
BEST
PRIVATE BANK
BERMUDA &
CAYMAN
2021
Agency
Short-Term Debt
Long-Term Senior Debt
Moody’s
Standard
& Poor’s
P-2
A3
A-2
BBB+
KBRA
K1
A+
All information is as at December 31, 2020 unless otherwise specified.
*Non-GAAP measure. See “Reconciliation of Non-GAAP Financial Measures” on page 7 of the Annual Report on Form 20-F within this publication for a reconciliation of US GAAP results to
non-GAAP measures.
** The Bank’s regulatory capital is determined in accordance with current Basel III guidelines as issued by the BMA.
Letter to Shareholders
Dear Shareholders,
I am pleased with Butterfield’s strong performance in 2020. The onset of
the global pandemic in the second quarter created challenging conditions,
but it also highlighted the strength and resilience of our strategy and
business model. Our technology and collaborative culture allowed us
to maintain safe and uninterrupted services for our clients as we moved
between office-based and remote working environments, and navigated
complex and rapidly evolving health and safety regulations. Our low-risk
credit strategy was validated by the uncertainty and economic downturn
caused by COVID-19. We remain confident that the Bank’s balance
sheet and capital strength will continue to position Butterfield for
long term growth.
As a leading independent offshore bank and trust company, we continue
to focus on our core profitable banking and wealth management
platforms in Bermuda, the Cayman Islands, and the Channel Islands.
We also provide specialized financial services to clients in The Bahamas,
Switzerland, Singapore and London. Our priority remains to provide
outstanding products and client service, while adhering to vigorous
compliance, tax and regulatory frameworks.
In a year with market interest rates near zero, Butterfield recorded net
income of $147.2 million, or $2.90 per share. Core net income* was
$154.5 million or $3.04 per share, which equates to a core return on
average tangible common equity* of 17.3%. We paid a sustainable
quarterly cash dividend of $0.44 per common share and completed our
3.5 million share repurchase program with the majority of the repurchase
activity during the second and third quarters of 2020, when valuations
were very attractive. We also improved our capital profile with a $100
million 5.25% qualifying subordinated debt offering in June.
In the third quarter of 2020 we completed the final integration of the
ABN AMRO Channel Islands acquisition. The Channel Islands continue
to represent a growth opportunity for Butterfield, both organically and
through potential acquisitions.
Historically low bond yields in 2020 contributed to significantly lower
net interest earnings, which increased emphasis on improving operating
leverage. As a result, we implemented a bank-wide restructuring program
to lower headcount and accelerate our multi-year strategy to transfer
non-client facing positions to our service center in Halifax, Nova Scotia.
Butterfield also helped support our local communities at a time when
many people faced tremendous uncertainty. We were proud to offer
mortgage deferrals and assist our communities with food security
programs and other targeted charitable actions.
During 2020 I also implemented a number of changes to the Executive
Committee. We introduced fresh perspectives and management
experience in Trust, Compliance and Operations, Risk, Communications
and Human Resources. I am proud of the whole management team and
have confidence in our bench strength to continue to lead and
grow Butterfield.
As previously announced, Independent Directors Caroline Foulger,
Meroe Park and Leslie Godridge departed the Board in 2020. All of
their contributions and service to Butterfield were greatly appreciated.
I was pleased to welcome Independent Directors Sonia Baxendale and
Jana Schreuder, as well as Executive Director and Chief Financial Officer,
Michael Schrum to the Board. Our Directors continue to be an inclusive
and increasingly diverse group, and I thank them for their support over
the past year.
Butterfield is well positioned to benefit from the anticipated economic
recovery in 2021. We continue to focus on building a leading offshore
bank and trust business with an aim to maintaining top quartile risk
adjusted returns with meaningful non-interest income contribution,
limited credit risk, an emphasis on efficiency and balanced capital
management. I owe a debt of thanks to our clients, staff, shareholders
and business partners for their support and dedication throughout 2020.
Michael W. Collins
Chairman and Chief Executive Officer
BOARD OF DIRECTORS
Michael Collins**
Chairman & Chief
Executive Officer
James Burr
Lead Independent
Director
Alastair Barbour
Non-Executive
Director
Conor O’Dea
Non-Executive
Director
Jana Schreuder
Non-Executive
Director
Michael Schrum**
Executive Director
& Group Chief
Financial Officer
Sonia Baxendale
Non-Executive
Director
Pamela
Thomas-Graham
Non-Executive
Director
Michael Covell
Non-Executive
Director
John Wright
Non-Executive
Director
EXECUTIVE COMMITTEE
Andrew Burns
Group Head of
Human Resources
Michael Neff
Managing Director,
Bermuda and
International Wealth
Kevin Dallas
Group Head of
Marketing &
Communications
Jane Pearce
Group Head of
Trust
Bri Hidalgo
Group Head of
Compliance &
Operational Risk
Richard Saunders
Managing Director,
Channel Islands
and the UK
Michael McWatt
Managing Director,
Cayman Islands
Sabeth Siddique
Group Chief
Risk Officer
Mark Lynch
Non-Executive
Director
Shaun Morris
General Counsel &
Group Chief
Legal Officer
*Non-GAAP measure. See “Reconciliation of Non-GAAP Financial Measures” on page 7 of the Annual Report on Form 20-F within this publication for a reconciliation of US GAAP to
non-GAAP measures.
**Michael Collins and Michael Schrum are also members of the Executive Committee.
Ratings
1.585 in
1.585 in
Financials
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended
December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
☐ 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
E-mail: Shaun.Morris@Butterfieldgroup.com
(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
Voting ordinary shares of par value BM$ 0.01 each
Voting ordinary shares of par value BM$ 0.01 each
Trading Symbol (s)
NTB
NTB.BH
Name of each exchange on which registered
New York 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 at December 31, 2020, there were 50,010,948 shares of the registrant's common stock outstanding.
1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
xYes oNo
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.
oYes xNo
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.
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 such files).
xYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an
emerging growth company. See definition of "large accelerated filer,"accelerated filer," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.:
Large accelerated filerx Accelerated filero Non-accelerated filero Emerging growth company ☐
xYes oNo
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
o
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting
Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
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.
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).
oItem 17 oItem 18
☐Yes xNo
2
TABLE OF CONTENTS
Part I
Item 1
Item 2
Item 3
Explanatory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Implications of Being a Foreign Private Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enforcement of Civil Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identity of Directors, Senior Management and Advisers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offer Statistics and Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Capitalization and Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Reasons for the Offer and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4
Information on the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. History and Development of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Organizational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Property, Plants and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Selected Statistical Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4A
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5
Operating and Financial Review and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Operating Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Research and Development, Patents and Licenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Trend Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Off Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. Tabular Disclosure of Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G. Safe Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Directors, Senior Management and Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Directors and Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Board Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Share Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7
Major Shareholders and Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Major Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Interests of Experts and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Consolidated Statements of Other Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Significant Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9
The Offer and Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Offering and Listing Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. Expenses of the Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Memorandum and Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Exchange Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10
Page
1
2
2
2
3
3
3
3
9
9
10
24
24
24
44
44
45
50
51
51
89
92
92
92
92
93
94
94
97
97
100
100
101
101
102
102
103
103
103
104
104
104
104
104
104
104
105
105
105
105
105
3
E. Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. Dividends and Paying Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G. Statements by Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H. Documents on Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I. Subsidiary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Securities other than Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defaults, Dividend Arrearages and Delinquencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Material Modifications to the Rights of Security Holders and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11
Item 12
Part II
Item 13
Item 14
Item 15
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16A
Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16B
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16C
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16D
Exemption from the Listing Standards for Audit Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16E
Purchases of Equity Securities by the Issuer and Affiliated Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16F
Changes in Registrant's Certifying Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16G Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16H Mine Safety Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105
108
108
108
108
108
108
109
109
109
109
109
109
109
110
110
110
110
111
Part III
Item 17
Item 18
Item 19
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-1
Financial Statements - Prepared Using a Basis of Accounting Other than IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
i
ii
iv
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;
"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.
◦
Refer also to the Glossary at the end of this document for additional terms.
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 at December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 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 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 GAAP. Non‑GAAP
measures used in this report are not a substitute for GAAP measures and readers should consider the GAAP measures as well. For more information on non‑GAAP measures,
including a reconciliation to the most directly comparable GAAP financial measures, see Item 3.A.“Selected 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.
1
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," "assume," "believe," "estimate," "expect," "indicate," "intend," "may," "plan," "point to," "predict,"
"project," "seek," "target," "potential," "will," "would," "could," "should," "continue," "contemplate" and other similar expressions, although not all forward-looking statements
contain these identifying words. 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 section captioned "Risk Factors" that appear in Item 3. D. "Risk Factors" of this annual report. 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.
We are a foreign private issuer, and so long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the
Exchange Act that are applicable to US domestic public companies, including:
IMPLICATIONS OF BEING A FOREIGN PRIVATE ISSUER
•
•
•
•
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 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 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. 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 US 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 US domestic issuer.
ENFORCEMENT OF CIVIL LIABILITIES
The Bank is incorporated under the laws of Bermuda. As a result, the rights of holders of the Bank’s common shares will be governed by Bermuda law, the
Butterfield Act and the Bank’s bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other
jurisdictions. Some of our directors and some of the named experts referred to in this annual report are not residents of the United States, and a substantial portion of our assets
are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United
States judgments obtained in US courts against us or those persons based on the civil liability provisions of the US federal securities laws. However, we may be served with
process in the United States with respect to actions against us arising out of or in connection with violations of US federal securities laws relating to offers and sales of common
shares made hereby by serving C T Corporation System, 28 Liberty Street, New York, NY 10005, our US agent irrevocably appointed for that purpose.
It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers
under the securities laws of those jurisdictions, or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
2
PART 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
Not applicable
Not applicable
A.
Selected Financial Data
Consolidated Financial Information
The following tables present our selected consolidated financial information as at and for the years ended December 31, 2020, 2019, and 2018.
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 Item 5.A "Operating Results".
The selected consolidated financial information presented as at December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 have been
derived from the audited consolidated financial statements of The Bank of N.T. Butterfield & Son Limited included elsewhere in this report.
Statement of Operations Data
(in millions of $, unless indicated otherwise)
Total interest income
Total interest expense
Net interest income before provisions for credit losses
Provision for credit recoveries (losses)
Net interest income after provisions for credit losses
Total non-interest income
Total other gains (losses)
Total net revenue
Total non-interest expense
Net income before income taxes
Income tax benefit (expense)
Net income
Net income to common shareholders
Earnings per common share from continuing operations (in US$)
Basic
Diluted(1)
Cash Dividends declared per common share (in BM$)
______________________________
(1)
Reflects only "in the money" options and certain unvested share awards, which have a dilutive effect.
For the year ended
December 31,
2020
2019
2018
352.0
34.4
317.6
(8.5)
309.1
183.9
1.2
494.2
344.6
149.6
(2.4)
147.2
147.2
2.91
2.90
1.76
405.1
59.4
345.7
0.2
345.9
184.0
2.8
532.6
356.9
175.7
1.4
177.1
177.1
3.33
3.30
1.76
367.6
24.6
343.0
7.0
350.0
168.7
(0.9)
517.8
321.3
196.5
(1.3)
195.2
195.2
3.55
3.50
1.52
3
Balance Sheet Data
(in millions of $)
Assets
Cash due from banks
Of which cash and demand deposits with banks — non-interest bearing
Of which demand deposits with banks — interest bearing
Of which cash equivalents — interest bearing
Securities purchased under agreements to resell
Short-term investments
Investment in securities
Of which equity securities at fair value
Of which available-for-sale (1)
Of which held-to-maturity(2)
Loans, net of allowance for credit losses
Premises, equipment and computer software, net of accumulated depreciation
Goodwill
Other intangible assets, net
Equity method investments
Other real estate owned, net
Accrued interest and other assets
Total assets
Liabilities
Total deposits
Of which — non-interest bearing
Of which — interest bearing
Employee benefit plans
Accrued interest and other liabilities
Long-term debt
Total liabilities
Total shareholders' equity(3)(4)
Of which common share capital(4)
Total liabilities and shareholders' equity
Common shares outstanding (number)(4)
______________________________
As at December 31,
2020
2019
3,289.6
2,550.1
133.4
433.5
2,722.7
197.0
823.0
4,862.8
7.3
2,661.1
2,194.4
5,160.8
150.8
25.6
67.2
12.9
4.1
88.0
839.3
1,622.7
142.3
1,218.4
4,436.4
7.4
2,220.3
2,208.7
5,142.6
158.2
24.8
71.7
14.5
3.8
144.8
158.7
14,738.6
13,921.6
13,250.1
12,441.6
3,012.4
2,238.3
10,237.7
10,203.4
131.3
203.9
171.5
110.3
262.4
143.5
13,756.7
12,957.8
981.9
0.5
963.7
0.5
14,738.6
13,921.6
50.0
53.0
(1)
(2)
(3)
Amortized cost of AFS debt securities was $2,588.3 million as at December 31, 2020 and $2,208.5 million as at December 31, 2019.
Fair value of HTM debt securities was $2,304.8 million as at December 31, 2020 and $2,256.0 million as at December 31, 2019.
As at December 31, 2020, the number of outstanding awards of unvested common shares was 0.9 million (December 31, 2019: 0.9 million). Only awards for which the
sum of 1) the expense that will be recognized in the future (i.e., the unrecognized expense) and 2) its exercise price, if any, was lower than the average market price of the
Bank's common shares were considered dilutive and, therefore, included in the computation of diluted earnings per share.
(4)
Figures reflect the retirement of 3.5 million shares during the year ended December 31, 2020 (December 31, 2019: 2.9 million).
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 GAAP. Non-GAAP measures used in this report are not a substitute for GAAP measures and readers should consider the
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 Item 3.A. "Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
4
(in %, unless otherwise indicated)
Return on average common shareholders' equity(1)
Core return on average tangible common equity(2)
Return on average assets(3)
Core return on average tangible assets(4)
Net interest margin(5)
Efficiency margin(6)
Core efficiency ratio(7)
Fee income ratio(8)
Common equity Tier 1 capital ratio(9)(10)
Tier 1 capital ratio(9)
Total capital ratio(9)
Leverage ratio(9)(10)
Tangible common equity/tangible assets(10)
Tangible total equity/tangible assets(11)
Non-performing assets ratio(12)
Non-accrual ratio(13)
Non-performing loan ratio(14)
Net charge-off (recoveries) ratio(15)
Core net income attributable to common shareholders(16)(17) (in $ million)
Core net income per common share fully diluted(18)(20) (in $)
Common equity per share(19) (in $)
______________________________
For the year ended December 31,
2020
2019
2018
15.0
17.3
1.1
1.1
2.42
67.6
66.0
37.3
16.1
16.1
19.8
5.3
6.1
6.1
0.6
1.4
1.8
0.1
154.5
3.04
19.88
19.1
23.4
1.4
1.6
2.86
66.4
62.2
34.7
17.3
17.3
19.4
5.9
6.3
6.3
0.4
1.0
1.3
—
197.9
3.69
18.40
23.1
25.6
1.8
1.8
3.25
61.8
61.5
32.5
19.6
19.6
22.4
7.6
7.5
7.5
0.4
1.2
1.4
0.1
197.0
3.53
15.94
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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.
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 Item 3.A."Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
ROA is an indicator of profitability relative to average 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.
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. For more information on the non-GAAP financial measures, see Item 3.A."Selected Financial Data -
Reconciliation of Non-GAAP Financial Measures".
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.
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 Item 3.A."Selected Financial Data -
Reconciliation of Non-GAAP Financial Measures".
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 on our core activities. 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 exclude 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 Item 3.A."Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
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).
The Bank's regulatory capital is determined in accordance with Basel III guidelines as issued by the BMA. 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. Under Basel III, Pillar I, banks
must maintain a minimum total capital ratio of 13.5%, inclusive of all capital buffers. In effect, this means that 13.5% of the RWA must be covered by permanent or near
permanent capital. The risk weighting process takes into account the relative risk of various types of lending and asset placements. The higher the capital adequacy ratio a
5
bank has, the greater the level of unexpected losses it can absorb before becoming insolvent. The tier 1 capital ratio is the ratio of the Bank's core equity capital to its total
RWA. RWA is the total of all assets held by the Bank weighted by credit risk according to a formula determined by the BMA which follows the BCBS guidelines in setting
formulas for asset risk weights. The CET1 ratio is equivalent to the tier 1 capital ratio except that it only includes common equity in the numerator and we must maintain a
minimum CET1 ratio of 10%. Basel III also adopts the new Leverage Ratio regime, which is calculated by dividing tier 1 capital by an exposure measure, and 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.
(10) The 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 Item 3.A. "Selected Financial Data - Reconciliation of
Non-GAAP Financial Measures".
(11) The 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 Item 3.A. "Selected Financial Data -
Reconciliation of Non-GAAP Financial Measures".
(12) The 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 + OREO) / total assets.
(13) The 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.
(14) The 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.
(15) The 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 loan is calculated as the average of the month-end asset balances during the
relevant period.
(16) 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 Item 3.A.
"Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
(17) 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 Item 3.A. "Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
(18) 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 Item 3.A."Selected Financial Data - Reconciliation of Non-
GAAP Financial Measures".
(19) Common equity per share is calculated as total common equity / number of common shares issued and outstanding at period end.
6
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.
24.8
124.3
218.5
367.6
1.26 %
2.71 %
5.47 %
3.48 %
(17.6)
—
(6.9)
(24.6)
(0.24) %
(2.11) %
(5.21) %
(0.33) %
For the year ended December 31,
Average
balance
($)
2020
Interest
($)
Average
rate
(%)
Average
balance
($)
2019
Interest
($)
Average
rate
(%)
Average
balance
($)
2018
Interest
($)
Average
rate
(%)
(in millions of $)
Assets
Cash due from banks, securities purchased under
agreements to resell, and short‑term investments
Investment in securities
Loans
Interest earning assets
Other assets
Total assets
Liabilities
Deposits
3,530.6
4,514.3
5,061.7
13,106.6
393.7
13,500.3
12.1
109.2
230.7
352.0
0.34 %
3,233.3
2.41 %
4,474.9
4.54 %
4,369.5
2.68 % 12,077.6
371.5
12,449.1
41.6
129.4
234.0
405.1
1.29 %
1,977.3
2.89 %
4,578.9
5.36 %
3,995.8
3.35 % 10,552.0
350.7
10,902.7
9,710.8
(25.1)
(0.26) %
8,851.5
(51.5)
(0.58) %
7,375.8
Securities sold under agreements to repurchase
Long-term debt
Interest bearing liabilities
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Non‑interest bearing funds net of non‑interest earning assets
(free balance)
—
173.4
9,884.2
2,363.9
280.6
12,528.6
971.7
13,500.3
3,222.5
—
— %
0.7
—
(2.12) %
1.6
(9.3)
(5.35) %
143.4
(34.4)
(0.35) %
8,995.5
(7.9)
(59.4)
(5.49) %
133.4
(0.66) %
7,510.8
2,147.2
310.4
11,453.1
995.9
12,449.1
3,082.1
2,231.8
281.0
10,023.7
879.0
10,902.7
3,041.1
Net interest margin
317.6
2.42 %
345.7
2.86 %
343.0
3.25 %
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 CFO in conjunction with the CEO, and approved by our Board of Directors. Consideration is given as 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 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 by taking the core non-interest expenses (which is the total non-interest
expenses excluding non-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). 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. The BMA and other banking regulatory bodies assess a bank's capital adequacy based on CET1 capital, the
calculation of which is codified in the Basel III framework as 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
7
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 non-GAAP financial measures 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).
(in millions of $, unless otherwise indicated)
Reconciliation of net income (GAAP) to core net income (non-GAAP)
Net income
Non-core (gains), losses and expenses
Non-core (gains) losses
Gain on disposal of a pass-through note investment (formerly a SIV)(1)
Distribution from equity method investment(2)
Settlement loss on de-risking on a defined benefit plan(3)
Total non-core (gains) losses
Non-core expenses
Early retirement program, redundancies and other non-core compensation costs(4)
Tax compliance review costs(5)
Business acquisition costs(6)
Total non-core expenses
Total non-core (gains), losses and expenses
Core net income attributable to common shareholders
Reconciliation of return on equity (GAAP) to core return on average tangible common equity (non-GAAP)
Core net income attributable to common shareholders
Average common equity
Less: average goodwill and intangible assets
Average tangible common equity
Return on equity
Core return on average tangible common equity
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)
Earnings per common share fully diluted
Non-core items per share
Core earnings per common share fully diluted
Reconciliation of return on average assets (GAAP) to core return on average tangible assets (non-GAAP)
Total average assets
Less: average goodwill and intangible assets
Average tangible assets
Return on average assets
Core return on average tangible assets
For the year ended December 31,
2020
2019
2018
147.2
177.1
195.2
—
(0.7)
—
(0.7)
8.0
—
—
8.0
7.3
(1.0)
(1.2)
—
—
(1.0)
16.3
—
5.5
21.8
20.8
—
1.5
0.3
—
0.5
1.0
1.5
1.8
154.5
197.9
197.0
A
B
C
D=B+C
E=A+D
E=A+D
154.5
197.9
197.0
F
G
A/F
E/G
F
A/J
D/F
G
H
A/G
E/H
981.0
927.7
843.2
(92.3)
(83.2)
(74.6)
888.8
844.5
768.6
15.0 %
17.3 %
19.1 %
23.4 %
23.1 %
25.6 %
50.9
2.90
0.14
3.04
53.7
3.30
0.39
3.69
55.7
3.50
0.03
3.53
13,618.2
12,471.8
10,851.2
(92.3)
(83.2)
(74.6)
13,525.9
12,388.5
10,776.6
1.1 %
1.1 %
1.4 %
1.6 %
1.8 %
1.8 %
8
(in millions of $, unless otherwise indicated)
Tangible equity to tangible assets
Shareholders' equity
Less: goodwill and intangible assets
Tangible common equity
Total assets
Less: goodwill and intangible assets
Tangible assets
Tangible common equity to tangible assets
Efficiency ratio
Non-interest expenses
Less: amortization of intangibles
Non-interest expenses before amortization of intangibles
Non-interest income
Net interest income before provision for credit losses
Net revenue before provision for credit losses and other gains/losses
Efficiency ratio
Core efficiency ratio
Non-interest expenses
Less: non-core expenses
Less: amortization of intangibles
Core non-interest expenses before amortization of intangibles
Core revenue before other gains and losses and provision for credit losses
Core efficiency ratio
______________________________
For the year ended December 31,
2020
2019
2018
981.9
(92.8)
889.1
963.7
(96.5)
867.2
882.3
(74.7)
807.6
14,738.6
13,921.6
10,773.2
(92.8)
(96.5)
(74.7)
14,645.8
13,825.1
10,698.4
6.1 %
6.3 %
7.5 %
344.6
(5.8)
338.8
183.9
317.6
501.5
356.9
(5.5)
351.5
184.0
345.7
529.7
321.3
(5.1)
316.3
168.7
343.0
511.7
67.6 %
66.4 %
61.8 %
344.6
(8.0)
(5.8)
330.8
501.5
356.9
(21.8)
(5.5)
329.7
529.7
321.3
(1.5)
(5.1)
314.7
511.7
I
J
I/J
K
L
K/L
M
N
O
N/O
66.0 %
62.2 %
61.5 %
(1)
(2)
(3)
(4)
(5)
(6)
Reflects a gain realized on a liquidation settlement from the Avenir pass-through note, our last remaining structured investment, in 2014. As the Bank no longer holds
structured investment products, management determined the gains represented by these liquidation settlements to be non-core. In 2018 and 2019, the Bank received
further distributions on this liquidation settlement.
Reflects gain due to a distribution from an equity method investment as a result of the sale of a legacy business interest.
In 2018, these losses reflected a non-core settlement loss on the de-risking of a defined benefit pension plan.
In 2019, primarily related to the costs associated with the departure of a senior executive, severance payments relating to the closure of a branch location, and staff exit
costs associated with the implementation of a target operating staffing model for the combined Channel Islands segment following the ABN AMRO (Channel Islands)
Limited acquisition. In 2020, primarily relates to the efficiency program, including voluntary separation, early retirement and redundancy costs. Management does not
consider the costs associated with these projects to be core to the strategy of the business.
In 2018 reflected costs associated with a review and account remediation exercise to determine the US tax compliance status of US person account holders linked to the
publicly announced so-called John Doe Summonses in November 2013 issued by the USAO to six US financial institutions with which the Bank had correspondent
banking relationships. These expenses are a result of exceptional circumstances which arose outside of the normal course of business.
In 2018, reflected contract negotiation, due diligence and other legal costs relating to the agreement to acquire Deutsche Bank’s GTS business, excluding its US
operations. In 2019, reflected contract negotiation, due diligence and other legal costs relating to the acquisition of ABN AMRO (Channel Islands) Limited. As above, due
to the limited nature of acquisitions, management does not consider the costs associated with these acquisitions to be a part of normal course of business. Therefore,
management considers costs associated with acquisitions, specifically including the costs associated with negotiation and integration of operations, to be non-core.
B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable
9
D. Risk Factors
The material risks and uncertainties that management believes affect us are described below. Any of the following risks, as well as risks that we do not know of or currently deem
immaterial, could have a material adverse effect on our business, financial condition or results of operations. Further, the risk factors below include cautionary statements
identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See
"Cautionary Note Regarding Forward-Looking Statements."
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business,
financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and
results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued
effectiveness of our business continuity plan (including remote working arrangements implemented for staff), the direct and indirect impact of the pandemic on our employees,
customers, clients, counterparties and service providers, as well as other market participants, actions taken by governmental authorities and other third parties in response to the
pandemic, and the effectiveness and acceptance of COVID-19 vaccines.
The COVID-19 pandemic has contributed to, among other things, (i) sudden and significant declines, and significant increases in volatility, in global financial markets;
(ii) ratings downgrades, credit deterioration and defaults of companies operating in many industries; (iii) significant reductions in interest rates implemented by the US Federal
Reserve and other central banks further contributing to a low interest rate environment globally; and (iv) heightened cybersecurity, data privacy, information security and
operational risks as a result of remote working arrangements or otherwise. In addition, many of our customers, counterparties and third-party service providers have been, and
may further be, affected by travel restrictions, quarantines and/or curfews in various jurisdictions, market volatility and other factors that increase their risks of business disruption
or that may otherwise affect their ability to repay loans, perform under the terms of any agreements with us or provide other essential services. As a result, our credit, operational
and other risks are generally expected to increase until the pandemic subsides.
We continue to monitor the sectors that are most susceptible to economic uncertainty as a result of the COVID-19 pandemic and the potential impact to our business.
In particular, the COVID-19 pandemic has impacted, and may continue to impact, our business due to the following:
• The continuation of a low interest rate environment, or further reductions in interest rates, over the medium or long term, which would adversely impact our net
interest income and net interest margin, as well as increase our reliance on fee businesses.
• A decrease in tourism in Bermuda and the Cayman Islands, with the timing of any recovery being uncertain, which adversely affects our revenues, including fee
income, as well as increases our credit exposure.
• Increased unemployment and decreased consumer confidence and business generally, leading to increased credit risks and decreased business in our banking and
trust jurisdictions.
• An increase in defaults on our residential mortgage loans.
• Credit deterioration and defaults in many industries that operate in our jurisdictions, including industries in which our clients operate, such as commercial real estate,
financial services and the hotel/restaurants/hospitality sector.
• An increase in exposure to sovereign risk in our jurisdictions, such as downgrades in sovereign credit ratings or defaults on government debt.
• A decrease in the rates and yields on US government guaranteed securities and increased prepayments on mortgage-backed securities we hold, which has led to a,
and could lead to a further decrease in the yield on our investment portfolio.
• Modification in credit terms, as customers and clients seek to manage liquidity.
• Instability in market conditions and increased demands on capital and liquidity.
• A reduction in the value of the assets under management for the custody and asset management businesses, which affects related fee income and demand for
these services.
• A decrease in service availability and business operations, including reduced location access, business operating times and access to standard banking services as
a result of business continuity plans driving reduced staff availability, split work locations or mandatory quarantine requirements.
Governmental authorities have taken measures in response to the pandemic, and may take further action in the future to provide economic assistance to individual
households and businesses, stabilize the markets and support economic growth. The success of existing and future measures to provide economic assistance and increase the
pace and magnitude of economic recovery is unknown, and they may not be sufficient to fully mitigate the negative impact of the COVID-19 pandemic. We may also face an
increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental
authorities take in response to those conditions.
The duration and scope of the pandemic and related economic consequences, as well as the efficacy of the measures being put in place to address it, are unknown.
Until the pandemic subsides, we expect reduced interest income and revenues from card service fees, and increased customer and client loan defaults, including defaults in
unsecured loans. Changes in the macroeconomic environment are extremely impactful to our provision for credit losses under CECL, including as a result of the COVID-19
pandemic. Even after the pandemic subsides, our businesses would be materially and adversely affected by any subsequent, prolonged recession in the jurisdictions in which
we have banking and trust operations. To the extent the pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect
of heightening many of the other risks set out herein.
Risks Relating to the Markets in Which We Operate
Adverse economic and market conditions in Bermuda, the Cayman Islands, the Channel Islands and the UK, and other markets in which we operate, have in the past
resulted in and could in the future result in lower revenue, lower asset quality, increased provisions and lower earnings.
Our financial performance generally, and in particular the ability of our borrowers to pay interest and repay principal on outstanding loans and the value for the collateral
securing those loans, as well as demand for loans and other products and services we offer and whose success we rely on to drive our future growth, are highly dependent upon
the business environment in the markets in which we operate. A downturn in Bermuda, the Cayman Islands, and the Channel Islands and the UK can have a profound impact on
our business performance. Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, any downgrade in
sovereign credit ratings, the prevailing yield curve, inflation and price levels, monetary policy, regulatory or legal changes (including changes in tax laws) or changes in
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enforcement thereof, unemployment rates, investor or business confidence, natural or man-made disasters, the strength of the local economy in the markets in which we
operate, or a combination of these or other factors.
Unfavorable market conditions (including as a result of the COVID-19 pandemic) can result in a deterioration in the credit quality of our borrowers and the demand for
our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for loan losses, decreases in asset values,
deterioration in investment performance and an overall material adverse effect on the quality of our loan portfolio.
Unlike banks that are more geographically diversified, our business is concentrated primarily in Bermuda, the Cayman Islands, and the Channel Islands and the UK,
and we may be more affected by a downturn in these markets than more diversified competitors.
Our banking operations are concentrated in Bermuda, the Cayman Islands, and the Channel Islands and the UK, and we serve customers in these markets. In the year
ended December 31, 2020, 48%, 29% and 20%, of our total net revenue was derived from our Bermuda, Cayman Islands, and Channel Islands and UK segments, respectively.
In addition, in the year ended December 31, 2020, 39%, 21% and 40% , of our loans originated in Bermuda, the Cayman Islands, and Channel Islands and the UK, respectively.
Accordingly, a downturn in these markets may have a profound effect on our banking business. In addition, we have sought to expand our core business lines, including through
recent acquisitions. Any failure in our ability to expand our core business lines, or any reduction in demand for our core services in our Bermuda, Cayman Islands and Channel
Islands and UK segments, including due to perceived reputational risks, increasing regulatory scrutiny over activities in these jurisdictions or otherwise, may adversely impact our
business and results of operations, including the ongoing success of any of our acquired businesses.
Geopolitical events could disrupt our businesses and adversely affect our financial condition or results of operations.
We are exposed to risks arising out of geopolitical events, such as trade barriers, including the imposition of tariffs and other limitations on international trade and travel,
exchange controls, government shutdowns, other measures taken by sovereign governments, including by the US, and uncertainty arising from recent or upcoming elections
(including in the US and the UK) that can hinder economic or financial activity levels. Furthermore, unfavorable political, military or diplomatic events, armed conflict, terrorist acts
and threats, and pandemics, and the responses to them by governments, could also negatively affect economic activity and have an adverse effect upon our business, financial
condition or results of operations.
In addition the UK formally leaving the EU (“Brexit”) and the US's present and future policies may increase the uncertainty and instability in the global financial markets,
which could lead to weaker macroeconomic conditions, globally and in our key markets. Such economic weakness and uncertainty may adversely affect our business, financial
condition and results of operations. Under the terms of a withdrawal agreement between the UK and the EU, the UK formally left the EU on January 31, 2020, and on January 1,
2021, the United Kingdom left the EU Single Market and Customs Union, as well as all EU policies and international agreements. On December 24, 2020, the European
Commission reached a trade agreement with the UK on the terms of its future cooperation with the EU (the "Trade Agreement"). We cannot predict the impact that the Trade
Agreement and any future agreements on services will have on our business; however, political and economic uncertainty has in the past led to, and could in the future lead to,
declines in market liquidity and activity levels, volatile market conditions and exchange rates, a contraction of available credit, lower or negative interest rates, declines in the real
estate market, weaker economic growth and investment performance and reduced business confidence, all of which could impact our business. We expect that Brexit could lead
to continued legal uncertainty and a greater divergence in national laws and regulations as the UK determines which EU laws to replicate or replace and we could face
associated costs, particularly as they relate to our operations in the UK and certain UK territories and dependencies, namely Bermuda, the Cayman Islands, and the Channel
Islands. It may also be time-consuming and expensive for us to alter our internal operations in order to comply with new regulations.
Furthermore, changes in legislation and regulation or an attempt by any territory or dependency of the UK in which we operate, to declare independence from the UK or
to implement changes in its constitution, including its fiscal and monetary policies, could have a negative effect on the applicable jurisdiction's position as an international
business center. This could have a significant negative effect on the local economy and in turn negatively affect our business.
Because the primary markets in which we operate do not have well-diversified economies, a downturn in their key industries could affect their economies as a
whole and have an adverse effect on our business, financial condition or results of operations.
Bermuda is among the largest reinsurance markets in the world. The Cayman Islands is a leader in fund domiciliation for global asset managers, with 11,157 regulated
mutual funds as at July 31, 2020 according to CIMA. International financial services account for a significant portion of the economies of the Channel Islands. Many of our
commercial customers are reinsurance or regulated fund service providers. As a result, a downturn in these key sectors, a change in laws or regulations (including the favorable
tax treatment of entities in these jurisdictions), or a shift of business away from Bermuda, the Cayman Islands, or the Channel Islands, including as a result of the inclusion of any
of these jurisdictions on the EU list of non-cooperative jurisdictions for tax purposes, could result in job losses and adversely impact the economies in these markets. Any
downturn or further concentration in the reinsurance, investment and asset management and banking markets could also adversely affect our business, financial condition and
results of operations.
Banks domiciled in Bermuda, including us, are not supported by a central bank from which to borrow funds, so if we are unable to maintain sufficient liquidity by
continuously attracting deposits and other short-term funding, our financial condition, including our capital ratios, funding costs or results of operations could be
adversely affected.
Unlike many other jurisdictions, there is no central bank or similar governmental agency in Bermuda from which we may borrow US or Bermuda Dollars if we
experience liquidity shortages, which may leave us without a lender of last resort in the event that Bermuda suffers a severe economic downturn at the same time as a liquidity
shortage. Similarly, there is no central bank in the Cayman Islands, Jersey or Guernsey to act as a lender of last resort. Accordingly, we may not have a lender of last resort in
case of future liquidity shortages and we may be unable to sufficiently fund our liquidity needs. While there is no central bank or similar governmental agency in Bermuda, the
Cayman Islands, Jersey or Guernsey that insures bank deposits, such as the Federal Deposit Insurance Corporation in the United States, the Governments of Bermuda and
Jersey and the Government of the States of Guernsey have each implemented a Deposit Insurance Scheme or Deposit Compensation Scheme. See Item 4.B. "Business
Overview - Supervision and Regulation" and "- Certain jurisdictions in which we operate, including Bermuda, Guernsey and Jersey, have a Deposit Insurance Scheme or Deposit
Compensation Scheme and we incur ongoing costs as a result.” The regulators in these jurisdictions have also required us to hold capital add-ons to compensate for the
systemic importance of our bank to the economy in the absence of a central bank. Without a central bank from which we could borrow funds, liquidity management will be critical
to the management of our consolidated balance sheet, and an inability to obtain sufficient liquidity could adversely affect our financial condition.
Certain jurisdictions in which we operate, including Bermuda, Guernsey and Jersey, have a Deposit Insurance Scheme or Deposit Compensation Scheme and we
incur ongoing costs as a result.
As a bank licensed by the BMA, we are required to be a member of the Deposit Insurance Scheme ("DIS") and pay contributions to the Deposit Insurance Fund.
Currently, our premium contribution is calculated by the Bermuda Deposit Insurance Corporation as 0.25% per annum of the average total amount of our Bermuda Dollar
deposits that are covered by the DIS guarantee over a rolling three-month period, payable every three months in arrears. The amount of the contribution we are liable to pay may
change from time to time as the total level of our insured Bermuda Dollar deposits changes; in addition, there is no guarantee that the current rate of premium contributions
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charged by the Bermuda Deposit Insurance Corporation will stay the same and not increase or that the Bermuda Deposit Insurance Corporation will not require additional
contributions in the event that the Deposit Insurance Fund is insufficient to pay compensation due to insured depositors. We may also not be able to recover our contributions to
the Deposit Insurance Fund from any failed institution whose insured depositors receive payments from the Deposit Insurance Fund. Any contributions we are required to make
as part of the DIS (and any associated costs) are a cost to our business, and such costs, including any future increases, may have an adverse effect on our business, financial
condition or results of operations.
As a bank licensed by the Guernsey Financial Services Commission, we are required to pay contributions to the Guernsey Deposit Compensation Scheme (the
"Guernsey DCS"). Currently, we are required to pay an administration levy which is calculated by the Guernsey DCS Board. The amount of the contribution we are liable to pay
may change from time to time and there is no guarantee that the current rate charged by the Guernsey DCS Board will stay the same and not increase. In the event of the failure
of a Guernsey licensed bank, the Guernsey DCS Board will estimate the total level of compensation levy required and the Bank will be liable in equal shares with every other
participant (i.e., every other licensed bank in Guernsey) for the first £10,000,000. If the total compensation levy exceeds £10,000,000 then the Bank will be liable on a pro-rata
basis (calculated by reference to the total "value at risk" of our Guernsey deposits compared to the Guernsey market) with every other participant for the amount of such excess.
We may also not be able to recover our contributions to the Guernsey DCS from any failed licensed bank whose insured depositors receive payments from the Guernsey DCS.
Any contributions we are required to make as part of the Guernsey DCS (and any associated costs) are a cost to our business, and such costs, including any future increases,
may have an adverse effect on our business, financial condition or results of operations.
The Jersey Bank Depositors Compensation Scheme ("Jersey DCS") is funded primarily through an upfront loan from the States of Jersey. In the event of a bank failing,
levies would be raised on Jersey banks, subject to certain caps for banking groups over a five-year period, based on the proportion of protected deposits each bank holds to
repay the loan. In the event that the full £100 million liability of the Jersey DCS was called upon, banks would contribute approximately two-thirds of funding, with the States of
Jersey contributing one-third.
We are not currently required to pay any contributions to the Jersey DCS. Any contributions we may be required in future to make as part of the Jersey DCS (and any
associated costs) are a cost to our business, and such costs, including any future increases, may have an adverse effect on our business, financial condition or results of
operations.
A decline in tourism in Bermuda and the Cayman Islands has, as a result of the COVID-19 pandemic, and could in the future, adversely affect our business, financial
condition or results of operations.
Tourism is a major contributor to the economies of Bermuda and the Cayman Islands. The COVID-19 pandemic has resulted in a significant decline in worldwide travel
and tourism, including in Bermuda and the Cayman Islands. See "Risks Related to the COVID-19 Pandemic.”
A continued decline in tourism could lead to further (i) decreases in the value of hotels and other commercial properties, which could further adversely affect our
commercial loan portfolio, and (ii) increases in unemployment, which could further affect the ability of our residential borrowers to make payments on their loans. Additionally, a
delayed or incomplete recovery of tourism in Bermuda or the Cayman Islands could have adverse effects on the economic stability of these jurisdictions, and our business,
financial condition or results of operations.
Severe weather and natural disasters could disrupt our businesses and adversely affect our financial condition or results of operations.
The key markets in which we operate include Bermuda and the Cayman Islands and our business is therefore subject to the risks associated with severe tropical
storms, hurricanes, tornadoes and earthquakes, including downed telephone lines, flooded facilities, power outages, fuel shortages, damaged or destroyed property and
equipment, and work interruptions. Although hurricanes in the Caribbean during 2018, 2019 and 2020 did not negatively impact the Bank's operations nor cause any insurable
losses, such severe weather conditions and natural disasters may, in the future, negatively impact us and our clients and their ability to meet their financial obligations to us,
including the repayment of loans. Such events may also result in an impairment of the value of property or other collateral used to secure the loans that we extend. Climate
change may aggravate the impact and increase the incidence of such severe weather. Furthermore, severe weather events may have a significant impact on the economies of
the key markets in which we operate, which could have a material adverse impact on our operations.
We cannot predict whether we will continue to be able to obtain insurance for hazard-related damages to our premises or, if obtainable and carried, whether this
insurance will be adequate to cover our losses. Moreover, we expect any insurance of this nature to be subject to substantial deductibles and to provide for premium adjustments
based on claims, and we do not carry insurance against all types of losses. For all these reasons, any future hazard-related costs and work interruptions could have an adverse
effect on our business, financial condition or results of operations.
The majority of the markets in which we operate do not have systemic credit bureau reports.
Unlike the US where the Fair Credit Reporting Act ("FCRA") is designed to help ensure that credit bureaus furnish correct and complete information when evaluating
loan applications, the majority of the markets in which we operate do not have systemic credit bureau reports. Therefore, we review each loan and we use a formal and
documented tiered credit approval process that is administered through and governed by our risk management framework. Due to limitations in the availability of information, our
assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have made and continue
to make improvements to our credit scoring systems to better assess borrowers' credit risk profiles, we cannot provide assurance that our credit scoring systems collect complete
or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we
have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and
subsequently our impairment losses and allowance for credit losses may be materially adversely affected. In addition, because our credit approval process involves detailed
analyses of the customer or credit risk, taking into account both quantitative and qualitative factors, it is subject to human or information technology systems errors. In exercising
their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our
exposure to higher credit risks than indicated by our risk rating system. In addition, we have been refining our credit policies and guidelines to address potential risks associated
with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur, or due to limited tools available to us, our
employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit
risk management system may result in an increase in the level of nonperforming loans and a higher risk exposure for us, which could have a material adverse effect on us.
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Risks Relating to Our Strategy, Brand, Portfolio and Other Aspects of Our Business
We rely on our reputation and the appeal of our brand to our customers. Any damage to our reputation and appeal could harm us and our business prospects.
The success of our strategy relies significantly on our reputation and the reputation of our senior management and the Board. In addition, our customers and key
introducers must continue to associate our brand with meeting customer needs and delivering value to those customers. Adverse publicity (whether or not justified) relating to
activities by our management, employees, agents or others with whom we do business, such as customer service mishaps or noncompliance with laws, could tarnish our
reputation and reduce the value of our brand. With the increase in the use of social media outlets such as Facebook, YouTube, Instagram and Twitter, adverse publicity can be
disseminated quickly and broadly, making it increasingly difficult for us to effectively respond. Such unfavorable publicity could also require us to allocate significant resources to
rebuild our reputation.
As a bank operating in Bermuda, the Cayman Islands, the Channel Islands and other international financial centers, we are subject to increasing scrutiny with respect to
potential or alleged legal and regulatory breaches and unethical behavior and associated reputational risks, including with respect to the general perception and reputation of
financial institutions in those jurisdictions, which may in turn be affected by factors including the EU list of non-cooperative jurisdictions for tax purposes (for example, the
inclusion of the Cayman Islands on the list from February to October 2020), and policies on controversial industries such as gaming and cryptocurrencies, among others. See
"Our business may be negatively impacted by the economic substance legislation and regulations in the jurisdictions in which we operate, including Bermuda, the Cayman
Islands, and the Channel Islands." Any circumstance that causes real or perceived damage to our brand or reputation, or banking or wealth management generally in these
jurisdictions, may negatively affect our relationships with our customers and key introducers, which would have an adverse effect on our business, financial condition or results of
operations.
Potential reputational issues include, but are not limited to:
• breaching or facing allegations of having breached legal and regulatory requirements (including, but not limited to, conduct requirements, anti-money laundering
requirements, anti-terrorism financing requirements, laws against assisting in tax evasion, cybersecurity and data protection laws, bribery and corruption);
•
legacy issues we inherit from the businesses we acquire through a merger or acquisition;
• acting or facing allegations of having acted unethically (including having adopted inappropriate sales and trading practices);
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•
failing or facing allegations of having failed to maintain appropriate standards of customer privacy, customer service and record-keeping;
failing to appropriately address potential conflicts of interest;
• experiencing technology failures that impact customer services and accounts;
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failing to properly identify legal, reputational, credit, liquidity and market risks inherent in products offered; and
changing the terms of our product offerings and pricing that may result in outcomes for customers that are unfair or perceived to be unfair.
A failure to address the above or any other relevant issues appropriately could make customers unwilling to do business with us, which could have an adverse effect on
our business, financial condition or results of operations and could damage our relationships with our employees and regulators.
We could be negatively affected if the soundness of other financial institutions and counterparties deteriorates or if such counterparties, including clearing houses,
are unwilling to do business with us, in particular in respect of US Dollar transactions.
Given the high level of interdependence between financial institutions, we are and will continue to be subject to the risk of actual or perceived deterioration in the
commercial and financial soundness of other financial services institutions. Within the financial services industry, the default by any one institution could lead to defaults by other
institutions. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, because the commercial and
financial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of
creditworthiness of, or questions about, a financial institution may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is
sometimes referred to as "systemic risk" or "contagion" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses and banks with whom we
interact on a daily basis. In particular, BNYM and Wells Fargo Bank, N.A. ("Wells Fargo") act as clearing houses for all our US Dollar transactions. If BNYM's or Wells Fargo's
ability to act as our clearing houses becomes impaired or BNYM or Wells Fargo cease to act as our clearing houses for any other reason and other financial institutions are not
willing to provide the services currently provided to us by BNYM and Wells Fargo, we could lose our ability to engage in US Dollar transactions, which could lead to severe
disruptions in our operations and adversely impact our business, financial condition or results of operations.
Our strategy includes expansion of our business through acquisitions of, or investments in, other companies or new products and services, but we may not be able
to achieve regulatory approval for such transactions or be able to achieve the anticipated cost savings, growth opportunities and other benefits anticipated from
such transactions.
We seek to grow both organically and through acquisitions. In the past several years, we have made various acquisitions and investments intended to complement and
expand our businesses, including our July 2019 acquisition of ABN AMRO (Channel Islands) Limited, our February 2018 agreement with Deutsche Bank to refer Deutsche
Bank's clients from their banking and custody business in the Cayman and Channel Islands to us, and our March 2018 acquisition of Deutsche Bank’s GTS business, excluding
its US operations. Our long-term growth strategy includes identifying and effecting selective acquisitions in our core geographies, but we cannot be sure that we will be able to
continue to identify suitable acquisition candidates or investment opportunities. Even if we identify suitable targets, there can be no assurance that we will be able to obtain the
necessary funding on acceptable terms, if at all, to finance any of those potential acquisitions or investments.
We may also be required to obtain regulatory approval (including from the BMA) prior to any potential acquisition or investment depending on the transaction and the
laws and regulations of the target’s country of incorporation (for example, from the Guernsey Financial Services Commission in respect of the acquisition of ABN AMRO
(Channel Islands) Limited). Regulators consider a number of factors when determining whether to approve a proposed transaction, and we may have difficulty obtaining the
necessary regulatory approvals, government permits or licenses required for such acquisitions. We may fail to pursue, evaluate or complete strategic and competitively
significant business opportunities as a result of our inability, or our perceived inability, to obtain any required regulatory approvals in a timely manner or at all.
Even where we are able to complete an acquisition or an investment, we cannot be sure that such acquired entity, business or asset or such investment will perform in
line with our assumptions or expectations or otherwise complement our business or strategy due to a variety of factors, including lower revenues than expected, unforeseen
operating difficulties and expenditures, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers,
clients or suppliers) and risks associated with the disruption of management’s attention from ongoing business operations due to acquisition and integration activities.
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In addition, integrating an acquired company, business or technology possesses significant risks, including, among other things:
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the incorporation of new technologies into our existing business infrastructure;
the maintenance of standards, controls, procedures and policies throughout the organization (including effective internal controls over financial reporting and
disclosure controls and procedures);
the consolidation of our corporate or administrative functions;
the coordination of our sales and marketing functions to incorporate the new business or technology;
the potential for liabilities and claims arising out of the acquired businesses;
the integration of corporate cultures;
the maintenance of morale, retention and integration of key employees to support the new business or technology and management of our expansion in capacity;
and
compliance with the regulatory regimes of newly entered jurisdictions.
In addition, a significant portion of the purchase price of companies that we may acquire may be allocated to goodwill and other intangible assets. Intangible assets are
tested for impairment annually or when there is a triggering event requiring such testing; an intangible asset that is subject to amortization is periodically reviewed for impairment.
Goodwill is tested for impairment on an annual basis. As at December 31, 2020, we had $25.6 million and $67.2 million of goodwill and intangible assets respectively. In the
future, if our acquisitions do not yield expected returns or there are changes in discount rates, we may be required to take additional charges to our earnings based on the
impairment assessment process, which could harm our business, financial condition, results of operations and prospects.
A decline in the residential real estate market, including in Bermuda, the Cayman Islands, the Channel Islands and the United Kingdom, could increase the risk of
loans being impaired and could have an adverse effect on our business, financial condition or results of operations.
We are exposed to the risk that our borrowers may not repay their loans according to their contractual terms and that the collateral securing the payment of these loans
may be insufficient. As at December 31, 2020, approximately 52% of our Bermuda loan portfolio, net of allowance for credit losses, was composed of residential mortgages in
Bermuda; approximately 57% of our Cayman Islands loan portfolio, net of allowance for credit losses, was composed of residential mortgages in the Cayman Islands and
approximately 82% of our Channel Islands and UK loan portfolio, net of allowance for credit losses, was composed of residential mortgages in the Channel Islands and the UK. A
decline in the real estate market, in particular in Bermuda, the Cayman Islands, the Channel Islands and the UK (including as a result of the ongoing COVID-19 pandemic or
Brexit), would mean that the collateral for our loans would hold less value. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be
diminished, and we would be more likely to suffer losses on the defaulted loans. Declines in the real estate market, including as a result of lower infrastructure spending in the
markets in which we operate, could also adversely affect demand for new loans, further decreasing the interest revenue generated by our loan portfolio. In addition, if our
estimate for our allowance for credit losses proves to be inadequate, we will have to increase the allowance accordingly and may have future charge-offs. This may lead to
impairment charges on loans and other assets, higher costs and higher incurred loan-loss provisions.
The risk of loan impairment may be compounded by the fact that there is limited economic and statistical data regarding the Bermuda, the Cayman Islands and the
Channel Islands real estate markets. Although reliable and comprehensive economic and statistical data is available for certain real estate markets, such as the Case-Schiller
Home Price Index in the United States, there is no comparable statistical data or mechanism to value the overall real estate market in all our markets. This lack of information
makes it difficult to assess the market value of real estate in these markets, and requires us to rely on observations of the valuation of our own real estate originations in order to
assess whether the value of mortgaged real estate has declined. See "- The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real
property may not accurately describe the net value of the collateral that we can realize." Any of the above factors 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.
As at December 31, 2020, we owned $4.9 billion of investment securities consisting primarily of securities issued by the US government and US governmental
agencies. In 2020, our investment portfolio had an average yield of 2.41%.
The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, the ongoing COVID-19 pandemic, and
the occurrence of any events adversely affecting the issuer of particular securities in our investment portfolio. We perform periodic reviews to determine if a credit impairment
exists. Our Group Asset and Liability Committee reviews the results of the impairment analysis and advises whether a credit impairment exists. The process for determining
whether a credit impairment exists usually requires complex, subjective judgments about the future financial performance of the issuer of the relevant security in order to assess
the probability of receiving all contractual principal and interest payments on the security.
We did not record any credit impairment losses on investments in the years ended December 31, 2020, 2019 and 2018. However, in prior periods we have experienced
higher credit impairments on investments, in particular as a result of investments in structured securities. See "- If we are unable to effectively manage our liquidity we may need
to seek additional financing and our business, financial condition or results of operations could be adversely affected."
We may be required to recognize credit impairments in future periods, which could have an adverse effect 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.
We are exposed to foreign currency risk as a result of our holdings of foreign currency denominated assets and liabilities, investment in foreign subsidiaries, and future
foreign currency denominated revenue and expense. Fluctuations in exchange rates may raise the potential for losses resulting from foreign currency trading positions, where
aggregate obligations to purchase and sell a foreign currency do not offset each other or offset each other in different time periods. In addition, Brexit has introduced volatility for
the Pound Sterling, which may continue in the future. Such volatility may adversely affect our operations that employ the Pound Sterling as the functional currency and materially
affect our results of operations. US political events and policy have also caused significant volatility for the US Dollar, which may continue in the future. Such volatility may have
negative impacts on our business, financial position and results of operations.
We also provide foreign exchange services to our clients, including trading on behalf of clients in all major currencies and providing hedging solutions to manage foreign
exchange risk. Foreign currency volatility influences the level of client activity. Changes in client activity may result in reduced foreign exchange trading income.
In addition, the Bermuda Dollar and the Cayman Islands Dollar are pegged to the US Dollar at exchange rates of 1 Bermuda Dollar to 1 US Dollar and 1 Cayman
Islands Dollar to 1.20 US Dollar, respectively. However, we cannot make assurances that these pegs will be maintained. In the event that the Bermuda Dollar or Cayman Islands
Dollar is de-pegged or the current ratios are changed, including as a result of changes in laws, regulations or policies in these jurisdictions, the value of our common shares
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could be adversely affected. Moreover, our US Dollar deposits are used to fund mortgages in Bermuda Dollars and Cayman Islands Dollars. As the Bermuda Dollar and the
Cayman Islands Dollar are pegged to the US Dollar, we do not engage in hedging activities to counteract this currency risk. If the Bermuda Dollar or Cayman Islands Dollar
ceased to be pegged to the US Dollar at the current ratios, however, we could be exposed to significant currency risks.
Fluctuations in interest rates and inflation may negatively impact our net interest margin and our profitability.
Net interest income is a significant component of our revenues and changes in prevailing interest rates may adversely affect our business, including the level of net
interest income we earn, and for our banking business, the levels of deposits and the demand for loans.
If interest rates increase, our net interest income would narrow if our cost of funding increased without a correlative increase in the interest we earn from loans and
investments. Because we rely extensively on deposits to fund our operations, our cost of funding would increase if there is an increase in the interest rate we are required to pay
our customers to retain their deposits. This could occur, for instance, if we are faced with competitive or regulatory pressures to increase rates on deposits. In addition, our cost
of funding would increase if the interest rates we are required to pay for other sources of funding increase. Moreover, increases in interest rates may decrease customer demand
for loans as the higher cost of obtaining credit may deter customers from seeking new loans. Further, higher interest rates might also lead to an increased number of delinquent
loans and defaults, which would affect the value of our loans.
Changes in interest rates may negatively affect the value of our assets and our ability to realize gains or avoid losses from the sale of those assets, all of which also
ultimately affect earnings and capital, as well as our regulatory solvency position. A sustained increase in the inflation rate in our key markets may also have an adverse effect on
our business, financial condition or results of operations. For example, a sustained increase in the inflation rate may result in an increase in nominal market interest rates. A
failure to accurately anticipate higher inflation and factor it into our product-pricing assumptions may result in mispricing of our products, which could adversely affect our
business, financial position or results of operations. On the other hand, recent concerns regarding negative interest rates and the low level of interest rates generally may
negatively impact our net interest income, which may have an adverse impact on our profitability.
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to
maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material
adverse effect on us. For example, in 2020 decreases in global market interest rates and increased prepayment speeds resulted in lower yields on the Bank's investments as
compared to the previous year. Prepayments also require us to recognize net premiums or commissions as income over a shorter period of time, thereby reducing the
corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments
could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent
to our commercial activity and an increase in prepayments could have a material adverse effect on us.
If we are unable to effectively manage our liquidity we may need to seek additional financing and our business, financial condition or results of operations could be
adversely affected.
We need liquidity to pay our operating expenses, fund depositor withdrawals, interest on our debt and dividends on our common shares, and to replace certain maturing
liabilities. Without sufficient liquidity, we will be forced to curtail our operations and our business will suffer.
Our main source of funding is customer deposits. As at December 31, 2020, we had $13.3 billion in deposits (55% USD deposits, 18% USD-pegged deposits), with
36% of our deposits derived from our Bermuda segment, 31% from the Cayman Islands segment, and 33% from the Channel Islands segment. In addition, we source our
funding from net income generated by the Bank, net of dividends paid, and to a lesser extent from other sources including the sale of securities to institutional counterparties
under repurchase agreements and the sale of equity securities and AFS securities. Our deposit base includes both demand and term liabilities, but the significant majority of
such deposits are demand deposits or are due within six months. Because we rely primarily on short-term deposits for funding, a sudden or unexpected shortage of funds in the
banking systems in which we operate may prevent us from obtaining necessary funding without incurring higher costs. Our deposit base includes deposits from commercial and
institutional clients which may be more sensitive to financial strength rating changes. A significant withdrawal of deposits in either of these markets could significantly affect our
liquidity and our ability to meet our funding needs.
In addition, as a bank with subsidiaries located in various jurisdictions, the Bank’s access to inter-company funds can be restricted because our regulated banking
subsidiaries are required to maintain certain liquidity ratios or minimum levels of capital in accordance with the laws of the jurisdictions in which they operate or otherwise. The
necessity of maintaining these ratios or levels of capital or other liquidity considerations could restrict the ability of these subsidiaries to transfer funds to us, in the form of cash
dividends, loans or advances.
In the event that our current resources do not satisfy our needs, we may need to seek additional financing. The availability of additional financing will depend on a
variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our
credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects, including
as a result of economic uncertainty or any downgrade in sovereign credit ratings in key markets in which we operate.
Changes in banks’ inter-bank lending rate reporting practices and the phase-out of the London Interbank Offered Rate ("LIBOR") may adversely affect our business
and results of operations.
On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer compel or persuade banks to contribute to LIBOR rate setting after 2021. On
November 30, 2020, the administrator of LIBOR announced it would extend the publication of certain USD LIBOR tenors until June 30, 2023. It remains unclear whether LIBOR
will continue to be viewed as an acceptable market benchmark rate, what rate or rates may develop as accepted alternatives to LIBOR, and what effect any such changes may
have on the markets for LIBOR-based financial instruments.
Uncertainty as to the nature of potential changes, alternative reference rates or other reforms may adversely affect market liquidity, the pricing of LIBOR-based
instruments and the availability and cost of associated hedging instruments and borrowings. Payments under contracts referencing new reference rates may differ from those
referencing LIBOR. The transition may change the Bank’s risk profile and require changes to its risk and pricing models, valuation tools, product design and hedging strategies.
Although the Bank is unable to quantify the ultimate impact of the transition from LIBOR given the uncertain nature of the potential changes, it continues to monitor the
developments related to the future of LIBOR in line with any regulatory or quasi-regulatory guidance. Moreover, the failure to manage any potential transition from LIBOR to a
different reference rate, or rates, may adversely affect the Bank’s reputation, business and financial condition, and results of operations.
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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.
We compete with a broad range of financial institutions. Many of our competitors are larger and have broader ranges of product and service offerings, increased access
to capital, greater efficiency and pricing power. We face competition from other lending institutions and from numerous other providers of financial services, including the
following:
• Non-banking financial institutions. The ability of these institutions to offer services previously limited to commercial banks has intensified competition. Because non-
banking financial institutions are not subject to the same regulatory restrictions as banks, they can often operate with greater flexibility and lower cost structures; and
• Competitors that have greater financial resources. Some of our larger competitors, including certain international banks that have a significant presence in our
market area, may have greater capital and resources and higher lending limits and may offer products, services and technology that we do not. We cannot predict
the reaction of our customers and other third parties with respect to our financial or commercial strength relative to our competition, including our larger competitors.
In our banking business, we face competition mainly from other local banks, such as Bermuda Commercial Bank and Clarien Bank in Bermuda and from Cayman
National Corporation in the Cayman Islands, as well as from subsidiaries of international banks, being Royal Bank of Canada in the Cayman Islands and HSBC in Bermuda,
whom we view 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 AUA.
In our trust business, we face competition primarily from other specialized trust service providers. Many of our competitors in the international financial sector offer fund
administration and corporate services work alongside private client fiduciary services.
Our ability to successfully attract and retain trust, wealth management and banking clients is dependent upon our ability to compete with competitors' investment
products, retail products and services, level of investment performance, client services and marketing and distribution capabilities. If we are not successful, our business,
financial condition or results of operations may be adversely affected.
The Bank's credit ratings have a direct effect on its competitive position, and declines in the Bank's ratings would increase the cost of borrowing funds and make
our ability to raise new funds, attract and retain deposits or renew maturing debt more difficult, which may negatively affect long-term and short-term funding.
The Bank's credit strength ratings are an important component of its liquidity profile and competitive position. Ratings show each agency's view of our financial strength,
operating performance and ability to meet debt obligations as they become due. Nationally recognized statistical rating organizations ("NRSROs") periodically review the
financial performance and condition of banks and may downgrade or change the outlook on a bank's ratings due to, for example: a change in a bank's regulatory capital ratios; a
change in an NRSRO's determination of the amount of capital cushion required to maintain a particular rating; an increase in the perceived risk of a bank's investment portfolio;
reduced confidence in management; or other considerations that may or may not be under our control. The Bank has credit ratings from Standard & Poor's ("S&P"), Moody's
Investor Service ("Moody's") and Kroll Bond Rating Agency ("KBRA"). Each of the rating agencies reviews its ratings and rating methodologies on a recurring basis and may
decide on a downgrade at any time. The Bank's ratings as at December 31, 2020 are shown in the table below:
Long-term issuer
Short-term issuer
Subordinated debt
Long-term counterparty risk assessment
Short-term counterparty risk assessment
KBRA
A+
K1
S&P
BBB+
A-2
Ratings
Moody's
A3
P-2
A3
A2
P-1
A downgrade in our credit ratings could adversely affect clients' perception of us and our ability to compete successfully in the marketplace for deposits (or result in the
withdrawal of deposits). A downgrade in our short-term debt ratings will affect our short-term funding capabilities. As a result, the impact of a one-notch downgrade in credit
ratings is currently not likely to have a direct impact on funding programs, activities, borrowing capacity or borrowing costs. In addition, there has been no measurable correlation
or effect on deposit levels during previous downgrades and, as a result, historically, no material impacts on the Bank's operations or results.
Negative changes in the Bank's long-term deposit ratings would also likely increase the cost of raising long-term funding in the capital markets or of borrowing funds.
Even where we can access the capital markets, negative changes in our ratings could affect our share price and make any equity offerings more difficult and dilutive to current
shareholders, further driving down the Bank's share price. Our ability to replace maturing or existing debt may be more difficult and expensive. In addition, our lenders and
counterparties in derivative transactions are sensitive to the risk of a ratings downgrade. However, we may issue additional debt securities in the future which may increase the
impact of a one-notch downgrade in credit ratings.
Management cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies that could adversely
affect our business. As with other companies in the financial services industry, our ratings could be downgraded at any time and without any notice by any NRSRO, which could
adversely affect our business, financial conditions or results of operations.
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 ability to implement our strategic plan and our future success depends on our ability to continue to attract, retain and motivate highly skilled and qualified personnel,
including our senior management and other key employees and directors, competitively with our peers. The marketplace for skilled personnel is becoming more competitive,
which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. The failure to attract or retain, including as a result of an untimely death or
illness of key personnel, or replace a sufficient number of appropriately skilled and key personnel could place us at a significant competitive disadvantage and prevent us from
successfully implementing our strategy or effectively managing our risk framework and business operations. This could impair our ability to implement our strategic plan
successfully, achieve our performance targets and otherwise have an adverse effect on our business, financial condition or results of operations.
We may also be unable to attract and retain staff due to our locations. Many of our employees are employed in Bermuda, the Cayman Islands, and the Channel Islands,
which are small markets. To the extent we have needs for employees in these locations, this may be an impediment to attracting and retaining experienced personnel. Further,
immigration laws in small markets may impose limitations on attracting experienced personnel.
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In addition, governmental scrutiny with respect to matters relating to compensation and other business practices in the financial services industry has increased
dramatically in the past several years and has resulted in more aggressive and intense regulatory supervision in certain markets in which we operate. Future legislation or
regulation or government views on compensation may result in us altering compensation practices in ways that could adversely affect our ability to attract and retain talented
employees.
We rely on third parties to provide services that are integral to our ordinary operations, and their failure to perform in a satisfactory manner could negatively
affect us.
We rely on third parties to provide services that are integral to our ordinary course operations, including providers of information technology, administrative or
investment advisory services. For example, we have a contract with Alumina Investment Management LLC ("Alumina") pursuant to which it provides investment advisory
services to us and a contract with DXC Technologies ("DXC") to supply technology infrastructure and application development management, information security and technical
support for our locations in Bermuda and the Cayman Islands. A material breach of customer data, including by DXC, may negatively impact our business reputation and cause
a loss of customer business; may result in increased expense to contain the event and/or require that we provide credit monitoring services for affected customers; may result in
regulatory fines and sanctions; and/or may result in litigation. We rely on our outsourced service providers to implement and maintain prudent cyber-security controls. We have
procedures in place to assess a vendor's cyber security controls prior to establishing a contractual relationship and to periodically review assessments of those control systems;
however, these procedures are not infallible and a vendor's system can be breached despite the procedures we employ. In addition, outsourcing is subject to regulatory controls
in certain jurisdictions in which we operate and we may not always be able to obtain approval to outsourcing on terms available or sought by us, which could adversely affect our
ability to enter into outsourcing arrangements.
In addition, BNYM and Wells Fargo act as clearing houses for all our US Dollar transactions and, if our relationships with BNYM and Wells Fargo are terminated, we
could lose our ability to engage in US Dollar transactions. For more information see " - We could be negatively affected if the soundness of other financial institutions and
counterparties deteriorates or if such counterparties, including clearing houses, are unwilling to do business with us, in particular in respect of US Dollar transactions."
Information provided to us about clients and counterparties may not be accurate or complete.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we rely on information furnished by or on behalf of clients and
counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and
completeness of that information and, with respect to financial statements, on reports of independent auditors. Such information could turn out to be inaccurate, including as a
result of fraud or misrepresentation on behalf of our clients, counterparties or other third parties, which would increase our credit risk and expose us to possible write-downs and
losses.
We cannot be certain that our underwriting and operational controls will prevent or detect such fraud or that we will not experience fraud losses or incur costs or other
losses related to such fraud. Our clients and counterparties may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make
use of our services.
During the periods reported in this annual report, we have not experienced any material losses, or had to write down collateral, as a result of fraud or misrepresentation,
but we cannot be certain that the Bank will not experience any such losses or have to write down any such collateral in the future, which could have a material adverse impact on
our results of operation and financial condition.
Our business is subject to risks related to litigation and regulatory actions.
We are, from time to time, involved in various legal and regulatory proceedings arising from our normal business activities. These claims and legal actions, including
supervisory actions by our regulators or proceedings or investigations brought by other regulators, could involve large monetary claims and significant defense costs. The
outcome of these cases is uncertain. Substantial legal liability or significant regulatory action against us could have material financial effects or cause significant reputational
harm to us, which in turn could seriously harm our business, financial condition, results of operations and prospects. We may be exposed to substantial uninsured liabilities,
which could materially affect our results of operations and financial condition.
As previously publicly announced, in November 2013, the 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. Although the Bank has been cooperating with the US authorities in their ongoing investigation, we are unable at
this point to predict the timing or outcome of the investigation and it is possible that the ultimate resolution of this matter may be material to our financial results. Although we are
unable to determine the precise amount of financial consequences, fines and/or penalties resulting from this tax compliance review, we have recorded as at December 31, 2020,
a provision of $5.5 million (December 31, 2019: $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 appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property may not accurately describe the net value of the
collateral that we can realize.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the
value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened
economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the
full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the
value of our OREO and to determine certain loan impairments. If any of these valuations is inaccurate, our consolidated financial statements may not reflect the correct value of
our OREO, and our allowance for credit losses may not reflect accurate loan impairments. This could have an adverse effect on our business, financial condition or results of
operations.
Risks Relating to Risk Oversight and Internal Controls
Our risk management framework, systems and process, and related guidelines and policies, may prove inadequate to manage our risks, and any failure to properly
assess or manage such risks could harm us.
Our approach to risk management requires senior management to make complex judgments, including decisions (based on assumptions about economic factors)
about the level and types of risk that we are willing to accept in order to achieve our business objectives. These also include the maximum level of risks we can assume before
breaching constraints determined by regulatory capital and liquidity needs and our regulatory and legal obligations including, among others, from a conduct and prudential
17
perspective. Given these complexities, and the dynamic environment in which we operate, the decisions made by senior management may not be appropriate or yield the results
expected. In addition, senior management may be unable to recognize emerging risks quickly enough for us to take appropriate action in a timely manner.
Our controls and procedures may fail or be circumvented, which could have an adverse impact on our business, financial condition or results of operations.
We face the risk that the design of our controls and procedures that govern operations, financial reporting and compliance across jurisdictions, including those to
mitigate the risk of human error, fraud or breach of fiduciary duties relating to our trust services by employees or outsiders, or to monitor financial reporting, may be inadequate,
circumvented or exposed to variations in compliance at the local level, thereby causing inaccuracies in data and information or delays in the detection of errors. At present, we do
not have a uniform core banking platform in place across the jurisdictions in which we operate and, therefore, we need to use manual processes to compile certain financial
information from certain subsidiaries. Moreover, in the past, our information technology capabilities in Bermuda and other jurisdictions have experienced difficulties with certain
identified weaknesses, including internal control deficiencies in our operations (including interest rate calculation functions). To address this, we used manual processing, data
spreadsheets or a combination thereof. Use of such manual procedures and data spreadsheets presents financial reporting and operational risks and increases the importance
of staff compliance with internal operating and security procedures. In addition, we may incur operational losses due to non-compliance by our staff with internal operating and
control procedures and arising from human error. Any failure or circumvention of our controls and procedures or failure to comply with any current or future regulations related to
controls and procedures could have an adverse effect on our business, financial condition or results of operations.
Our operations are reliant on effective implementation and use of technology and require us to adapt to new technologies, and a breach, interruption or failure of
our technology services or the inability to effectively integrate new technologies could have an adverse effect on our business, financial condition or results of
operations.
We rely heavily on communications and information systems to conduct business. In particular, we rely on technology to provide key components of our information
system infrastructure, including loan, deposit and general ledger processing, risk management information collection and processing for internal control purposes, internet
connections and network access. Any disruption in service of these key components, due to system errors, a natural catastrophe, or the termination of any third-party software
licenses upon which any of these systems is based, could adversely affect our ability to effectively deliver products and services to clients, to detect, assess and manage risk
and otherwise to conduct operations. See "- We rely on third parties to provide services that are integral to our ordinary operations, and their failure to perform in a satisfactory
manner could negatively affect us.” Furthermore, any security breach, due to computer viruses, programming, malfeasance or human errors or other events or developments, of
information systems or data, whether managed by us or third parties, could interrupt our business, harm our reputation or cause a decrease in the number of clients using our
services. The financial services industry is continually undergoing rapid technological change with frequent introductions of new, and technology-driven products and services.
We face the risk of having to establish and maintain further improved technological capabilities, and our future success depends, in part, on our ability to recognize and
implement new technologies to address our operational and internal control needs, operational efficiencies and to meet the demands of our clients. See "- 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.”
The widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing
products and services as we continue to grow our internet and mobile banking capabilities. The persistence or acceleration of this shift in demand towards internet and mobile
banking may necessitate changes to our retail distribution strategy, which may include restructuring our branches and work force. These actions could lead to losses on these
assets and may lead to increased expenditures to reform our retail distribution channel.
Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new,
technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological changes
and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may
cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors
and delays could have an adverse effect on our business, financial condition, results of operations, or competitive position.
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 are under continuous threat of loss due to cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels
to transact business. Third parties with whom we or our customers do business also present operational and information security risks to us, including security breaches or
failures of their own systems. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Such attacks are infrequent, but could
present significant reputational, legal and regulatory costs to us if successful.
We also face risks related to cyber-attacks and other security breaches in connection with credit card transactions that typically involve the transmission of sensitive
information regarding our customers through various third parties, including merchant acquiring banks, payment processors, payment card networks (e.g., Visa or Mastercard),
our processors, and BNYM and Wells Fargo as clearing banks. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the
transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these
third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them, including from
remediation costs, increased future protection costs, reputational harm, loss of customers and potential regulatory inquiries and/or civil litigation. We also rely on numerous other
third-party service providers to conduct other aspects of our business operations and face similar risks relating to them.
In addition, in April 2016, the Society for Worldwide Interbank Financial Telecommunication ("SWIFT") announced that one of its member banks was a target of a cyber-
attack in February 2016. During 2017 and 2018, there were several instances of cyber-attacks involving access to the SWIFT platform. The SWIFT platform is used by more than
10,000 financial institutions around the world, including us, to effect fund transfers. A cyber-attack on the SWIFT network can result in theft of funds and other adverse
consequences, and our business, financial condition or results of operations may be adversely affected in the event that such a cyber-attack is successful.
As a result of the COVID-19 pandemic, many of our employees (and staff of service providers) have been working remotely or from other sites. These working
arrangements could potentially provide increased opportunities for cyber threat actors to exploit.
Regulatory and Tax-Related Risks
We operate in a complex and changing regulatory environment and legal and regulatory changes or our failure to comply with laws and regulations could have a
negative impact on our business, financial condition or results of operations.
Our business is subject to ongoing changes in laws, regulations, policies, voluntary codes of practice and interpretations in the markets in which we operate. We
currently face an increasingly extensive and complex set of laws, regulations and standards as a result of the concerns enveloping the global financial sector. We are exposed to
potential changes in governmental or regulatory policies, price controls, capital controls, exchange controls, other restrictive actions, unfavorable political and diplomatic
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developments, and changes in legislation.
Some areas of potential regulatory change involve multiple jurisdictions seeking to adopt a coordinated approach. This may result in conflicts with specific
requirements of the jurisdictions in which we operate and, in addition, such changes may be inconsistently introduced across jurisdictions. See "- Our international business
model exposes us to various and possibly conflicting regulatory regimes across multiple jurisdictions."
Changes may also occur in the oversight approach of regulators. It is possible that governments in jurisdictions in which we operate or obtain funding might revise their
application of existing regulatory policies that apply to, or impact, the Bank's business, including for reasons relating to national interest and/or systemic stability. The powers
exercisable by our regulators may also be expanded in the future.
Regulatory changes and the timing of their introduction continue to evolve and we manage our businesses in the context of regulatory uncertainty. The nature and
impact of future changes are not predictable and are beyond our control. Regulatory compliance and the management of regulatory change are an important part of our planning
processes. We expect that we will be required to continue to invest significantly in compliance and the management and implementation of regulatory change and, at the same
time, significant management attention and resources will be required to update existing, or implement new, processes to comply with new regulations.
Changes and restrictions imposed by our primary lead regulator, the BMA, and other regulators may also impact our operations by requiring us to have increased
levels of liquidity, and higher levels of, and better quality, capital and funding, as well as placing restrictions on the businesses we conduct (including limiting our ability to provide
products and services to certain customers), requiring us to amend our corporate structure or requiring us to alter our product or service offerings. If a regulatory change has any
such effect, it could adversely affect one or more of our businesses, restrict our flexibility, require us to incur substantial costs and impact the profitability of one or more of our
business lines. Any such costs or restrictions could adversely affect our business, prospects, financial performance or financial condition.
Our failure or inability to fully comply with the laws and regulations could lead to fines, public reprimands, reputational damage, civil liability, enforced suspension of
operations or, in extreme cases, withdrawal of authorization to operate, which could adversely affect our business, financial condition or results of operations. We could also be
required to incur significant expenses to comply with new or revised regulations. Future developments or changes in laws, regulations, policies, voluntary codes of practice and
their effects are expected to require greater capital resources and significant management attention, and may require us to modify our business strategies and plans.
The costs of complying with, or our failure to comply with, US and foreign laws related to privacy, data security and data protection, such as the EU General Data
Protection Regulation, could adversely affect our financial condition, operating results and reputation.
Regulatory authorities have increased their focus on how companies collect, process, use, store, share and transmit personal data. New privacy security laws and
regulations, including the UK's Data Protection Act 2018, the Data Protection (Jersey) Law 2018, the Data Protection (Bailiwick of Guernsey) Law, 2017, The Cayman Islands
Data Protection Law 2017 (which became effective on September 30, 2019), Bermuda’s Personal Information Protection Act 2016, and the EU General Data Protection
Regulation 2016, pose increasingly complex and rigorous compliance challenges, which may increase our compliance costs. Any failure to comply with data privacy laws and
regulations could result in significant penalties, fines, legal challenges and reputational harm. See Item 4.B. "Business Overview - Supervision and Regulation".
Failure to comply with any applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on our business, financial condition or
results of operations.
We must comply with all applicable laws and regulations, which include anti-corruption, anti-money laundering, international financial sanctions and anti-terrorist
financing laws and regulations. Recently, there has been a substantial increase in the global enforcement of these laws and regulations, in particular in respect of the financial
services industry. The measures and procedures we have in place may not be entirely effective in preventing third parties from using us (and our correspondent banks) as a
conduit for money laundering (including illegal cash operations), terrorist financing or other financial crimes without our (and our correspondent banks') knowledge or consent.
Although, as of the date of this report, we have not been subject to any fines or penalties, as a result of violations of anti-money laundering and counter-terrorism laws and
regulations, there can be no assurances that we will not be subject to such fines, penalties or losses or harm in the future. If we were to be associated with money laundering
(including illegal cash operations) or terrorist financing, our reputation could be harmed and we could become subject to fines, sanctions or legal enforcement (including being
added to any "blacklists" that would prohibit certain parties, potentially including US Dollar clearing banks, from engaging in transactions with us), which could have an adverse
effect on our business, financial condition or results of operations.
Our international business model exposes us to various and possibly conflicting regulatory regimes across multiple jurisdictions.
Our international business model exposes us to different regulatory schemes across multiple jurisdictions. Although our central management and a large part of our
business are located in Bermuda, our operations are spread throughout ten international jurisdictions. In addition to the logistical and communications challenges this creates,
the financial services industry is heavily regulated in many jurisdictions, and each line of the business is exposed to different, constantly evolving and possibly conflicting
regulatory schemes. Our management has enacted internal controls and procedures that are designed to result in compliance with these regulatory schemes, which are
periodically reviewed and updated, but in the future we might have difficulty meeting and remaining in compliance with existing or new regulatory requirements imposed by a
particular jurisdiction, particularly in light of the increasing regulatory scrutiny of financial institutions and their subsidiaries. Our current internal controls for one jurisdiction may
not sufficiently comply with the demands of increased oversight in another jurisdiction.
To the extent we are unable to comply with the regulatory scheme of a particular jurisdiction, we might not be able to operate in that jurisdiction, or we may incur fines
or penalties for compliance failures or incur costs in order to remediate compliance failures, any or all of which could adversely affect our business, financial condition or results
of operations.
The Financial Action Task Force (“FATF”) may identify any of the jurisdictions in which we operate as a jurisdiction which has systemic anti-money laundering and/
or anti-terrorist financing deficiencies, which could have an adverse effect on our business.
The FATF is an international body that identifies jurisdictions with weak measures to combat money laundering and terrorist financing in public documents published
three times a year. FATF and its regional bodies work with such jurisdictions, governments, and regulatory bodies and report on progress made in addressing identified
deficiencies. Such reviews are at a country level, rather than an entity-specific level. Thus, while the Bank can have in place globally accepted standards to fight money
laundering and terrorist financing, the existing regulations in any of the jurisdictions in which we operate may not meet FATF requirements. Failure to comply with FATF
standards by any jurisdictions in which we operate could adversely affect our reputation and our ability to obtain financing from the international markets and attract foreign
investments.
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Our business may be negatively impacted by the economic substance legislation and regulations in the jurisdictions in which we operate, including Bermuda, the
Cayman Islands, and the Channel Islands.
In 2018, all major offshore jurisdictions enacted legislation in response to new requirements imposed by the EU’s Economic and Financial Affairs Council (“ECOFIN”)
regarding the need for entities registered in offshore jurisdictions to demonstrate economic substance. Compliance with these requirements is necessary to avoid a jurisdiction
being placed on the EU’s list of non-cooperative jurisdictions for tax purposes. Many of the jurisdictions in which we operate, including Bermuda, the Cayman Islands, The
Bahamas, Guernsey and Jersey have enacted legislation that will require entities registered, incorporated or continued under certain legislation in the respective jurisdictions
engaged in “relevant activities” (which includes engaging in banking or financing activities) to satisfy economic substance requirements by maintaining a substantial economic
presence in the respective jurisdiction. For example, in December 2018, Bermuda passed The Economic Substance Act 2018, the Cayman Islands passed International Tax Co-
operation (Economic Substance) Law, Guernsey passed the Income Tax (Substance Requirements) (Implementation) Regulations, 2018 and Jersey passed the Taxation
(Companies - Economic Substance) (Jersey) Law 2019. Any entity that must satisfy economic substance requirements but fails to do so could face financial penalties, a
restriction of its business activities or being struck-off as a registered entity in the relevant jurisdiction.
From February to October 2020, the Cayman Islands were on the EU’s list of non-cooperative jurisdictions for tax purposes. ECOFIN concluded that the Cayman
Islands did not have appropriate measures in place relating to collective investment vehicles, and in response the Cayman Islands adopted reforms sufficient to address this
deficiency. Bermuda was similarly placed on the EU’s list of non-cooperative tax jurisdictions in March 2019, but removed from this list in May 2019 and added, along with The
Bahamas, to the EU's list of cooperative tax jurisdictions in February 2020. EU Finance Ministers signaled their approval of the economic substance regulations by placing
Jersey and Guernsey on the EU's list of cooperative tax jurisdictions in March 2019, and the Organisation for Economic Co-operation and Development has endorsed Jersey
and Guernsey’s domestic legal framework as being in line with the relevant standard. As the EU continues to monitor compliance by the jurisdictions in which we operate, further
economic substance requirements imposed by these jurisdictions or a future addition of these jurisdictions to the EU's list of non-cooperative tax jurisdictions could have a
material adverse effect on us.
There is significant uncertainty with respect to the impact of these new economic substance requirements, and any past or future addition to the EU's list of non-
cooperative tax jurisdictions on the economies of the jurisdictions in which we operate that have enacted economic substance legislation. In particular, our existing customers
may be out of scope of economic substance requirements, may already be compliant with the economic substance requirements, or may be required to restructure their
business and operations to comply with economic substance requirements, which may include exiting jurisdictions and terminating their banking relationship with us. The new
economic substance requirements and any addition of a jurisdiction to the EU's list of non-cooperative tax jurisdictions may lead to a decline in AUM, a reduction in our client
base and/or a general economic downturn in the jurisdictions in which we operate, any or all of which could adversely affect our business, financial condition or results of
operations.
We are also required to evidence our compliance (and the compliance of each of our subsidiaries located in Bermuda, the Cayman Islands, The Bahamas and the
Channel Islands) with applicable economic substance requirements. Ensuring and reporting on our compliance with new economic substance requirements may require us to
devote additional resources or divert resources from other aspects of our business, and/or restructure certain of our operations, all of which may lead to greater expense and
could adversely affect our business, financial condition or results of operations.
Our business in Bermuda may be negatively impacted by the proposed Bermuda Tax Reform legislation.
On January 14, 2021, the Bermuda government announced that a new Tax Reform Commission (the “2021 Tax Commission”) would be established in 2021 with the
view to completing a wholesale review of Bermuda’s tax system by the end of 2021. The 2021 Tax Commission replaces the Tax Reform Commission that was established in
2017 and subsequently disbanded at the end of 2018. Any additional taxes that are identified by the 2021 Tax Commission and subsequently enacted by the government could
potentially result in i) an increase in costs associated with our business and operations in Bermuda; ii) a decrease in demand for our banking services in Bermuda; and iii) a
negative impact on our results of operations.
We are required to obtain approval from our regulators before engaging in certain activities.
The laws, regulations, policies, voluntary codes of practice and interpretations applicable to us govern a variety of matters, including acquisitions and other activities we
may engage in. As our primary lead regulator, the BMA requires that we obtain its prior consent, letter of no objection and/or approval before engaging in certain activities,
including paying dividends on our common shares, entering into material acquisitions or issuing or repurchasing our common shares, and there can be no assurance that any
regulatory approvals we may require will be obtained, either in a timely manner or at all. See "- Our strategy includes expansion of our business through acquisitions of, or
investments in, other companies or new products and services, but we may not be able to achieve regulatory approval for such transactions or be able to achieve the anticipated
cost savings, growth opportunities and other benefits anticipated from such transactions." Our regulators have the ability to compel us to, or restrict us from, taking certain
actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Any restrictions on our business placed by a regulator could have
a negative impact on our ability to execute on our growth strategy. See “"- Laws in certain jurisdictions in which we operate and our bye-laws could adversely affect the rights of
our shareholders or prevent or delay a change in control.”
Our ability to pay dividends to non-residents of Bermuda and the transfer of our common shares to non-residents of Bermuda could be impaired by Bermuda
regulations.
A large number of our shareholders are resident outside of Bermuda, and our common shares are listed on the BSX and the NYSE. Bermuda regulations impacting
non-Bermuda holders of our common shares are set by the Bermuda’s Controller of Foreign Exchange, whose current policy:
• permits the conversion of Bermuda Dollars for payment of dividends in foreign currency to shareholders who are non-residents of Bermuda for exchange control
purposes, provided that all payments are processed through an authorized dealer, including, for this purpose, us; and
• permits the free transferability of equity securities of a Bermuda company for so long as such equity securities of such company are listed on an ‘‘appointed stock
exchange’’ appointed by the Minister of Finance under section 2(9) of the Companies Act 1981.
However, if the Controller of Foreign Exchange were to change the foregoing policies, our ability to pay dividends in US Dollars to non-residents of Bermuda for
exchange control purposes could be impaired. Furthermore each transfer of our common shares to or from non-residents of Bermuda for exchange control purposes could
require specific approval by the Controller of Foreign Exchange. This could impact the liquidity of the market for our common shares, and the value of the common shares could
be adversely affected.
20
If we are considered to be a passive foreign investment company, such characterization could result in adverse US federal income tax consequences to
shareholders that are US investors.
Special adverse US federal income tax rules apply if a US shareholder holds shares of a company that is treated as a passive foreign investment company ("PFIC"),
for any taxable year during which the US shareholder held such shares. A foreign corporation will be considered a PFIC for any taxable year in which (1) 75% or more of its
gross income is passive income, or (2) 50% or more of the average fair market value of its assets is attributable to assets that produce or are held for the production of passive
income (the "asset test"). Passive income for this purpose generally includes dividends, interest, royalties, rents, annuities and gains from assets that produce passive income. If
a foreign corporation owns at least 25% (by value) of the stock of another corporation, the foreign corporation is treated, for purposes of the PFIC tests, as owning a
proportionate share of the other corporation's assets and receiving its proportionate share of the other corporation's income.
Banks generally derive a substantial part of their income from assets that are interest-bearing or that otherwise could be considered passive under the PFIC rules. The
US Internal Revenue Service (the "IRS"), has issued a notice, and has proposed regulations, that exclude from passive income any income derived in the active conduct of a
banking business by a qualifying foreign bank.
Based upon the proportion of our income derived from activities that are "bona fide" banking activities for US federal income tax purposes, we believe that we were not
a PFIC for the taxable year ended December 31, 2020 (the latest period for which the determination can be made) and, based further on our present regulatory status under local
laws, the present nature of our activities, and the present composition of our assets and sources of income, we do not expect to be a PFIC for the current year or for any future
years. However, because PFIC status is a factual determination and because there are uncertainties in the application of the relevant rules, there can be no assurances that we
will not be a PFIC for any particular year. If we were a PFIC in any taxable year during which a US shareholder owns our common shares and the US shareholder does not make
a "mark-to-market" election, as discussed under the heading "Certain Taxation Considerations - Material US Federal Income Tax Consequences - US shareholders - Passive
Foreign Investment Company Considerations," or a special "purging election," we generally would continue to be treated as a PFIC with respect to such US shareholders in all
succeeding years, regardless of whether we continue to meet the income or asset test discussed above. US shareholders are urged to consult their own tax advisers with
respect to the tax consequences to them if we were to become a PFIC for any taxable year in which they own our common shares.
US withholding tax and information reporting requirements imposed under the Foreign Account Tax Compliance Act may apply.
As discussed below under the heading "Certain Taxation Considerations - Material US Federal Income Tax Consequences - Foreign Account Tax Compliance Act
Withholding," pursuant to the Foreign Account Tax Compliance Act ("FATCA") enacted in 2010, a 30% withholding tax will be imposed on certain payments to certain non-US
financial institutions that fail to comply with certain information-reporting, account identification, withholding, certification and other FATCA-related requirements in respect of their
direct and indirect US shareholders and/or US account holders. To avoid becoming subject to FATCA withholding, we and other financial institutions may be required to report
information to the IRS regarding the holders of our common shares and to withhold on a portion of payments under our common shares to certain holders that fail to comply with
the relevant information reporting requirements (or that hold our common shares directly or indirectly through certain non-compliant intermediaries). However, under proposed
Treasury regulations, such withholding will not apply to payments made before the date that is two years after the date on which final regulations defining the term “foreign
passthru payment” are enacted. The rules for the implementation of this legislation have not yet been fully finalized, so it is impossible to determine at this time what impact, if
any, this legislation will have on holders of the common shares.
Many countries, including Bermuda, have entered into agreements with the United States ("intergovernmental agreements" or "IGAs") to facilitate the implementation
of FATCA. These IGAs modify the FATCA withholding regime described above. In December 2013, Bermuda entered into a Model 2 IGA with the United States pursuant to
which Bermudian financial institutions are directed by the Bermudian authorities to register with the IRS and to enter into an agreement with the IRS to perform specified due
diligence, reporting and withholding functions.
Risks Relating to the Common Shares
Purchases of our common shares under our share repurchase program may result in the price of our common shares being higher than the price that otherwise
might have existed in the open market.
On February 10, 2021, the Board of Directors approved a new share repurchase program. Pursuant to the program, the Bank is authorized to repurchase up to 2.0
million common shares of the Bank through February 28, 2022. This was executed following the completion of the previous share repurchase program of 3.5 million common
shares approved by our Board of Directors on December 2, 2019 with effect from December 2, 2019 to February 28, 2021. The timing, manner, price and amount of any
repurchases will be determined by the Company, in its discretion, based upon the evaluation of economic and market conditions, stock price, available cash, applicable legal and
regulatory requirements and other factors, and which may include purchases pursuant to Rule 10b5-1 of the Exchange Act. The program does not require the Company to
repurchase any specific number of shares and there can be no assurance that any shares will be repurchased under the program. The program may be suspended, extended,
modified or discontinued by the Company at any time. These activities may have had the effect of maintaining the market price of our common shares or retarding a decline in
the market price of the common shares, and, as a result, the price of our common shares may have been higher than the price that otherwise might have existed in the open
market.
We are a "foreign private issuer" under US securities law. Therefore, we are exempt from certain requirements applicable to US domestic registrants.
Although we are subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of foreign private issuers, including us, under the
Exchange Act is different from periodic disclosure required of US domestic registrants. Therefore, there may be less publicly available information about us than is regularly
published by or about US domestic registrants. We are exempt from certain other sections of the Exchange Act to which US domestic registrants are subject, including the
requirement to provide our shareholders with information statements or proxy statements that comply with the Exchange Act. In addition, our insiders and large shareholders are
not obligated to file reports under Section 16 of the Exchange Act. See ‘‘Implications of Being a Foreign Private Issuer.”
As a foreign private issuer, we are also permitted by the NYSE to comply with Bermuda corporate governance practice in lieu of complying with certain NYSE
corporate governance requirements. This means that we are not required to comply with NYSE requirements that:
the board of directors consists of a majority of independent directors;
independent directors meet in regularly scheduled executive sessions;
the audit committee satisfy NYSE standards for director independence;
the audit committee has a written charter addressing the committee's purpose and responsibilities;
•
•
•
•
• we have a nominating and corporate governance committee composed of independent directors with a written charter addressing the committee's purpose and
responsibilities;
• we have a compensation committee composed of independent directors with a written charter addressing the committee's purpose and responsibilities;
• we establish corporate governance guidelines and a code of business conduct;
21
• our shareholders approve any equity compensation plans; and
•
there be an annual performance evaluation of the nominating and corporate governance and compensation committees.
With the exception of having shareholders approve equity compensation plans, we have elected to comply with the NYSE requirements listed above, notwithstanding
the exemptions available to us as a foreign private issuer. However, as ongoing compliance is not required by the NYSE, our shareholders may not have the same protections
afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
We are a Bermuda company. Bermuda law differs from the laws in effect in the United States and might afford less protection to shareholders.
We are a Bermuda-based company incorporated under the laws of Bermuda. As a result, the rights of holders of our common shares will be governed by Bermuda
law, including the Companies Act, the Butterfield Act and our bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies
incorporated in other jurisdictions. In particular, under Bermuda law, the duties of directors and officers of a company are generally owed to the company only, and shareholders
do not generally have rights to take action against directors or officers of the company. In addition, class actions and derivative actions are generally not available to
shareholders under Bermuda law. The status of laws currently in place, and areas not currently governed, are subject to change. The interests of our shareholders could be
adversely affected if significant regulations are added or deleted from Bermuda’s existing statutory framework. For a summary of the existing legal framework in Bermuda, see
Item 4.B. “Business Overview - Supervision and Regulation.”
In addition, our business is based outside of the United States, a majority of our directors and officers reside outside of the United States and a majority of our assets
and some or all of the assets of such persons are located outside of the United States. As a result, it may be difficult or impossible to effect service of process on us or our
directors and officers in the United States or to enforce in the United States judgments obtained in the United States courts against us or those persons based on the civil liability
provisions of the United States securities laws. Furthermore, it is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United
States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the
securities laws of other jurisdictions.
There are provisions in our bye-laws that may be used to delay or block a takeover attempt, which could discourage, delay or prevent a change in control of the Bank
and could adversely impact the value of our common shares. For a detailed summary of the anti-takeover provisions in our bye-laws, see "Description of Share Capital" in our
registration statement on Form F-1 filed with the SEC on February 13, 2017 with file number 333-216018.
Laws in certain jurisdictions in which we operate and our bye-laws could adversely affect the rights of our shareholders or prevent or delay a change in control.
Under the provisions of Bermuda's Banks and Deposit Companies Act 1999 ("BDCA"), the rights of our shareholders could be impaired if any such shareholder
becomes a shareholder controller. If a shareholder controller fails to comply with the notice requirements in connection with a change in control under the BDCA or continues as
such after being given notice of objection to its being a shareholder controller, the BMA may take the actions specified in the BDCA, including, among other things, revoking the
relevant license of the Bank under the BDCA. For more information, see the summaries of relevant provisions of the BDCA regulations under Item 4.B. "Business Overview -
Supervision and Regulation” and "Description of Share Capital" in our registration statement on Form F-1 filed with the SEC on February 13, 2017 with file number 333-216018.
Similarly, in Guernsey certain changes to the ownership structure of our Guernsey company (which is licensed by the Guernsey Financial Services Commission) may
be considered to be a change of control requiring a declaration of "no objection" from the regulator, and in Jersey a change to the ownership or control of the Jersey regulated
entity may also require regulatory approval.
In addition to these restrictions, the provisions of our bye-laws provide that a person who is not "Bermudian" (as such term is defined in the Companies Act) who is
"interested" (as such term is defined in the bye-laws) in our shares which constitute more than 40% of all shares then issued and outstanding is not entitled to vote the shares
which are in excess of such 40% interest at any general meeting without the prior written approval of the Minister of Finance. See also Item 4.B. "Business Overview -
Supervision and Regulation.”
Our common shares trade on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading
between such markets.
Our common shares have traded on the BSX since 1971 and began trading on the NYSE in September 2016. Trading in our common shares on these markets takes
place in different currencies (US Dollars on the NYSE and Bermuda Dollars on the BSX), and at different times (resulting from different time zones, different trading days and
different public holidays in the United States and Bermuda). The trading prices of our common shares on these two markets may differ due to these and other factors. Any
decrease in the price of our common shares on the BSX could cause a decrease in the trading price of our common shares on the NYSE, or vice versa. Investors could seek to
sell or buy our common shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create
unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange.
General Risk Factors
We may be alleged to have infringed upon intellectual property rights owned by others or may be unable to protect our own intellectual property.
Competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights.
Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time
consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have
agreed to indemnify us for such costs, such indemnifying party may refuse, or be unable, to uphold its contractual obligations.
Moreover, we rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, and controls on access and
distribution. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive
advantage. In any event, we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is
expensive and could cause a diversion of resources and may not be successful.
Our insurance coverage may not be adequate to cover all possible losses that we could suffer, and our insurance costs could increase in the future.
Our insurance policies do not cover all types of potential losses and liabilities and are subject to limits and excesses. There can be no assurance that our insurance will
be sufficient to cover the full extent of all losses or liabilities for which we are ultimately responsible, which could result in losses being incurred by the Bank. Additionally, we
cannot guarantee that we will be able to renew our current insurance policies on favorable terms, or at all.
22
Changes in accounting policies and practices may be adopted by applicable regulatory agencies or other authoritative bodies, which could materially impact our
financial statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, applicable
regulatory agencies and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These
changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
The value of the common shares may fluctuate significantly.
The value of our common shares may fluctuate significantly as a result of a large number of factors, including, in part, changes in our actual or forecasted operating
results and the inability to fulfill the profit expectations of securities analysts, as well as the high volatility in the securities markets generally, and more particularly in shares of
financial institutions. The current market price of our common shares may not be indicative of future market prices.
Other factors, besides our financial results, that may impact the price of our common shares include, but are not limited to:
investor perception of the success and impact of our strategies;
investor perception of our positions and risks, including risks associated with economic uncertainty in key markets in which we operate;
• market expectations of the performance and capital adequacy of financial institutions in general;
•
•
• a downgrade or review of our credit ratings;
• potential litigation or regulatory action involving us;
• announcements concerning financial problems or any investigations into the accounting practices of other financial institutions; and
• general market circumstances.
Holders of our common shares may not receive dividends.
The dividend policy described under Item 8.A. "Consolidated Statements and Other Financial Information - Dividend Policy" should not be construed as a dividend
forecast. Our results of operations and financial condition are dependent on our performance. There can be no assurance that we will declare and pay dividends in the future.
Any decision to declare and pay dividends in the future will be subject to the prior approval of the BMA and be made at the discretion of the Board. Such dividends shall be
declared and paid by the Board only as permitted under applicable law. In determining the amount of any future dividends, factors the Board may take into account include: (1)
our financial results; (2) our available cash, as well as anticipated cash requirements (including debt servicing); (3) our capital requirements, including the capital requirements of
our subsidiaries; (4) our capital requirements to fund potential acquisitions; (5) contractual, legal, tax and regulatory restrictions on, and implications of, the declaration and
payment of dividends by us to our shareholders or share buy-back activity; (6) general economic and business conditions; (7) restrictions applicable to the Bank and its
subsidiaries under Bermuda and other applicable laws, regulations and policies, including the requirement to obtain a letter of no objection from the BMA for the payment of
dividends on our common shares; and (8) any other factors that the Board may deem relevant. Therefore, there can be no assurance that we will declare or pay any dividends to
holders of the common shares, or as to the amount of any such dividends.
Our ability to declare and pay dividends may also depend on the level of distributions, if any, received from our operating subsidiaries. Our operating subsidiaries may
be precluded from declaring and paying dividends by various factors, such as their own financial condition, or restrictions applicable to us and our subsidiaries under Bermuda
and other applicable laws, regulations and policies. The ability of certain of our subsidiaries to upstream funds has been increasingly restricted due to changes in the business
and regulatory environments in the jurisdictions in which those subsidiaries operate. In addition, any change in tax treatment of dividends or interest received by us may reduce
the level of yield received by our shareholders.
The issuance of additional shares in connection with future acquisitions, any share incentive or share option plan or otherwise may dilute all other shareholdings.
We may seek to raise capital to fund future acquisitions and other growth opportunities. We may, for these and other purposes, such as in connection with share
incentive and share option plans, issue additional equity or convertible securities. Any issuance of additional shares, however, is subject to prior BMA approval, and we cannot
guarantee that their approval will be obtained, either in a timely manner or at all. In the event that we are able to and do issue additional shares, existing shareholders could
suffer dilution in their percentage ownership.
23
A.
History and Development of the Company
Corporate Information
ITEM 4. INFORMATION ON THE COMPANY
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, 28 Liberty Street, New York, New York
10005. 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.
The SEC maintains an internet site at https://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically
with the SEC.
Our History
The origin of The Bank of N.T. Butterfield & Son Limited dates back to the founding of the trading firm of Nathaniel Butterfield circa 1784. In 1858, our company was
established as a bank in Bermuda and has been instrumental to the functioning of 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 BSX ("Bermuda Stock Exchange") under the ticker symbol "NTB.BH". In 2016, we listed our common shares on the NYSE 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 as well as existing shareholders.
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 and have been able to initiate a progressive
capital return policy for investors. The following are the most recent key steps in executing our strategy:
•
•
•
•
•
In October 2017, we entered into an agreement to acquire Deutsche Bank AG’s ("Deutsche Bank's") Global Trust Solutions (“GTS”) business, excluding its US
operations, for net cash payments of $24.7 million. 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. As part of the
transaction, we also acquired a service company in Mauritius to provide operations and support services to our trust businesses. 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. The Bank began to onboard certain customer deposits relating to the acquisition in
2018, and this onboarding activity was completed in the first half of 2019.
In May 2018, we issued $75 million 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.
In July 2019, we completed the £160.7 million ($201.1 million) acquisition of ABN AMRO (Channel Islands) Limited ("ABN AMRO (Channel Islands)"), which
provides banking, investment management and custody products to three distinct client groups, including trusts, private clients, and funds.
In June 2020, we issued $100 million of 5.25% Fixed to Floating Rate Subordinated Notes due 2030 for general corporate purposes, including the repayment of a
portion of our previously outstanding debt.
24
B.
Business Overview
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, comprising of retail and corporate banking, treasury services, and wealth management, which
consists of investment management, advisory and brokerage services, trust, estate, and company management in both our Bermuda and Cayman Islands segments, as well as
custody services in our Bermuda segment. The Channel Islands and the UK segment include the jurisdictions of Guernsey and Jersey (Channel Islands), and the UK. In the
Channel Islands, a broad range of services are provided to private clients and financial intermediaries including private banking and treasury services, internet banking, wealth
management and fiduciary services. The UK jurisdiction provides mortgage services for high-value residential properties. 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, 2020, we generated $494.2 million in net revenue after provision for credit losses and other gains/losses ("net revenue"). Our total
net revenue, before inter-segment eliminations, by each of our three geographic segments and our non-reportable "Other" segment for the years ended December 31, 2020,
2019 and 2018 are as follows:
In millions of $
Net Revenue
Bermuda
Cayman Islands
Channel Islands and the UK
Other
For the year ended
2020
2019
2018
$
$
$
$
238.0
145.6
101.9
14.4
$
$
$
$
272.1
168.9
82.9
22.2
$
$
$
$
299.4
152.6
59.0
15.2
As at December 31, 2020, we had $14.7 billion in total assets, $5.2 billion in net loans, $13.3 billion in total deposits (55% USD deposits, 18% USD-pegged deposits),
$104.1 billion and $32.4 billion of trust and custody businesses assets under administration, respectively, and $5.6 billion of assets under management.
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 cards, merchant acquiring, mobile and internet 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, responds to 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.
Our private banking business line offers access to a suite of services, targeted toward high net worth and ultra-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 access to their account
information through the use of internet and mobile banking.
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 and ultra-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.
From 2016 to 2020, our GAAP net income to common shareholders and our core net income to common shareholders ("Core Net Income to Common")(1) had
compound annual growth rates ("CAGR") of 20% and 5%, respectively. 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)
Core Net Income to Common is a non-GAAP financial measure that is calculated by adjusting net income for income or expense items which management considers not
to be representative of the ongoing operations of our business and preference share dividends, guarantee fees and premiums paid on preference share buybacks and
redemptions. For a reconciliation of Core Net Income to Common to GAAP net income to common, see Item 3.A. "Selected Financial Data - Reconciliation of Non-GAAP
Financial Measures".
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Our Markets
The charts below provide the geographic distribution of our Net Revenue for the year ended December 31, 2020.
2020 Net Revenue: $494.2 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 high net worth and ultra-high net worth
individuals and families.
The international trust market is primarily concentrated in select jurisdictions, including Bermuda, the Cayman Islands, Guernsey, Jersey, Hong Kong, 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 and ultra-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 at December 31, 2020, 71% of our AUM was in Bermuda, 14% was
in the Cayman Islands, and 14% 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.
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Segment Distribution of Net RevenueBermuda 48%Cayman 29%Channel Islands and the UK 20%Other 3%
Our International Network and Group Structure
The following map presents the several geographic regions in which our business operates. Non-client facing support centers in Canada and Mauritius are not shown.
The following chart presents our corporate structure, indicating our principal regulated subsidiaries as at December 31, 2020. All of the subsidiaries listed below are
wholly owned by the Bank.
Bermuda
The Bank itself is licensed in Bermuda to provide banking services and wealth management services. Through Butterfield Asset Management Limited and Butterfield
Securities (Bermuda) Limited, it is licensed and provides investment services and, through Butterfield Trust (Bermuda) Limited and Bermuda Trust Company Limited, it is
licensed and provides corporate trustee, fiduciary and corporate administration services. Butterfield Securities (Bermuda) Limited also provides investment advisory and listing
sponsor services.
Bahamas
Butterfield Trust (Bahamas) Limited provides trust and fiduciary services.
Cayman Islands
Butterfield Bank (Cayman) Limited provides banking services and Butterfield Trust (Cayman) Limited provides trustee, fiduciary and corporate administration services.
Guernsey
Butterfield Bank (Guernsey) Limited provides private banking, intermediary banking and custody services. Butterfield Trust (Guernsey) Limited provides trustee and
fiduciary services.
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United Kingdom
Butterfield Mortgages Limited provides residential property lending services.
Switzerland
Butterfield Holdings (Switzerland) Limited provides investment services and Butterfield Trust (Switzerland) Limited provides trust and fiduciary services.
Jersey
Butterfield Bank (Jersey) Limited provides deposit-taking, investment business and custody services.
Singapore
Butterfield Trust (Asia) Limited provides trust and fiduciary 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, greater 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 industry currently consists of four licensed banks and one licensed deposit-taking institution. These include one large subsidiary of an
international bank, HSBC, and three domestic institutions: Butterfield, 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 three non-retail Class 'A' banks and 116 limited service Class 'B' banks
according to CIMA. In the Channel Islands, Guernsey has 20 licensed banks and Jersey has 24, the majority of which are top global banking groups and brands such as
Barclays, RBS, Lloyds, Credit Suisse, Investec, Royal Bank of Canada and Northern Trust. 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 Scotia and CIBC FirstCaribbean in
the Cayman Islands as our most significant competitors in those markets.
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 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 shares in Bermuda and the Cayman Islands1, but a relatively small market share in the Channel 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 at December 31, 2020, our Bermuda, Cayman Islands and Channel Islands and the UK segments
contributed $4.8 billion, $4.1 billion and $4.3 billion, respectively, to our total deposit base.
Total deposits as at December 31, 2020 were $13.3 billion, up 6.5% over total deposits as at December 31, 2019. Demand deposits, which include checking, savings
and call accounts, totaled $10.6 billion, or 79.9% of our total deposits, as at December 31, 2020, compared to $9.4 billion, or 75.5%, as at December 31, 2019. Term deposits
totaled $2.6 billion as at December 31, 2020. The cost of funds on total deposits decreased from 47 basis points in 2019 to 21 basis points in 2020. The increase in deposit
balances was driven by both corporate and retail depositors in Bermuda and the Cayman Islands, the latter driven by the retail loan deferral programs in these segments, and
offset by expected runoff in the Channel Islands as the deposit book was repriced. Cost of funds decreased primarily due to both lower term deposit volumes and costs and the
impact of the aforementioned active deposit repricing in the Channel Islands.
Lending
We offer a broad set of lending products and services 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 of 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 $5.2 billion as at December 31, 2020. The loan portfolio represented 35.0% of total assets as at December 31, 2020, and loans, net of allowance for credit
losses, as a percentage of total deposits were 38.9%. The effective yield on total loans for the year ended December 31, 2020 was 4.54%, compared to 5.36% for the year
ended December 31, 2019.
1 Based on interpretive data provided by the BMA and CIMA respectively.
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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 at December 31, 2020, residential
mortgages totaled $3.4 billion, accounting for approximately 65.5% of the Group's total gross loan portfolio and approximately 64.5% 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 at December 31, 2020, non-residential loans to consumers totaled $230.8 million, accounting for approximately
4.4% of the Group's total gross loan portfolio and approximately 1.6% 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, the Cayman Islands, Guernsey and the UK.
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 at December 31, 2020, our commercial real estate loan portfolio totaled $760.2 million, accounting for approximately 14.6% of the Group's total gross loan portfolio
and approximately 8.7% 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 at December 31, 2020, commercial mortgages
totaled $715.3 million, and construction loans totaled $44.8 million, accounting for approximately 94.1% and 5.9% of our commercial real estate loan portfolio, 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 at December 31, 2020, the
Group's commercial loan portfolio, excluding loans to governments, totaled $520.2 million, accounting for approximately 10.0% of the Group's total gross loan portfolio and the
Group's loans to governments totaled $279.4 million, accounting for approximately 5.4% of our loan portfolio. As at December 31, 2020, other commercial loans accounted for
approximately 25.1% of our total non-accrual loans.
Investments
Given the large customer deposit base commanded in our Bermuda, Cayman Islands and Channel 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 comprises mainly
securities issued or guaranteed by the US government or federal agencies. The securities in which we invest are limited generally 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 April 1, 2013, we entered into an agreement with Alumina pursuant to
which Alumina provides investment advisory services to us in respect of our US Treasury and agency portfolio.
As at December 31, 2020, the Group held $4.9 billion in investments, representing approximately 33.0% of total assets.
Cash and Liquidity Management
We operate across multiple currency jurisdictions with multi-currency products. In our deposit taking jurisdictions—Bermuda, the Cayman Islands, Guernsey and Jersey
—there are currently no dedicated central banks, and no pre-funded deposit insurance scheme infrastructures (such as the Federal Deposit Insurance Corporation in the United
States), with the exception of Bermuda, where a pre-funded deposit insurance scheme has been implemented, and as described below in “- Supervision and Regulation” and
“Risk Factors - Risks Relating to the Markets in Which We Operate - Certain jurisdictions in which we operate, including Bermuda, Guernsey and Jersey, have a Deposit
Insurance Scheme or Deposit Compensation Scheme and we incur ongoing costs as a result”. 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 Canadian, UK and
US Treasury Bill portfolio. As at December 31, 2020, the cash due from banks of $3.3 billion was composed primarily of $2.7 billion in interest earning cash equivalents, which
are investments with a less than 90-day duration. The remaining amounts were comprised of non-interest earning and interest earning deposits of $0.1 billion and $0.4 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 79% of our foreign exchange revenue for the year ended December 31, 2020. We do not maintain a proprietary trading book. Foreign exchange
income is generated from client-driven transactions and totaled $37.2 million during the year ended December 31, 2020.
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 39 markets globally, including major markets and smaller, less-
developed markets, with principal markets covered being the United States, Canada, Europe and the Far East.
Our custody service offers safekeeping services for physical and book-entry assets. Custody for listed securities is conducted through Bank of New York Mellon. Hedge
funds, mutual funds and exchange traded funds are held by Brown Brothers Harriman. Trading in investment transactions is settled via our global sub-custodians, BNYM and
BBH. Custody services are offered from our Bermuda, Cayman Islands and Channel Islands segments and complement core wealth management 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.
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Custody fees comprise a basis point charge on the value of Assets Under Custody, 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 transaction fees based on account activity.
Information Technology
We devote significant resources to maintaining 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.
Currently, our information technology is operationally divided into two platforms: (i) Bermuda and Cayman and (ii) Channel Islands and the UK and Group Trust. In our
Bermuda and Cayman operations, we operate on a single industry standard banking technology platform utilizing a predominantly outsourced and supported model hosted in
Canada. In our Channel Islands and UK and Group Trust operations, we 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. For more information, see Item 3.D. "Risk Factors - Risks Relating to Risk
Oversight and Internal Controls".
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 the major markets in which we operate. 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.
For more information, see Item 3.D. "Risk Factors - Risks Relating to Our Strategy, Brand, Portfolio and Other Aspects of Our Business".
Supervision and Regulation
Bermuda
The Bank is subject to regulation and supervision by the Bermuda Monetary Authority (the "BMA") under:
the Bermuda Monetary Authority Act 1969;
the Banks and Deposit Companies Act 1999 (the "BDCA");
the Trusts (Regulation of Trust Business) Act 2001;
the Investment Business Act 2003;
the Exchange Control Regulations 1973;
the Corporate Services Provider Business Act 2012; and
•
•
•
•
•
•
• any applicable code of practice or guidance notes that may be published by the BMA from time to time.
The Bank is also subject to regulation by the Minister of Finance in Bermuda under the Companies Act 1981, the Banking (Special Resolution Regime) Act 2016 and
the Economic Substance Act 2018. It is also subject to the Deposit Insurance Act 2011 and the Deposit Insurance Rules 2016.
Supervision and Monitoring by the BMA
Our activities are regulated by the BMA and our ability to engage in certain activities is subject to prior approval by the BMA. One of the principal objectives of the BMA
is to supervise, regulate and inspect financial institutions which operate in or from within Bermuda and further to promote the financial stability and soundness of such financial
institutions. The supervision is primarily for the benefit and protection of the Bank's clients and not for the benefit of our investors. The BMA is also responsible for managing and
regulating transactions in foreign currency or gold.
In addition to conducting on-site reviews, the BMA utilizes a comprehensive quarterly statistical return system that enables off-site monitoring of institutions licensed
under the BDCA. The statistical system, which follows the standards imposed on banks in the UK by the Financial Conduct Authority and is consistent with Basel Committee
Standards, provides the BMA with a detailed breakdown of the Bank's balance sheet and profit-and-loss accounts on both a consolidated and unconsolidated basis. This
information enables the BMA to monitor the soundness of the Bank's financial position and ensure that it meets certain capital requirements.
As the Bank's supervisory authority in Bermuda, the BMA is responsible for the consolidated supervision of our worldwide operations. There are also host regulatory
bodies performing a similar function to that of the BMA in all major locations in which the Bank operates regulated activities. Many of these local authorities require detailed
reporting on the activities of the Bank's subsidiaries located in their jurisdictions. As part of its oversight process, the BMA receives copies of each of these reports on a regular
basis and liaises with the regulatory authorities in the respective locations.
From time to time, in the ordinary course of business, the Bank enters into agreements with the BMA under which the Bank agrees to achieve or maintain certain levels
of capital and to obtain the BMA's prior approval to take certain corporate actions. Certain actions that may not be taken without prior BMA approval include: (1) creating or
increasing the authorized amount of, or issuing any class of shares; (2) repurchasing any class of shares; and (3) entering into a material acquisition.
Under the market disclosure requirements (referred to as Pillar III disclosures) applicable under the Basel III Accord ("Basel III"), the Bank is required to publish
information about the risks to which it is exposed. Effective as of January 1, 2015, the BMA adopted capital and liquidity regulatory requirements consistent with Basel III, a
framework released by the BCBS. Basel III aims to raise the quality, consistency and transparency of the capital base, limit the build-up of excess leverage and increase capital
requirements for the banking sector. Basel III adopts CET1 capital as the predominant form of regulatory capital with the CET1 ratio as a new metric. Basel III also adopts the
new LCR and NSFR regimes.
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The Basel III regulatory framework adopts a phased implementation approach for Bermuda banks with full implementation on January 1, 2019, consistent with BCBS
recommendations. As of January 1, 2019, the Bank is subject to the following requirements:
• CET1 as the primary and predominant form of regulatory capital, with a requirement of CET1 of at least 7.0% of RWA, inclusive of a minimum CET1 capital
adequacy ratio of 4.5% plus a capital conservation buffer of 2.5%, but excluding the D-SIB surcharge described below. The BMA allowed Bermuda banks to make
the one-time irrevocable election to exclude other comprehensive income on their AFS portfolios from CET1 by no later than March 31, 2015;
• a Tier 1 capital requirement of at least 8.5% of RWA, inclusive of a minimum Tier 1 ratio of 6% and the capital conservation buffer of 2.5% but excluding the D-SIB
surcharge described below;
• a total capital requirement of at least 10.5% of RWA, inclusive of a minimum total capital ratio of 8% and the capital conservation buffer of 2.5% but excluding the D-
SIB surcharge described below;
the Bank is considered to be a D-SIB and is subject to a 3% surcharge composed of CET1-eligible capital implemented by the BMA effective September 30, 2015.
This is based upon its assessment of the extent to which the Bank (individually and collectively with the other Bermuda banks) poses a degree of material systemic
risk to the economy of Bermuda due to its role in deposit taking, corporate lending, payment systems and other core economic functions;
the inclusion of a countercyclical buffer to be introduced when macro-economic indicators provide an assessment of excessive credit or other pressures building in
the banking sector, potentially increasing the Bank's required capital buffer by up to 2.5%;
the introduction of a 5% leverage ratio as calculated in accordance with Basel III;
•
•
•
• an LCR with a minimum requirement of 100%; and
• a NSFR with a minimum requirement of 100%.
The minimum capital ratio requirements set forth above do not reflect additional Pillar II add-on requirements that the BMA may impose upon the Group as a prudential
measure from time to time. As the Group's capital requirements remain under continuous review by the BMA pursuant to its prudential supervision, the Group cannot guarantee
that the BMA will not seek higher total capital ratio requirements from time to time.
The Bank may from time to time also be subject to additional regulatory requirements imposed by the BMA in its role as Bermuda’s main prudential regulator such as
the Outsourcing Guidance Notes for Relevant Legal Entities, including banks, corporate service providers, trust companies, investment businesses and fund administrators,
which require (among other things) these entities to demonstrate good risk management, and to notify the BMA, of any new material outsourcing arrangements.
Effective February 29, 2020, the Bermuda Banking Code of Ethical Conduct was promulgated. This is a voluntary code that the Bank subscribes to. It sets out a number
of guiding principles and commitments in the Bermuda banking industry for customers. The code complements the Bermuda Banks and Deposit Companies Act 1999 in
promoting best practice and encouraging higher standards for the benefit of customers through competition and market forces.
Bermuda Monetary Authority Act 1969
The Bermuda Monetary Authority Act 1969 established the BMA as a statutory corporate body responsible for, among other things, supervising, regulating and
inspecting any financial institution which operates in or from within Bermuda (which includes the Bank). Specific areas of financial regulation, such as the banking industry, are
also the subject of separate, specific legislation (some of which is discussed below), but this specific legislation is nevertheless administered by the BMA in its supervisory
capacity. In addition to its supervisory functions, both under the Bermuda Monetary Authority Act 1969 and the specific legislation discussed below, the BMA is empowered to
assist foreign regulatory bodies by requiring entities supervised and regulated by the BMA to furnish information on demand to the BMA in connection with foreign regulatory
requests.
Banks and Deposit Companies Act 1999
The BDCA prohibits any person from carrying on a deposit-taking business in or from within Bermuda unless that person is a company incorporated in Bermuda and
licensed by the BMA under the BDCA. The BDCA provides for three classes of licenses: banking licenses, restricted banking licenses and deposit company licenses. The Bank
holds a banking license and a deposit company license. Unless otherwise permitted by the BMA, a company that holds a banking license must provide a range of minimum
services to the public in Bermuda, including (without limitation) current accounts in Bermuda dollars, other deposit accounts, loan facilities in Bermuda Dollars, foreign exchange
services and credit card or debit card facilities. A company holding a deposit company license typically offers a small range of services but, unless otherwise permitted by the
BMA, must also provide some specified services to the public in Bermuda, including (without limitation) savings, deposit or other similar accounts in Bermuda Dollars and loans
in Bermuda Dollars secured on mortgages of real property in Bermuda.
As the agency responsible for administering the BDCA, regulating deposit-taking businesses and protecting depositors, the BMA has broad authority to compel
companies licensed under the BDCA to take or cease specific actions and comply with informational or access requests. Under the BDCA, the BMA can, or can compel these
companies, including us, to, among other things, do any or all of the following:
•
submit a report prepared by the Bank's auditors or by an accountant or other person with professional skills on any matter about which the BMA could require us to
provide information;
• produce documentation or other information as the BMA may reasonably require; and
• permit any officer, servant or agent of the BMA, on producing evidence of his authority, to enter the Bank's premises to obtain information and documents.
In addition, the BMA has the power to do any or all of the following:
•
require the Bank to take certain steps or to refrain from adopting or pursuing a particular course of action or to restrict the scope of the Bank's business in a
particular way;
• appoint competent persons to investigate and report to the BMA on the Bank's business or the Bank's ownership and control;
•
•
restrict the scope of a license or revoke a license; and
vary or revoke the Bank's banking license and to give directions if it feels these are necessary to protect the Bank's depositors.
The Bank's failure to comply with any of the statutory requirements set forth in the BDCA could result in civil or criminal penalties.
The Bank is required to report certain transactions to the BMA. These include any transaction or transactions relating to any one person as a result of which the Bank
would be exposed to a risk of incurring losses in excess of 10% of the Bank's available capital resources, or where the Bank proposes to enter into a transaction or transactions
relating to any one person, which, either alone or together with previous transactions entered into by the Bank in relation to the same person, would result in the Bank being
31
exposed to the risk of incurring losses in excess of 25% of its available capital resources. This also applies where the transaction relates to different persons if they are
connected in such a way that the financial soundness of any of them may affect the financial soundness of the others or the same factors may affect the financial soundness of
both or all of them. The BMA may extend the scope of this requirement to the Bank's subsidiaries even if these subsidiaries are not licensed under the BDCA as if the
transactions and available capital resources of the Bank's subsidiaries were included in the Bank's available capital resources. For the purpose of the foregoing, the transactions
which must be reported by the Bank to the BMA are those between the Bank and a person where:
(a)
(b)
(c)
that person incurs an obligation to the Bank or as a result of which such person may incur such an obligation;
the Bank will incur, or as a result of which it may incur, an obligation in the event of that person defaulting on an obligation to a third party; or
the Bank acquires or incurs any obligation to acquire, or as a result of which it may incur an obligation to acquire, an asset the value of which depends wholly or
mainly on that person performing their obligations or otherwise on his financial soundness.
The risk of loss attributable to the transaction is, in a case within paragraph (a) or (b), the risk of the person concerned defaulting on the obligation therein mentioned
and, in a case within paragraph (c), the risk of the person concerned defaulting on the obligations therein mentioned or of a deterioration in such person's financial soundness.
The Bank's available capital resources may be determined by the BMA, after consultation with it and in accordance with principles published by the BMA, which are currently the
Basel III principles described above. It is an offense for the Bank to fail to make the required reports.
Under the BDCA, any person who becomes a significant shareholder of a deposit-taking institution, which is defined to include persons, either individually or with
associates (within the meaning of the BDCA), who (i) hold 5% or more of the shares in the institution or another company of which it is a subsidiary company; or (ii) is entitled to
exercise, or control the exercise of 5% or more of the voting power at any general meeting of the institution or of another company of which it is such a subsidiary, must notify the
BMA in writing of that fact within seven days. Failure to provide the BMA with prompt and appropriate notice would constitute an offense that could result in a fine.
The BDCA prohibits a person from becoming a shareholder controller of any company licensed under the BDCA unless the person provides written notice to the BMA
of his intent to do so and the BMA does not object. The definition of shareholder controller is set out in the BDCA but generally refers to a person who, among other things, either
alone or with any associate or associates (i) holds 10% or more of the shares in the licensed institution or another company of which it is a subsidiary company; (ii) is entitled to
exercise, or control the exercise of 10% or more of the voting power at any general meeting of the licensed institution or another company of which it is such a subsidiary; or (iii)
is able to exercise a significant influence over the management of the institution or of another company of which it is a subsidiary by virtue of holding shares in or an entitlement
to exercise or control the exercise of the voting power at any general meeting of either the institution or the other company concerned. The BDCA distinguishes between
shareholder controllers of the following threshold descriptions: "10% shareholder controllers," "20% shareholder controllers," "30% shareholder controllers," "40% shareholder
controllers," "50% shareholder controllers," "60% shareholder controllers" and "principal shareholder controllers" who have a 75% or greater interest. A person who intends to
become a shareholder controller, or a shareholder controller who intends to increase his shareholding/control, meaning generally, ownership of shares or the ability to exercise
or control the exercise of voting rights attached to shares, beyond his present threshold, must provide written notice to the BMA that he intends to do so. It is an offense not to
give this notice. The BMA may object to a person's notice of intent to become a shareholder controller of any description or to an existing shareholder controller seeking to
increase their control where it appears to the BMA that, among other things, such person is not or is no longer a fit and proper person to be such controller. If the BMA objects,
the BMA will provide such person with written notice of its objection.
Prior to serving a notice of objection, the BMA shall serve the person seeking to become a shareholder controller of any description or existing shareholder controller
seeking to increase their control with a preliminary written notice stating that the BMA is considering service on that person of a notice of objection, and that notice shall state
among other things, the reasons for the BMA's proposed objection. The statement of the BMA's reasons for their proposed objection will, however, be subject to the BMA's
determination that such statement would not involve the disclosure of confidential information, the disclosure of which would be prejudicial to a third party. A person served with a
preliminary written notice may, within a period of 28 days beginning with the day on which the notice is served, make written representations to the BMA and the BMA shall take
any such representations into account in deciding whether to serve a notice of objection.
If three months pass from the date of giving notice of intent to the BMA without the BMA serving a notice of objection, then the person may become a shareholder
controller as requested in the notice of intent. In practice, the BMA's procedure is generally to respond to a shareholder controller notification of intent.
If a person becomes a shareholder controller or increases their shareholding/control in spite of the BMA's objection thereto, if a shareholder controller fails to comply
with the foregoing notice requirements or if a shareholder controller continues as such after being given notice of objection to his or her being a shareholder controller, the BMA
may take the actions specified in the BDCA, including revoking the relevant license where a 50%, 60% or principal shareholder controller is involved, or mandating that any
specified shares become subject to one or more of the following restrictions:
• any transfer of or agreement to transfer those shares or, in the case of unissued shares, any transfer of or any agreement to transfer the right to be issued with
them, will be void;
• no voting rights may be exercisable in respect of the shares;
• no further shares may be issued in right of them or pursuant to any offer made to their holder; or
• except in liquidation, no payment may be made of any sums due from the institution on the shares, whether in respect of capital or otherwise.
A court in Bermuda may, on the application of the BMA, order the sale of any such shares. Any person may appeal to a tribunal constituted under the BDCA for a
review of a notice of objection given by the BMA as described above. However, this right of appeal does not apply to a person in any case in which such person has failed to give
a notice or has become or continued to be a controller in contravention of the BDCA. In addition, if a person has had its license revoked or has been subject to any of the
restrictions set forth above, the tribunal may confirm or reverse the decision which is the subject of the appeal but shall not have power to vary it except:
• where the decision was made to impose or vary any restriction, the tribunal may direct the BMA to impose different restrictions or to vary them in a different way; or
• where the decision was to revoke a license, the tribunal may direct the BMA to restrict it instead.
In the event that the BMA imposes any of the restrictions listed above, the restrictions may apply to:
• all shares of the institution where the person in question is a shareholder controller that (i) are held by him or any associate of his, and (ii) were not so held
immediately before he became such shareholder controller of the institution; and
• all shares in another company where the person in question became a shareholder controller (i) as a result of the acquisition by him or any associate of his of shares
in such other company, and (ii) the shares were not so held before he became a shareholder controller of such institution.
A company licensed under the BDCA must give written notice to the BMA in the event that any person has either become or ceased to be a director, controller or senior
executive of such licensed company. The written notice is required to be given to the BMA within 14 days beginning with the day on which the licensed company becomes aware
of the relevant change in director, controller or senior executive. The definition of "controller" is set out in the BDCA but generally refers to a shareholder controller, a managing
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director or chief executive officer of the institution or of another company of which it is a subsidiary, or a person in accordance with whose directions or instructions the directors
of the institution or of another company of which the institution is a subsidiary, or persons who are shareholder controllers (or any of them) are accustomed to act.
Trusts (Regulation of Trust Business) Act 2001
The principal purpose of the Trusts (Regulation of Trust Business) Act 2001 (the "Trusts Business Act"), is to regulate "trust business," which is generally defined as
providing the services of a trustee as a business, trade, profession or vocation. Under the Trusts Business Act, a license is required to conduct trust business in or from within
Bermuda. Licenses are designated as either "unlimited" or "limited." Only bodies corporate are entitled to obtain unlimited licenses, which allow them to conduct trust business
and solicit business from the public generally. Holding a license under the Trust Business Act obliges the licensed undertaking to maintain a physical presence in Bermuda at
which the licensed undertaking is directed and managed. A licensed undertaking is also required to hold all client funds separately from its own funds or funds held in respect of
any other business and maintain such books of account and other records such that client funds may be readily identified at any time.
At present, the Bank and certain of its subsidiaries hold unlimited licenses issued by the BMA pursuant to the Trusts Business Act. Pursuant to Section 6 of the Trusts
Business Act, the BMA has published a Statement of Principles, in accordance with which it is acting or purporting to act with respect to the exercise of its powers under the
Trusts Business Act, including (without limitation) the BMA's minimum licensing criteria, the grounds for revocation of licenses, the power to grant, revoke or restrict a license and
the power to obtain information or require the production of documents. As at December 31, 2019, the BMA amended the minimum licensing criteria under the Trusts Business
Act, such that a licensed undertaking is not regarded as conducting its business in a prudent manner (which is a requirement for licensing) unless it maintains or will maintain
adequate liquidity, having regard to the relationship between its assets and its actual and contingent liabilities, to the time at which those liabilities will or may fall due and its
assets mature, and to other factors appearing to the BMA to be relevant. In addition, pursuant to Section 7 of the legislation, the BMA published a Code of Practice that provides
guidance as to the duties, requirements, procedures, standards and principles to be observed by persons carrying on trust business under the Trusts Business Act.
The BMA's powers under the Trusts Business Act include (without limitation) the power to:
•
•
•
impose conditions on a license with respect to scope and type of business, to protect a client or potential client of a licensee;
revoke a license in certain circumstances including if the licensee has not complied with the licensing criteria; and
request and obtain information from a licensee to ensure compliance with the Trusts Business Act, and to safeguard the interests of the licensee's clients and
potential clients.
The Trusts Business Act prohibits a person from becoming a 10% shareholder controller or a majority shareholder controller of a licensed undertaking, unless such
person provides written notice to the BMA of his intent to do so and the BMA does not object. It is an offense not to provide this notice. The definition of shareholder controller is
set out in the Trusts Business Act, but generally refers to a person who, among other things, either alone or with any associate or associates (within the meaning of the Trusts
Business Act) (i) holds 10% or more of the shares in the licensed undertaking or another company of which it is a subsidiary company; or (ii) is entitled to exercise, or control the
exercise of 10% or more of the voting power at any general meeting of the licensed undertaking or another company of which it is such a subsidiary or (iii) is able to exercise a
significant influence over the management of a licensed undertaking or of another company of which the licensed undertaking is a subsidiary by virtue of holding shares in or an
entitlement to exercise or control the exercise of the voting power at any general meeting of either the licensed undertaking or the other company concerned. A "majority
shareholder controller" is defined under the Trusts Business Act as a shareholder controller which, among other things, (i) holds 50% or more of the shares in the licensed
undertaking or another company of which it is a subsidiary company; or (ii) is entitled to exercise, or control the exercise of 50% or more of the voting power at any general
meeting of the licensed undertaking or another company of which it is such a subsidiary.
The BMA may object to a person's notice of intent to become a 10% shareholder controller or majority shareholder controller or may object to an existing shareholder
controller of any description where it appears to the BMA that, among other things, such person is not or is no longer a fit and proper person to be such a controller of the
licensed undertaking. If the BMA objects, the BMA will provide such person with a written notice of objection. Prior to serving any such notice of objection, the BMA shall serve
the person seeking to become a shareholder controller or the existing shareholder controller with a preliminary written notice stating that the BMA is considering service on that
person of a notice of objection, stating, among other things, the reasons for the BMA's proposed objection. The statement of the BMA's reasons for its proposed objection will,
however, be subject to the BMA's determination that such statement would not involve the disclosure of confidential information, the disclosure of which would be prejudicial to a
third party. A person served with a preliminary written notice may, within a period of 28 days beginning with the day on which the notice is served, make written representations
to the BMA and the BMA shall take any such representations into account in deciding whether to serve a notice of objection.
If three months pass from the date of notifying the BMA of a new shareholder controller or an increased shareholding/control beyond a shareholder controller's then
current threshold, without the BMA serving a notice of objection, then the person may become a shareholder controller as requested in the notice. In practice, the BMA's
procedure is generally to respond to a person's shareholder controller notification.
If a person becomes a shareholder controller or increases their shareholding control, in spite of the BMA's objection thereto, if a shareholder controller fails to comply
with the foregoing notice requirements or if a shareholder controller continues as such after being given notice of objection to his being a shareholder controller, the BMA may
take certain actions, including revoking the relevant license where a shareholder controller holding 50% or more of the shares of the licensed undertaking is involved or
mandating that any specified shares become subject to one or more of the following restrictions:
• any transfer of or agreement to transfer those shares or, in the case of unissued shares, any transfer of or any agreement to transfer the right to be issued with
them, will be void;
• no voting rights may be exercisable in respect of the shares;
• no further shares may be issued in right of them or pursuant to any offer made to their holder; or
• except in liquidation, no payment may be made of any sums due from the licensed undertaking on the shares, whether in respect of capital or otherwise.
A court in Bermuda may, on the application of the BMA, order the sale of any such shares. Any person may appeal to a tribunal constituted under the Trusts Business
Act for a review of a notice of objection given by the BMA as described above. However, this right of appeal does not apply to a person in any case in which such person has
failed to give a notice or has become or continued to be a controller in contravention of the Trusts Business Act. In addition, if a person has had its license revoked or has been
subject to any of the restrictions set forth above, the tribunal may confirm or reverse the decision which is the subject of the appeal but shall not have power to vary it except:
• where the decision was made to impose different restrictions or vary them in a different way, the tribunal may direct the BMA to impose different restrictions; or
• where the decision was to revoke a license, the tribunal may direct the BMA to restrict it instead.
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In the event that the BMA imposes any of the restrictions listed above, the restrictions may apply to:
• all shares of the licensed undertaking of which the person in question is a shareholder controller that (i) are held by him or any associate of his, and (ii) were not so
held immediately before he became such shareholder controller of the licensed undertaking; and
• all shares in another company where the person in question became a shareholder controller (i) as a result of the acquisition by him or any associate of his of shares
in such other company, and (ii) the shares were not so held before he became a shareholder controller of such licensed undertaking.
An undertaking licensed under the Trusts Business Act must give written notice to the BMA in the event that any person has either become or ceased to be a controller
or officer of such licensed undertaking. The written notice is required to be given to the BMA within 14 days beginning with the day on which the licensed undertaking becomes
aware of the change in controller or officer. The definition of "controller" is set out in the Trusts Business Act but generally refers to a shareholder controller, a managing director
or chief executive officer of the undertaking or of another company of which it is a subsidiary, or a person in accordance with whose directions or instructions the directors of the
undertaking or of another company of which the undertaking is a subsidiary, or persons who are shareholder controllers (or any of them) are accustomed to act. The definition of
"officer" under the Trusts Business Act, includes a director, secretary or any senior executive.
Investment Business Act 2003
The Investment Business Act 2003 (the "Investment Business Act") prohibits any person from carrying on, or purporting to carry on, an investment business in or from
within Bermuda unless that person holds a license granted under the Investment Business Act, or is exempted from holding a license. The Investment Business Act defines
"investment business" broadly as the business of dealing in investments, arranging deals in investments, managing or offering investments and giving advice on investments.
Under the Investment Business Act, the BMA is given the authority to grant licenses and to supervise license holders. The BMA will only grant a license if it is satisfied
that the applicant complies with licensing criteria set out in the Investment Business Act, which include (without limitation) that controllers and senior executives of the applicant
are fit and proper persons to carry on such business, the applicant company's business is effectively directed by at least two individuals (unless the BMA otherwise approves),
the Board of the applicant has a number of non-executive directors considered appropriate by the BMA, the applicant's business is conducted in a prudent manner, the position
of the applicant in the group does not obstruct effective consolidated supervision and the applicant will carry on the investment business with integrity and professional skill
appropriate to the nature and scale of its activities.
At the present time, the Bank's wholly owned subsidiaries Butterfield Trust (Bermuda) Limited, Butterfield Securities (Bermuda) Limited and Butterfield Asset
Management Limited hold licenses under the Investment Business Act.
Under the Investment Business Act, the BMA may require an accountant's or auditor’s report on a license holder or the appointment of an inspector to carry out an
investigation into the affairs of a license holder and/or demand the production of documents or information relating to the investment business of a license holder. The Investment
Business Act also grants the BMA broad powers to enforce the provisions of the Investment Business Act, including (without limitation) powers to issue directions, to vary, restrict
or cancel a license, to appoint a person to manage and administer an offending investment business, to give directions desirable to safeguard the interests of the investment
provider’s clients, to levy fines and to seek from the court injunctions and restitution orders.
The Investment Business Act prohibits a person from becoming a 10% shareholder controller or a majority shareholder controller of an investment provider, unless such
person provides written notice to the BMA of his intent to do so and the BMA does not object. It is an offense not to provide this notice. The definition of 10% shareholder
controller is set out in the Investment Business Act, but generally refers to a person who, among other things, either alone or with any associate or associates (within the
meaning of the Investment Business Act) (i) holds 10% or more of the shares in the investment provider or its parent undertaking; (ii) is entitled to exercise, or control the
exercise of 10% or more of the voting power in the investment provider or in the parent undertaking; or (iii) is able to exercise a significant influence over the management of the
investment provider or its parent undertaking by virtue of the voting power in the investment provider or its parent undertaking. A "majority shareholder controller" is defined
under the Investment Business Act as a shareholder controller which (i) holds 50% or more of the issued and outstanding shares in the investment provider or its parent
undertaking; or (ii) is entitled to exercise, or control the exercise of 50% or more of the voting power in the investment provider or in the parent undertaking.
The BMA may object to a person's notice of intent to become a 10% shareholder controller or majority shareholder controller or to an existing shareholder controller of
any description where it appears to the BMA that, among other things, such person is not or is no longer a fit and proper person to be such controller of the licensed company. If
the BMA objects, the BMA will provide such person with a written notice of objection. Prior to serving any such notice of objection, the BMA serves the person seeking to become
a shareholder controller or will serve an existing shareholder controller with a preliminary written notice stating that the BMA is considering service on that person of a notice of
objection, stating, among other things, the reasons for the BMA's proposed objection. The statement of the BMA's reasons for their proposed objection will, however, be subject
to the BMA's determination that such statement would involve the disclosure of confidential information, the disclosure of which would be prejudicial to a third party. A person
served with a preliminary written notice may, within a period of 28 days beginning with the day on which the notice is served, make written representations to the BMA and the
BMA shall take any such representations into account in deciding whether to serve a notice of objection.
If three months pass from the date of notifying the BMA of a new shareholder controller or an increased shareholding/control beyond a shareholder controller's then
current threshold, without the BMA serving a notice of objection, then the person may become a shareholder controller as requested in the notice. In practice, the BMA's
procedure is generally to respond to a person's shareholder controller notification.
If a person becomes a shareholder controller or increases their shareholding/control in spite of the BMA's objection to his becoming a shareholder controller or if a
shareholder controller fails to comply with the foregoing notice requirements or if a shareholder controller continues as such after being given notice of objection to his being a
shareholder controller, the BMA may take certain actions, including revoking the relevant license where a shareholder controller holding 50% or more of the shares of the
licensed company is involved or mandating that any specified shares become subject to one or more of the following restrictions:
• any transfer of or agreement to transfer those shares or, in the case of unissued shares, any transfer of or any agreement to transfer the right to be issued with
them, will be void;
• no voting rights may be exercisable in respect of the shares;
• no further shares may be issued in right of them or pursuant to any offer made to their holder; or
• except in liquidation, no payment may be made of any sums due from the investment provider on the shares, whether in respect of capital or otherwise.
34
A court in Bermuda may, on the application of the BMA, order the sale of any such shares. Any person may appeal to a tribunal constituted under the Investment
Business Act for a review of a notice of objection given by the BMA as described above. However, this right of appeal does not apply to a person in any case in which such
person has failed to give a notice or has become or continued to be a controller in contravention of the Investment Business Act. In addition, if a person has had its license
revoked or has been subject to any of the restrictions set forth above, the tribunal may confirm or reverse the decision which is the subject of the appeal but shall not have power
to vary it except:
• where the decision was made to impose or vary any restriction, the tribunal may direct the BMA to impose different restrictions or to vary them in a different way; or
• where the decision was to revoke a license, the tribunal may direct the BMA to restrict it instead.
In the event that the BMA imposes any of the restrictions listed above, the restrictions may apply to:
• all shares of the investment provider of which the person in question is a shareholder controller that (i) are held by him or any associate of his; and (ii) were not so
held immediately before he became such shareholder controller of the investment provider; and
• all shares in another company where the person in question became a shareholder controller (i) as a result of the acquisition by him or any associate of his of shares
in such other company; and (ii) the shares were not so held before he became a shareholder controller of such investment provider.
A company licensed under the Investment Business Act must give written notice to the BMA in the event that any person has either become or ceased to be a controller
or officer of such investment provider. The written notice is required to be given to the BMA within 14 days beginning with the day on which the investment provider becomes
aware of the change in controller or officer. The definition of "controller" is set out in the Investment Business Act but generally refers to a shareholder controller, a managing
director or chief executive officer of the investment provider or of another company of which it is a subsidiary, or a person in accordance with whose directions or instructions the
directors of the investment provider or of its parent undertaking or persons who are shareholder controllers (or any of them) are accustomed to act. The definition of "officer"
under the Investment Business Act, includes a director, secretary or any senior executive.
Corporate Service Provider Business Act 2012
The Corporate Service Provider Business Act 2012 (“CSPB”) regulates persons carrying on a corporate service provider business in Bermuda. “Corporate service
provider business” in this context means the provision of any of the following services for a profit: (a) acting as a company formation agent or agent for establishment of a
partnership; (b) providing nominee services, including (among other things) providing nominee shareholders; (c) providing administrative and secretarial services to companies
or partnerships (including, among other things, providing a registered office and maintaining the books and records of a company or partnership); (d) performing functions in the
capacity as a resident representative under various Bermuda statutes; and (e) providing any other corporate or administrative services as may be specified in regulations made
under the CSPB. Under the CSPB, the Bank or any of its subsidiaries is required to hold a corporate service provider license to lawfully provide corporate services to our
customers in Bermuda. Licensing under the CSPB is administered by the BMA. Holding a license under the CSPB obliges the licensed undertaking to maintain a physical
presence in Bermuda at which the licensed undertaking is directed and managed. A licensed undertaking is also required to hold all client funds separately from its own funds or
funds held in respect of any other business and maintain such books of account and other records such that client funds may be readily identified at any time.
Pursuant to the provisions of the CSPB any person who, together with their associates (within the meaning of the CSPB), intends to become either a shareholder
controller or a majority shareholder controller of a CSPB licensed entity, must first serve notice of their intent to do so on the BMA and either receive a notice of non-objection
from the BMA, or wait for the expiration of a three month period starting from the date of the notice to the BMA without the BMA having served a written notice of objection. A
“shareholder controller” under the CSPB is any person who, either alone or with any associate or associates, (i) holds 10% or more of shares of the licensed entity (if it is a
company) or 10% or more of another company of which the licensed entity is a subsidiary; (ii) is entitled to control or control the exercise of 10% or more of the voting power at
any general meeting of the licensed entity (if it is a company) or of another company of which the licensed entity is a subsidiary; or (iii) is able to exercise a significant influence
over the management of a licensed entity or of another company of which the licensed entity is a subsidiary by virtue of holding shares in or an entitlement to exercise or control
the exercise of the voting power at any general meeting of either the licensed entity (if it is a company) or its holding company. A “majority shareholder controller” under the
CSPB has the same meaning as limbs (i) and (ii) in the preceding sentence, save that the relevant percentage threshold for ownership is 50% or more.
In addition to the requirement to notify and obtain BMA non-objection (whether express or deemed) of any change in shareholder controller or majority shareholder
controller of a CSPB licensed entity, if at any time it appears to the BMA that a person who is a “controller” of any description of a CSPB licensed entity is not a fit and proper
person for such role, the BMA may serve a written notice of objection to that controller; provided that, before serving such a notice, the BMA must serve that person with a
preliminary written notice stating that the BMA is considering service on that person of a notice of objection, specifying the reasons for which it appears to the BMA why that
person is not or is no longer a fit and proper person and advising as to the rights of that person to make written representations to the BMA within 28 days beginning on the day
on which such notice is served, and that such written representations shall be taken into account by the BMA in deciding whether to serve a notice of objection. For these
purposes a “controller” includes (i) a managing director of a licensed entity or the licensed entity’s holding company; (ii) the CEO of the licensed entity or the licensed entity’s
holding company; and (iii) a person in accordance with whose directions or instruction the directors of the licensed entity (or its holding company) are accustomed to act. Upon
determining that any individual is not a fit and proper person, the BMA may pass a prohibition order, thereby preventing that individual from exercising any functions in
connection with any business requiring licensing under the CSPB. Furthermore, under the CSPB, a licensed entity is required to give written notice to the BMA of any person
becoming or ceasing to be a controller or an “officer” (director, company secretary or senior executive) of the licensed entity.
Breaches of the CSPB are punishable by a range of criminal and civil penalties including fines, imprisonment and public censure; breaches can result in the licensed
entity losing its license and therefore its ability to conduct corporate service provider business. The BMA is also empowered to restrict a controller’s ability to sell any shares (and
exercise any rights in respect of such shares) held by the controller in a CSPB licensed entity if they continue to be or become a controller following a notice of objection from the
BMA.
Companies Act 1981
As a local company incorporated in Bermuda, the Bank is subject to the Companies Act 1981 (the "Companies Act"). Under section 114 of the Companies Act, no local
company may carry on business of any sort in Bermuda unless, among other things, (i) it complies with the control and ownership requirements set out in Part I of the Third
Schedule of the Companies Act; (ii) it is licensed under section 114B of the Companies Act and is carrying on such business in accordance with the terms and conditions
imposed in such license; or (iii) its shares are listed on a designated stock exchange and the company is engaged as a business in a material way in a prescribed industry
pursuant to section 114(1)(e) of the Companies Act.
In December 2000, the Minister of Finance issued to the Bank a license pursuant to section 114B of the Companies Act allowing the Bank to carry on business in
Bermuda without complying with certain provisions of the Third Schedule to the Companies Act. Effective June 10, 2016, the Bank relinquished its section 114B license and
carries on business in Bermuda without complying with the provisions of the Third Schedule in reliance upon the exemption in section 114(1)(e) of the Companies Act. The Bank
qualifies for this statutory exemption by virtue of (i) the listing of the Bank's shares on the BSX, which is a "designated stock exchange" for the purposes of the Companies Act
and (ii) the Bank's material business of banking, which is a "prescribed industry" for the purposes of the Companies Act.
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Exchange Control
The Bank is designated as resident in Bermuda for exchange control purposes.
The BMA has given its consent for the issue and free transferability of all of the common shares to and between non-residents of Bermuda for exchange control
purposes, provided the Bank's shares remain listed on an appointed stock exchange, which includes the NYSE. Approvals or permissions given by the BMA do not constitute a
guarantee by the BMA as to our performance or our creditworthiness. Accordingly, in giving such consent or permissions, the BMA shall not be liable for the financial soundness,
performance or default of our business or for the correctness of any opinions or statements expressed in this report.
Financial Crime Regulation
Bermuda has enacted a number of laws relating to combating money laundering and terrorist financing. The Proceeds of Crime Act 1997 (as amended), the Anti-
Terrorism (Financial and other Measures) Act 2004, the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Supervision and Enforcement) Act 2008 and the Proceeds
of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008, the Financial Intelligence Agency Act 2007, and the Anti-Terrorism (Financial and Other
Measures) (Businesses in Regulated Sector) Order 2008.
The Bank may be regulated together with its branches and subsidiaries in respect of anti-money laundering and anti-terrorist financing policies and procedures as a
“financial group” if so designated by the Bermuda minister responsible for justice. Furthermore, under the Bribery Act 2016 of Bermuda, the Bank may be guilty of an offense if
persons associated with the Bank (which can include the Bank’s employees, agents or subsidiaries) bribe another person intending to obtain or retain business for the Bank or to
obtain or retain an advantage in the conduct of business for the Bank. It is a defense to such offenses if the Bank proves that it has in place adequate procedures designed to
prevent persons associated with the Bank from undertaking such bribery.
Stamp Duty
Stamp duty is a tax in Bermuda imposed on written documents. The governing legislation is the Stamp Duties Act 1976, as amended (the "Stamp Duties Act"). The
Stamp Duties Act sets out the instruments that are subject to stamp duty, which generally include certain instruments or documents as specified in the Stamp Duties Act that are
executed in Bermuda or, if executed outside of Bermuda, are then brought into Bermuda.
There are certain limited stamp duty exemptions under the Bermuda Stock Exchange Company Act 1992 (the ‘‘BSX Act’’), which extend to local companies, the
securities of which are listed on the BSX. The Bank’s common shares are currently listed on the NYSE and BSX. Pursuant to the BSX Act, the provisions of the Stamp Duties
Act will not apply to any instrument which relates to (i) a conveyance or transfer on sale, (ii) a conveyance or transfer to effect or having the effect of a voluntary disposition inter
vivos, or (iii) any agreement for the lending and borrowing, of any securities which are listed on the BSX. Accordingly, for so long as the common shares of the Bank remain
listed on the BSX (and to the extent any other securities issued by the Bank are listed on the BSX), the forgoing stamp duty exemptions under the BSX Act would apply.
However, dealings in the Bank’s common shares beyond the limited exemptions under the BSX Act may attract stamp duty under various heads of the Schedule to the Stamp
Duties Act. For example, ad valorem stamp duty may be payable (i) where security is granted over shares of the Bank, (ii) where shares of the Bank form part of a deceased’s
estate and probate is sought, and (iii) on a share certificate where the share is issued by the Bank for the first time at a premium in excess of the par value thereof.
The Stamp Duties Act prescribes the persons liable to pay the stamp duty, whether the amount of duty is a fixed or ad valorem amount and the time period in which
the duty must be paid, depending on the nature of the instrument. The Stamp Duties Act also sets out the consequences for failure to stamp instruments which are subject
to duty.
Generally, if a stampable document has been executed in Bermuda or has been executed outside of Bermuda and then brought into Bermuda and stamp duty is not
paid, the document is not valid for any purpose (including registration) in Bermuda, until such time as it is stamped. In addition, a stampable document which is not stamped (i) is
not admissible in court proceedings in Bermuda, except in criminal proceedings or stamp duty violation prosecutions; and (ii) may not be acted upon, filed, or registered by any
public official or by any company. For any instrument which is liable to stamp duty that is not duly stamped, every person who is specified in the Stamp Duties Act as liable for
stamping commits an offense.
Limits on Shareholding
Generally, limits are imposed by the Companies Act on the percentage of shares in a local company carrying on business in Bermuda which may be held by persons
who are non-Bermudian as that term is defined in the Companies Act. As described above, although the Bank relies on an exemption under section 114(1)(e) of the Companies
Act to these ownership requirements and related control requirements, the bye-laws of the Bank currently restrict the voting rights of a person who is not "Bermudian" (as such
term is defined in the Companies Act) and who is "interested" (as such term is defined in the bye-laws) in the shares of the Bank which constitute more than 40% of all shares
then issued and outstanding is not entitled to vote the shares which are in excess of such 40% interest at any general meeting without the prior written approval of the Minister of
Finance.
In addition, there are certain prior approval requirements pursuant to the BDCA, the Trusts Business Act and the Investment Business Act with respect to any person
who seeks to become a "shareholder controller" (as defined in each of those Acts) of the Bank.
Deposit Insurance Scheme
Pursuant to the Deposit Insurance Act 2011 and the Deposit Insurance Rules 2016 of Bermuda, a Deposit Insurance Scheme (“DIS”) has come into effect in Bermuda.
The DIS is administered by the Bermuda Deposit Insurance Corporation. The DIS is designed to protect the deposits of individuals, charities, unincorporated associations,
partnerships, sole proprietors and small businesses by guaranteeing up to $25,000 of their aggregate Bermuda Dollar deposits in the event of a Bermuda deposit taking
institution’s failure. The DIS is backed by a Deposit Insurance Fund which is in turn funded from premium contributions that are payable by all banks and credit unions licensed
by the BMA . As a bank licensed by the BMA, we are required to be a member of the DIS and pay contributions to the Deposit Insurance Fund. Currently, our premium
contribution is calculated by the Bermuda Deposit Insurance Corporation as 0.25% per annum of the average total amount of our Bermuda Dollar deposits that are covered by
the DIS guarantee over a rolling three-month period based on information disclosed by us to the Bermuda Deposit Insurance Corporation. Each contribution to the Deposit
Insurance Fund is payable every three months in arrears.
Personal Information Protection Act, 2016
Bermuda’s principal data protection legislation is the Personal Information Protection Act 2016 (“PIPA”). PIPA applies to every organization (which includes any
individual, entity or public authority) that uses personal information in Bermuda where that personal information is used by automated or other means which form, or are intended
to form, part of a structured filing system. For the purposes of PIPA, “personal information” means any information about an identified or identifiable individual (meaning a natural
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person), and “use” or “using” are very broadly defined and effectively include possessing or carrying out any operation on personal information. The Bank uses and holds
individuals’ personal information in Bermuda, so must comply with the provisions of PIPA.
The majority of the operative provisions of PIPA, which include certain personal information privacy rights for individuals and specific obligations on organizations that
control the processing of personal information, are not yet in force in Bermuda. The first Bermuda Privacy Commissioner was appointed with effect from January 20, 2020, and
this appointment is an important step in bringing the remaining operative provisions of PIPA into force. However, as of February 2021, there is still no clear timetable for the
publication of PIPA codes of practice or the actual implementation of the remaining operating provisions.
The Cayman Islands
The Cayman Islands Monetary Authority ("CIMA")
Our activities in the Cayman Islands are monitored by CIMA. CIMA is responsible for currency management, regulation and supervision of the Cayman Islands financial
services sector (which includes securities and investments business, banking, insurance and fiduciary services), advice to the Cayman Islands government and cooperation with
overseas regulatory authorities. CIMA's principal focus is to promote and maintain a sound financial system in the Cayman Islands and to promote and enhance market
confidence, consumer protection and the reputation of the Cayman Islands as a financial center.
CIMA has broad statutory powers of enforcement. These powers are intended to permit CIMA to have access to information held or maintained by a licensee as
necessary and to enable CIMA to take appropriate remedial action if a licensee is in default of its obligations under applicable laws.
Relevant Legislation/Regulations
Banks & Trust Companies Law (2020 Revision)
The Banks and Trust Companies Act (2020 Revision) (the "BATCA") provides that it is an offense to conduct banking business or trust business without the appropriate
license. Bank of Butterfield (Cayman) Limited holds a category "A" banking license and a trust license, both issued by CIMA.
The BATCA is supplemented by certain regulations which, among other things, prescribe the fees that are payable by licensees and certain information that must be
submitted to CIMA in connection with any license application.
Licensees must adhere to certain capital adequacy requirements and must file audited financial statements with CIMA within three months of their financial year-end.
Prior written approval of CIMA is required in a number of circumstances including, but are not limited to, the issue, transfer or disposal of any shares, the appointment of a new
director or senior officer or where the licensee wishes to conduct business that deviates from its business plan submitted at the time of its license application.
Securities Investment Business Act (2020 Revision), as amended
The Securities Investment Business Act (2020 Revision), as amended (the "SIBA") provides that a person shall not carry on, or purport to carry on, securities
investment business in or from the Cayman Islands unless that person is for the time being licensed under SIBA or is exempted from the requirement to hold a license pursuant
to SIBA. Butterfield Bank (Cayman) Limited holds a securities investment business license, issued by CIMA, to conduct its business.
SIBA is essentially designed to achieve the licensing and regulation of securities investment providers and applies to (i) any company, foreign company or partnership
incorporated or registered in the Cayman Islands and carrying on "securities investment business" anywhere in the world, or (ii) any entity which has a "place of business" in the
Cayman Islands through which "securities investment business" is carried on. The entity need not have a physical presence in the Cayman Islands in order for such entity to fall
within the ambit of SIBA.
Certain categories of persons conducting activities that would otherwise fall within the definition of securities investment business are categorized as non-registrable
persons under SIBA. Such persons include single family offices who do not advise third parties and managers of non-Cayman limited liability companies who carry on securities
investment business only in that capacity. In addition, SIBA requires certain persons who are engaged in securities investment business with, among other things, sophisticated
or high net worth persons (as such terms are defined in SIBA) to register as a registered person under SIBA. Upon such registration, a registered person is subject to CIMA
regulation, however a number of requirements applicable to SIBA licensees do not apply to SIBA registered persons. For example, a SIBA registered person is not required to
submit annual audited financial statements or business plans to CIMA.
Insurance Act, 2010 (as amended)
CIMA regulates the insurance industry in the Cayman Islands pursuant to the Insurance Act, 2010 (as amended) (the "IA"). Such regulation includes licensing, ongoing
supervision, and enforcement.
Pursuant to the IA, a company is required to hold a license in order to carry on insurance or reinsurance business or business as an insurance agent, insurance broker
or insurance manager in or from the Cayman Islands. Bank of Butterfield (Cayman) Limited (which is not itself an insurer) holds an insurance agent license, issued by CIMA,
permitting it to solicit domestic business on behalf of not more than one general insurer and one long term insurer.
Companies Act (2020 Revision) as amended
Butterfield Bank (Cayman) Limited is an ordinary resident company incorporated in the Cayman Islands, meaning that, subject to it being licensed under the BATCA, it
can carry on business within the Cayman Islands. Butterfield Bank (Cayman) Limited is required to comply with the requirements of the Companies Act (2020 Revision), this
being the principal statute governing the incorporation and ongoing operations of the Cayman Islands companies.
Anti-Money Laundering Regulations (2020 Revision); Proceeds of Crime Act (2020 Revision); and Terrorism Act (2018 Revision), each as amended
Butterfield Bank (Cayman) Limited is subject to the Anti-Money Laundering Regulations (2020 Revision) (the "Regulations") made pursuant to the Proceeds of Crime
Act (2020 Revision) (the "PCL"), each as amended. The Regulations apply to anyone conducting "relevant financial business" in or from the Cayman Islands intending to form a
business relationship or carry out a one-off transaction. The Regulations require a financial service provider to maintain certain anti-money laundering procedures including those
for the purposes of verifying the identity and source of funds of an "applicant for business" except in certain circumstances, including where an entity is regulated by a recognized
overseas regulatory authority and/or listed on a recognized stock exchange in an approved jurisdiction. In addition, if any person resident in the Cayman Islands knows or
suspects, or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct, or is involved with terrorism or terrorist property, and the
information for that knowledge or suspicion came to their attention in the course of business in the regulated sector, or other trade, profession, business or employment, the
person will be required to report such knowledge or suspicion to (i) the Financial Reporting Authority of the Cayman Islands (the "FRA"), pursuant to the PCL, if the disclosure
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relates to criminal conduct or money laundering; or (ii) a police officer of the rank of constable or higher, or the FRA, pursuant to the Terrorism Law 2018 Revision), if the
disclosure relates to involvement with terrorism or terrorist financing and property.
The Cayman Islands Data Protection Act, 2017
The Data Protection Act (the “DPA”) came into force on September 30, 2019 and establishes a framework of rights and duties designed to safeguard individuals’
personal data, balanced against the need of public authorities, businesses and organizations to collect and use personal data for legitimate purposes. The DPA was developed
in line with international best practices while ensuring that it reflects the specific needs of the Cayman Islands. It is based substantially on the Data Protection Act, 1998 of the
United Kingdom. The DPA defines “personal data” very widely to include any data which enables a living individual to be identified.
In common with most businesses, Butterfield Bank (Cayman) Limited records information in respect of individuals, particularly those who are employees, clients or
suppliers, and the obligations under the DPA require a detailed review or establishment of policies and procedures in order to achieve compliance. Non-compliance with the DPA
may have serious ramifications.
The DPA is centered on eight data protection principles under which personal data must:
• be processed fairly and only when specific conditions are met, including where consent has been given, where there is a legal obligation, or where it is necessary for
the performance of a contract to which the data subject is a party. Additional conditions apply in respect of “sensitive personal data” (examples of which include
racial or ethnic origin, political opinions, religious beliefs, trade union membership, genetic data, health, sex life and offences);
• be obtained only for one or more specified lawful purposes, and shall not be further processed in any manner incompatible with such purposes;
• be adequate, relevant and not excessive in relation to the purpose or purposes for which they are collected or processed;
• be accurate and, where necessary, kept up to date;
• not be kept for longer than is necessary for the purpose;
• be processed in accordance with the rights of individuals as specified under the DPA;
• be protected by appropriate technical and organizational measures against unauthorized or unlawful processing, and against accidental loss, destruction or damage;
and
• not be transferred abroad unless the country or territory to which it is transferred ensures an adequate level of protection for the rights and freedoms of data subjects
in relation to the processing of personal data.
Under the DPA, individuals have the right to be informed how personal data is processed and Butterfield Bank (Cayman) Limited is required to provide individuals with a
privacy notice in this regard. Individuals also have the right (i) to request access to their personal data, (ii) to request rectification or correction of personal data, (iii) to request
that processing of personal data be stopped or restricted and (iv) to require Butterfield Bank (Cayman) Limited to cease processing personal data for direct marketing purposes.
Individuals who believe that their personal data has been handled incorrectly or are not satisfied with responses from Butterfield Bank (Cayman) Limited to any requests
made regarding the use of their personal data have a right under the DPA to complain to the Cayman Islands’ Ombudsman.
The Bahamas
The Central Bank of The Bahamas
Butterfield Trust (Bahamas) Limited has been granted a license from the Central Bank of The Bahamas to conduct trust business from within The Bahamas. As the
primary regulator of Butterfield Trust (Bahamas) Limited, the Central Bank of The Bahamas is responsible for the regulation and supervision of Butterfield Trust (Bahamas)
Limited with respect to all of its operations, corporate governance issues, and compliance with applicable laws and regulations. The Central Bank of The Bahamas' regulations
on capital adequacy and the regulatory framework within The Bahamas take into account the recommendations of the BCBS.
Relevant Legislation/Regulations
The Banks and Trust Companies Regulation Act and Regulations
The Banks and Trust Companies Regulation Act and Regulations set forth the basic provisions relating to the licensing and operations of banks and trust companies in
The Bahamas, as well as the powers of the Central Bank of The Bahamas to supervise and audit the activities of such entities. As it relates to the preservation of confidentiality,
the Banks and Trust Companies Regulation Act makes it an offense for certain individuals to disclose without customer consent, inter alia, the identity, assets, liabilities,
transactions or accounts of a customer of a licensee, save for in specified circumstances.
The Central Bank of The Bahamas Act and Regulations
The Central Bank of The Bahamas Act provides general provisions relating to the structure and operation of the Central Bank of The Bahamas, the regulatory reporting
required to be submitted to the Central Bank of The Bahamas by the licensees and the penalties that may be imposed for failure to comply with the orders of the Central Bank of
The Bahamas. From time to time, the Central Bank issues regulations, guidelines and policies which are available on its website.
Financial Intelligence and Reporting
The Financial Intelligence Unit Act provides for the establishment of the financial intelligence unit organization in The Bahamas that is responsible for receiving,
analyzing, obtaining and disseminating information which relates to or may relate to the proceeds of offenses under the Proceeds of Crime Act or the Anti-Terrorism Act.
The Financial Transactions Reporting Act and Regulations provides the basic requirements applicable to financial institutions in The Bahamas with respect to verifying
the identities of facility holders and bank customers, the obligation to report suspicious transactions to the financial intelligence unit, and minimum record retention policies and
procedures.
Data Protection (Privacy of Personal Information) Act
This Data Protection (Privacy of Personal Information) Act makes provision for the protection of the privacy of the personal data of individuals and the regulation of its
collection, processing, keeping, use and disclosure.
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Other Relevant Legislation
Butterfield Trust (Bahamas) Limited is also subject to various other acts and regulations, including the Proceeds of Crime Act, which sets forth that it is a crime in The
Bahamas for a person to conceal, transfer or deal with the proceeds of criminal conduct (such as money laundering) and the Anti-Terrorism Act, which sets forth that it is a crime
in The Bahamas for a person to provide or collect funds or provide financial services or make such services available to persons with the intention that such funds or services are
to be used in full or in part to carry out a terrorist act. In addition to the laws and regulations set forth above, Butterfield Trust (Bahamas) Limited is also obligated to comply with
the guidelines released by the Central Bank of The Bahamas from time to time.
Guernsey
Guernsey Financial Services Commission
Our activities in Guernsey are monitored by the Guernsey Financial Services Commission (the "GFSC") through its Probability Risk and Impact System. The primary
objective of the GFSC is to regulate and supervise finance businesses in the Bailiwick of Guernsey ("Guernsey," or the "Bailiwick"). Almost all financial service activities in
Guernsey are required to be licensed by the GFSC. Once licensed, the businesses are subject to the regulation, oversight, investigatory, information gathering and enforcement
powers of the GFSC.
The various divisions of the GFSC perform regular visits with the purpose of understanding the business and reviewing the risk management and internal control
environment (including monitoring and any outsourced functions). Such visits also monitor compliance with applicable law and regulation.
In addition to conducting on-site reviews, the GFSC has a continuing duty to determine whether entities it regulates and the persons who own or run them remain fit and
proper. Licensees therefore have a statutory obligation to notify the GFSC of various changes, which are set out in comprehensive rules and regulations. The GFSC also
requires financial services businesses to submit periodic returns for statistical analysis and inclusion in thematic studies.
The GFSC has wide powers of enforcement to address shortcomings and breaches by financial services businesses. These range from private warnings and
reprimands to revocation and suspension of applicable licenses and consents, fines and referral for criminal prosecution, among others.
The Banking Supervision (Bailiwick of Guernsey) Law, 1994
The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the "BSL") provides that no person shall in the Bailiwick accept a deposit in the course of carrying on,
whether in Guernsey or elsewhere, a deposit-taking business except under the authority of and in accordance with the conditions of a license granted by the GFSC. Butterfield
Bank (Guernsey) Limited holds a license under the BSL. In order to be granted a license, a company's business must be carried on with prudence, integrity, professional skills
and in a manner which will not tend to bring the Bailiwick into disrepute. The business must also be directed by at least two individuals who are resident in the Bailiwick of
Guernsey with appropriate standing and experience and sufficiently independent of each other. Businesses must also adhere to codes, principles, rules and instructions issued
from time to time.
Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law 2000
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law 2000 (the "Guernsey Fiduciaries Law") provides
that only a person licensed by the GFSC under the Guernsey Fiduciaries Law can operate fiduciary businesses, which includes:
•
•
formation, management and administration of trusts;
company or corporate administration;
• provision of executorship services; and
•
the formation and management of foundations.
The GFSC can grant two different categories of license, including a full fiduciary license, which can only be granted to a company or a partnership, and a personal
fiduciary license. The full fiduciary license covers any director, manager, partner or employee acting in the course of their employment.
The Protection of Investors (Bailiwick of Guernsey) Law, 1987
Under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "POI Law"), a person shall not (subject to certain exemptions) carry on, or hold
himself out as carrying on, any controlled investment business in or from within the Bailiwick, except under and in accordance with the terms of a license. For the purposes of the
POI Law, a controlled investment includes collective investment schemes and general securities and derivatives. All Guernsey domiciled funds have to be authorized by or
registered with the GFSC and be administered by a Guernsey licensed administrator. In addition, open-ended funds must also have a Guernsey-licensed custodian.
The Financial Services Commission (Bailiwick of Guernsey) Law, 1987
The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 provides that the general functions of the GFSC are to supervise the finance business in the
Bailiwick, to counter financial crime and the financing of terrorism and to maintain confidence in the Bailiwick's reputation as an international finance center.
The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999
The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 established certain offenses in connection with the proceeds of criminal conduct including
concealing of transferring the proceeds of crime, assisting another person to retain the proceeds of criminal conduct, acquisition, possession or use of proceeds of criminal
conduct and tipping-off.
The Terrorism and Crime (Bailiwick of Guernsey) Regulations, 2007
The Terrorism and Crime (Bailiwick of Guernsey) Regulations, 2007 provides for a positive obligation on businesses to report internally any suspicions of money
laundering. A money laundering reporting officer must be appointed to fulfill this function and to make disclosure to the relevant division of Guernsey's police unit.
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Deposit Compensation Scheme, 2008
Pursuant to the Banking Deposit Compensation Scheme (Bailiwick of Guernsey) Ordinance, 2008, a Guernsey DCS is in effect in Guernsey. The Guernsey DCS
provides compensation of up to £50,000 per qualifying deposit in the event of the failure of a Guernsey-licensed bank. The maximum total amount of compensation is capped at
£100 million in any 5 year period. If claims exceed this cap, compensation will be reduced pro rata. The cap also means that compensation in respect of any one bank cannot
exceed £100 million. The Guernsey DCS is paid for by Guernsey banks through an annual administration levy and, in the event of a bank failure, a compensation levy.
Data Protection (Bailiwick of Guernsey) Law, 2017
The Data Protection (Bailiwick of Guernsey) Law, 2017 ("DPL 2017") came into force on May 25, 2018 to coincide with the enforcement of the EU's General Data
Protection Regulation (EU) 2016/679. The DPL 2017 updated Guernsey's data protection framework to ensure that Guernsey retained its data protection 'adequacy' status with
the European Commission.
The DPL 2017 applies to the processing of personal data and provides rights to data subjects (i.e., individuals) and places obligations on data controllers and
processors of personal data including, among other matters, in relation to subject access requests, transfers of personal data and notification of data breaches.
The Office of the Data Protection Authority is the independent regulatory authority responsible for the regulatory functions under the DPL 2017, including the ability to
levy fines.
Jersey
Butterfield Bank (Jersey) Limited is regulated by the Jersey Financial Services Commission (“JFSC”) to carry on deposit-taking business under The Banking
Business (Jersey) Law 1991 (as amended); investment business pursuant to the Financial Services (Jersey) Law 1998 (as amended); fund services business pursuant to the
Financial Services (Jersey) Law 1998 (as amended); and money service business pursuant to the Financial Services (Jersey) Law 1998 (as amended).
The JFSC uses four key areas in supervising banks which are the development of regulatory requirements including laws and codes of practice; on-site
examinations and meetings; off-site supervision including the analysis of financial information; and international dialogue and liaison with other regulators involved in the
supervision of the broader group.
The JFSC has wide powers of enforcement to address shortcomings and breaches by financial services businesses. These range from private warnings and
reprimands to revocation and suspension of applicable licenses and consents, fines and referral for criminal prosecution, among others.
Financial Services Commission (Jersey) Law 1998
The Financial Services Commission (Jersey) Law 1998 provides that the JFSC is, among other things, responsible for the supervision and development of financial
services in or from within Jersey, preparing and submitting recommendations for legislation regarding financial services, supervising regulated entities, and administering laws
such as the Control of Borrowing (Jersey) Law 1947 and the Companies (Jersey) Law 1991. It will also have particular regard to the reduction of risk to the public of financial
loss, to protecting and enhancing the reputation and integrity of Jersey, and to the best economic interests of Jersey and the need to counter financial crime.
Banking Business (Jersey) Law 1991
The Banking Business (Jersey) Law 1991 (the "BBL") provides that no person shall carry on or hold themselves out as carrying on a deposit taking business in or
from within Jersey unless they are registered under the BBL. Butterfield Bank (Jersey) Limited holds a license under the BBL. In order to be granted a license, the JFSC will
consider the integrity, competence and financial standing of a company's business and that it would be in the best interests of persons who may deposit money that the company
should be registered. The business must also have a physical presence in Jersey involving meaningful decision making and management, and be subject to supervision by a
relevant supervisory authority. Businesses must adhere to secondary legislation and codes issued from time to time. This law also contains provisions regarding notification of
principal persons, key persons and shareholders, and sets out further powers of the JFSC.
Financial Services (Jersey) Law 1998
This law regulates investment, trust company, general insurance mediation, money service, fund services and alternative investment fund services business. It
includes requirements to register if carrying on regulated business, provisions for the supervision of financial services (including requirements to notify of changes to principal
persons, key persons and shareholders), and gives the JFSC powers to issue directions and public statements, request information, and issue further orders and regulations. It
also sets out the offenses of market manipulation, misleading information and insider dealing.
Collective Investment Funds (Jersey) Law 1988
Under the Collective Investment Funds (Jersey) Law, a person shall not (subject to certain exemptions) hold himself out as being a functionary of a recognized fund
in or from within Jersey, except under a permit. For the purposes of this law, a recognized fund is a type of collective investment fund subject to additional regulations. Any
person carrying on the business of an unclassified fund must also hold a certificate. This law also contains provisions regarding notification of principal persons, key persons and
shareholders, and sets out further powers of the JFSC.
Proceeds of Crime (Jersey) Law 1999 and Terrorism (Jersey) Law 2002
The Proceeds of Crime (Jersey) Law 1999 established certain offenses in connection with the proceeds of criminal conduct including acquiring, using or having
possession or control of criminal property, concealing, disguising, converting, transferring or removing such criminal property from Jersey, and tipping off and interference with
material.
The Terrorism (Jersey) Law 2002 contains similar offenses regarding using, possessing, providing, collecting or receiving property for the purposes of terrorism, and
otherwise dealing with terrorist property.
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Both the Proceeds of Crime (Jersey) Law 1999 and the Terrorism (Jersey) Law 2002 provide for a positive obligation on businesses to report any suspicions of
money laundering or terrorist financing.
Depositors Compensation Scheme, 2009
Pursuant to the Banking Business (Depositors Compensation) (Jersey) Regulations 2009, the Jersey Bank Depositors Compensation Scheme ("Jersey DCS") is in
effect in Jersey. The law covers all "eligible deposits" and, in the event of the failure of a Jersey bank, provides protection of up to £50,000 for deposits placed in Jersey per
person, per banking group, for local and international depositors. The maximum liability of the Jersey DCS is capped at £100 million in any 5 year period.
Data Protection (Jersey) Law, 2018 / Data Protection Authority (Jersey) Law, 2018
The Data Protection (Jersey) Law 2018 ("DPJL"), and its companion statute the Data Protection Authority (Jersey) Law 2018 ("DPAJL"), came into force on May 25,
2018 to coincide with implementation of the EU General Data Protection Regulation (EU) 2016/679 ("GDPR"). The DPJL updated Jersey's data protection framework expressly
to mirror the GDPR and ensure that Jersey retained its data protection 'adequacy' status with the European Commission.
In outline, the DPJL governs the processing of personal data in Jersey or in relation to Jersey residents; it provides rights to data subjects (i.e. individuals) and places
obligations on data controllers and processors of personal data including, among other matters, in relation to subject access requests, transfers of personal data and notification
of data breaches. The DPAJL requires any organization which is 'established' in Jersey to be registered with the Jersey Office of the Information Commissioner ("JOIC") and to
pay an annual charge.
The JOIC is the independent authority responsible for the regulatory and enforcement functions of the DPJL and DPAJL, including the ability to levy fines.
United Kingdom
Regulatory Regime
Butterfield Mortgages Limited provides UK residential property lending services.
The primary legislation governing the provision of Butterfield UK's services is the Financial Services and Markets Act 2000 ("FSMA") and its secondary regulations.
FSMA requires that in order to carry on mortgage and investment services in the UK, a firm must be authorized (or exempt) and have the necessary permissions. Butterfield
Mortgages Limited is authorized and has permissions to enter into, advise on and administer regulated mortgage contracts.
Because its permissions are limited to mortgage activities, Butterfield Mortgages Limited is regulated by the Financial Conduct Authority ("FCA"). The FCA has
responsibility for both prudential and conduct of business regulation of Butterfield Mortgages Limited.
Butterfield Mortgages Limited must comply with the FCA handbook which contains detailed rules and guidance in respect of governance and conduct matters. The
FCA's Principles for Business require, among other things, that Butterfield Mortgages Limited conducts its business with integrity and due skill, care and diligence and deal with
its regulators in an open and co-operative way. In addition, certain persons occupying senior management functions and certifications at Butterfield Mortgages Limited are
subject to statements of principle and a code of practice that describes behaviors expected of persons operating in the regulated sector. The Senior Management and
Certification Regime was implemented from December 9, 2019 and increased individual accountability of the regulator.
Control
FSMA requires any person seeking to obtain (and in certain circumstances increase) control over Butterfield UK to first get approval from the FCA. A person will
become a controller if it holds (itself or with another where they are acting together) (i) 20% or more in the shares of Butterfield UK or in any parent undertaking; or (ii) 20% or
more of the voting power in Butterfield UK or any parent.
The Companies Act 2006 requires that UK incorporated companies maintain a register of persons who have significant control over them. A person will be considered
to have significant control if it holds (itself or with another where they are acting together) 25% or more of the company's shares or voting rights or has the ability to appoint a
majority of the board of directors.
Capital
Butterfield UK is subject to capital rules under the FCA's Prudential sourcebook for Mortgage and Home Finance Firms and Insurance Intermediaries handbook
("MIPRU"). The MIPRU capital rules stipulate the minimum level and quality of capital that must be maintained to support the activities carried on.
AML and Financial Crime
Butterfield UK is subject to a range of legislation at a UK and European level requiring it to take steps to detect and prevent potential money laundering, financial crime
or terrorist financing. The FCA and HM Treasury have investigatory powers in relation to suspected breaches.
Relevant legislation at the EU level is the Fourth Money Laundering Directive (2015/849) which has been implemented in the UK through The Money Laundering,
Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLRs 2017") from June 26, 2017.
At the UK level, Butterfield UK must comply with its obligations under the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Anti-terrorism, Crime and
Security Act 2001, Counter-Terrorism Act 2008 (Schedule 7), MLRs 2017 and certain specific obligations the Transfer of Funds (Information on the Payer) Regulations 2007
and certain specific obligations in FSMA (in particular with respect to market abuse and insider dealing) and the FCA Handbook. Together, this legislation requires regulated
firms to create appropriate and risk-sensitive policies and procedures in relation to customer due diligence procedures and monitoring of transactions, to avoid financing terrorism
or money laundering or facilitating either of these, to avoid dealing with certain persons specified by HM Treasury, and to disclose suspicious activity to the relevant regulatory
authorities. In addition, the UK and all entities of the Bank must adhere to the Bribery Act 2010 which has broad extra-territorial reach.
Butterfield UK must also comply with legislation of third countries to the extent that such legislation has extra-territorial effect and is applicable to it. Examples of this are
the US PATRIOT Act of 2001 and The Foreign Account Tax Compliance Act ("FATCA") of 2010.
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Data Protection Act, 2018
The Data Protection Act 2018 (“DPA”) implements the EU General Data Protection Regulation (2016/679). Butterfield UK is required to have in place compliant policies
and procedures to meet the DPA obligations to deal with data appropriately. The DPA applies to any business or person using or holding personal data on individuals within the
EU and UK. Breaches of the legislation are criminal offenses and can result in severe penalties. The Information Commissioner’s Office has regulatory and disciplinary powers
and breach of the DPA can give rise to financial penalties based on a percentage of annual turnover.
Following the UK leaving the EU on January 31, 2020, the GDPR is incorporated into the UK’s domestic law under The European Union (Withdrawal Agreement) Act
2020 that makes legal provision for ratifying the Brexit Withdrawal Agreement of January 24, 2020 and implementing it into the domestic law of the United Kingdom.
Switzerland
Financial Institutions Act
The Swiss Federal Financial Institutions Act ("FinIA") and the implementing ordinance to the Swiss Federal Financial Institutions Act ("FinIO") entered into force on
January 1, 2020. FinIA and FinIO set forth the basic provisions relating to the licensing in Switzerland of financial institutions, which includes trustees and (collective) asset
managers but excludes banks and insurance companies as they are already subject to specific legislation. Pursuant to FinIA, Swiss trustees acting on a professional basis in
Switzerland or from Switzerland, must obtain a license from the Swiss Financial Market Supervisory Authority ("FINMA") to carry on their trustee-activities. A Swiss branch or a
Swiss representative office of a foreign trustee must also obtain a license from FINMA.
FINMA is responsible for granting the license and for taking any enforcement actions. In order to obtain a license from FINMA, a trustee will first need to affiliate to a
Supervisory Organisation, which is licensed and supervised by FINMA. The Supervisory Organisation will conduct the day-to-day supervision and perform regular audits of the
affiliated trustees. In order to obtain a license, the applicant must further, inter alia, comply with minimum capital requirements, have an appropriate level of own funds, an
appropriate organization, qualified executives and generally meet a "fit and proper" requirement.
In accordance with an obligation for existing trustees under FinIA, Butterfield Trust (Switzerland) Ltd notified FINMA before June 30, 2020 of its intention to apply for a
license. Butterfield Trust (Switzerland) Ltd has until December 31, 2022 to affiliate to a Supervisory Organisation, comply with the licensing requirements as set forth under FinIA
and apply for a license to FINMA. During such period, it may continue to provide trustee-services, provided it remains affiliated to a Self-Regulatory Organization for anti-money
laundering compliance purposes.
Swiss Anti-Money Laundering Act
The Swiss Federal Act on Combating Money Laundering and Terrorist Financing of 10 October 1997 ("AMLA") and the related implementing ordinances apply to
financial intermediaries, which include trustees. It governs the combating of money laundering and terrorist financing. It ensures the exercise of due diligence by the financial
institutions in the conduct of financial transactions. Pursuant to AMLA, financial institutions must affiliate to a recognized Self-Regulatory Organisation or a recognized
Supervisory Organisation (see above under Financial Institutions Act) which shall supervise compliance by financial intermediaries of their duties set out in AMLA. Butterfield
Trust (Switzerland) Ltd must comply with its obligations under AMLA and is currently affiliated to OAR-G, a Self-Regulatory Organisation licensed and supervised by FINMA.
Swiss Data Protection Act
The Swiss Federal Act on Data Protection of June 19, 1992 ("DPA") and the Ordinance to the Federal Data Protection of June 14, 1993 ("DPO") aim to protect the
privacy and the fundamental rights of persons when their data is processed. The DPA and DPO provide for several requirements and limits with respect to data processing in
Switzerland as well as the transfer of data outside Switzerland. The data protection legislation applies to any private entity processing data related to individuals or corporate
entities. Data processing is defined as any operation with personal data, irrespective of the means applied and the procedure, and in particular the collection, storage, use,
revision, disclosure, archiving or destruction of data. The DPA and DPO impose a series of duties on the so-called controller of the database, i.e. the entity that defines the
purpose and controls the content of the collected data. The activities of Butterfield Trust (Switzerland) Ltd imply data processing on various data subjects. As a result, it is to
comply with the provisions of the DPA when processing data.
The general principles of the Swiss data protection legislation include the obligations to lawfully, accurately and not excessively process data. Further, data processing
must be protected by appropriate technical and organizational measures against accidental destruction, loss, theft and any other unauthorized use. The persons or entities
whose data are being processed must be granted a right of access to their data if they request so and must have the opportunity to request the correction of the data that is
inaccurate.
On September 25, 2020, the Swiss Parliament has adopted the revision of the DPA. The Federal Council will decide on the entry into force at a later stage, but this is
not expected to occur before January 1, 2022. The revised DPA provides for strengthened individuals' rights, increased transparency in data processing activities and extended
governance and process rules for data controllers. The revised DPA also provides for increased fines for violation of duties under the revised DPA. The revisions further bring the
DPA more in line with the EU General Data Protection Regulation (EU 2016/679), so that Switzerland may uphold its status as a country adequately protecting personal data
from an EU perspective.
Singapore
Butterfield Trust (Asia) Limited holds a trust business license issued by the Monetary Authority of Singapore (“MAS”) pursuant to the Trust Companies Act (Chapter
336 of Singapore) ("TCA").
As the integrated financial services regulatory authority in Singapore, the MAS administers (among other financial services related statutes) the TCA and regulates
and supervises (among other types of financial institutions) trust business license holders (such as Butterfield Trust (Asia) Limited) in accordance with the TCA and all related
subsidiary legislation, notices, guidelines and other regulatory instruments issued by the MAS ("MAS Instruments"). These MAS Instruments cover a wide range of ongoing
obligations relating to, inter alia, capital adequacy, audit, conduct of business, confidentiality, anti-money laundering and countering of terrorist financing and also impose
approval and/or notification requirements in respect of controllers, directors and key officers.
Under the TCA, the MAS is empowered to conduct inspections and/or investigations of Butterfield Trust (Asia) Limited to ensure that it is in compliance with
requirements contained in the MAS Instruments. Where there is a breach, the MAS may pursue a wide range of enforcement sanctions, including private warnings, private or
public reprimands, composition offers (i.e., allowing the offense to be compounded by payment of a fine), prohibition orders, suspension or revocation of licenses, civil penalties
and criminal prosecution.
42
United States
Foreign Account Tax Compliance Act (FATCA)
Under FATCA, US federal tax legislation passed in 2010, a 30% withholding tax will be imposed on "withholdable payments" made to non-US financial institutions
(including non-US investment funds and certain other non-US financial entities) that fail (or, in some cases, that have 50% affiliates which are also non-US financial institutions
that fail) to provide certain information regarding their US accountholders and/or certain US investors (such US accountholders and US investors, "US accountholders") to the
IRS. For non-US financial institutions that fail to comply, this withholding will generally apply without regard to whether the beneficial owner of a withholdable payment is a US
person or would otherwise be entitled to an exemption from US federal withholding tax. "Withholdable payments" generally include, among other items, payments of US-source
interest and dividends. Furthermore, FATCA may also impose withholding on non-US source payments by non-US financial institutions that comply with FATCA to non-US
financial institutions that fail to comply with FATCA. However, under proposed Treasury regulations, such withholding will not apply to payments made before the date that is two
years after the date on which final regulations defining the term "foreign pass thru payment" are published. In general, non-publicly traded debt and equity interests in investment
vehicles will be treated as "accounts" and subject to these reporting requirements. In addition, certain insurance policies and annuities are considered accounts for these
purposes.
Some countries, including the Cayman Islands, Guernsey, Jersey, the UK, Singapore, Switzerland and The Bahamas, have entered into, and other countries are
expected to enter into, intergovernmental agreements ("IGAs") with the United States to facilitate the type of information reporting required under FATCA. While the existence of
IGAs will not eliminate the risk of the withholding described above, these agreements are expected to reduce that risk for financial institutions and investors in countries that have
entered into IGAs. IGAs will often require financial institutions in those countries to report some information on their US accountholders to the taxing authorities of those
countries, which will then pass the information to the IRS.
The Group closely monitors all present and new legislation that is or will be applicable for its organization, and is continuing to monitor all implications of FATCA and
legislation of countries that have entered into IGAs. While monitoring these implications, the Group is and will be in close contact with all of its stakeholders, including its peers
and financial industry representative organizations.
The Group has taken all the steps it believes are necessary to comply with current FATCA regulations, including analysis of its group entities and conclusions as to their
FATCA classifications, entering into agreements with the US tax authorities (as necessary), identification of reportable accounts, and timely and accurate filing of all required
annual FATCA filings, all in accordance with the appropriate IGA. Certain payments to the Group may be subject to withholding under FATCA if, in the future, the Group cannot
enter into such agreements or satisfy the requirements thereunder (including as a result of local laws in non-IGA countries prohibiting information-sharing with the IRS, as a
result of contracts or local laws prohibiting withholding on certain payments to accountholders, policyholders, annuitants or other investors, or as a result of the failure of
accountholders, policyholders, annuitants or other investors to provide requested information). The possibility of such withholding and the need for US accountholders,
policyholders, annuitants and investors to provide certain information may adversely affect the sales of certain of the Group's products. In addition, entering into agreements with
the IRS and compliance with the terms of such agreements and with FATCA and any regulations or other guidance promulgated thereunder or any legislation promulgated under
an IGA may substantially increase the Group's compliance costs.
Office of Foreign Assets Control Regulation
The US Treasury Department's Office of Foreign Assets Control ("OFAC"), administers and enforces economic and trade sanctions against targeted foreign countries
and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries.
OFAC sanctions apply to all transactions that take place in the United States. Transactions that take place outside the United States may become subject to the jurisdiction of the
United States and subject to compliance with OFAC sanctions if they involve US persons or payment in US dollars. Such payments typically are cleared through the US Dollar
settlement system located in the United States and involve the intermediation of US financial institutions. Although we currently do not have any operations in the United States,
our operations may involve transactions with US persons or in US Dollars and as a result, in order to comply with OFAC sanctions, we are responsible for, among other things,
blocking any such transactions with designated targets and countries and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have
serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval
is required or to prohibit such transactions even if approval is not required.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of worldwide governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. In
particular, United States anti-money laundering laws and regulations including the USA PATRIOT Act of 2001, applicable to non-US banks with operations in the United States,
including banks that engage in transactions outside the United States with US persons or in US Dollars, such as the Bank, impose significant compliance and due diligence
obligations. Under these laws and regulations, financial institutions are prohibited from entering into specified financial transactions and account relationships and must use
enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must
also take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities
routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including
causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if
approval is not required. Institutions that violate these obligations can be subject to cease and desist orders, civil money penalties and criminal sanctions.
Future Legislation and Regulation
The above jurisdictions and the other jurisdictions in which we operate may enact legislation from time to time that affects the regulation of the financial services
industry or that affect the regulation of financial institutions chartered by or operating in those jurisdictions. These governments and their regulatory agencies also periodically
propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or
regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate and may
significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and modify our business strategy, and limit
our ability to pursue business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely affected, perhaps
materially, as a result.
Additional Information
The Butterfield Act and our current amended and restated bye-laws have been filed as exhibits to this annual report on Form 20-F. The information contained in these
exhibits is incorporated by reference herein.
43
Information regarding the rights, preferences and restrictions attaching to each class of our common and preferred shares, as well as other information regarding
director and shareholder rights and proceedings, is described in the section entitled "Description of Share Capital" in our registration statement on Form F-1 filed with the SEC on
February 12, 2017 with the file number 333-216018 and incorporated by reference herein.
C. Organizational Structure
Refer to Item 4.B. "Business Overview".
D. Property, Plants and Equipment
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 UK, The Bahamas, Switzerland, Singapore, Mauritius and Canada. Additionally, we operate three branch locations in Bermuda and four branch
locations in the Cayman Islands. Premises are owned in Bermuda and the Cayman Islands, with the remainder being held under commercial leases.
44
E. Selected Statistical Data
The following tables present select statistical information as required by new subpart 1400 of Regulation S-K (previously Industry Guide 3).
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
Average Balance Sheet and Interest Rates
The following table presents average consolidated balance sheets and net interest income for the years indicated:
(in millions of $)
Assets
Cash due from banks — Interest bearing
Securities purchased under agreement to resell
Short-term investments
Equity securities at fair value
Available-for-sale
Held-to-maturity
Investment in securities(1)
Commercial loans
Consumer loans
Total loans, net of allowance for credit losses(2)
Interest-earning assets
Other assets
Total assets
Liabilities
Deposits
Securities sold under agreement to repurchase
Long-term debt
Interest bearing liabilities
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Non-interest bearing funds net of non-interest-earning assets (free balance)
Net interest margin
Net interest spread
For the year ended December 31
2020
Interest
income
(expense)
Average
yield/
rate
Average
balance
2019
Interest
income
(expense)
Average
yield/
rate
Average
balance
2018
Interest
income
(expense)
Average
yield/
rate
7.2
1.4
3.6
50.6
58.6
0.29 % 2,818.4
35.9
1.27 % 1,770.4
21.8
1.23 %
1.04 %
39.6
0.39 %
375.2
1.2
2.15 % 2,247.3
2.70 % 2,226.3
1.2
4.5
60.7
68.7
3.04 %
72.0
1.20 %
134.8
1.1
2.70 % 2,774.2
3.09 % 1,803.6
1.9
1.2
68.9
55.3
2.59 %
0.89 %
2.48 %
3.07 %
Average
balance
2,481.6
132.7
916.4
1.8
2,346.3
2,166.2
4,514.3
109.2
2.41 % 4,474.9
129.4
2.89 % 4,578.9
124.3
2.71 %
1,693.1
83.9
4.94 % 1,412.0
80.9
5.73 % 1,323.2
76.3
5.77 %
3,368.6
5,061.7
13,106.6
393.7
13,500.3
146.8
230.7
352.0
4.34 % 2,957.5
4.54 % 4,369.5
2.68 % 12,077.6
153.1
234.0
405.1
5.18 % 2,672.6
5.36 % 3,995.8
3.35 % 10,552.0
142.2
218.5
367.6
5.32 %
5.47 %
3.48 %
371.5
12,449.1
350.7
10,902.7
9,710.8
(25.1)
(0.26) % 8,851.5
(51.5)
(0.58) % 7,375.8
(17.6)
(0.24) %
—
173.4
—
— %
0.7
—
(2.12) %
1.6
—
(2.11) %
(9.3)
(5.35) %
143.4
(7.9)
(5.49) %
133.4
(6.9)
(5.21) %
9,884.2
(34.4)
(0.35) % 8,995.5
(59.4)
(0.66) % 7,510.8
(24.6)
(0.33) %
2,363.9
280.6
12,528.6
971.7
13,500.3
3,222.5
2,147.2
310.4
11,453.1
995.9
12,449.1
3,082.1
2,231.8
281.0
10,023.7
879.0
10,902.7
3,041.1
317.6
2.42 %
345.7
2.86 %
343.0
3.25 %
2.33 %
2.73 %
3.12 %
Ratio of average interest earning asset/ interest bearing liabilities
132.6 %
134.3 %
140.5 %
______________________________
(1)
Yields are based on average historical costs and yields on securities held in income tax exempt jurisdictions are not computed on a tax-equivalent yield basis.
(2)
Interest income and rates on loans include loan fees. Additionally, average non-accrual loans were included in the average loan balances used to determine the average
yield on loans in all of the periods presented. Interest income on non-accrual loans is recognized only to the extent it is received in cash. See "Note 2: Significant
accounting policies" of our audited consolidated financial statements for further information.
45
Analysis of Changes in Volume and Rate on Interest Income and Interest Expense
The following table presents the amount of changes in interest income and interest expense from December 31, 2019 to December 31, 2020 and from December 31,
2018 to December 31, 2019, due to changes in both average volume and average rate. Changes not solely due to volume or rate have been allocated to volume.
(in millions of $)
Interest income related to:
Cash due from banks — Interest bearing
Securities purchased under agreement to resell
Short-term investments
Equity securities at fair value
Available-for-sale
Held-to-maturity
Total investment in securities(1)
Commercial loans
Consumer loans
Total loans, net of allowance for credit losses(2)
Total interest-earning assets
Interest expenses related to:
Deposits
Securities sold under agreement to repurchase
Long-term debt
Total interest bearing liabilities
Change in net interest income
2020 compared to 2019
2019 compared to 2018
Increase/
(Decrease)
due to
Changes in
Net
Increase/
(Decrease)
Increase/
(Decrease)
due to
Changes in
Net
Increase/
(Decrease)
Volume
Rate
Volume
Rate
(0.90)
(27.80)
(28.70)
0.99
2.15
—
2.23
(1.43)
0.80
14.14
18.12
32.26
35.30
(2.26)
(0.01)
(1.61)
(3.88)
(0.79)
(3.05)
—
(12.33)
(8.67)
(21.00)
(11.14)
(24.62)
(35.76)
(88.40)
28.66
0.01
0.21
28.88
0.20
(0.90)
—
(10.10)
(10.10)
(20.20)
3.00
(6.50)
(3.50)
(53.10)
26.40
—
(1.40)
25.00
31.42
(59.52)
(28.10)
13.36
(0.99)
2.88
—
(14.23)
13.05
(1.18)
5.09
14.75
19.84
33.91
0.80
0.32
0.42
—
5.98
0.36
6.34
(0.51)
(3.80)
(4.31)
3.57
14.16
(0.66)
3.30
—
(8.25)
13.41
5.16
4.58
10.96
15.54
37.49
(8.63)
(25.24)
(33.87)
0.02
(0.55)
(9.15)
24.76
—
(0.38)
(25.61)
(22.05)
0.02
(0.93)
(34.78)
2.71
______________________________
(1)
Yields are based on average historical costs and yields on securities held in income tax exempt jurisdictions are not computed on a tax-equivalent yield basis.
(2)
Interest income and rates on loans include loan fees. Additionally, average non-accrual loans were included in the average loan balances used to determine the average
yield on loans in all of the periods presented.
Investment Portfolio
The following table presents an analysis of the weighted average yields for interest bearing debt securities that are not held at fair value through earnings as at
December 31, 2020:
(in millions of $)
Available-for-sale
US government and federal agencies
Non-US governments debt securities
Asset-backed securities - Student loans
Residential mortgage-backed securities
Weighted average yield(1)
Held-to-maturity
US government and federal agencies
Weighted average yield(1)
Total Weighted average yield(1)
Remaining term to maturity
Within
1 year
1 to 5
years
After 5
through 10
years
After 10
years
No specific
or single
maturity
Total
— %
6.50 %
— %
— %
— %
4.81 %
— %
— %
6.50 %
4.81 %
— %
— %
— %
— %
6.50 %
4.81 %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
2.40 %
— %
1.69 %
3.23 %
2.41 %
2.93 %
2.93 %
2.40 %
4.81 %
1.69 %
3.23 %
2.43 %
2.93 %
2.93 %
2.65 %
2.66 %
___________
(1)
Yields are based on average historical costs and yields on securities held in income tax exempt jurisdictions are not computed on a tax-equivalent yield basis.
46
Loan Portfolio
Maturity Profile of the Loan Portfolio
The following table presents certain items in our loan portfolio by contractual maturity as at December 31, 2020:
(in millions of $)
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total Commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total Commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total Consumer loans
As at December 31, 2020
Remaining term to average
contractual maturity
Within
1 year
1 to 5
years
After 5
years
through 15
years
After 15
years
No specific
maturity(1)
Total
30.8
99.6
72.5
202.9
60.8
44.3
105.1
1.0
68.3
25.1
57.7
152.1
20.5
192.7
—
213.2
174.1
0.5
174.6
20.5
—
—
38.5
59.0
228.1
165.3
—
393.4
471.3
—
471.3
1.1
—
—
17.7
18.8
—
2.0
—
2.0
9.3
—
9.3
—
—
—
2.1
2.1
—
—
—
—
—
—
—
—
—
—
—
—
—
279.4
459.6
72.5
811.5
715.5
44.8
760.3
22.6
68.3
25.1
116.0
232.0
3,406.4
Total Residential mortgages
436.9
1,288.8
597.7
1,083.0
Non-interest bearing items without a contractual maturity(1)
—
—
—
—
(15.3)
(15.3)
Total
897.0
1,735.6
1,481.2
1,096.4
(15.3)
5,194.9
The following table presents our loan portfolio by maturity and type of interest as at December 31, 2020:
(in millions of $)
Loans with fixed interest rates:
Commercial loans
Commercial real estate loans
Consumer loans
Residential mortgages
Total Loans with fixed interest rates
Loans with floating or adjustable interest rates:
Commercial loans
Commercial real estate loans
Consumer loans
Residential mortgages
Total loans with floating or adjustable interest rates
As at December 31, 2020
Remaining term to average
contractual maturity
Within
1 year
1 to 5
years
After 5
years
through 15
years
After 15
years
No specific
maturity(1)
Total
13.2
24.3
1.9
22.4
61.8
189.7
80.8
150.1
414.6
835.2
31.3
34.7
1.7
163.3
231.0
181.8
139.9
57.4
1,125.5
1,504.6
237.2
136.6
0.2
90.7
464.7
156.3
334.7
18.6
506.9
1,016.5
—
—
—
242.8
242.8
2.0
9.3
2.1
840.2
853.6
—
—
—
—
—
—
—
—
—
—
281.7
195.6
3.8
519.2
1,000.3
529.8
564.7
228.2
2,887.2
4,209.9
Non-interest bearing items without a contractual maturity(1)
—
—
—
—
(15.3)
(15.3)
Total loans
897.0
1,735.6
1,481.2
1,096.4
(15.3)
5,194.9
(1)Included here are items without a contractual maturity such as deferred loans fees and fair value adjustments.
47
Credit Ratios
The following table presents our credit ratios for the years indicated:
(in million of $)
Allowance for credit losses to total loan outstanding:
Allowance for credit losses
Total loans outstanding
Non-accrual loans to total loan outstanding:
Non-accrual loans
Total loans outstanding
Allowance for credit losses to non-accrual loans:
Allowance for credit losses
Non-accrual loans
Net charge-offs (recoveries) during the period to average loans outstanding:
Commercial loans
Net charge-offs (recoveries) during the period
Average amount outstanding
Commercial real estate loans
Net charge-offs (recoveries) during the period
Average amount outstanding
Consumer loans
Net charge-offs (recoveries) during the period
Average amount outstanding
Residential Mortgage
Net charge-offs (recoveries) during the period
Average amount outstanding
Total loans
Net charge-offs (recoveries) during the period
Average amount outstanding
For the year ended December 31,
2020
2019
2018
34.1
5,194.9
0.7 %
72.5
5,194.9
1.4 %
34.1
72.5
23.6
5,166.2
0.5 %
50.4
5,166.2
1.0 %
23.6
50.4
25.0
4,069.0
0.6 %
48.7
4,069.0
1.2 %
25.0
48.7
47.0 %
47.0 %
51.0 %
3.6
852.9
0.42 %
0.0
750.3
— %
0.6
228.2
0.28 %
1.7
3,260.1
0.05 %
5.9
5,061.7
0.12 %
0.4
699.4
0.05 %
0.0
631.1
— %
1.0
213.7
0.47 %
0.0
2,930.5
— %
1.4
4,369.5
0.03 %
0.3
699.0
0.04 %
0.0
587.3
— %
0.3
182.7
0.16 %
2.7
2,579.9
0.11 %
3.3
3,995.8
0.08 %
Allowance for credit losses to loan outstanding increased from 0.5% to 0.7% in 2020 from 2019 due to the implementation of CECL which saw an increased reserve
build through lifetime losses, past and current conditions as well as negative revised macroeconomic forecasts impacting future expected credit loss estimates.
Non-accrual loans to total loan outstanding ratio increased from 1.0% to 1.4% in 2020 from 2019 mainly due to a commercial loan in collateral dispute litigation and a
small number of residential mortgages in Bermuda.
Net charge-off (recoveries) ratio increased from 0.03% to 0.12% in 2020 from 2019 mainly due to the sale of a large commercial loan which had previously been
provisioned for.
48
Allocation of the Allowance for Credit Losses
(in millions of $)
Balance at End of Period Applicable to:
Commercial
Commercial real estate
Consumer
Residential Mortgage
December 31, 2020
Percent of
loans in each
category to
total loans
Amount
11.61
2.1
4.5
15.9
34.1
15.4 %
14.6 %
4.4 %
65.5 %
100 %
See "Note 6: Loans" to our audited consolidated financial statements as at December 31, 2020 for the breakdown of allowance for credit losses by each loan category.
Deposits
The following table presents our deposits by category for the years indicated:
(in millions of $, unless otherwise indicated)
Interest bearing deposits
Bermuda
Demand
Term
Total Bermuda
Non-Bermuda
Demand
Term
Non-Bermuda
Total interest bearing deposits
Non-interest bearing demand deposits
Bermuda
Non-Bermuda
Total non-interest bearing deposits
For the year ended December 31
2020
2019
2018
Average
balance
Average
rate
Average
balance
Average
rate
Average
balance
Average
rate
1,879.8
961.3
2,841.1
5,190.0
1,679.7
6,869.7
9,710.8
1,511.5
852.4
2,363.9
(0.03) %
1,946.3
0.07 %
2,825.8
0.90 %
1,009.3
1.51 %
863.6
2,955.6
3,689.4
0.02 %
4,280.1
0.27 %
2,784.6
0.96 %
1,615.8
1.44 %
901.8
— %
0.73 %
0.08 %
0.99 %
5,895.9
8,851.5
1,417.1
730.1
2,147.2
3,686.4
7,375.8
1,591.9
639.9
2,231.8
The following table presents the amount of uninsured deposits by reportable segment:
(in millions of $)
Bermuda (1)
Cayman (2)
Channel Islands and the UK (3)(4)
___________________________
As at December 31
2020
2019
4,571.1
4,108.7
4,284.8
4,197.1
3,475.0
4,510.4
12,964.6
12,182.5
(1)
(2)
(3)
(4)
The Bermuda Deposit Insurance Scheme covers BMD deposits only up to a maximum of $25,000 per group of depositor relationships. Eligibility is limited to individuals;
sole proprietors; partnerships; unincorporated associations; charities; and companies registered in the Register of Small Businesses maintained by the Bermuda Economic
Development Corporation.
Cayman currently has no deposit insurance scheme in place.
The Guernsey DCS covers deposits up to a maximum of £50,000 per qualifying claimant which is defined as a natural person; the trustee of a Guernsey Retirement
Annuity Trust; the executor or administrator of a deceased person's estate; or a Guernsey-registered charity. The total amount of compensation is capped at £100 million
in any 5-year period. Claims exceeding this cap will be reduced pro rata.
The Jersey DCS covers deposits up to a maximum of £50,000 per qualifying depositor per Jersey banking group. Qualifying depositors are defined as private individuals
and charities. The total amount of compensation is capped at £100 million in any 5-year period.
49
The following table presents the amount of uninsured time deposits by reportable segment and time to maturity:
(in millions of $)
Time deposits in excess of insured limit:
Bermuda
Channel Islands and the UK
Total time deposits in excess of insured limit
Time deposits in uninsured accounts:
Bermuda
Cayman
Channel Islands and the UK
Total time deposits in uninsured accounts
As at December 31, 2020
Remaining term to contractual maturity
Within
3 months
3 to 6
months
6 to 12
months
Over 12
months
19.5
142.8
162.3
286.9
242.8
878.2
1,407.9
14.2
28.1
42.3
174.6
272.1
140.0
586.7
20.0
79.8
99.8
81.7
16.1
145.0
242.8
39.2
—
39.2
49.6
0.7
—
50.3
Total
92.9
250.7
343.6
592.8
531.7
1,163.2
2,287.7
Total uninsured time deposits
1,570.2
629.0
342.6
89.5
2,631.3
None.
ITEM 4A: UNRESOLVED STAFF COMMENTS
50
ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.
Operating Results
Management's Discussion and Analysis of Financial Condition and Results of Operations
This section presents management's perspective on our financial condition and results of operations. The following discussion and analysis is intended to highlight and
supplement data and information presented elsewhere in this report, including the consolidated financial statements and related notes and should be read in conjunction with the
accompanying tables and our financial statements included in this report. The consolidated financial statements and notes have been prepared in accordance with GAAP. Certain
statements in this discussion and analysis may be deemed to include "forward-looking statements" and are based on management's current expectations and are subject to
uncertainty and changes in circumstances. Forward-looking statements are not historical facts but instead represent only management's belief regarding future events, many of which
by their nature are inherently uncertain and outside of management's control. Actual results may differ materially from those included in these statements due to a variety of factors,
including worldwide and local economic conditions, success in business retention and obtaining new business and other factors. Factors that could cause these differences are
discussed in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." For management's considerations and determinations of each non-core
item discussed, please see "Selected Financial Data—Reconciliation of Non-GAAP Financial Measures".
Overview
We are a full service bank and wealth manager headquartered in Hamilton, Bermuda. We operate our business through our four reportable segments, three
geographical and one other: Bermuda, the Cayman Islands, the Channel Islands and the UK and Other. We offer banking services, comprising of retail and corporate banking,
and wealth management, which consists of trust, private banking, and asset management. In our Bermuda and Cayman Islands segments, we offer retail banking and wealth
management. In our Channel Islands and the UK segment, we offer wealth management, and specifically in the UK jurisdiction, we offer residential property lending. The Other
segment includes our operations in the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland. In these jurisdictions we either provide wealth management
or operate service centers. These jurisdictions individually and collectively do not meet the quantitative threshold for segmented reporting and are therefore aggregated as a non-
reportable operating segment.
The following table details our Net Revenue in total and by segment, as well as our total assets, total loans, total deposits, total AUA (which includes trust and custody
AUA) and AUM for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
Net Revenue
% of Net Revenue from:
Bermuda segment
Cayman Islands segment
Channel Islands and the UK segment
Other segment
(in millions of $)
Summary Balance Sheet
Total Assets
Total Loans
Total Deposits
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Market Environment
For the year ended December 31,
2020
2019
2018
47.6 %
29.1 %
20.4 %
2.9 %
49.8 %
30.9 %
15.2 %
4.1 %
56.9 %
29.0 %
11.2 %
2.9 %
14,738.6
5,160.8
13,250.1
32,416.1
104,060.4
2,028.8
3,528.6
13,921.6
5,142.6
12,441.6
30,308.1
91,688.7
2,156.7
3,490.9
Our business is affected by international, regional and local economic conditions as well as, the perception of future economic prospects. The significant macro-
economic factors that impact our business include the US and global economic landscapes, unemployment rates, the housing markets and interest rates. With interest rates
historically low across the yield curve for most global markets, 2020 began with the expectation of a future rising rate environment underpinned by strong economic
fundamentals. As the impacts of the global COVID-19 health crisis spread by the end of March 2020, locking down nations and creating significant market volatility, global central
banks reacted swiftly by implementing accommodative monetary policies with multiple rate reductions to near zero levels within weeks as well as quantitative easing. With
economies shutting down and focusing on the health crisis, GDP forecasts declined to negative growth rates but with the introduction of multiple COVID-19 vaccines in late 2020,
GDP outlooks are starting to improve for 2021.
COVID-19 impacted all of our jurisdictions, and within these small island communities, the Bank plays an important role as an essential services provider, an employer,
a source of working capital for companies in need and an active corporate citizen supporting our communities. The Bank mandated social distancing, provided protective
equipment to staff, implemented split teams, established broad remote working conditions through its virtual desktop interface, and remained operational to the extent permitted.
The Bank took significant steps to assist clients impacted by COVID-19. For qualified residential mortgage and consumer borrowers in the Bermuda and Cayman
segments, the Bank automatically deferred principal and interest payments for three months from April 1, 2020 to June 30, 2020 with the loan term extended. Borrowers had the
51
option to notify the Bank if they preferred to continue with regular, scheduled payments (i.e. to opt-out). Commercial customers had the option to pay interest only on their
monthly loan payments with no penalties. The Bank subsequently extended the residential mortgage and personal loan deferral program for a further three months from July 1,
2020 to September 30, 2020, and borrowers had to notify the Bank of their intention to defer principal and interest payments (i.e. to opt-in). The Bank also introduced deferrals
on credit card payments for April and May in the Bermuda segment and May and June in the Cayman segment and deferred previously announced card-related fee increases.
Following the deferral programs, management engaged in an active calling program for the Bermuda mortgage deferrals to determine borrower capacity to resume payment,
with over 90% confirming the ability to make payment. Given the economic headwinds, the Bank has increased credit monitoring and remains cautiously confident that its
conservative underwriting and an improving economic outlook are evolving into a relatively mild deterioration in credit quality but will continue to work with customers who
experience difficulty, particularly those in the hospitality sector.
In Bermuda, we continued to face mixed economic conditions, owing to a continued slowdown in private consumption now exacerbated by COVID-19. In real terms,
GDP is expected to decline by 11.7% in 2020, the decline in growth influenced primarily by the response to reduce the spread of the COVID-19 pandemic. Bermuda's new airport
is now open, although with limited commercial airlift, and no cruise ships, total visitor numbers are down significantly. Bermuda has robust health guidelines and COVID-19
testing programs in place with relatively low numbers of COVID-19, which did encourage some tourism in the latter half of 2020. The Bermuda government implemented a
number of measures to stimulate the economy, including COVID-19 unemployment benefits, business relief in the form of import duty deferments and customs duty relief; and
the introduction of the Work from Bermuda certificate which would allow non-residents to work remotely from Bermuda for up to one year. The Bermuda economy will continue to
face challenges from unemployment, significant government debt and related debt service charges. See Item 3.D. "Risk Factors - Risks Relating to the Markets in Which We
Operate - Adverse economic and market conditions in Bermuda, the Cayman Islands and the Channel Islands and the UK, have in the past resulted in and could in the future
result in lower revenue, lower asset quality, increased provisions and lower earnings" and Item 3.D. “Risk Factors - Risks Relating to the Markets in Which We Operate - A
decline in tourism in Bermuda or the Cayman Islands could have a material adverse effect on our business, financial condition or results of operations”. Overcoming these
challenges, as well as continuing to attract foreign capital, is a key focus of the Bermuda government. Sustainable growth for the Bermudian economy will be driven largely by
successful management of these issues.
Bermuda GDP (in millions)
% change from prior year
Selected GDP Components:
Real estate and renting GDP (in millions)
% change from prior year
International business GDP (in millions)
% change from prior year
2019
7,484
3.6%
1,051
3.6%
1,835
6.4%
2018
7,224
1.1%
1,014
3.4%
1,724
0.2%
2017
7,142
3.5%
981
5.6%
1,720
0.1%
2016
6,900
3.7%
929
2.7%
1,718
0.6%
2015
6,655
3.8%
905
1.3%
1,707
5.6%
Source: Government of Bermuda, Department of Statistics, Annual Publication - 2019, Gross Domestic Product at current purchaser's prices, Table 4
In the Cayman Islands, COVID-19 has caused significant disruptions to tourist arrivals, both cruise and air, with a complete loss of cruise visitors and the Cayman
airport only re-opening for commercial flights in Q4 2020. The Cayman Islands government estimated that the economy contracted between 11.4%-12.2% in 2020, conditional on
the resumption of low visitor arrivals in late 2020. Like Bermuda, the Cayman Islands has robust health guidelines and COVID-19 testing regime and low numbers of reported
cases. The Cayman Islands governments prudent fiscal measures, evidenced by record growing surpluses and overall external debt reduction, meant they were able to respond
to the pandemic with appropriate fiscal measures in the short-term.
Cayman GDP (in millions)
% change from prior year
Source: Economist Intelligence Unit
2019
5,942
2.6%
2018
5,485
3.3%
2017
5,142
3.0%
2016
4,899
3.1%
2015
3,752
2.9%
In the Channel Islands, both Jersey and Guernsey have seen significant impacts on economic output due to the global pandemic, with early estimates of a 9%
reduction in GDP in Guernsey and 7.5% in Jersey. In terms of COVID-19 response, the Channel Islands have introduced a range of restrictions on inbound arrivals and as a
consequence, tourism and business-related travel is significantly below 2019 levels. Various health containment guidelines and measures have been introduced since the
pandemic began, focusing on rapid testing regimes and vaccination programs, together with social distancing measures, encouraging working from home and the use of various
lockdown strategies at various points in the cycle. Furthermore, and in a measured response to the impact, both islands have implemented a range of Government support
initiatives such as payroll co-funding, government grants and other fiscal measures, including the negotiation of revolving credit lines with local Banks.
The UK economy has also suffered from the effects of the global pandemic with initial annual 2020 GDP growth estimates indicating a 9.9% reduction in GDP, the
largest annual fall on record. However, in Q4 2020 there have been increases in services, production and construction output although these have remained below pre-
pandemic levels in Q4 2019. Our operations in the Channel Islands and UK use the Pound Sterling as their functional currency, and are closely linked to economic trends in both
the UK and The Eurozone due to the close relationships between the UK and Europe, despite the Channel Islands autonomy from the UK. See Item 3.D. “Risk Factors".
Against this backdrop, our banking businesses in the Channel Islands and the UK have continued to benefit from loan demand albeit at lower levels than previous
years. Our loan offering has continued to be competitive in the UK market, specifically in the Prime Central London property market.
Current/Nominal (in £ Millions)
Guernsey GDP (GVA Market/GBP)
Annual Changes (%)
Source: States of Guernsey
2019 CE
2018 CE
$3,252
2.6%
$3,169
2.2%
2017
$3,101
5.7%
2016
$2,934
4.2%
2015
$2,816
1.3%
52
Jersey GDP (GBP (in £ millions))
Annual Changes (%)
Source: States of Jersey
2019
$4,885
1.7%
2018
$4,803
1.9%
2017
$4,710
0.9%
2016
$4,669
0.2%
2015
$4,661
1.2%
We continue to maintain a cautious stance with a liquid balance sheet, a conservative investment portfolio, and no reliance on wholesale funding. Total liquid cash and
investments made up 62.2% of our balance sheet at December 31, 2020, which is up slightly from 60.0% at December 31, 2019.
The Bank continued to support customers and operate as permitted across all jurisdictions in 2020 and has not received any support or concessions from governments
or regulators in any of our operating jurisdictions.
2020 Overview
In 2020, our net income decreased by $29.9 million to $147.2 million from $177.1 million in 2019. This decrease was a reflection of the low interest rate environment
related to the COVID-19 pandemic which impacted all interest-earning assets. This was partially offset by a decrease in interest expense due to the active repricing of the ABN
AMRO (Channel Islands) deposit book, lower rollover deposit costs and lower marketing costs, due to the delayed rollout of our new brand, and travel costs, due to global travel
restrictions. The non-core items contributing to the decrease in our net income comprised principally of staff costs related to the cost restructure programs announced in Q3
2020 in order to mitigate the revenue impacts from COVID-19. Management continued to focus on the ABN AMRO (Channel Islands) integration which was completed in
September 2020, the diligent management of capital, expenses and risks, and maintaining our strong capital position with CET1 and Total capital ratios of 16.1% and 19.8%,
respectively. For the year ended December 31, 2020, the Board declared four quarterly dividends of $0.44 per quarter totaling $1.76 for each common share held on record as of
the applicable record dates, and completed the existing share buy-back program of 3.5 million common shares. Subsequent to year end, the Board approved a new share buy-
back program authorizing the purchase of up to 2.0 million common shares expiring on February 28, 2022. The Board will continue to evaluate capital planning options and the
payment of future dividends as warranted, subject to regulatory requirements. See Item 8.A. "Consolidated Statements and Other Financial Information - Dividend Policy" and
Item 3.D. "Risk Factors – General Risk Factors - Holders of our common shares may not receive dividends" elsewhere in this report for further details.
The quality of our assets remained strong and total assets increased year-over-year by $0.8 billion to $14.7 billion, driven primarily by increased deposit levels in
Bermuda and the Cayman Islands. Deposits increased by $0.8 billion to $13.3 billion whilst loans remained stable at $5.2 billion. The increase in deposit balances was driven by
both corporate and retail depositors in Bermuda and the Cayman Islands, the retail increases driven by the retail loan deferral programs in these segments. Investments
increased by $0.4 billion to $4.9 billion. Overall liquidity remained strong, as measured by cash due from banks, securities purchased under agreements to resell, short-term
investments and investments in securities as a percentage of total assets, ending the year at 62.2% compared to 60.0% in the prior year.
Our shareholders’ equity increased year-over-year by $18.2 million to $981.9 million, which was a result of organic growth through net income net of dividends paid out
during the year, the positive effect of mark-to-market movements in the value of our fixed income investments, partially offset by the common share buy-backs and retirements
throughout the year.
Key contributors to our 2020 results were as follows:
• Profitability: Net income decreased year-over-year by $29.9 million, or 16.9%, to $147.2 million, which was largely attributable to two US Federal Reserve and two
Bank of England interest rate cuts to near-zero in March 2020 in response to global synchronized economic stoppages related to the global COVID-19 pandemic. In
order to manage the bottom line, the Bank implemented cost restructure programs around the Group which included voluntary separation, early retirement and
redundancy costs and which were classified as "non-core".
• Net interest margin: NIM decreased by 44 basis points to 242 basis points compared to 286 basis points in 2019, and the cost of funding decreased by 26 basis
point to 21 basis points. One of the drivers of the decrease in NIM was a decrease in loan yields by 82 basis points to 454 basis points as a result of the impact of
US Federal Reserve and Bank of England rate reductions on the US prime rate referenced Cayman loans and Bank of England base rate referenced Channel Island
loans respectively. The investment portfolio also saw yields decrease by 48 basis points to 241 basis points due to elevated prepayment speeds on the mortgage-
backed securities due to the low rate environment, which were then reinvested at lower yields. Yields on cash due from banks, securities purchased under
agreements to resell and short-term investments, also impacted by the low rate environment, were down 95 basis points to 34 basis points. The cost of funding
offset the overall NIM decrease, with yields decreasing by 26 basis points to 21 basis points due to the active repricing of the ABN AMRO (Channel Islands) deposit
book, lower term deposit volumes and lower rollover deposit costs.
• Expenses: Total non-interest expenses decreased year-over-year by $12.3 million to $344.6 million in 2020 due to a $9.8 million decrease in staff-related costs
from reduced headcount as a result of restructuring programs initiated in 2020; a $6.7 million decrease in professional and outside services due principally to the
costs associated with the ABN AMRO (Channel Islands) acquisition in 2019 and a reduction in the volume of professional and outside services due to efficiency
programs implemented in 2020; and a $3.6 million decrease in marketing costs associated with the delayed rollout of the Bank's re-branding initiative, travel
expenses and client event costs. This was offset by a $5.2 million increase in property costs driven by the full year recognition of ABN AMRO (Channel Islands) as
well as extra health and safety related expenditure and planned renovations around the Group; and a $3.7 million increase in income tax expense driven by
increased net income in the Channel Islands and the recognition of a deferred tax asset in the UK in 2019. Our expenses also included $7.3 million of non-core
expenses which relate to the cost restructure program, e.g., voluntary separation, early retirement and redundancy costs. After removing the effect of these items,
core non-interest expenses increased marginally by $1.5 million, from $335.1 million in 2019, to $336.6 million in 2020.
• Deposits: Deposits increased year-over-year by $0.8 billion as at December 31, 2020. Increase in deposit balances were driven by both corporate and retail
depositors in Bermuda and the Cayman Islands, the increase in retail driven by the retail loan deferral programs in these segments, and offset by expected runoff in
the Channel Islands as the deposit book was repriced. Interest bearing deposit costs decreased by 32 basis points to 26 basis points in 2020. With non-interest
bearing deposits totaling $3.0 billion on December 31, 2020, the average cost of deposits for the year decreased by 26 basis points to 21 basis points. Cost of funds
decreased primarily due to both lower term deposit volumes and costs and the impact of the aforementioned active deposit repricing in the Channel Islands.
• Loan quality: As at December 31, 2020, we had gross non-accrual loans of $72.5 million representing 1.4% of total gross loans, an increase from $50.4 million, or
1.0%, of total loans, at December 31, 2019.
53
2019 Overview
In 2019, our net income decreased to $177.1 million from $195.2 million in 2018. The $18.1 million decrease was driven by a decreasing interest rate environment and
costs associated with the expansion of the Halifax service center, as well as certain items which management believes are not representative of our financial results (or "non-
core") which were partially offset by growth in fee income attributable to increased card service contributions and foreign exchange transactional volumes. The non-core items
contributing to the decrease in our net income comprised principally of deal-related expenses attributable to the ABN AMRO (Channel Islands) acquisition and our cost
restructuring initiatives in Bermuda and the Channel Islands. Excluding the non-core items, core net income improved year-over-year by $0.9 million to $197.9 million, which was
driven by a continued focus on prudent expansion within our core businesses and markets, diligent management of capital, expenses and risks, and maintaining our strong
capital position with CET1 and Total capital ratios of 17.3% and 19.4%, respectively. To enhance common shareholder returns, for the year ended December 31, 2019, the
Board declared four quarterly dividends of $0.44 per quarter totaling $1.76 for each common share held on record as of the applicable record dates, and approved a new share
buy-back program authorizing the purchase of up to $125 million or 3.5 million shares. The Board will continue to evaluate capital planning options and the payment of future
dividends as warranted, subject to regulatory requirements. See Item 8.A "Consolidated Statements and Other Financial Information - Dividend Policy" and Item 3.D. "Risk
Factors – General Risk Factors - Holders of our common shares may not receive dividends" elsewhere in this report for further details.
The quality of our assets remained strong and total assets increased year-over-year by $3.1 billion to $13.9 billion, driven primarily by our acquisition of ABN AMRO
(Channel Islands). Deposits increased $3.0 billion to $12.4 billion and loans increased $1.1 billion to $5.1 billion, both primarily as a result of the acquisition of ABN AMRO
(Channel Islands), with loans also benefiting from increased residential loan originations in prime central London and two new sovereign mandates in Bermuda and the Cayman
Islands. Investments marginally increased by $0.2 billion to $4.4 billion. Overall liquidity remained strong, as measured by cash due from banks, securities purchased under
agreement to resell, short-term investments and investments in securities as a percentage of total assets, ended the year at 60.0% compared to 59.3% in the prior year.
Our shareholders’ equity increased year-over-year by $81.4 million to $963.7 million, which was a result of organic growth through net income net of dividends paid out
during the year, the positive effect of mark-to-market movements in the value of our fixed income investments, partially offset by the common share buy-backs and retirements
throughout the year.
Key contributors to our 2019 results were as follows:
• Profitability: Net income decreased year-over-year $18.1 million, or 9.3%, to $177.1 million, which was largely attributable to three US Federal Reserve interest
rate cuts, costs associated with the expansion of a group service center prior to the transition in the first half of 2020 and higher non-core items comprised principally
of transaction-related expenses attributable to the ABN AMRO (Channel Islands) acquisition and cost restructuring initiatives in Bermuda and the Channel Islands.
After eliminating items which management believes are not representative of our financial results, or "non-core", our core net income increased $0.9 million to
$197.9 million. Increases in non-interest income are due to increased card service fee contributions, increased transactional volumes on foreign exchange
transactions, new business and the impact of the late 2018 on-boarding of Deutsche Bank clients as well as the ABN AMRO (Channel Islands) acquisition.
Increases in interest income on investments and deposits with banks are due to additional funding as a result of the ABN AMRO (Channel Islands) acquisition.
Increases in interest income on loans is also largely due to the ABN AMRO (Channel Islands) acquisition.
• Net interest margin: NIM decreased by 39 basis points to 286 basis points compared to 325 basis points in 2018, and the cost of funding increased by 29 basis
points to 47 basis points. One of the drivers of the decrease in NIM was a decrease in loan yields by 11 basis points to 536 basis points as a result of the impact of
Fed Funds rate reductions on the US prime rate referenced Cayman loans and the inclusion of the new ABN AMRO (Channel Islands) loan book at a lower yield.
An additional driver is the 29 basis points increase in cost of deposits to 47 basis points as a result of the higher rates as well as higher volumes of deposits as a
result of the ABN AMRO (Channel Islands) acquisition. The investment portfolio offset the overall NIM decrease, with yields increasing by 18 basis points to
289 basis points due to additional funding as a result of the ABN AMRO (Channel Islands) acquisition.
• Expenses: Total non-interest expenses increased year-over-year by $35.6 million to $356.9 million in 2019 due largely to the increased salaries and other
employee benefits resulting from an increased headcount with the ABN AMRO (Channel Islands) acquisition and Halifax service center expansion as well as cost
restructuring initiatives in Bermuda and the Channel Islands, costs associated with the departure of a senior executive, increases in marketing expenses associated
with the rebranding initiative we announced in Q4 2019, and overall increased costs associated with the ABN AMRO (Channel Islands) acquisition. Total non-
interest expenses were also due to the non-core expense items discussed above that management does not believe are representative of our ongoing operations.
After removing the effect of these items, core non-interest expenses increased by $15.3 million, from $319.8 million in 2018, to $335.1 million in 2019. The core
efficiency ratio increased from 61.5% in 2018 to 62.2% in 2019, reflecting the rate of core non-interest expense relative to the relative increase in revenue.
• Deposits: Total deposits increased year-over-year by $3.0 billion as at December 31, 2019 due primarily to the acquisition of ABN AMRO (Channel Islands), and
to a lower extent, to organic growth while interest bearing deposit costs increased by 34 basis points to 58 basis points in 2019. With non-interest bearing deposits
totaling $2.2 billion on December 31, 2019, the average cost of deposits for the year increased by 29 basis points to 47 basis points.
• Loan quality: As at December 31, 2019, we had gross non-accrual loans of $50.4 million representing 1.0% of total gross loans, a slight increase from the $48.7
million, or 1.2%, of total loans, at year-end 2018. Net non-accrual loans were $32.7 million, equivalent to 0.6% of net loans, after specific provisions of $17.7 million,
reflecting an increase in the specific provision coverage ratio of 35.1%, from 30.6% on December 31, 2018.
54
Financial Summary
Summary Balance Sheet
(in millions of $)
Cash due from banks
Securities purchased under agreements to resell
Short-term investments
Investment in securities
Loans, net of allowance for credit losses
Premises, equipment and computer software, net of accumulated depreciation
Goodwill and intangible assets, net
Total assets
Total deposits
Long-term debt
Shareholders' equity
As at December 31
2020
2019
3,289.6
2,550.1
197.0
823.0
4,862.8
5,160.8
150.8
92.8
142.3
1,218.4
4,436.4
5,142.6
158.2
96.5
14,738.6
13,921.6
13,250.1
12,441.6
171.5
981.9
143.5
963.7
Dollar
change
Percent
change
739.5
54.7
29.0 %
38.4 %
(395.4)
(32.5) %
426.4
18.2
(7.4)
(3.7)
817.0
808.5
28.0
18.2
9.6 %
0.4 %
(4.7) %
(3.8) %
5.9 %
6.5 %
19.5 %
1.9 %
Summary Income Statement
For the year ended December 31
Dollar change
Percent change
(in millions of $, except per share data)
2020
2019
2018
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
7.1 %
4.1 %
67.7 %
141.5 %
0.8 %
9.1 %
3.6 %
(97.1) %
15.0 %
5.6 %
(11.1) %
(411.1) %
(9.3) %
15.5
5.1
16.8
(34.8)
2.8
15.4
18.0
(1.4) %
(15.6) %
(70.9) %
(42.1) %
(8.1) %
(0.1) %
(5.3) %
(6.8)
(4,350.0) %
(5.4) %
0.8 %
(16.2) %
(57.1) %
(16.9) %
(23.9)
(9.1)
(21.7)
3.7
(18.1)
19.0
0.9
0.9
(9.9)
(64.9) %
1,055.6 %
(21.9) %
(21.9) %
(5.0) %
0.5 %
0.5 %
11.8 %
Interest income
Loans
Investments
Deposits with banks and other
Interest expense
Net interest income before provision for credit losses
Non-interest income
Net revenue
Provision for credit recoveries (losses)
Salaries and other employee benefits
Other non-interest expenses (including income taxes)
Net income before other gains (losses)
Total other gains (losses)
Net income
Non-core items
Core net income (Non-GAAP)
Core earnings to common shareholders (Non-GAAP)
230.7
109.2
12.1
234.0
129.4
41.6
218.5
124.3
24.8
(34.4)
(59.4)
(24.6)
317.6
183.9
501.5
(8.5)
(173.7)
(173.3)
146.0
1.2
147.2
7.3
154.5
154.5
345.7
184.0
529.7
0.2
(183.7)
(171.9)
174.3
2.8
177.1
20.8
197.9
197.9
343.0
168.7
511.7
7.0
(159.8)
(162.8)
196.0
(0.9)
195.2
1.8
197.0
197.0
Common dividends paid
(88.9)
(93.6)
(83.7)
(3.3)
(20.2)
(29.5)
25.0
(28.1)
(0.1)
(28.2)
(8.7)
10.0
(1.4)
(28.3)
(1.6)
(29.9)
(13.5)
(43.4)
(43.4)
4.7
55
The following charts show the trajectory of our performance from 2016 to 2020:
____________________________
(1)
(2)
Core Net Income to Common is a non-GAAP financial measure that is calculated by adjusting net income for income or expense items which management
considers not to be representative of the ongoing operations of our business and preference share dividends, guarantee fees and premiums paid on preference
share buybacks and redemptions. For a reconciliation of Core Net Income to Common to GAAP net income to common, see Item 3.A. "Selected Financial Data
- Reconciliation of Non-GAAP Financial Measures".
Core Earnings per Common Share Fully Diluted is a non-GAAP financial measure that is calculated by dividing Core Earnings to Common by the weighted
average shares outstanding. For a reconciliation of Core Earnings per Common Share Fully Diluted to GAAP earnings per share, see Item 3.A. "Selected
Financial Data - Reconciliation of Non-GAAP Financial Measures".
Our return on equity for 2020 of 15% and our Core ROATCE1 for 2020 of 17.3% were driven by a number of factors, including: significant fee income with historically
low capital requirements, low cost deposits, a high yielding loan portfolio, a conservative capital efficient securities portfolio, and our operations in corporate income tax neutral
jurisdictions. As a result, our business generated core net income in 2020 well in excess of that needed to execute our organic balance sheet growth strategy.
56
GAAP Net Income to Common ($ inmillions)$58.4$153.3$195.2$177.1$147.220162017201820192020GAAP Earnings per Common ShareFully Diluted$1.18$2.76$3.50$3.30$2.9020162017201820192020Core Net Income to Common ($ inmillions)¹$123.0$158.9$197.0$197.9$154.520162017201820192020Core Earnings per Common ShareFully Diluted²$2.48$2.86$3.53$3.69$3.0420162017201820192020
____________________________
(1)
Core ROATCE is a non-GAAP financial measure that is calculated by dividing core earnings to common shareholders by average tangible common equity. Average
tangible common equity does not include the preference shareholders' equity or goodwill and intangible assets. For more information on the non-GAAP financial
measures, see Item 3.A. "Selected Financial Data - Reconciliation of Non-GAAP Financial Measures".
The following chart shows total deposit trends for 2016 to 2020:
57
Return on Equity8.9%19.9%23.1%19.1%15.0%20162017201820192020Core ROATCE¹20.5%22.4%25.6%23.4%17.3%20162017201820192020Deposit Balance and Funding Costs ($ in billions)$10.0$9.5$9.5$12.4$13.30.12%0.11%0.18%0.47%0.21%Period-End Total DepositsCost of Deposit Funding20162017201820192020 Historically, the markets in which we operate generate fewer loans than deposits, which has led us to take a conservative approach to managing our balance sheet. We
accomplish this by maintaining a large cash balance and investing in high quality and liquid securities. The following chart illustrates our asset composition as at 2020:
As at December 31, 2020, 22% of our balance sheet was cash and cash equivalents, which included cash and demand deposits with banks, unrestricted term deposits,
and treasury bills with a maturity of less than three months.
In addition to maintaining a large cash and cash equivalents balance, we also have a large and conservative securities investment portfolio. We have a disciplined
investment portfolio selection process and invest in highly rated securities. We also seek to ensure that our portfolio remains liquid across market cycles: 97.9% of our portfolio
was invested in US government treasuries and mortgage-backed securities issued by US governmental agencies. Our investment strategy as at December 31, 2020, aims to
align the behavioral interest rate risk profile of our assets and liabilities — as at December 31, 2020, the average duration of our AFS investment portfolio was 2.8 years, the
average duration of our HTM investment portfolio was 2.7 years, and the average duration of our total investment portfolio was 2.6 years. As at December 31, 2020, the total
carrying value of our AFS investment portfolio was $2.7 billion, and the total carrying value of our HTM investment portfolio was $2.2 billion.
The following charts show the composition of our investment portfolio by rating and asset type as at 2020:
The combination of our significant cash and securities portfolios helps drive our capital efficient balance sheet, with risk-weighted assets equal to 34.4% of our total
assets and a Basel III total capital ratio of 19.8%, each as at December 31, 2020.
58
Balance Sheet Composition - Total Assets($ in billions)Loans 35.0% $5.2Securities33.0%$4.9Cash &Equivalents22.3%$3.3Other assets9.7%$1.4Investment Portfolio - RatingAAA99%AA/A1%Investment Portfolio - Asset TypeUS Government &Agency98%ABS/RMBS1%Non-US Gov't1% Our loan underwriting process requires that we complete a full credit assessment of every customer prior to committing to a loan, which we believe has resulted in a
high quality loan portfolio. Our lending markets do not have secondary markets for loans and as such we hold all of our originated loans on our balance sheet. In 2019 and 2020,
net charge-offs represented 0.03% and 0.12%, respectively, of average loans. As at December 31, 2020, our non-accrual loan balance was $72.5 million, or 1.4% of total gross
loans, and our loans past due were $98.0 million or 1.9% of total gross loans, of which 71.7% were full recourse residential mortgages. As at December 31, 2020, our loan
portfolio consisted of 81% floating-rate loans and 19% fixed-rate loans.
The following chart shows the segment composition of our loan portfolio as at December 31, 2020:
Our loan portfolio has exhibited stability over time. The following chart shows loan portfolio trends for 2016 to 2020:
The domestic lending markets in Bermuda, the Cayman Islands, and the Channel Islands have a limited number of participants and significant barriers to entry. 65.5%
of our loan balances were residential mortgages as at December 31, 2020. These loans are attractive for a number of reasons. Our mortgages have exhibited predictable cash
flows, with historically negligible refinancing activity due to high costs to refinance in these lending markets. Additionally, our mortgages in these markets have historically
benefited from a manual underwriting process, low LTVs (75.5% of residential loans below 70% LTV as at December 31, 2020), and a full recourse system.
We have also generated balanced sources of non-interest income from a well-diversified customer base. For the five-year period ended December 31, 2020, our non-
interest income is evenly split between banking which consists of banking and foreign exchange revenue, and wealth management, which consists of trust, asset management,
and custody and other administration services. The wealth management non-interest income stream is not directly correlated with the performance of our banking business. For
example, the typical trust we manage generates a relatively constant fee stream on an annual basis throughout its life. In addition, because fee revenue in our wealth
59
Loan Portfolio Composition by Origination - GeographyBermuda44%Cayman18%UK21%Guernsey17%Loan Balance and Yield ($ in billions)65%65%65%62%66%17%16%14%15%15%10%10%13%11%10%3%4%3%7%5%5%5%4%5%4%$3.6$3.8$4.0$5.1$5.24.78%5.10%5.47%5.36%4.54%ResidentialCommercial Real EstateOther CommercialGovernmentConsumerLoan Yield20162017201820192020 management business lines is driven primarily by the size and complexity of our clients’ assets and holdings, which are generally diversified across multiple geographies, the
performance of these businesses is not typically linked to the performance of the domestic economies of our local markets. Non-interest income represented 37.3% of our total
Net Revenue (our fee income ratio) in 2020, and contributed significantly to the Company’s high Core ROATCE and excess capital generation as limited capital is required for
our fee income business.
The following chart shows our various sources of non-interest income for the year ended December 31, 2020:
2020 Non-Interest Income: $183.9 million / 37.3% Fee Income Ratio
_____________
(1)
Foreign exchange revenue represents income generated from client-driven transactions in the normal course of business. We do not engage in proprietary trading.
Growth Opportunities
We expect that, all else being equal, a rising rate environment would increase our net interest income before provision for credit losses because an increase in our cost
of deposits would lag an increase in yield of our cash securities and loans. In addition, a significant portion of our deposits are non-interest bearing (23% as at December 31,
2020), and as a result, a portion of our funding is only partially sensitive to rising rates. Our non-interest bearing deposit balances have historically exhibited low correlation with
market interest rates, a behavior that we attribute in part to a sizable client base that utilizes our bank for custody and clearing services as well as cash management purposes.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios, measured over a 12-month period, are presented in the chart below (these
projections assume parallel shifts of the yield curves occurring immediately and no changes in other potential variables):
A negative 100 basis points interest rate shock reflects an increase in projected 12-month net interest income of 11.9% compared to the flat rate scenario. The income
is driven by lower loan and investment yields, which more than offset reduced rates paid on deposits. Mitigating against the loss of income is the potential to charge negative
interest rates on deposits (which we currently do in limited instances) and certain loans that have rate floors. Refer to discussion under "- Risk Management".
In addition, we are well-positioned as an acquirer of certain businesses, in private trust and banking. Our acquisition strategy seeks to capitalize on opportunities
created by international financial institutions that wish to simplify their businesses and deploy capital to onshore markets. We consider a wide range of potential acquisition
60
Non-Interest Income¹Asset Management: 16%Banking: 26%Foreign Exchange Revenue: 20%Trust: 28%Custody and OtherAdministration Services:8%Other Non-Interest Income: 3%Net Interest Income Sensitivity11.9%0.0%11.5%22.6%-100bpsFlat+100bps+200bps opportunities, and we have a well-defined, disciplined approach to identifying potential acquisition targets across numerous criteria including: geography, business alignment,
size, timing, quality, buyer universe and financial hurdles. Our focus has been on the private trust business and banking in our core markets where we have expertise, scale and
a strong brand.
In April 2016, we acquired HSBC’s Bermuda trust business and private banking investment management operations. HSBC also entered into an agreement to refer its
existing private banking clients to Butterfield. This acquisition added over $18.9 billion of trust AUA, $1.3 billion of AUM, and $1.6 billion of deposits.
In October 2017, we entered into an agreement to acquire Deutsche Bank’s Global Trust Solutions business, excluding its US operations. This transaction added the
ongoing management and administration of the GTS portfolio, comprising approximately 1,000 trust structures for approximately 900 private clients in Guernsey, Switzerland, the
Cayman Islands, and Singapore. 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. 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
provide services primarily to financial intermediaries and corporate clients. The Bank began to onboard certain customer deposits relating to the acquisition in 2018, and this
activity was completed in the first half of 2019.
In April 2019, we entered into an agreement to acquire ABN AMRO (Channel Islands) Limited which provides banking, investment management and custody products
to three distinct client groups, including trusts, private clients, and funds in Jersey and Guernsey. The transaction completed in July 2019.
Our relationship-driven business model and international corporate clientèle have allowed us to develop a stable deposit base with historically low funding costs. We
believe our customers’ deposit activity has historically been relatively inelastic to deposit pricing given the nature of corporate activity and competition in retail deposit taking in
our segments. From 2016 to 2020, deposits have grown at a CAGR of approximately at +6% in the Cayman Islands and +35% in the Channel Islands and the UK while it has
declined at -4% in Bermuda, taking into account the April 2016 acquisition of HSBC’s Bermuda trust business and private banking investment management operations that
added $1.6 billion of new deposits, the Deutsche Bank's banking and custody businesses acquisition in February 2018 that added $0.9 billion of new deposits, and the ABN
AMRO (Channel Islands) acquisition in April 2019 that added $3.5 billion in deposits. As at December 31, 2020, we had $13.3 billion in deposits at a cost of 0.21%, of which 23%
were non-interest bearing demand deposits, 57% were interest bearing demand deposits with a weighted-average cost of 0%, and 20% were term deposits with a weighted-
average cost of 0.66% and an average contractual or remaining maturity of 126 days. We believe the current market conditions in Bermuda, the Cayman Islands, and the
Channel Islands will allow us to continue to benefit from favorable deposit pricing.
Consolidated Results of Operations and Discussion for Fiscal Years Ended December 31, 2020, 2019 and 2018
Net Revenue
2020 vs. 2019
Total net revenue before provision for credit losses and other gains and losses for 2020 was $501.5 million, down $28.2 million, or 5.3%, from 2019. Net interest income
before provision for credit losses decreased from $345.7 million in 2019 to $317.6 million in 2020, a decline of $28.1 million, or 8.1%, and was driven by lower global market
interest rates as a result of the COVID-19 pandemic. Loan interest income decreased by $3.4 million to $230.7 million as yields decreased by 82 basis points due to base rate
decreases across all jurisdictions during the year. The average volume of loans outstanding increased by $692.2 million as a result of the full year contribution from ABN AMRO
(Channel Islands). Loan growth was impacted by the COVID-19 pandemic and the normal portfolio runoff was mostly offset by the loan deferral programs in both Bermuda and
the Cayman Islands. Investment interest income decreased by $20.2 million to $109.2 million, the average volume of investments increased by $39.4 million, and yields on
investments decreased by 48 basis points due to the aforementioned decrease in global market interest rates, increasing prepayment speeds. Deposits with banks interest
income decreased by $29.5 million, or 70.9%, the average volume increased by $297.4 million due to increased corporate and retail banking deposits in Bermuda and the
Cayman Islands. The total cost of deposits improved by $26.4 million or 51.2%, reflecting a 26 basis points decrease to 21 basis points. In addition, non-interest income was
down by $0.1 million, or 0.1%, principally attributable to much lower economic activity resulting from COVID-19 related "shelter-in-place" government mandates, impacting card
service fee contributions and offset by increases in asset management, foreign exchange, custody and other administration services as a result of the full year contribution from
ABN AMRO (Channel Islands).
2019 vs 2018
Total net revenue before provision for credit losses and other gains and losses for 2019 was $529.7 million, up $18.0 million, or 3.5%, from 2018. Net interest income
before provision for credit losses increased from $343.0 million in 2018 to $345.7 million in 2019, an improvement of $2.7 million, or 0.8%, and was driven by increases in loan
interest, investment interest and deposits with banks primarily due to the acquisition of ABN AMRO (Channel Islands). Loan interest income increased by $15.5 million to $234.0
million, the average volume of loans outstanding increased by $373.7 million principally as a result of the ABN AMRO (Channel Islands) acquisition, new residential mortgages
underwritten in our UK jurisdiction, increases in government lending in Bermuda and the Cayman Islands, and decreased yields on loans by 11 basis points due to base rate
decreases across all jurisdictions during the year. Investment interest income rose $5.2 million to $129.2 million, the average volume of investments decreased by $104.0 million,
and yields on investments increased 18 basis points in reaction to decreases in short-term US Treasury rates and re-balancing of the portfolio. Deposits with banks and other
interest income rose $16.8 million, or 67.6%, the average volume increased $1,256.0 million due to the ABN AMRO (Channel Islands) acquisition, and yield increased 3 basis
points. The total cost of deposits increased by $33.9 million or 192.3%, reflecting a 29 basis points increase to 47 basis points. In addition, non-interest income was up $15.3
million, or 9.1%, principally attributable to increases in banking fees due to transaction volume on credit cards, increases in foreign exchange income due to increased
transactional volume on foreign exchange transactions, as well as an overall increase in asset management, trust and custody fees due to the impact of the Deutsche Bank
acquisitions in 2018 and the ABN AMRO (Channel Islands) acquisition in 2019.
Net Interest Income Before Provision For Credit Losses
Net interest income is the amount of interest earned on our interest-earning assets less interest paid on our interest bearing liabilities. There are several drivers of the
change in net interest income, including changes in the volume and mix of interest-earning assets and interest bearing liabilities, their relative sensitivity to interest rate
movements, and the proportion of non-interest bearing sources of funds, such as equity and non-interest bearing current accounts.
61
The following table presents the components of net interest income for the years ended December 31, 2020, 2019 and 2018:
Year ended December 31
Average
balance
($)
2020
Interest
($)
Average
rate
(%)
Average
balance
($)
2019
Interest
($)
Average
rate
(%)
Average
balance
($)
2018
Interest
($)
Average
rate
(%)
3,530.6
4,514.3
5,061.7
13,106.6
393.7
12.1
109.2
230.7
352.0
0.34 %
3,233.3
2.41 %
4,474.9
4.54 %
4,369.5
2.68 % 12,077.6
—
371.5
41.6
129.4
234.0
405.1
1.29 %
1,977.3
2.89 %
4,578.9
5.36 %
3,995.8
3.35 % 10,552.0
—
350.7
24.8
124.3
218.5
367.6
1.26 %
2.71 %
5.47 %
3.48 %
—
13,500.3
352.0
2.60 % 12,449.1
405.1
3.25 % 10,902.7
367.6
3.37 %
9,710.8
(25.1)
(0.26) %
8,851.5
(51.5)
(0.58) %
7,375.8
(17.6)
(0.24) %
—
173.4
9,884.2
2,363.9
280.6
—
(9.3)
(34.4)
— %
0.7
—
(2.12) %
1.6
(5.35) %
143.4
(0.35) %
8,995.5
(7.9)
(59.4)
(5.49) %
133.4
(0.66) %
7,510.8
—
(6.9)
(24.6)
(2.11) %
(5.21) %
(0.33) %
2,147.2
310.4
2,231.8
281.0
12,528.6
(34.4)
(0.27) % 11,453.1
(59.4)
(0.52) % 10,023.7
(24.6)
(0.25) %
971.7
995.9
12,449.1
3,082.1
879.0
10,902.7
3,041.1
317.6
2.42 %
345.7
2.86 %
343.0
3.25 %
(in millions of $)
Assets
Cash due from banks, securities purchased
under agreements to resell, and short-term
investments
Investment in securities
Loans
Interest earning assets
Other assets
Total assets
Liabilities
Deposits
Securities sold under agreement to
repurchase
Long-term debt
Interest bearing liabilities
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
13,500.3
Non-interest bearing funds net of non-interest
earning assets (free balance)
3,222.5
Net interest margin
2020 vs. 2019
Net interest income before provision for credit losses of $317.6 million in 2020 represented a decrease of $28.1 million (or 8.1%) over our net interest income before
provision for credit losses in 2019. Net interest income is generated by our main segments of Bermuda, the Cayman Islands, and Channel Islands and the UK. Interest income
decreased by $53.1 million in 2020, which was driven by lower market interest rates across the yield curve.
Loan interest income decreased in 2020 by $3.4 million due primarily to an 82 basis point decrease in yield on floating rate loans as a result of the US Federal Reserve
and Bank of England rate cuts in March 2020 which were partially passed on to customers. This was partially offset by a $0.7 billion increase in average balances which was
driven by the full year contribution from ABN AMRO (Channel Islands).
Investment interest income decreased by $20.2 million, driven by increased prepayment speeds on the US agency securities book and reinvestment at lower yields.
This was partially offset by an increase of $39.4 million in average investment balances, due to the normalization of ABN AMRO (Channel Islands) deposits, which were invested
in longer term assets, as well as a re-balancing of a portion of our investment portfolio by selling floating rate notes for fixed in order to lock in fixed rates as a result of the
aforementioned US Federal Reserve rate cuts. The overall duration of the portfolio at year-end was 2.7 years, a decrease of 0.8 years from 2019.
Interest bearing liability costs decreased to 35 basis points, which resulted in a decrease in interest expense by $25.0 million, attributable to active deposit re-pricing on
the ABN AMRO (Channel Islands) deposits and lower rates on roll-over maturities due to lower global interest rates.
Average free balances for 2020 were $3.2 billion (2019: $3.1 billion), including non-interest bearing current accounts of $2.4 billion (2019: $2.1 billion), shareholders'
equity of $971.7 million (2019: $995.9 million), net of other assets and other liabilities totaling $113.1 million (2019: $61.1 million). See "-Risk Management" below for more
information on how interest rate risk is managed.
2019 vs. 2018
Net interest income before provision for credit losses of $345.7 million in 2019 represented an increase of $2.7 million(or 0.8%) over our net interest income before
provision for credit losses in 2018. Net interest income is generated by our main segments of Bermuda, the Cayman Islands, and Channel Islands and the UK. Interest income
increased by $37.5 million in 2019, which was driven by increased loan portfolio balances with decreased yields, decreased investment portfolio balances with increased yields
partially offset by an increase in the deposit balances and the cost of deposits, all of which were primarily attributable to the ABN AMRO (Channel Islands) acquisition in a
decreasing rate environment.
Loan interest income was higher in 2019 by $15.5 million due primarily to a $373.7 million increase in average balances, partially offset by an 11 basis point decrease in
yield. The increase in average balances was largely due to new loan origination in the Channel Islands and the UK, increases in government lending in Bermuda and the
Cayman Islands, as well as the ABN AMRO (Channel Islands) acquisition. The majority of the loan portfolio is on a floating rate basis, and utilizes US Federal Reserve rates as a
repricing reference point. Therefore, movements in the US Federal Reserve rates can impact loan interest income if management elects to change base rates. During 2019,
there were three decreases in the US Federal Reserve target rate.
62
Investment interest income increased by $5.2 million, driven by an 18 basis point rise in yield partially offset by a decrease of $104.0 million in average investment
balances. The improved yield resulted from the re-balancing of our investment portfolio in late 2018 by selling floating rate notes for fixed in order to lock in fixed rates in
anticipation of potential US Federal Reserve rate cuts in 2019. The overall duration of the portfolio at year-end was 3.5 years, a decrease of 0.5 years from 2018.
Interest bearing liability costs increased to 66 basis points, which resulted in an increase in interest expense by $34.8 million, attributable to the increase in the average
interest bearing deposit balances of $1,475.7 million, principally due to the ABN AMRO (Channel Islands) deposits which had a higher cost of funding.
Average free balances for 2019 were $3.1 billion (2018: $3.0 billion), including non-interest bearing current accounts of $2.1 billion (2018: $2.2 billion), shareholders'
equity of $995.9 million (2018: $879.0 million), net of other assets and other liabilities totaling $61.1 million (2018: $69.7 million). See "Risk Management" below for more
information on how interest rate risk is managed.
Provision for Credit Losses
2020 vs. 2019
Our net provision for credit losses in 2020 was a charge of $8.5 million compared to a release of $0.2 million in 2019. Provisions increased due primarily to declining
macro-economic forecasts which drive forward-looking expected losses and loans migrating into the past due and non-performing categories.
2019 vs. 2018
Our net provision for credit losses in 2019 was a release of $0.2 million compared to a release of $7.0 million in 2018. Provision releases were primarily a result of $5.7
million of releases from general reserves, due principally to qualitative factor revisions for UK residential real estate lending as well as decreases in the historical loss rates within
the Commercial and Residential sectors as a result of improving credit markets in our key jurisdictions. Offsetting this was $5.5 million of incremental specific provisions, relating
principally to consumer loans and residential mortgages.
Other Gains (Losses)
The following table represents the components of other gains (losses) for the years ended December 31, 2020, 2019 and 2018:
(in thousands of $)
Net gains (losses) on equity securities
Net realized gains (losses) on available-for-sale investments
Net gains (losses) on other real estate owned
Net other gains (losses)
Total other gains (losses)
Net gains (losses) on equity securities
For the year ended December 31,
Dollar Change
Percent Change
2020
2019
2018
658
1,220
(104)
(552)
1,222
925
1,624
(5)
223
2,767
(329)
1,100
(322)
(1,304)
(855)
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
(267)
(404)
(99)
(775)
(1,545)
1,254
524
317
1,527
3,622
(28.9) %
(24.9) %
(1,980.0) %
381.2 %
47.6 %
98.4 %
(347.5) %
117.1 %
(55.8) %
(423.6) %
A $0.7 million gain was recorded with respect to equity securities at fair value in 2020 a decrease of $0.3 million compared to $0.9 million in 2019 and net losses of $0.3
million in 2018. The balance in 2020 reflected lower mark-to-market gains on equity securities, partly due to mark-to-market losses recognized earlier in 2020 due to market
volatility as a result of the COVID-19 pandemic. The losses in 2019 reflected higher mark-to-market gains on equity securities. The gains in 2018 reflected losses on equity
securities.
Net Realized Gains (Losses) on Available-For-Sale Investments
Net realized gains of $1.2 million were recorded in 2020 and $1.6 million in 2019. In 2020, the gain is due to the strategic decision to liquidate floating rate and
purchase fixed rate US government and federal agency securities. In 2019, the gain is primarily as a result of the rebalancing of our investment portfolio resulting in the sale of
our remaining corporate debt and commercial mortgage-backed securities and the sale of a US Treasury security and liquidation proceeds from a former investment as detailed
below. In both 2020 and 2019, the proceeds from the sale of the above-mentioned investments were used to acquire US government and federal agency securities for either our
AFS or HTM portfolios.
Included in this amount in 2019 was a $1.0 million net realized gain on the receipt of liquidation proceeds from our former investment in the Avenir Pass-through Note,
which was formerly a structured investment vehicle. In 2018, we received $1.2 million in liquidation proceeds from this same investment. Management considers these gains in
2018 and 2019 to be non-core.
Net Gains (Losses) on other real estate owned
Valuation adjustments and realized gains and losses related to real estate held for sale were losses of $0.1 million in 2020 compared to losses of $5.0 thousand in
2019 and $0.3 million in 2018. In 2020, these losses relate to net revaluation losses on two properties. In 2019, these small losses were attributable to the revaluation of
properties offset by the gain on the sale of a property in Bermuda. In 2018, these losses were attributable largely to the revaluation of several properties in Bermuda.
Net Other Gains (Losses)
Net other losses were $0.6 million in 2020 compared to net other gains of $0.2 million in 2019 and net other losses of $1.3 million in 2018. The losses in 2020 relate to
a defined benefit pension plan adjustment offset by a distribution from an equity method investment as a result of the sale of a legacy business interest. The gains in 2019 are
principally the result of the sale of a fixed asset. The losses in 2018 are principally the result of a non-core defined pension plan settlement loss incurred in the UK.
Non-Interest Income
Non-interest income represents capital efficient and stable revenue sources for the Group. Non-interest income is derived primarily from banking, including cards,
foreign exchange commissions, asset management fees as well as trust fees. Our trust fee structure provides for varied pricing that depends primarily on the size of the
relationship and the nature of services provided. As a result, it is not always possible to draw a direct relationship between the value of client assets and the level of non-interest
income, though the trend of non-interest income generally follows the trend in client asset levels.
63
Total non-interest income decreased by $0.1 million from $184.0 million in 2019 to $183.9 million in 2020. Non-interest income as a percentage of total net revenue
increased from 34.7% in 2019 to 37.3% in 2020.
Total non-interest income increased from $168.7 million in 2018 to $184.0 million in 2019. Non-interest income as a percentage of total net revenue increased from
32.5% in 2018 to 34.7% in 2019.
The following table presents the components of non-interest income for the years ended December 31, 2020, 2019 and 2018:
(in thousands of $)
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
Asset Management
For the year ended December 31,
Dollar change
2020
2019
2018
2019 to
2020
2018 to
2019
Percent change
2019 to
2020
2018 to
2019
29,225
47,346
37,180
50,653
13,845
5,610
28,721
49,347
37,001
51,220
12,868
4,818
25,603
45,010
32,895
51,004
9,262
4,912
504
(2,001)
179
(567)
977
792
3,118
4,337
4,106
216
3,606
(94)
183,859
183,975
168,686
(116)
15,289
1.8 %
(4.1) %
0.5 %
(1.1) %
7.6 %
16.4 %
(0.1) %
12.2 %
9.6 %
12.5 %
0.4 %
38.9 %
(1.9) %
9.1 %
Asset management revenues are generally based on the market value of assets managed and the volume of transactions and fees for other services rendered. We
provide asset management services from our offices in Bermuda, the Cayman Islands, and the Channel Islands. Revenues from asset management were $29.2 million in 2020,
compared to $28.7 million in 2019, and $25.6 million in 2018.
The table that follows shows the changes in the year-end values of clients' assets under management, sub-divided between those managed for clients on a
discretionary basis and client funds invested in mutual funds that Butterfield manages ("Butterfield Funds"):
(in millions of $)
Butterfield Funds
Other assets under management
Total assets under management
2020 vs. 2019
Year ended December 31,
2020
2019
2018
2,029
3,529
5,558
2,157
3,491
5,648
2,058
2,786
4,844
Dollar Change
2019 to
2020
2018 to
2019
(128)
38
(90)
99
705
804
Asset management fees are generated primarily from management fees earned from Butterfield Funds and discretionary portfolios, as well as custody and brokerage
fees. AUM were relatively unchanged at $5.6 billion as at December 31, 2020, compared to December 31, 2019. Asset management fees earned increased by $0.5 million or
1.8% in 2020, compared to 2019. This was driven by an increase in fees from discretionary portfolios, primarily in the Channel Islands as a result of the full year recognition of
ABN AMRO (Channel Islands) income, and was partially offset by a reduction in the Bank's money market fund income due to fee reductions.
2019 vs. 2018
Asset management fees are generated primarily from management fees earned from Butterfield Funds and discretionary portfolios, as well as custody and brokerage
fees. AUM were $5.6 billion as at December 31, 2019, compared to $4.8 billion as at December 31, 2018. The increase in AUM was largely a result of overall valuation increases
in the stock and bond markets as well as the acquisition of ABN AMRO (Channel Islands). In line with the increase in AUM, asset management fees earned increased by $3.1
million or 12.2% in 2019, compared to 2018.
Banking
We provide a full range of community, commercial, and private banking services in select jurisdictions. Banking services are offered to individuals and small to medium-
sized businesses through branch locations, internet banking, automated teller machines, debit and credit cards, and mobile banking in Bermuda and the Cayman Islands, while
private banking services are offered in Bermuda, the Cayman Islands, and Guernsey. Banking revenues reflect loan, transaction processing, and other fees earned in these
jurisdictions.
Banking fee revenues decreased by 4.1% in 2020 to $47.3 million, compared to $49.3 million in 2019, primarily due to much lower economic activity resulting from
COVID-19 related border closures in Bermuda and the Cayman Islands and "shelter-in-place" government mandates, primarily during the months of April and May. These
restrictions impacted card service fee contributions as well as tourism credit card volumes.
Banking fee revenues increased by 9.6% in 2019 to $49.3 million, compared to $45.0 million in 2018, due primarily to increases in credit card activity, and increased
fees resulting from the acquisition of ABN AMRO (Channel Islands).
Foreign Exchange
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 79% of our foreign exchange revenue (2019: 84%; 2018: 93%). We do not maintain a proprietary trading book. Foreign exchange income is
generated from client-driven transactions and totaled $37.2 million in 2020, compared to $37.0 million in 2019 and $32.9 million in 2018. The $0.2 million increase from 2019 to
2020 primarily resulted from the full year effect of the ABN AMRO acquisition, offset by lower volumes this year due to much lower economic activity resulting from COVID-19
related "shelter-in-place" government mandates, primarily during the months of April and May and the loss of some repeat corporate businesses that has not been replaced. The
$4.1 million increase from 2018 to 2019 primarily resulted from increased revenues relating to the ABN AMRO (Channel Islands) acquisition and increased client activity and
related volumes in both retail and institutional foreign exchange flows.
64
Trust
We provide both personal and institutional fiduciary services from our operations in Bermuda, The Bahamas, the Cayman Islands, Guernsey, Singapore and
Switzerland. Revenues are derived from a combination of fixed fees, fees based on the size and complexity of the trust relationship and fees based on time spent in relation to
the range of personal trust and company administration services and pension and employee benefit trust services we provide.
In 2020, trust revenues represented 27.5% of our non-interest income, down from 27.8% in 2019. In 2020, trust revenues totaled $50.7 million, a decrease of $0.6
million or 1.1% over 2019. This decrease was driven primarily by a reduction in the time spent on trust services and lower fixed fees.
Trust AUA were $104.1 billion at the end of 2020 compared to $91.7 billion at the end of 2019, an increase of $12.4 billion or 13.5%, which is attributable largely to
foreign exchange movements and revaluation of some assets held in the underlying trust structures.
In 2019, trust revenue represented 27.8% of our non-interest income, down from 30.2% in 2018. In 2019, Trust revenue totaled $51.2 million, an increase of $0.2 million
or 0.4% over 2018.
Custody and Other Administration Services
Custody fees are generally based on market values of assets in custody, the volume of transactions and flat fees for other services rendered. We provide custody
services from our offices in Bermuda, Guernsey, and Jersey. In 2020, revenues were $13.8 million, an increase of $1.0 million from 2019 due to the full year impact of the ABN
AMRO (Channel Islands) acquisition and offset by some fee waivers. From 2018 to 2019, revenues increased by $3.6 million partially as a result of the aforementioned
acquisition of ABN AMRO (Channel Islands) and from a full year's activity related to the clients onboarded late in 2018 and in the first quarter of 2019 from the Deutsche Bank’s
Global Trust Solutions acquisition in 2018.
Total AUA for the custody and other administration services business were $32.4 billion on December 31, 2020, an increase from $30.3 billion on December 31, 2019
and $24.5 billion on December 31, 2018.
Other Non-Interest Income
The components of our other non-interest income for the years ended December 31, 2020, 2019 and 2018 are set forth in the following table:
(in thousands of $)
Net share of earnings from equity method investments
Rental income
Other
Total other non-interest income
Year ended December 31,
Dollar Change
Percent Change
2020
2019
2018
578
1,749
3,283
5,610
331
1,211
3,276
4,818
1,122
1,087
2,703
4,912
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
247
538
7
792
(791)
124
573
(94)
74.6 %
44.4 %
0.2 %
16.4 %
(70.5) %
11.4 %
21.2 %
(1.9) %
In 2020, we recorded our net share of earnings from equity method investments as a gain of $0.6 million, a $0.2 million increase due to higher equity pick-up by equity
method investments. From 2018 to 2019, equity pickup decreased due to lower earnings by equity method investments. Rental income increased by $0.5 million to $1.7 million
in 2020 due to increased sub-let income in the Channel Islands and increased by $0.1 million from 2018 to 2019. Included in the "Other" category are maintenance fees from
leased premises and other miscellaneous income.
Non-Interest Expenses
Expense management continued to be a key focus in 2020, especially as revenue came under pressure as a result of the COVID-19 pandemic. Total non-interest
expenses in 2020 were $344.6 million compared to $356.9 million in 2019 and $321.3 million in 2018. These figures include non-core expenses in 2020, 2019 and 2018 of $8.0
million, $21.8 million and $1.5 million, respectively.
After adjusting for these non-core items, 2020 core expenses increased by $1.5 million or 0.4% with a corresponding increase in core efficiency ratio to 66.0% from
62.2% in 2019 due to the reduction in revenue driven by the current low interest rate environment. From 2018 to 2019, core expenses increased by $15.3 million with a
corresponding improvement in core efficiency ratio to 62.2% from 61.5% in 2018.
In 2020, salaries and other employee benefits accounted for 50.4% of non-interest expenses, with technology and communications and property making up
27.4% combined.
65
The following table presents the components of non-interest expenses for the years ended December 31, 2020, 2019 and 2018:
(in millions of $)
Salaries and other employee benefits
Technology and communications
Property
Professional and outside services
Indirect taxes
Amortization of intangible assets
Marketing
Non-service employee benefits expense
Other non-interest expenses
Total non-interest expenses
Non-core items (Non-GAAP)
Core non-interest expenses (Non-GAAP)
Year ended December 31,
Dollar Change
Percent Change
2020
2019
2018
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
173.7
183.7
159.8
(10.0)
23.9
65.2
29.4
21.3
21.3
5.8
4.4
2.6
20.9
344.6
62.6
24.2
28.0
21.1
5.5
8.1
5.6
18.2
356.9
(8.0)
(21.8)
336.6
335.1
60.3
21.8
26.0
19.5
5.1
6.1
5.6
17.2
321.3
(1.5)
319.8
2.5
5.2
(6.7)
0.2
0.4
(3.6)
(3.0)
2.7
(12.3)
13.8
1.5
2.3
2.4
2.0
1.6
0.4
2.0
—
1.0
35.6
(20.3)
15.3
(5.4) %
4.0 %
21.5 %
(23.9) %
1.0 %
6.8 %
(44.8) %
(53.3) %
0.146
(3.4) %
14.9 %
3.7 %
10.8 %
7.8 %
8.3 %
7.8 %
32.8 %
— %
5.8 %
11.1 %
(63.3) %
1,353.3 %
0.4 %
4.8 %
For a full reconciliation of GAAP net income to core net income, please see Item 3.A."Selected Financial Data — Reconciliation of Non-GAAP Financial Measures".
Salaries and Other Employee Benefits
Total salaries and other employee benefits costs were $173.7 million in 2020, a decrease of $10.0 million compared to 2019. Included in 2020 were $8.0 million of non-
core costs in relation to COVID-19 related cost restructure programs (voluntary separation and redundancy costs) (2019: $16.0 million; 2018: nil).
Core salaries, which exclude these amounts, and other employee benefits costs were $165.7 million in 2020, down $2.0 million compared to $167.7 million in 2019
primarily due to the reduction in health insurance and temporary employment services during the year. From 2018 to 2019, core salaries increased by $7.9 million due to the
acquisition of ABN AMRO (Channel Islands) and the Halifax service center expansion
Headcount on a full-time equivalency basis at the end of 2020 was 1,314, compared to 1,512 in 2019 and 1,373 in 2018. The decrease from 2019 to 2020 was a result
of the cost restructure programs (voluntary separation and redundancy costs) during the year. The increase from 2018 to 2019 was a result of the Halifax service center
expansion and the ABN AMRO (Channel Islands) acquisition.
Technology and Communications
Technology and communication costs reflect expenses relating to the support for our IT infrastructure and increased from $62.6 million in 2019 to $65.2 million in 2020
primarily due to higher software maintenance costs, the full year impact of the ABN AMRO acquisition and partially offset by lower corporate travel costs. From 2018 to 2019,
technology and communications costs increased by $2.3 million to $62.6 million due to the acquisition of ABN AMRO (Channel Islands) in July 2019.
Property
Property costs, which reflect occupancy expenses, building maintenance, and depreciation of property, plant and equipment, were $29.4 million in 2020, an increase of
$5.2 million from $24.2 million recorded in 2019 driven by the full year recognition of ABN AMRO (Channel Islands) expenses as well as increased health and safety related
expenditure and planned renovations around the Group.
From 2018 to 2019, property costs increased by $2.4 million due primarily to the ABN AMRO (Channel Islands) acquisition.
Professional and Outside Services
Professional and outside services primarily include consulting, legal, audit and other professional services. Professional and outside services cost were $21.3 million in
2020, a decrease of $6.7 million from $28.0 million in 2019 due principally to the costs associated with the ABN AMRO (Channel Islands) acquisition in 2019 and a reduction in
the volume of professional and outside services due to improved vendor management programs implemented in 2020.
In 2019 and 2018, the total expenses of $28.0 million and $26.0 million included non-core project expenses of $5.5 million and $1.0 million, respectively. Excluding the
non-core costs, professional fees for our core business decreased by $2.6 million from 2018 to 2019 due to the non-recurrence of items in 2018 such as the development of a
recovery plan and cyber risk related programs, offset by an increase in audit and external legal costs, including those in connection with the ABN AMRO (Channel Islands)
acquisition.
Indirect Taxes
These taxes reflect taxes levied in the jurisdictions in which we operate, including employee-related payroll taxes, customs duties, and business licenses. In 2020, the
expense was $21.3 million, an increase of $0.2 million which mainly relates to the cost restructure program (voluntary separation and redundancy) during the year. From 2018 to
2019, indirect taxes increased by $1.6 million due primarily to the increased financial services tax in Bermuda related to a rate increase in 2019. Of the $21.3 million in indirect
taxes, $17.2 million was paid to the Bermuda government agencies for payroll tax, business licenses, deposit insurance, land taxes, and financial services tax and $4.1 million
was paid to other governments for business licenses, insurance tax, land taxes and work permit fees.
Amortization of Intangible Assets
Intangible assets relate to client relationships acquired from business acquisitions and are amortized on a straight-line basis over their estimated useful lives, not
exceeding 15 years. The estimated lives of these acquired intangible assets are re-evaluated annually and tested for impairment. The amortization expense associated with
intangible assets was $5.8 million in 2020 compared to $5.5 million in 2019 and $5.1 million in 2018. Amortization increased from 2019 to 2020 by $0.4 million as a result of the
66
full year amortization charge on the ABN AMRO (Channel Islands) intangible asset, and increased by $0.4 million from 2018 to 2019 as a result of additional identifiable
intangible assets resulting from the acquisition of ABN AMRO (Channel Islands) in April 2019.
Marketing
Marketing expenses reflect costs incurred in advertising and promoting our products and services. Marketing expenses totaled $4.4 million in 2020, and decreased by
$3.6 million compared to 2019 which is associated with lower costs on the Bank's re-branding initiative, lower travel expenses and client event costs. From 2018 to 2019
marketing expenses increased by $2.0 million, primarily as a result of expenses associated with the re-branding initiative announced in Q3 2019.
Other Non-Interest Expenses
(in millions of $)
Stationery & supplies
Custodian & handling
Charitable donations
Insurance
Other expenses
Total other non-interest expenses
For the year ended December 31,
Dollar Change
Percent Change
2020
2019
2018
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
1.2
3.0
1.6
3.7
11.5
20.9
1.7
2.5
1.4
3.4
9.4
1.4
2.2
1.3
3.1
9.2
18.2
17.2
(0.5)
0.5
0.2
0.3
2.1
2.7
0.3
0.3
0.1
0.3
0.2
1.0
(29.3) %
20.9 %
14.6 %
8.9 %
22.8 %
14.6 %
21.4 %
13.6 %
7.7 %
9.7 %
2.2 %
5.8 %
Other non-interest expenses were $20.9 million in 2020, an increase of $2.7 million compared to 2019, driven by the full year recognition of ABN AMRO (Channel
Islands) expenses as well as higher operational losses and write-offs in the Channel Islands.
From 2018 to 2019, other non-interest expenses increased by $1.1 million, reflecting the acquisition of ABN AMRO (Channel Islands) and the timing of the Deutsche
Bank GTS acquisition in 2018 and related costs primarily in Jersey.
Income Taxes
Each jurisdiction in which we operate is subject to different corporate income tax laws. See Item 3.D. "Risk Factors - Regulatory and Tax-Related Risks". We are
incorporated in Bermuda as a local company and, pursuant to Bermuda law, not obligated to pay any direct taxes in Bermuda on either income or capital gains. Our subsidiaries
in the Cayman Islands and The Bahamas are not subject to any taxes on either income or capital gains under current laws applicable in the respective jurisdictions. In general,
entities in Bermuda and the Cayman Islands are not subject to corporate income taxes but are required to pay higher rates of indirect taxes (included above) such as license
fees and, in Bermuda, payroll taxes.
Our subsidiaries in the UK, Guernsey, Jersey, Switzerland, Canada, Singapore, and Mauritius are subject to the tax laws of those jurisdictions. See "Note 25 Income
taxes" in the Audited Consolidated Financial Statements for a reconciliation between the effective income tax rate and the statutory income tax rate.
In 2020, income tax expense netted to an expense of $2.4 million compared to a recovery of $1.4 million in 2019. The change in income tax expense of $3.7 million in
2020 (2018 to 2019: $2.7 million) was mostly due to a change in the deferred tax valuation allowance resulting in a deferred tax recovery in the UK in 2019, because the UK
Subsidiary became profitable.
67
Consolidated Balance Sheet and Discussion
The following table shows the balance sheet as reported as at December 31, 2020 and 2019:
(in millions of $)
Assets
Cash due from banks
Securities purchased under agreement to resell
Short-term investments
Investment in securities
Loans, net of allowance for credit losses
Premises, equipment and computer software
Goodwill and intangibles
Other assets
Total assets
Liabilities
Total deposits
Total other liabilities
Long-term debt
Total liabilities
Common shareholders' equity
Total shareholders' equity
Total liabilities and shareholders' equity
Capital Ratios
Risk-weighted assets
Tangible common equity (TCE)
Tangible assets (TA)
TCE/TA
Common Equity Tier 1
Total Tier 1
Total Capital
Leverage ratio
As at
December 31
2020
2019
Dollar
Change
Percent
Change
3,290
197
823
4,863
5,161
151
93
162
2,550
142
1,218
4,436
5,143
158
97
177
14,739
13,922
13,250
12,442
335
171
373
144
13,757
12,958
982
982
964
964
14,739
13,922
740
55
29.0 %
38.7 %
(395)
(32.4) %
427
18
(7)
(4)
(15)
817
808
(38)
27
799
18
18
817
9.6 %
0.3 %
(4.4) %
(4.1) %
(8.5) %
5.9 %
6.5 %
(10.2) %
18.8 %
6.2 %
1.9 %
1.9 %
5.9 %
As at
December 31,
2020
2019
5,069
889
4,898
867
14,646
13,825
6.1 %
16.1 %
16.1 %
19.8 %
5.3 %
6.3 %
17.3 %
17.3 %
19.4 %
5.9 %
We maintain a liquid balance sheet and are well capitalized. As at December 31, 2020, total cash due from banks, short-term investments and investment in securities
represented $9.2 billion, or 62.2% of total assets, up slightly from 60.0% at the end of 2019. Shareholders' equity at December 31, 2020 was $981.9 million, up from $963.7
million at the end of 2019 due primarily to an increase in unrealized gains on AFS investments included in AOCL and offset by net income for the year net of dividends paid and
shares repurchased.
Total assets increased by $0.8 billion to $14.7 billion from 2019 to 2020, primarily due to an increase in depositor funding which is reflected in the increase in cash and
the investment portfolio.
As at December 31, 2020, our capital ratios were strong, and were significantly in excess of regulatory requirements. The Bank's regulatory capital is determined in
accordance with current Basel III guidelines as issued by the BMA.
The TCE/TA ratio at the end of 2020 was 6.1% (2019: 6.3%), while the CET1 and total Tier 1 capital ratios at the end of 2020 were 16.1% (2019: 17.3%) and 16.1%
(2019: 17.3%), respectively. These ratios continue to remain in excess of regulatory minimums at December 31, 2020.
68
Cash Due from Banks, Securities Purchased Under Agreement to Resell and Short-Term Investments
We only place deposits with highly-rated institutions and ensure that there is appropriate geographic and sector diversification in our exposures. Limits are set for
aggregate geographic exposures and for every counterparty for which we place deposits. Those limits are monitored and reviewed by our Credit Risk Management division and
approved by the Financial Institutions Committee. We define cash due from banks to include cash on hand, cash items in the process of collection, amounts due from
correspondent banks and liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in fair value. Such
investments are those with less than three months maturity from the date of acquisition and include unrestricted term deposits, certificates of deposit and treasury bills.
Investments of a similar nature that are either restricted or have a maturity of more than three months but less than one year are classified as short-term investments. Securities
purchased under agreement to resell are treated as collateralized lending transactions, and are referred to as repurchase agreements. We utilize repurchase agreements to
manage liquidity. The risks of these transactions include changes in the fair value in the securities posted or received as collateral and other credit-related events. The Bank
manages these risks by ensuring that the collateral involved is appropriate and by monitoring the value of the securities posted or received as collateral on a daily basis.
As at December 31, 2020, cash due from banks, securities purchased under agreements to resell and short-term investments were $4.3 billion, compared to $3.9 billion
as at December 31, 2019. The increase from 2019 to 2020 is primarily a result of increased depositor funding levels.
See "Note 3: Cash due from banks", "Note 4: Short-term investments" and "Note 12: Credit related arrangements, repurchase agreements and commitments" to our
audited consolidated financial statements as at and for the year ended December 31, 2020 for additional tables and information.
Investment in Securities
Our investment policy requires management to maintain a portfolio of securities that provide the liquidity necessary to cover our obligations as they come due, and
mitigate our overall exposure to credit and interest rate risk, while achieving a satisfactory return on the funds invested. The securities in which we invest are limited to securities
that are considered investment grade. Securities in our investment portfolio are accounted for as either equity securities at fair value, AFS or HTM. Investment policies are
approved by the Board, governed by the Group Asset and Liability Committee and monitored by Group Market Risk, a department of the Group Risk Management division.
Consistent with industry and rating agency designations, we define investment grade as "BBB" or higher. As at December 31, 2020, 99.8% (2019: 99.8%) of our total
investments were investment grade. Of these securities, 99.8% (2019: 99.8%) are rated "A" or higher.
The following table presents the carrying value of investment securities by balance sheet category as at December 31, 2020 and 2019:
(in millions of $)
Equity securities at fair value
Available-for-sale
Held-to-maturity
Total Investment in Securities
As at
December 31,
2020
2019
7
2,661
2,194
4,862
7
2,220
2,209
4,436
Dollar
Change
Percent
Change
—
441
(15)
426
— %
19.9 %
(0.7) %
9.6 %
The investments were placed primarily in US government and federal agency securities totaling $4.8 billion, based upon carrying value, or 97.9% of the total investment
portfolio, as at December 31, 2020. Total net unrealized gains of the investment portfolio were $185.2 million, compared to net unrealized gains of $60.8 million at the end of
2019. The movement in unrealized gains for the year was primarily due to improved valuations due to continued, lower long-term US dollar interest rates.
Equity securities at fair value totaled $7.3 million at the end of 2020, compared to $7.4 million at the end of 2019. As at December 31, 2020 and 2019, equity securities
at fair value consisted entirely of real estate mutual funds and seed capital invested in mutual funds managed by the Bank.
AFS securities totaled $2.7 billion at the end of 2020, compared to $2.2 billion at the end of 2019. As at December 31, 2020, 96.4% or $2.6 billion (2019: 92.4%, or $2.1
billion) of AFS securities consisted of holdings of securities issued by the US government and federal agencies. As at December 31, 2020, the remaining 3.5%, or $95.1 million
of AFS securities (2019: 7.6% or $167.9 million) was comprised primarily of guaranteed student loan-backed securities of 0.5%, or $12.9 million (2019: 0.6%, or $12.9 million),
debt securities issued by non-US governments of 0.8%, or $22.4 million (2019: 1.2%, or $25.7 million) and residential mortgage-backed securities of 2.2%, or $59.7 million
(2019: 5.8%, or $129.3 million). The overall increase in US government and federal agency securities was funded by both a reallocation from short-term investments as the ABN
AMRO (Channel) Islands deposit book matured and an increase in depositor funding.
HTM investments were $2.2 billion as at December 31, 2020 (2019: $2.2 billion) and consisted entirely of mortgage-backed securities issued by US federal agencies
that management does not intend to sell before contractual maturity.
Investment Valuation — Impairment and Credit Loss Considerations
Securities in unrealized loss positions are analyzed as part of management's ongoing assessment of impairment and credit losses. For debt securities, where
management does not expect to recover the entire amortized cost basis of the security and intends to sell such securities or it is more likely than not that the Bank will be
required to sell the securities before recovering the amortized cost, it recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair
value of those securities through the income statement. Following the recognition of impairment, the security's new amortized cost basis is the previous basis less impairment.
When management does not intend to sell or it is more likely than not that the Bank will hold such securities until recovering the amortized cost, management
determines whether any credit losses (or OTTI prior to January 1, 2020) exist. See "Note 2.H: investments" and "Note 2.J: Allowance for Credit Losses".
While management sold AFS securities in 2020 and 2019, these securities were sold for net gains of $1.2 million and $1.6 million respectively, and involved selling
floating rate notes in exchange for fixed rate notes due to the current low interest rate environment. Management does not have the intention or does not foresee a more likely
than not scenario where the Bank will be required to sell any further securities which are in an unrealized loss position, and accordingly, management has concluded that these
sales are not credit loss indicators (or OTTI indicators prior to January 1, 2020) for any remaining securities in a loss position as at December 31, 2020.
See Note 5: Investment in securities to our audited consolidated financial statements as at December 31, 2020 for additional tables and information.
69
Loans
The loan portfolio increased from $5.1 billion at the end of 2019 to $5.2 billion as at December 31, 2020, Loan growth was negatively impacted by the COVID-19
pandemic and the normal portfolio amortization was mostly offset by the six month mortgage deferral programs in both Bermuda and the Cayman Islands.
The loan portfolio represented 35.0% of total assets as at December 31, 2020 (2019: 36.9%), while loans as a percentage of total deposits decreased from 41.3% at
the end of 2019 to 38.9% at the end of 2020.
Allowance for credit losses as at December 31, 2020 totaled $34.1 million, an increase of $10.5 million from the prior year. The movement in the allowance was mainly
due to the adoption of CECL which resulted in the recognition of a $7.8 million change in accounting policy adjustment on January 1,2020. In addition, the allowance was
impacted by loans migrating into the past due and non-performing categories as well as lower macroeconomic forecasts impacting future expected credit loss estimates,
primarily due to the COVID-19 pandemic.
Gross non-accrual loans totaled $72.5 million as at December 31, 2020, $22.1 million higher than $50.4 million as at December 31, 2019, and represented 1.4% of the
total loan portfolio as at December 31, 2020, compared to 1.0% as at December 31, 2019. This increase was driven by a commercial loan in collateral dispute litigation and a few
residential mortgages in Bermuda. During 2020, we held OREO amounting to $4.1 million (2019: $3.8 million), consisting of commercial real estate of $3.3 million (2019: $3.3
million) and foreclosed residential properties of $0.8 million (2019: $0.5 million).
Government
Loans to governments were $279.4 million, which was a $91.3 million decrease from 2019, due primarily to the repayment of the government facility in Bermuda.
Commercial
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.
Commercial real estate loans are offered to real estate investors, developers and builders domiciled primarily in Bermuda and the Cayman Islands. To manage our
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 non-cancellable long-term leases to high quality international businesses. These cash flows are generally sufficient to
service the loan. The portfolio increased by $6.4 million to $760.2 million at December 31, 2020.
Commercial loans outstanding as at December 31, 2020 were $520.2 million, which represented a decrease of $39.1 million from the previous year as repayments
exceeded new loan growth.
Residential
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 residential property.
All mortgages were underwritten utilizing our stringent credit standards. See Item 5.A. "Operating Results". Residential loans consist of conventional home mortgages
and equity credit lines.
As at December 31, 2020, residential mortgages totaled $3.4 billion (or 65.5% of total gross loans), a $196.2 million increase from December 31, 2019. This increase
was attributed mainly to growth in both the Cayman Islands and UK mortgage books.
Other Loan Portfolios
We provide loans, as part of our normal banking business, in respect of automobile financing, consumer financing, credit cards, commercial financing, loans to financial
institutions and overdraft facilities to retail, corporate and private banking clients in the jurisdictions in which we operate. As at December 31, 2020, other consumer loans totaled
$230.8 million (or 4.4% of total gross loans), a $25.7 million decrease from December 31, 2019. This was due to lower loan growth resulting from the COVID-19 pandemic.
See "Note 6: Loans" and "Note 7: Credit risk concentrations" to our audited consolidated financial statements as at December 31, 2020 for more information on our loan
portfolio and contractual obligations and arrangements.
Deposits
Deposits are our principal funding source for use in lending, investments and liquidity. We are a deposit-led bank and do not require the use of wholesale or institutional
markets to fund our loan business. See Item 5.A. "Operating Results - Liquidity Risk" and "- Credit Risk". Deposit balances at the end of reporting periods can fluctuate due to
significant balances that flow in and out from private trust, fund and insurance clients to meet quarter-end operational requirements.
70
The table below shows the year-end and average total deposit balances by jurisdiction for the year ended and as at December 31, 2020 and 2019:
(in millions of $)
Bermuda
Cayman Islands
Channel Island and the UK
Total deposits
As at
December 31
2020
2019
4,813
4,109
4,329
4,412
3,475
4,555
13,250
12,442
Dollar
change
Average balance
2020
2019
Dollar
change
401
634
(226)
808
4,353
3,585
4,138
4,373
3,342
3,284
(20)
243
854
12,075
10,999
1,076
Average total deposits increased by $1.1 billion to $12.1 billion in 2020. On a year-end basis, total deposits were up to $0.8 billion from $12.4 billion at the end of 2019.
The increase was driven by both corporate and retail depositors in Bermuda and the Cayman Islands, the latter driven by the retail loan deferral programs in these segments,
and offset by expected runoff in the Channel Islands as the deposit book was repriced.
Demand deposits, which include checking accounts (both interest bearing and non-interest bearing), savings and call accounts, totaled $10.6 billion, or 79.9% of total
deposits at the end of 2020, compared to $9.4 billion or 75.5%, at the end of 2019. Term deposits decreased by $0.4 billion to $2.7 billion compared to the prior year. The cost of
funds on deposits decreased from 47 basis points in the full year ended 2019 to 21 basis points in 2020 primarily due to both lower market rates and the impact of the active
deposit repricing in the Channel Islands. Average non-interest bearing deposits increased to $2.4 billion from $2.1 billion in 2019.
Included in total deposits are deposits with banks of $25.1 million at the end of 2020, down from $33.8 million at the end of 2019.
See "Note 10: Customer deposits and deposits from banks" to our audited consolidated financial statements as at December 31, 2020 for additional tables and
information.
Borrowings
We have no issuances of certificates of deposit ("CD"), commercial paper ("CP") or senior notes outstanding and have no CD or CP issuance programs. We use
funding from the inter-bank market as part of interest rate risk and liquidity management. As at December 31, 2020, deposits from banks totaled $25.1 million, slightly lower from
the prior year.
Employee Future Benefits
We maintain trusteed pension plans including non-contributory defined benefit plans and a number of defined contribution plans, and provide post-retirement healthcare
benefits to our qualifying retirees. The defined benefit provisions under the pension plans are generally based upon years of service and average salary during the final years of
employment. The defined benefit pension and post-retirement healthcare plans are not open to new participants, are non-contributory and thus the funding required is provided
by us, based upon the advice of an independent actuary. The defined benefit pension plans are in the Bermuda, Guernsey and UK jurisdictions, and the defined benefit post-
retirement medical plan is in Bermuda. The Bank has a residual obligation on top of its defined contribution plan in Mauritius.
Effective December 31, 2011, the Bermuda defined benefit pension benefits were amended to freeze credited service and final average earnings for remaining active
members. Effective January 2012, all the participants of the Bermuda defined benefit pension plan are inactive and in accordance with GAAP, the net actuarial loss of the
Bermuda defined benefit pension plan is amortized over the estimated average remaining life expectancy of the inactive participants of 22.8 years. Prior to all Bermuda
participants being inactive, the net actuarial loss of the Bermuda defined benefit pension plan was amortized to net income over the estimated average remaining service period
for active members of 4.5 years.
Effective September 30, 2014, the defined benefit pension benefits of our Guernsey operations were amended to freeze credited service and final average earnings for
remaining active members. The benefits amendment resulted in a further reduction in the Guernsey defined benefit pension liability of $4.6 million as at September 30, 2014.
Effective October 2014, all of the participants of the Guernsey defined benefit pension plan are inactive and in accordance with GAAP, the net actuarial loss of the
Guernsey defined benefit pension plan will be amortized over the estimated average remaining life expectancy of the inactive participants of 39 years. Prior to all Guernsey
participants being inactive, the net actuarial loss of the Guernsey defined benefit pension plan was amortized to net income over the estimated average remaining service period
for active members of 15 years.
For the year ended December 31, 2014, numerous changes in the plan provisions were made to align the plan provisions with our administrative practices resulting in a
further increase in the Bermuda defined benefit post-retirement healthcare plan liability of $7.9 million. We amortize prior service credit resulting from plan amendments that
occurred when plan members were active employees, on a linear basis over the expected average remaining service period (to full eligibility) of active members expected to
receive benefits under the plan. Such remaining service periods are as follow: 3.1 years for the 2010 plan amendments and 4.6 years for the 2011 plan amendments. Plan
amendments occurring in 2014 resulted in the recognition of new prior service cost on December 31, 2014 on a plan for which substantially all members are now inactive and, in
accordance with GAAP, we have elected to amortize this new prior service cost on a linear basis over 21 years, which is the average remaining life expectancy of members
eligible for benefits under the plan at the time of the amendments.
As at December 31, 2020, we had a net obligation for employee future benefits in the amount of $131.3 million, up $20.9 million (19.0%) from $110.3 million at the end
of 2019. The increase was driven primarily by actuarial losses on the post-retirement healthcare plan due to lower projected asset returns.
See "Note 11: Employee benefit plans" to our audited consolidated financial statements as at December 31, 2020 for additional tables and information.
Long-Term Debt, Interest Payments and Maturities
We had outstanding issuances of long-term debt with a carrying value of $171.5 million as at December 31, 2020 and $143.5 million as at December 31, 2019, all
issued in US Dollars. On June 11, 2020, the Bank issued US $100 million of Subordinated Lower Tier II capital notes. The notes were issued at par and due on June 15, 2030.
The issuance was by way of a registered offering with US institutional investors. The notes are listed on the BSX in the specialist debt securities category. The proceeds of the
issue were used, amongst other, to repay the entire amount of the US $45 million outstanding subordinated notes series 2005-B which matured on July 2, 2020 and the entire
amount of the US $25 million outstanding subordinated notes series 2008-B which were eligible for redemption. As at December 31, 2020, all of our outstanding long-term debt
71
was eligible for inclusion in our Tier 2 regulatory capital base and was limited to 50% of Tier 1 capital, up from the end of 2019 due to the $100 million 2020 issuance and
repayment of the two older issuances which amortized in the last five years to maturity.
The following table presents the contractual maturity, interest rates and principal outstanding as at December 31, 2020:
Long-term debt (in millions of $)
2018 issuance
2020 issuance
Unamortized debt issuance costs
Total
Earliest date
redeemable at
the Bank's option
Contractual
maturity date
Interest rate until
date redeemable
Interest rate from earliest date
redeemable to contractual maturity
Principal
outstanding
June 1, 2023
June 1, 2028
June 15, 2025
June 15, 2030
5.25%
5.25%
3 months US$ LIBOR + 2.255%
3 months US$ SOFR + 5.060%
75.0
100.0
(3.5)
171.5
See "Note 19: Long-term debt" to our audited consolidated financial statements as at December 31, 2020 for additional information.
Other Liabilities
Other liabilities include operating lease liabilities, derivative liabilities, current employee salaries and benefits payable and related payroll tax, as well as sundry
liabilities. Other liabilities decreased by $58.5 million to $203.9 million as at December 31, 2020. The decrease was a result of decreased mark-to-market losses on derivatives
and lower sundry liabilities.
Leases
In the normal course of operation, the Bank enters into leasing agreements either as the lessee or the lessor, mostly for office and parking spaces as well as for small
office equipment. The Bank recognizes right-of-use assets and lease liabilities for operating leases. Lease liabilities are measured as the present value of future lease payments,
including term renewals that are reasonably certain to occur, discounted using the Bank’s incremental borrowing rate. The Bank has used the rate of its June 11, 2020 debt
issuance as the current incremental borrowing rate.
The terms of the existing leases, including renewal options that are reasonably certain to be exercised, extend up to the year 2035. Certain lease payments will be
adjusted during the related leases’ terms based on movements in the relevant consumer price index.
See "Note 13: Leases" to our audited consolidated financial statements as at December 31, 2020 for additional information.
Repurchase Agreements
We also obtain funds from time to time from the sale of securities to institutional investors under repurchase agreements. In a repurchase agreement transaction, we
will generally pledge investment securities as collateral in a borrowing transaction, agreeing to repurchase the identical security on a specified later date, generally not more than
90 days, at a price greater than the original sales price. The difference between the sale price and repurchase price is the cost of the use of the proceeds, or interest expense.
The investment securities underlying these agreements may be delivered to securities dealers who arrange such transactions as collateral for the repurchase obligation.
Repurchase agreements represent a cost competitive funding source and also provide liquidity on agency paper for us. However, we are subject to the risk that the borrower of
the securities may default at maturity and not return the collateral. In order to minimize this potential risk when entering into such transactions, we generally deal with large,
established investment brokerage firms with whom we have master repurchase agreements. Repurchase transactions are accounted for as collateralized financing
arrangements rather than as sales of such securities, and the obligation to repurchase such securities is reflected as a liability in our consolidated financial statements. As at
December 31, 2020 and 2019, there were no repurchase agreements outstanding.
Shareholders' Equity
Shareholders' equity increased during the year ended December 31, 2020 by $18.2 million to $981.9 million.
Increases totaling $225.8 million included:
• $147.2 million of net income for the year;
• $61.0 million from net change in unrealized gains (losses) on AFS investments;
• $15.2 million for share-based compensation and settlements;
• $1.7 million from issuance of new common shares as part of share-based settlements; and
• $0.7 million of other adjustments.
The increases were offset by the following decreases of $207.6 million:
• $88.9 million of common share dividends;
• $86.6 million from net increases in treasury shares;
• $24.0 million from adjustments to employee benefit plans;
• $7.8 million cumulative effect from change in accounting policy; and
• $0.3 million of other adjustments.
72
Segment Overview
The Bank is managed by the Chairman and CEO on a geographic basis. The Bank presents four reportable segments, three geographical and one other: Bermuda, the
Cayman Islands, Channel Islands and the UK, and Other. The Other segment is composed of several non-reportable operating segments that have been aggregated in
accordance with GAAP. Each reportable segment has a managing director who reports to the Chairman and CEO. The Chairman and CEO and the segment managing director
have final authority over resource allocation decisions and performance assessment.
Transactions between segments are accounted for on an accrual basis and are all eliminated upon consolidation. The Bank generally does not allocate assets,
revenues and expenses among its business segments, with the exception of certain corporate overhead expenses and loan participation revenue and expenses. Loan
participation revenue and expenses are allocated pro-rata based on the percentage of the total loan funded by each jurisdiction participating in the loan.
Bermuda (Including Head Office)
For more than 150 years, Bermuda has served as home to our headquarters and remains our largest jurisdiction in terms of number of employees and business
volume. The following table provides certain financial information for our Bermuda segment for the years ended December 31, 2020, 2019 and 2018.
Summary Income Statement
For the year ended December 31,
Dollar change
Percent change
(in millions of $)
Net interest income
Provision for credit recoveries (losses)
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other gains (losses)
Net income
Summary Balance Sheet
(in millions of $)
Total deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
2020 vs. 2019
2020
2019
2018
159.6
183.9
(8.8)
(3.1)
85.2
236.0
89.1
269.9
205.3
6.8
87.4
299.5
(192.8)
(209.4)
(202.4)
43.2
2.0
45.2
60.5
2.2
62.7
97.1
—
97.1
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
(24.3)
(21.4)
(13.2) %
(10.4) %
(5.7)
(3.9)
(33.9)
16.6
(17.3)
(0.2)
(17.5)
(9.9)
1.7
(29.6)
(7.0)
(36.6)
2.2
(34.4)
(183.9) %
(145.6) %
(4.4) %
(12.6) %
(7.9) %
(28.6) %
(9.1) %
(27.9) %
1.9 %
(9.9) %
3.5 %
(37.7) %
100.0 %
(35.4) %
As at December 31,
2020
2019
4,813
2,077
5,925
4,412
2,096
5,220
Dollar
change
Percent
change
401
(19)
705
16,071
53,512
15,220
44,369
851
9,143
1,811
2,152
3,963
449
1,897
2,085
3,982
520
(86)
67
(19)
(71)
9.1 %
(0.9) %
13.5 %
5.6 %
20.6 %
(4.5) %
3.2 %
(0.5) %
(13.7) %
Net income before other gains and losses was $43.2 million for the year ended December 31, 2020, down by $17.3 million from $60.5 million in the prior year. This
decrease is due principally to the following movements in net interest income, provision for credit losses, non-interest income and operating expenses:
Net interest income before provision for credit losses decreased by $24.3 million to $159.6 million in 2020, due primarily to the impact of lower market rates across
the yield curve as a result of the COVID-19 pandemic, which was partially offset by lower deposit costs.
Provision for credit losses was up by $5.7 million to $8.8 million in 2020. The increase is due to the implementation of the new CECL model, COVID-19 driven
negative macroeconomic forecasts impacting future expected credit loss estimate and loans migrating into the past due and non-performing categories.
Non-interest income decreased by $3.9 million to $85.2 million in 2020. This was primarily due to lower economic activity resulting from COVID-19 related "shelter-
in-place" government mandates, primarily during the months of April and May, impacting card service fee contributions and foreign exchange transactional volumes. Asset
management fees were impacted from Q3 2020 due to fees on the Bank's money market fund being reduced to offset low short term market rates.
Operating expenses decreased by $16.6 million to $192.8 million in 2020 driven by a decrease in salary and other employee benefit costs, due to both higher
restructuring costs and the costs associated with the departure of a senior executive in 2019; decreased professional and other outside services costs, due principally to the
costs associated with the ABN AMRO (Channel Islands) acquisition in 2019 which were booked at the Head Office level and a reduction in the volume of professional and
outside services due to vendor management cost reduction programs implemented in 2020; reduced marketing costs from the delay of rebranding and reduced travel
expenditure due to COVID-19; and partially offset by an increase in property costs due to extra health and safety related expenditure and planned renovations.
Total assets as at December 31, 2020 were $5.9 billion, up $0.7 billion from December 31, 2019. Total deposits were $4.8 billion in December 31, 2020, up $0.4
billion from December 31, 2019, and loan balances at December 31, 2020 were unchanged at $2.1 billion.
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Client AUA for the trust and custody businesses as at December 31, 2020 were $53.5 billion and $16.1 billion, respectively, while assets under management were $4.0
billion. This compares with $44.4 billion, $15.2 billion and $4.0 billion, respectively, as at December 31, 2019.
2019 vs. 2018
Net income before other gains and losses was $60.5 million for the year ended December 31, 2019, down by $36.6 million from $97.1 million in the prior year. This
decrease is due principally to the following movements in net interest income, provision for credit losses, non-interest income, operating expenses and total other gains:
Net interest income before provision for credit losses decreased by $21.4 million to $183.9 million in 2019, due primarily to a lower average volume of interest
earning assets in 2019 driven by lower deposit funding as well as higher interest rates paid on customer term deposits.
Provision for credit losses was $3.1 million which was down $9.9 million from a release in the prior year. This resulted primarily from smaller releases from the
general provision compared to the prior year as well as increased specific provisions on a few residential mortgages and a commercial loan.
Non-interest income increased by $1.7 million to $89.1 million in 2019. This was primarily driven by increased card service fee contributions, increased asset
management fees due to new business, increased custody fees due to new fees and offset by reduced foreign exchange income due to reduced transactional volumes on
foreign exchange transactions.
Operating expenses increased by $7.0 million to $209.4 million in 2019 due primarily to increased salary and other employee benefit costs, due to both restructuring
initiatives and costs associated with the departure of a senior executive, increased professional and other outside services costs, resulting from costs associated with the ABN
AMRO (Channel Islands) acquisition which were booked at the Head Office level, and increased marketing costs associated with the rebranding initiative.
Other gains increased by $2.2 million in 2019. Other gains in 2018 were immaterial. This was driven by higher mark-to-market gains on equity securities and net
realized gains on the sale of AFS.
Total assets as at December 31, 2019 were $5.2 billion, down $0.2 billion from December 31, 2018. Customer deposits ended 2019 at $4.4 billion, down $0.1 billion
from the end of 2018, and loan balances ended 2019 at $2.1 billion, up $0.1 billion from the end of 2018.
Client AUA for the trust and custody businesses as at December 31, 2019 were $44.4 billion and $15.2 billion, respectively, while assets under management were
$4.0 billion. This compares with $46.9 billion, $16.5 billion and $3.6 billion, respectively, as at December 31, 2018.
Cayman Islands
We are a leading financial services provider in the Cayman Islands, offering a comprehensive range of personal and corporate financial services. In addition to our
strong retail presence, we are focused on the provision of wealth management services including private banking, asset management and trust services.
We have continued to enhance our client delivery channels and online and mobile banking platform upgrades. With four Banking Centers in desirable locations and
15 ATMs strategically located in Grand Cayman, we continue to be a leading provider of financial services locally. The following table provides certain financial information for
our Cayman Islands segment for the years ended December 31, 2020, 2019 and 2018.
Summary Income Statement
For the year ended December 31,
Dollar change
Percent change
(in millions of $)
Net interest income
Provision for credit recoveries (losses)
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other gains (losses)
Net income
Summary Balance Sheet
(in millions of $)
Total deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
2020
2019
2018
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
95.4
0.5
49.3
145.2
114.6
1.9
51.9
168.4
103.2
1.3
47.8
152.3
(62.6)
(61.1)
(60.7)
82.6
0.4
83.0
107.3
0.6
107.9
91.6
0.4
92.0
(19.2)
(1.4)
(2.6)
(23.2)
(1.5)
(24.7)
(0.2)
(24.9)
11.4
0.6
4.1
16.1
(0.4)
15.7
0.2
15.9
(16.8) %
(73.7) %
(5.0) %
(13.8) %
2.5 %
(23.0) %
(33.3) %
(23.1) %
11.0 %
46.2 %
8.6 %
10.6 %
0.7 %
17.1 %
50.0 %
17.3 %
As at December 31,
2020
2019
Dollar
change
Percent
change
4,109
1,124
4,480
3,159
7,611
170
625
795
236
3,475
1,105
3,839
2,582
7,723
195
646
841
296
634
19
641
577
(112)
(25)
(21)
(46)
(60)
18.2 %
1.7 %
16.7 %
22.3 %
(1.5) %
(12.8) %
(3.3) %
(5.5) %
(20.3) %
74
2020 vs. 2019
Net income before other gains and losses for the year ended December 31, 2020 was $82.6 million, down by $24.7 million from $107.3 million in 2019. This decrease is
due principally to the following movements in net interest income, provision for credit losses, non-interest income and operating expenses:
Net interest income before provision for credit losses was $95.4 million in 2020, down by $19.2 million compared to 2019. The decrease from 2019 to 2020 was due
primarily to the impact of lower market rates across the yield curve as a result of the COVID-19 pandemic and was partially offset by lower deposit costs.
Provision for credit losses was a recovery of $0.5 million in 2020, representing a decrease of $1.4 million compared to a credit recovery of $1.9 million in 2019. This
decrease was mainly due to lower credit recoveries in 2020 as a result of the net specific provision release driven by a small government loan-to-debt conversion in 2019.
Non-interest income was $49.3 million, down $2.6 million from 2019 driven by lower economic activity resulting from COVID-19 related "shelter-in-place" government
mandates, primarily during the months of April and May, impacting card service fee contributions and foreign exchange transactional volumes.
Operating expenses increased by $1.5 million from 2019 to $62.6 million in 2020, driven primarily by an increase in professional and outside services due to higher
intercompany charges from the Halifax service center; an increase in property costs due to extra health and safety related expenditure; an increase in IT sourcing and
communication costs; and partially offset by reduced marketing costs from the delay of rebranding and reduced travel expenditure due to COVID-19.
Total assets as at December 31, 2020 were $4.5 billion, up $0.6 billion from December 31, 2019, reflecting higher depositor funding levels. Net loans were relatively flat
at $1.1 billion at December 31, 2020.
Client AUA for the trust and custody businesses were $7.6 billion and $3.2 billion, respectively, while AUM were $0.8 billion at December 31, 2020. This compares with
$7.7 billion, $2.6 billion and $0.8 billion, respectively, on December 31, 2019.
2019 vs. 2018
Net income before other gains and losses for the year ended December 31, 2019 was $107.3 million, up by $15.7 million from $91.6 million in 2018. This increase is
due principally to the following movements in net interest income, provision for credit losses, non-interest income and operating expenses:
Net interest income before provision for credit losses was $114.6 million in 2019, an improvement of $11.4 million compared to 2018. The increase from 2018 to 2019
was driven primarily by an improvement in investment income which was up by $8.8 million from 2018 to 2019 as a result of the increase in higher yielding investment assets.
Interest income on loans also increased by $1.9 million as a result of higher loan volumes. Deposit liability costs increased from $4.2 million in 2018 to $8.4 million in 2019 as a
result of higher volumes and customer rates.
Provision for credit losses was a recovery of $1.9 million in 2019, representing an increase of $0.6 million compared to a smaller credit recovery in 2018. This increase
in recovery was due to a net specific provision release driven by a small government loan-to-debt conversion and additional releases in the general provision in 2019.
Non-interest income was $51.9 million, up $4.1 million from 2018 due primarily to increased transactional volumes on foreign exchange transactions and to increased
card service fee contributions.
Operating expenses increased by $0.4 million from 2018 to 2019, to $61.1 million, driven primarily by higher compensation costs from increased headcount and offset
by reduced property expenses due to the expiry and non-renewal of a lease.
Other gains and losses for the year ended December 31, 2019 were gains of $0.6 million, an increase of $0.2 million from gains in the prior year, which resulted
primarily from investment sales as a part of the strategic repositioning of the investment portfolio.
Total assets as at December 31, 2019 were $3.8 billion, up $0.1 billion from the end of 2018, reflecting higher total deposit levels. Net loans increased $0.1 billion from
year-end 2018 to year-end 2019 at $1.1 billion due to an increase in both corporate and consumer lending.
Client AUA for the trust and custody businesses were $7.7 billion and $2.6 billion, respectively, while AUM were $0.8 billion at the end of 2019. This compares with $7.7
billion, $2.2 billion and $0.8 billion, respectively, on December 31, 2018.
Channel Islands and the UK
The Channel Islands and UK segment includes the jurisdictions of Guernsey, Jersey (both in the 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 mortgages for high-value residential properties. The following table provides certain financial information for our Channel Islands and the UK
segment for the years ended December 31, 2020, 2019 and 2018.
Summary Income Statement
For the year ended December 31,
Dollar change
Percent change
(in millions of $)
Net interest income
Provision for credit recoveries (losses)
Non-interest income
Net revenue before other gains (losses)
Operating expenses
Net income before other gains (losses)
Total other gains (losses)
Net income
2020
2019
2018
2019 to
2020
2018 to
2019
2019 to
2020
2018 to
2019
62.7
(0.2)
40.7
103.2
47.2
1.4
34.3
82.9
34.5
(1.1)
26.8
60.2
(82.2)
(74.2)
(50.4)
21.0
(1.2)
19.8
8.7
—
8.7
9.8
(1.2)
8.6
15.5
(1.6)
6.4
20.3
(8.0)
12.3
(1.2)
11.1
12.7
2.5
7.5
22.7
(23.8)
(1.1)
1.2
0.1
32.8 %
36.8 %
(114.3) %
227.3 %
18.7 %
24.5 %
10.8 %
141.4 %
100.0 %
127.6 %
28.0 %
37.7 %
47.2 %
(11.2) %
(100.0) %
1.2 %
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Summary Balance Sheet
(in millions of $)
Total deposits
Loans, net of allowance for credit losses
Total assets
Assets under administration
Custody and other administration services
Trust
Assets under management
Butterfield Funds
Other assets under management
Total assets under management
Number of employees
2020 vs. 2019
As at December 31,
2020
2019
Dollar
change
Percent
change
4,329
2,046
4,827
4,555
2,025
5,108
(226)
21
(281)
13,186
19,226
12,506
20,417
680
(1,191)
48
752
800
363
65
760
825
425
(17)
(8)
(25)
(62)
(5.0) %
1.0 %
(5.5) %
5.4 %
(5.8) %
(26.2) %
(1.1) %
(3.0) %
(14.6) %
Our Channel Islands and UK segment posted net income before gains and losses of $21.0 million in 2020, an increase of $12.3 million when compared to 2019. This
increase is due principally to the following movements in net interest income, provision for credit losses, non-interest income and operating expenses:
Net interest income before provision for credit losses increased by $15.5 million to $62.7 million in 2020, compared to $47.2 million in 2019, primarily due to the full year
impact of the ABN AMRO acquisition, the impact of planned deposit repricing and lower deposit volumes from a reduction in primarily Euro deposits. This was partially offset by
the impact of lower market rates across the yield curve as a result of the COVID-19 pandemic.
Provision for credit losses was an expense of $0.2 million, compared to a recovery of $1.4 million in 2019 due to the reversal of the Brexit economic factor provision in
2019.
Non-interest income increased by $6.4 million to $40.7 million in 2020, due to the full year impact of the ABN AMRO acquisition and partially offset by lower trust
income from lesser time spent and loss of business.
Operating expenses of $82.2 million in 2020 were $8.0 million higher than 2019, principally due to the full year impact of the ABN AMRO acquisition; higher operational
losses and write-offs and partially offset by higher restructuring costs incurred in 2019 compared to 2020.
Total other gains (losses) for 2020 increased $1.2 million compared to 2019 due to a defined benefit pension plan adjustment.
Total assets of $4.8 billion as at December 31, 2020, a decrease from $5.1 billion as at December 31, 2019 primarily from a planned reduction of Euro deposit levels
associated with the ABN AMRO (Channel Islands) acquisition.
As at December 31, 2020, client AUA for the trust and custody businesses were $19.2 billion and $13.2 billion, respectively, while AUM were $0.8 billion. This
compares with $20.4 billion, $12.5 billion and $0.8 billion, respectively, as at December 31, 2019.
2019 vs. 2018
Our Channel Islands and UK segment posted net income before gains and losses of $8.7 million in 2019, a decrease of $1.1 million when compared to 2018. This
movement is due principally to the following movements in net interest income, provision for credit losses, non-interest income and operating expenses:
Net interest income before provision for credit losses increased by $12.7 million to $47.2 million in 2019, compared to $34.5 million in 2018, primarily due to a $15.1
million increase in loan interest income and a $15.1 million increase in deposits with banks interest income due to additional funding as a result of the ABN AMRO (Channel
Islands) acquisition. Partially offsetting this was a $18.9 million increase in interest expense, principally from deposit funding from the ABN AMRO (Channel Islands) acquisition.
Provision for credit losses was a recovery of $1.4 million, compared to an expense of $1.1 million in 2018 due to the reversal of Brexit economic factors that were no
longer supported and reduced historical rates.
Non-interest income increased by $7.5 million to $34.3 million in 2019, attributable to the impact of the late-2018 onboarding of Deutsche Bank clients as well as the
ABN AMRO (Channel Islands) acquisition.
Operating expenses of $74.2 million in 2019 were $23.8 million higher than 2018, principally due to increased salaries and other staff benefits from a higher headcount
as a result of the ABN AMRO acquisition, increased property expenses from ABN AMRO staff occupying a separate building as well as higher technology expenses from
increased infrastructure investment and to accommodate the other elements of the ABN AMRO acquisition.
Other gains for 2019 saw an improvement of $1.2 million compared to 2018. Losses in 2018 reflected a non-core settlement loss on a defined benefit pension plan.
Total assets of $5.1 billion as at December 31, 2019, an increase from $2.0 billion as at December 31, 2018 primarily from the ABN AMRO (Channel Islands)
acquisition as well as an increase in new residential loan origination in the UK.
At the end of 2019, client AUA for the trust and custody businesses were $20.4 billion and $12.5 billion, respectively, while AUM were $0.8 billion. This compares with
$21.5 billion, $6.3 billion and $0.4 billion, respectively, as at December 31, 2018.
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Critical Accounting Policies and Estimates
The Bank's significant accounting policies conform to GAAP and are described in Note 2 of our audited consolidated financial statements. Various elements of our
accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Given the sensitivity of our
consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of
operations or financial condition. Details of certain critical policies and estimates that affect our business results are summarized below:
Allowance for Credit Losses
Accounting for Financial instruments - Credit losses
Starting on January 1, 2020 the Bank adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326). Accordingly, from the
date of adoption, the Bank uses a current expected credit loss model ("CECL") which is based on expected losses. The model used by the Bank up to December 31, 2019 to
estimate credit losses was based on incurred losses. The CECL model is applied by the Bank to the measurement of credit losses on financial instruments at amortized cost,
including loan receivables and held-to-maturity ("HTM") debt securities. The Bank also applies the CECL model to certain off-balance sheet credit exposures such as undrawn
loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In line with Topic 326, the Bank will present credit losses on available-for-sale
("AFS") securities as a valuation allowance rather than as a direct write-down. Changes in expected credit losses are recorded through the respective credit loss allowances on
the consolidated balance sheets as well as in the provision for credit losses (recoveries) in the consolidated statements of operations.
The Bank's purchased credit-impaired (“PCI”) loans outstanding as at January 1, 2020 are now classified as purchased credit deteriorated (“PCD”) loans and both the
amortized cost and an allowance for expected credit losses are disclosed and included with other non-PCD loans' figures. The Bank will continue to recognize the amortization of
the noncredit discount, if any, as interest income based on the yield of such assets.
The Bank has not restated comparative information previously accounted for under the incurred loss and the PCI models. The total adjustment resulting from the
adoption of this methodology on the opening balance of the Bank’s accumulated deficit as at January 1, 2020 was a negative adjustment of $7.8 million relating to the Bank's
loan portfolio.
Under the CECL model, the Bank collects and maintains attributes as they relate to its financial instruments that are within scope of CECL including fair value of
collateral, expected performance over the lifetime of the instruments and reasonable and supportable assumptions about future economic conditions. The Bank's measurement
of expected losses takes into account historical loss information and is primarily based on the product of: the respective instrument’s probability of default (“PD”), loss given
default (“LGD”) and exposure at default (“EAD”). For AFS securities, any allowance for credit losses is based on an impairment assessment.
The Bank made the accounting policy election to write off accrued interest receivable on loans that are placed on non-accrual status by reversing the then accrued
interest balance against interest income revenue.
The Bank maintains an allowance for credit losses, which in management’s opinion is adequate to absorb all estimated credit-related losses that are incurred in its
lending and off-balance sheet credit-related arrangements at the balance sheet date.
Management measures expected credit losses on held-to-maturity and available-for-sale debt securities on a collective basis by major security type when similar risk
characteristics exist, or failing that, on an individual basis.
For available-for-sale debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to
sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written
down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has
resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the
rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the
present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be
collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is
less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria
regarding intent or requirement to sell is met.
The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected
on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries typically do not
exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and
reasonable and supportable forecasts as well as the Bank's internal risk rating framework. Historical credit loss experience provides the basis for the estimation of expected
credit losses. Adjustments to historical loss information are made for differences in the current-loan specific risk characteristics such as differences in underwriting practices,
vintage, portfolio mix, delinquency level, term as well as changes in environmental conditions, such as changes in macroeconomic factors and collateral values.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. In each of its jurisdictions, the Bank has identified the
following portfolio segments: Residential mortgages, Consumer loans (including overdrafts), Commercial loans, Commercial overdrafts, Commercial real estate loans and Credit
cards. For Loans and overdrafts, Management uses a probability of default and loss-given-default model to estimate the allowance for credit losses. Loans that do not share risk
characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. For Credit cards, Management uses a loss rate to
estimate expected credit losses.
Expected credit losses are estimated over the contractual term of the loans. The contractual term excludes potential extensions, renewals and modifications unless
management has a reasonable expectation at the reporting date that the extension or renewal options included in the original contract will occur or that a troubled debt
restructuring will be executed. Credit card receivables do not have stated maturities, therefore establishing a contractual term is performed by using an analytical approximation
of behavior.
77
Fair Value
We define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. We determine the fair values of assets and liabilities based on the fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The relevant
accounting standard describes three levels of inputs that may be used to measure fair value. Investments classified as trading and AFS, and derivative assets and liabilities are
recognized in the consolidated balance sheet at fair value.
Fair value inputs are considered Level 1 when based on unadjusted quoted prices in active markets for identical assets.
We determine fair value based on quoted market prices, where available. If quoted prices are not available, fair value is estimated based upon other observable inputs,
and may include valuation techniques such as present value cash flow models or other conventional valuation methods. In addition, when estimating the fair value of assets, we
may use the quoted price of similar assets, if available.
We use unobservable inputs when observable inputs are not available. These inputs are based upon our judgments and assumptions, which represent our assessment
of the assumptions market participants would use in pricing the asset or liability, which may include assumptions about risk, counterparty credit quality and liquidity and are
developed based on the best information available. The use of different assumptions could produce significantly different results, which could have material positive or negative
effects on the Bank's results of operations.
Significant assets measured at fair value on a recurring basis include our US government and federal agencies investments, corporate debt securities, and commercial
mortgage-backed securities. The fair values of these instruments are generally sourced from an external pricing service and are classified as Level 2 within the fair value
hierarchy. The service's pricing models use predominantly observable valuation inputs to measure the fair value of these securities under both the market and income
approaches.
Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include
OREO, loan impairments for certain loans and goodwill.
We review and update the fair value hierarchy classifications on a quarterly basis. We also verify the accuracy of the pricing provided by our primary external pricing
service on a quarterly basis.
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2020 and 2019.
Refer to "Note 17: Fair value measurements" of the audited consolidated financial statements for further detail on the judgments made in classifying instruments in the
fair value hierarchy.
Goodwill
We account for acquisitions using the acquisition method of accounting, under which the acquired company's net assets are recorded at fair value at the date of the
acquisition and the difference between the fair value of consideration and fair value of the net assets acquired is recorded as goodwill, if positive, and as bargain purchase gain,
if negative.
Goodwill is tested annually in the third quarter for impairment at the reporting unit level, or more frequently if events or circumstances indicate there may be impairment.
The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value
including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is deemed to be not impaired. If the carrying value exceeds fair value, there
is an indication of impairment and the second step is performed to measure the amount of impairment.
The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as
determined in the first step, over the aggregate fair values of the individual assets, liabilities and identifiable intangible assets as if the reporting unit were being acquired in a
business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of
goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot
exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not
permitted.
We rely on several assumptions when estimating the fair value of our reporting units using the discounted cash flow method. These assumptions include the estimated
future cash flows from operations, required discount rate, as well as projected loan losses, an estimate of terminal value and other inputs. Our estimated future cash flows are
largely based on our historical actual cash flows and industry and economic trends, among other considerations. Although management has used the estimates and
assumptions it believes to be most appropriate in the circumstances, it should be noted that even relatively minor changes in certain valuation assumptions used in
management's calculation would result in significant differences in the results of the impairment test.
The valuation of goodwill is dependent on forward-looking expectations related to nationwide and local economic conditions and our associated financial performance.
In the future, if our acquisitions do not yield expected returns or there are changes in discount rates, we may be required to take additional charges to our earnings based on the
impairment assessment process, which could harm our business, financial condition, results of operations and prospects. We had $25.6 million as of December 31, 2020 and
$24.8 million as of December 31, 2019 of goodwill, and the results of the impairment analysis for both annual periods resulted in no impairment being required.
Employee Benefit Plans
We maintain trusteed pension plans for substantially all employees as either non-contributory defined benefit plans or defined contribution plans. Benefits under the
defined benefit plans are primarily based on the employee's years of credited service and average annual salary during the final years of employment as defined in the plans. We
also provide post-retirement medical benefits for certain qualifying active and retired Bermuda-based employees.
The calculations of the amounts recorded require the use of various actuarial assumptions, such as discount rates, assumed rates of return on plan assets,
compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and
trends when appropriate. We believe that the assumptions used in recording our defined benefit plan obligations are reasonable based on our experience and advice from our
actuaries.
78
The post-retirement medical benefits obligation is determined using our assumptions regarding health care cost trend rates. The health care trend rates are developed
based on historical cost data, the near-term outlook on health care trends and the likely long-term trends.
In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized
expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect the defined benefit obligations and future expense.
See "Note 11: Employee benefit plans" to our audited consolidated financial statements as at December 31, 2020 for more information on our pension plans and post-
retirement medical benefit plan, along with the key actuarial assumptions.
Share-based Compensation
We engage in equity settled share-based payment transactions in respect of services received from eligible employees. The fair value of the services received is
measured by reference to the fair value of the shares or share options granted on the date of the grant. The cost of the employee services received in respect of the shares or
share options granted is recognized in the consolidated statements of operations over the shorter of the vesting or service period.
The fair value of the options granted is determined using option pricing models, which take into account the exercise price of the option, the current share price, the
risk-free interest rate, expected dividend rate, the expected volatility of the share price over the life of the option and other relevant factors. The fair value of unvested share
awards is deemed to be the closing price of the publicly traded Bank shares on the grant date. The fair value of time vesting conditions are taken into account by adjusting the
number of shares or share options included in the measurement of the cost of employee services so that ultimately, the amount recognized in the consolidated statements of
operations reflects the number of vested shares or share options. The Bank recognizes compensation cost for awards with performance conditions if and when the Bank
concludes that it is probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures (e.g., due to termination of employment prior to vesting).
See "Note 21: Share-based payments" to our audited consolidated financial statements as at December 31, 2020 for more information on share-based
compensation.
Business Combinations
All business combinations are accounted for using the acquisition method. Identifiable intangible assets (mostly customer relationships) are recognized separately
from goodwill and are initially valued at fair value using discounted cash flow calculations and other recognized valuation techniques. Goodwill represents the excess of the fair
value of the consideration paid for the acquisition of a business over the fair value of the net assets acquired. Contingent purchase consideration is measured at its fair value
and recorded on the purchase date. Any subsequent changes in the fair value of a contingent consideration liability will be recorded through the consolidated statements of
operations.
See "Note 26: Business combinations" to our audited consolidated financial statements as at December 31, 2020 for more information on business combinations.
Risk Management
Risk Oversight and Management
General
The principal types of risk inherent in our business are market, liquidity, credit and operational risks.
Organizational structure
The Board has overall responsibility for determining the strategy for risk management, setting the Bank's risk appetite and ensuring that risk is monitored and controlled
effectively. It accomplishes its mandate through the activities of two dedicated committees:
The Risk Policy and Compliance Committee ("RPCC"): This committee of the Board assists the Board in fulfilling its responsibilities by overseeing the Group's risk
profile and its performance against approved risk appetites and tolerance thresholds. Specifically, the committee considers the sufficiency of the Group's policies, procedures
and limits related to the identification, measurement, monitoring and control of activities that give rise to credit, market, liquidity, interest rate, operational, regulatory, compliance
and reputational risks, as well as overseeing its compliance with laws, regulations and codes of conduct.
The Audit Committee: This committee reviews the overall adequacy and effectiveness of the Group's system of internal controls and the control environment,
including in respect of the risk management process. It reviews recommendations arising from internal and independent audit review activities and management's response to
any findings raised.
Both the RPCC and Audit Committee are supported in the execution of their respective mandates by the dedicated Audit, Compliance and Risk Policy Committees for
our UK, Guernsey, Jersey, Cayman Islands and The Bahamas operations, which oversee the sufficiency of local risk management policies and procedures and the effectiveness
of the system of internal controls that are in place. These committees are chaired by non-executive directors drawn from the boards of directors for each jurisdiction.
The Group executive management team is led by the Chairman and CEO and includes the members of executive management reporting directly to the Chairman and
CEO. The executive management team is responsible for setting business strategy and for monitoring, evaluating and managing risks across the Group. It is supported by the
following management committees:
The Group Risk Committee ("GRC"): This committee comprises executive and senior management team members and is chaired by the Group Chief Risk Officer. It
provides a forum for the strategic assessment of risks assumed across the Group as a whole based on an integrated view of credit, market, liquidity, legal, regulatory and
financial crime compliance, operational, cybersecurity, insurance, pension, investment, capital and reputational risks, ensuring that these exposures are consistent with the risk
appetites and tolerance thresholds promulgated by the Board. It is responsible (i) for reviewing, evaluating and recommending the Group's Risk Appetite Framework, the results
of the Capital Assessment and Risk Profile and recovery and resolution planning processes (including all associated stress testing performed) and the Group's key risk policies
to the Board for approval; (ii) for reviewing and evaluating current and proposed business strategies in the context of our risk appetites; and (iii) for identifying, reviewing and
advising on current and emerging risk issues and associated mitigation plans.
The Group Asset and Liability Committee ("GALCO"): This committee comprises executive and senior management team members and is chaired by the Group
CFO. The committee is responsible for liquidity, interest rate and exchange rate risk management and other balance sheet issues. It also oversees key policies and the
79
execution of the Group's investment and capital management strategies and monitors the associated risks assumed. It is supported in the execution of its mandate by the work
undertaken by the dedicated Asset & Liability Committees in each of the Bank's jurisdictional business units.
The Group Credit Committee ("GCC"): This committee comprises executive and senior management and is chaired by the Group Chief Risk Officer. The committee
is responsible for a broad range of activities relating to the monitoring, evaluation and management of credit risks assumed across the Group at both transaction and portfolio
levels. It is supported in the execution of its mandate by the Financial Institutions Committee ("FIC"), a dedicated sub-committee that is responsible for the evaluation and
approval of recommended inter-bank and counterparty exposures assumed in the Group's treasury and investment portfolios, and by the activities of the jurisdictional Credit
Committees, which review and approve transactions within delegated authorities and recommends specific transactions outside of these limits to the GCC for approval.
The Provisions and Impairments Committee: This committee comprises executive and senior management team members and is chaired by the Group Chief Risk
Officer. The committee is responsible for approving significant provisions and other impairment charges. It also oversees the overall credit risk profile of the Group in regards to
non-accrual loans and assets. It is supported in the execution of its mandate by local credit committees and the GCC, which make recommendations to this committee.
Risk Management
We manage our exposure to risk through a three "lines of defense" model.
The first "line of defense" is provided by our jurisdictional business units, which retain ultimate responsibility for the risks they assume and for bearing the cost of risks
associated with these exposures.
The second "line of defense" is provided by our Risk Management and Compliance groups, which work in collaboration with our business units to identify, assess,
mitigate and monitor the risks associated with our business activities and strategies. They do this by:
• making recommendations to the GRC regarding the constitution of the Risk Appetite Framework;
•
setting risk strategies that are designed to manage risk exposures assumed in the course of pursuing our business strategies and aligning them with agreed
appetites;
• establishing and communicating policies, procedures and limits to control risks in alignment with these risk strategies;
• measuring, monitoring and reporting on risk levels;
• opining on specific transactions that fall outside delegated risk limits; and
•
identifying and assessing emerging risks.
The functions within the Risk Management and Compliance groups that support our risk management activities are outlined below.
Group Market Risk — This unit provides independent oversight of the measurement, monitoring and control of liquidity and funding risks, interest rate and foreign
exchange risks as well as the market risks associated with our investment portfolios. It also monitors compliance with both regulatory requirements and our internal policies and
procedures relating to the management of these risks.
Group Credit Risk Management — This unit is responsible for the adjudication and oversight of credit risks associated with our retail and commercial lending activities
and the management of risks associated with our investment portfolios and counterparty exposures. It also establishes the parameters and delegated limits within which credit
risks may be assumed and promulgates guidelines on how exposures should be managed and monitored.
Group Operational Risk — This unit assesses the effectiveness of our procedures and internal controls in managing our exposure to various forms of operational risk,
including those associated with new business activities and processes and the deployment of new technologies. It also oversees our incident management processes and
reviews the effectiveness of our loss data collection activities.
Group Compliance — This unit provides independent analysis and assurance of our compliance with applicable laws, regulations, codes of conduct and
recommended best practices, including those associated with the prevention of financial crime, including money laundering and terrorist financing. It is also responsible for
assessing our potential exposure to upstream risks and for providing guidance on the preparations that should be made in advance of these changes coming into effect. The
Group Head of Compliance and Operational Risk reports directly to the Chairman and CEO.
The third "line of defense" is provided by our Group Internal Audit function, which performs oversight and ongoing review, and challenges the effectiveness of the
internal controls that are executed by both the business, Risk Management and Compliance. The Group Head of Internal Audit has a dual reporting line to both the Chair of the
Audit Committee and the Chairman and CEO.
Regulatory Review Process
Our banking, trust and investment business activities in Bermuda are monitored by the BMA as the lead regulator. One of the principal objectives of the BMA is to
supervise, regulate and inspect Bermuda-based financial institutions to ensure their financial stability and soundness.
In addition to conducting on-site reviews, the BMA utilizes a comprehensive quarterly statistical return system that enables off-site monitoring. The statistical system is
consistent with Basel Committee Standards, which provides the BMA with a detailed breakdown of a bank's balance sheet and profit-and-loss accounts on both a consolidated
and unconsolidated basis. This information enables the BMA to monitor the soundness of a bank's financial position and ensure that it meets certain capital requirements. For
more information, see Item 4.B. "Business Overview - Supervision and Regulation - Bermuda - Supervision and Monitoring by the BMA".
Each of our regulated entities is separately monitored by the local regulatory authority in that jurisdiction to ensure their financial stability and soundness.
The Risk Appetite Framework
The Risk Appetite Framework is the cornerstone of our approach to risk management. Developed by executive management and approved formally by the Board, it
outlines the appropriateness of taking on certain risks in the pursuit of our strategic objectives and defines those that should be avoided. It also provides management with a
clear mandate regarding the amount and type of risk that it may accept and establishes minimum expectations regarding the practices and behaviors that should be brought to
bear in managing the exposures assumed. It is aligned with the interests of our stakeholders, feeds into our business planning processes, and shapes our discussions on risk
matters generally.
80
Our framework comprises the following elements:
(1) Broad categories of risk: outsourcing; credit; market; liquidity; regulatory compliance; financial crime compliance; fiduciary; governance; operational;
people; cyber and information security; technology; investment; tax reporting; strategy; financial reporting; correspondent banking; reputational and change. These represent the
various risks that the Group assumes across the entirety of its operations in the pursuit of its strategic goals.
(2) A declared risk appetite. To ensure consistency in our risk conversations, these have been distilled into the three options set out in the following table, with
each appetite designed to convey a clear strategic direction in terms of the risk/reward profile assumed:
Appetite
Conservative
Balanced
Tolerant
Definition
Profile
Areas in which the Group avoids risk, or acts to
Our processes and controls are defensive and focus on
minimize or eliminate the likelihood that the risk will
occur, because we have determined the potential
downside costs are intolerable; we must maintain a very
strong control environment.
detection and prevention.
Areas in which the Group must constantly strike a
balance between the potential upside benefits and
potential downside costs of a given decision.
Exposures are only assumed when the risk can be
quantified accurately and is assessed as being
acceptable.
Areas in which the Group has a preference for
disciplined risk-taking because we have determined the
potential upside benefits outweigh the potential costs.
Exposures can be estimated reliably and structures,
systems and processes are in place to manage them.
(3) A statement of our governing principles relating to each risk category. This establishes the characteristics of the risks that the Bank is willing to assume and
the management behaviors that we should exhibit when doing so.
(4) Specific performance measures and tolerance thresholds in respect of each risk category, combining quantitative and qualitative targets (which are
designed to reflect both forward-looking as well as historical perspectives), designed to provide executive management and the Board with an indication of the "direction" of our
exposure relative to our declared risk appetite and an early warning of material adverse developments requiring remedial action.
Application of the Risk Appetite Framework
The limits, targets and thresholds used to measure performance continue to be refined by the Group Risk Management and Compliance functions in an effort to
express as complete a "picture" as possible of our exposure to a given risk, relative to the stated appetite. All changes proposed pass through a formal review and approval
process at both the executive management and Board levels prior to their adoption. Through this approach, the risk appetite framework sets the tone for our risk culture across
the Group as a whole, influencing behaviors at all levels of the organization and reinforcing accountability for decisions taken. Many of our jurisdictional offices have developed
subsidiary risk appetite frameworks in conjunction with their local risk management functions. This ensures appropriate coverage of local risk factors and the establishment of
proportional tolerance thresholds. The Group Risk Management and Compliance functions have reviewed these frameworks prior to their adoption and have modified any
appetites proposed that are considered to be inconsistent with the overall Group approach.
Market Risks
Interest Rate Risk Management
Our primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or changes in net interest margin because of changes in
interest rates.
We seek to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or
re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when our assets, liabilities and off-balance sheet contracts each respond
differently to changes in interest rates, including as a result of explicit and implicit provisions in agreements related to such assets and liabilities and in off-balance sheet
contracts that alter the applicable interest rate and cash flow characteristics as interest rates change. The two primary examples of such provisions that we are exposed to are
the duration and rate sensitivity associated with indeterminate-maturity deposits (e.g., interest bearing call accounts) and the rate of prepayment associated with fixed-rate
lending and mortgage-backed securities. Interest rates may also affect loan demand, credit losses, mortgage origination volume and other items affecting earnings.
Our management of interest rate risk is overseen by the RPCC, which outlines reporting and measurement requirements. In particular, this infrastructure sets limits and
management targets, calculated for various metrics, including our economic value sensitivity, our economic value of equity and net interest income simulations involving parallel
shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. Our Risk Management infrastructure also
requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, non-
interest bearing and interest bearing demand deposit durations based on historical analysis, and the targeted investment term of capital.
The principal objective of our interest rate risk management is to maximize profit potential while minimizing exposure to changes in interest rates. Our actions in this
regard are taken under the guidance of GALCO. The committee is actively involved in formulating the economic assumptions that we use in our financial planning and budgeting
processes and establishes policies which control and monitor the sources, uses and pricing of funds. From time to time, we utilize hedging techniques to reduce interest rate risk.
GALCO uses interest income simulation and economic value of equity analysis to measure inherent risk in our balance sheet at specific points in time.
Appetite for interest rate risk is documented in the Group's policies on market risk and investments. This includes the completion of stress testing on at least a quarterly
basis of the impact of an immediate and sustained shift in interest rates of +/– 200 basis points on net interest income, economic value of equity and the ratio of tangible total
equity to average assets. If any of the parameters established by policy are exceeded, GALCO will provide a plan to executive management to bring the exposure back within
tolerance under advice to the Board. The plan does not have to bring the exposure back within limit immediately, but must adjust the exposure within Board and management
approved timeframes.
We also use derivatives in the asset and liability management of positions to minimize significant unplanned fluctuations in earnings that are caused by interest rate
volatility. Our derivative contracts principally involve over-the-counter transactions that are privately negotiated between the Group and the counterparty to the contract.
Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps. Interest rate swaps generally involve the exchange of fixed
and variable rate interest payments between two parties, based on a common notional principal amount and maturity date.
81
Interest Rate Risk
The following table sets out the assets, liabilities and shareholders' equity and off-balance sheet instruments on the date of the earlier of contractual maturity, expected
maturity and repricing date. Use of these tables to derive information about our interest rate risk position is limited by the fact that customers may choose to terminate their
financial instruments at a date earlier than the contractual maturity or repricing date. Examples of this include fixed-rate mortgages, which are shown at contractual maturity but
which may pre-pay earlier, and certain term deposits, which are shown at contractual maturity but which may be withdrawn before their contractual maturity subject to
prepayment penalties. Investments are shown based on remaining contractual maturities. The remaining contractual principal maturities for mortgage-backed securities
(primarily US government agencies) do not consider prepayments. Remaining expected maturities differ from contractual maturities because borrowers may have the right to
prepay obligations before the underlying mortgages mature.
December 31, 2020
(in $ millions)
Assets
Cash and deposits with banks
Securities purchased under agreement to resell
Short-term investments
Investments(2)
Loans(3)
Other assets
Total assets
Liabilities and shareholders' equity
Demand deposits
Term deposits(4)
Other liabilities
Subordinated capital(4)
Shareholders' equity
Total liabilities and shareholders' equity
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Earlier of contractual maturity or repricing date
Within
3 months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
Total
Total fair
value(1)
3,156
197
494
13
4,170
—
8,030
7,578
1,584
—
—
—
9,162
(1,132)
(1,132)
—
—
327
13
39
—
379
—
634
—
—
—
634
—
—
2
27
71
—
100
—
344
—
—
—
344
(255)
(244)
—
—
—
92
652
—
744
—
99
—
171
—
270
474
(1,387)
(1,631)
(1,157)
—
—
—
4,711
187
—
4,898
—
—
—
—
—
—
134
3,290
3,290
—
—
7
42
405
588
3,012
—
335
—
982
197
823
4,863
5,161
405
197
823
4,973
5,193
405
14,739
14,881
10,590
2,661
335
171
982
10,590
2,665
335
170
1,120
14,881
4,329
14,739
4,898
3,741
(3,741)
—
—
—
____________________________
(1)
See Item 5.A. "Operating Results - Critical Accounting Policies and Estimates - Fair Values" and "Note 17: Fair value measurements" of the audited consolidated financial
statements for further detail on the determination of fair value.
Investments include (i) HTM, which are carried at their amortized cost on the consolidated balance sheet, and (ii) equity securities and AFS investments, each of which are
carried at fair value on the consolidated balance sheet. The fair value columns presents all classifications at their fair value.
Loans are carried on the consolidated balance sheet as the principal amount outstanding, net of allowance for credit losses, unearned income, fair value adjustments
arising from hedge accounting and net deferred loan fees.
Term deposits and subordinated capital are carried on the consolidated balance sheet as the principal outstanding.
(2)
(3)
(4)
Asset/Liability Management and Interest Rate Risk
The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of
interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital.
As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and
expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest bearing liabilities, other than those which have a short term to
maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same
time maximizing income.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative
contracts for the purpose of managing interest rate risk, but we may elect to do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange
or commodity price risk. Our exposure to holdings categorized as "trading positions" falls below the de minimis threshold established of 5% (ratio of total trading book open
position compared to the sum of on and off-balance sheet assets that are not part of the trading book).
We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios
are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an
instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a
complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is
a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for
the risk to our future earnings and is used in conjunction with the analysis on net interest income. The following table summarizes simulated change in net interest income versus
unchanged rates as at December 31, 2020 and December 31, 2019:
82
+300 basis points
+200 basis points
+100 basis points
Flat rates
−100 basis points
For the year ended
December 31, 2020
December 31, 2019
Following
12 Months
Months 13 - 24
Following
12 Months
Months 13 - 24
33.2 %
22.6 %
11.5 %
0.0 %
11.9 %
42.1 %
29.3 %
15.4 %
0.0 %
8.4 %
7.7 %
5.8 %
3.6 %
0.0 %
(4.0) %
14.0 %
10.2 %
5.9 %
0.0 %
(7.4) %
The following table presents the change in our economic value of equity as at December 31, 2020 and December 31, 2019, assuming immediate parallel shifts in
interest rates:
+300 basis points
+200 basis points
+100 basis points
Flat rates
−100 basis points
For the year ended
December 31, 2020
December 31, 2019
4.5 %
5.0 %
4.2 %
0.0 %
2.8 %
(7.7) %
(5.3) %
(2.0) %
0.0 %
(2.1) %
The differences between the change in our net interest income and economic value of equity assuming immediate parallel shifts in interests rates from December 31,
2019 to December 31, 2020 is driven by the low interest rate environment, after major central banks dropped interest rates to near zero in early 2020 in reaction to the global
COVID-19 health pandemic, increasing the possibility of negative rates and a lowered deposit sensitivity to rate increases.
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors,
including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include the full
suite of actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ materially.
Foreign Exchange Risk
The Group holds various non-USD denominated assets and liabilities and maintains investments in subsidiaries whose domestic currency is either not USD or whose
domestic currency is not pegged to USD. Assets and liabilities denominated in currencies other than USD are translated to USD at the rates of exchange prevailing at the
balance sheet date. The resulting gains or losses are included in foreign exchange revenue in the consolidated statement of operations. Assets and liabilities of subsidiaries
outside of Bermuda are translated at the rate of exchange prevailing on the balance sheet date while associated revenues and expenses are translated to USD at the average
rate of exchange prevailing through the accounting period. Unrealized translation gains or losses on investments in foreign currency based subsidiaries are recorded as a
separate component of shareholders' equity within accumulated other comprehensive loss. Such gains or losses are recorded in the consolidated statement of operations only
when realized. Our foreign currency subsidiaries may give rise to significant foreign currency translation movements against the USD. We also provide foreign exchange
services to our clients, principally in connection with our banking and wealth management businesses, and effect other transactions in non-USD currencies. Foreign currency
volatility and fluctuations in exchange rates may impact the value of non-USD denominated assets and liabilities and raise the potential for losses resulting from foreign currency
trading positions where aggregate obligations to purchase and sell a currency other than USD do not offset one another, or offset each other in different time periods. If the
policies and procedures we have in place to assess and mitigate potential impacts of foreign exchange volatility are not followed, or are not effective to mitigate such risks, our
results and earnings may be negatively affected. The Group maintains a clearly articulated foreign exchange risk exposure tolerance framework which limits exposures to select
currencies.
Liquidity Risk
The objectives of liquidity risk management are to ensure that the Group can meet its cash flow requirements and capitalize on business opportunities on a timely and
cost-effective basis. Liquidity is defined as the ability to hold and/or generate cash adequate to meet our needs for day-to-day operations and material long and short-term
commitments. Liquidity risk is the risk of potential loss if the Group were unable to meet its funding requirements at a reasonable cost.
We monitor and manage our liquidity on a Group-wide basis. The treasury functions in the Group's banking operations, located in Bermuda, the Cayman Islands,
Guernsey, and Jersey, manage day-to-day liquidity. The Group market risk function has the responsibility for measuring and reporting to senior management on liquidity risk
positions. We manage our liquidity based on demand, commitments, specific events and uncertainties to meet current and future financial obligations of a short-term nature. Our
objective in managing liquidity is to respond to the needs of depositors and borrowers as well as to earnings enhancement opportunities in a changing marketplace. Management
is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. The Group adopts a cautious liquidity risk appetite with internal
quantitative liquidity risk tolerances more stringent than regulatory requirements. Specifically, the Group manages liquidity against internal limits established by the market risk
management policy and its related liquidity risk standard and quarterly stress testing methodology.
We maintained a balance sheet with loans representing 35.0% of total assets as at December 31, 2020. Further, at that date there were significant sources of liquidity
within our balance sheet in the form of cash and cash equivalents, short-term investments, securities purchased under agreement to resell and investments amounting to $9.2
billion, or 62.2%, of total assets.
An important element of our liquidity management is our liquidity contingency plan which can be employed in the event of a liquidity crisis. The objective of the liquidity
contingency plan is to ensure that we maintain our liquidity during periods of stress. This plan takes into consideration a variety of scenarios that could challenge our liquidity.
These scenarios include specific and systemic events that can impact our on-and off-balance sheet sources and uses of liquidity. This plan is reviewed and updated at
least annually.
83
Credit Risk
Credit risk is defined as the risk that unexpected losses arise as a result of the Group's borrowers or market counterparties failing to meet their obligations to repay.
Credit risk is managed through the jurisdictional CRM departments. CRM provides a system of checks and balances for our diverse credit-related activities by establishing and
monitoring all credit-related policies and practices throughout the Group and assuring their uniform application. These activities are designed to diversify credit exposure on an
industry and client basis, thus lessening overall credit risk. These credit management activities also apply to our use of derivative financial instruments, including foreign
exchange contracts and interest rate risk management instruments, which are used primarily to facilitate client transactions.
Individual credit authority for commercial and other loans is limited to specified amounts and maturities. Credit decisions involving commitment exposure in excess of
the specified individual limits are submitted to CRM and then to the GCC, which provides a forum for ongoing executive review of loan activity, establishing our credit guidelines
and policies and approving selected credit transactions in accordance with our business objectives. The committee reviews large credit exposures, establishes and reviews
credit strategy and policy and approves selected credit transactions. The FIC manages counterparty risk in respect of (third party) bank counterparties which do not have
commercial credit relationships within the Group and also approves country exposure limits.
As part of our ongoing credit granting process, internal ratings are assigned to commercial clients before credit is extended, based on an assessment of
creditworthiness. At least annually, a review of all significant credit exposures is undertaken to identify, at an early stage, clients who might be facing financial difficulties. Internal
borrower risk ratings are also reviewed during this process, allowing identification of adverse individual borrower and sector trends.
An integral part of the CRM function is to formally review past due and potential problem loans to determine which credits, if any, need to be placed on non-accrual
status or charged off. The allowance for loan losses is reviewed quarterly to determine the amount necessary to maintain an adequate provision for current expected
credit losses.
Another way credit risk is managed is by requiring collateral. Management's assessment of the borrower's creditworthiness determines whether collateral is obtained.
The amount and type of collateral held varies but may include deposits held in financial institutions, mutual funds, US Treasury securities, other marketable securities, income-
producing commercial properties, accounts receivable, residential real estate, property, plant and equipment, and inventory. Values of variable collateral are monitored on a
regular basis to ensure that they are maintained at an appropriate level.
Credit Risk — Retail and Private Banking
Retail and private lending activity is split between residential mortgages, personal loans, credit cards and authorized overdrafts. Retail credit risks are managed in
accordance with limits and processes set out in the credit risk policies and guidelines approved by GCC and GRC (and approved by the Board). The policies set out where
specialist underwriting may be needed.
For residential mortgages, a combination of lending policy criteria, lending guidelines and underwriting are used to make a decision on applications for credit. The
primary factors considered are affordability, residential status, residential history, credit history, employment history, nature of income and LTV of the residential property. In
addition, confirmation of a borrower's identity is obtained and an assessment of the value of the collateral carried out prior to granting a credit facility. When considering
applications the primary focus is placed on the willingness and ability to repay.
LTV ratios are derived based on third-party valuations as part of the original underwriting or when increased borrowing has been requested. Updated valuations are not
otherwise obtained unless the loan reaches non-accrual status. Non-accrual loans which are collateral-dependent on real estate must be supported by a third-party valuation no
older than 12 months. Costs of sale for commercial properties are calculated based on individual circumstances, whereas the haircuts for residential real estate are prescribed in
lending guidelines by geographic location and are never less than 15% of the valuation amount.
As valuations are conducted throughout the year, the rolling average age of the valuations is closer to 6 months than 12 months. To further ensure that valuations within
the 12-month revaluation period remain appropriate measures for input into the CECL model, we: (1) compare renewal valuations to the prior valuation to track market
movement; (2) back-test all sales to compare net carrying value versus any additional gain/loss at the time of sale; (3) segregate the tests described in (1) and (2) by geographic
area and, where required, amend provision factors accordingly; and (4) perform a review of new valuations to ascertain such valuations' reasonableness and determine if any
change in value may impact similar properties or locations where valuations are more stale-dated and require an adjustment to the CECL model.
The Bank performs an annual assessment of group residential LTV ranges as part of its stress-testing exercise for regulatory and capital-adequacy purposes. Real
estate indices are not available in the Bank's primary markets and LTV values are based on standard reductions in value over time, based on observed market activity.
Generally, maximum LTV for new residential and commercial loans follow:
Residential:
Owner-occupied freehold
Owner-occupied leasehold condominium
Investment (not owner-occupied)
Raw land
Commercial Real Estate
Bermuda
Cayman
UK—London
Channel Islands
70 %
70 %
65 %
50 %
65 %
85 %
85 %
75 %
80 %
65 %
65 %
65 %
65 %
n/a
n/a
80 %
80 %
80 %
n/a
65 %
For other retail lending products, similar lending policy criteria are used, and each of these products has its own policy and underwriting guidelines to enable decisions
on applications for credit and to manage accounts. The factors used are attuned to the lending product in question, although affordability and credit history are considered in all
cases. Ongoing monitoring of all retail and private banking credit is undertaken by the business unit concerned as well as by CRM. In addition, the GCC reviews reports on a
weekly basis. In the event that particular exposures show adverse features such as arrears, the Bank's specialist recovery teams generally work with borrowers to resolve the
situation.
Unlike the United States where the FCRA is designed to help ensure that credit bureaus furnish correct and complete information when evaluating loan applications, the
markets in which we operate do not have systemic credit bureau reports. Therefore, we manually review each loan and we use a formally governed tiered credit approval
process that is administered through and governed by our Risk Management framework.
84
Credit Risk — Commercial Banking
Commercial credit risks are managed in accordance with limits and asset quality measures set out in the credit risk policies and guidelines approved by GCC
(and ratified by the Board).
In respect of Commercial Banking, there is a level of delegated sanctioning authority to underwrite certain credit risks based upon an evaluation of the borrower's
experience, track record, financial strength, ability to repay, transaction structure and security characteristics. Lending decisions for large or high risk exposures are based upon
a thorough credit risk analysis and the assignment of an internal borrower risk rating, and are subject to further approval by the assigned officers in CRM or the GCC.
Consideration is also given to risk mitigation measures which will provide the Group with protection, such as third-party guarantees, supporting collateral and security,
legal documentation and financial covenants. Commercial portfolio asset quality monitoring is based upon a number of measures, including the monitoring of financial covenants,
cash flows, pricing movements and variable collateral. In the event that particular exposures begin to show adverse features such as payment arrears, covenant breaches or
business trading losses, a full risk reassessment is undertaken. Where appropriate, a specialist recovery team will work with the borrower to resolve the situation. If this proves
unsuccessful, the case will be subject to intensive monitoring and management procedures designed to maximize debt recovery.
Credit Risk — Treasury
Treasury credit risks are managed in accordance with limits, asset quality measures and criteria set out within the policy approved by the GCC and ratified by the
Board. The policy also sets out powers which require higher levels of authorization according to the size of the transaction or the nature of the associated risk. The FIC identifies,
assesses, prioritizes and manages our risks associated with counterparty exposure to other financial institutions, as well as country-specific exposures.
Exposures to financial institutions arise within the Group's investment portfolio and treasury operations. The Group has treasury operations in all of its banking
locations. Treasury exposures primarily take the form of deposits with banks and foreign exchange positions. Exposures to financial institutions in the investment portfolio can
take the form of bonds, floating rate notes and or certificates of deposit.
Diversification and avoidance of concentration is emphasized. The Group establishes limits for countries and each financial institution where there is an expected
exposure. Ongoing asset quality monitoring is undertaken by Treasury and CRM and reports are sent to the FIC, GCC and the GRC on a monthly basis. Exception reporting
takes place against a range of asset quality triggers. Treasury uses a number of risk mitigation techniques including netting and collateralization agreements. Other methods
(such as margining and derivatives) are used periodically to mitigate the risk associated with particular transactions or group of transactions.
For its exposure to Treasury credit risk, the Group uses S&P, Fitch and Moody's as external credit assessment institutions as permitted under Basel III for sovereign,
financial institutions, asset-backed securities, covered bonds and corporate risks. With regard to financial institutions and corporates, the Group's preference for a long-term
rating is the senior unsecured rating. However, counterparty ratings and/or short-term deposit or commercial paper ratings are used if this is unavailable. For asset-backed
securities, the issue or tranche rating is used.
Exposures
The following tables analyze the Group's regulatory credit risk exposures as at December 31, 2020 and December 31, 2019. Exposures are allocated to specific
standardized exposure portfolios determined by the BMA's Revised Framework for Regulatory Capital Assessment and it is these portfolios that determine the risk weights used.
These exposures include both on- and off-balance sheet exposures, with the latter shown separately after credit conversion factors have been applied.
Analysis of exposures class
(in millions of $)
Cash
Claims on Sovereigns
Claims on Public Sector Entities
Claims on Corporates
Claims on Banks and Securities Firms
Securitizations
Retail Loans
Residential Mortgages
Commercial Mortgages
Past Due Loans
Other Balance Sheet Exposures
Non‑Market Related Off-Balance Sheet Credit Exposures
Market Related Off‑Balance Sheet Credit Exposures
Total
Average
Exposure
2020
Position as at
December 31,
2020
Average
Exposure 2019
Position as at
December 31,
2019
71.5
1,697.9
106.2
819.0
1,858.7
4,562.3
242.7
3,200.0
682.1
68.3
278.9
557.2
68.4
83.4
2,230.7
102.2
741.3
1,998.7
4,844.6
236.4
3,348.4
705.3
75.4
277.1
637.0
54.5
46.1
1,036.3
107.9
662.3
2,131.4
4,361.2
229.2
2,838.5
535.0
50.0
263.9
412.5
62.1
63.1
1,841.3
112.4
783.5
2,148.4
4,415.0
268.8
3,175.3
649.5
57.8
277.1
451.8
94.8
14,213.2
15,335.0
12,736.4
14,338.8
85
Geographic segment distribution of exposures class
as at December 31, 2020
(in millions of $)
Bermuda
Cayman
Channel
Islands & UK
Other
Total
Cash
Claims on Sovereigns
Claims on Public Sector Entities
Claims on Corporates
Claims on Banks and Securities firms
Securitizations
Retail Loans
Residential Mortgages
Commercial Mortgages
Past Due Loans
Other Balance Sheet Exposures
Non‑Market Related Off-Balance Sheet Credit exposures
Market Related Off-Balance Sheet Credit Exposures
Total
Residual maturity breakdown of exposures class
as at December 31, 2020
(in millions of $)
Cash
Claims on Sovereigns
Claims on Public Sector Entities
Claims on Corporates
Claims on Banks and Securities firms
Securitizations
Retail Loans
Residential Mortgages
Commercial Mortgages
Past Due Loans
Other Balance Sheet Exposures
Non‑Market Related Off-Balance Sheet Credit exposures
Market Related Off-Balance Sheet Credit Exposures
44.1
784.1
102.2
505.0
600.3
2,042.8
94.1
1,055.7
423.5
63.5
130.9
190.6
29.7
39.3
217.4
—
104.0
768.2
2,201.7
77.2
622.7
172.0
1.9
11.0
281.3
7.3
—
1,229.2
—
132.3
618.3
600.1
65.1
1,670.0
109.8
10.0
80.5
165.1
17.5
6,066.5
4,504.0
4,697.9
—
—
—
—
11.9
—
—
—
—
—
54.7
—
—
66.6
83.4
2,230.7
102.2
741.3
1,998.7
4,844.6
236.4
3,348.4
705.3
75.4
277.1
637.0
54.5
15,335.0
Up to
12 months
1 ‑ 5 years
More than
5 years
No specific
maturity
Total
83.4
2,033.3
29.7
391.4
1,998.7
0.7
157.7
427.9
58.3
27.5
—
637.0
54.5
—
42.9
—
187.1
—
21.4
64.1
1,285.0
173.0
6.0
—
—
—
—
154.5
72.5
162.8
—
4,822.5
14.6
1,635.5
474.0
41.9
—
—
—
—
—
—
—
—
—
—
—
—
—
277.1
—
—
83.4
2,230.7
102.2
741.3
1,998.7
4,844.6
236.4
3,348.4
705.3
75.4
277.1
637.0
54.5
5,900.1
1,779.5
7,378.3
277.1
15,335.0
The table below details the mappings between the main Fitch, Moody's and S&P external credit assessment institutions used by the Group and the credit quality steps
used to determine the risk weightings applied to rated counterparties. Where no external rating is used in the risk weighted assets calculation, the unrated credit quality
step applies.
Credit quality step
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Impairment Provisions
Credit Risk Concentrations
Fitch's
assessment
AAA to AA–
A+ to A–
BBB+ to BBB–
BB+ to BB–
B+ to B–
Moody's
assessment
Aaa to Aa3
A1 to A3
Baa1 to Baa3
Ba1 to Ba3
B1 to B3
S&P's
assessment
AAA to AA–
A+ to A–
BBB+ to BBB–
BB+ to BB–
B+ to B–
CCC+ and below
Caa1 and below
CCC+ and below
Concentration risk is defined as: any single exposure or group of exposures with the potential to produce losses large enough (relative to the Group's capital, total
assets or overall risk level) to threaten the Group's health or ability to maintain core operations. The management of concentration risk is addressed in the first instance by the
Group's large exposure policy and related credit guidelines, which require that credit facilities to entities that are affiliated through common ownership or management are
aggregated for adjudication and reporting purposes. The policy also defines what constitutes a large exposure and the related reporting requirements. The CRM function also
undertakes monitoring and assessment of our exposure to concentration risk, reporting the results of these analyses to the GCC, the GRC and RPCC.
86
The factors taken into consideration when assessing concentration risk are as follows:
•
•
single or linked counterparty;
industry or economic sector (e.g., hospitality, property development, commercial office building investment);
• geographic region;
• product type;
•
collateral type; and
• maturity date (whether of the facility or of interest rate fixes).
Counterparty Concentrations
Counterparty concentrations is the risk associated with assuming a high level of exposure to a single counterparty, the failure of which could have an adverse impact on
the Group.
Large exposures are reviewed quarterly by the GRC and RPCC for the loan portfolio and the treasury/investment portfolios. Group Market Risk and Treasury work
closely together on daily treasury positions and exceptions.
All large exposures and concentrations in the portfolio are reviewed and agreed by the FIC on a quarterly basis and are reported to the Board as a part of this process.
The review of large exposures considers:
•
facility total;
• any link with other facilities;
•
total linked facility being within guidelines;
• borrower risk rating;
•
•
security value on the facility; and
loan-to-value percentage against minimum security covenants.
Industry Concentration
Industry concentration encompasses the scenario that a risk factor inherent within an industry is tied to an entire portfolio of accounts or investments; e.g., a portfolio
made up of a large number of small individual loans where all the counterparties are hotel operators. We believe that due to the nature of the Group's client base our exposure to
the property, insurance and fund sectors could be classified as industry concentration, although geographic and product concentration are the more appropriate risks
to measure.
Geographic Concentration
Geographic concentration of the book is monitored as follows. Reports are generated which provide details of all the property loan exposure of the Group. Through this,
loans are subdivided into regional exposure. From this, the percentage breakdown per region of the Group's property exposure is analyzed and reported to the GRC and RPCC.
Assessment of the exposure allows the committees to decide whether the Group should decline further lending in any area in which it is becoming over-weighted.
Product Concentration
Product concentration is defined in the context of credit risk, as an over-weighting in the portfolio to a given product type, making the Group vulnerable to the impact of
a variety of external factors that could either reduce demand for the product itself or lead to an increase in the level of default rates experienced. We operate as a full service
bank in Bermuda and the Cayman Islands and aim to satisfy the requirements of our customers in these communities through the range of products and services we offer.
Accordingly, there is no dependence or concentration on a single product in these markets outside of the residential mortgage portfolios, which comprised 65.5% of the Group's
loan book as at December 31, 2020 (compared to 62.3% as at December 31, 2019); in Bermuda, residential mortgage lending made up 52.1% of the Bermuda loan book as at
December 31, 2020 (compared to 53.4% as at December 31, 2019), and loans for many purposes (education, business support, family requirements) were made in the form of
residential mortgages. Product category analysis confirms that the total lending portfolio is concentrated in the property market; this has been addressed in stress testing
performed.
Collateral Concentration
Collateral concentration considers whether the Group's loan book is secured by a limited number of collateral types. An example of this would be when a large value of
loans to a diversified group of borrowers is all secured by shares in the same company or by the shares of various companies within the same industry sector. Any decline in the
value of these shares or in the performance of the sector as a whole could have an adverse impact on the Group's security position across all affected borrowers. The most
relevant example of collateral concentration is the Group's exposure to real estate property values. Ignoring cash-backed facilities, the largest collateral concentrations within the
portfolio are to residential and commercial property. The greatest risk with collateral concentration is that the value of the security could be severely reduced. To simulate this,
the Group's stress testing process incorporates a scenario in which all real estate collateral is devalued by factors as high as 30%.
Credit Risk Mitigation
The Group uses a wide range of techniques to reduce credit risk of its lending. The most basic of these is performing an assessment of the ability of a borrower to
service the proposed level of borrowing without distress. However, the risk can be further mitigated by obtaining security for the funds advanced.
Residential Mortgages
Residential property is the Group's main source of collateral and means of mitigating credit risk inherent in the residential mortgage portfolio. All mortgage lending
activities are supported by underlying assumptions and estimated values received by independent third parties. All residential property must be insured to cover property risks
through a third party.
87
Commercial
Commercial property is one of the Group's primary sources of collateral and means of mitigating credit risk inherent in its commercial portfolios. Collateral for the
majority of commercial loans comprises first legal charges over freehold or long leasehold property but the following may also be taken as security: life insurance policies; credit
balances assignments; share guarantees; equitable charges; debentures; chattel mortgages and charges over residential property.
For property-based lending, supporting information such as professional valuations are an important tool to help determine the suitability of the property offered as
security and, in the case of investment lending, generating the cash to cover interest and principal payments. All standard documentation is subject to in-house legal review and
sign-off in order to ensure that the Group's legal documentation is robust and enforceable. Documentation for large advances may be specifically prepared by independent
solicitors. Insurance requirements are always fully considered as part of the application process and the Group ensures that appropriate insurance is taken out to protect the
property against an insurable event.
Treasury
Collateral held as security for treasury assets, including investments, is determined by the nature of the instrument. Loans, debt securities, treasury and other eligible
bills are generally unsecured with the exception of asset-backed securities and similar instruments, which are secured by pools of financial assets. The ISDA Master Agreement
is the Group's preferred method of documenting derivative activity. It is common in such cases for a Credit Support Annex to be executed in conjunction with the ISDA Master
Agreement in order to mitigate credit risk on the derivatives portfolio. Valuations are performed, agreed with the relevant counterparties, and collateral is exchanged to bring the
credit exposure within agreed tolerances. The EAD value to the counterparty is measured under the standardised approach for measuring counterparty credit risk exposures
method and is derived by adding the gross positive fair value of the contract (replacement cost) to the contracts potential future credit exposure, which is derived by applying a
multiple base on the contracts residual maturity to the notional value of the contract, and applying an alpha of 1.4 to the sum of these components.
The following table shows the exposures to counterparty credit risk for derivative contracts as at December 31, 2020 and December 31, 2019:
Gross
Positive
Fair Value of
Contracts
as at
December 31,
2020
Potential
Future
Credit
Exposure
as at
December 31,
2020
Alpha as at
December 31,
2020
EAD Value
as at
December 31,
2020
Gross
Positive
Fair Value of
Contracts
as at
December 31,
2019
Potential
Future
Credit
Exposure
as at
December 31,
2019
Alpha as at
December 31,
2019
EAD Value
as at
December 31,
2019
13.8
25.1
1.4
54.5
32.7
35.0
1.4
94.7
(in millions of $)
Spot and forward
foreign exchange
and currency
swap contracts . .
Securitizations
The Bank has not, to date, securitized assets that it has originated. The Bank's total exposure to purchased securitization positions as at December 31, 2020 was
$4.8 billion by market value (compared to $4.4 billion as at December 31, 2019), with US government and federal agencies accounting for the majority of this exposure.
The following table provides an analysis of the Bank's investments in securitization positions by exposure type as at December 31, 2020 and December 31, 2019:
Underlying asset type (in millions of $)
US government and federal agencies
Mortgage backed securities — Retail
Asset-backed securities — Student loans
Total
Exposure Value
as at
December 31,
2020
Exposure Value
as at
December 31,
2019
4,771.8
59.9
12.9
4,844.6
4,272.4
129.7
12.9
4,415.0
A combination of ratings published by Fitch, Moody's and S&P are used to derive the external rating to be used under the standardized approach for securitization
exposures.
Where more than two credit assessments are available, the two most favorable credit assessments are used and where the two most favorable assessments are
different, the less favorable of the two is applied.
The following table shows the aggregate amount of the Bank's purchased securitizations as at December 31, 2020 and December 31, 2019 broken down by
risk weighting:
Risk Weight % (in millions of $)
20%
50%
100%
350%
Look through to underlying assets
Total
Exposure
Value
as at
December 31,
2020
Exposure
Value after
Credit Risk
Mitigation
as at
December 31,
2020
Exposure
Value
as at
December 31,
2019
Exposure
Value after
Credit Risk
Mitigation
as at
December 31,
2019
4,844.6
3,025.0
4,415.0
2,035.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,844.6
3,025.0
4,415.0
2,035.8
88
Operational Risk
In providing our services, we are exposed to operational risk. This is the risk of loss from inadequate or failed internal processes and systems, actions or inactions of
people, or from external events. Operational risk is inherent in our activities and can manifest itself in various ways including fraudulent acts, business interruptions, inappropriate
behavior of employees, unintentional failure to comply with applicable laws and regulations, cyber-security incidents and privacy breaches or failure of vendors to perform in
accordance with their arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damage to us. Our risk management goal is to
keep operational risk at appropriate levels consistent with our risk appetite, financial strength, the characteristics of our businesses, the markets in which we operate and the
competitive and regulatory environment to which we are subject.
As we continue to expand our use of technology, we are exposed to various forms of cyber-attacks. We devote significant resources to maintain and regularly upgrade
our systems and networks and review the ever changing threat landscape in order to mitigate our exposure to cyber risks. In addition to the policy reviews, we continue to look to
implement technology solutions that enhance preventive and detection capabilities and our ability to recover quickly should a successful cyber-attack occur. We assess our third-
party vendor controls and have a developed business continuity plan that addresses potential cyber risks. We also maintain insurance coverage that may, subject to policy terms
and conditions, cover certain aspects of cyber risks. However, such insurance may be insufficient to cover all losses.
Operational risk is mitigated through internal controls embedded in our business activities and our risk management practices, which are designed to continuously
reassess the effectiveness of these controls in order to keep the risk we assume at levels appropriate to our risk appetite as approved by the Board. Data on operational losses
and any significant control failures incurred are captured through an incident reporting process. These events are reported to both the GRC and RPCC, which assess the
sufficiency of the corrective actions taken by management to prevent recurrence. Both committees also receive regular reporting on actual performance against established risk
tolerance metrics.
Capital Adequacy Management
Effective January 1, 2015, the BMA adopted capital and liquidity requirements consistent with Basel III. These requirements are contained within the BMAs "Basel III for
Bermuda Banks November 2017 Rule Update" and can be found on their website.
The Group manages its capital both on a total Group basis and, where appropriate, on a legal entity basis. The finance department has the responsibility for measuring,
monitoring and reporting capital levels within guidelines and limits established by the RPCC. The management of capital will also involve regional management to ensure
compliance with local regulation. In establishing the guidelines and limits for capital, a variety of factors are taken into consideration, including the overall risk of the business in
stressed scenarios, regulatory requirements, capital levels relative to our peers, and the impact on our credit ratings.
Capital Assessment and Risk Profiling
Under the requirements of the Basel II Accord as implemented by the BMA, the Group undertakes a CARP process, which is an internal assessment of all material
risks to determine our capital needs. This internal assessment takes account of the minimum capital requirement and other risks not covered by the minimum capital requirement
(Pillar II). Where capital is deemed as not being able to mitigate a particular risk, alternative management actions are identified and described within the CARP. The CARP is
presented to the RPCC before being presented to the Board for challenge and approval and then submission to the BMA. The CARP process is performed annually or more
frequently should the need arise.
A SREP is then undertaken biannually by the BMA, which is designed to assess the Group's risk profile as documented in the CARP. This assessment is used to
determine and set the Individual Capital Guidance which is the minimum level of capital the Group will be required to hold until the next SREP review is conducted.
B.
Liquidity and Capital Resources
Liquidity
We define liquidity as our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or
maturity of existing assets or by obtaining additional funding through liability management.
Sources and Uses of Cash
Our primary sources of cash are (i) cash obtained from deposits, (ii) long-term debt, and (iii) cash from operations. Our primary uses are (i) the payment of our
operating expenses, (ii) payment of dividends on our common shares, (iii) repayment of certain maturing liabilities, (iv) repurchase of our common shares, and (v) extraordinary
requirements for cash, such as acquisitions. We had $3.3 billion of cash and cash equivalents as at December 31, 2020 and $2.6 billion as at December 31, 2019, as well as
$5.9 billion and $5.8 billion, respectively, of liquid securities, the balance of which could be sold to meet liquidity requirements. In our opinion, the Bank’s working capital is
sufficient for the Bank’s present requirements.
Liquidity Risk
Our liquidity risk is managed through a comprehensive framework of policies and limits overseen by our Group Asset and Liability Committee. We consider the effective
and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to
fund our obligations and other commitments on a timely basis and at a reasonable cost.
We continuously monitor and make adjustments to our liquidity position by adjusting the balance between sources and uses of funds as we deem appropriate. Our
primary measures of liquidity include monthly cash flow analysis under ordinary business activities and conditions and under situations simulating a severe run on the Bank. The
Bank strives to use a balanced liquidity risk appetite with internal quantitative liquidity risk tolerances more stringent than regulatory requirements. Specifically the Bank manages
liquidity against internal limits established by the market risk management policy and its related liquidity risk standard and quarterly stress testing methodology. The results of
these measures and analysis are incorporated into our liquidity contingency plan, which provides the basis for the identification of our liquidity needs. For more information, see
Item 11 "Operating Results - Liquidity Risk".
89
Capital Resources
We have financed our operations, growth and cash needs primarily through income from operations and issuances of debt and equity securities. We believe that our
cash on hand and cash flows from operations will be sufficient to repay our outstanding debt as it matures. In the future, we may need to incur additional debt or issue additional
equity securities, which we may be unable to do or which may be on less favorable terms.
We manage our capital both on a consolidated basis and, where appropriate, on a legal entity basis. The group finance team has the responsibility for measuring,
monitoring and reporting capital levels within guidelines and limits established by the Risk Policy & Compliance Committee of the Board. The management of capital will also
involve jurisdictional management to ensure compliance with local regulation. In establishing the guidelines and limits for capital, a variety of factors are taken into consideration,
including the overall risk of the business in stressed scenarios, regulatory requirements, capital levels relative to our peers, and the impact on our credit ratings.
Effective January 1, 2015, the BMA implemented the capital reforms proposed by the BCBS and referred to as the Basel III regulatory framework. Basel III aims to
raise the quality, consistency and transparency of the capital base, limit the build-up of excess leverage and increase capital requirements for the banking sector. Basel III adopts
CET1 capital as the predominant form of regulatory capital with the CET1 ratio as a new metric. Basel III also adopts the new Leverage Ratio, Liquidity Coverage Ratio ("LCR")
and Net Stable Funding Ratio ("NSFR") regimes.We are now subject to the following requirements:
•
•
•
•
•
•
•
•
CET1 ratio of at least 7.0% of RWA, inclusive of a minimum CET1 ratio of 4.5% and the new capital conservation buffer of 2.5%, but excluding the Domestic
Systematically Important Bank ("D-SIB") surcharge described below;
Tier 1 capital of at least 8.5% of RWA, inclusive of a minimum Tier 1 ratio of 6% and the new capital conservation buffer of 2.5% but excluding the D-SIB surcharge
described below;
Total capital of at least 10.5% of RWA, inclusive of a minimum total capital ratio of 8% and the new capital conservation buffer of 2.5% but excluding the D-SIB
surcharge described below;
We are considered to be a D-SIB and are subject to a 3% surcharge composed of CET1-eligible capital implemented by the BMA effective September 30, 2015.
This is based upon our assessment of the extent to which we (individually and collectively with the other Bermuda banks) pose a degree of material systemic risk to
the economy of Bermuda due to our role in deposit taking, corporate lending, payment systems and other core economic functions;
Counter-cyclical buffer of up to 2.5% composed of CET1-eligible capital may be implemented by the BMA when macroeconomic indicators provide an assessment of
excessive credit or other pressures building in the banking sector, potentially increasing the CET1, Tier 1 and total capital ratios by up to 2.5%. No counter-cyclical
buffer has been implemented to date;
Leverage ratio must be at 5.0% or higher;
LCR with a minimum requirement of 100%; and
NSFR with a minimum requirement of 100%.
The minimum capital ratio requirements set forth above do not reflect additional Pillar II add-on requirements that the BMA may impose upon us as a prudential
measure from time to time. Our capital requirements remain under continuous review by the BMA pursuant to its prudential supervision and we cannot guarantee that the BMA
will not seek higher total capital ratio requirements at any time.
In December 2017, the BCBS published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly
referred to as "Basel IV"). Among other things, these standards revise the BCBS's standardized approach for credit risk (including by recalibrating risk weights and introducing
new segmentations for exposures) and provides a new standardized approach for operational risk capital. Under the BCBS framework, these standards will generally be effective
on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. The impact of these standards on us will depend on the manner in which they are
implemented by the BMA.
90
The following table sets forth our capital adequacy as at December 31, 2020 and 2019 in accordance with the Basel III framework:
(in millions of $)
Capital
Common Equity Tier 1
Tier 1 capital
Tier 2 capital
Total capital
Risk Weighted Assets
Cash due from banks and investments
Loans
Other assets
Off-balance sheet items
Operational risk charge
Total risk-weighted assets
Capital Ratios (%)
Common Equity Tier 1
Tier 1 total
Total capital
Leverage ratio
As at December 31,
2020
2019
816.0
816.0
187.1
1,003.1
1,085.7
2,635.1
288.0
217.4
842.1
848.8
848.8
103.2
952.1
862.8
2,697.4
287.4
282.1
768.2
5,068.6
4,897.9
16.1 %
16.1 %
19.8 %
5.3 %
17.3 %
17.3 %
19.4 %
5.9 %
CET 1 capital has decreased primarily due to the share repurchase activity for the year and an increase in AOCL related to employee benefit plans. Tier 2 capital
increased due to the issuance of $100 million of 5.25% 10-year, fixed to floating rate subordinated debt, the proceeds of which were used to replace existing and less capital
efficient subordinated debt. The increase in RWA is also driven by increased depositor funding and this has also impacted our leverage ratios. As at December 31, 2020, we
were in compliance with the minimum LCR of 100% as well as the minimum NSFR of 100%.
Share Buy-Back Program
The Bank repurchases its common shares through share buy-back programs from time to time as a means to improve shareholder liquidity and facilitate growth in
share value. In accordance with applicable laws, regulations and listing standards, each program was approved by the Board and repurchases of shares pursuant to each
program is subject to the approval of the BMA. In addition, the BSX is advised monthly of shares purchased pursuant to each program.
On February 15, 2018, the Board approved, with effect on April 1, 2018, the 2018 common share buy-back program, authorizing the purchase for treasury of up to 1.0
million common shares. On December 6, 2018, following the completion of the initial 2018 share buy-back program, the Board approved the 2019 share buy-back program,
authorizing for purchase for treasury of up to 2.5 million common shares through February 29, 2020.
On December 2, 2019, the Board approved, with effect from the completion of the previous program on December 20, 2019 through to February 28, 2021, a common
share buy-back program, authorizing the purchase for treasury of up to 3.5 million common shares or $125 million.
On February 10, 2021, the Board approved a new common share-buy back program, authorizing the purchase for treasury of up to 2.0 million common shares. The
timing and amount of repurchase transactions under the new program will be based on market conditions, share price, legal requirements and other factors. No assurances can
be given as to the amount of common shares that may actually be repurchased.
Total common share buy-backs for the years ending December 31, 2020, 2019 and 2018, are as follows:
Acquired number of shares (to the nearest share)
Average cost per common share (in $)
Total cost (in $)
For the year ending December 31
2020
2019
2018
Total
3,452,000
2,293,788
1,254,212
7,000,000
25.10
35.55
38.62
30.95
86,639,889
81,534,076
48,442,768
216,616,733
From time to time, our associates, insiders and insiders' associates as defined by the BSX regulations may sell shares which may result in such shares being
repurchased pursuant to each program, provided no more than any such person's pro-rata share of the listed securities is repurchased. Pursuant to the BSX regulations, all
repurchases made by any issuer pursuant to a securities repurchase program must be made: (1) in the open market and not by private agreement; and (2) for a price not higher
than the last independent trade for a round lot of the relevant class of securities.
Dividends
During the year ended December 31, 2020, we paid cash dividends totaling $88.9 million or $1.76 (2019: $93.6 million or $1.76; 2018: $83.7 million or $1.52) for each
common share on record as of the related record dates. The Board declared these dividends as a quarterly dividend of $0.44 per common share for each quarter of 2020, $0.44
per common share for each quarter of 2019, and $0.38 per common share for each quarter of 2018.
For more information, see Item 3.D. "Risk Factors – Risks Relating to the Common Shares".
91
Cash Flows
2020 vs. 2019
Cash due from banks was $3.3 billion as at December 31, 2020, compared to $2.6 billion as at December 31, 2019. The increase is described below by category of
operating, investing and financing activities.
For the year ended December 31, 2020, net cash provided by operating activities totaled $188.2 million (2019: $248.7 million). Cash flows from operating activities are
generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided by operating activities decreased by $60.6 million from
2019 to 2020, due primarily to a decrease in net income as well as movements in other liabilities.
Net cash provided by investing activities for the year ending December 31, 2020 totaled $41.7 million, compared to cash provided by investing activities of $1,093.4
million in 2019. The $1,135.1 million decrease in cash provided by investing activities in 2020 was mainly attributable to the acquisition of ABN AMRO (Channel Islands) in 2019
which had significant deposit funding which was deployed into short term investments.
Net cash used in financing activities totaled $546.4 million in 2020, compared to net cash used in financing activities of $919.4 million in 2019. The $1,465.9 million
increase is mainly due to an increase in the balance of deposits liabilities.
2019 vs. 2018
Cash due from banks was $2.6 billion as at December 31, 2019, compared to $2.1 billion as at December 31, 2018. The increase is described below by category of
operating, investing and financing activities.
For the year ended December 31, 2019, net cash provided by operating activities totaled $249.6 million (2018: $296.3 million). Cash flows from operating activities are
generally the cash effects of transactions and other events that enter into the determination of net income. Cash provided by operating activities decreased by $46.7 million from
2018 to 2019, due primarily to a decrease in net income as well as movements in other liabilities.
Net cash provided by investing activities for the year ending December 31, 2019 totaled $1,092.5 million, compared to cash provided by investing activities of $338.6
million in 2018. The $754.0 million increase in cash provided by investing activities in 2019 was mainly attributable to the acquisition of ABN AMRO (Channel Islands) which had
significant deposit funding which was deployed into short term investments for the short to medium term until such deposits are behavioralized.
Net cash used in financing activities totaled $919.4 million in 2019, compared to net cash used in financing activities of $125.2 million in 2018. The $794.3 million
increase is mainly due to a reduction in the balance of customer deposits liabilities, excluding the customer deposits obtained during the ABN AMRO (Channel Islands)
acquisition.
C.
Research and Development, Patents and Licenses, etc.
Not applicable.
D.
Trend Information
See discussion in Item 5.A. "Operating Results" for a description of the Trend information relevant to us.
E.
Off Balance Sheet Arrangements
Assets Under Administration and Assets Under Management
In the normal course of business, we hold AUA and AUM in a fiduciary or agency capacity for our clients. In accordance with GAAP, these assets are not our assets
and are not included in our consolidated balance sheets.
Credit-Related Arrangements
We enter into standby letters of credit, letters of guarantee and contractual commitments to extend credit in the normal course of business, which are not required to be
recorded on the balance sheet. Since many commitments expire unused or only partially used, these arrangements do not necessarily reflect future cash requirements.
Management believes there are no material commitments to extend credit that represent risks of an unusual nature.
Standby letters of credit and letters of guarantee are issued at the request of our clients in order to secure a client's payment or performance obligations to a third party.
These guarantees represent our irrevocable obligation to pay the third-party beneficiary upon presentation of the guarantee and satisfaction of the documentary requirements
stipulated therein, without investigation as to the validity of the beneficiary's claim against the client. Generally, the term of the standby letters of credit does not exceed one year,
while the term of the letters of guarantee does not exceed four years.
Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the credit risk should the instrument be fully
drawn upon and the client defaults. To control the credit risk associated with issuing letters of credit and letters of guarantee, we subject such activities to the same credit quality
and monitoring controls as our lending activities. The types and amounts of collateral security we hold for these standby letters of credit and letters of guarantee are generally
represented by our deposits or a charge over assets held in mutual funds. We are obligated to meet the entire financial obligation of these agreements and in certain cases are
able to recover the amounts paid through recourse against the collateral security.
F.
Tabular Disclosure of Contractual Obligations
Credit-Related Arrangements
We enter into standby letters of credit, letters of guarantee and contractual commitments to extend credit in the normal course of business, which are not required to be
recorded on the balance sheet. Since many commitments expire unused or only partially used, these totals do not necessarily reflect future cash requirements. Generally, the
92
term of the standby letters of credit does not exceed one year, while the term of the letters of guarantee does not exceed four years. The following table sets forth the
outstanding financial guarantees with contractual amounts representing credit risk as of the dates indicated:
(in millions of $)
Standby letters of credit
Letters of guarantee
Total
December 31, 2020
December 31, 2019
Gross
Collateral
Net
Gross
Collateral
Net
266.0
5.4
271.4
258.7
5.4
264.1
7.3
—
7.3
231.0
7.8
238.8
223.7
7.7
231.4
7.3
0.1
7.4
The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.
Substantially all of the Bank's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management
assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses. The following table sets forth the
outstanding unfunded legally binding commitments to extend credit as of the dates indicated:
(in millions of $)
Commitments to extend credit
Documentary and commercial letters of credit
Total unfunded commitments to extend credit
Allowance for credit losses
December 31, 2020
December 31, 2019
836.7
1.0
837.7
(0.2)
549.0
0.4
549.4
—
The Bank has a facility with one of its custodians, whereby the Bank may offer up to $200 million of standby letters of credit to its customers on a fully secured basis.
Under the standard terms of the facility, the custodian has the right to set-off against securities held of 110% of the utilized facility. At December 31, 2020, $153.2 million
(December 31, 2019: $143.6 million) of standby letters of credit were issued under this facility.
The increase in the allowance for credit losses is driven by the adoption of CECL on January 1,2020.
Contractual Obligations
The following table presents our outstanding contractual obligations as at December 31, 2020:
(in millions of $)
Long term debt(1)
Sourcing arrangements(2)
Term deposits
Other obligations
Total outstanding contractual obligations
Total
Less than 1
year
1 to 3
years
3 to 5
years
After 5
years
175.0
13.0
—
13.0
2,660.1
2,561.6
40.1
18.6
2,888.3
2,593.2
—
—
98.5
17.2
115.7
175.0
—
—
4.3
179.3
—
—
—
—
—
______________________________
(1)
(2) We have an outstanding contractual obligation relating to a five-year agreement entered into in November 2016 with DXC (previously HP) to supply technology
Long-term debt excludes interest and unamortized debt issuance costs.
infrastructure and application development management, information security and technical support for our locations in Bermuda and the Cayman Islands. Under our
agreement with DXC, server management and maintenance, technology field support, application support and development and help desk functions are managed by
DXC. Our obligations to DXC under this agreement amounted to $13.0 million as at December 31, 2020 (December 31, 2019: $27.6 million).
See "Note 12: Credit related arrangements, repurchase agreements and commitments" to our audited consolidated financial statements as at December 31, 2020 for
additional information.
Interest expense on our contractual obligations relates primarily to deposit liabilities and our long-term debt. Interest expense on customer deposits was $25.1 million
for the year-ended December 31, 2020, compared to $51.5 million and $17.6 million for the years ended December 31, 2019 and 2018, respectively. Movements in interest
expense on deposit liabilities are due primarily to market interest rate movements, with yearly average deposits liabilities of $12.1 billion, $11.0 billion and $9.6 billion for 2020,
2019 and 2018, respectively. The decrease in the expense is related primarily to a 26 basis point decrease in average deposit interest rates during 2020 driven by reduced
market interest rates as a result of global central banks interest rate cuts in early 2020 in response to the global COVID-19 pandemic.
During the year-ended December 31, 2020, none of the interest rates on any tranches of our long-term debt reset but we issued $100 million in new long-term debt at a
fixed interest rate of 5.25% and used the proceeds to repay the $45 million 2005 issuance - Series B notes which matured in July 2020 and to redeem the $25 million 2008
issuance - Series B notes in November 2020. For the year ended December 31, 2020, total interest expense decreased by $25.0 million to $34.4 million mostly due to the
decreases in customer deposit interest rates driven by the global central bank interest rate cuts as noted above as well as the higher volume of long-term debt outstanding. For
the year ended December 31, 2019, total interest expense increased by $34.8 million compared to 2018 mostly due to the increases in customer term deposit interest rates and
the increased volume of average deposits following the acquisition of ABN AMRO (Channel Islands).
G.
Safe Harbor
The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act shall apply to forward-looking information provided pursuant to
Items 5.E. "Off Balance Sheet Arrangements" and 5.F. "Tabular Disclosure of Contractual Obligations".
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEE
A.
Directors and Senior Management
Board
Our Board oversees the affairs of the Bank. The current Board is composed of eleven members, consisting of our Chairman and Chief Executive Officer, Group Chief
Financial Officer and nine non-executive independent directors. The Bank's bye-laws provide that the Board shall consist of not less than six and not more than twelve directors.
The Board holds regular meetings five times per year and ad hoc meetings as necessary.
Persons may be proposed for election or appointed as directors at a general meeting either by the Board or by one or more shareholders holding shares which in the
aggregate carry not less than 5% of the voting rights in respect of the election of directors. There is only a single class of director and each director holds office until the next
annual general meeting.
As a foreign private issuer we are allowed to follow our "home country" corporate governance practices in lieu of the NYSE governance requirements for NYSE-listed
US companies. Notwithstanding this, our Board has determined that, under current NYSE listing standards regarding independence (to which we are not currently subject), and
taking into account any applicable committee standards, a majority of our Board, including Alastair Barbour, Sonia Baxendale, James Burr, Michael Covell, Mark Lynch, Conor
O'Dea, Jana Schreuder, Pamela Thomas-Graham and John Wright, are independent directors.
As the regulatory environment in which we operate becomes more complex, our governance practices and the structures and methodology we use to operate the Bank
continue to be of key strategic significance. With the exception of the Chairman and Chief Executive Officer and Group Chief Financial Officer, our Board is comprised entirely of
Directors who are not employees of the Bank. Our Board reviews and oversees the Bank's implementation of corporate governance policies and practices in accordance with
prevailing standards. The following table lists the names, positions and age of the Directors of the Bank:
Name
Michael Collins
Alastair Barbour
Sonia Baxendale
James Burr
Michael Covell
Mark Lynch
Conor O'Dea
Jana Schreuder
Michael Schrum
Pamela Thomas-Graham
John Wright
Age
57
68
58
55
66
59
61
62
52
57
79
Position
Chairman and Chief Executive Officer
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Director and Group Chief Financial Officer
Non-Executive Director
Non-Executive Director
Each of our directors may be reached at our registered office at: 65 Front Street, Hamilton, HM 12, Bermuda, or by postal mail at P.O. Box HM 195, Hamilton HM AX,
Bermuda.
Michael Collins joined the Board in September of 2015 when he was named Chief Executive Officer of the Bank. He was named Chairman in July of 2017. Prior to this
appointment, Mr. Collins was Senior Executive Vice President with responsibility for all of the Bank's client businesses in Bermuda, including Corporate, Private and Retail
Banking, as well as the Operations, Custody and Marketing functions in Bermuda and the Cayman Islands. Mr. Collins has over 35 years' experience in financial services, having
held progressively senior positions at Morgan Guaranty Trust Company in New York and later at Bank of Bermuda and HSBC in Bermuda. Before joining the Bank in 2009,
Mr. Collins was Chief Operating Officer at HSBC Bank Bermuda. Mr. Collins holds a BA in Economics from Brown University.
James Burr joined the Board in 2016 and was named Lead Independent Director in 2018. Presently, Mr. Burr is a Managing Director in the Global Financial Services
Group of The Carlyle Group, where he focuses on investing in management buyouts, growth capital opportunities and strategic minority investments in financial services. Prior to
joining Carlyle, Mr. Burr served as Corporate Treasurer of Wachovia Bank, where he was responsible for activities relating to funding, investing, risk transference, balance sheet
management, liquidity and capital usage. He served in various other roles at Wachovia Bank, including as Assistant Treasurer, Controller of the Corporate and Investment Bank
and Management Analyst since 1992. Mr. Burr began his career at Ernst & Young, where he was a certified public accountant focused on banking and computer audit issues.
Mr. Burr formerly served on the Board of Directors of Central Pacific Financial Corp. and currently serves as a Director of several private companies, including The Hilb Group,
Benefit Mall, Hurst Point Topco Limited and Jen Cap Insurance Solutions.
Alastair Barbour joined the Board in 2012. He is a Chartered Accountant with more than 25 years of experience providing auditing and advisory services to publicly
traded companies, primarily in the financial services industry. Mr. Barbour was employed with KPMG from 1978 until his retirement in 2011. During his time there, he held
various positions both locally and overseas. In 1985, he was named a Partner at KPMG (Bermuda). Mr. Barbour's most recent position was head of KPMG's Financial Services
Group in Scotland. Currently, Mr. Barbour serves as Chairman of Liontrust Asset Management plc, a Director and Chairman of the Audit Committee of Phoenix Group Holdings
plc and a Director of RSA Insurance Group plc. Mr. Barbour trained with Peat, Marwick, Mitchell & Co. in London and holds a Bachelor of Science from the University of
Edinburgh. He is a Fellow of the Institute of Chartered Accountants in England & Wales.
Sonia Baxendale joined the Board in November 2020. She is currently the President and CEO of the Global Risk Institute, a think tank and consultancy that provides
thought leadership and actionable insights on emerging risks within the global financial services industry. From 1992 to 2011, Ms. Baxendale held senior leadership roles within
Canadian Imperial Bank of Commerce (“CIBC”), including six years as Senior Executive Vice President and President of Retail Banking and Wealth Management with
responsibility for 28,000 employees serving 11 million clients in Canada, as well as investment management and business banking services for clients in the Caribbean, China
and Singapore. During her time at CIBC, Ms. Baxendale also served as Executive Vice President Asset Management, Card Products & Collections, Executive Vice President
Global Private Banking & Investment Management, and Managing Director of CIBC Wood Gundy, the bank’s retail brokerage arm. Prior to joining CIBC, Ms. Baxendale held
progressively senior positions with Saatchi & Saatchi and American Express Canada. Ms. Baxendale serves on the Board of Directors of Foresters Financial, where she is Chair
94
of the Human Capital and Governance Committee and a member of the Audit and Compliance Committee, and on the Board of Laurentian Bank of Canada, where she is Chair
of the Risk Management Committee and a member of the Human Resources and Corporate Governance Committee . In addition, she is a Director of RSA Insurance Group Plc,
where she is Chair of the Investment Committee and a member of the Audit Committee. Ms. Baxendale is the Chair of the Board of Directors of the Hospital for SickKids
Foundation and serves on the Board of Trustees for Toronto’s Hospital for Sick Children, where she is a member of the Facilities Committee. She holds a Bachelor of Arts in
Political Science and Economics from Victoria College, University of Toronto.
Michael Covell joined the Board in 2018. Mr. Covell currently serves as non-executive Chairman of several private companies, including Acolin, Ascot Lloyd, Sackville
Capital and C Le Masurier Limited. Previously, Mr. Covell was Chairman of the Tilney Group and Hawksford International. He was also a Director of the International Property
Securities Exchange and Leeds Castle Foundation. Mr. Covell retired from Goldman Sachs in 2008, where he was a Managing Director of their European Private Wealth
Management Division. Prior to Goldman Sachs, he was a senior partner at Rawlinson & Hunter, an international accountancy firm. Mr. Covell is a Fellow of the Institute of
Chartered Accountants in England and Wales, and Member of the Society of Trust & Estate Practitioners.
Mark Lynch joined the Board in 2019, and is an investment manager and analyst with a specialization in financial services. Until June 30, 2019, he was a partner of
Boston-based Wellington Management Co., where he had served as the firm’s senior financial services analyst since 1994 and a partner since 1996. He was also a portfolio
manager of mutual funds, hedge funds, and institutional portfolios over that period. Prior to joining Wellington, Mr. Lynch was a US regional bank analyst with Lehman Brothers
and Bear Stearns. He holds a degree in European History from Harvard College.
Conor O'Dea joined the Board in 2016 following his retirement as the Group's President & Chief Operating Officer and Managing Director of Butterfield Bank (Cayman)
Limited. He joined Butterfield in 1989 and was named Managing Director, Butterfield Bank (Cayman) Limited in 1997. In 2010, he was named Senior Executive Vice President,
Caribbean, and in 2011 Senior Executive Vice President, International Banking. Mr. O'Dea is a Chartered Accountant who has worked in the financial services industry in the
Cayman Islands and internationally for over 30 years. He is Chairman of Cayman Finance (a financial services industry group) and is a past President of the Cayman Islands
Chamber of Commerce and the Cayman Islands Bankers Association. Mr. O’Dea serves as a Director of several listed and private companies, including BF&M Limited and
Digicel Cayman Limited. Mr. O’Dea holds a Bachelor of Commerce degree from the University College Dublin and has been a Fellow of the Institute of Chartered Accountants in
Ireland since 1995.
Jana Schreuder joined the Board in August 2020. She is an experienced executive who most recently served as Executive Vice President and Chief Operating Officer
of Northern Trust Corporation, a role from which she retired in 2018. Ms. Schreuder joined Northern Trust in 1980 and during her tenure held multiple roles as a member of the
executive management team, including: the President of Wealth Management from 2011 through 2014; President of Operations & Technology from 2007 through 2010; and
Chief Risk Officer from 2005 through 2006. Ms. Schreuder currently serves as a Director and Compensation Committee member of Blucora, Inc. Since 2008, Ms. Schreuder has
served as a Board member and Chair of the Compensation Committee for Entrust Datacard Group. From 2016 to 2018, Ms. Schreuder was a member of the Board of Directors
of LifePoint Health. Ms. Schreuder received her Bachelor of Business Administration degree from Southern Methodist University and a Master’s degree in finance and marketing
management from Northwestern University's Kellogg Graduate School of Management. Ms. Schreuder is a member of the Global Strategy Committee and New York Chapter of
Women Corporate Directors and the National Association of Corporate Directors.
Michael Schrum joined the Board in April 2020 and has served as the Bank’s Group Chief Financial Officer since September 2015. He was previously Chief Financial
Officer at HSBC Bank Bermuda. Mr. Schrum has more than 25 years of financial services experience in London, New York and Bermuda, mainly in banking, insurance and tax.
He joined HSBC in Bermuda in 2001 and held progressively more senior positions within the bank’s Commercial Banking, Strategy, and Finance divisions. He is a Chartered
Financial Analyst and a Fellow of the Institute of Chartered Accountants in England and Wales. Mr. Schrum holds Master’s (University of London) and Bachelor’s (Southern
Denmark Business School) degrees in Economics. Mr. Schrum is also Chairman of the Bermuda Foundation and the Royal Danish Consul in Bermuda.
Pamela Thomas-Graham joined the Board in 2017. She is the Founder and Chief Executive Officer of Dandelion Chandelier LLC, a private digital media enterprise
focused on the intersection of luxury, marketing and technology. Prior to establishing Dandelion Chandelier, Ms. Thomas-Graham spent six years with Credit Suisse where she
served as Chief Talent, Branding and Communications Officer, and Chief Marketing and Talent Officer & Head of Private Banking and Wealth Management New Markets. From
2008 to 2010, she was Managing Director of private equity firm, Angelo, Gordon & Company, leading the firm’s investments in the consumer and retail sectors. Before assuming
leadership roles in financial services, Ms. Thomas-Graham was Senior Vice President, Global Brand Development and Group President, Apparel Brands at Liz Claiborne (now
Kate Spade & Company) where she was responsible for the P&L of 18 global brands. Prior to joining Liz Claiborne, she spent six years at NBC Universal, where she served as
President and Chief Executive Officer of CNBC.com, and later President and Chief Operating Officer, and Chairman, President and Chief Executive Officer of CNBC. Ms.
Thomas-Graham began her career at global consulting firm McKinsey & Company in 1989, and became the firm’s first African-American female partner in 1995. She serves as a
Director for several private and listed companies, including as the Lead Independent Director for Clorox, a Director and member of the Audit Committee of Norwegian Cruise
Line Holdings Limited and a Director of Peloton Interactive. Ms. Thomas-Graham holds Bachelor of Arts in Economics, Masters of Business Administration, and Doctor of Law
degrees from Harvard University.
John Wright joined the Board in 2002. Mr. Wright served as a non-executive director of Butterfield UK from 2001 through 2014. Mr. Wright retired as chief executive of
Clydesdale & Yorkshire Banks in 2001. Mr. Wright’s career in commercial banking spans over 43 years and includes assignments in the UK, India, Sri Lanka, West Africa,
Canada, Hong Kong and the United States. He is a visiting Professor at Heriot-Watt University Business School and he serves on the Board of Directors of several public and
private U.K. and overseas companies, including Dhofar Insurance Company, LLC, where he serves on the Audit Committee, XM International Associates Limited, where he
serves as Chairman of the Advisory Board, and Rasmala UK Limited. He is also a past President of the Irish Institute of Bankers and a past Vice President of the Chartered
Institute of Bankers in Scotland. Mr. Wright was educated at Daniel Stewart's College Edinburgh.
95
Executive Management Team
The Group's current executive management team is as follows:
Name
Michael Collins
Andrew Burns
Kevin Dallas
Bri Hidalgo
Michael McWatt
Shaun Morris
Michael Neff
Jane Pearce
Richard Saunders
Michael Schrum
Sabeth Siddique
Age
57
42
42
41
55
60
57
51
51
52
58
Position
Chairman and Chief Executive Officer
Group Head of Human Resources
Group Head of Marketing and Communications
Group Head of Compliance and Operational Risk
Managing Director, Cayman
General Counsel, Group Chief Legal Officer
Managing Director, Bermuda and International Wealth
Group Head of Trust
Managing Director, Channel Islands and the UK
Group Chief Financial Officer
Group Chief Risk Officer
Each member of our executive management team may be reached at our registered office at 65 Front Street, Hamilton, HM 12, Bermuda, or by postal mail
at P.O. Box HM 195, Hamilton HM AX, Bermuda.
Andrew Burns was named Group Head of Human Resources in September 2020. He was previously Group Head of Internal Audit from 2016, and became a member
of the Executive Committee in October 2017. Mr. Burns has more than 19 years of progressive leadership experience in the financial services sector, having begun his career
with PricewaterhouseCoopers’ financial services group in Australia. He first joined the Butterfield Group of companies in the Fund Services subsidiary in Bermuda, before
transferring to the Internal Audit team in 2007, where he has held progressively senior management roles. Mr. Burns is a Chartered Accountant and a Certified Internal Auditor.
He holds a Bachelor of Commerce degree from the University of Melbourne, Australia.
Kevin Dallas joined Butterfield as Group Head of Marketing and Communications in October 2020. Mr. Dallas was previously Chief Executive Officer at the Bermuda
Tourism Authority from 2017 to 2020, overseeing the strategy, operations, and financial management of Bermuda’s independent public authority, which focuses on delivering
economic growth through tourism. Prior to that he was Chief Product and Marketing Officer at Worldpay Group plc (2013 to 2016), and spent 13 years at Monitor Group LLP and
Bain & Company Inc., as a Partner, in London and Johannesburg. Mr. Dallas holds a Bachelor of Arts degree in Economics from Brown University.
Bri Hidalgo joined Butterfield as Group Head of Compliance and Operational Risk in September 2020. Before joining Butterfield, Ms. Hidalgo spent 14 years with Wells
Fargo Bank in compliance and risk management roles, with her most recent role having been Chief Risk Officer, Wealth & Investment Management. Prior to joining Wells Fargo,
she worked in senior risk management and compliance roles at Wachovia Securities and First State Investments in the US and the UK. Ms. Hidalgo holds a Bachelor of Science
degree from San Francisco State University.
Michael McWatt currently serves as Managing Director for Butterfield Bank (Cayman) Limited, with responsibility for the overall operations of the bank in the Cayman
Islands. Mr. McWatt joined the Group in 1999 and was appointed Managing Director in 2016. He has held progressively senior leadership positions with the Group, including
Deputy Managing Director, EVP Group Head of Community Banking and SVP Group Chief Credit Officer. Mr. McWatt is a career banker with more than 30 years of experience
in Canada, Bermuda and the Cayman Islands. Mr. McWatt previously held progressively senior positions in Corporate Banking and Risk Management in Canada. Mr. McWatt
holds a BA in Economics from McMaster University, an Honors Commerce Degree from University of Windsor and is a graduate of the Ivey Executive Program at Western
University. He is a Director and past president of the Cayman Islands Bankers’ Association and is a Director of Cayman Finance.
Shaun Morris currently serves as General Counsel and Group Chief Legal Officer. Mr. Morris joined the Group as General Counsel and Group Chief Legal Officer in
2012. From 2005 to 2012, Mr. Morris was the Managing Partner of Appleby's Bermuda Office. Appleby is one of the largest offshore law and fiduciary groups operating in
Bermuda. Prior to joining the Group, Mr. Morris spent his entire professional career at Appleby and was a Partner in the Banking and Asset Finance team in Bermuda. In that
role, he practiced corporate and commercial law, specializing in shipping, capital markets, mergers & acquisitions and project finance. Mr. Morris holds an MA (Economics) from
Dalhousie University in Canada and a Bachelor of Laws from the London School of Economics & Political Science. He is currently a member of the Bermuda Bar Association.
Michael Neff currently serves as Managing Director, Bermuda and International Wealth. He previously served as the Bank's Group Head of Wealth Management. Mr.
Neff has over 30 years’ experience in financial services, having held senior roles in wealth management, commercial banking, and client services. He began his career at
Chemical Bank’s Private Banking Group where he ultimately served on the Executive Committee and led relationship management across the group. Mr. Neff then led the
implementation of the global wealth management client relationship model at Citibank’s Private Bank before leaving to establish AnswerSpace Inc., a financial planning
technology consultancy in 1998. He went on to found Monetaire Inc., a leading provider of financial and investment planning software that was acquired by the RiskMetrics
Group. At RiskMetrics, he initially served as Global Head of Wealth Management, rising to become Co-Head of the firm’s Global Financial Risk Management business in 2009.
Mr. Neff holds a Bachelor of Arts from Middlebury College and a Master of Business Administration from Columbia Business School.
Jane Pearce joined Butterfield as Group Head of Trust in 2020 with responsibility for the delivery of the Group Trust strategy and value proposition across all
jurisdictions. Ms. Pearce began her career with Ernst & Young and has extensive experience of administering and accounting for complex investment structures. Prior to joining
Butterfield, she was Regional Managing Director of Vistra’s UK, Ireland and Channel Islands businesses. From 2006 to 2014 she was a Partner and Group Director of the Ogier
Group, one of the largest offshore law and fiduciary firms at the time. Ms. Pearce has been named in the Citywealth Leaders List, the IFC Powerwomen Top 200, and e-private
Clients 50 Most Influential. She is a Fellow of the Association of Chartered Certified Accountants, and holds degrees from Teesside University and the Scottish School of
Physical Education, and is a member of the Institute of Directors.
Richard Saunders currently serves as Managing Director, Channel Islands, with responsibility for Butterfield Bank (Guernsey) Limited, Butterfield Bank (Jersey)
Limited and Butterfield Mortgages Limited in London. Mr. Saunders joined the Group in 2001 and was appointed Managing Director in 2015. He has held progressively senior
leadership positions with the Group, including Head of European Asset Management. Mr Saunders joined the Butterfield Group Executive Committee in July 2018. He has more
than 25 years of progressive management experience, having begun his career at Royal Bank of Canada in Guernsey. Mr. Saunders is a Chartered Member of the London-
based Chartered Institute for Securities & Investment and holds a Bachelor’s degree in Mathematics and Sports Science from Loughborough University, England.
96
Sabeth Siddique joined Butterfield as Group Chief Risk Officer in September 2020. Mr. Siddique has over 30 years experience in risk management and banking. He
was formerly Assistant Director in Banking Supervision and Regulation with the Federal Reserve Board in Washington DC and has also held senior level positions with money
center and regional banks in the US and Asia as well as management consulting experience with a leading global consulting firm. Mr. Siddique holds a Master of Business
Administration degree from Carnegie Mellon University, and a Bachelor of Science degree in Chemical Engineering from Rutgers University.
B.
Compensation
Senior Management and Director Compensation
In 2020, senior management included the following executives: Michael Collins, Elizabeth Bauman (retired September 2020), Andrew Burns, Kevin Dallas, Bri Hidalgo
Siân Dalrymple (retired September 2020), Michael McWatt, Shaun Morris, Michael Neff, Jane Pearce, Richard Saunders, Michael Schrum and Sabeth Siddique. Our
compensation program is designed to reward and retain senior management and includes base salary, annual short-term cash and equity incentive compensation, long-term
equity incentive compensation and miscellaneous employee benefits and fringe benefits (including, among others, executive medical benefits). In 2020, our compensation
program for directors was comprised of an annual cash retainer and an equity grant. None of our directors has entered into service contracts with the Group that provide for
benefits upon the termination of their service as a director.
The CEO is required to own a minimum aggregate value of our common shares equal to five times base salary. Eligible stock includes vested shares, unvested
restricted shares, and other stock held by the CEO. The intrinsic value of vested or unvested stock options is not considered eligible stock. The CEO complies with this
requirement. If the market value of the CEO’s common stock falls below the requirements, the CEO must retain 50% of the shares he receives as compensation until he
achieves the specified ownership level.
Effective April 2020, senior management are required to own a minimum aggregate value of our common shares equal to two times base salary by December 31, 2022,
or within five years following first appointment. Eligible stock includes vested shares, unvested restricted shares, and other stock held by senior management. The intrinsic value
of vested or unvested stock options is not considered eligible stock. If the market value of senior managements common stock falls below the required threshold, senior
management must retain 50% of the shares they receive as compensation until they achieve the specified ownership level. All members of senior management currently or
intend to comply with this requirement.
The aggregate amount of compensation, including the value of in-kind benefits, paid to our directors and senior management during fiscal year 2020 was $19.8 million.
During 2020, the Group did not sponsor any deferred compensation plans (other than the equity compensation programs described below) and no amounts were set aside or
accrued to provide pension, retirement or similar benefits to directors or senior management, other than employer matching contributions to retirement accounts on terms
applicable to employees generally.
Short-Term Incentive Compensation
Senior management participates in our annual discretionary bonus program. Our compensation committee establishes an annual bonus pool based on overall
company-wide performance during the applicable fiscal year. Once the compensation committee has approved the pool, the pool is allocated to eligible employees, including
senior management, based on the employee's achievement of pre-established performance goals during the applicable fiscal year. Annual bonuses for executives are paid 50%
in cash and 50% in the form of restricted stock unit awards that vest in three equal installments on the first three anniversaries of the date of grant.
Equity Compensation
The Group sponsors two equity incentive plans in which our senior management and directors have been or are eligible to participate: the 2010 Omnibus Share
Incentive Plan (the "2010 Plan") and the 2020 Omnibus Share Incentive Plan (the "2020 Plan") which was approved and adopted by the Board on April 30, 2020. The Group no
longer grants equity awards under the 1997 Stock Option Plan for Employees (the "1997 Plan") and all remaining unvested stock options under the 1997 Plan expired in 2019.
The Group previously granted equity awards under the 2010 Plan, which plan was replaced with the adoption of the 2020 Plan. Awards granted pursuant to the 2010 plan prior
to the adoption of the 2020 Plan that remain outstanding will continue to be governed by the 2010 Plan, but no new awards are issued thereunder. The Group currently grants
restricted stock unit and performance-vesting restricted stock unit awards under the 2020 Plan. As at December 31, 2020, in the aggregate, our members of senior management
held 641,007 restricted stock units (assuming that performance with respect to performance-vesting restricted stock unit awards is satisfied at target levels) and no options.
Senior management participates in our long-term equity incentive compensation program. During 2020, our compensation committee granted annual restricted stock
unit and performance-vesting restricted stock unit awards under our 2010 and 2020 Plans. Restricted stock unit awards granted in 2018, 2019 and 2020 were granted (i) under
our long-term equity incentive compensation program in the form of performance shares, generally vesting upon the achievement of certain performance targets in the three-year
period from the effective grant date, and (ii) under the omnibus programs in the form of time-based restricted stock units, generally vesting in three equal installments on the first
three anniversaries of the date of grant. Certain members of senior management also participate in our 2010 and 2020 Executive Stock Purchase Plan, which allows participants
to borrow against their common shares held in a restricted account to purchase common shares.
During calendar year 2020, in the aggregate, our compensation committee granted senior management 317,156 restricted stock units (which includes restricted stock
unit awards granted under both the annual bonus program and long-term equity incentive compensation, and assumes that performance with respect to performance-vesting
restricted stock unit awards is satisfied at target levels).
C.
Board Practices
The Bank's bye-laws authorize the Board to delegate certain of its duties to committees of directors. The principal board committees are the: (1) Audit Committee,
(2) Risk Policy & Compliance Committee, (3) Corporate Governance Committee, (4) Compensation & Human Resources Committee, and (5) Executive Committee. Members of
committees are appointed by, from and among the non-executive members of the Board (other than the Executive Committee which includes our Chairman and Chief Executive
Officer and Group Chief Financial Officer). The responsibilities and compositions of these committees are described below.
Audit Committee
Our Audit Committee, on behalf of the Board, monitors: (1) the integrity of the financial reports and other financial information provided by the Group to any
governmental body or the public; (2) the independent auditor's qualifications and independence; (3) the performance of the Group's internal audit function and the independent
auditors; (4) compliance with legal and regulatory requirements; (5) the Group's system of internal controls regarding finance, accounting, legal and ethics as established by
management and the Board; and (6) the Group's auditing, accounting and financial reporting processes generally. Subject to shareholder approval, the Audit Committee has
97
responsibility for the appointment or replacement of the independent auditor and for the compensation and oversight of the work of the independent auditor. In addition, the Audit
Committee is responsible for approving all audit services, internal control-related services and permitted non-audit services. With respect to internal controls, the Audit
Committee reviews and evaluates any major issues as to the adequacy of the Bank's internal controls, and any major control deficiencies or changes in internal controls over
financial reporting are discussed with the Bank's management and the independent auditor. With respect to financial reporting, the Audit Committee consults with management,
the independent auditor and the internal auditors about the integrity of the financial reporting process, reviews significant financial reporting risk exposure and management's
responses, reviews significant auditor findings and establishes and reviews procedures for the receipt, retention and treatment of complaints about accounting and auditing
matters, and reviews and recommends for the Board's approval the Group's financial reports.
Our Audit Committee consists of five directors that are independent under the NYSE requirements. Each member of the Audit Committee also meets the additional
criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
The members of the Audit Committee are appointed by the Board upon the recommendation of the Corporate Governance Committee. The Audit Committee's
membership is as follows:
Name
Alastair Barbour
Sonia Baxendale
Mark Lynch
Pamela Thomas-Graham
John Wright
Mr. Barbour qualifies as the Audit Committee financial expert.
Risk Policy & Compliance Committee
Position
Chairperson
Member
Member
Member
Member
The Risk Policy & Compliance Committee, on behalf of the Board, acts as the oversight function in respect to those activities throughout the Group that give rise to
credit, market, liquidity, interest rate, operational, cyber security and reputational risks and reviews compliance with laws and regulations. Specifically, the Risk Policy &
Compliance Committee assists the Board in fulfilling its responsibilities by overseeing the Group's risk profile and its performance against approved risk appetites and tolerance
thresholds. It approves and ensures compliance with the capital allocation model and approves overall insurance coverage for the Group. The Risk Policy & Compliance
Committee also reviews the credit risk of the Group with respect to country and financial institution risk, large exposures, reserves and provisioning, off-balance sheet risk and
related capital needs, as well as market, interest rate and liquidity risks. The Risk Policy & Compliance Committee monitors operational risks, including cybersecurity risks,
material breaches of agreed risk limits, appropriate product risk profiles and senior management policies for identification and management of risk. In doing so, the Risk Policy &
Compliance Committee seeks to ensure compliance with all applicable policies and establishes the Group's risk appetite and tolerance.
The Risk Policy & Compliance Committee’s membership is as follows:
Name
Conor O'Dea
James Burr
Mark Lynch
Jana Schreuder
Corporate Governance Committee
Position
Chairperson
Member
Member
Member
The Corporate Governance Committee, on behalf of the Board, reviews the effectiveness and performance of the Board as a whole, each Board committee and the
boards and board committees of the Bank's subsidiaries in accordance with the corporate governance guidelines and policies of the Group. This committee acts as the
nomination committee for the Board. The principal duties of the Corporate Governance Committee include reviewing and recommending to the Board membership criteria and
director nominees, membership of the Board’s committees and matters relating to the performance, diversity and independence of directors. The Corporate Governance
Committee oversees questions of director independence and conflicts of interest, induction and ongoing training for directors and the Board’s corporate governance policies and
procedures. The Corporate Governance Committee also recommends director compensation and reviews and approves related-party transactions.
The Corporate Governance Committee's membership is as follows:
Name
Pamela Thomas-Graham
Sonia Baxendale
Michael Covell
Conor O'Dea
Compensation & Human Resources Committee
Position
Chairperson
Member
Member
Member
The Compensation & Human Resources Committee, on behalf of the Board, reviews and approves executive compensation, employee salary ranges, levels and
degrees of participation in incentive compensation programs (including bonuses and equity-based incentive plans) and oversees employee development, relations and
succession. Specifically, the Compensation & Human Resources Committee evaluates the fairness and effectiveness of the compensation practices implemented by the Group,
approves overall compensation packages for executives, provides regular updates on executive compensation to the Board, approves changes in employee salary ranges for
employees, approves the criteria and design of the Group's incentive bonus plans and approves changes to the other employee benefit plans. The Compensation & Human
Resources Committee also recommends to the Board changes in the Group's equity-based incentive plans and the granting of awards under such plans, reviews and approves
changes to our pension plans, reviews periodic management reports on our compensation and benefits, as well as other matters bearing on the relationship between
98
management and employees, while making recommendations to the Board concerning our senior level organization structure and staffing, training and employee development
programs.
The Compensation & Human Resources Committee's membership is as follows:
Name
James Burr
Alastair Barbour
Michael Covell
Jana Schreuder
John Wright
Executive Committee
Position
Chairperson
Member
Member
Member
Member
The Executive Committee may act on behalf of the Board to approve certain matters requiring immediate action in the intervals between regularly scheduled Board
meetings when it is not possible to convene a full Board meeting. The other principal duties of the Executive Committee are to monitor the progress of, and provide guidance on,
important Group initiatives. The Executive Committee's membership is comprised of the Chairman and Chief Executive Officer, the Group Chief Financial Officer, the chair of the
Corporate Governance Committee, the chair of the Audit Committee, the chair of the Risk Policy & Compliance Committee and the chair of the Compensation & Human
Resources Committee. The Chairman of the Board serves as the chair of the Executive Committee.
The Executive Committee's membership is as follows:
Name
Michael Collins
James Burr
Alastair Barbour
Conor O'Dea
Michael Schrum
Pamela Thomas-Graham
Governance of Geographical Segments
Position
Chairperson
Member
Member
Member
Member
Member
Our banking business operates in three geographical segments — Bermuda, the Cayman Islands, and the Channel Islands and the UK— and each geographical
segment utilizes operating subsidiary companies of the Bank within these jurisdictions. See Item 4.B. "Business Overview - Our International Network and Group Structure",
which presents the corporate structure chart of our principal subsidiaries as at December 31, 2020. Our principal operating subsidiaries are each regulated by their respective
geographical regulator and are fully capitalized as stand-alone operating companies, each with its own board of directors consisting of both executive and non-executive
independent directors. Guidance on general corporate governance, board sub-committee structuring, and the various governance policies and procedures of the operating
subsidiaries is determined at the Group level.
Board Leadership Structure and Qualifications
The Bank must comply with the BMA Corporate Governance Policy, which requires the Bank to appoint board members who have appropriate experience,
competencies and personal qualities, including professionalism and personal integrity.
It is the Bank's policy to ensure that all companies within the Group have board members who are fit and proper persons to direct the Bank's business with prudence,
integrity and professional skills. The Boards of the Bank and the Bank's subsidiaries are composed of individuals who possess diverse skills, experience and knowledge that are
key to understanding the Bank's business and the execution of the Bank's strategies.
The Bank has established guidelines that address the size and composition of its own Board and those of its subsidiaries, and for identifying and selecting suitable
candidates for appointment to these boards. The Corporate Governance Committee makes appointment recommendations to the Board and the appointment procedure is
formal, rigorous and transparent. Each of the Bank and the Bank's subsidiary Boards are reviewed at least every two years or earlier whenever circumstances dictate in order to
assess whether the Board composition is commensurate with the Bank's strategic objective and diversity principles.
In assessing continuity of service on the Board there is a general presumption that individuals should serve for a maximum of 15 years in order that the Board tenure be
refreshed. Non-executive directors who have served for a period of more than 15 years are subject to an independent assessment in accordance with applicable legal
requirements and regulatory and listing standards.
Board Oversight of Risk Management
The Board believes that effective risk management and control processes are critical to our safety and soundness, our ability to predict and manage the challenges that
we face and, ultimately, our long-term corporate success. The Board, both directly and through its committees, is responsible for overseeing our risk management processes,
with each of the committees of the Board assuming a different and important role in overseeing the management of the risks we face.
The Risk Policy & Compliance Committee oversees our enterprise-wide risk management framework, including cybersecurity risk, which establishes our overall risk
appetite and risk management strategy and enables our management to understand, manage and report on the risks we face. The Risk Policy & Compliance Committee also
reviews and oversees policies and practices established by management to identify, assess, measure and manage key risks we face, including the risk appetite metrics
developed by management and approved by the Board. The Audit Committee of the Board is responsible for overseeing risks associated with financial, accounting and legal
matters (particularly financial reporting, accounting practices and policies, disclosure controls and procedures and internal control over financial reporting), reviewing and
discussing generally the identification, assessment, management and control of our risk exposures on an enterprise-wide basis and engaging as appropriate with the Risk Policy
& Compliance Committee to assess our enterprise-wide risk framework. The Compensation & Human Resources Committee of the Board has primary responsibility for risks and
exposures associated with our compensation policies, plans and practices, regarding both executive compensation and the compensation structure generally. In particular, our
99
Compensation & Human Resources Committee, in conjunction with our Chairman and Chief Executive Officer, Group Head of Human Resources and Group Chief Risk Officer
and other members of our management as appropriate, reviews our incentive compensation arrangements to ensure these programs are consistent with applicable laws and
regulations, including safety and soundness requirements, and do not encourage imprudent or excessive risk-taking by our employees. The Corporate Governance Committee of
the Board oversees risks associated with the independence of the Board and potential conflicts of interest.
Our senior management is responsible for implementing and reporting to the Board regarding our risk management processes, including by assessing and managing
the risks we face, including strategic, operational, cybersecurity, regulatory, investment and execution risks, on a day-to-day basis. Our senior management is also responsible
for creating and recommending to the Board for approval appropriate risk appetite metrics reflecting the aggregate levels and types of risk we are willing to accept in connection
with the operation of our business and pursuit of our business objectives.
The role of the Board in our risk oversight is consistent with our leadership structure, with our Chairman and Chief Executive Officer and the other members of senior
management having responsibility for assessing and managing our risk exposure, and the Board and its committees providing oversight in connection with those efforts. We
believe this division of risk management responsibilities presents a consistent, systemic and effective approach for identifying, managing and mitigating risks throughout
our operations.
D.
Employees
As at December 31, 2020, 2019 and 2018, we had the following employees:
Per segment:
Bermuda
Cayman Islands
Channel Islands and the UK
Other Segment
Total per full-time equivalency basis
Of which:
Full-time and part-time employees
Temporary employees
Total per full-time equivalency basis
As at December 31,
2020
2019
2018
449
236
363
266
520
296
425
271
572
277
331
193
1,314
1,512
1,373
1,258
56
1,314
1,389
123
1,512
1,274
99
1,373
The decrease from 2019 to 2020 was as a result of the COVID-19 related cost restructuring program, which included voluntary separation, early retirement and
redundancies across all operating segments. The increase from 2018 to 2019 was a result of the Halifax service center expansion and the ABN AMRO (Channel Islands)
acquisition.
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.
E.
Share Ownership
See Item 7.A. "Major Shareholders".
100
Bermuda.
Major Shareholders:
Davis Selected Advisers, L.P.(1)
Blackrock, Inc. (2)
Directors and Executive Officers:
Alastair Barbour
Sonia Baxendale
Andrew Burns(3)
James F. Burr(4)
Michael Collins(5)
Michael Covell
Kevin Dallas
Bri Hidalgo
Mark Lynch(6)
Michael McWatt(7)
Shaun Morris(8)
Michael Neff(9)
Conor O'Dea
Jane Pearce
Richard Saunders(10)
Jana Schreuder
Michael Schrum(11)
Sabeth Siddique
ITEM 7. MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS
A.
Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our common shares as at February 15, 2021, unless noted otherwise, in each case
by: each person or entity known by us to beneficially own 5% or more of our issued and outstanding common shares; each of our directors and executive officers individually;
and all of our directors and executive officers as a group. As at February 15, 2021, we had approximately 50 million common shares issued and outstanding.
Under the rules of the Securities and Exchange Commission, a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules,
more than one person may be deemed to be a beneficial owner of such securities as to which such person has voting or investment power. Except as described in the footnotes
below, to our knowledge, each of the persons named in the table below has sole voting and investment power with respect to the common shares beneficially owned, subject to
community property laws where applicable.
Unless otherwise noted, the address for each shareholder listed on the table below is: c/o The Bank of N.T. Butterfield & Son Limited, 65 Front Street, Hamilton, HM 12,
Name of beneficial owner
Number of common
shares beneficially owned
Beneficial ownership
percentage
4,022,478
2,548,153
8.0 %
5.1 %
14,266
225
9,922
4,911
107,456
4,007
—
2,140
176,933
20,176
23,753
41,851
64,169
2,075
10,574
2,574
92,792
—
4,308
13,977
596,109
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Pamela Thomas-Graham
John R. Wright(12)
All directors and executive officers as a group (20 persons)
*
Indicates less than 1%
(1)
Based on the Schedule 13G/A filed on February 12, 2021 by Davis Selected Advisers, L.P., which reported that as at December 31, 2020, Davis Selected Advisers, L.P. beneficially owned 4,022,478 common shares, with sole voting and dispositive power
over all such shares. The business address of Davis Selected Advisers, L.P. is 2949 East Elvira Road, Suite 101, Tucson, Arizona 85756.
(2)
Based on the Schedule 13G filed on February 2, 2021 by Blackrock, Inc., which reported that as at December 31, 2020, Blackrock, Inc. beneficially owned 2,548,153 common shares, with sole voting over 2,490,080 of such shares and sole dispositive power
over all such shares. The business address of Blackrock, Inc. is 55 East 52nd Street, New York, NY 10055.
Consists of (i) 8,750 ordinary shares and (ii) 1,172 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
Consists of (i) 4,007 ordinary shares held by Mr. Burr directly and (ii) 904 ordinary shares held by Wells Fargo over which Mr. Burr exercises voting and dispositive control.
Consists of (i) 95,087 ordinary shares and (ii)12,369 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
Consists of (i) 176,133 ordinary shares held by Mr. Lynch directly and (ii) 800 ordinary shares held by a family member over which Mr. Lynch exercises voting and dispositive control
Consists of (i) 18,263 ordinary shares and (ii) 1,913 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
Consists of (i) 21,032 ordinary shares and (ii) 2,721 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
Consists of (i) 39,757ordinary shares and (ii) 2,094 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Consists of (i) 8,853 ordinary shares and (ii) 1,721 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
(11) Consists of (i) 86,296 ordinary shares and (ii) 6,496 ordinary shares underlying restricted stock that will vest within 60 days of February 15, 2021.
(12) Consists of 13,977 ordinary shares held jointly with his spouse.
101
The shareholders listed above do not have voting rights that are different from those held by any other holder of common shares of the Bank. As at January 31,
2021, approximately 83% of our common shares were held by holders and/or Custodians of record located in the United States, and there were approximately 253 holders of
record of our common shares located in the United States. As at January 31, 2021, approximately 16% of our common shares were held of record by holders located in
Bermuda, and there were approximately 4,125 holders of record of our common shares located in Bermuda.
B.
Related Party Transactions
See "Note 27: Related party transactions" to our audited consolidated financial statements as at December 31, 2020 for information on transactions with related parties
and with directors and executive officers.
Employment Agreements
The Group has entered into employment agreements with senior management. The compensation paid in 2020 to senior management under the employment
agreements is described above under Item 6.B. "Compensation". The senior management employment agreements generally provide for terms and conditions of employment,
including the payment of a base salary, participation in the Group’s short and long-term incentive compensation programs, notice provisions, severance benefits, change in
control, double-trigger equity award vesting and participation in the Group’s health, welfare and retirement programs available to all senior executives. For certain members of
senior management, the employment agreements also provide for executive life insurance and participation in the Group’s share purchase programs.
Related-Party Transaction Policy
The Board has adopted a written policy governing the review, approval or ratification of transactions between the Bank or any of its subsidiaries and any "related party,"
which is a person or entity: (1) that controls, is controlled by, or is under common control with the Bank; (2) that is an associate of the Bank; (3) that is a shareholder of the Bank
that has significant influence by virtue of its ownership of the Bank; (4) that is a director, executive officer or other key management person at the Bank; or (5) in which a
substantial interest in its voting power is held by the persons described in (3) or (4) above. The policy calls for the related-person transactions to be reviewed and, if deemed
appropriate, approved or ratified by our Corporate Governance Committee. In determining whether or not to approve or ratify a related-person transaction, our Corporate
Governance Committee takes into account, among other factors it deems important, whether the related-person transaction is in our best interests and whether the transaction is
on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances. In the event that a member of our Corporate
Governance Committee is not disinterested with respect to the related-person transaction under review, that member may not participate in the review, approval or ratification of
that related-person transaction. Approval of the disclosure of any related party transaction included in our financial statements or any other SEC filing is the responsibility of the
Audit Committee.
C.
Interests of Experts and Counsel
Not applicable.
102
Refer to Part III, Item 17 for the Consolidated Financial Statements and Notes to the Consolidated Financial Statements
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Refer to Part III, Item 17 for the Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
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 for the Southern District of New York ("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 US. 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 at
December 31, 2020, a provision of $5.5 million (December 31, 2019: $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.
Dividend Policy
It is our intention to pay a quarterly dividend subject to the requisite approvals. There can be no assurance, however, that we will pay any dividend for any given period,
and the declaration of dividends remains subject to the approval of our Board and receipt of a letter of no objection from the BMA.
Although we currently expect to pay dividends according to our dividend policy, we may elect not to pay dividends. Any declarations of dividends will be at the discretion
of the Board and will be subject to the receipt of a letter of no objection from the BMA. Such dividends may be declared and paid by the Board only as permitted under applicable
law. In determining the amount of any future dividends, the Board may take into account: (1) our financial results; (2) our available cash, as well as anticipated cash requirements
(including debt servicing); (3) our capital requirements, including the capital requirements of our subsidiaries; (4) contractual, legal, tax and regulatory restrictions on, and
implications of, the payment of dividends by us to our shareholders; (5) general economic and business conditions; (6) restrictions applicable to us and our subsidiaries under
Bermuda and other applicable laws, regulations and policies, including the requirement to obtain a letter of no objection from the BMA for the payment of dividends on our
common shares; and (7) any other factors that the Board may deem relevant. Therefore, there can be no assurance that we will declare or pay any dividends to holders of the
common shares, or as to the amount of any such dividends. See Item 3.D "Risk Factors - Risks Relating to the Common Shares".
Our Historical Dividends
Since 2013 we have declared and paid dividends on a quarterly basis. For the year ended December 31, 2020, we declared four quarterly dividends of $0.44 per
quarter totaling $1.76 for each common share held on record as of the applicable record dates.
The following table sets forth dividends per share paid per common share during the periods indicated.
(in $, unless otherwise indicated)
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total dividends per common share
Year ended December 31,
2020
2019
2018
0.44
0.44
0.44
0.44
1.76
0.44
0.44
0.44
0.44
1.76
0.38
0.38
0.38
0.38
1.52
Total dividends per common share as a percentage of earnings per share (in %)
60.5 %
52.9 %
42.8 %
On February 10, 2021, the Board of Directors declared an interim dividend of $0.44 per common share to be paid on March 10, 2021 to shareholders of record on
February 24, 2021.
B.
Significant Changes
Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2020.
103
A.
Offering and Listing Details
ITEM 9. THE OFFER AND LISTING
The Bank's common shares trade on the New York Stock Exchange under the symbol "NTB" and on the Bermuda Stock Exchange under the symbol "NTB.BH".
B.
Plan of Distribution
Not applicable.
C.
Markets
The Bank's common shares began trading on the New York Stock Exchange under the symbol "NTB" on September 21, 2016 and on the Bermuda Stock Exchange
under the symbol "NTB.BH" on February 2, 1971.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
104
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Incorporation
Information can be found in the following Exhibits:
•
1.1 Amended and Restated Bye-laws of The Bank of N.T. Butterfield & Son Limited (incorporated by reference to Exhibit 1.1 to the registrants Annual Report on
Form 20-F for the year ended December 31, 2018)
• 1.2 The N.T. Butterfield & Son Bank Act, 1904 (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form F-1, filed on August 4,
2016)
• 2.2 Description of Securities
C.
Material Contracts
We have not entered into any material contracts outside the ordinary course of business within the last two years.
D.
Exchange Controls
Refer to Item 4.B. "Business Overview - Supervision and Regulation".
E.
Taxation
Bermuda Tax Considerations
Under Bermuda law, there are currently no stamp or documentary taxes, duties or similar taxes in connection with a conveyance or transfer on sale, or a conveyance or
transfer to effect or having the effect of a voluntary disposition inter vivos or any agreement for the lending and borrowing of the Bank's shares which are listed on the BSX or
NYSE.
We are not required by any Bermuda law or regulation to make any deductions or withholdings in Bermuda from any payment we may make in respect of the Bank's
shares. However, during 2018 the Bermuda Tax Reform Commission proposed the introduction of a withholding tax on interest and dividend income, amongst other reforms. The
Bermuda government has not introduced this tax as yet. In January 2021, the Bermuda Government passed the Tax Reform Commission Amendment Act 2021, which allows
the Minister of Finance to appoint a further Tax Reform Commission. The Bermuda Government has announced that it expects to form a new Tax Reform Commission in 2021,
with such commission to report on tax reform within six months of creation. This new Tax Reform Commission may reiterate the 2018 commission’s recommendation for a
withholding tax on interest and dividend income, but it is unclear what changes will be proposed to Bermuda’s system of taxation, as well as whether or not such changes will be
implemented and on what terms. If additional taxes are introduced, whether in the form of withholding or otherwise, there may be an impact on holders of the Bank’s shares,
along with an increase in our compliance obligations.
Furthermore, Bermuda currently has no corporate or capital gains taxes.
Material US Federal Income Tax Consequences
This section describes the material US federal income tax consequences of owning and disposing of common shares of the Bank. It applies solely to US shareholders
(as defined below) that hold shares as capital assets for US federal income tax purposes. This section does not describe all of the tax consequences that may apply to members
of a special class of holders subject to special rules, including:
• a dealer in securities or foreign currencies;
• a regulated investment company;
• a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
• a tax-exempt organization;
• a bank, an insurance company, or any other financial institution;
• a person that actually or constructively owns 10% or more, by vote or value, of the Bank;
• a person that holds the Bank's common shares as part of a straddle or a hedging, conversion, or other risk reduction transaction for US federal income tax purposes;
• a person that purchases or sells common shares as part of a wash sale for tax purposes;
• an entity classified as a partnership for US federal income tax purposes; or
• a person whose functional currency is not the US Dollar.
This section is based on the Internal Revenue Code of 1986, as amended (the "IRC"), its legislative history, existing and proposed Treasury regulations, published
rulings and court decisions, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis.
If an entity treated as a partnership for US federal income tax purposes holds common shares, the US federal income tax treatment of a partner will generally depend
on the status of the partner and the tax treatment of the partnership. A partner in an entity treated as a partnership for US federal income tax purposes holding common shares
should consult its tax advisers with regard to the US federal income tax treatment of the ownership and disposition of the Bank's common shares.
Shareholders should consult their own tax advisers regarding the US federal, state and local and foreign and other tax consequences of owning and disposing of the
Bank's common shares in their particular circumstances.
Special adverse US federal income tax rules apply if a US shareholder owns shares of a company that is or was treated as a PFIC for US federal income tax purposes
for any taxable year during which the US shareholder held such shares. US shareholders should consult their own tax advisers as to the potential application of the PFIC rules to
their ownership and disposition of the Bank's common shares.
105
US Shareholders
For the purposes of this discussion, a "US shareholder" is a beneficial owner of common shares that is:
• an individual that is a citizen or resident of the United States,
• a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States, any state therein or the District of Columbia,
• an estate whose income is subject to US federal income tax regardless of its source, or
• a trust if a US court can exercise primary supervision over the trust's administration and one or more US persons are authorized to control all substantial decisions of
the trust.
Passive Foreign Investment Company Considerations
Special adverse US federal income tax rules apply if a US shareholder holds shares of a company that is treated as a PFIC for any taxable year during which the US
shareholder held such shares. This conclusion is a factual determination that is made annually and thus may be subject to change. A foreign corporation will be considered a
PFIC with respect to a US Shareholder for any taxable year if (i) at least 75% of its gross income for the taxable year is passive income, or (ii) at least 50% of the value,
determined on the basis of a quarterly average, of its assets is attributable to assets that produce or are held for the production of passive income (the "asset test"). Passive
income for this purpose generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business),
annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% (by value) of the shares or stock of another corporation, the foreign
corporation is treated, for purposes of the PFIC tests, as owning a proportionate share of the other corporation's assets and receiving its proportionate share of the other
corporation's income.
Banks generally derive a substantial part of their income from assets that are interest bearing or that otherwise could be considered passive under the PFIC rules. The
IRS has issued a notice, and has proposed regulations, that exclude from passive income any income derived in the active conduct of a banking business by a qualifying
foreign bank.
Based upon the proportion of our income derived from activities that are "bona fide" banking activities for US federal income tax purposes, we believe that we were not
a PFIC for the taxable year ending December 31, 2020 (the latest period for which the determination can be made) and, based further on our present regulatory status under
local laws, the present nature of our activities, and the present composition of our assets and sources of income, we do not expect to be a PFIC for the current year or any future
years. However, because PFIC status is a factual determination and because there are uncertainties in the application of the relevant rules, there can be no assurances that we
will not be a PFIC for any particular year.
If the Bank were a PFIC in any taxable year during which a US shareholder owns the Bank's common shares and the US shareholder does not make a "mark-to-
market" election, as discussed below, or a special "purging" election, the Bank generally would continue to be treated as a PFIC with respect to such US shareholder in all
succeeding taxable years, regardless of whether the Bank continues to meet the income or asset test discussed above. US shareholders are urged to consult their own tax
advisers with respect to the tax consequences to them if the Bank were to become a PFIC for any taxable year in which they own the common shares.
If the Bank is a PFIC for any taxable year during which a US shareholder holds the common shares and the US shareholder does not make a mark-to-market election,
as described below, the US shareholder will be subject to special rules with respect to:
• any gain realized on the sale or other disposition of its common shares; and
• any "excess distribution" that the Bank makes to the US shareholder (generally, any distributions to the US shareholder during a single taxable year that are greater
than 125% of the average annual distributions received by the US shareholder in respect of its common shares during the three preceding taxable years or, if
shorter, the portion of the US shareholder's holding period for the common shares that preceded the current taxable year).
Under these rules:
•
•
•
the gain or excess distribution will be allocated ratably over the US shareholder's holding period for the common shares;
the amount allocated to the taxable year in which the US shareholder realized the gain or excess distribution and to years before the Bank became a PFIC will be
taxed as ordinary income; and
the amount allocated to each other taxable year, with certain exceptions, will be subject to additional tax calculated by multiplying the amount allocated to such other
taxable year by the highest tax rate in effect for that taxable year for individuals or corporations, as appropriate, and the interest charge generally applicable to
underpayments of tax will be imposed in respect of the tax attributable to each such year.
Alternatively, if a US shareholder owns shares in a PFIC that are treated as "marketable stock," the US shareholder may make a mark-to-market election. The common
shares will be treated as marketable stock if they are regularly traded on a "qualified exchange." For these purposes, the common shares will be considered regularly traded
during any calendar year during which it is traded, other than in negligible quantities, on a qualified exchange, which includes the NYSE, on at least 15 days during each
calendar quarter. Any trades that have as their principal purpose meeting this requirement will be disregarded.
A US shareholder that makes a mark-to-market election will not be subject to the PFIC rules described above. Instead, the US shareholder will include as ordinary
income each year that the Bank is a PFIC the excess, if any, of the fair market value of its common shares at the end of the taxable year over its adjusted basis in the common
shares. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains discussed above. The
US shareholder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its common shares over their fair market value at the end of
the taxable year that the Bank is a PFIC (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). The US shareholder's
basis in its common shares will be adjusted to reflect any such income or loss amounts recognized. Any gain recognized on the sale or other disposition of the common shares in
a taxable year when the Bank is a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income
previously included as a result of the mark-to-market election). Distributions paid on the common shares will be treated as discussed below under "- Taxation of Dividends".
A mark-to-market election will continue to be in effect for all taxable years in which the Bank is a PFIC and the common shares are treated as marketable stock, and
may not be revoked without the consent of the IRS. If the US shareholder makes a mark-to-market election with respect to its common shares, it will be treated as having a new
holding period in its common shares beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. The
application of the mark-to-market rules to an investment in a PFIC with a subsidiary that is also a PFIC is not entirely clear; however, there is a significant risk that some or all of
such an investment will be subject to the special rules described above that apply if a mark-to-market election is not made, even if a mark-to-market election is made with respect
to the parent PFIC. In the event that the Bank is a PFIC, US shareholders are urged to consult their tax advisers regarding the availability of the mark-to-market election, and
whether the election would be advisable in the holder's particular circumstances.
106
The PFIC rules outlined above would also not apply to a US shareholder if such holder were to elect to treat us as a qualified electing fund ("QEF"). An election to treat
us as a QEF will not be available, however, if the Bank does not provide the information necessary to make such an election. The Bank will not provide US shareholders with the
information necessary to make a QEF election, and thus, the QEF election will not be available with respect to the common shares.
Notwithstanding any election made with respect to the common shares, dividends received with respect to the common shares will not constitute "qualified dividend
income" if we are a PFIC (or are treated as a PFIC with respect to the relevant US shareholder) in either the taxable year of the distribution or the preceding taxable year.
Dividends that do not constitute qualified dividend income are not eligible for taxation at the reduced tax rate available to certain non-corporate holders described below in "-
Taxation of Dividends". Instead, such dividends would be subject to tax at ordinary income rates.
If a US shareholder owns common shares during any taxable year in which we are a PFIC, the US shareholder generally must file annual tax returns (including on
Form 8621), for each taxable year that the US shareholder owns the common shares, unless its ownership satisfies a de minimis test.
Taxation of Dividends
Subject to the preceding discussion under the heading "— Passive Foreign Investment Company Considerations" above, a US shareholder must include in its gross
income as dividends the gross amount of any distribution paid by the Bank to the extent that it is paid out of the Bank's current or accumulated earnings and profits as
determined for US federal income tax purposes. Distributions in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will
be treated as a non-taxable return of capital to the extent of the US shareholder's basis in the common shares of the Bank, causing a reduction in the US shareholder's adjusted
basis in such common shares, and thereafter as capital gain. Because the Bank does not maintain calculations of its earnings and profits under US federal income tax principles,
it is expected that distributions generally will be reported to US shareholders as dividends.
Dividends paid to certain non-corporate US shareholders by a "qualified foreign corporation" that constitute qualified dividend income are taxable to the shareholder at
the preferential rates applicable to long-term capital gains provided that the shareholder holds the shares for more than 60 days during the 121-day period beginning 60 days
before the ex-dividend date and meets other holding period requirements. For this purpose, common shares of the Bank will be treated as stock of a "qualified foreign
corporation" if the Bank was not a PFIC for the taxable year in which the dividend was paid, or the preceding taxable year and if such common shares are listed on an
established securities market in the United States, such as the NYSE. The common shares of the Bank are listed on the NYSE. Accordingly, subject to the preceding discussion
under the heading "— Passive Foreign Investment Company Considerations", dividends the Bank pays with respect to the common shares will constitute qualified dividend
income, assuming the holding period requirements are met.
The dividend will not be eligible for the dividends-received deduction allowed to US corporations in respect of dividends received from other US corporations.
Dividends generally will be treated as foreign source income for US foreign tax credit purposes. Under Section 904(h) of the IRC, however, dividends paid by a foreign
corporation that is treated as 50% or more owned, by vote or value, by US persons for US federal income tax purposes may be treated as US source income (rather than foreign
source income) for foreign tax credit purposes, to the extent the foreign corporation earns US source income. In general, therefore, the application of Section 904(h) of the IRC
may adversely affect a US shareholder's ability to use foreign tax credits. As a result of the listing of the common shares of the Bank on the NYSE, the Bank may be treated as
50% or more owned by US persons for purposes of Section 904(h) of the IRC. US shareholders are strongly urged to consult their own tax advisers regarding the possible
impact if Section 904(h) of the IRC should apply.
Taxation of Capital Gains
Subject to the preceding discussion under the heading "— Passive Foreign Investment Company Considerations", a US shareholder that sells or otherwise disposes of
common shares of the Bank will recognize capital gain or loss for US federal income tax purposes equal to the difference between the amount that the US shareholder realizes
and the US shareholder's tax basis in those common shares. Capital gain of a non-corporate US shareholder is generally taxed at preferential rates where the property is held for
more than one year. The gain or loss will be US source income or loss for foreign tax credit limitation purposes. The deduction of capital losses is subject to limitations.
Medicare Tax on Net Investment Income
A US person that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax (the "Medicare
tax") on the lesser of (i) the US person's "net investment income" (or "undistributed net investment income" in the case of an estate or trust) for the relevant taxable year and
(ii) the excess of the US person's modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and
$250,000, depending on the individual's circumstances). A shareholder's net investment income generally includes its dividend income and its net gains from the disposition of
shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive
or trading activities). If a shareholder is a US person that is an individual, estate or trust, the shareholder is urged to consult the shareholder's tax advisers regarding the
applicability of the Medicare tax to the shareholder's income and gains in respect of the shareholder's investment in the Bank's common shares.
Information with Respect to Foreign Financial Assets
Owners of "specified foreign financial assets" with an aggregate value in excess of $50,000 (and in some cases, a higher threshold) may be required to file an
information report with respect to such assets with their tax returns. "Specified foreign financial assets" include any financial accounts maintained by foreign financial institutions,
as well as any of the following, if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-US persons,
(ii) financial instruments and contracts that have non-US issuers or counterparties and (iii) interests in foreign entities. US shareholders are urged to consult their tax advisers
regarding the application of this legislation to their ownership of the Bank's common shares.
Backup Withholding and Information Reporting
Information reporting requirements for a non-corporate US shareholder, on IRS Form 1099, will apply to (i) dividend payments or other taxable distributions made to
such US shareholder within the United States, and (ii) the payment of proceeds to such US shareholder from the sale of the Bank's common shares effected at a US office of
a broker.
Additionally, backup withholding may apply to such payments to a non-corporate US shareholder that (i) fails to provide an accurate taxpayer identification number,
(ii) (in the case of dividend payments) is notified by the IRS that such US shareholder has failed to report all interest and dividends required to be shown on such US
shareholder's federal income tax returns, or (iii) in certain circumstances, fails to comply with applicable certification requirements.
A US shareholder may obtain a refund of any amounts withheld under the backup withholding rules that exceed the shareholder's income tax liability by properly filing a
refund claim with the IRS.
107
Payment of proceeds from the sale of shares effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding.
However, a sale effected at a foreign office of a broker could be subject to information reporting in the same manner as a sale within the United States, (and in certain cases may
be subject to backup withholding as well) if (i) the broker has certain connections to the United States, or (ii) the sale has certain other specified connections with the United
States.
Foreign Account Tax Compliance Act Withholding
Pursuant to the FATCA enacted in 2010, a 30% withholding tax will be imposed on certain payments to certain non-US financial institutions that fail to comply with
certain information-reporting, account identification, withholding, certification and other FATCA-related requirements in respect of their direct and indirect United States
shareholders and/or United States accountholders. To avoid becoming subject to FATCA withholding, we and other non-US financial institutions may be required to report
information to the IRS regarding the holders of the common shares and to withhold on a portion of payments under the common shares to certain holders that fail to comply with
the relevant information reporting requirements (or the holders of the common shares directly or indirectly through certain non-compliant intermediaries). However, under
proposed Treasury regulations, such withholding will not apply to payments made before the date that is two years after the date on which final regulations defining the term
"foreign passthru payment" are enacted.
F.
Dividends and Paying Agents
Not applicable.
G.
Statements by Experts
Not applicable.
H.
Documents on Display
As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of
investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such
as Rule 10b-5 under the Securities Act. Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by other United States
domestic reporting companies, the Bank’s shareholders, potential shareholders and the investing public in general should not expect to receive information about us in the same
amount, and at the same time, as information is received from, or provided by, other United States domestic reporting companies. We are liable for violations of the rules and
regulations of the SEC which do apply to us as a foreign private issuer, see ‘‘Implications of Being a Foreign Private Issuer’’.
The SEC maintains an internet site at https://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC. These SEC
filings are also available to the public from commercial document retrieval services.
I.
Subsidiary Information
Not applicable.
Refer to Risk Management discussion in Item 5.A. "Operating Results".
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
108
PART II
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
Not applicable.
Evaluation of Disclosure Controls and Procedures
ITEM 15. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, Butterfield carried out an evaluation, under the supervision and with the participation of Butterfield’s management,
including our Chairman and Chief Executive Officer and Group Chief Financial Officer, of the effectiveness of the design and operation of Butterfield’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act), to ensure that information required to be disclosed by Butterfield in reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to Butterfield’s management, including its Chairman and Chief Executive Officer and Group Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. Based upon that evaluation, Butterfield’s Chairman and Chief Executive Officer and Group Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report.
Reports Regarding Internal Controls
Management’s Annual Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are included on pages
F-2 and F-3, respectively.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
Refer to Item 6.A. "Directors and Senior Management".
Code of Conduct and Ethics and Whistleblower Policy
The Board has adopted a Group Code of Conduct and Ethics (the "Code") based upon recommended principles of corporate governance. The Code sets out the
guidelines and procedures for establishing a high standard of ethical conduct, accountability and transparency to which all of our employees are expected to comply and which
are consistent with our high standards of ethics and core values. The Board, in conjunction with the Corporate Governance Committee and Risk Policy & Compliance
Committee, are responsible for administering the Code. The Code is available on our website at www.butterfieldgroup.com.
The Board has adopted a Whistleblower Policy which augments the Code. The policy is designed to serve as a tool to assist employees who believe they have or may
have discovered illegal, unethical, or questionable practices to communicate their concerns confidentially and without fear of reprisals. It is also designed to protect the integrity
of the Bank's financial reporting and its business dealings.
The following table sets forth for the fiscal years indicated the fees charged by our principal accountant and its associated entities for various services provided
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
during those periods:
In millions of $
Type of Services
Audit services
Audit-related services
Other services
Total
Fiscal Year Ended
December 31, 2020
December 31, 2019
Description of Service
6.3
0.1
0.2
6.6
6.5
0.1
0.2
6.8
(1)
(1)
(2)
(1)
(2)
Professional services rendered for the audit and review of the consolidated financial statements of The Bank of N.T. Butterfield & Son Limited and statutory audits of the
financial statements of The Bank of N.T. Butterfield & Son Limited and its subsidiaries, compliance with local regulations, review of documents filed with the BMA and
the SEC (including services provided by independent experts to the audit firms in connection with the audit).
The non-audit services required during the years disclosed above were subject to the Audit Committee's pre-approval process pursuant to paragraph (c) (7)(i)(C) of
Rule 2-01 of Regulation S-X.
109
Pre-approval Procedures
To ensure PwC's independence, all services provided by PwC have to be pre-approved by the Audit Committee. A pre-approval may be granted either for a specific
mandate or in the form of a blanket pre-approval authorizing a limited and well-defined type and amount of services. The Audit Committee reviews and approves a list of blanket
pre-approvals annually.
The Audit Committee has delegated pre-approval authority to its Chairman up to a maximum of $500,000 for any engagement, and the Group Chief Financial Officer
and Group Head of Finance submit all proposals for services by PwC to the Chairman of the Audit Committee, unless there is a blanket pre-approval in place. The Audit
Committee is informed of the approvals granted by its Chairman on a quarterly basis.
Not applicable.
ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
The below details purchases made by or on behalf of the issuer or any "affiliated purchaser," as defined in §240.10b-18(a)(3), of shares or other units of any class of
the issuer's equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act (15 U.S.C. 78I) during the year ended December 31, 2020.
From time to time, the Bank, may seek to repurchase and retire equity securities of the Bank, through cash purchase, privately negotiated transactions, or otherwise.
Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be
material.
As previously reported, on December 2, 2019, the Board approved, with effect from December 20, 2019 to February 28, 2021, a common share repurchase
program, authorizing the purchase for treasury of up to 3.5 million common shares. On February 10, 2021, the Board approved a new common share repurchase program,
authorizing the purchase for treasury of up to 2.0 million common shares through to February 28, 2022. In the year ended December 31, 2020, the Bank retired 3,452,000 shares
which were previously held as treasury shares as a result of these buy-backs.
The following table summarizes our repurchases of our common shares during the year ended December 31, 2020.
Period
January 1 to 31, 2020
February 1 to 29, 2020
March 1 to 31, 2020
April 1 to 30, 2020
May 1 to 31, 2020
June 1 to 30, 2020
July 1 to 31, 2020
August 1 to 31, 2020
September 1 to 30, 2020
October 1 to 31, 2020
November 1 to 30, 2020
December 1 to 7, 2020
Not applicable.
Total number of shares
purchased
Average price paid per share
Total number of shares
purchased as part of a
publicly announced program
Maximum number of shares
that may yet be purchased
under the program
252,000
403,000
640,000
525,000
262,500
425,000
470,000
196,100
75,600
92,400
83,900
26,500
35.69
32.27
21.64
18.33
22.02
25.29
24.81
25.82
24.32
25.74
31.49
31.80
252,000
655,000
1,295,000
1,820,000
2,082,500
2,507,500
2,977,500
3,173,600
3,249,200
3,341,600
3,425,500
3,452,000
3,200,000
2,797,000
2,157,000
1,632,000
1,369,500
944,500
474,500
278,400
202,800
110,400
26,500
—
ITEM 16F. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
The listing rules of the NYSE include certain accommodations with respect to corporate governance requirements that allow foreign private issuers, such as us, to
follow "home country" corporate governance practices in lieu of otherwise applicable NYSE corporate governance standards for listed US companies. However, foreign private
issuers are required to have an audit committee that satisfies certain of the NYSE standards, including the requirements of the SEC’s Rule 10A-3. Our Audit Committee satisfies
such requirements. The NYSE also requires a foreign private issuer to provide certain written affirmations and notices to the NYSE.
SEC rules require foreign private issuers to disclose the significant ways in which their corporate governance practices differ from NYSE listing standards. A description
of how our corporate governance practices compare to NYSE listing standards is set forth below:
•
•
A Majority of Independent Directors. The NYSE requires the majority of the board of directors of a listed US company to be independent directors pursuant to
applicable NYSE standards. As required by our Corporate Governance Guidelines, a majority of our Board is independent according to the NYSE's standards.
A Nominating/Corporate Governance Committee. The NYSE requires a listed US company to have a nominating/corporate governance committee consisting of
independent directors as well as a written charter specifying the purpose and responsibilities of the committee. We currently have a Corporate Governance
Committee, and the composition of this committee and its written charter are determined pursuant to the NYSE standards. A copy of the charter is available on
our website at www.butterfieldgroup.com.
110
•
•
A Compensation Committee. The NYSE requires a listed US company to have a compensation committee consisting of independent directors that also meet
additional independence requirements as set forth in the NYSE rules as well as a committee charter specifying the purpose and responsibilities of the
committee. We currently have a Compensation & Human Resources Committee, and the composition of this committee and its written charter are determined
pursuant to the NYSE standards. A copy of the charter is available on our website at www.butterfieldgroup.com.
Executive Sessions. The NYSE requires that non-management directors meet regularly in executive sessions without management. The NYSE also requires
that all independent directors meet in an executive session at least once a year. Our non-management directors meet regularly in executive sessions without
management present. In 2020, the Board held five executive sessions with only our independent directors present.
• Company Policies. The NYSE requires a listed US company to adopt and disclose a code of business conduct and corporate governance guidelines that
address certain governance standards. As noted above, the Board has adopted the Code. In addition, the Board has adopted Corporate Governance
Guidelines that address Board composition and qualifications, director responsibilities, director access to management, director orientation and continuing
education, succession planning and management development and Board assessments. The Code and the Corporate Governance Guidelines are available on
our website at www.butterfieldgroup.com.
Shareholder Approval of Equity Compensation Plans. The NYSE requires a listed US company to receive shareholder approval of any equity compensation
plans. The Bank does not submit its equity compensation plans to shareholders for approval.
•
We believe that our established corporate governance practice satisfies the NYSE listing standards applicable to foreign private issuers. If at any time we cease to be a
"foreign private issuer" under the rules of the NYSE and no other exemptions apply, or if we otherwise so elect, the Board will take any additional actions necessary to comply
with NYSE corporate governance rules applicable to listed US companies, subject to a permitted "phase-in" period.
Not applicable.
ITEM 16H. MINE SAFETY DISCLOSURE
111
PART III
ITEM 17. FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018
Page
F-2
F-3
F-5
F-6
F-7
F-8
F-9
F-11
F-1
Management’s Annual Report on Internal Control over Financial Reporting
Management of The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision
of, the Bank's principal executive and principal financial officers, or persons performing similar functions, and effected by Butterfield's Board
of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of
America.
Butterfield's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records,
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Bank’s assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of Butterfield’s
management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Bank's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. Management has completed an assessment of the
effectiveness of Butterfield's internal control over financial reporting as at December 31, 2020. In making the assessment, management used
the “Internal Control - Integrated Framework (2013)” promulgated by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based upon the assessment performed, management concluded that as at December 31, 2020, Butterfield's internal control over financial
reporting was effective. There have been no changes in Butterfield’s internal control over financial reporting that occurred during the period
covered by this report which have materially affected or are reasonably likely to materially affect Butterfield’s internal control over financial
reporting.
The Bank's internal control over financial reporting as at December 31, 2020, has been audited by PricewaterhouseCoopers Ltd., an
independent registered public accounting firm, as stated in their report on page F-3 of this annual report.
/s/ Michael Collins
Michael Collins
Chairman and Chief Executive Officer
/s/ Michael Schrum
Michael Schrum
Group Chief Financial Officer
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Bank of N.T. Butterfield & Son Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Bank of N.T. Butterfield & Son Limited and its
subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations,
comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We
also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
credit losses on certain financial instruments in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
F-3
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to
accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Allowance for Credit Losses
As described in Notes 2 and 6 to the consolidated financial statements, management assesses the adequacy of the
allowance for credit losses based on evaluations of the loan portfolio utilizing quantitative and qualitative criteria. At
December 31, 2020, the allowance for credit losses was $34.1 million on total loans retained of $5.2 billion. As described
by management, the allowance is management’s estimate of credit losses incurred in its lending and off-balance sheet
credit-related arrangements based upon a current expected credit loss (“CECL”) model. The quantitative criteria used in
the model primarily includes the Company’s internal risk rating framework and historical credit loss experience, relevant
available information relating to past events and current conditions, and specific allowances for impaired loans.
Management subjectively assesses the adequacy of the total allowance for credit losses and the need for adjustments to the
quantitative model estimate, with consideration given to qualitative assumptions such as changes in underwriting
practices, vintage, portfolio mix, delinquency level and term as well as changes in environmental conditions such as
changes in macroeconomic factors and collateral values not adequately included in the quantitative model estimate.
The principal considerations for our determination that performing procedures relating to the qualitative assessment of
the allowance for credit losses is a critical audit matter are (i) the significant judgment by management in determining the
assumptions used in the qualitative assessment, which in turn led to a high degree of auditor judgment in performing
procedures relating to the significant assumptions used in management’s qualitative assessment; and (ii) significant audit
effort in evaluating audit evidence relating to management’s assumptions used and the estimation process.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls
relating to the Company’s estimation process for the allowance for credit losses, which included controls over the
assumptions used within management’s qualitative assessment. These procedures also included, among others, testing
management’s process for determining the allowance for credit losses by evaluating the appropriateness of the
methodology and models, testing the data used in the estimate and evaluating the reasonableness of the significant
assumptions used in management’s qualitative assessment. Evaluating the assumptions used in the model involved
evaluating the reasonableness of the impact of external macroeconomic factors and events that have occurred but are not
yet otherwise reflected in the quantitative model estimate for the allowance for credit losses for consistency with external
market and industry data and consistency with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers Ltd.
Hamilton, Bermuda
February 23, 2021
We have served as the Company’s auditor since 1961.
F-4
The Bank of N.T. Butterfield & Son Limited
Consolidated Balance Sheets
(In thousands of US dollars, except share and per share data)
As at
December 31, 2020
December 31, 2019
133,363
433,511
2,722,718
3,289,592
197,039
823,039
7,317
2,661,116
2,194,371
4,862,804
5,194,908
(34,098)
5,160,810
150,752
25,627
67,192
12,933
4,052
144,794
14,738,634
3,012,360
10,237,724
13,250,084
131,279
203,861
335,140
171,462
13,756,686
500
1,013,326
33,918
(16,116)
(49,680)
981,948
14,738,634
88,031
839,320
1,622,719
2,550,070
142,283
1,218,380
7,419
2,220,341
2,208,663
4,436,423
5,166,210
(23,588)
5,142,622
158,233
24,838
71,665
14,480
3,842
158,739
13,921,575
2,238,256
10,203,369
12,441,625
110,347
262,360
372,707
143,500
12,957,832
530
1,081,569
(9,237)
(22,022)
(87,097)
963,743
13,921,575
Assets
Cash and demand deposits with banks - Non-interest bearing
Demand deposits with banks - Interest bearing
Cash equivalents - Interest bearing
Cash due from banks
Securities purchased under agreements to resell
Short-term investments
Investment in securities
Equity securities at fair value
Available-for-sale at fair value (amortized cost: $2,588,335 (2019: $2,208,531))
Held-to-maturity (fair value: $2,304,756 (2019: $2,255,987))
Total investment in securities
Loans
Loans
Allowance for credit losses
Loans, net of allowance for credit losses
Premises, equipment and computer software, net of accumulated depreciation
Goodwill
Other Intangible assets, net
Equity method investments
Other real estate owned, net
Accrued interest and other assets
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Total deposits
Employee benefit plans
Accrued interest and other liabilities
Total other liabilities
Long-term debt
Total liabilities
Commitments, contingencies and guarantees (Note 12)
Shareholders' equity
Common share capital ( BMD 0.01 par; authorized voting ordinary shares 2,000,000,000 and
non-voting ordinary shares 6,000,000,000) issued and outstanding: 50,010,948 (2019: 53,005,177)
Additional paid-in capital
Retained earnings (Accumulated deficit)
Less: treasury common shares, at cost: 619,212 (2019: 619,212)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
/s/ Michael Collins
Michael Collins
Chairman of the Board
F-5
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Operations
(In thousands of US dollars, except per share data)
Non-interest income
Asset management
Banking
Foreign exchange revenue
Trust
Custody and other administration services
Other non-interest income
Total non-interest income
Interest income
Interest and fees on loans
Investments (none of the investment securities are intrinsically tax-exempt)
Available-for-sale
Held-to-maturity
Deposits with banks and other
Total interest income
Interest expense
Deposits
Long-term debt
Securities sold under agreement to repurchase
Total interest expense
Net interest income before provision for credit losses
Provision for credit recoveries (losses)
Net interest income after provision for credit losses
Net gains (losses) on equity securities
Net realized gains (losses) on available-for-sale investments
Net gains (losses) on other real estate owned
Net other gains (losses)
Total other gains (losses)
Total net revenue
Non-interest expense
Salaries and other employee benefits
Technology and communications
Professional and outside services
Property
Indirect taxes
Non-service employee benefits expense
Marketing
Amortization of intangible assets
Other expenses
Total non-interest expense
Net income before income taxes
Income tax benefit (expense)
Net income
Earnings per common share
Basic earnings per share
Diluted earnings per share
Year ended
December 31, 2020 December 31, 2019 December 31, 2018
29,225
47,346
37,180
50,653
13,845
5,610
183,859
28,721
49,347
37,001
51,220
12,868
4,818
183,975
25,603
45,010
32,895
51,004
9,262
4,912
168,686
230,656
234,032
218,495
50,621
58,607
12,125
352,009
25,116
9,294
—
34,410
317,599
(8,491)
309,108
658
1,220
(104)
(552)
1,222
494,189
173,662
65,156
21,263
29,392
21,323
2,640
4,443
5,819
20,896
344,594
149,595
(2,378)
147,217
2.91
2.90
60,686
68,735
41,625
405,078
51,486
7,876
14
59,376
345,702
184
345,886
925
1,624
(5)
223
2,767
532,628
183,659
62,633
27,952
24,181
21,109
5,649
8,050
5,451
18,240
356,924
175,704
1,371
177,075
3.33
3.30
68,936
55,327
24,830
367,588
17,617
6,949
33
24,599
342,989
6,991
349,980
(329)
1,100
(322)
(1,304)
(855)
517,811
159,778
60,280
26,034
21,825
19,485
5,570
6,116
5,091
17,164
321,343
196,468
(1,284)
195,184
3.55
3.50
The accompanying notes are an integral part of these consolidated financial statements.
F-6
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Comprehensive Income
(In thousands of US dollars)
Year ended
December 31, 2020 December 31, 2019 December 31, 2018
147,217
177,075
195,184
Net income
Other comprehensive income (loss), net of taxes
Net change in unrealized gains and losses on translation of net investment in foreign operations
(247)
(952)
(2,317)
Accretion of net unrealized gains and losses on held-to-maturity investments transferred from
available-for-sale investments
Net change in unrealized gains and losses on available-for-sale investments
Employee benefit plans adjustments
Other comprehensive income (loss), net of taxes
665
60,971
(23,972)
37,417
71
55,438
6,873
61,430
43
(27,893)
10,692
(19,475)
Total comprehensive income
184,634
238,505
175,709
The accompanying notes are an integral part of these consolidated financial statements.
F-7
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Changes in Shareholders' Equity
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
Number of
shares
In thousands of
US dollars
Number of
shares
In thousands of
US dollars
Number of
shares
In thousands of
US dollars
Common share capital issued and outstanding
Balance at beginning of year
Retirement of shares
Issuance of common shares
Balance at end of year
Additional paid-in capital
Balance at beginning of year
Share-based compensation
Share-based settlements
Retirement of shares
Issuance of common shares, net of underwriting discounts
and commissions
Balance at end of year
Retained earnings (Accumulated deficit)
Balance at beginning of year
Cumulative effect from change in accounting policy (Note 2)
Net Income for the year
Common share cash dividends declared and paid, 1.76 per
share (2019: $1.76 per share)
Retirement of shares
Balance at end of year
Treasury common shares
Balance at beginning of year
Purchase of treasury common shares
Retirement of shares
Balance at end of year
Accumulated other comprehensive income (loss)
Balance at beginning of year
Other comprehensive income (loss), net of taxes
Balance at end of year
Total shareholders' equity
53,005,177
(3,452,000)
457,771
50,010,948
530
(35)
5
500
55,359,218
(2,928,788)
574,747
53,005,177
554
(29)
5
530
54,692,630
—
666,588
55,359,218
1,081,569
14,608
637
(85,222)
1,734
1,013,326
(9,237)
(7,841)
147,217
(88,932)
(7,289)
33,918
1,171,435
17,459
257
(107,926)
344
1,081,569
(92,676)
—
177,075
(93,636)
—
(9,237)
619,212
3,452,000
(22,022)
(86,640)
1,254,212
2,293,788
(48,443)
(81,534)
(3,452,000)
92,546
(2,928,788)
107,955
—
1,254,212
—
619,212
(16,116)
619,212
(22,022)
1,254,212
(87,097)
37,417
(49,680)
981,948
(148,527)
61,430
(87,097)
963,743
547
—
7
554
1,155,542
11,664
918
—
3,311
1,171,435
(204,156)
—
195,184
(83,704)
—
(92,676)
—
(48,443)
—
(48,443)
(129,052)
(19,475)
(148,527)
882,343
The accompanying notes are an integral part of these consolidated financial statements.
F-8
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Cash Flows
(In thousands of US dollars)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to operating cash flows
Depreciation and amortization
Provision for credit (recoveries) losses
Share-based payments and settlements
Net change in equity securities at fair value
Net realized (gains) losses on available-for-sale investments
Net (gains) losses on other real estate owned
(Increase) decrease in carrying value of equity method investments
Dividends received from equity method investments
Changes in operating assets and liabilities
(Increase) decrease in accrued interest receivable and other assets
Increase (decrease) in employee benefit plans, accrued interest payable and other liabilities
Cash provided by (used in) operating activities
Cash flows from investing activities
(Increase) decrease in securities purchased under agreements to resell
Short-term investments other than restricted cash: proceeds from maturities and sales
Short-term investments other than restricted cash: purchases
Available-for-sale investments: proceeds from sale
Available-for-sale investments: proceeds from maturities and pay downs
Available-for-sale investments: purchases
Held-to-maturity investments: proceeds from maturities and pay downs
Held-to-maturity investments: purchases
Net (increase) decrease in loans
Additions to premises, equipment and computer software
Proceeds from sale of other real estate owned
Purchase of intangible assets
Gross cash received (disbursed for) from business acquisition
Cash provided by (used in) investing activities
Year ended
December 31, 2020 December 31, 2019
December 31, 2018
147,217
177,075
195,184
62,435
8,491
15,245
102
(1,220)
104
(1,298)
2,845
(8,143)
(37,628)
188,150
48,390
(184)
17,716
(925)
(1,624)
5
(340)
520
(18,583)
26,672
248,722
(54,756)
2,214,870
(114,942)
568,944
(1,815,887)
(1,657,456)
352,965
565,028
(1,313,884)
538,345
(533,379)
25,555
(20,566)
—
—
—
(41,709)
225,305
348,665
(563,007)
274,490
(420,018)
(362,624)
(22,777)
1,102
—
2,815,752
1,093,434
46,476
(6,991)
12,582
329
(1,100)
322
(1,118)
556
(3,975)
54,409
296,674
151,428
252,028
(63,913)
854,160
480,765
(242,087)
166,406
(903,958)
(321,944)
(18,529)
5,896
(1,308)
(20,722)
338,222
F-9
The Bank of N.T. Butterfield & Son Limited
Consolidated Statements of Cash Flows
(In thousands of US dollars)
Cash flows from financing activities
Net increase (decrease) in deposits
Issuance of subordinated capital, net of underwriting fees
Repayment of long-term debt
Common shares repurchased
Proceeds from stock option exercises
Cash dividends paid on common shares
Cash provided by (used in) financing activities
Net effect of exchange rates on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash: beginning of year
Cash, cash equivalents and restricted cash: end of year
Components of cash, cash equivalents and restricted cash at end of year
Cash due from banks
Restricted cash included in short-term investments on the consolidated balance sheets
Total cash, cash equivalents and restricted cash at end of year
Supplemental disclosure of cash flow information
Cash interest paid
Cash income taxes paid
Supplemental disclosure of non-cash items
Transfer to (out of) other real estate owned
Initial recognition of right-of-use assets and operating lease liabilities
Reduction in net loans due to initial adoption of a current expected credit loss model
Extinguishment of loan in exchange for available-for-sale investments
Year ended
December 31, 2020 December 31, 2019
December 31, 2018
692,635
97,647
(70,000)
(86,640)
1,739
(88,932)
546,449
42,707
735,597
2,578,901
3,314,498
(744,610)
—
—
(81,534)
349
(93,636)
(919,431)
86,056
508,781
2,070,120
2,578,901
3,289,592
24,906
3,314,498
2,550,070
28,831
2,578,901
(22,543)
73,218
(47,000)
(48,443)
3,318
(83,704)
(125,154)
2,646
512,388
1,557,732
2,070,120
2,053,883
16,237
2,070,120
39,125
5,052
314
323
7,841
—
56,265
2,628
27,374
544
(397)
2,437
22,370
—
3,347
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-10
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements
(In thousands of US dollars, unless otherwise stated)
Note 1: Nature of business
The Bank of N.T. Butterfield & Son Limited (“Butterfield”, the “Bank” or the “Company”) is incorporated under the laws of Bermuda and has a banking license under the Banks
and Deposit Companies Act, 1999 (“the Act”). Butterfield is regulated by the Bermuda Monetary Authority (“BMA”), which operates in accordance with Basel principles.
Butterfield is a full service bank and wealth manager headquartered in Hamilton, Bermuda. The Bank operates its business through three geographic segments: Bermuda, the
Cayman Islands, and the Channel Islands and the United Kingdom ("UK"), where its principal banking operations are located and where it offers specialized financial services.
Butterfield offers banking services, comprised of retail and corporate banking, and wealth management, which consists of trust, private banking, and asset management. In the
Bermuda and Cayman Islands segments, Butterfield offers both banking and wealth management. In the Channel Islands and the UK segment, the Bank offers wealth
management and residential property lending. Butterfield also has operations in the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland, which are
included in our Other segment.
The Bank's common shares trade on the New York Stock Exchange under the symbol "NTB" and on the Bermuda Stock Exchange ("BSX") under the symbol "NTB.BH".
Note 2: Significant accounting policies
The Bank's reporting currency is United States ("US") dollars. Assets, liabilities, revenues and expenses denominated in Bermuda dollars are translated to US dollars at par.
A. Basis of Presentation and Use of Estimates and Assumptions
The accounting and financial reporting policies of the Bank and its subsidiaries conform to generally accepted accounting principles in the United States of America (“GAAP”).
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the year, and actual results could differ from those estimates.
Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may
change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on the future financial
condition and results of operations. Management believes that the most critical accounting policies upon which the financial condition depends, and which involve the most
complex or subjective decisions or assessments, are as follows:
•
•
•
•
•
•
•
Allowance for credit losses
Fair value and impairment of financial instruments
Impairment of long-lived assets
Impairment of goodwill
Employee benefit plans
Share-based compensation
Business combinations
B. Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (collectively the “Bank”). Intercompany accounts and transactions
have been eliminated.
The Bank consolidates entities where it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control. Entities where the Bank holds 20% to 50% of
the voting rights and/or has the ability to exercise significant influence are accounted for under the equity method, and the pro rata share of their income (loss) is included in
other non-interest income.
C. Foreign Currency Translation
Assets, liabilities, revenues and expenses denominated in Bermuda dollars are translated to US dollars at par. Assets and liabilities of the parent company arising from other
foreign currency transactions are translated into US dollars at the rates of exchange prevailing at the balance sheet date. The resulting gains or losses are included in foreign
exchange revenue in the consolidated statements of operations.
The assets and liabilities of foreign currency-based subsidiaries are translated at the rate of exchange prevailing on the balance sheet date, while associated revenues and
expenses are translated to US dollars at the average rates of exchange prevailing throughout the year. Unrealized translation gains or losses on investments in foreign currency-
based subsidiaries are recorded as a separate component of Shareholders' equity within accumulated other comprehensive income (“AOCI”). Gains and losses on foreign
currency-based subsidiaries are recorded in the consolidated statements of operations when the Bank ceases to have a controlling financial interest in a foreign currency-based
subsidiary.
D. Assets Held in Trust or Custody
Securities and properties (other than cash and deposits held with the Bank and its subsidiaries) held in trust, custody, agency or fiduciary capacity for customers are not included
in the consolidated balance sheets because the Bank is not the beneficiary of these assets.
E. Cash Due from Banks
Cash due from banks includes cash on hand, cash items in the process of collection, amounts due from correspondent banks and highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of change in fair value. Such investments are those with a maturity of three months or less
from the date of acquisition and include unrestricted term deposits, certificates of deposit and treasury bills.
F. Securities Purchased Under Agreement to Resell
Securities purchased under agreement to resell are treated as collateralized lending transactions. The obligation to resell is recorded at the value of the cash paid on purchase
adjusted for the amortization of the difference between the purchase price and the agreed resell price. The amortization of this amount is recorded as interest income.
F-11
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
G. Short-Term Investments
Short-term investments have maturities of less than one year from the date of acquisition, are only subject to an insignificant risk of change in fair value and comprise (1)
restricted term and demand deposits, and (2) unrestricted term deposits, certificate of deposits and treasury bills with a maturity greater than three months from the date of
acquisition.
H. Investments
Equity securities with readily determinable fair values are carried at fair value in the consolidated balance sheets, with unrealized gains and losses included in the consolidated
statements of operations as net gains (losses) on equity securities.
Contained within other assets are investments in private equity for which the Bank does not have sufficient rights or ownership interests to follow the equity method of
accounting. Unquoted equity investments which are held directly by the Bank and which do not have readily determinable fair values are recorded at cost, less impairment, plus
or minus observable price changes from transactions of identical or similar securities.
Equity method investments which include investments whereby the Bank has the ability to influence, but not control, the financial or operating policies of such entities, are
accounted for using the equity method of accounting.
Debt securities are classified as available-for-sale (“AFS”) or held-to-maturity (“HTM”).
Investments are classified as trading when management has the intent to sell these investments for profit. Debt securities classified as trading investments are carried at fair
value in the consolidated balance sheets, with unrealized gains and losses included in the consolidated statements of operations as net gains (losses) on trading investments.
Investments are classified primarily as AFS when used to manage the Bank’s exposure to interest rate and liquidity movements, as well as to make strategic longer-term
investments. AFS investments are carried at fair value in the consolidated balance sheets with unrealized gains and losses reported in AOCL, net of the allowance for credit
losses. Investments that the Bank has the positive intent and ability to hold to maturity are classified as HTM and are carried at amortized cost in the consolidated balance
sheets, net of the allowance for credit losses. Unrecognized gains and losses on HTM securities are disclosed in the notes to the consolidated financial statements.
The specific identification method is used to determine realized gains and losses on investments, which are included in net gains (losses) on equity securities and net realized
gains (losses) on AFS investments respectively, in the consolidated statements of operations.
Dividend and interest income, including amortization of premiums and discounts, on securities for which cash flows are not considered uncertain are included in interest income
in the consolidated statements of operations. For securities with uncertain cash flows, the investments are accounted for under the cost recovery method, whereby all principal
and coupon payments received are applied as a reduction of the amortized cost and carrying amount. Accrual of income is suspended in respect of debt securities that are in
default, or from which it is unlikely that future interest payments will be received as scheduled.
Impairment and credit losses (From January 1, 2020)
For debt securities, where management does not expect to recover the entire amortized cost basis of the security and intends to sell such securities or it is more likely than not
that the Bank will be required to sell the securities before recovering the amortized cost, it recognizes an impairment loss equal to the full difference between the amortized cost
basis and the fair value of those securities through the statement of operations. Following the recognition of impairment, the security's new amortized cost basis is the previous
basis less impairment.
When management does not intend to sell or it is more likely than not that the Bank will hold such securities until recovering the amortized cost, management determines
whether any credit losses exist. See "Note 2.J: Allowance for Credit Losses".
Recognition of other-than-temporary impairments (Prior to January 1, 2020)
For debt securities, management considers a decline in fair value to be other-than-temporary when it does not expect to recover the entire amortized cost basis of the security.
Investments in debt securities in unrealized loss positions are analyzed as part of management’s ongoing assessment of other-than-temporary impairment (“OTTI”). When
management intends to sell such securities or it is more likely than not that the Bank will be required to sell the securities before recovering the amortized cost, it recognizes an
impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When management does not intend to sell or it is more likely
than not that the Bank will hold such securities until recovering the amortized cost, management determines whether any credit losses exist to identify any OTTI.
Under certain circumstances, management will perform a qualitative determination and consider a variety of factors, including the length of time and extent to which the fair
value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a security;
payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after
the balance sheet date. Alternatively, management estimates cash flows over the remaining lives of the underlying security to assess whether credit losses exist.
In situations where there is a credit loss, only the amount of impairment relating to credit losses on AFS and HTM investments is recognized in net income. For AFS
investments, the decrease in fair value relating to factors other than credit losses is recognized in AOCL. Cash flow estimates take into account expectations of relevant market
and economic data as of the end of the reporting period, including, for example, underlying loan-level data, and structural features of securitization, such as subordination,
excess spread, over collateralization or other forms of credit enhancement. The degree of judgment involved in determining the recoverable value of an investment security is
dependent upon the availability of observable market prices or observable market parameters. When observable market prices and parameters do not exist, judgment is
necessary to estimate recoverable value which gives rise to added uncertainty in the assessment. The assessment takes into consideration factors such as interest rate
changes, movements in credit spreads, default rate assumptions, prepayment assumptions, type and quality of collateral, and market sentiment.
Management's fair valuations may include inputs and assumptions that are less observable or require greater estimation, thereby resulting in values which may be greater or
lower than the actual value at which the investments may be ultimately sold or the ultimate cash flows that may be recovered. If the assumptions on which management based
its fair valuations change, the Bank may experience additional OTTI or realized losses or gains, and the period-to-period changes in value could vary significantly.
I. Loans
Loans are reported as the principal amount outstanding, net of allowance for credit losses, unearned income, fair value adjustments arising from hedge accounting and net
deferred loan fees. Interest income is recognized over the term of the loan using the effective interest method, or on a basis approximating a level rate of return over the term of
the loan, except for loans classified as non-accrual. Prepayments are treated as a reduction of principal outstanding which is recognized upon receipt of payment. Prepayment
penalties, if applicable under the terms of the specific loan agreement, are recognized also upon receipt of payment.
F-12
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Acquired loans
Acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, are accounted for as purchased
credit-deteriorated ("PCD") loans. PCD loans are recorded at their purchase price with an adjustment to the amortized cost basis for the initial expected credit losses at the time
of acquisition i.e. via a balance sheet gross-up. Changes in estimates of expected credit losses after acquisition are recognized as a movement in provision for credit recoveries
(losses) in the statement of operations. Generally, acquired loans that meet the Bank's definition for non-accrual status are considered to be PCD loans.
The Bank's purchased credit-impaired (“PCI”) loans outstanding as at January 1, 2020 are now classified as PCD loans and both the amortized cost and an allowance for
expected credit losses are disclosed and included with other non-PCD loans' figures. The Bank will continue to recognize the amortization of the noncredit discount, if any, as
interest income based on the yield of such assets as at the date of purchase.
Participated or Assigned Loans
The Bank may act as lead lender on large loans from time to time and may for strategic or commercial reasons, assign portions of such loans to other market participants. Such
assignments are without full right of recourse to the Bank as the lead lender and participants/assignees accept all risks and obligations of the ultimate borrower associated with
their proportional participation and assignment in such loans. The Bank records the unassigned portion of the principal outstanding in such loans on the consolidated balance
sheets and records only its proportional share of interest income on the unassigned portion of the loan in the consolidated statement of operations.
Impaired loans
A loan is considered to be impaired when, based on current information and events, the Bank determines that it will not be able to collect all amounts due according to the
original loan contract, including scheduled interest payments. Impaired loans include all non-accruing loans and all loans modified in a troubled debt restructuring (‘‘TDR’’) even if
full collectability is expected following the restructuring.
If the Bank determines that the expected realizable value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or
costs and unamortized premium or discount), impairment is recognized through an allowance estimate. If the Bank determines that part of the allowance is uncollectible, that
amount is charged off.
Non-accrual
Commercial, commercial real estate and consumer loans (excluding credit card consumer loans) are placed on non-accrual status if:
•
•
in the opinion of management, full payment of principal or interest is in doubt; or
principal or interest is 90 days past due.
Residential mortgages are placed on non-accrual status immediately if:
•
•
in the opinion of management, full payment of principal or interest is in doubt; or
when principal or interest is 90 days past due, unless the loan is well secured and any ongoing collection efforts are reasonably expected to result in repayment of all
amounts due under the contractual terms of the loan.
Interest income on non-accrual loans is recognized only to the extent it is received in cash. Cash received on non-accrual loans where there is no doubt regarding full repayment
(no impairment recognized in the form of a specific allowance) is first applied as repayment of the past due principal amount of the loan and secondly to past due interest and
fees.
Where there is doubt regarding the ultimate full repayment of the non-accrual loan (impairment recognized in the form of a specific allowance), all cash received is applied to
reduce the principal amount of the loan. Interest income on these loans is recognized only after the entire balance receivable is recovered and interest is actually received.
Loans are returned to accrual status when:
•
•
none of the principal or accrued interest is past due (with certain exceptions as noted below) and the Bank expects repayment of the remaining contractual
obligation; or
when the loan becomes well secured and in the process of collection.
Loans modified in a TDR
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession from originally agreed terms. If a
restructuring is considered a TDR, the Bank is required to make certain disclosures to the notes of the consolidated financial statements and evaluate the restructured loan for
impairment. The Bank employs various types of concessions when modifying a loan which may include extension of repayment periods, interest rate reductions, principal or
interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.
Commercial and industrial loans modified in a TDR may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional
collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR may involve extending the maturity date at an
interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may
also involve extending the interest-only payment period.
Residential mortgage modifications generally involve a short-term forbearance period after which the missed payments are added to the end of the loan term, thereby extending
the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the mortgage remains unchanged. As the forbearance period
usually involves an insignificant payment delay they typically do not meet the reporting criteria for a TDR.
Automobile loans modified in a TDR are primarily composed of loans where the Bank has lowered monthly payments by extending the term.
When a loan undergoes a TDR, the determination of the loan's accrual versus non-accrual status following the modification depends on several factors. As with the risk rating
process, the accrual status decision for such a loan is a separate and distinct process from the loan's TDR analysis and determination. Management considers the following in
determining the accrual status of restructured loans:
•
If the loan was appropriately on accrual status prior to the restructuring, the borrower has demonstrated performance under the previous terms, and the Bank's credit
evaluation shows the borrower's capacity to continue to perform under the restructured terms (both principal and interest payments), it is likely that the appropriate
conclusion is for the loan to remain on accrual at the time of the restructuring. This evaluation must include consideration of the borrower's sustained historical
repayment performance for a reasonable period prior to the date on which the loan was restructured. A sustained period of repayment performance generally would
be a minimum of six months and would involve payments of cash or cash equivalents; or
F-13
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
•
If the loan was on non-accrual status before the restructuring, but the Bank's credit evaluation shows the borrower's capacity to meet the restructured terms, the loan
would likely remain as non-accrual until the borrower has demonstrated a reasonable period of sustained repayment performance. As noted above, this period
generally would be at least six months (thereby providing reasonable assurance as to the ultimate collection of principal and interest in full under the modified terms).
Sustained performance before the restructuring may be taken into account.
Loans that have been modified in a TDR are restored to accrual status only when interest and principal payments are brought current for a continuous period of six months under
the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can
meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to
meet the revised payment schedule is uncertain, the loan remains on non-accrual status.
A loan that is modified in a TDR prior to becoming impaired will be left on accrual status if full collectability in accordance with the restructured terms is expected. The Bank may
enter into a TDR for loans that are in default, or at risk of defaulting, even if the loan is not impaired.
A loan that had previously been modified in a TDR and is subsequently refinanced under current underwriting standards at a market rate with no concessionary terms is
accounted for as a new loan and is no longer reported as a TDR.
Delinquencies
The entire balance of an account is contractually delinquent if the minimum payment of principal or interest is not received by the specified due date. Delinquency is reported on
loans that are more than 30 days past due.
Charge-offs
The Bank recognizes charge-offs when it determines that loans are uncollectible, and this generally occurs when all commercially reasonable means of recovering the loan
balance have been exhausted.
Commercial and consumer loans are either fully or partially charged-off down to the fair value of collateral securing the loans when:
•
•
•
•
management judges the loan to be uncollectible;
repayment is expected to be protracted beyond reasonable time frames;
the asset has been classified as a loss by either the Bank’s internal loan review process or third party appraisers; or
the customer has filed bankruptcy and the loss becomes evident owing to a lack of assets or cash flow.
The outstanding balance of commercial and consumer real estate secured loans and residential mortgages that are in excess of the estimated property value, less costs to sell,
is charged-off once there is reasonable assurance that such excess outstanding balance is not recoverable.
Credit card consumer loans that are contractually 180 days past due and other consumer loans with an outstanding balance under $100,000 that are contractually 180 days past
due are generally written off and reported as charge-offs.
J. Allowance for Credit Losses
Accounting for Financial instruments - Credit losses
Starting on January 1, 2020 the Bank adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326). Accordingly, from the date of
adoption, the Bank uses a current expected credit loss model ("CECL") which is based on expected losses. The model used by the Bank up to December 31, 2019 to estimate
credit losses was based on incurred losses. The CECL model is applied by the Bank to the measurement of credit losses on financial instruments at amortized cost, including
loan receivables and held-to-maturity ("HTM") debt securities. The Bank also applies the CECL model to certain off-balance sheet credit exposures such as undrawn loan
commitments, standby letters of credit, financial guarantees, and other similar instruments. In line with Topic 326, the Bank will present credit losses on available-for-sale ("AFS")
securities as a valuation allowance rather than as a direct write-down. Changes in expected credit losses are recorded through the respective credit loss allowances on the
consolidated balance sheets as well as in the provision for credit losses (recoveries) in the consolidated statements of operations.
The Bank's PCI loans outstanding as at January 1, 2020 are now classified as PCD loans and both the amortized cost and an allowance for expected credit losses are disclosed
and included with other non-PCD loans' figures. The Bank will continue to recognize the amortization of the noncredit discount, if any, as interest income based on the yield of
such assets.
The Bank has not restated comparative information previously accounted for under the incurred loss and the PCI models. The total adjustment resulting from the adoption of this
methodology on the opening balance of the Bank’s accumulated deficit as at January 1, 2020 was a negative adjustment of $7.8 million relating to the Bank's loan portfolio.
Under the CECL model, the Bank collects and maintains attributes as they relate to its financial instruments that are within scope of CECL including fair value of collateral,
expected performance over the lifetime of the instruments and reasonable and supportable assumptions about future economic conditions. The Bank's measurement of
expected losses takes into account historical loss information and is primarily based on the product of: the respective instrument’s probability of default (“PD”), loss given default
(“LGD”) and exposure at default (“EAD”). For AFS securities, any allowance for credit losses is based on an impairment assessment.
The Bank made the accounting policy election to write off accrued interest receivable on loans that are placed on non-accrual status by reversing the then accrued interest
balance against interest income revenue.
The Bank maintains an allowance for credit losses, which in management’s opinion is adequate to absorb all estimated credit-related losses that are incurred in its lending and
off-balance sheet credit-related arrangements at the balance sheet date.
Management measures expected credit losses on held-to-maturity and available-for-sale debt securities on a collective basis by major security type when similar risk
characteristics exist, or failing that, on an individual basis.
For available-for-sale debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell
the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to
fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted
from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the
security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present
F-14
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be
collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is
less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding
intent or requirement to sell is met.
The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the
loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries typically do not exceed
the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and
reasonable and supportable forecasts as well as the Bank's internal risk rating framework. Historical credit loss experience provides the basis for the estimation of expected
credit losses. Adjustments to historical loss information are made for differences in the current-loan specific risk characteristics such as differences in underwriting practices,
vintage, portfolio mix, delinquency level, term as well as changes in environmental conditions, such as changes in macroeconomic factors and collateral values.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. In each of its jurisdictions, the Bank has identified the following
portfolio segments: Residential mortgages, Consumer loans (including overdrafts), Commercial loans, Commercial overdrafts, Commercial real estate loans and Credit cards.
For Loans and overdrafts, Management uses a probability of default and loss-given-default model to estimate the allowance for credit losses. Loans that do not share risk
characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. For Credit cards, Management uses a loss rate to
estimate expected credit losses.
Expected credit losses are estimated over the contractual term of the loans. The contractual term excludes potential extensions, renewals and modifications unless management
has a reasonable expectation at the reporting date that the extension or renewal options included in the original contract will occur or that a troubled debt restructuring will be
executed. Credit card receivables do not have stated maturities, therefore establishing a contractual term is performed by using an analytical approximation of behavior.
Prior to January 1, 2020, under the incurred loss model, the allowance for credit losses consisted of specific allowances and a general allowance as follows:
Specific allowances
Specific allowances are determined on an exposure-by-exposure basis identified through the Bank's internal risk rating framework and reflect the associated estimated credit
loss. The specific allowance for an individual loan is computed as the difference between the recorded investment in the loan and the present value of expected future cash
flows and is dependent upon the assumptions on the timing and amounts of the receipts or the fair value of collateral-dependent loans. The effective rate of return on the loan is
used for discounting the cash flows. However, when foreclosure of a collateral-dependent loan is probable, the Bank measures impairment based on the fair value of the
collateral. The Bank considers estimated costs to sell, on a discounted basis, in the measurement of impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loan. If the measurement of an impaired loan is less than the recorded investment in the loan, then the Bank recognizes impairment by creating an
allowance with a corresponding charge to provision for credit losses.
For all commercial and commercial real estate TDRs, the Bank conducts further analysis to determine the probable amount of loss and establishes a specific allowance for the
loan, if appropriate. The Bank estimates the impairment amount by comparing the loan’s carrying amount to the estimated present value of its future cash flows or the fair value
of its underlying collateral. For collateral-dependent impaired commercial and commercial real estate loans, the excess of the Company’s recorded investment in the loan over
the fair value of the collateral, less cost to sell, is charged off to the specific allowance.
For consumer and residential mortgage TDRs that are not collateral-dependent, allowances are developed using the present value of expected future cash flows, compared to
the recorded investment in the loans. Expected re-default factors are considered in this analysis. The fair value of collateral is periodically monitored subsequent to the
modification.
General allowances
The allowance for credit losses attributed to the remaining portfolio of smaller balance homogeneous loans is established through various analyzes that estimate the incurred
loss at the balance sheet date inherent in the lending and off-balance sheet credit-related arrangements portfolios. These analyzes may consider historical default and loss
rates, geographic, industry, economic, and other environmental factors. Management may also consider overall portfolio indicators including trends in internally risk rated
exposures, delinquent (defined as loans that are more than 30 days past due), non-performing, trends in volumes and terms of loans, cash-basis loans, historical and forecasted
write-offs, and a review of industry, geographic and portfolio concentrations, including current developments within those segments. In addition, management may consider the
current business strategy and credit process, including lending policies and procedures such as limit setting and compliance, credit approvals, loan underwriting criteria and loan
workout procedures.
K. Business Combinations, Goodwill and Intangible Assets
All business combinations are accounted for using the acquisition method. Identifiable intangible assets (mostly customer relationships) are recognized separately from goodwill
and are initially valued at fair value using discounted cash flow calculations and other recognized valuation techniques. Goodwill represents the excess of the fair value of the
consideration paid for the acquisition of a business over the fair value of the net assets acquired. Contingent purchase consideration is measured at its fair value and recorded
on the purchase date. Any subsequent changes in the fair value of a contingent consideration liability will be recorded through the consolidated statements of operations.
Goodwill is tested annually for impairment at the reporting unit level, or more frequently if events or circumstances indicate there may be impairment. If the carrying amount of a
reporting unit, including the allocated goodwill, exceeds its fair value, goodwill impairment is measured as the excess of the carrying amount of the reporting unit's allocated
goodwill over the implied fair value of the goodwill. Other acquired intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, not
exceeding 15 years. Intangible assets' estimated lives are re-evaluated annually and an impairment test is carried out if certain indicators of impairment exist.
L. Premises, Equipment and Computer Software
Land is carried at cost. Buildings, equipment and computer software, including leasehold improvements, are carried at cost less accumulated depreciation. The Bank generally
computes depreciation using the straight-line method over the estimated useful life of an asset, which is 50 years for buildings, and 3 to 10 years for other equipment. For
leasehold improvements the Bank uses the straight-line method over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement.
The Bank capitalizes certain costs, including interest cost incurred during the development phase, associated with the acquisition or development of internal use software. Once
the software is ready for its intended use, these costs are amortized on a straight-line basis over the software's expected useful life, which is between 5 and 10 years.
F-15
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Management reviews the recoverability of the carrying amount of premises, equipment and computer software when indicators of impairment exist and an impairment charge is
recorded when the carrying amount of the reviewed asset is deemed not recoverable by future expected cash flows to be derived from the use and disposition of the asset. If
there is a disposition of premises, equipment and computer software, a gain is recorded if the difference of the proceeds on disposition is in excess of the asset's carrying value.
Otherwise, a loss is recorded. If there is an abandonment out of premises, equipment and computer software, the full carrying value of the asset is recognized as a loss.
M. Other Real Estate Owned
Other real estate owned (“OREO”) comprises real estate property held for sale and commercial and residential real estate properties acquired in partial or total satisfaction of
loans acquired through foreclosure proceedings, acceptance of a deed-in-lieu of foreclosure or by taking possession of assets that were used as loan collateral. These properties
are initially recorded at fair value less estimated costs to sell the property. If the recorded investment in the loan exceeds the property’s fair value at the time of acquisition, a
charge-off is recorded against the specific allowance. If the carrying value of the real estate exceeds the property’s fair value at the time of reclassification, an impairment charge
is recorded in the consolidated statements of operations. Subsequent decreases in the property’s fair value below the new cost basis are recorded through the use of a valuation
allowance. Subsequent increases in the fair value of a property may be used to reduce the allowance but not below zero. Any operating expenses of the property are recognized
through charges to non-interest expense.
N. Leases
In the normal course of operation, the Bank enters into leasing agreements either as the lessee or the lessor. Starting on January 1, 2019 (the adoption date of the new lease
accounting guidance Accounting Standards Update (“ASU”) 2016-02 Leases (Topic 842)), the Bank recognized (prospectively, with no adjustments to prior periods) right-of-use
assets and lease liabilities for operating leases. Lease liabilities are measured as the present value of future lease payments, including term renewals that are reasonably certain
to occur, discounted using the Bank’s incremental borrowing interest rate. Right-of-use assets are measured as the carrying amount of the related lease liabilities adjusted for:
prepaid or accrued lease payments, unamortized lease incentive received, unamortized initial direct costs and any impairment of the right-of-use asset.
On January 1, 2019 the Bank elected the practical expedient: (1) not to reassess whether any expired or existing contracts are or contain leases; (2) not to reassess the lease
classification for any expired or existing leases and (3) not to reassess initial direct costs for any existing leases.
The Bank also elected: (1) the practical expedient not to separate lease components from non-lease components for all classes of underlying assets; and (2) the practical
expedient not to recognize a right-of-use asset and a lease liability for leases with a term at inception of 12 months or less, including renewal options that are reasonably certain
to be exercised (referred to as “short term leases”).
O. Derivatives
All derivatives are recognized on the consolidated balance sheets at their fair value. On the date that the Bank enters into a derivative contract, it designates the derivative as
either: a hedge of the fair value of a recognized asset or liability (a fair value hedge); a hedge of a forecasted transaction or the variability of cash flows that are to be received or
paid in connection with a recognized asset or liability (a cash flow hedge); a hedge of an exposure to foreign currency risk of a net investment in a foreign operation (a net
investment hedge); or, an instrument that is held for trading or non-hedging purposes (a trading or non-hedging derivative instrument).
All instruments utilized as a hedging instrument in a fair value hedge or cash flow hedge must have one or more underlying notional amounts, no or a minimal net initial
investment and a provision for net settlement in the contract to meet the definition of a derivative instrument. Instruments utilized as a hedging instrument in a hedge of a net
investment in foreign operations may be derivative instruments or non-derivatives.
The changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk, are recorded in the statement of operations.
The changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive
income ("OCI") and the ineffective portion is recorded in statement of operations. That is, ineffectiveness from a derivative that overcompensates for changes in the hedged cash
flows is recorded in statement of operations. However, the ineffectiveness from a derivative that under compensates is not recorded in statement of operations.
The changes in the fair value of a derivative that is designated and qualifies as a foreign currency hedge is recorded in either current year earnings or OCI, depending on
whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. If, however, a derivative is used as a hedge of a net investment in a foreign operation,
the changes in the derivative’s fair value, to the extent that the derivative is effective as a hedge, are recorded in the cumulative translation adjustment (“CTA”) account within
OCI.
Changes in the fair value of trading and non-hedging derivative instruments are reported in the statement of operations.
The Bank formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various
hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the
consolidated balance sheets or specific firm commitments or forecasted transactions.
The Bank also formally assesses whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of
hedged items and whether those derivatives may be expected to remain highly effective in future periods.
For those hedge relationships that are terminated, hedge designations that are elected to be removed, forecasted transactions that are no longer expected to occur, or the hedge
relationship ceases to be highly effective, the hedge accounting treatment described in the paragraphs above is no longer applied and the end-user derivative is terminated or
transferred to the trading designation. For fair value hedges, any changes to the carrying value of the hedged item prior to the discontinuance remain as part of the basis of the
asset or liability. When a cash flow hedge is discontinued, the net derivative gain (loss) remains in AOCI unless it is probable that the forecasted transaction will not occur in the
originally specified time period.
P. Collateral
The Bank pledges assets as collateral as required for various transactions involving security repurchase agreements, deposit products and derivative financial instruments.
Assets that have been pledged as collateral, including those that can be sold or repledged by the secured party, continue to be reported on the Bank’s consolidated balance
sheets under the same line items as non-pledged assets of the same type.
F-16
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Q. Employee Benefit Plans
The Bank maintains trusteed pension plans for substantially all employees as either non-contributory defined benefit plans or defined contribution plans. Benefits under the
defined benefit plans are based primarily on the employee's years of credited service and average annual salary during the final years of employment as defined in the plans.
The Bank also provides post-retirement medical benefits for certain qualifying active and retired Bermuda-based employees.
Expense for the defined benefit pension plans and the post-retirement medical benefits plan is composed of (a) the actuarially determined benefits for the current year's service,
(b) imputed interest on the actuarially determined liability of the plan, (c) in the case of the defined benefit pension plans, the expected investment return on the fair value of plan
assets and (d) amortization of certain items over the expected average remaining service life of employees in the case of the active defined benefit pension plans, estimated
average remaining life expectancy of the inactive participants in the case of the inactive defined benefit pension plans and the expected average remaining service life to full
eligibility age of employees covered by the plan in the case of the post-retirement medical benefits plan. The items amortized are amounts arising as a result of experience gains
and losses, changes in assumptions, plan amendments and the change in the net pension asset or post-retirement medical benefits liability arising on adoption of revised
accounting standards.
For each of the defined benefit pension plans and for the post-retirement medical benefits plan, the assets and liabilities recognized for accounting purposes are reported in other
assets and employee benefit plans respectively. The actuarial gains and losses, transition obligation and prior service costs of the defined pension plans and post-retirement
medical benefits plan are recognized in OCI net of tax and amortized to net income over the average service period for the active defined benefit pension plans and post-
retirement medical benefits plan and average remaining life expectancy for the inactive defined benefit pension plans.
For the defined contribution pension plans, the Bank and participating employees provide an annual contribution based on each participating employee's pensionable earnings.
Amounts paid are expensed in the period.
R. Share-Based Compensation
The Bank engages in equity settled share-based payment transactions in respect of services received from eligible employees. The fair value of the services received is
measured by reference to the fair value of the shares or share options granted on the date of the grant. The cost of the employee services received in respect of the shares or
share options granted is recognized in the consolidated statements of operations over the shorter of the vesting or service period.
The fair value of the options granted is determined using option pricing models, which take into account the exercise price of the option, the current share price, the risk-free
interest rate, expected dividend rate, the expected volatility of the share price over the life of the option and other relevant factors. The fair value of unvested share awards is
deemed to be the closing price of the publicly traded Bank shares on grant date. The fair value of time vesting conditions is taken into account by adjusting the number of shares
or share options included in the measurement of the cost of employee services so that ultimately, the amount recognized in the consolidated statements of operations reflects
the number of vested shares or share options. The Bank recognizes compensation cost for awards with performance conditions if and when the Bank concludes that it is
probable that the performance condition will be achieved, net of an estimate of pre-vesting forfeitures (e.g., due to termination of employment prior to vesting).
S. Revenue Recognition
Trust, custody and other administration services fees include fees for private and institutional trust, executorship, and custody services. Asset management fees include fees for
investment management, investment advice and brokerage services. Fees are recognized as revenue over the period of the relationship or when the Bank has rendered all
services to the clients and is entitled to collect the fee from the client, as long as there are no contingencies associated with the fees.
Banking services fees primarily include fees for letters of credit and other financial guarantees, compensating balances, overdraft facilities and other financial services-related
products as well as credit card fees. Letters of credit and other financial guarantees fees are recognized as revenue over the period in which the related guarantee is
outstanding. Credit card fees are comprised of merchant discounts, late fees and membership fees, net of interchange and rewards costs. Credit card fees and other fees are
recognized in the period in which the service is provided.
Foreign exchange revenue includes fees earned on currency exchange transactions which are recognized when such transactions occur, as well as gains and losses recognized
when translating financial instruments held or due in currencies other than the local functional currency at the rates of exchange prevailing at the balance sheet date.
Loan interest income includes the amortization of deferred non-refundable loan origination and commitment fees. These fees are recognized as an adjustment of yield over the
life of the related loan. Loan origination and commitment fees are offset by their related direct costs and only the net amounts are deferred and amortized into interest income.
Dividend and interest income, including amortization of premiums and discounts, on securities for which cash flows are not considered uncertain are included in interest income
in the consolidated statements of operations. Loans placed on non-accrual status and investments with uncertain cash flows are accounted for under the cost recovery method,
whereby all principal, dividends, interest and coupon payments received are applied as a reduction of the amortized cost and carrying amount.
T. Fair Values
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. The Bank determines the fair values of assets and liabilities based on the fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The relevant
accounting standard describes three levels of inputs that may be used to measure fair value. Equity securities and debt investments classified as AFS, and derivative assets and
liabilities are recognized in the consolidated balance sheets at fair value.
Level 1, 2 and 3 valuation inputs
Management classifies items that are recognized at fair value on a recurring basis based on the level of inputs used in their respective fair value determination as described
below.
Fair value inputs are considered Level 1 when based on unadjusted quoted prices in active markets for identical assets.
Fair value inputs are considered Level 2 when based on inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in
markets that are not considered to be active.
Fair value inputs are considered Level 3 when based on internally developed models using significant unobservable assumptions involving management's estimations or non-
binding bid quotes from brokers.
F-17
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The following methods and assumptions were used in the determination of the fair value of financial instruments:
Cash due from banks
The carrying amount of cash and demand deposits with banks, being short-term in nature, is deemed to approximate fair value.
Cash equivalents include unrestricted term deposits, certificates of deposits and Treasury bills with a maturity of less than three months from the date of acquisition and the
carrying value at cost is considered to approximate fair value because they are short term in nature, bear interest rates that approximate market rates, and generally have
negligible credit risk.
Short-term investments
Short-term investments comprise restricted term and demand deposits and unrestricted term deposits, certificates of deposit and treasury bills with less than one year but greater
than three months' maturity from the date of acquisition. The carrying value at cost is considered to approximate fair value because they are short term in nature, bear interest
rates that approximate market rates, and generally have negligible credit risk.
Equity securities, defined benefit pension plan equity securities, and mutual funds
The fair value of listed equity securities is based upon quoted market values. Investments in actively traded mutual funds are based on their published net asset values.
AFS and HTM investments and defined benefit pension plan fixed income securities
The fair values for AFS investments are generally sourced from third parties. The fair value of fixed income securities is based upon quoted market values where available,
“evaluated bid” prices provided by third party pricing services (“pricing services”) where quoted market values are not available, or by reference to broker or underwriter bid
indications where pricing services do not provide coverage for a particular security. To the extent the Bank believes current trading conditions represent distressed transactions,
the Bank may elect to utilize internally generated models. The pricing services typically use market approaches for valuations using primarily Level 2 inputs (in the vast majority
of valuations), or some form of discounted cash flow analysis.
Pricing services indicate that they will only produce an estimate of fair value if there is objectively verifiable information available to produce a valuation. Standard inputs to the
valuations provided by the pricing services listed in approximate order of priority for use when available include: reported trades, benchmark yields, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bids, offers, and reference data. The pricing services may prioritize inputs differently on any given day for any security, and
not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. However, the pricing services also monitor market indicators
and industry and economic events. When these inputs are not available, pricing services identify “buckets” of similar securities (allocated by asset class types, sectors, sub-
sectors, contractual cash flows/structure, and credit rating characteristics) and apply some form of matrix or other modeled pricing to determine an appropriate security value
which represents their best estimate as to what a buyer in the marketplace would pay for a security in a current sale.
It is common industry practice to utilize pricing services as a source for determining the fair values of investments where the pricing services are able to obtain sufficient market
corroborating information to allow them to produce a valuation at a reporting date. In addition, in the majority of cases, although a value may be obtained from a particular pricing
service for a security or class of similar securities, these values are corroborated against values provided by other pricing services. While the Bank receives values for the
majority of the investment securities it holds from pricing services, it is ultimately management’s responsibility to determine whether the values received and recorded in the
financial statements are representative of appropriate fair value measurements.
Broker/dealer quotations are used to value investments with fixed maturities where prices are unavailable from pricing services due to factors specific to the security such as
limited liquidity, lack of current transactions, or trades only taking place in privately negotiated transactions. These are considered Level 3 valuations, as significant inputs utilized
by brokers may be difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not available to support a
Level 2 classification.
For disclosure purposes, HTM investments are fair valued using the same methods described above.
Loans
The majority of loans are variable rate and re-price in response to changes in market rates and hence management estimates that the fair value of loans is not significantly
different than their carrying amount. For significant fixed-rate loan exposures, fair value is estimated by discounting the future cash flows, using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans. Management includes the effects of any credit losses recorded
against individual loans, which factors in a loan's credit quality, as well as accrued interest in determining the fair value of loans.
Accrued interest
The carrying amounts of accrued interest receivable and payable are assumed to approximate their fair values given their short-term nature.
OREO
OREO assets are carried at the lower of cost or fair value less estimated costs to sell. The determination of fair value, which aims at estimating the realizable value of the
properties, is based either on third-party appraisals, when available, or on internal valuation models. Appraisals of OREO properties are updated on an annual basis. Where the
fair value of the related property is based on an unadjusted appraised value, the OREO is generally classified as Level 2. Where significant adjustments are made to the
appraised value, or based on an internally generated valuation model, the OREO is generally classified as Level 3.
Deposits
The fair value of fixed-rate deposits has been estimated by discounting the contractual cash flows, using market interest rates offered at the balance sheet date for deposits of
similar terms. The carrying amount of deposits with no stated maturity date is deemed to equate to the fair value.
Long-term debt
The fair value of the long-term debt has been estimated by discounting the contractual cash flows, using current market interest rates.
Derivatives
Derivative contracts can be exchange traded or over-the-counter (“OTC”) derivative contracts and may include forward, swap and option contracts relating to interest rates or
foreign currencies. Exchange-traded derivatives typically fall within Level 1 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. OTC
derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing
transactions, broker or dealer quotations or alternative pricing sources where an understanding of the inputs utilized in arriving at the valuations is obtained.
F-18
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms and specific risks inherent in the instrument as well
as the availability of pricing information in the market. The Bank generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid
markets, such as generic forwards, interest rate swaps and options, model inputs can generally be verified and model selection does not involve significant management
judgment.
Goodwill
The fair value of reporting units for which goodwill is recognized is determined when an impairment assessment is performed by discounting estimated future cash flows using
discount rates reflecting valuation-date market conditions and risks specific to the reporting unit.
U. Impairment or Disposal of Long-Lived Assets
Impairment losses are recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected from its use and disposal. The
impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Long-lived assets that are to be disposed of other than by
sale are classified and accounted for as held for use until the date of disposal or abandonment. Assets that meet certain criteria are classified as held for sale and are measured
at the lower of their carrying amounts or fair value less estimated costs to sell.
V. Credit-Related Arrangements
In the normal course of business, the Bank enters into various commitments to meet the credit requirements of its customers. Such commitments, which are not included in the
consolidated balance sheet, include:
•
•
•
commitments to extend credit, which represent undertakings to make credit available in the form of loans or other financing for specific amounts and maturities,
subject to certain conditions;
standby letters of credit, which represent irrevocable obligations to make payments to third parties in the event that the customer is unable to meet its financial
obligations; and,
documentary and commercial letters of credit, related primarily to the import of goods by customers, which represent agreements to honor drafts presented by third
parties upon completion of specific activities.
These credit arrangements are subject to the Bank's normal credit standards and collateral is obtained where appropriate. The contractual amounts for these commitments set
out in the table in Note 12 represent the maximum payments the Bank would have to make should the contracts be fully drawn, the counterparty default, and any collateral held
prove to be of no value. As many of these arrangements will expire or terminate without being drawn upon or are fully collateralized, the contractual amounts do not necessarily
represent future cash requirements. The Bank does not carry any liability for these obligations.
W. Income Taxes
The Bank uses the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effect of temporary differences
between the consolidated financial statements' carrying amounts of assets and liabilities and their respective tax bases. Accordingly, a deferred income tax asset or liability is
determined for each temporary difference based on the enacted tax rates to be in effect on the expected reversal date of the temporary difference. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Bank records net deferred tax assets to the extent the Bank believes these assets will more likely than not be realized. Net deferred income tax assets or liabilities
accumulated as a result of temporary differences are included in other assets or other liabilities, respectively. A valuation allowance is established to reduce deferred income tax
assets to the amount more likely than not to be realized. In making such a determination, the Bank considers all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event the Bank were to
determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount, the Bank would make an adjustment to the deferred
tax asset valuation allowance, which would reduce the provision for income taxes.
The Bank records uncertain tax positions on the basis of a two-step process whereby (1) the Bank determines whether it is more likely than not that the tax positions will be
sustained based on the technical merits of the position and (2) where those tax positions that meet the more-likely-than-not recognition threshold, the Bank recognizes the
largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Income taxes on the consolidated statements of operations include the current and deferred portions of the income taxes. The Bank recognizes accrued interest and penalties
related to income taxes in operating expenses. Income taxes applicable to items charged or credited directly to shareholders’ equity are included in such items.
X. Consolidated Statements of Cash Flows
For the purposes of the consolidated statements of cash flows, cash due from banks include cash on hand, cash items in the process of collection, amounts due from
correspondent banks and highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in fair value,
and restricted cash included in short-term investments on the consolidated balance sheets.
Y. Earnings Per Share
Earnings per share have been calculated using the weighted average number of common shares outstanding during the year (see also Note 20: Earnings per share). In periods
when basic earnings per share is positive, the dilutive effect of share-based compensation plans is calculated using the treasury stock method, whereby the proceeds received
from the exercise of share-based awards are assumed to be used to repurchase outstanding common shares, using the quarterly average market price of the Bank’s shares for
the period.
Z. New Accounting Pronouncements
The following accounting developments were issued during the year ended December 31, 2020 or are accounting standards pending adoption:
In January 2020, the Financial Accounting Standards Board (“FASB”) published ASU 2020-01 Clarifying the Interactions between Topic 321 (Investments-Equity Securities),
Topic 323 (Investments-Equity Method and Joint Ventures), and Topic 815 (Derivatives and Hedging). The amendments in this update are effective for the Bank for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years. The Bank does not anticipate this ASU to have a material impact on its consolidated financial
statements.
In March 2020 and January 2021, respectively, the FASB published ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting and ASU 2021-01 Reference Rate Reform (Topic 848): Scope. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying
F-19
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and are effective for the Bank upon issuance (March
12, 2020) through December 31, 2022. The amendments to ASU 2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and
hedge accounting apply to derivatives that are affected by the discounting transition, specifically derivative instruments that use an interest rate for margining, discounting, or
contract price alignment that is modified as a result of reference rate reform. The Bank may elect to apply the amendments in ASU 2021-01 on a full retrospective basis as of any
date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim
period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Bank has elected to
early adopt ASU 2021-01. These ASUs have not had a material impact on the Bank's consolidated financial statements.
In October 2020, the FASB published ASU 2020-08-Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. The amendments in
this update clarify that an entity should re-evaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The amendments in
this update are effective for the Bank for fiscal years, beginning after December 15, 2020, and interim periods within those fiscal years. The Bank does not anticipate this ASU to
have a material impact on its consolidated financial statements.
In October 2020, the FASB published ASU 2020-10-Codification Improvements which is intended to conform, clarify, simplify, and/or provide technical corrections to a wide
variety of codification topics, including moving certain presentation and disclosure guidance to the appropriate codification section. The amendments in Sections B and C of this
update are effective for the Bank for annual periods beginning after December 15, 2020. The Bank does not anticipate this ASU to have a material impact on its consolidated
financial statements.
Note 3: Cash due from banks
Non-interest bearing
Cash and demand deposits with banks
Interest bearing¹
Demand deposits with banks
Cash equivalents
Sub-total - Interest bearing
Total cash due from banks
December 31, 2020
December 31, 2019
133,363
88,031
433,511
2,722,718
3,156,229
839,320
1,622,719
2,462,039
3,289,592
2,550,070
¹ Interest bearing cash due from banks includes certain demand deposits with banks as at December 31, 2020 in the amount of $156.2 million (December 31, 2019: $439.5
million) that are earning interest at a negligible rate.
Note 4: Short-term investments
Unrestricted
Maturing within three months
Maturing between three to six months
Maturing between six to twelve months
Total unrestricted short-term investments
Affected by drawing restrictions related to minimum reserve and derivative margin requirements
Non-interest earning demand deposits
Interest earning demand and term deposits
Total restricted short-term investments
December 31, 2020
December 31, 2019
469,580
326,836
1,717
798,133
260
24,646
24,906
594,749
591,212
2,584
1,188,545
2,270
27,565
29,835
Total short-term investments
823,039
1,218,380
F-20
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 5: Investment in securities
Amortized Cost, Carrying Amount and Fair Value
On the consolidated balance sheets, equity securities and AFS investments are carried at fair value and HTM investments are carried at amortized cost.
December 31, 2020
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
Amortized
cost
December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
5,274
5,274
2,531
2,531
(488)
(488)
7,317
7,317
5,724
5,724
2,142
2,142
(447)
(447)
7,419
7,419
Equity securities
Mutual funds
Total equity securities
Available-for-sale
US government and federal agencies
2,493,659
72,713
(306)
2,566,066
2,040,171
18,617
(6,342)
2,052,446
Non-US governments debt securities
Asset-backed securities - Student loans
Residential mortgage-backed securities
Total available-for-sale
22,797
13,290
58,589
2,588,335
—
—
1,108
73,821
(389)
(345)
—
22,408
12,945
59,697
26,118
13,290
128,952
82
—
654
(524)
(399)
(278)
25,676
12,891
129,328
(1,040)
2,661,116
2,208,531
19,353
(7,543)
2,220,341
Held-to-maturity¹
US government and federal agencies
Total held-to-maturity
2,194,371
2,194,371
110,526
110,526
(141)
2,304,756
2,208,663
(141)
2,304,756
2,208,663
47,814
47,814
(490)
2,255,987
(490)
2,255,987
¹ For the years ended December 31, 2020, 2019 and 2018, impairments recognized in other comprehensive income for HTM investments were nil.
Investments with Unrealized Loss Positions
The Bank does not believe that the unrealized losses on AFS debt securities as of December 31, 2020, comprising 13 securities representing 5.9% of the AFS portfolios'
carrying value (December 31, 2019: 62 and 40.7%), represent credit losses. Total gross unrealized AFS losses were 0.7% of the fair value of the affected AFS securities
(December 31, 2019: 0.8%).
The Bank’s HTM debt securities are comprised of US government and federal agencies securities and have a zero credit loss assumption under the CECL model. HTM debt
securities that were in an unrealized loss position as of December 31, 2020, were comprised of 3 securities representing 1.7% of the HTM portfolios’ carrying value
(December 31, 2019: 6 and 4.3%). Total gross unrealized HTM losses were 0.4% of the fair value of affected HTM securities (December 31, 2019: 0.5%).
Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery of the cost of these securities.
Unrealized losses were attributable primarily to changes in market interest rates, relative to when the investment securities were purchased, and not due to a decrease in the
credit quality of the investment securities. The issuers continue to make timely principal and interest payments on the securities. The following describes the processes for
identifying credit impairment in security types with the most significant unrealized losses as shown in the preceding tables.
Management believes that all the US government and federal agencies securities do not have any credit losses, given the explicit and implicit guarantees provided by the US
federal government.
Management believes that all the Non-US governments debt securities do not have any credit losses, given the explicit guarantee provided by the issuing government.
Investments in Asset-backed securities - Student loans are composed primarily of securities collateralized by Federal Family Education Loan Program loans (“FFELP loans”).
FFELP loans benefit from a US federal government guarantee of at least 97% of defaulted principal and accrued interest, with additional credit support provided in the form of
over-collateralization, subordination and excess spread, which collectively total in excess of 100%. Accordingly, the vast majority of FFELP loan-backed securities are not
exposed to traditional consumer credit risk.
None of the investments in Residential mortgage-backed securities were in an unrealized loss position at December 31, 2020 (December 31, 2019: 7). No credit losses were
recognized on these securities.
F-21
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
In the following tables, debt securities with unrealized losses that are not deemed to be credit impaired and for which an allowance for credit losses has not been recorded are
categorized as being in a loss position for "less than 12 months" or "12 months or more" based on the point in time that the fair value most recently declined below the amortized
cost basis.
December 31, 2020
Available-for-sale securities with unrealized losses
US government and federal agencies
Non-US governments debt securities
Asset-backed securities - Student loans
Less than 12 months
12 months or more
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Total
fair value
Total gross
unrealized
losses
120,599
(279)
15
—
—
—
236
22,393
12,945
35,574
(27)
(389)
(345)
(761)
120,835
22,408
12,945
(306)
(389)
(345)
156,188
(1,040)
Total available-for-sale securities with unrealized losses
120,614
(279)
Held-to-maturity securities with unrealized losses
US government and federal agencies
December 31, 2019
Available-for-sale securities with unrealized losses
US government and federal agencies
Non-US governments debt securities
Asset-backed securities - Student loans
Residential mortgage-backed securities
36,079
(141)
—
—
36,079
(141)
Less than 12 months
12 months or more
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Total
fair value
Total gross
unrealized
losses
376,262
(1,786)
435,999
(4,556)
812,261
(6,342)
202
—
6,038
(1)
—
(30)
22,246
12,891
50,254
(523)
(399)
(248)
22,448
12,891
56,292
(524)
(399)
(278)
Total available-for-sale securities with unrealized losses
382,502
(1,817)
521,390
(5,726)
903,892
(7,543)
Held-to-maturity securities with unrealized losses
US government and federal agencies
47,038
(214)
46,411
(276)
93,449
(490)
Investment Maturities
The following table presents the remaining term to contractual maturity of the Bank’s securities. The actual maturities may differ as certain securities offer prepayment options to
the borrowers.
December 31, 2020
Available-for-sale
US government and federal agencies
Non-US governments debt securities
Asset-backed securities - Student loans
Residential mortgage-backed securities
Total available-for-sale
Held-to-maturity
US government and federal agencies
Remaining term to maturity
Within
3 months
3 to 12
months
—
15
—
—
15
—
—
—
—
—
—
—
1 to 5
years
—
22,393
—
—
22,393
—
5 to 10
years
Over
10 years
No specific
or single
maturity
Carrying
amount
—
—
—
—
—
—
—
—
—
—
—
2,566,066
2,566,066
—
12,945
59,697
22,408
12,945
59,697
2,638,708
2,661,116
—
2,194,371
2,194,371
Pledged Investments
The Bank pledges certain US government and federal agencies investment securities to further secure the Bank's issued customer deposit products. The secured party does not
have the right to sell or repledge the collateral.
Pledged Investments
Available-for-sale
Held-to-maturity
December 31, 2020
December 31, 2019
Amortized
cost
1,387
2,460
Fair
value
1,456
2,623
Amortized
cost
3,848
5,449
Fair
value
3,912
5,552
F-22
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Sale Proceeds and Realized Gains and Losses of AFS Securities
December 31, 2020
December 31, 2019
December 31, 2018
Year ended
US government and federal agencies
Non-US governments debt securities
Corporate debt securities
Commercial mortgage-backed securities
Pass-through note
Total
Sale
proceeds
349,699
3,266
—
—
—
Gross
realized
gains
Gross
realized
(losses)
Sale
proceeds
Gross
realized
gains
Gross
realized
(losses)
Sale
proceeds
Gross
realized
gains
Gross
realized
(losses)
1,171
104
—
—
—
(55)
35,001
—
—
—
64,787
—
124,545
—
972
115
—
49
901
972
—
812,720
1,599
(1,263)
—
—
(141)
24,975
(272)
15,260
—
1,205
—
—
—
1,205
2,804
—
(87)
(354)
—
(1,704)
352,965
1,275
(55) 225,305
2,037
(413) 854,160
Taxability of Interest Income
None of the investments' interest income has received a specific preferential income tax treatment in any of the jurisdictions in which the Bank owns investments.
Note 6: Loans
The principal means of securing residential mortgages, personal, credit card and business loans are entitlements over assets and guarantees. Mortgage loans are generally
repayable over periods of up to 30 years and personal and business loans are generally repayable over terms not exceeding five years. Government loans are repayable over a
variety of terms which are individually negotiated. Amounts owing on credit cards are revolving and typically a minimum amount is due within 30 days from billing. The effective
yield on total loans as at December 31, 2020 is 4.13% (December 31, 2019: 4.73%). The interest receivable on total loans as at December 31, 2020 is $8.7 million
(December 31, 2019: $9.2 million). The interest receivable is included in Accrued interest and other assets on the consolidated balance sheets and is excluded from all loan
amounts disclosed in this note.
Loans' Credit Quality
The four credit quality classifications set out in the following tables are defined below and describe the credit quality of the Bank's lending portfolio. These classifications each
encompass a range of more granular internal credit rating grades. Loans' internal credit ratings are assigned by the Bank's customer relationship managers as well as members
of the Bank's jurisdictional and group Credit Committees. The borrowers' financial condition is documented at loan origination and maintained periodically thereafter at a
frequency which can be up to monthly for certain loans. The loans' performing status, as well as current economic trends, are continuously monitored. The Bank's jurisdictional
and group Credit Committees meet on a monthly basis. The Bank also has a group Provisions and Impairments Committee which is responsible for approving significant
provisions and other impairment charges.
A pass loan shall mean a loan that is expected to be repaid as agreed. A loan is classified as pass where the Bank is not expected to face repayment difficulties because the
present and projected cash flows are sufficient to repay the debt and the repayment schedule as established by the agreement is being followed. Loans in this category are
reviewed by the Bank’s management on at least an annual basis.
A special mention loan shall mean a loan under close monitoring by the Bank’s management on at least a quarterly basis. Loans in this category are currently protected and
still performing, but are potentially weak and present an undue credit risk exposure, but not to the point of justifying a classification of substandard.
A substandard loan shall mean a loan whose evident unreliability makes repayment doubtful and there is a threat of loss to the Bank unless the unreliability is averted. Loans in
this category are under close monitoring by the Bank’s management on at least a quarterly basis.
A non-accrual loan shall mean either management is of the opinion full payment of principal or interest is in doubt or when principal or interest is 90 days past due unless it is a
residential mortgage loan which is well secured and collection efforts are reasonably expected to result in amounts due. Loans in this category are under close monitoring by the
Bank’s management on at least a quarterly basis.
F-23
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The amortized cost of loans by credit quality classifications and allowance for expected credit losses by class of loans is as follows:
December 31, 2020
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer1
Total consumer loans
Special
Pass
mention Substandard
Non-accrual
Total
amortized
cost
Allowance
for expected
credit losses
Total net
loans
279,417
422,616
70,324
772,357
627,512
4,950
632,462
22,491
68,025
23,934
112,466
226,916
—
5,841
1,686
7,527
79,168
39,870
119,038
52
—
1,127
1,031
2,210
—
1,082
451
1,533
2,362
—
2,362
—
234
—
215
449
—
18,226
1
18,227
6,300
—
6,300
127
—
2
1,048
1,177
279,417
447,765
72,462
799,644
715,342
44,820
760,162
22,670
68,259
25,063
114,760
230,752
(1,453)
(9,926)
277,964
437,839
(230)
72,232
(11,609)
788,035
(847)
714,495
(1,257)
(2,104)
43,563
758,058
(103)
(2,795)
(162)
(1,416)
(4,476)
22,567
65,464
24,901
113,344
226,276
Residential mortgage loans
3,212,218
61,499
83,846
46,787
3,404,350
(15,909)
3,388,441
Total
4,843,953
190,274
88,190
72,491
5,194,908
(34,098)
5,160,810
1 Other consumer loans’ amortized cost comprises $54 million of cash and portfolio secured lending and $45 million of lending secured by buildings in construction or other
collateral.
December 31, 2019
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate
loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer1
Total consumer loans
Pass
Special
mention Substandard
Non-accrual
Total
amortized
cost
General and
specific
allowances
Total net
loans
Individually
evaluated
Collectively
evaluated
Evaluation of gross loans for
impairment
370,753
469,591
23,529
863,873
—
57,438
4,565
62,003
581,450
91,812
71,638
—
673,262
71,638
21,229
87,250
5,270
135,534
249,283
78
—
2,504
3,550
6,132
—
1,119
451
1,570
2,955
3,128
6,083
—
424
50
—
474
—
7,567
2
7,569
370,753
535,715
28,547
935,015
—
370,753
—
(7,195)
528,520
48,386
(86)
28,461
2
(7,281)
927,734
48,388
370,753
487,329
28,545
886,627
3,250
—
659,293
94,940
(1,496)
657,797
—
94,940
9,871
3,128
649,422
91,812
3,250
754,233
(1,496)
752,737
12,999
741,234
155
—
34
1,063
1,252
21,462
87,674
7,858
140,147
257,141
(102)
(445)
(28)
21,360
87,229
7,830
(927)
139,220
(1,502)
255,639
155
—
34
1,070
1,259
21,307
87,674
7,824
139,077
255,882
Residential mortgage loans
3,019,105
80,135
82,251
38,330
3,219,821
(13,309)
3,206,512
115,535
3,104,285
Total
4,805,523
219,908
90,378
50,401
5,166,210
(23,588)
5,142,622
178,181
4,988,028
1 Other consumer loans’ amortized cost comprises $74 million of cash and portfolio secured lending and $48 million of lending secured by buildings in construction or other
collateral.
F-24
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Based on the most recent analysis performed, the amortized cost of loans by year of origination and credit quality indicator is as follows:
December 31, 2020
Loans by origination year
2020
2019
2018
2017
2016
Prior
Overdrafts and credit cards
Total amortized cost
Pass
Special
mention
Substandard
Non-accrual
683,821
1,026,634
684,716
624,332
447,293
1,183,869
193,288
4,843,953
18,789
27,575
65,570
2,381
2,073
69,934
3,952
190,274
—
181
559
3,245
7,993
75,466
746
88,190
70
4
1,407
11,910
4,939
52,174
1,987
72,491
Total
amortized
cost
702,680
1,054,394
752,252
641,868
462,298
1,381,443
199,973
5,194,908
Age Analysis of Past Due Loans (Including Non-Accrual Loans)
The following tables summarize the past due status of the loans. The aging of past due amounts are determined based on the contractual delinquency status of payments under
the loan and this aging may be affected by the timing of the last business day at period end. Loans less than 30 days past due are included in current loans.
December 31, 2020
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total amortized cost
30 - 59
days
60 - 89
days
More than 90
days
Total past
due loans
Total
current
—
109
—
109
710
—
710
55
480
—
56
591
—
50
—
50
1,552
—
1,552
35
224
—
3
262
—
18,176
90
18,266
4,748
—
4,748
127
234
2
1,043
1,406
—
18,335
90
18,425
7,010
—
7,010
217
938
2
1,102
2,259
279,417
429,430
72,372
781,219
708,332
44,820
753,152
22,453
67,321
25,061
113,658
228,493
Total
amortized
cost
279,417
447,765
72,462
799,644
715,342
44,820
760,162
22,670
68,259
25,063
114,760
230,752
6,304
4,023
59,957
70,284
3,334,066
3,404,350
7,714
5,887
84,377
97,978
5,096,930
5,194,908
F-25
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
30 - 59
days
60 - 89
days
More than 90
days
Total past
due loans
Total
current
—
276
—
276
445
—
445
53
630
—
994
1,677
—
—
—
—
—
—
—
58
221
—
139
418
—
7,487
2
7,489
3,250
3,128
6,378
135
424
34
1,028
1,621
—
7,763
2
7,765
3,695
3,128
6,823
246
1,275
34
2,161
3,716
370,753
527,952
28,545
927,250
655,598
91,812
747,410
21,216
86,399
7,824
137,986
253,425
Total
amortized
cost
370,753
535,715
28,547
935,015
659,293
94,940
754,233
21,462
87,674
7,858
140,147
257,141
December 31, 2019
Commercial loans
Government
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
31,931
9,487
47,132
88,550
3,131,271
3,219,821
Total amortized cost
34,329
9,905
62,620
106,854
5,059,356
5,166,210
Changes in Allowances for Credit Losses
The increase in the allowance for credit losses during the year ended December 31, 2020 was primarily attributable to changes in macroeconomic factors, such as GDP
forecasts, and changes in the credit ratings of some residential and commercial customers. As per the Bank’s accounting policy, as disclosed in Note 2, the Bank continuously
collects and maintains attributes related to financial instruments within the scope of CECL, including current conditions, and reasonable and supportable assumptions about
future economic conditions.
Year ended December 31, 2020
Commercial
Commercial
real estate
Consumer
Residential
mortgage
Balance at the beginning of period, before change in accounting policy
Cumulative effect from change in accounting policy (Note 2)
Provision increase (decrease)
Recoveries of previous charge-offs
Charge-offs
Other
Allowances for expected credit losses at end of year
7,281
4,109
3,832
12
(3,635)
10
11,609
1,496
1,026
(418)
—
—
—
2,104
1,502
2,506
1,095
1,247
13,309
200
3,803
379
Total
23,588
7,841
8,312
1,638
(1,876)
(2,043)
(7,554)
2
4,476
261
15,909
273
34,098
Balance at beginning of period
Provision increase (decrease)
Recoveries of previous charge-offs
Charge-offs
Other
General and specific allowances at end of period
Allowances at end of period: individually evaluated for impairment
Allowances at end of period: collectively evaluated for impairment
Year ended December 31, 2019
Commercial
Commercial
real estate
Consumer
6,913
733
9
(374)
—
7,281
4,904
2,377
4,092
(2,596)
—
—
—
1,496
470
1,026
802
1,701
1,186
(2,193)
6
1,502
676
826
Residential
mortgage
13,295
(22)
445
(449)
40
13,309
11,628
1,681
Total
25,102
(184)
1,640
(3,016)
46
23,588
17,678
5,910
Collateral-dependent loans
Management identified that the repayment of certain commercial and consumer mortgage loans is expected to be provided substantially through the operation or the sale of the
collateral pledged to the Bank ("collateral-dependent loans"). The Bank believes that for the vast majority of loans identified as collateral-dependent, the sale of the collateral will
be sufficient to fully reimburse the loan's carrying amount.
F-26
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Loan Deferral Program
In response to the COVID-19 pandemic, effective April 1, 2020 the Bank implemented a residential mortgage and consumer loan deferral program for qualified borrowers in the
Bermuda and Cayman segments under which principal and interest payments on performing loans were automatically deferred for three months from April 1, 2020 to June 30,
2020 and the loan term extended. Borrowers had the option to notify the Bank if they preferred to continue with regular, scheduled payments (i.e. to opt-out). Commercial
customers had the option to pay interest only on their monthly loan payments with no penalties. The Bank subsequently extended the residential mortgage and personal loan
deferral program for a further three months from July 1, 2020 to September 30, 2020, however, borrowers had to notify the Bank of their intention to defer principal and interest
payments (i.e. to opt-in). Loans that meet the requirements for deferral under the programs are not considered TDRs or past due as the borrowers were current on their
payments and were not experiencing financial difficulty at the time of these modifications.
In addition, the Bank also introduced deferrals on credit card payments for April and May in the Bermuda segment and May and June in the Cayman segment.
Non-Performing Loans
During the year ended December 31, 2020, no interest was recognized on non-accrual loans. Non-performing loans at December 31, 2020 include PCD loans, which have all
been on non-accrual status since their acquisition. The balances at December 31, 2019 have not been restated to include the $1.8 million amortized cost of PCD loans as at that
date. No credit deteriorated loans were purchased during the year.
December 31, 2020
December 31, 2019
Non-accrual
loans with an
allowance
Non-accrual
loans
without an
allowance
Past due
more than 90
days and
accruing
Total non-
performing
loans
Non-accrual
loans with an
allowance
Non-accrual
loans without
an allowance
Past due
more than 90
days and
accruing
Total non-
performing
loans
18,207
—
18,207
952
—
952
126
—
—
869
995
19
1
20
5,348
—
5,348
1
—
2
179
182
—
89
89
—
—
—
—
234
—
—
234
18,226
90
18,316
6,300
—
6,300
127
234
2
1,048
1,411
7,487
—
7,487
1,019
—
1,019
—
—
—
676
676
80
2
82
2,231
—
2,231
155
—
34
387
576
—
—
—
—
3,128
3,128
—
424
—
—
424
7,567
2
7,569
3,250
3,128
6,378
155
424
34
1,063
1,676
Commercial loans
Commercial and industrial
Commercial overdrafts
Total commercial loans
Commercial real estate loans
Commercial mortgage
Construction
Total commercial real estate loans
Consumer loans
Automobile financing
Credit card
Overdrafts
Other consumer
Total consumer loans
Residential mortgage loans
Total non-performing loans
36,897
57,051
9,890
15,440
18,788
19,111
65,575
91,602
29,016
38,198
9,314
12,203
12,008
15,560
50,338
65,961
Loans modified in a TDR
As at December 31, 2020, the Bank had nil loans that were modified in a TDR during the preceding 12 months that subsequently defaulted (December 31, 2019: nil;
December 31, 2018: 2).
F-27
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Year ended December 31, 2020
Pre-
modification
recorded
loans
Modification:
interest
capitalization
Post-
modification
recorded
loans
Number of
contracts
9
5,590
98
5,688
Year ended December 31, 2019
Pre-
modification
recorded
loans
Modification:
interest
capitalization
Post-
modification
recorded
loans
Number of
contracts
3
1,381
101
1,482
December 31, 2020
December 31, 2019
Accrual
Non-accrual
Accrual
Non-accrual
901
2,362
61,937
65,200
—
1,811
17,129
18,940
939
2,954
65,275
69,168
—
1,315
9,576
10,891
TDRs entered into during the period
Residential mortgage loans
Residential mortgage loans
TDRs Outstanding
Commercial loans
Commercial real estate loans
Residential mortgage loans
Total TDRs outstanding
Note 7: Credit risk concentrations
Concentrations of credit risk in the lending and off-balance sheet credit-related arrangements portfolios arise when a number of customers are engaged in similar business
activities, are in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. The Bank regularly monitors various segments of its credit risk portfolio to assess potential concentrations of risks and to obtain collateral when
deemed necessary. In the Bank's commercial portfolio, risk concentrations are evaluated primarily by industry and by geographic region of loan origination. In the consumer
portfolio, concentrations are evaluated primarily by products. Credit exposures include loans, guarantees and acceptances, letters of credit and commitments for undrawn lines
of credit. Unconditionally cancellable credit cards and overdraft lines of credit are excluded from the tables below.
The following table summarizes the credit exposure of the Bank by geographic region. The exposures amounts disclosed below do not include accrued interest and are gross of
allowances for credit losses and gross of collateral held. The comparatives have been revised to conform to current year presentation.
December 31, 2020
December 31, 2019
Geographic region
Australia
Belgium
Bermuda
Canada
Cayman
Germany
Guernsey
Ireland
Japan
Jersey
Netherlands
New Zealand
Norway
Saint Lucia
Switzerland
The Bahamas
United Kingdom
United States
Other
Cash due from
banks, resell
agreements and
short-term
investments
220,871
4,271
51,329
996,213
29,480
107,412
83,842
6,029
—
—
23,463
57,900
—
4,510
1,516
Loans
Off-balance
sheet
Total credit
exposure
—
—
—
—
220,871
4,271
2,225,401
323,097
2,599,827
—
—
996,213
948,290
396,654
1,374,424
—
—
1
779,915
213,461
—
—
—
—
26,773
35,224
107,412
993,377
83,842
6,029
61,997
Cash due from
banks, resell
agreements and
short-term
investments
170,956
3,554
38,059
553,941
55,360
—
4
—
16,183
—
—
—
—
—
—
12,024
—
—
—
—
—
—
—
410,461
23,463
57,900
—
4,510
13,540
6,174
1,204
—
8,015
1,607
Loans
—
—
Off-balance
sheet
Total credit
exposure
—
—
170,956
3,554
2,253,969
347,802
2,639,830
—
—
553,941
931,434
208,404
1,195,198
—
—
—
856,453
123,376
979,833
—
—
7,219
—
—
—
29,400
—
12,859
—
—
—
—
—
—
—
—
—
—
16,183
7,219
410,461
6,174
1,204
29,400
8,015
14,466
1,291,655
1,202,505
140,663
2,634,823
1,742,676
1,074,876
108,599
2,926,151
1,428,090
3,088
—
—
—
—
1,428,090
3,088
898,262
4,277
—
—
—
—
898,262
4,277
Total gross exposure
4,309,670
5,194,908
1,109,099
10,613,677
3,910,733
5,166,210
788,181
9,865,124
F-28
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
December 31, 2020
December 31, 2019
Cost
8,730
164,171
25,150
197,165
4,988
400,204
Accumulated
depreciation
Net carrying
value
—
(71,721)
(15,930)
(161,801)
—
8,730
92,450
9,220
35,364
4,988
(249,452)
150,752
Cost
8,730
156,756
22,928
189,380
8,107
385,901
Accumulated
depreciation
Net carrying
value
—
(66,370)
(17,062)
(144,236)
—
8,730
90,386
5,866
45,144
8,107
(227,668)
158,233
December 31, 2020 December 31, 2019 December 31, 2018
Year ended
Note 8: Premises, equipment and computer software
Category
Land
Buildings
Equipment
Computer hardware and software in use
Computer software in development
Total
Depreciation charged to operating expenses
Buildings (included in Property expense)
Equipment (included in Property expense)
Computer hardware and software (included in Technology and communication expense)
Total depreciation charged to operating expenses
Note 9: Goodwill and other intangible assets
Goodwill
5,511
1,929
21,773
29,213
4,492
1,524
20,620
26,636
Segment
Channel Islands
and the UK
Cayman
—
551
—
551
—
551
—
551
21,529
1,231
(1,333)
21,427
818
22,245
719
22,964
Other
—
2,086
(73)
2,013
29
2,042
70
2,112
4,283
1,413
20,441
26,137
Total
21,529
3,868
(1,406)
23,991
847
24,838
789
25,627
December 31, 2020
December 31, 2019
Cost
29,785
17,728
90,069
5,563
143,145
Accumulated
amortization
Net carrying
amount
(15,009)
(6,773)
(53,279)
(892)
(75,953)
14,776
10,955
36,790
4,671
67,192
Cost
29,785
17,728
90,069
5,563
143,145
Accumulated
amortization
Net carrying
amount
(13,579)
(5,672)
(51,435)
(794)
(71,480)
16,206
12,056
38,634
4,769
71,665
Customer relationships are initially valued based on the present value of net cash flows expected to be derived solely from the recurring customer base existing as at the date of
acquisition. Customer relationship intangible assets may or may not arise from contracts.
During the year ended December 31, 2020, no new customer intangible assets were acquired. During the year ended December 31, 2019, the Bank acquired $24.4 million new
customer intangible assets with an estimated useful life of 15 years (see "Note 26: Business combinations"). During the year ended December 31, 2018, the Bank acquired
$18.2 million new customer intangible assets with an estimated useful life of 15 years, of which $16.9 million was acquired through a business acquisition (see Note 26: Business
combinations) and $1.3 million via asset acquisitions. The amortization expense amounted to $5.8 million (December 31, 2019: $5.5 million, December 31, 2018: $5.1 million)
and the foreign exchange translation adjustment increased the net carrying amount by $1.3 million (December 31, 2019: decreased by $2.0 million, December 31, 2018:
decreased by $1.5 million). The estimated aggregate amortization expense for each of the succeeding five years is $6.1 million.
F-29
Balance at December 31, 2017
Acquisitions during the year
Foreign exchange translation adjustment
Balance at December 31, 2018
Foreign exchange translation adjustment
Balance at December 31, 2019
Foreign exchange translation adjustment
Balance at December 31, 2020
Customer Relationship Intangible Assets
Segment
Bermuda
Cayman
Channel Islands and the UK
Other
Total
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 10: Customer deposits and deposits from banks
By Maturity
December 31, 2020
Demand
Non-interest
bearing
Interest
bearing
Total
demand
deposits
Within 3
months
Demand or less than $100k¹
3,012,360
7,577,642
10,590,002
30,551
Term - $100k or more
Total deposits
N/A
N/A
—
1,553,178
3,012,360
7,577,642
10,590,002
1,583,729
Term
3 to 6
months
8,402
625,533
633,935
6 to 12
months
13,138
330,773
343,911
After 12
months
14,875
83,632
Total
term
deposits
Total
deposits
66,966
10,656,968
2,593,116
2,593,116
98,507
2,660,082
13,250,084
December 31, 2019
Demand
Non-interest
bearing
Interest
bearing
Total
demand
deposits
Demand or less than $100k¹
2,238,256
7,152,063
9,390,319
Within 3
months
31,666
Term - $100k or more
Total deposits
N/A
N/A
—
2,402,619
2,238,256
7,152,063
9,390,319
2,434,285
Term
3 to 6
months
9,355
224,945
234,300
6 to 12
months
13,497
291,020
304,517
After 12
months
16,478
61,726
78,204
Total
term
deposits
Total
deposits
70,996
9,461,315
2,980,310
2,980,310
3,051,306
12,441,625
¹ The weighted-average interest rate on interest-bearing demand deposits as at December 31, 2020 is -0.04% (December 31, 2019: 0.20%).
By Type and Segment
Bermuda
Cayman
Channel Islands and the UK
Total deposits
Note 11: Employee benefit plans
Payable
on demand
December 31, 2020
Payable on a
fixed date
4,107,156
3,577,120
2,905,726
705,490
531,602
1,422,990
Total
4,812,646
4,108,722
4,328,716
10,590,002
2,660,082
13,250,084
December 31, 2019
Payable
on demand
Payable on a
fixed date
3,145,859
2,995,119
3,249,341
9,390,319
1,265,679
479,848
1,305,779
Total
4,411,538
3,474,967
4,555,120
3,051,306
12,441,625
The Bank maintains trusteed pension plans including non-contributory defined benefit plans and a number of defined contribution plans, and provides post-retirement medical
benefits to its qualifying retirees. The defined benefit provisions under the pension plans are generally based upon years of service and average salary during the relevant years
of employment. The defined benefit and post-retirement medical plans are not open to new participants and are non-contributory and the funding required is provided by the
Bank, based upon the advice of independent actuaries. The defined benefit pension plans are in the Bermuda, Guernsey and UK jurisdictions, and the defined benefit post-
retirement medical plan is in Bermuda. The Bank has a residual obligation on top of its defined contribution plan in Mauritius.
Bermuda Defined Benefit and Post-Retirement Medical Benefit Plan
The Bank amortizes prior service credit resulting from plan amendments that occurred when plan members were active employees, on a linear basis over the expected average
remaining service period (to full eligibility) of active members expected to receive benefits under the plan. Such remaining service periods are as follows: 3.1 years for the 2010
plan amendments and 4.6 years for the 2011 plan amendments. Plan amendments occurring in 2014 and 2019 resulted in the recognition of new prior service cost on December
31, 2014 and December 31, 2019 on a plan for which substantially all members are now inactive the Bank has elected to amortize these new prior service costs on a linear basis
over 21 years and 16 years, respectively, which was the average remaining life expectancy of members eligible for benefits under the plan at the time of the amendments.
Guernsey Defined Benefit Pension Plan
Effective October 2014, all the participants of the Guernsey defined benefit pension plan became inactive and in accordance with GAAP, the net actuarial loss of the Guernsey
defined benefit pension plan is amortized over the then estimated average remaining life expectancy of the inactive participants of 39 years. Prior to all of the Guernsey
participants being inactive, the net actuarial loss of the Guernsey defined benefit pension plan was amortized to net income over the estimated average remaining service period
for active members of 15 years.
UK Defined Benefit Pension Plan
The UK defined benefit pension plan closed to new members effective April 1, 2002 and subsequently closed to further accrual of new benefits effective October 1, 2012. During
the years ended December 31, 2018 and 2017, the pension plan settled in cash the liability of several plan members and an insurance policy was purchased in the name of the
trustees of the plan to match the liabilities of remaining members who were pensioners as at March 31, 2016.
Mauritius Portable Retirement Gratuity Fund
Under the Mauritius Workers’ Right Act of 2019, the Portable Retirement Gratuity Fund was established for the purpose of providing for the payment of a gratuity on the death or
retirement of an employee and came into effect on January 1, 2020. The Fund operates as a centralized defined contribution scheme with employers required to make upfront
contributions at prescribed rates based on employees monthly remuneration. Any shortfall in this lump sum gratuity in the employees accumulated fund upon death or retirement,
is to be funded by the Bank. Accordingly, the Bank recognizes the related service and net interest costs as well as the related net actuarial liability.
F-30
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The following table presents the financial position of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan, which is unfunded. The Bank
measures the benefit obligations and plan assets annually on each December 31 and therefore, the most recent measurement date is December 31, 2020.
Accumulated benefit obligation at end of year
179,018
128,167
168,791
110,347
148,966
117,203
December 31, 2020
December 31, 2019
December 31, 2018
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
Change in projected benefit obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Prior service cost
Plan amendment
Settlement and curtailment of liability
Actuarial (gain) loss
Foreign exchange translation adjustment
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Plan settlement
Benefits paid
Foreign exchange translation adjustment
Fair value of plan assets at end of year
168,791
110,347
148,966
117,203
179,613
127,687
43
3,957
66
3,270
—
5,034
58
4,741
—
4,971
63
4,305
(7,412)
(4,069)
(7,546)
(4,010)
(17,274)
(3,263)
48
—
(7,505)
18,326
2,770
—
—
—
18,553
—
—
—
(2,549)
21,950
2,936
—
2,369
—
212
—
(1,825)
—
—
—
(10,014)
(12,423)
(11,589)
—
(4,308)
—
179,018
128,167
168,791
110,347
148,966
117,203
175,400
14,945
2,917
(5,903)
—
—
4,069
(7,412)
(4,069)
154,151
25,225
2,605
(2,043)
(7,546)
—
—
4,010
—
185,495
(11,618)
3,653
(1,608)
—
—
3,263
—
(4,010)
(17,274)
(3,263)
2,569
182,516
—
—
3,008
175,400
—
—
(4,497)
154,151
—
—
—
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost included in other assets
6,610
—
6,609
—
5,185
Accrued pension benefit cost included in employee benefit plans liability
(3,112)
(128,167)
—
(110,347)
—
(117,203)
Surplus (deficit) of plan assets over projected benefit obligation at
measurement date
3,498
(128,167)
6,609
(110,347)
5,185
(117,203)
F-31
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
Post-
retirement
medical
benefit plan
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
Pension
plans
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial gain (loss), excluding deferred taxes
(73,506)
(21,213)
(67,118)
(2,660)
(65,506)
(12,946)
Net prior service credit (cost)
Deferred income taxes assets (liabilities)
(226)
(7,866)
(190)
(8,390)
(202)
(6,397)
1,477
—
996
—
816
—
Net amount recognized in accumulated other comprehensive loss
(72,255)
(29,079)
(66,312)
(11,050)
(64,892)
(19,343)
Annual Benefit Expense
Expense component
Service cost
Interest cost
Line item in the consolidated
statements of operations
Salaries and other employee benefits
97
Non-service employee benefits expense
3,960
66
3,270
—
5,034
Expected return on plan assets
Non-service employee benefits expense
(7,547)
N/A
(7,563)
Amortization of net actuarial (gains) losses
Non-service employee benefits expense
2,412
Amortization of prior service (credit) loss
Non-service employee benefits expense
21
(Gain) loss on settlement
Defined benefit (income) expense
Defined contribution expense
Net other gains (losses)/Non-service
employee benefits expense
1,326
269
8,933
—
524
—
3,860
—
2,197
20
572
260
8,340
58
4,741
—
272
376
—
5,447
—
—
4,971
(8,720)
2,106
—
1,757
114
7,442
63
4,305
—
2,615
39
—
7,022
—
Total benefit (income) expense
The components of benefit expense (income) other than the service cost component are included in the line item non-service employee benefits expense in the consolidated
statements of operations.
5,447
7,556
8,600
3,860
9,202
7,022
Other Changes Recognized in Other Comprehensive Income (Loss)
Net gain (loss) arising during the year
Prior service credit (cost) arising during the year
Amortization of net actuarial (gains) losses
Amortization of prior service (credit) cost
Change in deferred taxes
Foreign exchange adjustment
(8,363)
(18,553)
(3,472)
10,014
(5,987)
11,589
(47)
2,412
20
456
(421)
—
—
524
—
—
—
(2,369)
(212)
2,407
19
149
(523)
272
376
—
—
2,106
—
(298)
840
—
2,615
39
—
—
Total changes recognized in other comprehensive income (loss)
(5,943)
(18,029)
(1,420)
8,293
(3,551)
14,243
To develop the expected long-term rate of return on the plan assets assumption for each plan, the Bank considered the historical returns and the future expectations for returns
for each asset class, as well as the target asset allocations of the assets. The weighted average discount rate used to determine benefit obligations at the end of the year is
derived from interest rates on high quality corporate bonds with maturities that match the expected benefit payments.
F-32
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Actuarial Assumptions
Actuarial assumptions used to determine annual benefit expense
Weighted average discount rate
Weighted average rate of compensation increases 1
Weighted average expected long-term rate of return on plan assets
Weighted average annual medical cost increase rate
Actuarial assumptions used to determine benefit obligations at end of year
Weighted average discount rate
Weighted average rate of compensation increases 1
Weighted average annual medical cost increase rate
1 Only the UK subsidiary plan is impacted by potential future compensation increases.
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
Post-
retirement
medical
benefit plan
Pension
plans
2.65 %
2.30 %
4.60 %
N/A
1.90 %
2.20 %
N/A
3.38 %
N/A
N/A
7.3% to
4.5% in
2040
2.53 %
N/A
7.2% to
4.5% in
2040
3.65 %
2.50 %
5.00 %
N/A
2.65 %
2.30 %
N/A
4.40 %
N/A
N/A
7.5% to
4.5% in
2035
3.38 %
N/A
7.3% to
4.5% in
2040
3.05 %
2.50 %
4.70 %
N/A
3.65 %
2.50 %
N/A
3.73 %
N/A
N/A
7.7% to
4.5% in
2035
4.40 %
N/A
7.5% to
4.5% in
2035
Investments Policies and Strategies
The pension plans’ assets are managed according to each plan's investment policy statement, which outlines the purpose of the plan, statement of objectives and guidelines and
investment policy. The asset allocation is diversified and any use of derivatives is limited to hedging purposes only.
Weighted average actual and target asset allocations of the pension plans by asset category
Debt securities (including debt mutual funds)
Equity securities (including equity mutual funds)
Other
Total
December 31, 2020
December 31, 2019
Actual
allocation
Target
allocation
Actual
allocation
Target
allocation
37 %
50 %
13 %
100 %
30 %
52 %
18 %
100 %
32 %
51 %
17 %
100 %
36 %
47 %
17 %
100 %
Fair Value Measurements of Pension Plans' Assets
The following table presents the fair value of the plans' assets by category and level of inputs used in their respective fair value determination as described in "Note 2: Significant
accounting policies", except the level 3 security, for which the valuation determination is described following the below table:
December 31, 2020
Fair value determination
December 31, 2019
Fair value determination
US government and federal agencies
Non-US governments debt securities
Corporate debt securities
Equity securities and mutual funds
Other
Level 1
—
—
—
925
727
Level 2
21,566
1,132
45,871
90,574
226
Total fair value of plans' assets
1,652
159,369
Level 3
Total
fair value
Level 1
—
—
—
—
21,495
21,495
21,566
1,132
45,871
91,499
22,448
182,516
—
—
—
1,112
10,049
11,161
Level 2
19,445
1,089
35,688
88,631
406
145,259
Level 3
—
—
—
—
18,980
18,980
Total
fair value
19,445
1,089
35,688
89,743
29,435
175,400
The Level 3 assets consist of insured annuity policies covering the full pension benefits of certain plan members. The fair value of these policies is deemed equal to the actuarial
value of the projected benefit obligation for the insured benefits. At December 31, 2020, 28.4% (December 31, 2019: 26.8%) of the assets of the pension plans were mutual
funds and equity securities managed or administered by wholly-owned subsidiaries of the Bank. At December 31, 2020, 0.5% (December 31, 2019: 0.6%) of the plans' assets
were invested in common shares of the Bank.
The investments of the pension funds are diversified across a range of asset classes and are diversified within each asset class. The assets are generally actively managed with
the goal of adding some incremental value through security selection and asset allocation.
F-33
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Estimated 2021 Bank contribution to and estimated benefit payments for the next ten years under the pension and post-retirement medical benefit plans are as follows:
Estimated Bank contributions for the full year ending December 31, 2021
Estimated benefit payments by year:
2021
2022
2023
2024
2025
2026-2030
Post-
retirement
medical
benefit plan
—
4,538
4,763
4,992
5,216
5,447
Pension
plans
3,000
7,400
7,400
7,300
7,200
7,200
34,500
30,034
Note 12: Credit related arrangements, repurchase agreements and commitments
Commitments
As at December 31, 2020, the Bank was committed to expenditures under contract for information technology services sourcing of $13.0 million (December 31, 2019: $27.6
million). The Bank funded its expenditures with its own resources and plans to fund those currently in progress with its own resources, which may be obtained through cash on
hand, cash flows from operations and issuances of debt and equity securities.
The following table summarizes the Bank's commitments for sourcing, long-term leases and other agreements:
Year ending December 31
2021
2022
2023
2024
2025
Total commitments
Sourcing
13,029
—
—
—
—
13,029
Other
18,638
11,682
5,552
2,490
1,779
40,141
Total
31,667
11,682
5,552
2,490
1,779
53,170
The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.
Substantially all of the Bank's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management
assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for expected credit losses.
The Bank has a facility with one of its custodians, whereby the Bank may offer up to US $200 million of standby letters of credit to its customers on a fully secured basis. Under
the standard terms of the facility, the custodian has the right to set-off against securities held of 110% of the utilized facility. At December 31, 2020, $153.2 million (December 31,
2019: $143.6 million) of standby letters of credit were issued under this facility.
Outstanding unfunded commitments to extend credit
December 31, 2020
December 31, 2019
Commitments to extend credit
Documentary and commercial letters of credit
Total unfunded commitments to extend credit
Allowance for credit losses
836,710
981
837,691
(179)
549,049
355
549,404
—
Credit-Related Arrangements
Standby letters of credit and letters of guarantee are issued at the request of a Bank customer in order to secure the customer’s payment or performance obligations to a third
party. These guarantees represent an irrevocable obligation of the Bank to pay the third party beneficiary upon presentation of the guarantee and satisfaction of the documentary
requirements stipulated therein, without investigation as to the validity of the beneficiary’s claim against the customer. Generally, the term of the standby letters of credit does not
exceed one year, while the term of the letters of guarantee does not exceed four years. The types and amounts of collateral security held by the Bank for these standby letters of
credit and letters of guarantee are generally represented by deposits with the Bank or a charge over assets held in mutual funds.
The Bank considers the fees collected in connection with the issuance of standby letters of credit and letters of guarantee to be representative of the fair value of its obligation
undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, the Bank defers fees collected in connection with the issuance of
standby letters of credit and letters of guarantee. The fees are then recognized in income proportionately over the life of the credit agreements. The following table presents the
outstanding financial guarantees. Collateral is shown at estimated market value less selling cost. Where the collateral is cash, it is shown gross including accrued income.
Outstanding financial guarantees
Standby letters of credit
Letters of guarantee
Total
December 31, 2020
Gross
Collateral
265,959
5,449
271,408
258,699
5,413
264,112
Net
7,260
36
7,296
December 31, 2019
Gross
230,971
7,806
238,777
Collateral
223,711
7,672
231,383
Net
7,260
134
7,394
F-34
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Repurchase agreements
The Bank utilizes repurchase agreements and resell agreements (reverse repurchase agreements) to manage liquidity. The risks of these transactions include changes in the
fair value in the securities posted or received as collateral and other credit-related events. The Bank manages these risks by ensuring that the collaterals involved are
appropriate and by monitoring the value of the securities posted or received as collateral on a daily basis.
As at December 31, 2020, the Bank had 5 open positions (December 31, 2019: 13) in resell agreements with a remaining maturity of less than 30 days involving pools of
mortgages issued by US federal agencies. The amortized cost of these resell agreements is $197.0 million (December 31, 2019: $142.3 million) and is included in securities
purchased under agreement to resell on the consolidated balance sheets. As at December 31, 2020, there were no positions (December 31, 2019: no positions) which were
offset on the consolidated balance sheets to arrive at the carrying value, and there was no collateral amount which was available to offset against the future settlement amount.
Legal Proceedings
There are actions and legal proceedings pending against the Bank and its subsidiaries which arose in the normal course of its business. Management, after reviewing all actions
and proceedings pending against or involving the Bank and its subsidiaries, considers that the resolution of these matters would in the aggregate not be material to the
consolidated financial position of the Bank, except as noted in the following paragraphs.
As publicly announced, in November 2013, the US Attorney's Office for the Southern District of New York applied for and secured the issuance of so-called John Doe
Summonses to six US financial institutions with which the Bank had correspondent bank relationships. The Bank has been fully cooperating with the US authorities in their
ongoing investigation. Specifically, the Bank has conducted an extensive review and account remediation exercise to determine the US tax compliance status of US person
account holders. The review process and results have been shared with the US authorities.
Management believes that as at December 31, 2020, a provision of $5.5 million (December 31, 2019: $5.5 million), which has been recorded, is appropriate. As the investigation
remains ongoing at this time, the timing and terms of the final resolution, including any fines or penalties, remain uncertain and the financial impact to the Bank could exceed the
amount of the provision. In this regard, we note that the US authorities have not approved or commented on the adequacy or reasonableness of the estimate. The provision is
included on the consolidated balance sheets under other liabilities.
Note 13: Leases
The Bank enters into operating lease agreements either as the lessee or the lessor, mostly for office and parking spaces as well as for small office equipment. The terms of the
existing leases, including renewal options that are reasonably certain to be exercised, extend up to the year 2035. Certain lease payments will be adjusted during the related
lease's term based on movements in the relevant consumer price index. Rental expense for premises leased on a long-term basis for the year ended December 31, 2018
amounted to $5.6 million.
Lease costs
Operating lease costs
Short-term lease costs
Sublease income
Total net lease cost
Operating lease income
Other information for the period
Right-of-use assets related to new operating lease liabilities
Operating cash flows from operating leases
Other information at end of period
Operating leases right-of-use assets (included in other assets on the balance sheets)
Operating lease liabilities (included in other liabilities on the balance sheets)
Weighted average remaining lease term for operating leases (in years)
Weighted average discount rate for operating leases
Year ended
December 31, 2020
December 31, 2019
7,932
1,500
(1,205)
8,227
940
323
8,330
6,606
858
(534)
6,930
677
28,703
7,071
Year ended
December 31, 2020
December 31, 2019
46,244
44,940
10.14
47,947
48,334
10.37
5.25 %
5.25 %
F-35
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The following table summarizes the maturity analysis of the Bank's commitments for long-term leases as at December 31, 2020:
Year ending December 31
Operating Leases
2021
2022
2023
2024
2025
2026 & thereafter
Total commitments
Less: effect of discounting cash flows to their present value
Operating lease liabilities
Note 14: Loan interest income
Contractual interest earned
Amortization
Amortization of fair value hedge
Amortization of loan origination fees (net of amortized costs)
Amortization of fair value adjustment on purchased loans
Total loan interest income
8,319
8,111
6,980
6,247
3,870
24,793
58,320
(13,380)
44,940
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
224,474
228,892
213,908
(300)
5,436
1,046
(316)
5,456
—
(501)
5,088
—
230,656
234,032
218,495
Balance of unamortized fair value hedge included in loans as at year end
Balance of unamortized loan fees included in loans as at year end
1,376
12,204
1,676
11,628
1,992
10,010
Note 15: Segmented information
The Bank is managed by the Chairman and Chief Executive Officer (“CEO”) on a geographic basis. The Bank presents four reportable segments, three geographical and one
other: Bermuda, Cayman, Channel Islands and the UK, and Other. The Other segment is composed of several non-reportable operating segments that have been aggregated
in accordance with GAAP. Each reportable segment has a managing director who reports to the Chairman and CEO. The Chairman and CEO and the segment managing
director have final authority over resource allocation decisions and performance assessment.
The geographic segments reflect this management structure and the manner in which financial information is currently evaluated by the Chairman and CEO. Segment results
are determined based on the Bank's management reporting system, which assigns balance sheet and statement of operations items to each of the geographic segments. The
process is designed around the Bank's organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information
published by other financial institutions. A description of each reportable segment and table of financial results is presented below.
Accounting policies of the reportable segments are the same as those described in Note 2: Significant accounting policies. Transactions between segments are accounted for on
an accrual basis and are all eliminated upon consolidation. The Bank generally does not allocate assets, revenues and expenses among its business segments, with the
exception of certain corporate overhead expenses and loan participation revenue and expenses. Loan participation revenue and expenses are allocated pro-rata based upon the
percentage of the total loan funded by each jurisdiction participating in the loan.
The Bermuda segment provides a full range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized businesses
through three branch locations and through internet banking, mobile banking, automated teller machines (“ATMs”) and debit cards. Retail services include deposit services,
consumer and mortgage lending, credit cards and personal insurance products. Commercial banking includes commercial lending and mortgages, cash management, payroll
services, remote banking and letters of credit. Treasury services include money market and foreign exchange activities. Bermuda’s wealth management offering consists of
Butterfield Asset Management Limited, which provides investment management, advisory and brokerage services and Butterfield Trust (Bermuda) Limited, which provides trust,
estate, company management and custody services. Bermuda is also the location of the Bank's head offices and accordingly, retains the unallocated corporate overhead
expenses.
The Cayman segment provides a comprehensive range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized
businesses through three branch locations and through internet banking, mobile banking, ATMs and debit cards. Retail services include deposit services, consumer and
mortgage lending, credit cards and property/auto insurance. Commercial banking includes commercial lending and mortgages, cash management, payroll services, remote
banking and letters of credit. Treasury services include money market and foreign exchange activities. Cayman’s wealth management offering comprises investment
management, advisory and brokerage services and Butterfield Trust (Cayman) Limited, which provides trust, estate and company management.
The Channel Islands and the UK segment includes the jurisdictions of Guernsey and Jersey (Channel Islands), and the UK. In the Channel Islands, a broad range of services
are provided to private clients and financial intermediaries including private banking and treasury services, internet banking, wealth management and fiduciary services. The UK
jurisdiction provides mortgage services for high-value residential properties.
F-36
Bermuda
Cayman
Channel Islands and the UK
Other
Total before eliminations
Inter-segment eliminations
Total
2019
Year ended December 31
Bermuda
Cayman
Other
Total before eliminations
Inter-segment eliminations
Total
2018
Year ended December 31
Bermuda
Cayman
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The Other segment includes the jurisdictions of The Bahamas, Canada, Mauritius, Singapore and Switzerland. These operating segments individually and collectively do not
meet the quantitative threshold for segmented reporting and are therefore aggregated as non-reportable operating segments.
Total Assets by Segment
Bermuda
Cayman
Channel Islands and the UK
Other
Total assets before inter-segment eliminations
Less: inter-segment eliminations
Total
2020
Net interest income
Year ended December 31
Customer
December 31, 2020
December 31, 2019
5,924,779
4,479,937
4,826,671
32,928
15,264,315
(525,681)
14,738,634
5,220,016
3,839,074
5,108,357
35,148
14,202,595
(281,020)
13,921,575
Provision for
credit
recoveries
(losses)
Non-interest
income
Net revenue
before gains
and losses
Gains and
losses
Total net
revenue
(8,750)
483
(224)
—
85,216
49,294
40,698
14,384
(8,491)
189,592
236,034
145,137
103,138
14,391
498,700
—
(5,733)
(5,733)
(8,491)
183,859
492,967
1,970
491
(1,238)
(1)
1,222
—
1,222
Total
expenses
192,781
62,605
82,057
15,262
Net income
45,223
83,023
19,843
(872)
352,705
147,217
238,004
145,628
101,900
14,390
499,922
(5,733)
(5,733)
—
494,189
346,972
147,217
Inter-
segment
778
1,149
(1,927)
—
—
—
—
158,790
94,211
64,591
7
317,599
—
317,599
Channel Islands and the UK
49,486
(2,307)
Net interest income
Customer
182,674
113,493
Inter-
segment
1,236
1,071
49
345,702
—
345,702
—
—
—
—
Provision for
credit
recoveries
(losses)
Non-interest
income
Net revenue
before gains
and losses
Gains and
losses
(3,088)
1,893
1,379
—
184
—
184
89,114
51,853
34,319
22,119
269,936
168,310
82,877
22,168
197,405
543,291
(13,430)
(13,430)
183,975
529,861
2,172
570
43
(18)
2,767
—
2,767
Total net
revenue
272,108
168,880
82,920
22,150
Total
expenses
209,417
61,057
74,217
24,292
Net income
62,691
107,823
8,703
(2,142)
546,058
368,983
177,075
(13,430)
(13,430)
—
532,628
355,553
177,075
Net interest income
Customer
202,901
102,793
Inter-
segment
2,383
416
Provision for
credit
recoveries
(losses)
6,823
1,297
Channel Islands and the UK
37,276
(2,799)
(1,129)
Other
Total before eliminations
Inter-segment eliminations
Total
19
342,989
—
342,989
—
—
—
—
—
6,991
—
6,991
Note 16: Derivative instruments and risk management
Non-interest
income
Net revenue
before gains
and losses
Gains and
losses
87,352
47,781
26,824
15,157
299,459
152,287
60,172
15,176
(20)
349
(1,185)
1
Total net
revenue
299,439
152,636
58,987
15,177
Total
expenses
202,318
60,666
50,353
17,718
Net income
97,121
91,970
8,634
(2,541)
177,114
527,094
(855)
526,239
331,055
195,184
(8,428)
(8,428)
—
(8,428)
(8,428)
—
168,686
518,666
(855)
517,811
322,627
195,184
The Bank uses derivatives for risk management purposes and to meet the needs of its customers. The Bank’s derivative contracts principally involve over-the-counter ("OTC")
transactions that are negotiated privately between the Bank and the counterparty to the contract and include interest rate contracts and foreign exchange contracts.
The Bank may pursue opportunities to reduce its exposure to credit losses on derivatives by entering into International Swaps and Derivatives Association master agreements
(“ISDAs”). Depending on the nature of the derivative transaction, bilateral collateral arrangements may be used, as well. When the Bank is engaged in more than one
outstanding derivative transaction with the same counterparty, and also has a legally enforceable master netting agreement with that counterparty, the net marked-to-market
exposure represents the netting of the positive and negative exposures with that counterparty. When there is a net negative exposure, the Bank regards its credit exposure to the
counterparty as being zero. The net marked-to-market position with a particular counterparty represents a reasonable measure of credit risk when there is a legally enforceable
master netting agreement between the Bank and that counterparty.
F-37
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Certain of these agreements contain credit risk-related contingent features in which the counterparty has the option to accelerate cash settlement of the Bank's net derivative
liabilities with the counterparty in the event the Bank's credit rating falls below specified levels or the liabilities reach certain levels.
All derivative financial instruments, whether designated as hedges or not, are recorded on the consolidated balance sheets at fair value within other assets or other liabilities.
These amounts include the effect of netting. The accounting for changes in the fair value of a derivative in the consolidated statements of operations depends on whether the
contract has been designated as a hedge and qualifies for hedge accounting.
Notional Amounts
The notional amounts are not recorded as assets or liabilities on the consolidated balance sheets as they represent the face amount of the contract to which a rate or price is
applied to determine the amount of cash flows to be exchanged. Notional amounts represent the volume of outstanding transactions and do not represent the potential gain or
loss associated with market risk or credit risk of such instruments. Credit risk is limited to the positive fair value of the derivative instrument, which is significantly less than the
notional amount.
Fair Value
Derivative instruments, in the absence of any compensating up-front cash payments, generally have no market value at inception. They obtain value, positive or negative, as
relevant interest rates, exchange rates, equity or commodity prices or indices change. The potential for derivatives to increase or decrease in value as a result of the foregoing
factors is generally referred to as market risk. Market risk is managed within clearly defined parameters as prescribed by senior management of the Bank. The fair value is
defined as the profit or loss associated with replacing the derivative contracts at prevailing market prices.
Risk Management Derivatives
The Bank enters into interest derivative contracts as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings that are
caused by interest rate volatility. The Bank’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain consolidated balance sheet
assets and liabilities so that movements in interest rates do not adversely affect the net interest margin. Derivative instruments that are used as part of the Bank’s risk
management strategy include interest rate swap contracts that have indices related to the pricing of specific consolidated balance sheet assets and liabilities. Interest rate swaps
generally involve the exchange of fixed and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. The Bank
uses foreign currency derivative instruments to hedge its exposure to foreign currency risk. Certain hedging relationships are formally designated and qualify for hedge
accounting as fair value or net investment hedges. Risk management derivatives comprise fair value hedges, net investment hedges and derivatives not formally designated as
hedges as described below.
Fair value hedges include designated currency swaps that are used to minimize the Bank's exposure to variability in the fair value of available-for-sale investments due to
movements in foreign exchange rates. The effective portion of changes in the fair value of the hedging instrument is recognized in current year earnings consistent with the
related change in fair value of the hedged items attributable to foreign exchange rates. For fair value hedges, hedging effectiveness of the hedged item and the hedging
instrument are assessed and managed at inception and on an ongoing basis using a partial-term method.
Net investment hedges include designated currency swaps and qualifying non-derivative instruments and are used to minimize the Bank’s exposure to variability in the foreign
currency translation of net investments in foreign operations. The effective portion of changes in the fair value of the hedging instrument is recognized in AOCI consistent with the
related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at
inception and on an ongoing basis to minimize the risk of hedge ineffectiveness.
For derivatives designated as net investment hedges, the Bank follows the method based on changes in spot exchange rates. Accordingly:
- The change in the fair value of the derivative instrument that is reported in AOCI (i.e., the effective portion) is determined by the changes in spot exchange rates.
- The change in the fair value of the derivative instrument attributable to changes in the difference between the forward rate and spot rate are excluded from the measure
of the hedge ineffectiveness and that difference is reported directly in the consolidated statements of operations under foreign exchange revenue.
Amounts recorded in AOCI are reclassified to earnings only upon the sale or substantial liquidation of an investment in a foreign subsidiary.
For foreign-currency-denominated debt instruments that are designated as hedges of net investments in foreign operations, the translation gain or loss that is recorded in AOCI
is based on the spot exchange rate between the reporting currency of the Bank and the functional currency of the respective subsidiary. See Note 23: Accumulated other
comprehensive loss" for details on the amount recognized into AOCI during the current period from translation gain or loss.
Derivatives not formally designated as hedges are entered into to manage the interest rate risk of fixed rate deposits and the Bank's exposure to foreign exchange risk.
Changes in the fair value of derivative instruments not formally designated as hedges are recognized in foreign exchange income.
Client service derivatives
The Bank enters into foreign exchange contracts and interest rate caps primarily to meet the foreign exchange needs of its customers. Foreign exchange contracts are
agreements to exchange specific amounts of currencies at a future date at a specified rate of exchange. Changes in the fair value of client services derivative instruments are
recognized in foreign exchange income.
F-38
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The following table shows the aggregate notional amounts of derivative contracts outstanding listed by type and respective gross positive or negative fair values and classified by
those used for risk management (sub-classified as hedging and those that do not qualify for hedge accounting), client services and credit derivatives. Fair value of derivatives is
recorded in the consolidated balance sheets in other assets and other liabilities. Gross positive fair values are recorded in other assets and gross negative fair values are
recorded in other liabilities, subject to netting when master netting agreements are in place.
Derivative instrument
Number of
contracts
Notional
amounts
Gross
positive
fair value
Gross
negative
fair value
Net
fair value
Derivatives not formally designated as hedging instruments Currency swaps
Subtotal risk management derivatives
Currency swaps
Currency swaps
4
5
42
68,231
197,987
1,471,632
1,737,850
—
4,039
2,678
6,717
(4,586)
—
(21,239)
(25,825)
(4,586)
4,039
(18,561)
(19,108)
Spot and forward foreign
exchange
241
770,113
2,507,963
7,128
13,845
(6,862)
266
(32,687)
(18,842)
Derivative instrument
Number of
contracts
Notional
amounts
Gross
positive
fair value
Gross
negative
fair value
Net
fair value
December 31, 2020
Risk management derivatives
Net investment hedges
Fair value hedges
Client services derivatives
Total derivative instruments
December 31, 2019
Risk management derivatives
Net investment hedges
(118)
293
175
458
633
Derivatives not formally designated as hedging instruments Currency swaps
Subtotal risk management derivatives
Currency swaps
1
9
9,502
207,032
216,534
—
1,632
1,632
(118)
(1,339)
(1,457)
Client services derivatives
Total derivative instruments
Spot and forward foreign
exchange
352
3,280,636
3,497,170
31,060
32,692
(30,602)
(32,059)
In addition to the above, as at December 31, 2020 foreign denominated deposits of £192.8 million (December 31, 2019: £251.4 million) and CHF 0.4 million (December 31, 2019:
CHF 0.4 million) were designated as a hedge of foreign exchange risk associated with the net investment in foreign operations.
We manage derivative exposure by monitoring the credit risk associated with each counterparty using counterparty specific credit risk limits, using master netting arrangements
where appropriate and obtaining collateral. The Bank elected to offset in the consolidated balance sheets certain gross derivative assets and liabilities subject to netting
agreements.
The Bank also elected not to offset certain derivative assets or liabilities and all collateral received or paid that the Bank or the counterparties could legally offset in the event of
default. In the tables below, these positions are deducted from the net fair value presented in the consolidated balance sheets in order to present the net exposures. The
collateral values presented in the following table are limited to the related net derivative asset or liability balance and, accordingly, do not include excess collateral received or
paid.
December 31, 2020
Derivative assets
Gross fair
value
recognized
Less: offset
applied
under master
netting
agreements
Net fair value
presented in the
consolidated
balance sheets
Less: positions not offset in the
consolidated balance sheets
Gross fair value of
derivatives
Cash collateral
received / paid
Net exposures
Spot and forward foreign exchange and currency swaps
13,845
(7,153)
6,692
Derivative liabilities
Spot and forward foreign exchange and currency swaps
32,687
(7,153)
Net negative fair value
25,534
(18,842)
—
—
(3)
6,689
(3,042)
22,492
December 31, 2019
Derivative assets
Gross fair
value
recognized
Less: offset
applied
under master
netting
agreements
Net fair value
presented in the
consolidated
balance sheets
Less: positions not offset in the
consolidated balance sheets
Gross fair value of
derivatives
Cash collateral
received / paid
Net exposures
Spot and forward foreign exchange and currency swaps
32,692
(2,233)
30,459
Derivative liabilities
Spot and forward foreign exchange and currency swaps
32,059
(2,233)
Net positive fair value
29,826
633
—
—
(3,224)
27,235
(997)
28,829
F-39
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The following tables show the location and amount of gains (losses) recorded in either the consolidated statements of operations or consolidated statements of comprehensive
income on derivative instruments outstanding.
Derivative instrument
Consolidated statements of operations line item
December 31, 2020
December 31, 2019
December 31, 2018
Year ended
Spot and forward foreign exchange
Foreign exchange revenue
Currency swaps, not designated as hedge Foreign exchange revenue
Currency swaps - fair value hedges
Foreign exchange revenue
Total net gains (losses) recognized in net income
(191)
(18,854)
4,039
(15,006)
(202)
592
—
390
(25)
1,697
—
1,672
Derivative instrument
Consolidated statements of comprehensive income line item
December 31, 2020
December 31, 2019
December 31, 2018
Currency swaps - net investment hedge
Net change in unrealized gains and (losses) on translation of net
investment in foreign operations
Total net gains (losses) recognized in comprehensive income
(4,469)
(4,469)
(85)
(85)
—
—
Note 17: Fair value measurements
The following table presents the financial assets and liabilities that are measured at fair value on a recurring basis. Management classifies these items based on the type of
inputs used in their respective fair value determination as described in "Note 2: Significant accounting policies".
Management reviews the price of each security monthly, comparing market values to expectations and to the prior month’s price. Management's expectations are based upon
knowledge of prevailing market conditions and developments relating to specific issuers and/or asset classes held in the investment portfolio. Where there are unusual or
significant price movements, or where a certain asset class has performed out-of-line with expectations, the matter is reviewed by management.
Financial instruments in Level 1 include actively traded redeemable mutual funds.
Financial instruments in Level 2 include government debt securities, corporate debt securities, mortgage-backed securities and other asset-backed securities, forward foreign
exchange contracts and mutual funds not actively traded.
Financial instruments in Level 3 include asset-backed securities for which the market is relatively illiquid and for which information about actual trading prices is not readily
available.
There were no transfers between Level 1 and Level 2 or Level 2 and Level 3 during the year ended December 31, 2020 and the year ended December 31, 2019.
December 31, 2020
Fair value
Level 1
Level 2
Level 3
Total
carrying
amount /
fair value
December 31, 2019
Fair value
Level 1
Level 2
Level 3
Items that are recognized at fair value on a recurring basis:
Total
carrying
amount /
fair value
7,419
7,419
2,052,446
25,676
12,891
—
—
—
—
7,081
7,081
236
236
7,317
7,317
7,141
7,141
278
278
—
—
—
—
—
—
—
—
—
—
2,566,066
22,408
—
12,945
59,697
—
2,566,066
22,408
12,945
59,697
2,648,171
12,945
2,661,116
6,692
—
6,692
—
—
—
—
—
—
2,052,446
25,676
—
12,891
129,328
—
129,328
2,207,450
12,891
2,220,341
30,459
—
30,459
—
25,534
—
25,534
—
29,826
—
29,826
F-40
Financial assets
Equity securities
Mutual funds
Total equity securities
Available-for-sale investments
US government and federal agencies
Non-US governments debt securities
Asset-backed securities - Student loans
Residential mortgage-backed securities
Total available-for-sale
Other assets - Derivatives
Financial liabilities
Other liabilities - Derivatives
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Level 3 Reconciliation
The Level 3 financial instrument, shown as Asset-backed securities - Student loans in the above table, is a federal family education loan program guaranteed student loan
security and is valued using a non-binding quote from an external security pricing service.
The table below summarizes realized and unrealized gains and losses for Level 3 assets still held at the reporting date.
Carrying amount at beginning of year
Realized and unrealized gains (losses) recognized in other comprehensive income
Carrying amount at end of year
Cumulative gain (loss) recognized in other comprehensive income
Items Other Than Those Recognized at Fair Value on a Recurring Basis:
December
31, 2020
December 31,
2019
December 31,
2018
Available-
for-sale
investments
Available-
for-sale
investments
Available-
for-sale
investments
12,891
54
12,945
12,626
265
12,891
12,493
133
12,626
(345)
(399)
(664)
Financial assets
Cash due from banks
Securities purchased under agreements to resell
Short-term investments
Investments held-to-maturity
Loans, net of allowance for credit losses
Other real estate owned¹
Financial liabilities
Term deposits
Long-term debt
December 31, 2020
December 31, 2019
Level
Carrying
amount
Fair
value
Appreciation /
(depreciation)
Carrying
amount
Fair
value
Appreciation /
(depreciation)
Level 1
3,289,592
3,289,592
Level 2
Level 1
197,039
823,039
Level 2
2,194,371
Level 2
5,160,810
Level 2
4,052
197,039
823,039
2,304,756
5,193,240
4,052
—
—
—
110,385
32,430
—
2,550,070
2,550,070
142,283
1,218,380
2,208,663
5,142,622
3,842
142,283
1,218,380
2,255,987
5,161,257
3,842
Level 2
2,660,082
2,665,463
(5,381)
3,051,306
3,054,813
Level 2
171,462
170,086
1,376
143,500
147,574
—
—
—
47,324
18,635
—
(3,507)
(4,074)
¹ The current carrying value of OREO is adjusted to fair value only when there is devaluation below carrying value.
F-41
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 18: Interest rate risk
The following tables set out the assets, liabilities and shareholders' equity on the date of the earlier of contractual maturity, expected maturity or repricing date. Use of these
tables to derive information about the Bank’s interest rate risk position is limited by the fact that customers may choose to terminate their financial instruments at a date earlier
than the contractual maturity or repricing date. Examples of this include fixed-rate mortgages, which are shown at contractual maturity but which may pre-pay earlier, and certain
term deposits, which are shown at contractual maturity but which may be withdrawn before their contractual maturity subject to prepayment penalties. Investments are shown
based on remaining contractual maturities. The remaining contractual principal maturities for mortgage-backed securities (primarily US government agencies) do not consider
prepayments. Remaining expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages
mature.
December 31, 2020
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
(1,132)
(1,132)
(255)
(244)
474
(1,387)
(1,631)
(1,157)
4,898
3,741
(3,741)
—
—
—
December 31, 2019
Earlier of contractual maturity or repricing date
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing
funds
(in $ millions)
Assets
Cash due from banks
Securities purchased under agreement to resell
Short-term investments
Investments
Loans
Other assets
Total assets
Liabilities and shareholders' equity
Shareholders’ equity
Demand deposits
Term deposits
Other liabilities
Long-term debt
Total liabilities and shareholders' equity
(in $ millions)
Assets
Cash due from banks
Securities purchased under agreement to resell
Short-term investments
Investments
Loans
Other assets
Total assets
Liabilities and shareholders' equity
Shareholders’ equity
Demand deposits
Term deposits
Other liabilities
Long-term debt
Total liabilities and shareholders' equity
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
4,329
14,739
Total
3,290
197
823
4,863
5,161
405
14,739
982
10,590
2,661
335
171
Total
2,550
142
1,218
4,436
5,143
433
13,922
964
9,390
3,052
373
143
134
—
—
7
42
405
588
982
3,012
—
335
—
88
—
2
7
14
433
544
964
2,239
—
373
—
3,156
197
494
13
4,170
—
8,030
—
7,578
1,584
—
—
9,162
—
—
327
13
39
—
379
—
—
634
—
—
634
—
—
2
27
71
—
100
—
—
344
—
—
344
—
—
—
92
652
—
744
—
—
99
—
171
270
—
—
—
4,711
187
—
4,898
—
—
—
—
—
—
—
—
3
11
148
—
162
—
—
305
—
—
305
—
—
—
102
292
—
394
—
—
78
—
73
151
—
—
—
3,878
648
—
4,526
—
—
—
—
—
—
—
—
591
23
16
—
630
—
—
234
—
—
234
396
2,462
142
622
415
4,025
—
7,666
—
7,151
2,435
—
70
9,656
(1,990)
(1,990)
F-42
3,576
13,922
(143)
243
(1,594)
(1,737)
(1,494)
4,526
3,032
(3,032)
—
—
—
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 19: Long-term debt
On June 27, 2005, the Bank issued US $150 million of Subordinated Lower Tier II capital notes. The notes were issued at par in two tranches, namely US $90 million in Series A
notes due 2015, which were redeemed at face value in January 2014, and US $60 million in Series B notes due 2020. The issuance was by way of private placement with US
institutional investors. The notes are listed on the BSX in the specialist debt securities category. The Series B notes paid a fixed coupon of 5.11% until July 2, 2015 when they
became redeemable in whole at the Bank’s option. The Series B notes were priced at a spread of 1.10% over the 10-year US Treasury yield. During September 2011, the Bank
repurchased $15 million of the outstanding 5.11% 2005 Series B Subordinated notes with the balance of $45 million maturing in July 2, 2020.
On May 27, 2008, the Bank issued US $78 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches, namely US $53 million in Series
A notes due 2018, which were redeemed at face value in May 2013 and US $25 million in Series B notes due 2023. The issuance was by way of private placement with US
institutional investors. The notes are listed on the BSX in the specialist debt securities category. The proceeds of the issue were used to repay the entire amount of the US $78
million outstanding subordinated notes redeemed in May 2008. The Series B notes paid a fixed coupon of 8.44% until May 27, 2018 when they became redeemable in whole at
the Bank’s option. The Series B notes were priced at a spread of 4.51% over the 10-year US Treasury yield and were redeemed at face value in November 2020.
On May 24, 2018, the Bank issued US $75 million of Subordinated Lower Tier II capital notes. The notes were issued at par and due on June 1, 2028. The issuance was by way
of a registered offering with US institutional investors. The notes are listed on the BSX in the specialist debt securities category. The proceeds of the issue were used, among
other, to repay the entire amount of the US $47 million outstanding subordinated notes series 2003-B. The notes issued pay a fixed coupon of 5.25% until June 1, 2023 when
they become redeemable in whole at the option of the Bank. The notes were priced at a spread of 2.27% over the 10-year US Treasury yield. The Bank incurred $1.8 million of
costs directly related to the issuance of these capital notes. These costs have been capitalized directly against the carrying value of these notes on the balance sheet, and will be
amortized over the life of the notes.
On June 11, 2020, the Bank issued US $100 million of Subordinated Lower Tier II capital notes. The notes were issued at par and due on June 15, 2030. The issuance was by
way of a registered offering with US institutional investors. The notes are listed on the BSX in the specialist debt securities category. The proceeds of the issue were used,
among other, to repay the entire amount of the US $45 million outstanding subordinated notes series 2005-B which matured on July 2, 2020. The notes issued pay a fixed
coupon of 5.25% until June 15, 2025 when they become redeemable in whole at the option of the Bank. The notes were priced at a spread of 4.43% over the 10-year US
Treasury yield. The Bank incurred $2.3 million of costs directly related to the issuance of these capital notes. These costs have been capitalized directly against the carrying
value of these notes on the balance sheet, and will be amortized over the life of the notes.
No interest was capitalized during the years ended December 31, 2020, 2019 and 2018.
In the event the Bank would be in a position to redeem long-term debt, priority would go to the redemption of the higher interest-bearing Series, subject to availability relative to
the earliest date the Series is redeemable at the Bank's option.
The following table presents the contractual maturity and interest payments for long-term debt issued by the Bank as at December 31, 2020. The interest payments are
calculated until contractual maturity using the current LIBOR and Secured Overnight Financing Rate ("SOFR").
Earliest date
redeemable at
the Bank's
option
Contractual
maturity date
Interest rate
until date
redeemable
Interest rate from earliest date
redeemable to contractual
maturity
Principal
Outstanding
Within
1 year
1 to 5
years
After
5 years
Interest payments until contractual
maturity
Long-term debt
Bermuda
2018 issuance
2020 issuance
Total
Unamortized debt issuance costs
Long-term debt less unamortized debt issuance costs
Note 20: Earnings per share
June 1, 2023
June 1, 2028
5.25 % 3 months US$ LIBOR + 2.255%
June 15, 2025
June 15, 2030
5.25 % 3 months US$ SOFR + 5.060%
3,938
5,250
9,188
10,654
20,983
31,637
4,743
23,413
28,156
75,000
100,000
175,000
(3,538)
171,462
Earnings per share have been calculated using the weighted average number of common shares outstanding during the year after deduction of the shares held as treasury
stock. The dilutive effect of share-based compensation plans was calculated using the treasury stock method, whereby the proceeds received from the exercise of share-based
awards are assumed to be used to repurchase outstanding shares, using the average market price of the Bank’s shares for the year. Numbers of shares are expressed in
thousands.
During the year ended December 31, 2020, options to purchase an average of 0.1 million (December 31, 2019: 0.2 million, December 31, 2018: 0.3 million) common shares
were outstanding. During the year ended December 31, 2020, the average number of outstanding awards of unvested common shares was 0.9 million (December 31, 2019: 0.9
million, December 31, 2018: 0.9 million). Only awards for which the sum of 1) the expense that will be recognized in the future (i.e., the unrecognized expense) and 2) its
exercise price, if any, was lower than the average market price of the Bank‘s common shares were considered dilutive and, therefore, included in the computation of diluted
earnings per share. An award's unrecognized expense is also considered to be the proceeds the employees would need to pay to purchase accelerated vesting of the awards.
For purposes of calculating dilution, such proceeds are assumed to be used by the Bank to buy back common shares at the average market price. The weighted-average
number of outstanding awards, net of the assumed weighted-average number of common shares bought back, is included in the number of diluted participating shares.
F-43
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Net income
Basic Earnings Per Share
Weighted average number of common shares issued
Weighted average number of common shares held as treasury stock
Weighted average number of common shares (in thousands)
Basic Earnings Per Share
Diluted Earnings Per Share
Weighted average number of common shares
Net dilution impact related to options to purchase common shares
Net dilution impact related to awards of unvested common shares
Weighted average number of diluted common shares (in thousands)
Diluted Earnings Per Share
Note 21: Share-based payments
Year ended
December 31, 2020 December 31, 2019 December 31, 2018
147,217
177,075
195,184
51,128
(619)
50,509
54,338
(1,166)
53,172
2.91
3.33
50,509
55
286
50,850
2.90
53,172
118
369
53,659
3.30
55,159
(213)
54,946
3.55
54,946
223
576
55,745
3.50
The common shares transferred to employees under all share-based payments are either taken from the Bank's common treasury shares or from newly issued shares. All share-
based payments are settled by the ultimate parent company which, pursuant to Bermuda law, is not taxed on income. There are no income tax benefits in relation to the issue of
such shares as a form of compensation.
In conjunction with the 2010 capital raise, the Board of Directors approved the 2010 Omnibus Plan (the "2010 Plan"). Under the 2010 Plan, 5% of the Bank’s fully diluted
common shares, equal to approximately 2.95 million shares, were initially available for grant to certain officers in the form of stock options or unvested shares awards. Both types
of awards are detailed below. In 2012 and 2016, the Board of Directors approved an increase to the equivalent number of shares allowed to be granted under the 2010 Plan to
5.0 million and 7.5 million shares, respectively.
In May 2020, the Board of Directors approved the 2020 Omnibus Plan (the "2020 Plan") which replaces the 2010 Plan. Under the 2020 Plan, 3.0 million shares are initially
available for grant to employees in the form of stock options or unvested shares awards. Both types of awards are detailed below.
Stock Option Awards
1997 Stock Option Plan
Prior to the capital raise on March 2, 2010, the Bank granted stock options to employees and Directors of the Bank that entitle the holder to purchase one common share at a
subscription price equal to the market price on the effective date of the grant. Generally, the options granted vest 25 percent at the end of each year for four years, however,
as a result of the 2010 capital raise, the options granted under the Bank's 1997 Stock Option Plan to employees became fully vested and options awarded to certain executives
were surrendered.
2010 and 2020 Plan
Under the 2010 and 2020 Plans, options are awarded to Bank employees and executive management, based on predetermined vesting conditions that entitle the holder to
purchase one common share at a subscription price usually equal to the price of the most recently traded common share when granted and have a term of 10 years. The
subscription price is reduced for all special dividends declared by the Bank. Stock option awards granted under the 2010 and 2020 Plans vest based on two specific types of
vesting conditions i.e., time and performance conditions, as detailed below:
Time vesting condition
50% of each option award was granted in the form of time vested options and vested 25% on each of the second, third, fourth and fifth anniversaries of the effective grant date.
In addition to the time vesting conditions noted above, the options will generally vest immediately:
• by reason of the employee’s death or disability,
• upon termination, by the Bank, of the holder’s employment, unless if in relation with the holder’s misconduct, or
• in limited circumstances and specifically approved by the Board, as stipulated in the holder’s employment contract.
In the event of the employee’s resignation, any unvested portion of the awards shall generally be forfeited and any vested portion of the options shall generally remain
exercisable during the 90-day period following the termination date or, if earlier, until the expiration date, and any vested portion of the options not exercised as of the expiration
of such period shall be forfeited without any consideration therefore.
Performance vesting condition
50% of each option award was granted in the form of performance options and would vest (partially or fully) on a “valuation event” date (the date that any of the March 2, 2010
new investors transfers at least 5% of the total number of common shares or the date that there is a change in control and any of the new investors realize a predetermined
multiple of invested capital (“MOIC”)). On September 21, 2016, it was determined that a valuation event occurred during which a new investor realized a MOIC of more than
200% of the original invested capital of $12.09 per share and accordingly, all outstanding unvested performance options vested.
F-44
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Changes in Outstanding Stock Option Plans
Number of shares transferable upon
exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
Year ended December 31, 2020
Outstanding at beginning of year
Exercised
Forfeitures and cancellations
Outstanding at end of year
Vested and exercisable at end of year
1997 Stock
Option Plan
2010 Stock
Option Plan
—
—
—
—
—
159
(143)
(16)
—
—
Total
159
(143)
(16)
—
—
1997 Stock
Option Plan
2010 Stock
Option Plan
1997 Stock
Option Plan
2010 Stock
Option Plan
—
—
—
—
—
12.07
12.13
11.50
—
—
0.00
0.00
0.00
0.00
Number of shares transferable upon
exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
Year ended December 31, 2019
Outstanding at beginning of year
Exercised
Expiration at end of plan life
Outstanding at end of year
Vested and exercisable at end of year
1997 Stock
Option Plan
2010 Stock
Option Plan
25
—
(25)
—
—
189
(30)
—
159
159
Total
214
(30)
(25)
159
159
1997 Stock
Option Plan
2010 Stock
Option Plan
1997 Stock
Option Plan
2010 Stock
Option Plan
64.51
—
64.51
—
—
11.98
11.50
—
12.07
12.07
0.00
0.00
0.73
0.73
Number of shares transferable upon
exercise (thousands)
Weighted average
exercise price ($)
Weighted average
remaining life (years)
Year ended December 31, 2018
Outstanding at beginning of year
Exercised
Forfeitures and cancellations
Outstanding at end of year
Vested and exercisable at end of year
1997 Stock
Option Plan
2010 Stock
Option Plan
58
—
(33)
25
25
476
(287)
—
189
189
Total
534
(287)
(33)
214
214
1997 Stock
Option Plan
2010 Stock
Option Plan
1997 Stock
Option Plan
2010 Stock
Option Plan
113.46
—
150.46
64.51
64.51
11.73
11.56
—
11.98
11.98
0.20
0.20
1.67
1.67
Aggregate
intrinsic value
($ thousands)
2,192
—
Aggregate
intrinsic value
($ thousands)
659
3,958
Aggregate
intrinsic value
($ thousands)
10,172
3,665
Share-Based Plans
Recipients of unvested share awards are entitled to the related common shares at no cost, at the time the award vests. Recipients of unvested shares may be entitled to receive
additional unvested shares having a value equal to the cash dividends that would have been paid had the unvested shares been issued and vested. Such additional unvested
shares granted as dividend equivalents are subject to the same vesting schedule and conditions as the underlying unvested shares.
Unvested shares subject only to the time vesting condition generally vest upon retirement, death, disability or upon termination, by the Bank, of the holder’s employment unless if
in connection with the holder’s misconduct. Unvested shares subject to both time vesting and performance vesting conditions remain outstanding and unvested upon retirement
and will vest only if the performance conditions are met. Unvested shares can also vest in limited circumstances and if specifically approved by the Board, as stipulated in the
holder’s employment contract. In all other circumstances, unvested shares are generally forfeited when employment ends.
The grant date weighted average fair value of unvested share awards granted in the years ended December 31, 2020, 2019 and 2018 was $33.35, $35.77 and $39.25,
respectively. The Bank expects to settle these awards by issuing new shares.
Employee Deferred Incentive Plan (“EDIP”)
Under the Bank’s EDIP Plan, shares are awarded to Bank employees and executive management based on the time vesting condition, which states that the shares will vest
equally over a three-year period from the effective grant date.
Executive Long-Term Incentive Share Plan (“ELTIP”) - Years 2013 - 2020
The 2020 ELTIP was approved on February 12, 2020. Under the Bank’s ELTIP plans for the years 2013 through 2020, performance shares as well as time-vested shares were
awarded to executive management. The performance shares will generally vest upon the achievement of certain performance targets in the three-year period from the effective
grant date. The time-vested shares will generally vest over the three-year period from the effective grant date.
F-45
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Changes in Outstanding ELTIP and EDIP awards (in thousands of shares transferable upon vesting)
Outstanding at beginning of year
Granted
Vested (fair value in 2020: $9.6 million, 2019: $18.9 million; 2018: $16.0 million)
Forfeitures (resignations, retirements, redundancies)
Outstanding at end of year
Share-based Compensation Cost Recognized in Net Income
Cost recognized in net income
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
EDIP
251
245
(129)
(3)
364
ELTIP
618
209
(162)
(7)
658
EDIP
234
169
(149)
(3)
251
ELTIP
697
317
(389)
(7)
618
EDIP
244
130
(138)
(2)
234
ELTIP
679
241
(220)
(3)
697
December 31, 2020 December 31, 2019 December 31, 2018
Year ended
EDIP and
ELTIP
14,608
EDIP and
ELTIP
17,459
EDIP and
ELTIP
11,664
Unrecognized Share-based Compensation Cost
December 31, 2020
December 31, 2019
EDIP
ELTIP
Time vesting shares
Performance vesting shares
Total unrecognized expense
Note 22: Share buy-back plans
Weighted average
years over which it
is expected to be
Unrecognized cost
recognized Unrecognized cost
6,588
1.91
4,744
156
8,187
14,931
1.09
1.60
121
9,765
14,630
Weighted average
years over which it
is expected to be
recognized
1.71
0.48
1.80
From time to time, the Bank may seek to repurchase and retire equity securities of the Bank, through cash purchase, privately negotiated transactions, or otherwise. Such
transactions, if any, depend on prevailing market conditions, liquidity and capital requirements, contractual restrictions, and other factors.
Common Share Buy-Back Program
On February 15, 2018, the Board approved, with effect on April 1, 2018, the 2018 common share buy-back program, authorizing the purchase for treasury of up to 1.0 million
common shares.
On December 6, 2018, the Board approved, with effect from December 10, 2018 to February 29, 2020, a common share buy-back program, authorizing the purchase for treasury
of up to 2.5 million common shares.
On December 2, 2019, the Board approved a new $125 million common share repurchase program, authorizing the purchase for treasury of up to 3.5 million common shares
through to February 28, 2021. The new program came into effect on December 20, 2019 following the completion of the previous program.
On February 10, 2021, the Board approved a new common share repurchase program, authorizing the purchase for treasury of up to 2 million common shares through to
February 28, 2022.
In the year ended December 31, 2020, the Bank repurchased and retired 3,452,000 shares.
Common share buy-backs
Acquired number of shares (to the nearest 1)
Average cost per common share
Total cost (in US dollars)
Year ended December 31
2020
2019
2018
Total
3,452,000
2,293,788
1,254,212
7,000,000
25.10
35.55
38.62
30.95
86,639,889
81,534,076
48,442,768
216,616,733
F-46
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 23: Accumulated other comprehensive loss
Year ended December 31, 2020
Balance at beginning of year
Other comprehensive income (loss), net of taxes
Balance at end of year
Year ended December 31, 2019
Balance at beginning of year
Unrealized (losses)
on translation of
net investment in
foreign
operations
Unrealized
gains (losses)
on AFS
investments
HTM
investments
Employee benefit plans
Post-
retirement
healthcare
Subtotal -
employee
benefits plans
Pension
Total AOCL
(20,818)
(247)
(21,065)
(725)
665
(60)
11,808
60,971
72,779
(66,312)
(11,050)
(77,362)
(87,097)
(5,943)
(18,029)
(23,972)
37,417
(72,255)
(29,079)
(101,334)
(49,680)
Unrealized (losses)
on translation of
net investment in
foreign
operations
Unrealized
gains (losses)
on AFS
investments
HTM
investments
Employee benefit plans
Post-
retirement
healthcare
Subtotal -
employee
benefits plans
Pension
Total AOCL
(19,866)
(796)
(43,630)
(64,892)
(19,343)
(84,235)
(148,527)
Other comprehensive income (loss), net of taxes
Balance at end of year
(952)
(20,818)
71
(725)
55,438
11,808
(1,420)
8,293
6,873
61,430
(66,312)
(11,050)
(77,362)
(87,097)
Year ended December 31, 2018
Balance at beginning of year
Other comprehensive income (loss), net of taxes
Balance at end of year
Unrealized (losses)
on translation of
net investment in
foreign
operations
Unrealized
gains (losses)
on AFS
investments
HTM
investments
Employee benefit plans
Post-
retirement
healthcare
Subtotal -
employee
benefits plans
Pension
Total AOCL
(17,549)
(2,317)
(19,866)
(839)
(15,737)
(61,341)
(33,586)
(94,927)
(129,052)
43
(27,893)
(3,551)
14,243
10,692
(19,475)
(796)
(43,630)
(64,892)
(19,343)
(84,235)
(148,527)
F-47
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Net Change of AOCI Components
Year ended
Line item in the consolidated
statements of operations, if any
December 31, 2020 December 31, 2019 December 31, 2018
Net unrealized gains (losses) on translation of net investment
in foreign operations adjustments
Foreign currency translation adjustments
Gains (loss) on net investment hedge
Net change
Held-to-maturity investment adjustments
N/A
N/A
Amortization of net gains (losses) to net income
Interest income on investments
Net change
Available-for-sale investment adjustments
9,991
(10,238)
(247)
16,200
(17,152)
(952)
(13,764)
11,447
(2,317)
665
665
71
71
43
43
Gross unrealized gains (losses)
N/A
62,191
57,062
(26,793)
Net realized gains (losses) on AFS
investments
(1,220)
60,971
(1,624)
55,438
(1,100)
(27,893)
Transfer of realized (gains) losses to net income
Net change
Employee benefit plans adjustments
Defined benefit pension plan
Net actuarial gain (loss)
N/A
(8,363)
(3,472)
Net loss (gain) on settlement reclassified to net income
Net other gains (losses)
Prior service credit (cost) arising during the year
N/A
Amortization of net actuarial (gains) losses
Non-service employee benefits expense
Change in deferred taxes
N/A
Amortization of prior service (credit) cost
Non-service employee benefits expense
Foreign currency translation adjustments of related balances
N/A
Net change
Post-retirement healthcare plan
Net actuarial gain (loss)
Prior service cost
Amortization of net actuarial (gains) losses
Amortization of prior service (credit) cost
Net change
N/A
N/A
Non-service employee benefits expense
Non-service employee benefits expense
—
(47)
2,412
456
20
(421)
(5,943)
(18,553)
—
—
524
(18,029)
—
—
2,407
149
19
(523)
(1,420)
10,014
(2,369)
272
376
8,293
(7,541)
1,554
(212)
2,106
(298)
—
840
(3,551)
11,589
—
2,615
39
14,243
Other comprehensive income (loss), net of taxes
37,417
61,430
(19,475)
Note 24: Capital structure
Authorized Capital
On September 16, 2016, the Bank began trading on the New York Stock Exchange under the ticker symbol "NTB". The offering of 12,234,042 common shares consisted of
5,957,447 newly issued common shares sold by Butterfield and 6,276,595 common shares sold by certain selling shareholders, including 1,595,744 common shares sold by
certain of the selling shareholders pursuant to the underwriters’ option to purchase additional shares, which was exercised in full prior to the closing.
The par value of each issued common share and each authorized but unissued common share was BM$0.01 and the authorized share capital of the Bank comprises
2,000,000,000 common shares of par value BM$0.01 each, 6,000,000,000 non‑voting ordinary shares of par value BM$0.01 each, 110,200,001 preference shares of par value
US$0.01 each and 50,000,000 preference shares of par value £0.01 each.
Dividends Declared
During the year ended December 31, 2020, the Bank declared and paid cash dividends of $1.76 (December 31, 2019: $1.76, December 31, 2018: $1.52) for each common
share as of the related record dates. On February 10, 2021, the Board of Directors declared an interim dividend of $0.44 per common share to be paid on March 10, 2021 to
shareholders of record on February 24, 2021.
The Bank is required to comply with Section 54 of the Companies Act 1981 issued by the Government of Bermuda (the “Companies Act”) each time a dividend is declared or
paid by the Bank and also obtain a letter of no objection from the BMA pursuant to the Banks and Deposit Companies Act 1999 for any dividends declared. The Bank has
complied with Section 54 and has obtained the BMA's letter of no objection for all dividends declared during the periods presented.
F-48
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Regulatory Capital
The Bank’s regulatory capital is determined in accordance with current Basel III guidelines as issued by the BMA. The Bank is fully compliant with all regulatory capital
requirements to which it is subject, and it maintains capital ratios in excess of regulatory minimums as at December 31, 2020 and 2019. The following table sets forth the Bank's
capital adequacy in accordance with the Basel III framework:
December 31, 2020
December 31, 2019
Actual
Regulatory
minimum(1)
Actual
Regulatory
minimum(1)
Capital
CET 1 capital
Tier 1 capital
Tier 2 capital
Total capital
816,009
816,009
187,090
1,003,099
N/A
N/A
N/A
N/A
848,821
848,821
103,243
952,064
Risk Weighted Assets
5,068,590
N/A
4,897,851
Leverage Ratio Exposure Measure
15,349,363
N/A 14,377,474
N/A
N/A
N/A
N/A
N/A
N/A
Capital Ratios (%)
CET 1 capital
Tier 1 capital
Total capital
Leverage ratio
16.1 %
16.1 %
19.8 %
5.3 %
10.0 %
11.5 %
13.5 %
5.0 %
17.3 %
17.3 %
19.4 %
5.9 %
10.0 %
11.5 %
13.5 %
5.0 %
(1)The minimum capital ratio requirements do not reflect additional Pillar II add-on requirements that the BMA may impose upon the Bank as a prudential measure from time to
time.
Note 25: Income taxes
The Bank is incorporated in Bermuda, and pursuant to Bermuda law is not taxed on either income or capital gains. The Bank’s subsidiaries in the Cayman Islands and The
Bahamas are not subject to any taxes in their respective jurisdictions on either income or capital gains under current law applicable in the respective jurisdictions. The Bank’s
subsidiaries in Canada, the United Kingdom, Guernsey, Jersey, Switzerland, Singapore and Mauritius are subject to the tax laws of those jurisdictions.
For the years ended December 31, 2020, 2019, and 2018, the Bank did not record any unrecognized tax benefits or expenses and has no uncertain tax positions as at
December 31, 2020, 2019, and 2018.
The Bank records income taxes based on the enacted tax laws and rates applicable in the relevant jurisdictions for the years ended December 31, 2020, 2019, and 2018. For the
years ended December 31, 2020, 2019, and 2018, the Bank did not incur any interest or pay any penalties.
Year ended
Income taxes in consolidated statements of operations
December 31, 2020 December 31, 2019 December 31, 2018
Current tax expense
Deferred tax (recovery) expense
Total tax (benefit) expense
2,382
(4)
2,378
1,860
(3,231)
(1,371)
721
563
1,284
Reconciliation between the Effective Income Tax Rate and the Statutory Income Tax Rate
December 31, 2020
December 31, 2019
December 31, 2018
Year ended
Income tax expense in international offices taxed at different rates
Expenses not deductible for tax purposes
Prior year tax adjustments
Change in valuation allowance
Other - net
Income tax (benefit) expense at effective tax rate
%
1.8
0.2
—
(0.4)
(0.1)
1.6
$
695
104
160
(2,429)
99
(1,371)
%
0.4
0.1
0.1
(1.4)
0.1
(0.8)
$
876
225
(79)
315
(53)
1,284
%
0.4
0.1
—
0.2
—
0.7
$
2,695
299
41
(582)
(75)
2,378
F-49
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Deferred income taxes
Deferred income tax asset
Tax loss carried forward
Pension liability
Fixed assets
Allowance for compensated absence
Deferred income tax asset before valuation allowance
Less: valuation allowance
Deferred income tax asset after valuation allowance
Deferred income tax liability
Other
Net deferred income tax assets
December 31, 2020 December 31, 2019
8,134
1,448
(905)
44
8,721
(4,257)
4,464
(19)
4,445
8,427
968
(691)
15
8,719
(4,839)
3,880
(14)
3,866
Management assesses the available positive and negative evidence to evaluate if sufficient future taxable income will be generated to use the existing deferred tax assets. On
the basis of this evaluation, as at December 31, 2020, a valuation allowance of $4.3 million (December 31, 2019: $4.8 million) has been recognized to record only the portion of
the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future
taxable income during the carry-forward period change, or if there are changes in the available positive and negative evidence.
The Bank has net taxable loss carry forwards related to the Bank’s international operations of approximately $47.4 million (December 31, 2019: $48.1 million). Of these losses
available to carry forward, $45.2 million (December 31, 2019: $45.6 million) have an indefinite life.
Note 26: Business combinations
Deutsche Bank’s Global Trust Solutions Acquisition
On March 29, 2018, the Bank concluded the acquisition of Deutsche Bank’s Global Trust Solutions (“GTS”) business, excluding its US operations, for net cash payments of
$24.7 million (composed of an initial cash payment of $30.2 million followed by a refund of $5.5 million on May 29, 2018). The refund was received based upon the movement in
the number of clients in the GTS portfolio between the time the acquisition was agreed upon and the conclusion of the acquisition, together with an adjustment based upon the
net asset values of the companies transferred. Butterfield has taken over the ongoing management and administration of the GTS portfolio, comprising approximately 1,000 trust
structures for some 900 private clients. Butterfield has also offered positions to all employees who are fully dedicated to GTS in the Cayman Islands, Guernsey, Switzerland,
Singapore and Mauritius. The acquisition was undertaken to enhance the Bank's market presence in the global trust service market.
The Bank incurred transaction expenses related to this acquisition in the amount of $3.8 million, of which $1.9 million were expensed during the year ended December 31, 2018
(including $1.0 million of legal and professional fees) and $1.9 million were expensed during the year ended December 31, 2017 (including $1.6 million of legal and professional
fees).
For the year ended December 31, 2018, the amount of revenues and net deficit relating to the acquired GTS operations that were not inextricably merged into the Bank’s
operations were $6.5 million and $2.9 million, respectively.
The assets acquired consist mainly of: customer relationships intangible assets, goodwill and accounts receivable. The liabilities assumed consist mainly of deferred revenues
and accounts payable. Goodwill is made up of expected cash flows to be derived from new business and expected synergies resulting from leveraging existing support services
and infrastructure within the Bank. The goodwill arising from the acquisition was allocated to reportable segments as per Note 9: Goodwill and other intangible assets.
Total consideration transferred
Assets acquired
Cash due from banks
Intangible assets (estimated useful life of 15 years)
Other assets
Total assets acquired
Liabilities acquired (included in Other liabilities on the balance sheet)
Excess purchase price (Goodwill)
As at March 29, 2018
24,680
3,958
16,932
4,548
25,438
(4,626)
3,868
Disclosure of the unaudited pro forma financial information to present a summary of the combined results of the Bank and GTS acquisition is impracticable for the year ended
December 31, 2018. The disclosure is impracticable as the Bank does not have access to the complete historical revenue and expense data as it relates to GTS for the period
preceding the acquisition.
Asset Acquisition
On February 15, 2018, the Bank announced that it had entered into an agreement to acquire Deutsche Bank's banking and custody business in the Cayman Islands, Guernsey
and Jersey. During the year ended December 31, 2018, the Bank began to onboard certain customer deposits relating to the acquisition, and this activity was completed in the
first half of 2019.
F-50
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
ABN AMRO (Channel Islands) Limited Acquisition
On April 25, 2019, the Bank announced that it entered into an agreement to acquire all the outstanding shares of ABN AMRO (Channel Islands) Limited (“ABN AMRO Channel
Islands”), the Channel Islands-based banking subsidiary of ABN AMRO Bank N.V. via one of the Bank's subsidiaries, Butterfield Bank (Guernsey) Limited. ABN AMRO Channel
Islands offers banking, investment management and custody products to three distinct client groups, including trusts, private clients, and funds.
This agreement is part of the Bank's strategy to grow through acquisitions in offshore markets where the Bank already has scale and expertise in order to create an organization
with a widened and diversified offering.
On July 15, 2019, the transaction completed as planned and the aggregate purchase price of £160.7 million ($201.1 million) was paid in cash. During 2020, ABN AMRO Channel
Islands' business and employees were integrated with the existing Butterfield Guernsey operations and operate under the Butterfield name. In addition to the figures noted
below, on July 15, 2019, ABN AMRO Channel Islands had estimated clients' assets under management and custody of $4.7 billion.
The fair value of the net assets acquired and allocation of purchase price is summarized as follows:
Total consideration transferred
Assets acquired
Cash due from banks
Loans
Intangible assets - Customer relationships
Other assets
Total assets acquired
Liabilities assumed
Deposits
Other liabilities
Total liabilities assumed
Excess purchase price (Goodwill)
The acquired customer relationships intangible assets have an estimated finite useful life of 15 years.
As at July 15, 2019
201,107
3,016,859
654,503
24,371
31,674
3,727,407
(3,493,239)
(33,061)
(3,526,300)
—
The Bank incurred legal and professional transaction expenses related to this acquisition in the amount of $5.4 million all of which were incurred and expensed during the year
ended December 31, 2019.
For the period beginning on July 15, 2019 (i.e. acquisition date) to December 31, 2019, the amount of revenues and earnings relating to the acquired ABN AMRO Channel
Islands operations that were not inextricably merged into the Bank’s operations were $13.7 million and a net income of $1.5 million, respectively.
The following selected unaudited pro forma financial information has been provided to present a summary of the combined results of the Bank and the acquired ABN AMRO
Channel Islands operations, assuming the transaction had been effected on January 1, 2018. The unaudited pro forma data is for informational purposes only and does not
necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above. The pro forma financial information has been prepared
based on the actual results realized by ABN AMRO Channel Islands from January 1, 2017 to July 15, 2019, and results estimated at the time of acquisition.
Unaudited pro forma financial information
Total net revenue
Total non-interest operating (expense)
Pro forma net income post business combination
Year ended
December 31, 2019
December 31, 2018
555,341
(372,796)
182,545
563,786
(351,320)
212,466
F-51
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements
(In thousands of US dollars, unless otherwise stated)
Note 27: Related party transactions
Financing Transactions
Certain directors and executives of the Bank, companies in which they are principal owners and/or members of the board, and trusts in which they are involved, have loans and
deposits with the Bank. Loans to directors were made in the ordinary course of business at normal credit terms, including interest rate and collateral requirements. Loans to
executives may be eligible for preferential rates. All of these loans were considered performing loans as at December 31, 2020 and December 31, 2019. Loan balances with
directors and executives of the Bank, companies in which they are principal owners and/or members of the board, and trusts in which they are involved were as follows:
Balance at December 31, 2018
Loans issued during the year
Loan repayments and the effect of changes in the composition of related parties
Balance at December 31, 2019
Loans issued during the period
Loan repayments and the effect of changes in the composition of related parties
Balance at December 31, 2020
Consolidated balance sheets
Deposits
Consolidated statement of operations
Interest and fees on loans
97,195
45,602
(104,156)
38,641
37,073
(33,323)
42,391
December 31, 2020
December 31, 2019
19,591
12,838
Year ended December 31
2020
1,444
2019
1,887
2018
4,533
Certain affiliates of the Bank have loans and deposits with the Bank which were made and are maintained in the ordinary course of business on normal commercial terms.
Balances with these parties were as follows:
Consolidated balance sheets
Loans
Deposits
Consolidated statement of operations
Interest and fees on loans
Other gains/losses
Total non-interest expense
December 31, 2020
December 31, 2019
12,939
423
Year ended December 31
2020
654
742
1,431
2019
677
—
1,717
9,888
342
2018
635
—
1,769
Investments
The Bank holds seed investments in several Butterfield mutual funds, which are managed by a wholly-owned subsidiary of the Bank. These investments are included in equity
securities at their fair value and are as follows:
Consolidated balance sheets
Equity securities
Fair value
Unrealized gain
December 31, 2020
December 31, 2019
7,081
2,531
7,142
2,142
As at December 31, 2020, several Butterfield mutual funds which are managed by a wholly owned subsidiary of the Bank, had loan balances and deposit balances held with the
Bank. The Bank also earned asset management revenue and custody and other administration services revenue from funds managed by a wholly-owned subsidiary of the Bank
and from directors and executives, companies in which they are principal owners and/or members of the board and trusts in which they are involved, as well as other income
from other related parties.
Consolidated balance sheets
Loans
Deposits
Consolidated statement of operations
Asset management
Custody and other administration services
Other non-interest income
December 31, 2020
December 31, 2019
2,518
26,541
Year ended December 31
2020
7,131
1,108
729
2019
10,273
1,452
1,458
16
3,492
2018
9,412
1,376
972
F-52
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
Note 28: Condensed financial statements of the parent company only
Condensed financial statements of the Bank of N.T. Butterfield & Son Limited (the ultimate parent company) without consolidation of its subsidiaries were as follows:
The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Balance Sheets
(In thousands of US dollars)
Assets
Cash and demand deposits with banks - Non-interest-bearing
Demand deposits with banks - Interest-bearing
Cash equivalents - Interest-bearing
Cash due from banks
Securities purchased under agreements to resell
Short-term investments
Investment in securities
Equity securities at fair value
Available-for-sale (amortized cost: $1,058,195 (2019: 1,248,726))
Held-to-maturity (fair value: $1,023,424 (2019: $1,030,183))
Total investment in securities
Net assets of subsidiaries - Banks
Net assets of subsidiaries - Non-banks
Loans to third parties, net of allowance for credit losses
Loans to subsidiaries - Banks
Loans to subsidiaries - Non-banks
Other assets, including accrued interest, premises, equipment and computer software, equity method investments,
receivables from subsidiaries and other real estate owned
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Total deposits
Employee benefit plans
Other liabilities, including accrued interest and payables to subsidiaries
Total other liabilities
Long-term debt
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
As at
December 31, 2020
December 31, 2019
44,086
99,035
1,244,878
1,387,999
197,039
16,277
7,316
1,092,325
967,926
2,067,567
618,461
11,971
2,025,358
13,669
58,515
199,273
6,596,129
1,945,042
3,298,165
5,243,207
128,167
71,345
199,512
171,462
38,615
118,583
329,494
486,692
142,283
44,512
7,420
1,252,749
1,003,248
2,263,417
610,217
10,303
2,046,406
13,241
56,951
207,896
5,881,918
1,441,194
3,161,634
4,602,828
110,347
61,500
171,847
143,500
5,614,181
4,918,175
981,948
6,596,129
963,743
5,881,918
F-53
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Operations
(In thousands of US dollars)
December 31, 2020
December 31, 2019
December 31, 2018
Year ended
Non-interest income
Banking
Foreign exchange revenue
Custody and other administration services
Other non-interest income
Dividends from subsidiaries - Banks
Dividends from subsidiaries - Non-banks
Total non-interest income
Interest income
Interest and fees on loans
Investments
Deposits with banks and other
Total interest income
Interest expense
Deposits
Long-term debt
Securities sold under agreement to resell
Total interest expense
Net interest income before provision for credit losses
Provision for credit recoveries (losses)
Net interest income after provision for credit losses
Net gains (losses) on equity securities
Net realized gains (losses) on available-for-sale investments
Net gains (losses) on other real estate owned
Net other gains (losses)
Total other gains (losses)
Total net revenue
Non-interest expense
Salaries and other employee benefits
Technology and communications
Professional and outside services
Property
Indirect taxes
Non-service employee benefits expense
Marketing
Amortization of intangible assets
Other expenses
Total non-interest expense
Net income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income, net of tax
Total comprehensive income
F-54
24,429
9,166
6,927
5,924
121,522
19,864
187,832
123,774
52,135
3,109
179,018
9,386
9,294
—
18,680
160,338
(8,750)
151,588
658
702
(104)
714
1,970
341,390
69,521
35,434
27,791
9,092
15,633
3,462
2,418
169
9,896
173,416
167,974
(20,757)
147,217
37,417
184,634
24,870
10,613
7,625
5,650
122,776
23,371
194,905
132,104
68,721
9,156
209,981
17,410
7,876
13
25,299
184,682
(3,088)
181,594
925
1,053
(5)
2
1,975
378,474
77,923
36,008
27,954
6,927
15,355
5,879
4,372
169
9,260
183,847
194,627
(17,552)
177,075
61,430
238,505
23,506
11,727
—
6,330
60,000
19,095
120,658
133,124
73,698
12,932
219,754
6,709
6,949
33
13,691
206,063
6,823
212,886
(329)
758
(323)
—
106
333,650
75,949
36,466
22,696
6,693
14,669
6,427
3,034
169
4,230
170,333
163,317
31,867
195,184
(19,475)
175,709
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Cash Flows
(In thousands of US dollars)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to operating cash flows
Depreciation and amortization
Provision for credit (recovery) losses
Share-based payments and settlements
Net change in equity securities at fair value
Net realized (gains) losses on available-for-sale investments
Net (gains) losses on other real estate owned
(Increase) decrease in carrying value of equity method investments
Dividends received from equity method investments
Equity in undistributed earnings of subsidiaries
Changes in operating assets and liabilities
(Increase) decrease in accrued interest receivable and other assets
Increase (decrease) in employee benefit plans, accrued interest payable and other liabilities
Cash provided by (used in) operating activities
Cash flows from investing activities
(Increase) decrease in securities purchased under agreements to resell
Short-term investments other than restricted cash: proceeds from maturities and sales
Short-term investments other than restricted cash: purchases
Available-for-sale investments: proceeds from sale
Available-for-sale investments: proceeds from maturities and pay downs
Available-for-sale investments: purchases
Held-to-maturity investments: proceeds from maturities and pay downs
Held-to-maturity investments: purchases
Net (increase) decrease in loans to third parties
Net (increase) decrease in loans to bank subsidiaries
Net (increase) decrease in loans to non-bank subsidiaries
Additions to premises, equipment and computer software
Proceeds from sale of other real estate owned
Injection of capital in subsidiary
Return of capital from a subsidiary
Cash provided by (used in) investing activities
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
147,217
177,075
195,184
26,562
8,750
15,245
102
(702)
104
(1,376)
2,710
20,757
754
9,456
229,579
(54,756)
68,272
(35,319)
205,770
295,547
(317,451)
229,576
(195,898)
8,263
(428)
(1,564)
(11,313)
—
(1,522)
3,314
192,491
21,734
3,088
17,716
(925)
(1,053)
5
(290)
385
17,552
6,808
(3,753)
238,342
(114,942)
—
(32,953)
114,058
204,105
(196,652)
137,622
(53,228)
(99,793)
(487)
(930)
(14,009)
1,102
(175,107)
12,972
(218,242)
21,425
(6,823)
12,582
329
(758)
323
(1,033)
376
(31,867)
(11,915)
(786)
177,037
151,428
106,221
(18,953)
681,656
340,114
(156,271)
82,853
(525,637)
15,184
764
1,812
(9,830)
5,896
(64,029)
8,244
619,452
F-55
The Bank of N.T. Butterfield & Son Limited
Notes to the Consolidated Financial Statements (continued)
(In thousands of US dollars, unless otherwise stated)
The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Cash Flows
(In thousands of US dollars)
Cash flows from financing activities
Net increase (decrease) in demand and term deposit liabilities
Issuance of subordinated capital, net of underwriting fees
Repayment of long-term debt
Common shares repurchased
Proceeds from stock option exercises
Cash dividends paid on common shares
Cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalent and restricted cash
Cash, cash equivalents and restricted cash: beginning of year
Cash, cash equivalents and restricted cash: end of year
Components of cash, cash equivalents and restricted cash at end of year
Cash due from banks
Restricted cash included in short-term investments on the consolidated balance sheets
Total cash, cash equivalents and restricted cash at end of year
Supplemental disclosure of cash flow information
Cash interest paid
Supplemental disclosure of non-cash items
Transfer to (out of) other real estate owned
Initial recognition of right-of-use assets and operating lease liabilities
Reduction in net loans due to initial adoption of a current expected credit loss model
Note 29: Subsequent events
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
630,141
97,647
(70,000)
(86,640)
1,739
(88,932)
483,955
906,025
498,251
1,404,276
1,387,999
16,277
1,404,276
(64,027)
—
—
(81,534)
349
(93,636)
(238,848)
(218,748)
716,999
498,251
486,692
11,559
498,251
(603,925)
73,218
(47,000)
(48,443)
3,318
(83,704)
(706,536)
89,953
627,046
716,999
703,263
13,736
716,999
19,532
24,190
15,428
314
—
3,899
—
133
—
2,041
—
—
On February 10, 2021, the Board of Directors declared an interim dividend of $0.44 per common share to be paid on March 10, 2021 to shareholders of record on February 24,
2021.
On February 10, 2021, the Board of Directors approved a new common share repurchase program, authorizing the purchase for treasury of up to 2 million common shares.
F-56
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
i
The SEC maintains an internet site at https://www.sec.gov that contains reports and other information regarding issuers that file
electronically with the SEC. These SEC filings are also available to the public from commercial document retrieval services.
ITEM 19. EXHIBITS
(a) The following documents are filed as exhibits hereto:
Exhibit No.
Description
1.1 Amended and Restated Bye-laws of The Bank of N.T. Butterfield & Son Limited (incorporated by reference to
Exhibit 1.1 to the registrant's Annual Report on Form 20-F for the year ended December 31, 2018)
1.2 The N.T. Butterfield & Son Bank Act, 1904 (incorporated by reference to Exhibit 3.2 to the registrant’s
registration statement on Form F-1, filed on August 4, 2016)
2.1 Form of Specimen of Common Registered Share Certificate (incorporated by reference to Exhibit 4.1 to the
registrant’s registration statement on Form F-1/A, filed on August 30, 2016)
2.2 Description of Securities
4.1 The Bank of N.T. Butterfield & Son Limited 2010 Omnibus Share Incentive Plan (incorporated by reference to
Exhibit 10.2 to the registrant’s registration statement on Form F-1, filed on August 4, 2016)
4.2 First Amendment to The Bank of N.T. Butterfield & Son Limited 2010 Omnibus Share Incentive Plan
(incorporated by reference to Exhibit 99.1 to the registrant’s registration statement on Form S-8, filed on
October 27, 2016)
4.3 Subordinated Debt Securities Indenture between The Bank of N.T. Butterfield & Son Limited and The Bank of
New York Mellon Trust Company, N.A., as Trustee, dated as at May 24, 2018 (incorporated by reference to
Exhibit 4.1 to the registrant's report on Form 6-K filed on May 24, 2018)
4.4 First Supplemental Indenture, between The Bank of N.T. Butterfield & Son Limited and The Bank of New York
Mellon Trust Company, N.A., as Trustee, dated as at May 24, 2018, to Subordinated Debt Securities
Indenture, dated as at May 24, 2018 (incorporated by reference to Exhibit 4.2 to the registrant's report on
Form 6-K filed on May 24, 2018)
4.5 Purchase Agreement, dated April 24, 2019, by and among Bank of N.T. Butterfield & Son Limited, Butterfield
Bank (Guernsey) Limited and ABN AMRO (Channel Islands) Limited (incorporated by reference to Exhibit 2.1
to the registrant's report on Form 6-K filed on April 25, 2019)
4.6 The Bank of N.T. Butterfield & Son Limited 2020 Omnibus Share Incentive Plan (incorporated by reference to
Exhibit 4.4 to the registrant’s registration statement on Form S-8, filed on May 6, 2020)
4.7 Second Supplemental Indenture, between The Bank of N.T. Butterfield & Son Limited and The Bank of New
York Mellon Trust Company, N.A., as Trustee, dated as at June 11, 2020, to Subordinated Debt Securities
Indenture, dated as at May 24, 2018 (incorporated by reference to Exhibit 4.1 to the registrant's report on
Form 6-K filed on June 11, 2020)
8 List of Subsidiaries
12.1 Certification of the Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under
the Securities Exchange Act of 1934
12.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities
Exchange Act of 1934
13.1 Certification of the Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1 Consent of PricewaterhouseCoopers Ltd.
101 The following materials from our annual report on Form 20-F for the year ended December 31, 2020 formatted
in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Financial Statements and (ii) the
Notes to the Consolidated Financial Statements, tagged as blocks of text and in detail.
ii
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
The Bank of N.T. Butterfield & Son Limited
SIGNATURES
By:
/s/ Michael Collins
Name:
Michael Collins
Title:
Date:
Chairman and Chief Executive
Officer
February 23, 2021
iii
Glossary of abbreviations and defined terms
AFS
AMLA
AOCL
AT1
AUA
AUC
AUM
Basel III
BATCA
BBH
BBL
BCBS
BDCA
BMA
BNYM
Board
BRR
BSL
BSX Act
BSX
CARP
CCR
CD
CEACS
CECL
CEO
CET1
CFO
CIMA
Core ROATA
Core ROATCE
CP
CRM
CSPB
CTA
DIS
DPA
DPAJL
DPJL
DPL 2017
D-SIB
DXC
EAD
ECAIs
ECOFIN
EVE
Exchange Act
FATCA
FATF
FCA
FCRA
FIC
FinIA
FinIO
FINMA
FPI
FSMA
GAAP
GALCO
GCC
GDPR
Available-for-sale
Swiss Federal Act on Combating Money Laundering and
Terrorist Financing of 10 October 1997
Accumulated other comprehensive loss
Additional Tier 1 capital
Assets Under Administration
Assets Under Custody
Assets Under Management
Basell III Accord
Banks and Trust Companies Act (2020 Revision)
Brown Brothers Harriman
Banking Business (Jersey) Law 1991
Basel Committee on Banking Supervision
Banks and Deposit Companies Act 1999
Bermuda Monetary Authority
Bank of New York Mellon
Board of Directors
Borrower Risk Ratings
Banking Supervision (Bailiwick of Guernsey) Law, 1994
Bermuda Stock Exchange Company Act 1992
Bermuda Stock Exchange
Capital Assessment and Risk Profile
Counterparty Credit Risk
Certificates of Deposit
Core net income attributable to common shareholders
Current Expected Credit Loss Model
Chairman and Chief Executive Officer
Common Equity Tier 1 capital
Chief Financial Officer
Cayman Islands Monetary Authority
Core return on average tangible assets
Core return on average tangible common equity
Commercial Paper
Credit Risk Management
Corporate Service Provider Business Act 2012
Cumulative translation adjustment
Deposit Insurance Scheme
Data Protection Act
Data Protection Authority (Jersey) Law 2018
Data Protection (Jersey) Law 2018
Data Protection (Bailiwick of Guernsey) Law, 2017
Domestic Systemically Important Bank
DXC Technologies
Exposure at Default
External Credit Assessment Institutions
EU’s Economic and Financial Affairs Council
Economic Value of Equity
Securities Exchange Act of 1934
Foreign Account Tax Compliance Act
Financial Action Task Force
Financial Conduct Authority
Fair Credit Reporting Act
Financial Institutions Committee
Swiss Federal Financial Institutions Act
Swiss Federal Financial Institutions Act
Swiss Financial Market Supervisory Authority
Foreign Private Issuers
Financial Services and Markets Act 2000
Generally Accepted Accounting Principles in the United
States of America
Group Asset and Liability Committee
Group Credit Committee
EU General Data Protection Regulation (EU) 2016/679
GDP
GFSC
GRC
Guernsey DCS
HTM
IGAs
IRC
IRS
IRRBB
ISDA
Jersey DCS
JFSC
JOIC
KBRA
LCR
LIBOR
LGD
LTV
MAS
MIPRU
Moody's
NACL
NCO
NII
NIM
NPA
NPL
NRSROs
NSFR
NYSE
OCL
OFAC
OREO
OTC
PCD
PCI
PCL
PD
PFIC
PIPA
Regulation FD
ROA
ROE
RPCC
RWA
SA-CCR
SREP
S&P
SEC
SIBA
SWIFT
TCA
TCE/TA
TDR
TE/TA
USAO
Gross Domestic Product
Guernsey Financial Services Commission
Group Risk Committee
Guernsey Deposit Compensation Scheme
Held-to-maturity
Intergovernmental Agreements
Internal Revenue Code of 1986
US Internal Revenue Service
Interest Rate Risk in the Banking Book
International Swaps and Derivatives Association
Jersey Bank Deposit Compensation Scheme
Jersey Financial Services Commission
Jersey Office of the Information Commissioner
Kroll Bond Rating Agency
Liquidity Coverage Ratio
London Interbank Offered Rate
Loss-Given Default
Loan-to-Value
Monetary Authority of Singapore
Mortgage and Home Finance Firms and Insurance
Intermediaries
Moody's Investor Service
Non-Accrual Loan
Net Charge-Off
Net Interest Income
Net interest margin
Non-Performing Assets
Non-Performing Loan
Nationally recognized statistical rating organizations
Net Stable Funding Ratio
New York Stock Exchange
Other comprehensive loss
US Treasury Department's Office of Foreign Assets
Control
Other Real Estate Owned
Over-the-counter
Purchased Credit-Deteriorated
Purchased Credit-Impaired
Proceeds of Crime Act (2020 Revision)
Probability of Default
Passive Foreign Investment company
Personal Information Protection Act 2016
Regulation Fair Disclosure
Return on average assets
Return on average common shareholders' equity
Risk Policy and Compliance Committee
Risk-weighted Assets
Standardised Approach for measuring Counterparty
Credit Risk exposures
Supervisory Review and Evaluation Process
Standard & Poor's
Securities and Exchange Commission
Securities Investment Business Act (2020 Revision)
Society for Worldwide Interbank Financial
Telecommunication
Trust Companies Act
Tangible Common Equity/Tangible Assets
Troubled debt restructuring
Tangible total Equity/Tangible Assets
U.S Attorney's Office for the Southern District of New
York
iv
1.585 in
1.585 in
Shareholder
Information
& Directory
Shareholder
Information
DIRECTORS’ AND EXECUTIVE OFFICERS’ SHARE
INTERESTS AND DIRECTORS’ SERVICE CONTRACTS
In accordance with Regulation 6.8(3) of Section IIA of
the Bermuda Stock Exchange Listing Regulations, the
total interests in common shares of the Bank held by
all Directors and Executive Officers* are noted on page
101 of the Annual Report on Form 20-F within this
publication. For information on equity compensation
for Directors and Executive Officers, please see
page 97 of the Annual Report on Form 20-F within
this publication.
Save for those arrangements described in Note 27 to
the Bank’s December 31, 2020 consolidated financial
statements, there are no contracts of significance
subsisting during or at the end of the financial year
ended December 31, 2020 in which a Director of the
Bank is or was materially interested, either directly
or indirectly.
*As listed on pages 94 and 96 of the Annual
Report on Form 20-F within this publication.
WRITTEN NOTICE OF SHARE REPURCHASE
PROGRAM — BSX REGULATION 6.38
On February 10, 2021, the Board approved, with effect
from February 12, 2021 through to February 28, 2022,
a common share buy-back program, authorizing the
purchase for treasury of up to 2.0 million common
shares or $50 million.
The repurchase of shares pursuant to the buy–back
program was confirmed by way of non-objection from
the Bermuda Monetary Authority. The timing and
amount of repurchase transactions will be based on
market conditions, share price, legal requirements and
other factors. No assurances can be given as to the
amount of common shares that may actually
be repurchased.
Under the Bank’s share buy-back programs, the total
shares acquired or purchased for cancellation during
the year ended December 31, 2020 amounted to
3,452,000 common shares to be held as treasury shares
or cancelled.
From time to time, the Bank’s associates, insiders and
insiders’ associates as defined by the BSX regulations
may sell shares, which may result in such shares being
repurchased pursuant to the program, but under BSX
regulations, such trades must not be pre-arranged
and all repurchases must be made in the open market.
Prices paid by the Bank must not, according to BSX
regulations, be higher than the last independent trade
for a “round lot” defined as 100 shares or more.
The Bank will advise the BSX monthly of the number
of shares repurchased by the Bank.
LARGE SHAREHOLDERS
See page 101 of the Annual Report on Form 20-F
within this publication for a listing of registered
holders of 5% or more of the issued share capital
as at February 15,2021.
MEDIA RELATIONS / PUBLICATION REQUESTS
Kevin Dallas
Group Head of Marketing & Communications
Tel: (441) 299 5904
E-mail: kevin.dallas@butterfieldgroup.com
INVESTOR RELATIONS
Noah Fields
Head of Investor Relations
Tel: (441) 299 3816
E-mail: noah.fields@butterfieldgroup.com
FOR ADDITIONAL SHAREHOLDER INFORMATION
Please visit www.butterfieldgroup.com
EXCHANGE LISTING
The Bank’s shares are listed on the following
stock exchanges:
BERMUDA STOCK EXCHANGE
30 Victoria Street
3rd Floor
Hamilton, HM 12
P.O. Box HM 1369
Hamilton HM FX
Bermuda
Tel: (441) 292 7212
Fax: (441) 292 7619
www.bsx.com
NEW YORK STOCK EXCHANGE
11 Wall Street
New York, NY 10005
United States of America
Tel: (212) 656 3000
www.nyse.com
SHARE DEALING SERVICE
Butterfield Securities (Bermuda) Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
REGISTRAR AND TRANSFER AGENT
For Bermuda-registered securities:
MUFG Fund Services (Bermuda) Limited
4th Floor North, Cedar House
41 Cedar Avenue
Hamilton, HM 12
Bermuda
Tel: (441) 295 1355
Fax: (441) 295 6759
E-mail: bntbshareholders2@mfsadmin.com
For US-registered securities:
Computershare
462 South 4th Street
Suite 1600
Louisville, KY 40202
United States of America
Tel: (800) 736 3001
(781) 575 3100
JERSEY
Butterfield Bank (Jersey) Limited
Corporate and Intermediary Banking, Custody
Managing Director: Noel McLaughlin
P.O. Box 250
St. Paul’s Gate
New Street
St. Helier
Jersey JE4 5PU
Channel Islands
Tel: (44) 1534 843 333
Fax: (44) 1534 843 334
E-mail: jersey@butterfieldgroup.com
SINGAPORE
Butterfield Trust (Asia) Limited
Trust and Fiduciary Services
Managing Director: Mark Florance
#14 02-04
6 Battery Road
Singapore 049909
Tel: (65) 6916 3636
E-mail: singapore@butterfieldgroup.com
SWITZERLAND
Butterfield Trust (Switzerland) Limited
Trust and Fiduciary Services
Managing Director: Jim Parker
Boulevard des Tranchées 16
1206 Geneva
Switzerland
Tel: (41) 22 839 0000
Fax: (41) 22 839 0099
E-mail: switzerland@butterfieldgroup.com
UNITED KINGDOM
Butterfield Mortgages Limited
UK Residential Property Lending
Chief Executive Officer: Alpa Bhakta
Sun Court
66-67 Cornhill
London EC3V 3NB
United Kingdom
Tel: (44) 020 3871 6900
Fax: (44) 020 3871 6901
E-mail: ukmortgages@butterfieldgroup.com
Directory
PRINCIPAL OFFICES & SUBSIDIARIES
This list does not include all companies in
the Group.
The Bank of N.T. Butterfield & Son Limited
Group Parent Company, Community Banking,
Corporate Banking, Private Banking,
Credit and Treasury Services, Custody
Head Office
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 295 1111
Fax: (441) 292 4365
E-mail: info@butterfieldgroup.com
Mailing Address:
P.O. Box HM 195
Hamilton, HM AX
Bermuda
BERMUDA
Managing Director: Michael Neff
Butterfield Asset Management Limited
Asset Management
Head of Global Asset Management:
Dwayne Outerbridge
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3817
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
Butterfield Securities (Bermuda) Limited
Brokerage Services
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: info@butterfieldgroup.com
Bermuda Trust Company Limited
Butterfield Trust (Bermuda) Limited
Grosvenor Trust Company Limited
Trust and Fiduciary Services
Managing Director: John Richmond
Rosebank Centre
11 Bermudiana Road
Hamilton, HM 08
Bermuda
Tel: (441) 299 3980
Fax: (441) 292 1258
E-mail: info@butterfieldgroup.com
THE BAHAMAS
Butterfield Trust (Bahamas) Limited
Trust and Fiduciary Services
Managing Director: Craig Barley
3rd Floor, Montague Sterling Centre
East Bay Street
P.O. Box N-3242
Nassau, N.P.
The Bahamas
Tel: (242) 393 8622
Fax: (242) 393 3772
E-mail: bahamas@butterfieldgroup.com
CAYMAN ISLANDS
Butterfield Bank (Cayman) Limited
Community Banking, Corporate Banking,
Private Banking, Asset Management,
Credit and Treasury Services, Custody
Managing Director: Michael McWatt
Butterfield Place
12 Albert Panton Street
P.O. Box 705
Grand Cayman KY1-1107
Cayman Islands
Tel: (345) 949 7055
Fax: (345) 949 7004
E-mail: info.cayman@butterfieldgroup.com
Butterfield Trust (Cayman) Limited
Trust and Fiduciary Services
Managing Director: Andrew Leggatt
68 Fort Street
P.O. Box 705
Grand Cayman KY1-1107
Cayman Islands
Tel: (345) 949 7055
Fax: (345) 949 7004
E-mail: trust.cayman@butterfieldgroup.com
GUERNSEY
Butterfield Bank (Guernsey) Limited
Private Client, Intermediary and Institutional
Banking, Credit and Treasury Services,
Asset Management, Custody
Managing Director: Richard Saunders
P.O. Box 25
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 711 521
Fax: (44) 1481 714 533
E-mail: guernsey@butterfieldgroup.com
Butterfield Trust (Guernsey) Limited
Trust and Fiduciary Services
Managing Director: Lindsay Ozanne
P.O. Box 25
Regency Court
Glategny Esplanade
St Peter Port
Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 711 521
Fax: (44) 1481 728 665
E-mail: guernsey@butterfieldgroup.com
The Bank of N.T. Butterfield & Son Limited
65 Front Street
Hamilton, Bermuda
butterfieldgroup.com