The Bank of N.T. Butterfield & Son (NTB) - 2020 Q4 - Annual Report

Part I Key Information This section presents key financial data, non-GAAP reconciliations, and significant risk factors for fiscal years 2018-2020 Selected Financial Data Provides selected financial data and key ratios for 2018-2020, highlighting trends in income, assets, and non-GAAP core metrics Consolidated Financial Highlights | Indicator | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Income (in millions) | $147.2 | $177.1 | $195.2 | | Diluted EPS (in US$) | $2.90 | $3.30 | $3.50 | | Total Assets (in millions) | $14,738.6 | $13,921.6 | $10,773.2 | | Total Deposits (in millions) | $13,250.1 | $12,441.6 | $10,315.8 | | Total Shareholders' Equity (in millions) | $981.9 | $963.7 | $882.3 | Key Financial Ratios | Ratio | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Return on average common shareholders' equity (%) | 15.0 | 19.1 | 23.1 | | Core return on average tangible common equity (%) | 17.3 | 23.4 | 25.6 | | Net interest margin (%) | 2.42 | 2.86 | 3.25 | | Core efficiency ratio (%) | 66.0 | 62.2 | 61.5 | | Total capital ratio (%) | 19.8 | 19.4 | 22.4 | - Net interest income decreased to $317.6 million in 2020 from $345.7 million in 2019, driven by a lower average rate on interest-earning assets (2.68% in 2020 vs 3.35% in 2019), despite an increase in average interest-earning assets[59] - The company adjusts GAAP net income for non-core items to calculate 'core net income', including $8.0 million in 2020 for an early retirement program and $21.8 million in 2019 for executive departure and acquisition costs[67][70] Risk Factors Details material risks including the COVID-19 pandemic's impact, geopolitical events, cybersecurity threats, and a complex regulatory environment - The COVID-19 pandemic has adversely affected the business through significant reductions in interest rates, increased credit risk, decreased tourism in key markets, and heightened operational risks[73][74][75] - The Bank's operations are concentrated in Bermuda, the Cayman Islands, and the Channel Islands/UK, making it susceptible to economic downturns in these markets, which generated 48%, 29%, and 20% of total net revenue, respectively, in 2020[84] - Unlike in many other jurisdictions, banks in Bermuda, the Cayman Islands, and the Channel Islands are not supported by a central bank as a lender of last resort, posing a potential challenge in a severe liquidity shortage[89] - The company's growth strategy includes acquisitions, but it faces risks in obtaining regulatory approval and achieving anticipated synergies, such as with the ABN AMRO (Channel Islands) integration[106][107][111] - The company is subject to an ongoing investigation by the US Attorney's Office related to potential tax evasion by US persons, with a provision of $5.5 million recorded as of December 31, 2020[150] - The company faces risks from new economic substance legislation in jurisdictions like Bermuda and the Cayman Islands, where non-compliance could lead to penalties and negatively impact the Bank's client base[176][178] Information on the Company Outlines the company's history, corporate structure, business operations, regulatory frameworks, and provides selected statistical data History and Development of the Company Traces the company's history, post-crisis restructuring, and recent strategic acquisitions to expand its core offshore businesses - Following the 2008-2009 financial crisis, the Bank implemented a comprehensive restructuring plan, which included hiring a new management team, de-risking the balance sheet, and raising $550 million of common equity[215] - Recent strategic acquisitions to expand its core business include Deutsche Bank's Global Trust Solutions (GTS) business in 2018 and ABN AMRO (Channel Islands) Limited in July 2019 for £160.7 million ($201.1 million)[216] Business Overview Describes the company's banking and wealth management services, key markets, competitive landscape, and regulatory supervision Key Metrics (as of Dec 31, 2020) | Metric (as of Dec 31, 2020) | Value (USD) | | :--- | :--- | | Total Assets | $14.7 billion | | Net Loans | $5.2 billion | | Total Deposits | $13.3 billion | | Trust Assets Under Administration | $104.1 billion | | Custody Assets Under Administration | $32.4 billion | | Assets Under Management | $5.6 billion | - The company's net revenue is geographically diversified across its main segments, with Bermuda contributing $238.0 million, Cayman Islands $145.6 million, and the Channel Islands & UK $101.9 million for the year ended December 31, 2020[219] - Total deposits increased by 6.5% to $13.3 billion as of December 31, 2020, from the previous year, with demand deposits constituting 79.9% of total deposits[250] - The loan portfolio stood at $5.2 billion as of December 31, 2020, with residential mortgages comprising the largest portion at $3.4 billion, or 65.5% of the total gross loan portfolio[251][253] - The Bank is subject to extensive regulation by the Bermuda Monetary Authority (BMA), which has adopted Basel III requirements, and is designated as a Domestic Systemically Important Bank (D-SIB) in Bermuda[272][287] Selected Statistical Data Presents detailed statistical tables on the Bank's average balance sheet, loan portfolio composition, and credit quality metrics Average Balance Sheet and Net Interest Margin | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Average Yield on Interest-Earning Assets | 2.68% | 3.35% | 3.48% | | Average Rate on Interest-Bearing Liabilities | 0.35% | 0.66% | 0.33% | | Net Interest Spread | 2.33% | 2.73% | 3.12% | | Net Interest Margin | 2.42% | 2.86% | 3.25% | - The decrease in net interest income in 2020 was primarily driven by a decline in interest rates, which contributed to an $88.4 million negative impact, partially offset by a $35.3 million positive impact from increased asset volume[443] Loan Portfolio Composition | Loan Portfolio Composition (Gross, as of Dec 31, 2020) | Amount (in millions) | % of Total | | :--- | :--- | :--- | | Residential Mortgages | $3,406.4 | 65.5% | | Commercial Loans | $811.5 | 15.6% | | Commercial Real Estate Loans | $760.3 | 14.6% | | Consumer Loans | $232.0 | 4.5% | | Total | $5,210.2 | 100.0% | - Credit quality indicators showed some deterioration in 2020, with the ratio of non-accrual loans to total loans increasing to 1.4% from 1.0% in 2019, and the net charge-off ratio rising to 0.12% from 0.03%[446][447] Operating and Financial Review and Prospects Provides management's analysis of financial results, highlighting pandemic impacts, segment performance, and risk management Operating Results Details the decline in 2020 net income due to interest rate pressure, offset by cost controls and segment performance - Net income for 2020 decreased by $29.9 million to $147.2 million, largely due to the low interest rate environment related to the COVID-19 pandemic[474] - Net interest margin (NIM) fell by 44 basis points to 2.42% in 2020, driven by lower yields on loans and investments, while the cost of funding decreased by 26 basis points to 0.21%[476] - Total non-interest expenses decreased by $12.3 million to $344.6 million in 2020, aided by lower staff-related costs and professional services fees[476] - The Bank's asset quality remained strong, with non-accrual loans representing 1.4% of total gross loans as of December 31, 2020, an increase from 1.0% at year-end 2019[476] - The Bank adopted the Current Expected Credit Loss (CECL) model on January 1, 2020, resulting in a $7.8 million negative adjustment to retained earnings and a provision for credit losses of $8.5 million for 2020[521][665][667] Liquidity and Capital Resources Outlines the Bank's strong liquidity and capital positions, capital management activities, and regulatory capital ratios Capital Ratios | Capital Ratio (%) | Dec 31, 2020 | Dec 31, 2019 | Regulatory Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 16.1 | 17.3 | 10.0 | | Tier 1 Capital | 16.1 | 17.3 | 11.5 | | Total Capital | 19.8 | 19.4 | 13.5 | | Leverage Ratio | 5.3 | 5.9 | 5.0 | - The Bank repurchased 3,452,000 common shares in 2020 for a total cost of $86.6 million, at an average price of $25.10 per share[812] - The Bank declared and paid dividends totaling $1.76 per common share in 2020, consistent with 2019, representing a payout ratio of 60.5%[813][928] - In June 2020, the Bank issued $100 million of 5.25% 10-year subordinated notes to replace existing debt and increase its Tier 2 capital[610][1353] Off Balance Sheet Arrangements Describes off-balance sheet activities including fiduciary assets and credit-related arrangements for clients - The Bank holds significant assets under administration and management for clients in a fiduciary capacity, which are not included on its balance sheet[825] - The Bank enters into credit-related arrangements such as standby letters of credit and letters of guarantee, which are subject to the same credit controls as loans[826][827] Tabular Disclosure of Contractual Obligations Presents a breakdown of contractual obligations and credit-related commitments as of year-end 2020 Contractual Obligations | Contractual Obligations (as of Dec 31, 2020) | Total (in millions) | Less than 1 year | 1 to 3 years | 3 to 5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long term debt | $175.0 | — | — | $175.0 | — | | Sourcing arrangements | $13.0 | $13.0 | — | — | — | | Term deposits | $2,660.1 | $2,561.6 | $98.5 | — | — | | Other obligations | $40.1 | $18.6 | $17.2 | $4.3 | — | | Total | $2,888.3 | $2,593.2 | $115.7 | $179.3 | — | Credit-Related Arrangements | Credit-Related Arrangements (as of Dec 31, 2020) | Gross (in millions) | Collateral (in millions) | Net (in millions) | | :--- | :--- | :--- | :--- | | Standby letters of credit | $266.0 | $258.7 | $7.3 | | Letters of guarantee | $5.4 | $5.4 | — | | Total | $271.4 | $264.1 | $7.3 | - Unfunded commitments to extend credit increased significantly to $837.7 million as of December 31, 2020, from $549.4 million in the prior year[831] Directors, Senior Management and Employees Details the Board and executive team, compensation structure, committee responsibilities, and employee headcount changes - The Board is composed of eleven members, with the majority being independent under NYSE listing standards[840][842] - The aggregate compensation paid to directors and senior management in 2020 was $19.8 million, with executives subject to share ownership requirements[868][869][870] - The Bank's governance structure includes five key Board committees: Audit, Risk Policy & Compliance, Corporate Governance, Compensation & Human Resources, and Executive[875] - Total full-time equivalent employee headcount decreased from 1,512 in 2019 to 1,314 in 2020 as a result of a cost restructuring program[899] Major Shareholders and Related Party Transactions Discloses the Bank's principal shareholders, executive ownership, and policies for related-party transactions Major Shareholders | Major Shareholder | Beneficial Ownership % (as of Feb 15, 2021) | | :--- | :--- | | Davis Selected Advisers, L.P. | 8.0% | | Blackrock, Inc. | 5.1% | - As of February 15, 2021, all directors and executive officers as a group beneficially owned less than 1% of the total outstanding common shares[907] - The Board has a written policy for reviewing and approving related-party transactions, managed by the Corporate Governance Committee[916] Financial Information Covers ongoing legal proceedings with the US Attorney's Office and outlines the company's dividend policy and history - The Bank is involved in an ongoing investigation by the US Attorney's Office regarding potential tax evasion by US persons, with a provision of $5.5 million recorded as of December 31, 2020[922][923] Dividend History | Dividend per Common Share | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Annual Dividend ($) | $1.76 | $1.76 | $1.52 | Additional Information Discusses the Bermuda tax environment and material US federal income tax considerations for shareholders, including PFIC status - Under current Bermuda law, the Bank is not subject to income or capital gains taxes, and there are no withholding taxes on dividends[943][944] - The Bank believes it was not a Passive Foreign Investment Company (PFIC) for the 2020 taxable year, but cannot provide assurance for future years, which could result in adverse US tax consequences for US shareholders[185][952] - The Bank will not provide US shareholders with the information necessary to make a Qualified Electing Fund (QEF) election under the PFIC rules[960] Part II Controls and Procedures Confirms the effectiveness of the Bank's disclosure controls and procedures as evaluated by management - The Chairman and Chief Executive Officer and Group Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[990] - Management's annual report on internal control over financial reporting and the auditor's report are included in the financial statements section of the report[991] Other Information Covers governance topics, accountant fees, share repurchase details, and differences from NYSE listing standards Principal Accountant Fees | Service Type | FY 2020 Fees (in millions) | FY 2019 Fees (in millions) | | :--- | :--- | :--- | | Audit services | $6.3 | $6.5 | | Audit-related services | $0.1 | $0.1 | | Other services | $0.2 | $0.2 | | Total | $6.6 | $6.8 | - The Bank repurchased a total of 3,452,000 common shares during the year ended December 31, 2020, completing its previously announced 3.5 million share repurchase program[1006][1008] - As a foreign private issuer, the Bank's corporate governance practices largely comply with NYSE requirements, with the exception that it does not submit equity compensation plans to shareholders for approval[1012][1017] Part III Financial Statements Presents the complete audited consolidated financial statements, management's report on internal controls, and the auditor's report - Management concluded that as of December 31, 2020, the Bank's internal control over financial reporting was effective, based on the COSO framework (2013)[1023] - The independent auditor, PricewaterhouseCoopers Ltd, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[1027] - A critical audit matter identified by the auditor was the qualitative assessment of the allowance for credit losses, due to significant management judgment involved[1036][1037] - The Bank adopted the new CECL model for credit losses on January 1, 2020, which resulted in a negative adjustment of $7.8 million to the opening balance of accumulated deficit[1116]