NTB 20-F Report ended Dec. 31, 2019

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•	" Bank " or " Butterfield " refers to:

•	The Bank of N.T. Butterfield & Son Limited;

•	" BMA " refers to:

•	The Bermuda Monetary Authority;

•	" Board " refers to:

•	The Board of Directors of the Bank;

•	" IPO " refers to:

•	our initial public offering on the New York Stock Exchange of 12,234,042 common shares completed on September 21, 2016;

•	" common shares " refers to:

•	the voting ordinary shares of par value BM$ 0.01 each in the Bank; and

•	" we ", " our ", " us ", " the Company " and " the Group " refer to:

•	the Bank and its consolidated subsidiaries.

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•	the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

•	the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

•	the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission (the "SEC") of quarterly reports on Form 10‑Q containing unaudited financial and other specified information, or current reports on Form 8‑K, upon the occurrence of specified significant events; and

•	Regulation Fair Disclosure ("Regulation FD"), which regulates selective disclosures of material information by issuers.

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•	changes in economic and market conditions, particularly in our primary markets;

•	the impact of geopolitical events;

•	changes in market interest rates;

•	the lack of a central bank or lender of last resort in Bermuda and certain other jurisdictions in our primary markets;

•	a decline in tourism in Bermuda or certain other jurisdictions in our primary markets;

•	severe weather and natural disasters disrupting our business;

•	competition in the markets in which we operate;

•	our ability to successfully execute our business plan and implement our growth strategy;

•	our ability to successfully expand our business through acquisitions or investments;

•	our ability to successfully develop and commercialize new or enhanced products and services;

•	damage to our reputation from any of the factors described in this section, in "Risk Factors" and in "Management's Discussion and Analysis of Financial Condition and Results of Operations";

•	a decline in the residential real estate markets in Bermuda, the Cayman Islands or the Channel Islands and the United Kingdom ("UK");

•	our reliance on appraisals and valuation techniques;

•	changes in the value of our investment portfolio;

•	fluctuations in foreign currency exchange rates;

•	fluctuations in interest rates and inflation;

•	prepayments of our loan and investment portfolios;

•	our access to sources of liquidity and capital to address our liquidity needs;

•	our reliance on other financial institutions and counterparties, such as clearing houses;

•	changes in banks' inter-bank lending rate reporting practices;

•	our ability to attract and retain wealth management, trust and banking clients;

•	a decline in our credit ratings;

•	our ability to attract and maintain highly skilled and qualified employees, including our senior management, other key employees and members of the Board;

•	our reliance on third-party vendors;

•	our reliance on representations provided to us about clients and counterparties;

•	our exposure to litigation and regulatory actions;

•	our ability to protect our intellectual property;

•	the effectiveness of our insurance coverage;

•	our reliance on the effective implementation, use and protection of technology systems used by us and by our vendors;

•	our ability to identify and address cyber-security risks;

•	the effectiveness of our internal disclosure controls and procedures;

•	the adequacy of our risk management framework, systems and processes;

•	the complex and changing regulatory environment in which we operate, including any changing regulatory requirements and restrictions placed on us by our principal regulator, the BMA, and other regulators, as well as our ability to comply with regulatory schemes in multiple jurisdictions;

•	our effectiveness in complying with applicable privacy, data security and data protection laws;

•	changes in accounting policies;

•	our effectiveness in complying with applicable anti-corruption legislations;

•	the impact of decisions made by the Financial Action Task Force ("FATF") relating to our operating jurisdictions;

•	the impact of economic substance legislation and regulations in our operating jurisdictions;

•	the impact of proposed tax reform in Bermuda; and

•	the impact of US Federal income tax and tax information reporting requirements.

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(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 "Selected Consolidated Financial and Other Data - Reconciliation of Non-GAAP Financial Measures".

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•	In 2010, we sold our operations in Hong Kong and Malta, and in 2012, we sold our operations in Barbados as they were no longer consistent with our strategy.

•	In 2010, we sold $820 million of asset-backed securities to cleanse our investment portfolio.

•	In 2013, we implemented an annual cash dividend of $0.40 per year plus a $0.10 per year special dividend.

•	In 2014, we completed two acquisitions, which allowed us to both expand and complement our existing business lines: Legis Group Holdings' Guernsey-based trust and corporate services business, as well as a significant portion of HSBC's corporate and retail banking business in the Cayman Islands.

•	In April 2015, CIBC sold its 19% ownership stake. We repurchased and retired 8 million shares for a total of $120 million, and The Carlyle Group purchased CIBC's remaining 2.3 million shares and subsequently sold them to other existing investors.

•	In December 2015, we repositioned our balance sheet to better match the duration of our assets and liabilities and to reclassify a portion of our Available-for-sale ("AFS") portfolio as Held-to-maturity ("HTM").

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In February 2016, we commenced an orderly wind-down ("OWD") of our UK operations. We exited our private banking and asset management operations in our UK segment, but retained our UK high net worth and ultra-high net worth mortgage lending business. The OWD was completed by early 2017 with the change in the business operations to mortgage lending services and the change of name of our UK operations to Butterfield Mortgages Limited. The excess capital in the UK was released early in 2017, which we invested in other areas of our business.

•	In April 2016, we completed an acquisition of HSBC's Bermuda trust business and private banking investment management operations that added $1.6 billion of deposits to our balance sheet. As part of the transaction, HSBC also entered into an agreement to refer its existing private banking clients to Butterfield.

•	In September 2016, we successfully completed a $288 million initial public offering and listing on the NYSE, through which we raised approximately $126 million in net primary proceeds.

•	In December 2016, we redeemed and canceled all of our issued and outstanding preference shares, which had a book value of $183 million, removing approximately $16 million of annual preference dividend and guarantee fees. We also repurchased for cancellation the outstanding warrant from the Government of Bermuda, removing a potentially dilutive instrument.

•	In February 2017, we successfully completed a first follow-on offering of 10,989,163 Common Shares. Following the closing of the offering, The Carlyle Group no longer held any Common Shares and the Investment Agreement between Butterfield and Carlyle was terminated.

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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. 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 deal, we also purchased a service company in Mauritius to provide operations and support services to the Cayman Islands and the 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 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 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.

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

(2)

Reflects only "in the money" options and warrants to purchase the common shares as well as certain unvested share awards, which have a dilutive effect. Warrants issued to the Government of Bermuda in exchange for the Government's guarantee of the preference shares are not included in the computation of earnings per share because the exercise price was greater than the average market price of the common shares for the relevant periods. In December 2016, in connection with the preference share redemption, the warrant issued to the Government of Bermuda was repurchased for cancellation by the Bank. Only share awards and options for which the sum of (1) the expense that will be recognized in the future (i.e., the unrecognized expense) and (2) its exercise price, if any, was lower than the average market price of the common shares were considered dilutive, and therefore, included in the computation of diluted earnings per share.

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(1)	For the years ended December 31, 2018, 2017, 2016 and 2015, the classification of certain interest bearing and non-interest bearing cash items was amended.

(2)	For the year ended December 31, 2015, investments in trading securities has been split into equity securities at fair value and trading debt securities to align with current GAAP guidance.

(3)	Fair value of HTM debt securities was $2,256.0 million as at December 31, 2019 , $2,036.2 million as at December 31, 2018 , $1,377.4 million as at December 31, 2017 , $1,046.8 million as at December 31, 2016 and $701.5 million as at December 31, 2015 .

(4)

As at December 31, 2019 the number of outstanding awards of unvested common shares was 0.9 million ( December 31, 2018 : 0.9 million , December 31, 2017 : 0.9 million , December 31, 2016 : 0.8 million and December 31, 2015 : 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. A warrant, outstanding until the Bank repurchased it in December 2016, to purchase 0.43 million shares (December 31, 2015: 0.43 million) was excluded from the computation of earnings per share because the exercise price was greater than the average market price of the common shares. Figures reflect the reverse share split that the Bank effected on September 6, 2016.

(5)	Figures reflect the reverse share split that the Bank effected on September 6, 2016 and the retirement of 2,928,788 shares during the year ended December 31, 2019 (December 31, 2018, 2017, 2016 and 2015: nil).

(6)	Reflects the repurchase for cancellation of 8,000,000 common shares previously held by CIBC effected on April 30, 2015. Figures reflect the reverse share split that the Bank effected on September 6, 2016.

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(1)

Return on average common shareholders' equity ("ROE") measures profitability revealing how much profit is generated with the money invested by common shareholders. ROE represents the amount of net income to common shareholders as a percentage of average common equity and calculated as net income to common shareholders / average common equity. Net income to common shareholders is net income for the full fiscal year, before dividends paid to common shareholders but after dividends to preference shareholders. Average common equity does not include the preference shareholders' equity.

(2)

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

(3)	Return on average assets ("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.

(4)

Core return on average tangible assets ("Core ROATA") is a non-GAAP financial measure. Core ROATA is an indicator used to assess the core profitability of average tangible assets and is intended to demonstrate how efficiently management is utilizing its tangible assets to generate core net income. Core ROATA is calculated by taking the core income as a percentage of average tangible assets and is calculated as core net income / average tangible assets. Core net income is the net income adjusted to exclude certain items that are included in the financial results presented in accordance with GAAP. Core ROATA is a non-GAAP financial measure. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".

(5)

Net interest margin ("NIM") is a performance metric that examines how successful the Bank's investment decisions are compared to its cost of funding assets and is expressed as net interest income as a percentage of average interest-earning assets. NIM is calculated as net interest income before provision for credit losses / average interest-earning assets. Net interest income is the interest earned on cash due from banks, investments, loans and other interest earning assets minus the interest paid for deposits, short-term borrowings and long-term debt. The average interest-earning assets is calculated using daily average balances of interest-earning assets.

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(6)

Efficiency margin is a non-GAAP financial measure. Efficiency margin is an indicator used to assess operating efficiencies and is intended to demonstrate how efficiently management is controlling expenses relative to generating revenues. The efficiency margin is calculated by taking the non-interest expenses as a percentage of total net revenue before total other gains (losses) and provisions for credit losses, and is calculated as (non-interest expense - amortization of intangible assets) / (total non-interest income + net interest income before provision for credit losses). For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".

(7)

The core efficiency ratio is a non-GAAP financial measure. The core efficiency ratio is an indicator used to assess operating efficiencies and is intended to demonstrate how efficiently management is controlling expenses relative to generating revenues 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 "— Reconciliation of Non-GAAP Financial Measures".

(8)	The fee income ratio is a measure used to determine the proportion of revenues derived from non-interest income sources. The ratio is calculated as non-interest income / (non-interest income + net interest income after provision for credit losses).

(9)

The total capital ratio measures the amount of the Bank's capital in relation to the amount of risk it is taking. All banks must ensure that a reasonable proportion of their risk is covered by permanent capital. Prior to January 1, 2015, the Bank's regulatory capital was determined in accordance with Basel II guidelines issued by the BMA. Under Basel II, Pillar I, banks must maintain a minimum total capital ratio of 14.46%, inclusive of all capital buffers. In effect, this means that 14.46% of the risk weighted assets ("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 bank has, the greater the level of unexpected losses it can absorb before becoming insolvent. Under Basel III as implemented by the BMA for 2019, we must maintain a total capital ratio of 16.3% . The tier 1 capital ratio is the ratio of the Bank's core equity capital, as measured under Basel II, to its total RWA. RWA are the total of all assets held by the Bank weighted by credit risk according to a formula determined by the regulator. The Bank follows the Basel Committee on Banking Supervision ("BCBS") guidelines in setting formulas for asset risk weights. The tier 1 common ratio is equivalent to the tier 1 capital ratio except that it only includes common equity in the numerator and deducts the preference shareholders' equity. Note that the tier 1 common ratio is calculated in the same manner as the common equity tier 1 ("CET1") ratio discussed below, but differs in its inputs based upon RWA calculations under Basel II versus Basel III.

(10)

Effective January 1, 2015, the Bank's regulatory capital is determined in accordance with current Basel III guidelines issued by the BMA. However, the Bank was not required to publish its capital ratios under Basel III until January 1, 2016 as per guidance from the BMA and continued to publish certain ratios under Basel II during 2015. Basel III adopts CET1 as the predominant form of regulatory capital with the CET1 ratio as a new metric. Under Basel III as implemented by the BMA, 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. Under Basel III, banks must maintain a minimum Leverage Ratio of 5.0% . The exposure measure consists of total assets (excluding items deducted from tier 1 capital) and certain off balance sheet items converted into credit exposure equivalents as well as adjustments for derivatives to reflect credit and other risks.

(11)

The tangible common equity/tangible assets ("TCE/TA") ratio is a non-GAAP financial measure. The TCE/TA ratio is a measure used to determine how significant of an unexpected loss can be incurred by the Bank before other forms of capital, other than common equity, are impacted. The TCE/TA ratio is calculated as (common equity - intangible assets - goodwill) / tangible assets. Tangible common equity does not include the preference shareholders' equity or goodwill and intangible assets. Tangible assets are the Bank's total assets from continuing operations less goodwill and intangibles. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".

(12)

The tangible total equity/tangible assets ("TE/TA") ratio is a non-GAAP financial measure. The TE/TA ratio is a measure used to determine how much loss the Bank can absorb before subordinated debt capital is impacted. The TE/TA ratio is calculated as (total shareholders' equity - intangible assets - goodwill) / tangible assets. Tangible assets are the Bank's total assets from continuing operations less intangible assets and goodwill. For more information on the non-GAAP financial measures, see "— Reconciliation of Non-GAAP Financial Measures".

(13)	The non-performing assets ("NPA") ratio is an indicator of the credit quality of the Bank's total assets by expressing the non-performing assets as a percentage of total assets. The NPA ratio is calculated as (gross non-accrual loans - specific allowance for credit losses on non-accrual loans + accruing loans past due 90 days + other real estate owned ("OREO")) / total assets.

(14)	The non-accrual ("NACL") ratio is an indicator used to assess the credit performance of the Bank's loan portfolio by calculating the non-accrual loans as a percentage of loans. The NACL ratio is calculated as gross non-accrual loans / gross total loans. Note the reference to gross implies the amounts prior to loan allowances for credit losses.

(15)	The non-performing loan ("NPL") ratio is an indicator used to assess the credit performance of the Bank's loan portfolio by calculating the non-performing loans as a percentage of loans. The NPL ratio is calculated as total gross non-performing loans / total gross loans.

(16)	The net charge-off ("NCO") ratio is an indicator used to assess the net credit loss of the Bank's loan portfolio by calculating the net charge-offs as a percentage of average total loans. The NCO ratio is calculated as net charge-off expense / average total loans. Average total loan is calculated as the average of the month-end asset balances during the relevant period.

(17)	Core net income is a non-GAAP financial measure. Core net income measures net income on a core basis. Core net income is calculated by adjusting net income for income or expense items which are not representative of the ongoing operations of our business. For a reconciliation of core net income to net income, see "— Reconciliation of Non-GAAP Financial Measures".

(18)	Core net income attributable to common shareholders ("CEACS") is a non-GAAP financial measure. CEACS measures profitability attributable to common shareholders on a core basis. For a reconciliation of CEACS to net income, see "— Reconciliation of Non-GAAP Financial Measures".

(19)	Core net income per common share — fully diluted is a non-GAAP financial measure. Core net income per common share —  fully diluted measures core profitability attributable to common shareholders on a per share basis. For a reconciliation to net income per share, see "— Reconciliation of Non-GAAP Financial Measures".

(20)	Common equity per share is calculated as total common equity / number of common shares issued and outstanding at period end.

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

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•	Preparation of the Bank's operating budgets;

•	Quarterly financial performance reporting; and

•	Monthly reporting of consolidated results (management reporting only).

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(1)	Premium paid on the preference share buy-backs and redemption are removed from core net income available to common shareholders as management views these premium amounts as non-core.

(2)	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 2016, 2017, 2018 and 2019, the Bank received further distributions on this liquidation settlement.

(3)	In 2015, reflected impairment write-downs on the core banking system in the UK related to the orderly wind-down of the deposit taking and investment management businesses. The loss was a result of decisions made which are not part of the core business strategy and therefore management considers this loss to be non-core.

(4)

These gains and losses were a result of the price movements of certain securities which were previously classified as AFS for our operations in Guernsey and the UK but should have been classified as trading securities in the previously published financial statements since 2011, which have been subsequently revised. This classification introduced unintended asymmetry between core accounting performance measures of the Bank and economic/risk performance of the Bank, and led management to the decision to prospectively dispose of the securities. Management considers this to be an exceptional circumstance, and accordingly has classified these as non-core items.

(5)

In 2017 and 2016, reflected an adjustment to the holdback payable for the acquisition of Legis due to continued strong revenue from legacy clients. While management considers the integrated operations of acquired entities to be core to our business operations, due to the limited and isolated nature of acquisitions, management does not consider the costs associated with these acquisitions to be a part of the normal course of business. Therefore management considers costs associated with acquisitions, including these contractual adjustments to the holdback payable amount, to be non-core.

(6)	In 2018, these losses reflected a non-core settlement loss on the de-risking of a defined benefit pension plan.

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(7)

In 2015, predominantly reflected the cost of negotiated packages for three executives who stepped down from their positions during the year. In 2016, reflected payments to non-executive management staff whose roles were made redundant resulting from a span of control review. In 2017, primarily reflected severance payments to staff in our Bahamas segment as a result of management rescinding our banking license in that jurisdiction. 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. Management does not consider the costs associated with these projects to be core to the strategy of the business.

(8)

In each of the periods 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.

(9)

In 2015 and 2016, reflected a provision associated with the aforementioned review and account remediation exercise referenced in the above footnote. Although the Bank is unable to determine the amount of financial consequences, fine and/or penalties resulting from this tax compliance review, this reflects a provision which management believes to be appropriate. These expenses are a result of exceptional circumstances which arose outside of the normal course of business.

(10)

In 2015 and 2016, reflected contract negotiation, due diligence and IT implementation costs relating to the acquisition of the Bermuda Trust Company Limited and the private banking investment management of operations of HSBC Bank Bermuda Limited. In 2017 and 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.

(11)	In 2015, 2016 and 2017, reflected costs associated with the orderly wind-down of the deposit taking, investment management and custody businesses of Butterfield Bank (UK) Limited which included staff redundancy expenses and professional fees. These expenses are a result of exceptional circumstances which arose outside of the normal course of business.

(12)

In 2015, reflected professional and legal fees related to the research and evaluation of an international stock exchange listing for the Bank's common shares. This research and evaluation was undertaken in an effort to provide a means for liquidity for the Bank's shareholders, and was therefore not in the normal course of business. Accordingly, management considers the expenses associated with this investigation to be non-core.

(13)	In 2016, reflected the expense for the vesting of the outstanding 2010 Performance Options resulting from the IPO which led to an $8.5 million salaries and other employee benefits expense, and a related payroll tax expense of $0.3 million. Management does not consider these expenses to be core to the strategy of the business.

(14)	In 2017, reflected professional and legal fees related to the secondary follow-on offering of the Bank's common shares. This offering was undertaken in an effort to provide further liquidity for the Bank's shareholders, and was therefore not in the normal course of business. Accordingly, management considers the expenses associated with this offering to be non-core.

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

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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.

•	breaching or facing allegations of having breached legal and regulatory requirements (including, but not limited to, conduct requirements, money laundering, 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;

•	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.

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•	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

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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.

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•	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.

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•	market expectations of the performance and capital adequacy of financial institutions in general;

•	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;

•	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.

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•	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;

•	our shareholders approve any equity compensation plans; and

•	there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

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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 is 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.

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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 point 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.

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Expenses: Total non-interest expenses increased year-over-year $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.

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Deposits: Customer 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.

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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 .

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Profitability: Net income increased year-over-year by $41.9 million, or 27.4%, to $195.2 million, which was largely attributable to increases in non-interest and net interest income and partially offset by certain "non-core" items described above. After eliminating these non-core items, our core net income increased $38.2 million to $197.0 million. Increases in non-interest income were driven largely by additional revenues earned from trust fees as a result of the recent acquisition of Deutsche Bank's GTS business. Increases in net interest income were largely a result of continued increased yields on loans as a result of base rate increases in certain jurisdictions and increased yields on investments resulting from a rising interest rate environment.

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Net interest margin: NIM increased by 52 basis points to 325 basis points compared to 273 basis points in 2017, and the cost of funding increased by 7 basis point to 18 basis points. The primary driver of the increase in NIM was an increase in loan yields by 37 basis points to 547 basis points as a result of base rate increases in certain jurisdictions during the year. The investment portfolio augmented the increase, with yields increasing by 49 basis points to 271 basis points due to an average increase in the long-term yield of US Treasury debt over the year, which was reflected in our portfolio due to the high proportion of our portfolio in adjustable-rate securities as well as purchases of longer duration, higher yielding securities into our HTM portfolio.

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Expenses: Total non-interest expenses increased year-over-year by $21.0 million to $321.3 million in 2018, due largely to the increased salaries and other employee benefits resulting from an increased headcount from the two acquisitions and increased discretionary compensation, in conjunction with increased professional fees associated with the two Deutsche Bank acquisitions, increased costs supporting our cyber risk protection program, which include staffing and other professional fees, and other regulatory compliance costs. Total non-interest expenses also increased 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 $27.6 million, from $292.2 million in 2017, to $319.8 million in 2018. The core efficiency ratio decreased from 64.3% in 2017 to 61.5% in 2018, reflecting the rate of core non-interest expense relative to the relative increase in revenue.

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Deposits: Customer deposits decreased year-over-year by $105.6 million as at December 31, 2018 due to several large corporate clients withdrawing their deposits during the year, partially offset by organic growth and growth from the acquisition of Deutsche Bank's banking and custody business in the Cayman and Channel Islands, while interest bearing deposit costs increased by 9 basis points to 24 basis points in 2018 and 2017. With non-interest bearing deposits totaling $2.1 billion on December 31, 2018, the average cost of deposits for the year increased by 7 basis point to 18 basis points.

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Loan quality: As at December 31, 2018, we had gross non-accrual loans of $48.7 million representing 1.2% of total gross loans, relatively flat from the $43.9 million, or 1.2%, of total loans at year-end 2017. Net non-accrual loans were $33.8 million, equivalent to 0.8% of net loans, after specific provisions of $14.9 million, reflecting an increase in the specific provision coverage ratio of 30.6%, down from 31.1% on December 31, 2017.

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(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 "Selected Consolidated Financial and Other Data – Reconciliation of Non-GAAP Financial Measures".

(2)	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 "Selected Consolidated Financial and Other Data – Reconciliation of Non-GAAP Financial Measures".

(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 "Selected Consolidated Financial and Other Data — Reconciliation of Non-GAAP Financial Measures."

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•	Legal and professional fees relating to the acquisition of ABN AMRO (Channel Islands), which amounted to $5.5 million in 2019;

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Costs relating to the extensive review and account remediation exercise to determine the US tax compliance status of US person account holders resulting from the so-called John Doe Summonses issued by the USAO to six US financial institutions with which we had correspondent bank relationships. There were no costs associated with this remediation exercise during the year ended December 31, 2019 ( 2018 : nil; 2017 : $0.9 million);

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•	Legal and professional fees relating to the acquisition of Deutsche Bank’s GTS business, excluding its US operations, which were completed in 2018 (2018: $0.9 million; 2017: $2.1 million); and

•	Legal and professional fees relating to the secondary bank share offering completed during 2017, which amounted to $1.9 million in 2017.

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(1)	Long-term debt excludes interest and unamortized debt issuance costs.

(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 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 $27.6 million as at December 31, 2019 ( December 31, 2018 : $39.2 million).

(3)	This excludes Lease obligations which are discussed in Leases below.

•	$177.1 million of net income for the year;

•	$55.4 million from net change in unrealized gains (losses) on AFS investments;

•	$17.5 million for share-based compensation;

•	$6.9 million from adjustments to employee benefit plans;

•	$0.3 million from issuance of new common shares as part of share-based settlements; and

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•	$0.3 million of other smaller adjustments.

•	$93.6 million of common share dividends;

•	$81.5 million from net increases in treasury shares; and

•	$1.0 million of translation adjustments on foreign operations.

•	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;

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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

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•	NSFR with a minimum requirement of 100%.

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(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.

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(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.

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(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.

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(1)	Total recorded investment.

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(1)	Based on the contractual rate that was being charged at the time the loan was restructured or placed on non-accrual status.

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(1)	Percent of loans in each category to total loans.

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(1)	Net income divided by average total assets.

(2)	Net income divided by average equity.

(3)	Dividends declared per share divided by net income per share.

(4)	Average equity divided by average total assets.

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•	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.

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(1)	See "Critical Accounting Policies and Estimates - Fair Values" and " Note 18: Fair value measurements " of the audited consolidated financial statements for further detail on the determination of fair value.

(2)	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.

(3)	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.

(4)	Term deposits and subordinated capital are carried on the consolidated balance sheet as the principal outstanding.

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•	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).

•	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.

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•	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.

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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%.

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•	provide such information as the BMA may reasonably require;

•	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.

•	examine, copy or retain any documents relating to the Bank's deposit-taking business;

•	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, suspend or revoke the Bank's banking license and to give directions if it feels these are necessary to protect the Bank's depositors.

(a)	that person incurs an obligation to the Bank or as a result of which such person may incur such an obligation;

(b)	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

(c)	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.

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•	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.

•	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.

•	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.

•	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.

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•	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 company on the shares, whether in respect of capital or otherwise.

•	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.

•	all shares of the licensed company 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 company; 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 company.

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•	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.

•	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.

•	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.

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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 DPL;

•	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.

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•	formation, management and administration or trusts;

•	company or corporate administration;

•	provision of executorship services; and

•	the formation and management of foundations.

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•	A Majority of Independent Directors . The NYSE requires the majority of the board of directors of a listed U.S. 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.

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A Nominating/Corporate Governance Committee . The NYSE requires a listed U.S. 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.

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A Compensation Committee . The NYSE requires a listed U.S. 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.

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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 2019 , the Board held five executive sessions with only our independent directors present.

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Company Policies . The NYSE requires a listed U.S. 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 and the Board’s authority to engage advisors. Furthermore, we have adopted a Corporate Governance Policy that addresses director compensation, director orientation and continuing education, management succession 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 U.S company to receive shareholder approval of any equity compensation plans. The Bank does not submit its equity compensation plans to shareholders for approval.

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*	Indicates less than 1%

(1)	Based on the Schedule 13G filed on February 13, 2019 by Davis Selected Advisers, L.P., which reported that as at December 31, 2019, Davis Selected Advisers, L.P. beneficially owned 3,305,458 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)	Consists of (i) 28,603 ordinary shares and (ii) 2,384 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(3)	Consists of (i) 2,150 ordinary shares and (ii) 1,094 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(4)	Consists of (i) 1,433 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.

(5)	Consists of (i) 80,745 ordinary shares and (ii) 21,343 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(6)	Consists of (i) 2,499 ordinary shares and (ii) 1,697 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(7)	Consists of (i) 18,552 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

(8)	Consists of (i) 23,357 ordinary shares and (ii) 1,786 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(9)	Consists of (i) 54,298 ordinary shares and (ii) 2,541 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(10)	Consists (i) 29,199 ordinary shares and (ii) 1,954 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(11)	Consists of (i) 3,488 ordinary shares and (ii) 1,607 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(12)	Consists of (i) 105,349 ordinary shares and (ii) 11,863 ordinary shares underlying restricted stock that will vest within 60 days of February 17, 2020.

(13)	Consists of 11,403 ordinary shares held jointly with his spouse.

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•	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.

•	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.

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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).

•	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.

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(1)

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).

(2)	Services that are normally performed by the independent accountants, ancillary to audit services.

(3)	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.

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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.

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 payments

•	Business combinations

B. Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (collectively the “Bank”), and those variable interest entities (“VIEs”) where the Company is the primary beneficiary. Intercompany accounts and transactions have been eliminated. VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

The Bank is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The determination of whether the Bank meets the criteria to be considered the primary beneficiary of a VIE requires a periodic evaluation of all transactions (such as investments, loans and fee arrangements) with the entity. The Bank performs on-going reassessments of: (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Bank’s involvement with a VIE cause the Bank’s consolidation conclusion to change.

Certain Bank sponsored asset management funds are structured as limited partnerships or limited companies (collectively the “funds”). The funds have various investment strategies (including but not limited to fixed income, equities and fund of funds) and are financed by non-affiliated investors. A subsidiary of the Bank is either the general partner or investment manager to the funds but does not have any significant variable interests in these entities. For those funds where the non-affiliated investors have the ability to remove the subsidiary of the Bank as the general partner or investment manager without cause (i.e. kick out rights), based on a simple majority vote, or the non-affiliated investors have rights to participate in important decisions, the Bank does not consolidate such voting interest entities. In cases where the non-affiliated investors do not have substantive kick out or participating rights, the Bank evaluates the funds as VIEs and consolidates if it is the general partner or investment manager and has a potentially significant interest.

During the three years ended December 31, 2019 , 2018 and 2017 , the Bank had no interests in VIEs where the Bank was considered the primary beneficiary, nor did the Bank have any significant variable interests in a VIE where the Bank was not considered the primary beneficiary. For the variable interests the Bank holds in entities which are not considered VIEs, the Bank utilized the majority voting interest framework. The Bank consolidates these 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, other than investments in designated VIEs, are accounted for under the equity method, and the pro rata share of their income (loss) is included in other non-interest income.

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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 loss (“AOCL”). 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.

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 trading, 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 as net increase or decrease to AOCL. 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. 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 trading and AFS investments, which are included in net trading gains and losses and net realized gains and 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.

Recognition of other-than-temporary impairments

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.

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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.

Acquired loans

Acquired loans are recorded at fair value at the date of acquisition. No allowance for credit losses is recorded on the acquisition date as the fair value of the acquired assets incorporates assumptions regarding credit risk. Acquired loans with evidence of credit quality deterioration for which it is probable that the Bank will not receive all contractually required payments receivable are accounted for as purchased credit-impaired loans. Generally, acquired loans that meet the Bank's definition for non-accrual status are considered to be credit-impaired.

The excess of the cash flows expected to be collected on purchased credit-impaired loans, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using an effective yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the non-accretable difference which is included as a reduction of the carrying amount of the purchased credit-impaired loans.

The Bank evaluates at each balance sheet date the estimated cash flows and corresponding carrying value of purchased credit-impaired loans in the same manner as for the measurement of impaired loans, as is described below. The Bank evaluates at each balance sheet date whether the carrying value of its purchased credit-impaired loans has decreased and if so, recognizes an allowance for credit losses in its consolidated statements of operations. For any increases in cash flows expected to be collected, the Bank adjusts any prior recorded allowance for purchased credit-impaired loans first, and then the amount of accretable yield recognized on a prospective basis over the purchased credit-impaired loan’s remaining life. Purchased credit-impaired loans are not considered non-performing and continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected.

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.

When a loan is identified as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases the current fair value of the collateral, less selling costs, is used instead of discounted cash flows.

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.

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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 in the notes of the consolidated financial statements and individually 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:

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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

•

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

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. The allowance for credit losses consists of specific allowances and a general allowance as follows:

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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 three 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 five and 10 years.

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 out of premises, equipment and computer software, a gain is recorded if the difference of the proceeds on disposition is in excess of the assets 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 and for finance 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”).

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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 current year earnings.

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 loss ("OCL") and the ineffective portion is recorded in current year earnings. That is, ineffectiveness from a derivative that overcompensates for changes in the hedged cash flows is recorded in earnings. However, the ineffectiveness from a derivative that under compensates is not recorded in earnings.

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 OCL, 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 OCL.

Changes in the fair value of trading and non-hedging derivative instruments are reported in current year earnings.

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 AOCL 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.

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 OCL 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.

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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 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).

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. Investments classified as trading and 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.

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

These include equities 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.

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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 specific provisions raised 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.

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,

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•	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 21 ). 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, 2019 or are accounting standards pending adoption:

In June 2016, the Financial Accounting Standards Board (“FASB”) published ASU 2016-13 Financial Instruments – Credit Losses. The amendments in this update provide a new impairment model, known as the current expected credit loss model (“CECL") that is based on expected losses rather than incurred losses. The amendments in this update are also intended to reduce the complexity and reduce the number of impairment models entities use to account for debt instruments. For public business entities that meet the GAAP definition of a Securities and Exchange Commission (“SEC”) filer, the effective date for this update is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The CECL model is applicable to the measurement of credit losses on financial instruments at amortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases recognized by a lessor. In addition, the amendments to Topic 326 require credit losses on AFS securities to be presented as a valuation allowance rather than as a direct write-down.

For debt securities, the guidance will be applied prospectively. Existing purchased credit-impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. For all other assets within the scope of CECL, which are primarily loans for the Bank, a cumulative-effect adjustment will be recognized in retained earnings (accumulated deficit) as of the date of application. Subsequent changes in expected credit losses will be recorded through the respective allowance.

The Bank will apply the provisions of ASU 2016-13 with effect from January 1, 2020. The Bank does not intend to restate comparative information. In addition to the adjustment to opening accumulated deficit and the measurement of expected credit losses, the standard will also result in revisions to accounting policies and procedures, new and additional financial statement note disclosures, changes and amendments to internal control documents, the development of a new risk model and associated methodologies, as discussed above. The new loss model will also require the Bank to collect and maintain attributes as it relates to its financial instruments that are within scope of CECL including fair value of collateral, expected performance over the lifetime of the instrument and reasonable and supportable assumptions about future economic conditions. Changes in the required allowance for credit losses will be recorded in the consolidated statement of operations.

The Bank had previously established a governance process and a working group with multiple members from applicable departments, including credit risk management and finance, to evaluate the requirements of this new standard, to develop a loss model consistent with lifetime expected loss estimates and to design and implement any changes required to current processes. The design and implementation of the new impairment process has been completed with the measurement of expected losses to be primarily based on the product of the respective instrument’s probability of default (“PD”), loss given default (“LGD”), and exposure at default (“EAD”), and historically incurred loss rates, respectively. For AFS securities, any allowance for credit losses is based on an impairment assessment.

The total expected adjustment as at December 31, 2019 resulting from the adoption of this methodology on the opening balance of the Bank’s net equity at January 1, 2020 is an estimated decrease of $ 7.8 million relating to the Bank's loan portfolio. The Bank will continue to monitor and enhance elements of its impairment process in advance of the financial reporting for the first quarter of 2020.

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In April 2019 and November 2019, respectively, the FASB published ASU 2019-04 and ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments—Credit Losses affecting a variety of topics including Topic 815, Derivatives and Hedging, Topic 825, Financial Instruments and Sub-topic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest. The amendments clarify, correct and improve various aspects of the guidance in the following ASU's related to financial instruments: ASU 2016-01 Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments relating to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, early adoption is permitted and it should be applied on a modified-retrospective transition basis. The amendments relating to ASU 2016-13 are effective as noted in ASU 2016-13. The amendments relating to ASU 2017-12 are effective as noted in ASU 2017-12. Other than the impact of ASU 2016-13 as disclosed above, ASU 2019-04 and ASU 2019-11 are not expected to have a material impact on the Bank's financial statements.

In May 2019, the FASB published ASU 2019-05 Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief. The amendments in this update provide targeted transition relief that is an option for, and will be available to, all reporting entities within the scope of Topic 326. It provides entities with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments that are within the scope of Subtopic 326-20 upon adoption of Topic 326. The fair value option election does not apply to HTM debt securities. The effective date and transition methodology for the amendments in this update are the same as in ASU 2016-13. The Bank has elected not to adopt this elective guidance.

In March 2019, the FASB published ASU 2019-01 Leases (Topic 842) - Codification Improvements. The amendments in this update provide clarification on three issues relating to ASU 2016-02 Leases (Topic 842): (1) determining the fair value of the underlying asset by lessors that are not manufactures or dealers; (2) presentation on the statement of cash flows - sales-type and direct financing leases for all lessors that are depository and lending entities within the scope of Topic 942; and (3) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The transition and effective date provisions for this update apply to Issue 1 and Issue 2 and are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, for public business entities. Issue 3 amendments are to the original transition requirements in Topic 842 to clarify that the transition disclosures for Topic 250, paragraphs 250-10-50-1(b)(2) and paragraph 250-10-50-3 are excluded from interim disclosure requirements for Topic 842. The Bank does not anticipate this ASU to have a material impact on the Bank.

Note 3: Cash due from banks

In 2019, the classification of certain interest bearing and non-interest bearing cash items was amended and the 2018 classification presented below was revised accordingly.

	December 31, 2019		December 31, 2018
Non-interest bearing
Cash and demand deposits with banks	88,031		91,722
Interest bearing¹
Demand deposits with banks	839,320		520,048
Cash equivalents	1,622,719		1,442,113
Sub-total - Interest bearing	2,462,039		1,962,161
Total cash due from banks	2,550,070		2,053,883

¹ Interest bearing cash due from banks includes certain demand deposits with banks as at December 31, 2019 in the amount of $ 439.5 million ( December 31, 2018 : $ 236.7 million ) that are earning interest at a negligible rate.

Note 4: Short-term investments

	December 31, 2019		December 31, 2018
Unrestricted
Maturing within three months	594,749		25,459
Maturing between three to six months	591,212		9,641
Maturing between six to twelve months	2,584		—
Total unrestricted short-term investments	1,188,545		35,100
Affected by drawing restrictions related to minimum reserve and derivative margin requirements
Non-interest earning demand deposits	2,270		2,401
Interest earning demand and term deposits	27,565		14,835
Total restricted short-term investments	29,835		17,236
Total short-term investments	1,218,380		52,336

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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, 2019								December 31, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
Equity securities
Mutual funds	5,724		2,142		( 447	)	7,419		5,724		1,176		( 405	)	6,495
Total equity securities	5,724		2,142		( 447	)	7,419		5,724		1,176		( 405	)	6,495
Available-for-sale
US government and federal agencies	2,040,171		18,617		( 6,342	)	2,052,446		1,820,808		3,355		( 37,656	)	1,786,507
Non-US governments debt securities	26,118		82		( 524	)	25,676		25,804		19		( 398	)	25,425
Corporate debt securities	—		—		—		—		80,177		—		( 1,464	)	78,713
Asset-backed securities - Student loans	13,290		—		( 399	)	12,891		13,290		—		( 664	)	12,626
Commercial mortgage-backed securities	—		—		—		—		125,806		6		( 2,603	)	123,209
Residential mortgage-backed securities	128,952		654		( 278	)	129,328		160,492		—		( 4,223	)	156,269
Total available-for-sale	2,208,531		19,353		( 7,543	)	2,220,341		2,226,377		3,380		( 47,008	)	2,182,749
Held-to-maturity¹
US government and federal agencies	2,208,663		47,814		( 490	)	2,255,987		2,066,120		5,012		( 34,918	)	2,036,214
Total held-to-maturity	2,208,663		47,814		( 490	)	2,255,987		2,066,120		5,012		( 34,918	)	2,036,214

¹ For the years ended December 31, 2019 , 2018 and 2017 , non-credit impairments recognized in AOCL for HTM investments were nil .

Investments with Unrealized Loss Positions

The Bank does not believe that the AFS and HTM investment securities that were in an unrealized loss position as at December 31, 2019 (and December 31, 2018 ), which were composed of 68 securities representing 23 % of the AFS and HTM portfolios' carrying value ( December 31, 2018 : 198 and 75 % , respectively), represent an OTTI. Total gross unrealized losses were 0.8 % of the fair value of affected securities ( December 31, 2018 : 2.6 % ). 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. Unrealized losses were attributable primarily to changes in market interest rates, relative to when the investment securities were purchased, and not due to 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.

Investments in Residential mortgage-backed securities relate to 7 securities which are rated AAA and possess similar significant credit enhancement as described above. No credit losses were recognized on these securities as the weighted average credit support and the weighted average loan-to-value ratios (“LTV”) range from 11 % - 22 % and 54 % - 63 % , respectively. Current credit support is significantly greater than any delinquencies experienced on the underlying mortgages.

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In the following tables, debt securities with unrealized losses that are not deemed to be OTTI 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.

	Less than 12 months				12 months or more
December 31, 2019	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Total fair value		Total gross unrealized losses
Available-for-sale securities with unrealized losses
US government and federal agencies	376,262		( 1,786	)	435,999		( 4,556	)	812,261		( 6,342	)
Non-US governments debt securities	202		( 1	)	22,246		( 523	)	22,448		( 524	)
Asset-backed securities - Student loans	—		—		12,891		( 399	)	12,891		( 399	)
Residential mortgage-backed securities	6,038		( 30	)	50,254		( 248	)	56,292		( 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	)
	Less than 12 months				12 months or more
December 31, 2018	Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Total fair value		Total gross unrealized losses
Available-for-sale securities with unrealized losses
US government and federal agencies	372,283		( 1,586	)	1,027,638		( 36,070	)	1,399,921		( 37,656	)
Non-US governments debt securities	—		—		22,360		( 398	)	22,360		( 398	)
Corporate debt securities	14,914		( 114	)	63,799		( 1,350	)	78,713		( 1,464	)
Asset-backed securities - Student loans	—		—		12,626		( 664	)	12,626		( 664	)
Commercial mortgage-backed securities	812		—		117,379		( 2,603	)	118,191		( 2,603	)
Residential mortgage-backed securities	49,804		( 1,313	)	106,465		( 2,910	)	156,269		( 4,223	)
Total available-for-sale securities with unrealized losses	437,813		( 3,013	)	1,350,267		( 43,995	)	1,788,080		( 47,008	)
Held-to-maturity securities with unrealized losses
US government and federal agencies	647,484		( 11,468	)	724,974		( 23,450	)	1,372,458		( 34,918	)

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.

	Remaining term to maturity
December 31, 2019	Within 3 months		3 to 12 months		1 to 5 years		5 to 10 years		Over 10 years		No specific or single maturity		Carrying amount
Equity securities
Mutual funds	—		—		—		—		—		7,419		7,419
Available-for-sale
US government and federal agencies	—		—		—		—		—		2,052,446		2,052,446
Non-US governments debt securities			—		22,449		3,227		—		—		25,676
Asset-backed securities - Student loans	—		—		—		—		—		12,891		12,891
Residential mortgage-backed securities	—		—		—		—		—		129,328		129,328
Total available-for-sale	—		—		22,449		3,227		—		2,194,665		2,220,341
Held-to-maturity
US government and federal agencies	—		—		—		—		—		2,208,663		2,208,663
Total investments	—		—		22,449		3,227		—		4,410,747		4,436,423
Total by currency
US dollars			—		22,449		3,227		—		4,410,469		4,436,145
Other	—		—		—		—		—		278		278
Total investments	—		—		22,449		3,227		—		4,410,747		4,436,423

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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.

	December 31, 2019				December 31, 2018
Pledged Investments	Amortized cost		Fair value		Amortized cost		Fair value
Available-for-sale	3,848		3,912		42,531		42,400
Held-to-maturity	5,449		5,552		70,818		69,030

Sale Proceeds and Realized Gains and Losses of AFS Securities

	Year ended
	December 31, 2019
	Sale proceeds		Gross realized gains		Gross realized (losses)
US government and federal agencies	35,001		115		—
Corporate debt securities	64,787		49		( 141	)
Commercial mortgage-backed securities	124,545		901		( 272	)
Pass-through note	972		972		—
Total	225,305		2,037		( 413	)

	Year ended
	December 31, 2018
	Sale proceeds		Gross realized gains		Gross realized (losses)
US government and federal agencies	812,720		1,599		( 1,263	)
Corporate debt securities	24,975		—		( 87	)
Commercial mortgage-backed securities	15,260		—		( 354	)
Pass-through note	1,205		1,205		—
Total	854,160		2,804		( 1,704	)

	Year ended
	December 31, 2017
	Sale proceeds		Gross realized gains		Gross realized (losses)
Corporate debt securities	202,700		1,684		—
Commercial mortgage-backed securities	7,785		—		( 60	)
Pass-through note	2,562		2,562		—
Total	213,047		4,246		( 60	)

Taxability of Interest Income

None of the investments' interest income have received a specific preferential income tax treatment in any of the jurisdictions in which the Bank owns investments.

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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 thirty 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, 2019 is 4.73 % ( December 31, 2018 : 5.53 % ).

	December 31, 2019		December 31, 2018
Commercial loans
Government	370,753		105,664
Commercial and industrial	535,715		513,863
Commercial overdrafts	28,547		33,094
Total gross commercial loans	935,015		652,621
Less specific allowance for credit losses	( 4,904	)	( 4,453	)
Net commercial loans	930,111		648,168
Commercial real estate loans
Commercial mortgage	659,293		496,975
Construction	94,940		78,669
Total gross commercial real estate loans	754,233		575,644
Less specific allowance for credit losses	( 470	)	( 600	)
Net commercial real estate loans	753,763		575,044
Consumer loans
Automobile financing	21,462		20,224
Credit card	87,674		84,089
Overdrafts	7,858		12,886
Other consumer	140,147		63,491
Total gross consumer loans	257,141		180,690
Less specific allowance for credit losses	( 676	)	( 274	)
Net consumer loans	256,465		180,416
Residential mortgage loans	3,219,821		2,660,036
Less specific allowance for credit losses	( 11,628	)	( 9,588	)
Net residential mortgage loans	3,208,193		2,650,448
Total gross loans	5,166,210		4,068,991
Less specific allowance for credit losses	( 17,678	)	( 14,915	)
Less general allowance for credit losses	( 5,910	)	( 10,187	)
Net loans	5,142,622		4,043,889

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Age Analysis of Past Due Loans (Including Non-Accrual Loans)

The following tables summarize the past due status of the loans as at December 31, 2019 and December 31, 2018 . 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, 2019	30 - 59 days		60 - 89 days		More than 90 days		Total past due loans		Total current		Total loans
Commercial loans
Government	—		—		—		—		370,753		370,753
Commercial and industrial	276		—		7,487		7,763		527,952		535,715
Commercial overdrafts	—		—		2		2		28,545		28,547
Total commercial loans	276		—		7,489		7,765		927,250		935,015
Commercial real estate loans
Commercial mortgage	445		—		3,250		3,695		655,598		659,293
Construction	—		—		3,128		3,128		91,812		94,940
Total commercial real estate loans	445		—		6,378		6,823		747,410		754,233
Consumer loans
Automobile financing	53		58		135		246		21,216		21,462
Credit card	630		221		424		1,275		86,399		87,674
Overdrafts	—		—		34		34		7,824		7,858
Other consumer	994		139		1,028		2,161		137,986		140,147
Total consumer loans	1,677		418		1,621		3,716		253,425		257,141
Residential mortgage loans	31,931		9,487		47,132		88,550		3,131,271		3,219,821
Total gross loans	34,329		9,905		62,620		106,854		5,059,356		5,166,210
December 31, 2018	30 - 59 days		60 - 89 days		More than 90 days		Total past due loans		Total current		Total loans
Commercial loans
Government	—		—		3,750		3,750		101,914		105,664
Commercial and industrial	231		—		7,379		7,610		506,253		513,863
Commercial overdrafts	—		—		2		2		33,092		33,094
Total commercial loans	231		—		11,131		11,362		641,259		652,621
Commercial real estate loans
Commercial mortgage	837		1,282		4,062		6,181		490,794		496,975
Construction	—		—		—		—		78,669		78,669
Total commercial real estate loans	837		1,282		4,062		6,181		569,463		575,644
Consumer loans
Automobile financing	125		29		162		316		19,908		20,224
Credit card	351		313		126		790		83,299		84,089
Overdrafts	—		—		4		4		12,882		12,886
Other consumer	456		183		577		1,216		62,275		63,491
Total consumer loans	932		525		869		2,326		178,364		180,690
Residential mortgage loans	31,015		8,859		36,394		76,268		2,583,768		2,660,036
Total gross loans	33,015		10,666		52,456		96,137		3,972,854		4,068,991

Loans' Credit Quality

The four credit quality classifications set out in the following tables (which exclude purchased credit-impaired loans) 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 assigned.

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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.

A special mention loan shall mean a loan under close monitoring by the Bank’s management. Loans in this category are currently protected and still performing (current with respect to interest and principal payments), 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.

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 and for residential mortgage loans which are not well secured and in the process of collection.

Based on the most recent analysis performed, the credit quality classifications by class of loan is as follows:

December 31, 2019	Pass		Special mention		Substandard		Non-accrual		Total gross recorded loans
Commercial loans
Government	370,753		—		—		—		370,753
Commercial and industrial	469,591		57,438		1,119		7,567		535,715
Commercial overdrafts	23,529		4,565		451		2		28,547
Total commercial loans	863,873		62,003		1,570		7,569		935,015
Commercial real estate loans
Commercial mortgage	581,450		71,638		2,955		3,250		659,293
Construction	91,812		—		3,128		—		94,940
Total commercial real estate loans	673,262		71,638		6,083		3,250		754,233
Consumer loans
Automobile financing	21,229		78		—		155		21,462
Credit card	87,250		—		424		—		87,674
Overdrafts	5,270		2,504		50		34		7,858
Other consumer	135,534		3,550		—		1,063		140,147
Total consumer loans	249,283		6,132		474		1,252		257,141
Residential mortgage loans	3,019,105		80,135		82,251		38,330		3,219,821
Total gross recorded loans	4,805,523		219,908		90,378		50,401		5,166,210
December 31, 2018	Pass		Special mention		Substandard		Non-accrual		Total gross recorded loans
Commercial loans
Government	101,914		—		—		3,750		105,664
Commercial and industrial	501,241		4,097		1,146		7,379		513,863
Commercial overdrafts	29,896		2,705		491		2		33,094
Total commercial loans	633,051		6,802		1,637		11,131		652,621
Commercial real estate loans
Commercial mortgage	444,397		45,390		3,126		4,062		496,975
Construction	78,669		—		—		—		78,669
Total commercial real estate loans	523,066		45,390		3,126		4,062		575,644
Consumer loans
Automobile financing	19,927		119		16		162		20,224
Credit card	83,963		—		126		—		84,089
Overdrafts	12,650		232		—		4		12,886
Other consumer	60,766		1,869		10		846		63,491
Total consumer loans	177,306		2,220		152		1,012		180,690
Residential mortgage loans	2,501,814		47,039		78,697		32,486		2,660,036
Total gross recorded loans	3,835,237		101,451		83,612		48,691		4,068,991

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Evaluation of Loans For Impairment	December 31, 2019				December 31, 2018
	Individually evaluated		Collectively evaluated		Individually evaluated		Collectively evaluated
Commercial	48,388		886,627		12,096		640,525
Commercial real estate	12,999		741,234		10,957		564,687
Consumer	1,260		255,881		1,023		179,667
Residential mortgage	115,535		3,104,286		116,211		2,543,825
Total gross loans	178,182		4,988,028		140,287		3,928,704

Changes in General and Specific Allowances For Credit Losses

	Year ended December 31, 2019
	Commercial		Commercial real estate		Consumer		Residential mortgage		Total
Allowances at beginning of year	6,913		4,092		802		13,295		25,102
Provision increase (decrease)	733		( 2,596	)	1,701		( 22	)	( 184	)
Recoveries	9		—		1,186		445		1,640
Charge-offs	( 374	)	—		( 2,193	)	( 449	)	( 3,016	)
Other	—		—		6		40		46
Allowances at end of year	7,281		1,496		1,502		13,309		23,588
Allowances at end of year: individually evaluated for impairment	4,904		470		676		11,628		17,678
Allowances at end of year: collectively evaluated for impairment	2,377		1,026		826		1,681		5,910

	Year ended December 31, 2018
	Commercial		Commercial real estate		Consumer		Residential mortgage		Total
Allowances at beginning of year	6,309		10,360		888		17,910		35,467
Provision increase (decrease)	865		( 6,290	)	211		( 1,777	)	( 6,991	)
Recoveries	14		28		656		201		899
Charge-offs	( 275	)	—		( 953	)	( 2,931	)	( 4,159	)
Other	—		( 6	)	—		( 108	)	( 114	)
Allowances at end of year	6,913		4,092		802		13,295		25,102
Allowances at end of year: individually evaluated for impairment	4,453		600		274		9,588		14,915
Allowances at end of year: collectively evaluated for impairment	2,460		3,492		528		3,707		10,187

	Year ended December 31, 2017
	Commercial		Commercial real estate		Consumer		Residential mortgage		Total
Allowances at beginning of year	3,377		16,224		965		23,681		44,247
Provision increase (decrease)	2,853		( 5,895	)	1,059		( 3,854	)	( 5,837	)
Recoveries	106		—		730		483		1,319
Charge-offs	( 34	)	( 1	)	( 1,869	)	( 2,475	)	( 4,379	)
Other	7		32		3		75		117
Allowances at end of year	6,309		10,360		888		17,910		35,467
Allowances at end of year: individually evaluated for impairment	2,866		583		274		9,901		13,624
Allowances at end of year: collectively evaluated for impairment	3,443		9,777		614		8,009		21,843

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Non-Performing Loans (excluding purchased credit-impaired loans)	December 31, 2019						December 31, 2018
	Non-accrual		Past due more than 90 days and accruing		Total non- performing loans		Non-accrual		Past due more than 90 days and accruing		Total non- performing loans
Commercial loans
Government	—		—		—		3,750		—		3,750
Commercial and industrial	7,567		—		7,567		7,379		—		7,379
Commercial overdrafts	2		—		2		2		—		2
Total commercial loans	7,569		—		7,569		11,131		—		11,131
Commercial real estate loans
Commercial mortgage	3,250		—		3,250		4,062		—		4,062
Construction	—		3,128		3,128		—		—		—
Total commercial real estate loans	3,250		3,128		6,378		4,062		—		4,062
Consumer loans
Automobile financing	155		—		155		162		—		162
Credit card	—		424		424		—		126		126
Overdrafts	34		—		34		4		—		4
Other consumer	1,063		—		1,063		846		—		846
Total consumer loans	1,252		424		1,676		1,012		126		1,138
Residential mortgage loans	38,330		12,008		50,338		32,486		6,332		38,818
Total non-performing loans	50,401		15,560		65,961		48,691		6,458		55,149

Impaired Loans (excluding purchased credit-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-accrual loans and all loans modified in a TDR even if full collectability is expected following the restructuring. During the year ended December 31, 2019 , the amount of gross interest income that would have been recorded had impaired loans been current was $ 2.7 million ( December 31, 2018 : $ 2.1 million ; December 31, 2017 : $ 2.1 million ).

	Impaired loans with an allowance						Gross recorded impaired loans without an allowance		Total impaired loans
December 31, 2019	Gross recorded loans		Specific allowance		Net loans				Gross recorded loans		Specific allowance		Net loans
Commercial loans
Commercial and industrial	7,487		( 4,904	)	2,583		1,019		8,506		( 4,904	)	3,602
Commercial overdrafts	—		—		—		2		2		—		2
Total commercial loans	7,487		( 4,904	)	2,583		1,021		8,508		( 4,904	)	3,604
Commercial real estate loans
Commercial mortgage	1,018		( 470	)	548		5,186		6,204		( 470	)	5,734
Consumer loans
Automobile financing	—		—		—		155		155		—		155
Overdrafts	—		—		—		34		34		—		34
Other consumer	676		( 676	)	—		387		1,063		( 676	)	387
Total consumer loans	676		( 676	)	—		576		1,252		( 676	)	576
Residential mortgage loans	57,887		( 11,628	)	46,259		45,718		103,605		( 11,628	)	91,977
Total impaired loans	67,068		( 17,678	)	49,390		52,501		119,569		( 17,678	)	101,891

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	Impaired loans with an allowance						Gross recorded impaired loans without an allowance		Total impaired loans
December 31, 2018	Gross recorded loans		Specific allowance		Net loans				Gross recorded loans		Specific allowance		Net loans
Commercial loans
Government	3,750		( 1,687	)	2,063		—		3,750		( 1,687	)	2,063
Commercial and industrial	7,379		( 2,766	)	4,613		965		8,344		( 2,766	)	5,578
Commercial overdrafts	—		—		—		2		2		—		2
Total commercial loans	11,129		( 4,453	)	6,676		967		12,096		( 4,453	)	7,643
Commercial real estate loans
Commercial mortgage	1,081		( 600	)	481		6,108		7,189		( 600	)	6,589
Consumer loans
Automobile financing	130		( 75	)	55		32		162		( 75	)	87
Overdrafts	—		—		—		4		4		—		4
Other consumer	199		( 199	)	—		647		846		( 199	)	647
Total consumer loans	329		( 274	)	55		683		1,012		( 274	)	738
Residential mortgage loans	49,431		( 9,422	)	40,009		49,571		99,002		( 9,422	)	89,580
Total impaired loans	61,970		( 14,749	)	47,221		57,329		119,299		( 14,749	)	104,550

Specific allowance excludes $ 0.2 million recognized relating to purchased credit-impaired loans.

Average Impaired Loan Balances and Related Recognized Interest Income

	December 31, 2019				December 31, 2018				December 31, 2017
	Average gross recorded loans		Interest income recognized¹		Average gross recorded loans		Interest income recognized¹		Average gross recorded loans		Interest income recognized¹
Commercial loans
Government	1,875		—		3,750		—		—		—
Commercial and industrial	8,425		69		8,415		68		5,057		63
Commercial overdrafts	2		—		2		—		2		—
Total commercial loans	10,302		69		12,167		68		5,059		63
Commercial real estate loans
Commercial mortgage	6,697		262		7,539		287		7,778		222
Consumer loans
Automobile financing	159		—		194		—		256		—
Overdrafts	19		—		4		—		11		—
Other consumer	955		—		665		—		598		—
Total consumer loans	1,133		—		863		—		865		—
Residential mortgage loans	101,304		4,621		97,378		4,568		89,063		4,378
Total impaired loans	119,436		4,952		117,947		4,923		102,765		4,663

¹ All interest income recognized on impaired loans relate to loans previously modified in a TDR.

Troubled Debt Restructuring

As at December 31, 2019 , the Bank had no loans that were modified in a TDR during the preceding 12 months that subsequently defaulted (i.e., 90 days or more past due following a modification). As at December 31, 2018 , the Bank had two residential mortgage loans that were modified in a TDR during the preceding 12 months that subsequently defaulted with a recorded investment of $ 0.8 million . As at December 31, 2017 , the Bank had no loans that were modified in a TDR during the preceding 12 months that subsequently defaulted.

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The following table presents loans by class modified as TDRs:

	Year ended December 31, 2019
	Number of contracts		Pre- modification recorded loans		Modification: interest capitalization		Post- modification recorded loans
Residential mortgage loans	3		1,381		101		1,482
Total loans modified in a TDR	3		1,381		101		1,482

	Year ended December 31, 2018
	Number of contracts		Pre- modification recorded loans		Modification: interest capitalization		Post- modification recorded loans
Residential mortgage loans	19		7,864		846		8,710
Total loans modified in a TDR	19		7,864		846		8,710

	Year ended December 31, 2017
	Number of contracts		Pre- modification recorded loans		Modification: interest capitalization		Post- modification recorded loans
Commercial real estate loans	2		1,544		—		1,544
Residential mortgage loans	42		24,588		1,345		25,933
Total loans modified in a TDR	44		26,132		1,345		27,477

	December 31, 2019				December 31, 2018
TDRs outstanding	Accrual		Non-accrual		Accrual		Non-accrual
Commercial loans	939		—		965		—
Commercial real estate loans	2,954		1,315		3,127		1,336
Residential mortgage loans	65,275		9,576		66,516		8,154
Total TDRs outstanding	69,168		10,891		70,608		9,490

Purchased Credit-Impaired Loans

The Bank acquired certain credit-impaired loans as part of the November 7, 2014 acquisition of substantially all retail loans of HSBC Bank (Cayman) Limited. The accretable difference (or "accretable yield") represents the excess of a loan's cash flows expected to be collected over the loan's carrying amount.

	Year ended
	December 31, 2019
	Contractual principal		Non-accretable difference		Accretable difference		Carrying amount
Balance at beginning of year	4,531		( 901	)	( 661	)	2,969
Advances and increases in cash flows expected to be collected	45		28		( 28	)	45
Reductions resulting from repayments	( 1,577	)	247		177		( 1,153	)
Increase (reduction) resulting from changes in allowances for credit losses	—		166		—		166
Reductions resulting from charge-offs	( 495	)	262		—		( 233	)
Balance at end of year	2,504		( 198	)	( 512	)	1,794

	Year ended
	December 31, 2018
	Contractual principal		Non-accretable difference		Accretable difference		Carrying amount
Balance at beginning of year	6,001		( 1,239	)	( 711	)	4,051
Advances and increases in cash flows expected to be collected	25		42		( 42	)	25
Reductions resulting from repayments	( 1,495	)	191		92		( 1,212	)
Increase (reduction) resulting from changes in allowances for credit losses	—		105		—		105
Balance at end of year	4,531		( 901	)	( 661	)	2,969

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	Year ended
	December 31, 2017
	Contractual principal		Non-accretable difference		Accretable difference		Carrying amount
Balance at beginning of year	8,016		( 1,617	)	( 811	)	5,588
Advances and increases in cash flows expected to be collected	36		48		( 48	)	36
Reductions resulting from repayments	( 1,581	)	307		148		( 1,126	)
Reductions resulting from changes in allowances for credit losses	—		( 99	)	—		( 99	)
Reductions resulting from charge-offs	( 470	)	122		—		( 348	)
Balance at end of year	6,001		( 1,239	)	( 711	)	4,051

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 tables summarize the credit exposure of the Bank by business sector and by geographic region. The on-balance sheet exposure amounts disclosed are net of specific allowances and the off-balance sheet exposure amounts disclosed are gross of collateral held.

	December 31, 2019						December 31, 2018
Business sector	Loans		Off-balance sheet		Total credit exposure		Loans		Off-balance sheet		Total credit exposure
Banks and financial services	767,684		324,388		1,092,072		611,404		415,124		1,026,528
Commercial and merchandising	563,494		189,060		752,554		316,349		182,440		498,789
Governments	372,544		8,807		381,351		104,857		—		104,857
Individuals	2,483,334		148,519		2,631,853		2,339,854		89,931		2,429,785
Primary industry and manufacturing	383,395		110,947		494,342		120,088		1,003		121,091
Real estate	371,758		6,312		378,070		395,086		1,547		396,633
Hospitality industry	200,603		73		200,676		160,680		3,497		164,177
Transport and communication	5,720		75		5,795		5,758		75		5,833
Sub-total	5,148,532		788,181		5,936,713		4,054,076		693,617		4,747,693
General allowance	( 5,910	)	—		( 5,910	)	( 10,187	)	—		( 10,187	)
Total	5,142,622		788,181		5,930,803		4,043,889		693,617		4,737,506

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	December 31, 2019								December 31, 2018
Geographic region	Cash due from banks, resell agreements and short-term investments		Loans		Off-balance sheet		Total credit exposure		Cash due from banks, resell agreements and short-term investments		Loans		Off-balance sheet		Total credit exposure
Australia	170,956		—		—		170,956		145,675		—		—		145,675
Barbados	784		—		—		784		—		2,063		—		2,063
Belgium	3,554		—		—		3,554		3,007		—		—		3,007
Bermuda	38,059		2,237,372		347,802		2,623,233		36,827		2,133,859		333,845		2,504,531
Canada	553,941		—		—		553,941		759,437		—		—		759,437
Cayman	55,360		931,254		208,404		1,195,018		18,138		730,418		222,189		970,745
Guernsey	4		855,553		123,376		978,933		6		290,578		22,619		313,203
Japan	16,183		—		—		16,183		14,271		—		—		14,271
Jersey	—		7,219		—		7,219		—		9,083		449		9,532
Netherlands	410,461		—		—		410,461		—		—		—		—
New Zealand	6,174		—		—		6,174		1,082		—		—		1,082
Norway	1,204		—		—		1,204		8,750		—		—		8,750
Saint Lucia	—		29,400		—		29,400		—		90,000		—		90,000
Switzerland	8,015		—		—		8,015		6,637		—		—		6,637
The Bahamas	1,607		12,859		—		14,466		1,534		14,367		—		15,901
United Kingdom	1,742,676		1,074,875		108,599		2,926,150		725,634		783,708		114,515		1,623,857
United States	898,262		—		—		898,262		411,248		—		—		411,248
Other	3,493		—		—		3,493		1,314		—		—		1,314
Sub-total	3,910,733		5,148,532		788,181		9,847,446		2,133,560		4,054,076		693,617		6,881,253
General allowance	—		( 5,910	)	—		( 5,910	)	—		( 10,187	)	—		( 10,187	)
Total	3,910,733		5,142,622		788,181		9,841,536		2,133,560		4,043,889		693,617		6,871,066

Note 8: Premises, equipment and computer software

	December 31, 2019						December 31, 2018
Category	Cost		Accumulated depreciation		Net carrying value		Cost		Accumulated depreciation		Net carrying value
Land	8,730		—		8,730		8,612		—		8,612
Buildings	156,756		( 66,370	)	90,386		144,196		( 61,853	)	82,343
Equipment	22,928		( 17,062	)	5,866		21,323		( 15,490	)	5,833
Computer hardware and software in use	189,380		( 144,236	)	45,144		177,017		( 121,652	)	55,365
Computer software in development	8,107		—		8,107		5,907		—		5,907
Total	385,901		( 227,668	)	158,233		357,055		( 198,995	)	158,060

	Year ended
Depreciation charged to operating expenses	December 31, 2019		December 31, 2018		December 31, 2017
Buildings (included in Property expense)	4,492		4,283		3,781
Equipment (included in Property expense)	1,524		1,413		1,336
Computer hardware and software (included in Technology and communication expense)	20,620		20,441		18,382
Total depreciation charged to operating expenses	26,636		26,137		23,499

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Note 9: Goodwill and other intangible assets

Goodwill

	Segment
	Cayman		Channel Islands and the UK		Other		Total
Balance at December 31, 2016	—		19,622		—		19,622
Foreign exchange translation adjustment	—		1,907		—		1,907
Balance at December 31, 2017	—		21,529		—		21,529
Acquisitions during the year	551		1,231		2,086		3,868
Foreign exchange translation adjustment	—		( 1,333	)	( 73	)	( 1,406	)
Balance at December 31, 2018	551		21,427		2,013		23,991
Foreign exchange translation adjustment	—		818		29		847
Balance at December 31, 2019	551		22,245		2,042		24,838

Customer Relationship Intangible Assets

	December 31, 2019						December 31, 2018
Business segment	Cost		Accumulated amortization		Net carrying amount		Cost		Accumulated amortization		Net carrying amount
Bermuda	29,785		( 13,579	)	16,206		29,785		( 11,733	)	18,052
Cayman	17,728		( 5,672	)	12,056		17,728		( 4,571	)	13,157
Channel Islands and the UK	90,069		( 51,435	)	38,634		65,698		( 51,210	)	14,488
Other	5,563		( 794	)	4,769		5,563		( 509	)	5,054
Total	143,145		( 71,480	)	71,665		118,774		( 68,023	)	50,751

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, 2019 , the Bank acquired $ 24.4 million new customer intangible assets with an estimated useful life of 15 years through a business acquisition (see Note 27: 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 27: Business combinations ) and $ 1.3 million via asset acquisitions. During the year ended December 31, 2017 , no new customer intangible assets were acquired. The amortization expense amounted to $ 5.5 million ( December 31, 2018 : $ 5.1 million , December 31, 2017 : $ 4.2 million ) and the foreign exchange translation adjustment decreased the net carrying amount by $ 2.0 million ( December 31, 2018 : decreased by $ 1.5 million , December 31, 2017 : decreased by $ 1.0 million ). The estimated aggregate amortization expense for each of the succeeding five years is $ 5.9 million .

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Note 10: Customer deposits and deposits from banks

By Maturity
	Demand				Total demand deposits		Term								Total term deposits
December 31, 2019	Non-interest bearing		Interest bearing				Within 3 months		3 to 6 months		6 to 12 months		After 12 months				Total deposits
Customers
Demand or less than $100k¹	2,229,974		7,131,016		9,360,990		31,666		9,355		13,497		16,478		70,996		9,431,986
Term - $100k or more	N/A		N/A		—		2,398,802		224,435		290,917		61,726		2,975,880		2,975,880
Total customer deposits	2,229,974		7,131,016		9,360,990		2,430,468		233,790		304,414		78,204		3,046,876		12,407,866
Banks
Demand or less than $100k	8,282		21,047		29,329		—		—		—		—		—		29,329
Term - $100k or more	N/A		N/A		—		3,817		510		103		—		4,430		4,430
Total bank deposits	8,282		21,047		29,329		3,817		510		103		—		4,430		33,759
Total deposits	2,238,256		7,152,063		9,390,319		2,434,285		234,300		304,517		78,204		3,051,306		12,441,625
	Demand				Total demand deposits		Term								Total term deposits
December 31, 2018	Non-interest bearing		Interest bearing				Within 3 months		3 to 6 months		6 to 12 months		After 12 months				Total deposits
Customers
Demand or less than $100k¹	2,111,496		5,338,347		7,449,843		31,101		9,692		12,754		15,151		68,698		7,518,541
Term - $100k or more	N/A		N/A		—		1,206,918		218,449		419,615		54,896		1,899,878		1,899,878
Total customer deposits	2,111,496		5,338,347		7,449,843		1,238,019		228,141		432,369		70,047		1,968,576		9,418,419
Banks
Demand or less than $100k	8,100		18,965		27,065		—		—		—		—		—		27,065
Term - $100k or more	N/A		N/A		—		6,656		—		101		—		6,757		6,757
Total bank deposits	8,100		18,965		27,065		6,656		—		101		—		6,757		33,822
Total deposits	2,119,596		5,357,312		7,476,908		1,244,675		228,141		432,470		70,047		1,975,333		9,452,241

¹ The weighted-average interest rate on interest-bearing demand deposits as at December 31, 2019 is 0.20 % ( December 31, 2018 : 0.13 % ).

By Type and Segment	December 31, 2019						December 31, 2018
	Payable on demand		Payable on a fixed date		Total		Payable on demand		Payable on a fixed date		Total
Bermuda
Customers	3,137,577		1,265,679		4,403,256		3,537,510		958,092		4,495,602
Banks	8,282		—		8,282		8,100		—		8,100
Cayman
Customers	2,974,866		475,418		3,450,284		2,847,793		472,442		3,320,235
Banks	20,253		4,430		24,683		17,564		6,757		24,321
Channel Islands and the UK
Customers	3,248,547		1,305,779		4,554,326		1,064,540		538,042		1,602,582
Banks	794		—		794		1,401		—		1,401
Total Customers	9,360,990		3,046,876		12,407,866		7,449,843		1,968,576		9,418,419
Total Banks	29,329		4,430		33,759		27,065		6,757		33,822
Total deposits	9,390,319		3,051,306		12,441,625		7,476,908		1,975,333		9,452,241

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Note 11: Employee benefit plans

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.

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 and, in accordance with GAAP, 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 will be 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.

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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, 2019 .

	December 31, 2019				December 31, 2018				December 31, 2017
	Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan
Accumulated benefit obligation at end of year	168,791		110,347		148,966		117,203		179,613		127,687
Change in projected benefit obligation
Projected benefit obligation at beginning of year	148,966		117,203		179,613		127,687		178,068		126,334
Service cost	—		58		—		63		—		64
Interest cost	5,034		4,741		4,971		4,305		5,361		4,703
Benefits paid	( 7,546	)	( 4,010	)	( 17,274	)	( 3,263	)	( 13,444	)	( 2,118	)
Prior service cost	—		—		212		—		—		—
Plan amendment	—		2,369		—		—		—		—
Settlement and curtailment of liability	( 2,549	)	—		( 1,825	)	—		( 6,108	)	—
Actuarial (gain) loss	21,950		( 10,014	)	( 12,423	)	( 11,589	)	7,384		( 1,296	)
Foreign exchange translation adjustment	2,936		—		( 4,308	)	—		8,352		—
Projected benefit obligation at end of year	168,791		110,347		148,966		117,203		179,613		127,687
Change in plan assets
Fair value of plan assets at beginning of year	154,151		—		185,495		—		172,206		—
Actual return on plan assets	25,225		—		( 11,618	)	—		14,801		—
Employer contribution	2,605		4,010		3,653		3,263		8,448		2,118
Plan settlement	( 2,043	)	—		( 1,608	)	—		( 5,123	)	—
Benefits paid	( 7,546	)	( 4,010	)	( 17,274	)	( 3,263	)	( 13,444	)	( 2,118	)
Foreign exchange translation adjustment	3,008		—		( 4,497	)	—		8,607		—
Fair value of plan assets at end of year	175,400		—		154,151		—		185,495		—
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost included in other assets	6,609		—		5,185		—		6,993		—
Accrued pension benefit cost included in employee benefit plans liability	—		( 110,347	)	—		( 117,203	)	( 1,111	)	( 127,687	)
Surplus (deficit) of plan assets over projected benefit obligation at measurement date	6,609		( 110,347	)	5,185		( 117,203	)	5,882		( 127,687	)

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		Year ended
		December 31, 2019				December 31, 2018				December 31, 2017
		Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial gain (loss), excluding deferred taxes		( 67,118	)	( 2,660	)	( 65,506	)	( 12,946	)	( 62,521	)	( 27,150	)
Net prior service credit (cost)		( 190	)	( 8,390	)	( 202	)	( 6,397	)	—		( 6,436	)
Deferred income taxes assets (liabilities)		996		—		816		—		1,180		—
Net amount recognized in accumulated other comprehensive loss		( 66,312	)	( 11,050	)	( 64,892	)	( 19,343	)	( 61,341	)	( 33,586	)
Annual Benefit Expense
Expense component	Line item in the consolidated statements of operations
Service cost	Salaries and other employee benefits	—		58		—		63		—		64
Interest cost	Non-service employee benefits expense	5,034		4,741		4,971		4,305		5,361		4,703
Expected return on plan assets	Non-service employee benefits expense	( 7,563	)	—		( 8,720	)	—		( 8,199	)	—
Amortization of net actuarial (gains) losses	Non-service employee benefits expense	2,197		272		2,106		2,615		2,238		3,514
Amortization of prior service (credit) loss	Non-service employee benefits expense	20		376		—		39		—		( 759	)
(Gain) loss on settlement	Net other gains (losses) / Non-service employee benefits expense	572		—		1,757		—		1,232		—
Defined benefit (income) expense		260		5,447		114		7,022		632		7,522
Defined contribution expense		8,340		—		7,442		—		6,521		—
Total benefit (income) expense		8,600		5,447		7,556		7,022		7,153		7,522
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.
Other Changes Recognized in Other Comprehensive Income (Loss)
Net gain (loss) arising during the year		( 3,472	)	10,014		( 5,987	)	11,589		1,472		1,296
Prior service credit (cost) arising during the year		—		( 2,369	)	( 212	)	—		—		—
Amortization of net actuarial (gains) losses		2,407		272		2,106		2,615		2,247		3,514
Amortization of prior service (credit) cost		19		376		—		39		—		( 759	)
Change in deferred taxes		149		—		( 298	)	—		( 595	)	—
Foreign exchange adjustment		( 523	)	—		840		—		( 1,233	)	—
Total changes recognized in other comprehensive income (loss)		( 1,420	)	8,293		( 3,551	)	14,243		1,891		4,051

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.

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Actuarial Assumptions

	Year ended
	December 31, 2019				December 31, 2018				December 31, 2017
	Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan		Pension plans		Post- retirement medical benefit plan
Actuarial assumptions used to determine annual benefit expense
Weighted average discount rate	3.65	%	4.40	%	3.05	%	3.73	%	3.40	%	4.37	%
Weighted average rate of compensation increases 1	2.50	%	N/A		2.50	%	N/A		2.50	%	N/A
Weighted average expected long-term rate of return on plan assets	5.00	%	N/A		4.70	%	N/A		4.75	%	N/A
Weighted average annual medical cost increase rate	N/A		7.5% to 4.5% in 2035		N/A		7.7% to 4.5% in 2035		N/A		7.8% to 4.5% in 2035
Actuarial assumptions used to determine benefit obligations at end of year
Weighted average discount rate	2.65	%	3.38	%	3.65	%	4.40	%	3.05	%	3.73	%
Weighted average rate of compensation increases 1	2.30	%	N/A		2.50	%	N/A		2.40	%	N/A
Weighted average annual medical cost increase rate	N/A		7.3% to 4.5% in 2040		N/A		7.5% to 4.5% in 2035		N/A		7.7% to 4.5% in 2035
1 Only the UK subsidiary plan is impacted by potential future compensation increases.

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.

	December 31, 2019				December 31, 2018
Weighted average actual and target asset allocations of the pension plans by asset category	Actual allocation		Target allocation		Actual allocation		Target allocation
Debt securities (including debt mutual funds)	32	%	36	%	33	%	47	%
Equity securities (including equity mutual funds)	51	%	47	%	55	%	37	%
Other	17	%	17	%	12	%	16	%
Total	100	%	100	%	100	%	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, 2019								December 31, 2018
	Fair value determination								Fair value determination
	Level 1		Level 2		Level 3		Total fair value		Level 1		Level 2		Level 3		Total fair value
US government and federal agencies	—		19,445		—		19,445		—		10,221		—		10,221
Non-US governments debt securities	—		1,089		—		1,089		—		1,039		—		1,039
Corporate debt securities	—		35,688		—		35,688		—		39,589		—		39,589
Equity securities and mutual funds	1,112		88,631		—		89,743		925		83,638		—		84,563
Other	10,049		406		18,980		29,435		—		1,779		16,960		18,739
Total fair value of plans' assets	11,161		145,259		18,980		175,400		925		136,266		16,960		154,151

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, 2019 , 26.8 % ( December 31, 2018 : 32.6 % ) 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, 2019 , 0.6 % ( December 31, 2018 : 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.

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Estimated 2020 Bank contribution to and estimated benefit payments for the next ten years under the pension and post-retirement medical benefit plans are as follows:

	Pension plans		Post- retirement medical benefit plan
Estimated Bank contributions for the full year ending December 31, 2020	2,472		4,161
Estimated benefit payments by year:
2020	7,300		4,161
2021	7,300		4,474
2022	7,300		4,716
2023	7,200		4,959
2024	7,100		5,194
2025-2029	34,400		29,109

Note 12: Credit related arrangements, repurchase agreements and commitments

Commitments

As at December 31, 2019 , the Bank was committed to expenditures under contract for information technology services sourcing of $ 27.6 million ( December 31, 2018 : $ 39.2 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	Sourcing		Other		Total
2020	15,598		12,561		28,159
2021	11,998		7,006		19,004
2022	—		2,889		2,889
2023	—		1,581		1,581
2024	—		1,212		1,212
2025 & thereafter	—		1,028		1,028
Total commitments	27,596		26,277		53,873

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 Bank has a facility by 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, 2019 , $ 143.6 million ( December 31, 2018 : $ 137.4 million ) of standby letters of credit were issued under this facility.

Outstanding unfunded commitments to extend credit	December 31, 2019		December 31, 2018
Commitments to extend credit	549,049		445,215
Documentary and commercial letters of credit	355		561
Total unfunded commitments to extend credit	549,404		445,776

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 is 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.

	December 31, 2019						December 31, 2018
Outstanding financial guarantees	Gross		Collateral		Net		Gross		Collateral		Net
Standby letters of credit	230,971		223,711		7,260		245,156		237,051		8,105
Letters of guarantee	7,806		7,672		134		2,685		2,599		86
Total	238,777		231,383		7,394		247,841		239,650		8,191

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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, 2019 , the Bank had 13 open positions ( December 31, 2018 : 2 ) 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 $ 142.3 million ( December 31, 2018 : $ 27.3 million ) and are included in securities purchased under agreement to resell on the consolidated balance sheets. As at December 31, 2019 , there were no positions ( December 31, 2018 : no positions) which were offset on the balance sheet 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, 2019 , a provision of $ 5.5 million ( December 31, 2018 : $ 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.

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 (December 31, 2017: $ 4.9 million ).

	Year ended
	December 31, 2019
Lease costs
Operating lease costs	6,606
Short-term lease costs	858
Sublease (income)	( 534	)
Total net lease cost	6,930
Operating lease income	677
Other information for the period
Right-of-use assets related to new operating lease liabilities	28,703
Operating cash flows from operating leases	7,071
Other information at end of period	As at December 31, 2019
Operating leases right-of-use assets (included in other assets on the balance sheets)	47,947
Operating lease liabilities (included in other liabilities on the balance sheets)	48,334
Weighted average remaining lease term for operating leases (in years)	10.37
Weighted average discount rate for operating leases	5.25	%
The following table summarizes the maturity analysis of the Bank's commitments for long-term leases as at December 31, 2019:
Year ending December 31	Operating Leases
2020	8,570
2021	8,312
2022	7,923
2023	7,004
2024	4,324
2025 & thereafter	27,194
Total commitments	63,327
Less: effect of discounting cash flows to their present value	( 14,993	)
Operating lease liabilities	48,334

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Note 14: Exit cost obligations

During December 2015, the Bank agreed to commence an orderly wind-down of the deposit taking and investment management businesses in the United Kingdom jurisdiction in the Channel Islands and the UK segment as reflected in management segment reporting described in Note 16: Segmented information . In making this determination, the Bank considered the increasing regulatory pressure along with periods of negative profitability and made the determination that an orderly wind-down of the deposit taking and investment management businesses in the UK was prudent for Butterfield as a group. The orderly wind-down was largely completed by the end of 2016 with the change in business operations to mortgage lending services and the change in name from Butterfield Bank (UK) Limited to Butterfield Mortgages Limited. The amounts expensed shown in the following table were included in the consolidated statements of operations as restructuring costs under non-interest expenses.

Related to this orderly wind-down, it was determined that the core banking system utilized in the operations of the UK jurisdiction was impaired (included in premises, equipment and computer software on the consolidated balance sheets). This determination was based upon the realizable value of this software upon completion of the orderly wind-down and was expensed in the year ended December 31, 2015.

	Total exit costs recognized		Total amounts paid		Exit cost liability
	Years 2015 - 2017		Years 2015 - 2017		As at December 31, 2019		As at December 31, 2018
Staff redundancy expenses	3,680		3,680		—		—
Professional services	4,388		4,388		—		—
Lease termination expenses	649		649		—		—
Other expenses	1,504		1,504		—		—
Total	10,221		10,221		—		—

Note 15: Loan interest income

	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
Contractual interest earned	228,892		213,908		183,571
Amortization
Amortization of fair value hedge	( 316	)	( 501	)	( 722	)
Amortization of loan origination fees (net of amortized costs)	5,456		5,088		4,171
Total loan interest income	234,032		218,495		187,020
Balance of unamortized fair value hedge included in loans as at year end	1,676		1,992		2,493
Balance of unamortized loan fees included in loans as at year end	11,628		10,010		9,364

Note 16: Segmented information

The Bank is managed by the Group Chief Executive Officer (“CEO”) on a geographic basis. In 2017, the Bank presented six segments which included Bermuda, Cayman, Guernsey, Switzerland, The Bahamas and the UK. In 2018, the Bank reassessed the segment reporting as a result of acquisitions which were announced in 2017 and early 2018 and concluded on the following three geographic segments: Bermuda, Cayman, and Channel Islands and the UK. 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 Group CEO. The Group 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 CEO. Segment results are determined based on the Bank's management reporting system, which assigns balance sheet and income statement 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 expense. 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.

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

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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.

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	December 31, 2019		December 31, 2018
Bermuda	5,220,016		5,387,347
Cayman	3,839,074		3,705,468
Channel Islands and the UK	5,108,357		1,966,547
Other	35,148		30,035
Total assets before inter-segment eliminations	14,202,595		11,089,397
Less: inter-segment eliminations	( 281,020	)	( 316,219	)
Total	13,921,575		10,773,178

2019	Net interest income				Provision for credit recoveries (losses)		Non-interest income		Net revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Year ended December 31	Customer		Inter- segment
Bermuda	182,674		1,236		( 3,088	)	89,114		269,936		2,172		272,108		209,417		62,691
Cayman	113,493		1,071		1,893		51,853		168,310		570		168,880		61,057		107,823
Channel Islands and the UK	49,486		( 2,307	)	1,379		34,319		82,877		43		82,920		74,217		8,703
Other	49		—		—		22,119		22,168		( 18	)	22,150		24,292		( 2,142	)
Total before eliminations	345,702		—		184		197,405		543,291		2,767		546,058		368,983		177,075
Inter-segment eliminations	—		—		—		( 13,430	)	( 13,430	)	—		( 13,430	)	( 13,430	)	—
Total	345,702		—		184		183,975		529,861		2,767		532,628		355,553		177,075
2018	Net interest income				Provision for credit recoveries (losses)		Non-interest income		Net revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Year ended December 31	Customer		Inter- segment
Bermuda	202,901		2,383		6,823		87,352		299,459		( 20	)	299,439		202,318		97,121
Cayman	102,793		416		1,297		47,781		152,287		349		152,636		60,666		91,970
Channel Islands and the UK	37,276		( 2,799	)	( 1,129	)	26,824		60,172		( 1,185	)	58,987		50,353		8,634
Other	19		—		—		15,157		15,176		1		15,177		17,718		( 2,541	)
Total before eliminations	342,989		—		6,991		177,114		527,094		( 855	)	526,239		331,055		195,184
Inter-segment eliminations	—		—		—		( 8,428	)	( 8,428	)	—		( 8,428	)	( 8,428	)	—
Total	342,989		—		6,991		168,686		518,666		( 855	)	517,811		322,627		195,184
2017	Net interest income				Provision for credit recoveries (losses)		Non-interest income		Net revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Year ended December 31	Customer		Inter- segment
Bermuda	178,600		1,324		4,618		81,416		265,958		2,785		268,743		192,293		76,450
Cayman	86,074		3		1,033		46,004		133,114		( 28	)	133,086		59,400		73,686
Channel Islands and the UK	24,978		( 1,367	)	186		24,445		48,242		( 1,488	)	46,754		43,758		2,996
Other	92		40		—		11,424		11,556		—		11,556		11,436		120
Total before eliminations	289,744		—		5,837		163,289		458,870		1,269		460,139		306,887		153,252
Inter-segment eliminations	—		—		—		( 5,464	)	( 5,464	)	—		( 5,464	)	( 5,464	)	—
Total	289,744		—		5,837		157,825		453,406		1,269		454,675		301,423		153,252

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Note 17: Derivative instruments and risk management

The Bank uses derivatives for risk management purposes and to meet the needs of its customers. The Bank’s derivative contracts principally involve 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.

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 consist of designated interest rate swaps and are used to minimize the Bank's exposure to changes in the fair value of assets and liabilities due to movements in interest rates. The Bank previously entered into interest rate swaps to convert its fixed-rate long-term loans to floating-rate loans, and convert fixed-rate deposits to floating-rate deposits. During the year ended December 31, 2011, the Bank canceled its interest rate swaps designated as fair value hedges of loans receivable and therefore discontinued hedge accounting for these financial instruments. The fair value attributable to the hedged loans are accounted for prospectively and are being amortized to net income over the remaining life of each individual loan, which could extend to year 2029, using the effective interest method.

Net investment hedges includes 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 AOCL 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 AOCL (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 AOCL 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 AOCL is based on the spot exchange rate between the reporting currency of the Bank and the functional currency of the respective subsidiary. See Note 24: Accumulated other comprehensive loss for details on the amount recognized into AOCL 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 foreign exchange risk of the Bank's exposure. 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.

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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.

December 31, 2019	Derivative instrument	Number of contracts		Notional amounts		Gross positive fair value		Gross negative fair value		Net fair value
Risk management derivatives
Net investment hedges	Currency swaps	1		9,502		—		( 118	)	( 118	)
Derivatives not formally designated as hedging instruments	Currency swaps	9		207,032		1,632		( 1,339	)	293
Subtotal risk management derivatives				216,534		1,632		( 1,457	)	175
Client services derivatives	Spot and forward foreign exchange	352		3,280,636		31,060		( 30,602	)	458
Total derivative instruments				3,497,170		32,692		( 32,059	)	633
December 31, 2018	Derivative instrument	Number of contracts		Notional amounts		Gross positive fair value		Gross negative fair value		Net fair value
Risk management derivatives
Net investment hedges	Currency swaps	1		2,935		—		( 32	)	( 32	)
Derivatives not formally designated as hedging instruments	Currency swaps	8		235,875		269		( 569	)	( 300	)
Subtotal risk management derivatives				238,810		269		( 601	)	( 332	)
Client services derivatives	Spot and forward foreign exchange	288		2,064,762		13,331		( 12,671	)	660
Total derivative instruments				2,303,572		13,600		( 13,272	)	328

In addition to the above, as at December 31, 2019 foreign denominated deposits of £ 251.4 million ( December 31, 2018 : £ 124.5 million ) and CHF 0.4 million ( December 31, 2018 : 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 collaterals 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.

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	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
December 31, 2019							Gross fair value of derivatives		Cash collateral received / paid		Net exposures
Derivative assets
Spot and forward foreign exchange and currency swaps	32,692		( 2,233	)	30,459		—		( 3,224	)	27,235
Derivative liabilities
Spot and forward foreign exchange and currency swaps	32,059		( 2,233	)	29,826		—		( 997	)	28,829
Net positive fair value					633
	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
December 31, 2018							Gross fair value of derivatives		Cash collateral received / paid		Net exposures
Derivative assets
Spot and forward foreign exchange and currency swaps	13,600		( 2,036	)	11,564		—		( 3,216	)	8,348
Derivative liabilities
Spot and forward foreign exchange and currency swaps	13,272		( 2,036	)	11,236		—		( 1,861	)	9,375
Net positive fair value					328

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.

		Year ended
Derivative instrument	Consolidated statements of operations line item	December 31, 2019		December 31, 2018		December 31, 2017
Spot and forward foreign exchange	Foreign exchange revenue	( 202	)	( 25	)	541
Currency swaps, not designated as hedge	Foreign exchange revenue	592		1,697		( 4,916	)
Currency swaps - net investment hedge	Foreign exchange revenue	—		—		( 11,334	)
Total net gains (losses) recognized in net income		390		1,672		( 15,709	)
Derivative instrument	Consolidated statements of comprehensive income line item	December 31, 2019		December 31, 2018		December 31, 2017
Currency swaps - net investment hedge	Net change in unrealized gains and (losses) on translation of net investment in foreign operations	( 85	)	—		( 4,410	)
Total net gains (losses) recognized in comprehensive income		( 85	)	—		( 4,410	)

Note 18: 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, 2019 and the year ended December 31, 2018 .

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	December 31, 2019								December 31, 2018
	Fair value						Total carrying amount / fair value		Fair value						Total carrying amount / fair value
	Level 1		Level 2		Level 3				Level 1		Level 2		Level 3
Items that are recognized at fair value on a recurring basis:
Financial assets
Equity securities
Mutual funds	7,141		278		—		7,419		6,176		319		—		6,495
Total equity securities	7,141		278		—		7,419		6,176		319		—		6,495
Available-for-sale investments
US government and federal agencies	—		2,052,446		—		2,052,446		—		1,786,507		—		1,786,507
Non-US governments debt securities	—		25,676		—		25,676		—		25,425		—		25,425
Corporate debt securities	—		—		—		—		—		78,713		—		78,713
Asset-backed securities - Student loans	—		—		12,891		12,891		—		—		12,626		12,626
Commercial mortgage-backed securities	—		—		—		—		—		123,209		—		123,209
Residential mortgage-backed securities	—		129,328		—		129,328		—		156,269		—		156,269
Total available-for-sale	—		2,207,450		12,891		2,220,341		—		2,170,123		12,626		2,182,749
Other assets - Derivatives	—		30,459		—		30,459		—		11,564		—		11,564
Financial liabilities
Other liabilities - Derivatives	—		29,826		—		29,826		—		11,236		—		11,236

Level 3 Reconciliation

The Level 3 financial instruments, 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 broker quote. The fair value provided by the broker is based on the last trading price of similar securities but as the market for the security is illiquid, a Level 2 classification is not supported.

The table below summarizes realized and unrealized gains and losses for Level 3 assets still held at the reporting date.

	December 31, 2019		December 31, 2018		December 31, 2017
	Available- for-sale investments		Available- for-sale investments		Available- for-sale investments
Carrying amount at beginning of year	12,626		12,493		12,493
Realized and unrealized gains (losses) recognized in other comprehensive income	265		133		—
Carrying amount at end of year	12,891		12,626		12,493

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Items Other Than Those Recognized at Fair Value on a Recurring Basis:
		December 31, 2019						December 31, 2018
	Level	Carrying amount		Fair value		Appreciation / (depreciation)		Carrying amount		Fair value		Appreciation / (depreciation)
Financial assets
Cash due from banks	Level 1	2,550,070		2,550,070		—		2,053,883		2,053,883		—
Securities purchased under agreements to resel l	Level 2	142,283		142,283		—		27,341		27,341		—
Short-term investments	Level 1	1,218,380		1,218,380		—		52,336		52,336		—
Investments held-to-maturity	Level 2	2,208,663		2,255,987		47,324		2,066,120		2,036,214		( 29,906	)
Loans, net of allowance for credit losses	Level 2	5,142,622		5,161,257		18,635		4,043,889		4,047,262		3,373
Other real estate owned¹	Level 2	3,842		3,842		—		5,346		5,346		—
Financial liabilities
Customer deposits (excluding demand deposits)
Term deposits	Level 2	3,046,876		3,050,383		( 3,507	)	1,968,576		1,970,004		( 1,428	)
Deposits from banks	Level 2	33,759		33,759		—		33,822		33,822		—
Long-term debt	Level 2	143,500		147,574		( 4,074	)	143,322		146,261		( 2,939	)

¹ The current carrying value of OREO is adjusted to fair value only when there is devaluation below carrying value.

Note 19: 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. In 2019, the classification of certain interest bearing and non-interest bearing cash items was revised. The 2018 table below was revised to conform to current year presentation.

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December 31, 2019	Earlier of contractual maturity or repricing date
(in $ millions)	Within 3 months		3 to 6 months		6 to 12 months		1 to 5 years		After 5 years		Non-interest bearing funds		Total
Assets
Cash due from banks	2,462		—		—		—		—		88		2,550
Securities purchased under agreement to resell	142		—		—		—		—		—		142
Short-term investments	622		591		3		—		—		2		1,218
Investments	415		23		11		102		3,878		7		4,436
Loans	4,025		16		148		292		648		14		5,143
Other assets	—		—		—		—		—		433		433
Total assets	7,666		630		162		394		4,526		544		13,922
Liabilities and shareholders' equity
Shareholders’ equity	—		—		—		—		—		964		964
Demand deposits	7,151		—		—		—		—		2,239		9,390
Term deposits	2,435		234		305		78		—		—		3,052
Other liabilities	—		—		—		—		—		373		373
Long-term debt	70		—		—		73		—		—		143
Total liabilities and shareholders' equity	9,656		234		305		151		—		3,576		13,922
Interest rate sensitivity gap	( 1,990	)	396		( 143	)	243		4,526		( 3,032	)	—
Cumulative interest rate sensitivity gap	( 1,990	)	( 1,594	)	( 1,737	)	( 1,494	)	3,032		—		—
December 31, 2018	Earlier of contractual maturity or repricing date
(in $ millions)	Within 3 months		3 to 6 months		6 to 12 months		1 to 5 years		After 5 years		Non-interest bearing funds		Total
Assets
Cash due from banks	1,962		—		—		—		—		92		2,054
Securities purchased under agreement to resell	27		—		—		—		—		—		27
Short-term investments	40		10		—		—		—		2		52
Investments	488		35		8		245		3,473		6		4,255
Loans	3,160		278		38		223		330		15		4,044
Other assets	—		—		—		—		—		341		341
Total assets	5,677		323		46		468		3,803		456		10,773
Liabilities and shareholders' equity
Shareholders’ equity	—		—		—		—		—		882		882
Demand deposits	5,357		—		—		—		—		2,120		7,477
Term deposits	1,245		228		432		70		—		—		1,975
Other liabilities	—		—		—		—		—		296		296
Long-term debt	70		—		—		73		—		—		143
Total liabilities and shareholders' equity	6,672		228		432		143		—		3,298		10,773
Interest rate sensitivity gap	( 995	)	95		( 386	)	325		3,803		( 2,842	)	—
Cumulative interest rate sensitivity gap	( 995	)	( 900	)	( 1,286	)	( 961	)	2,842		—		—

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Note 20: Long-term debt

On May 28, 2003, the Bank issued US $ 125 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches, namely US $ 78 million in Series A notes due 2013 and US $ 47 million in Series B notes due 2018. The issuance was by way of private placement with US institutional investors. The notes were listed on the BSX in the specialist debt securities category. Part of the proceeds of the issue were used to repay the entire amount of the US $ 75 million outstanding subordinated notes redeemed in July 2003. The notes issued under Series A paid a fixed coupon of 3.94 % until May 27, 2008 when it was redeemed in whole by the Bank. The Series B notes paid a fixed coupon of 5.15 % until May 27, 2013 when they became redeemable in whole at the Bank’s option. The Series B notes were priced at a spread of 1.35 % over the 10-year US Treasury yield. In May 2018, the Bank fully redeemed the 2003 issuance Series B for its nominal value of $ 47 million .

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 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 notes issued under Series A paid a fixed coupon of 4.81 % until July 2, 2010 after which the coupon rate became floating and the principal became redeemable in whole at the Bank's option. The Series B notes paid a fixed coupon of 5.11 % until July 2, 2015 when they also became redeemable in whole at the Bank’s option. The Series A notes were priced at a spread of 1.00 % over the five-year US Treasury yield and 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 a portion of the outstanding 5.11 % 2005 Series B Subordinated notes (“the Note”). The face value of the portion of the Note repurchased was $ 15 million and the purchase price paid for the repurchase was $ 13.875 million , which realized a gain of $ 1.125 million . During January 2014, the Bank fully redeemed the 2005 issuance Series A subordinated debt for its nominal value of $ 90 million .

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 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 notes issued under Series A paid a fixed coupon of 7.59 % until May 27, 2013 when they became redeemable in whole at the option of the Bank. In May 2013, the Bank exercised its option to redeem the Series A note outstanding at face value. The Series B notes pay 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.

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.

No interest was capitalized during the years ended December 31, 2019 , 2018 and 2017 .

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, 2019 . The interest payments are calculated until contractual maturity using the current London Inter-bank Offered Rate ("LIBOR") rates.

									Interest payments until contractual maturity
Long-term debt	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
Bermuda
2005 issuance - Series B	July 2, 2015	July 2, 2020	5.11	%	3 months US$ LIBOR + 1.695%		45,000		1,234		—		—
2008 issuance - Series B	May 27, 2018	May 27, 2023	8.44	%	3 months US$ LIBOR + 4.929%		25,000		1,738		4,326		—
2018 issuance	June 1, 2023	June 1, 2028	5.25	%	3 months US$ LIBOR + 2.255%		75,000		3,938		14,606		11,085
Total							145,000		6,910		18,932		11,085
Unamortized debt issuance costs							( 1,500	)
Long-term debt less unamortized debt issuance costs							143,500

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Note 21: Earnings per share

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, 2019 , options to purchase an average of 0.2 million ( December 31, 2018 : 0.3 million , December 31, 2017 : 0.9 million ) common shares were outstanding. During the year ended December 31, 2019 , the average number of outstanding awards of unvested common shares was 0.9 million ( December 31, 2018 : 0.9 million , December 31, 2017 : 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.

	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
Net income	177,075		195,184		153,252
Basic Earnings Per Share
Weighted average number of common shares issued	54,338		55,159		54,296
Weighted average number of common shares held as treasury stock	( 1,166	)	( 213	)	—
Weighted average number of common shares (in thousands)	53,172		54,946		54,296
Basic Earnings Per Share	3.33		3.55		2.82
Diluted Earnings Per Share
Weighted average number of common shares	53,172		54,946		54,296
Net dilution impact related to options to purchase common shares	118		223		561
Net dilution impact related to awards of unvested common shares	369		576		594
Weighted average number of diluted common shares (in thousands)	53,659		55,745		55,451
Diluted Earnings Per Share	3.30		3.50		2.76

Note 22: Share-based payments

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.

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 Plan

Under the 2010 Plan, 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 Plan 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.

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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.

Changes in Outstanding Stock Option Plans
	Number of shares transferable upon exercise (thousands)						Weighted average exercise price ($)				Weighted average remaining life (years)		Aggregate intrinsic value ($ thousands)
Year ended December 31, 2019	1997 Stock Option Plan		2010 Stock Option Plan		Total		1997 Stock Option Plan		2010 Stock Option Plan		1997 Stock Option Plan	2010 Stock Option Plan
Outstanding at beginning of year	25		189		214		64.51		11.98
Exercised	—		( 30	)	( 30	)	—		11.50				659
Expiration at end of plan life	( 25	)	—		( 25	)	64.51		—
Outstanding at end of year	—		159		159		—		12.07		0.00	0.73	3,958
Vested and exercisable at end of year	—		159		159		—		12.07		0.00	0.73
	Number of shares transferable upon exercise (thousands)						Weighted average exercise price ($)				Weighted average remaining life (years)		Aggregate intrinsic value ($ thousands)
Year ended December 31, 2018	1997 Stock Option Plan		2010 Stock Option Plan		Total		1997 Stock Option Plan		2010 Stock Option Plan		1997 Stock Option Plan	2010 Stock Option Plan
Outstanding at beginning of year	58		476		534		113.46		11.73
Exercised	—		( 287	)	( 287	)	—		11.56				10,172
Forfeitures and cancellations	( 33	)	—		( 33	)	150.46		—
Outstanding at end of year	25		189		214		64.51		11.98		0.20	1.67	3,665
Vested and exercisable at end of year	25		189		214		64.51		11.98		0.20	1.67
	Number of shares transferable upon exercise (thousands)						Weighted average exercise price ($)				Weighted average remaining life (years)		Aggregate intrinsic value ($ thousands)
Year ended December 31, 2017	1997 Stock Option Plan		2010 Stock Option Plan		Total		1997 Stock Option Plan		2010 Stock Option Plan		1997 Stock Option Plan	2010 Stock Option Plan
Outstanding at beginning of year	116		1,950		2,066		132.13		11.57
Exercised	—		( 1,474	)	( 1,474	)	—		11.51				32,333
Forfeitures and cancellations	( 58	)	—		( 58	)	151.20		—
Outstanding at end of year	58		476		534		113.46		11.73		0.63	2.48	11,700
Vested and exercisable at end of year	58		476		534		113.46		11.73		0.63	2.48

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, 2019 , 2018 and 2017 was $ 35.77 , $ 39.25 and $ 31.13 , 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 - 2019

The 2019 ELTIP was approved on January 14, 2019. Under the Bank’s ELTIP plans for the years 2013 through 2019, 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.

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Changes in Outstanding ELTIP and EDIP awards (in thousands of shares transferable upon vesting)
	Year ended
	December 31, 2019				December 31, 2018				December 31, 2017
	EDIP		ELTIP		EDIP		ELTIP		EDIP		ELTIP
Outstanding at beginning of year	234		697		244		679		215		640
Granted	169		317		130		241		132		236
Vested (fair value in 2019: $18.9 million, 2018: $16.0 million, 2017: $10.2 million)	( 149	)	( 389	)	( 138	)	( 220	)	( 102	)	( 196	)
Forfeitures (resignations, retirements, redundancies)	( 3	)	( 7	)	( 2	)	( 3	)	( 1	)	( 1	)
Outstanding at end of year	251		618		234		697		244		679

Share-based Compensation Cost Recognized in Net Income
	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
	EDIP and ELTIP		EDIP and ELTIP		EDIP and ELTIP
Cost recognized in net income	17,459		11,664		8,110

Unrecognized Share-based Compensation Cost	December 31, 2019			December 31, 2018
	Unrecognized cost		Weighted average years over which it is expected to be recognized	Unrecognized cost		Weighted average years over which it is expected to be recognized
EDIP	4,744		1.71	4,442		1.73
ELTIP
Time vesting shares	121		0.48	1,746		1.03
Performance vesting shares	9,765		1.80	7,880		1.85
Total unrecognized expense	14,630			14,068

Note 23: Share buy-back plans

The Bank initially introduced two share buy-back programs on May 1, 2012 as a means to improve shareholder liquidity and facilitate growth in share value. Each program was approved by the Board of Directors for a period of 12 months, in accordance with the regulations of the BSX. The BSX must be advised monthly of shares purchased pursuant to each program.

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 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.

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.

In the year ended December 31, 2019, the Bank retired 2,928,788 shares which were previously held as Treasury Shares resulting from these buybacks.

		Year ended December 31
Common share buy-backs		2019		2018		2017		2016		2015		Total
Acquired number of shares (to the nearest 1)		2,293,788		1,254,212		—		97,053		250,371		3,895,424
Average cost per common share		35.55		38.62		—		16.36		19.42		35.02
Total cost (in US dollars)		81,534,076		48,442,768		—		1,588,189		4,862,248		136,427,281

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Note 24: Accumulated other comprehensive loss

	Unrealized (losses) on translation of net investment in foreign operations		HTM investments		Unrealized gains (losses) on AFS investments		Employee benefit plans
Year ended December 31, 2019							Pension		Post-retirement healthcare		Subtotal - employee benefits plans		Total AOCL
Balance at beginning of year	( 19,866	)	( 796	)	( 43,630	)	( 64,892	)	( 19,343	)	( 84,235	)	( 148,527	)
Other comprehensive income (loss), net of taxes	( 952	)	71		55,438		( 1,420	)	8,293		6,873		61,430
Balance at end of year	( 20,818	)	( 725	)	11,808		( 66,312	)	( 11,050	)	( 77,362	)	( 87,097	)
	Unrealized (losses) on translation of net investment in foreign operations		HTM investments		Unrealized gains (losses) on AFS investments		Employee benefit plans
Year ended December 31, 2018							Pension		Post- retirement healthcare		Subtotal - employee benefits plans		Total AOCL
Balance at beginning of year	( 17,549	)	( 839	)	( 15,737	)	( 61,341	)	( 33,586	)	( 94,927	)	( 129,052	)
Other comprehensive income (loss), net of taxes	( 2,317	)	43		( 27,893	)	( 3,551	)	14,243		10,692		( 19,475	)
Balance at end of year	( 19,866	)	( 796	)	( 43,630	)	( 64,892	)	( 19,343	)	( 84,235	)	( 148,527	)
	Unrealized (losses) on translation of net investment in foreign operations		HTM investments		Unrealized gains (losses) on AFS investments		Employee benefit plans
Year ended December 31, 2017							Pension		Post- retirement healthcare		Subtotal - employee benefits plans		Total AOCL
Balance at beginning of year	( 20,152	)	( 979	)	( 22,680	)	( 63,232	)	( 37,637	)	( 100,869	)	( 144,680	)
Other comprehensive income (loss), net of taxes	2,603		140		6,943		1,891		4,051		5,942		15,628
Balance at end of year	( 17,549	)	( 839	)	( 15,737	)	( 61,341	)	( 33,586	)	( 94,927	)	( 129,052	)

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Net Change of AOCL Components				Year ended
		Line item in the consolidated statements of operations, if any		December 31, 2019		December 31, 2018		December 31, 2017
Net unrealized gains (losses) on translation of net investment in foreign operations adjustments
Foreign currency translation adjustments		N/A		16,200		( 13,764	)	12,568
Gains (loss) on net investment hedge		N/A		( 17,152	)	11,447		( 9,965	)
Net change				( 952	)	( 2,317	)	2,603
Held-to-maturity investment adjustments
Amortization of net gains (losses) to net income		Interest income on investments		71		43		140
Net change				71		43		140
Available-for-sale investment adjustments
Gross unrealized gains (losses)		N/A		57,062		( 26,793	)	11,129
Transfer of realized (gains) losses to net income		Net realized gains (losses) on AFS investments		( 1,624	)	( 1,100	)	( 4,186	)
Net change				55,438		( 27,893	)	6,943
Employee benefit plans adjustments
Defined benefit pension plan
Net actuarial gain (loss)		N/A		( 3,472	)	( 7,541	)	1,472
Net loss (gain) on settlement reclassified to net income		Net other gains (losses)		—		1,554		—
Prior service credit (cost) arising during the year		N/A		—		( 212	)	—
Amortization of net actuarial (gains) losses		Non-service employee benefits expense		2,407		2,106		2,247
Change in deferred taxes		N/A		149		( 298	)	( 595	)
Amortization of prior service (credit) cost		Non-service employee benefits expense		19		—		—
Foreign currency translation adjustments of related balances		N/A		( 523	)	840		( 1,233	)
Net change				( 1,420	)	( 3,551	)	1,891
Post-retirement healthcare plan
Net actuarial gain (loss)		N/A		10,014		11,589		1,296
Prior service cost		N/A		( 2,369	)	—		—
Amortization of net actuarial (gains) losses		Non-service employee benefits expense		272		2,615		3,514
Amortization of prior service (credit) cost		Non-service employee benefits expense		376		39		( 759	)
Net change				8,293		14,243		4,051
Other comprehensive income (loss), net of taxes				61,430		( 19,475	)	15,628

Note 25: 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.

On July 25, 2016, the Bank’s board of directors approved a consolidation of the existing common shares on the basis of a 10 to 1 ratio, subject to shareholder approval. As a result of this consolidation, effective September 6, 2016 upon shareholder approval, every 10 common shares of par value BM $ 0.01 were consolidated into 1 common share of par value BM $ 0.10 (the “Share Consolidation”).

In addition, as at September 6, 2016, the par value of each issued common share and each authorized but unissued common share was reduced from BM $ 0.10 to BM $ 0.01 and the authorized share capital of the Bank was correspondingly reduced from 2,000,000,000 common shares of par value BM $ 0.10 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 to 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, without any payment by the Bank to the holders of the voting ordinary shares in respect thereof (the “Reduction in Par Value” and together with the Share Consolidation, the “Reverse Share Split”). Immediately following the Reduction in Par Value, the Bank repurchased any and all fractions of common shares issued and outstanding from the holders thereof. Prior to the Reverse Share Split, the Bank’s total authorized share capital consisted of (i) 20 billion common shares of par value BM $ 0.01 , (ii) 6 billion non‑voting ordinary shares of par value BM $ 0.01 ; (iii) 110,200,001 preference shares of par value US $ 0.01 and (iv) 50 million preference shares of par value £ 0.01 .

---

Dividends Declared

During the year ended December 31, 2019 , the Bank declared cash dividends of $ 1.76 ( December 31, 2018 : $ 1.52 , December 31, 2017 : $ 1.28 ) for each common share as of the related record dates. On February 12, 2020 , the Board of Directors declared an interim dividend of $ 0.44 per common share to be paid on March 11, 2020 to shareholders of record on February 26, 2020 .

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 BMA's letter of no objection for all dividends declared during the periods presented.

Regulatory Capital

Effective January 1, 2016, the Bank’s regulatory capital is determined in accordance with current Basel III guidelines as issued by the BMA. Basel III adopts Common Equity Tier 1 ("CET1") as the predominant form of regulatory capital with the CET1 ratio as a new metric. Basel III also adopts the new Leverage Ratio regime, which is calculated by dividing Tier 1 capital by an exposure measure. The Leverage Ratio 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 risk and other risks.

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, 2019 and 2018 . The following table sets forth the Bank's capital adequacy in accordance with the Basel III framework:

	December 31, 2019				December 31, 2018
	Actual		Regulatory minimum		Actual		Regulatory minimum
Capital
CET 1 capital	848,821		N/A		846,043		N/A
Tier 1 capital	848,821		N/A		846,043		N/A
Tier 2 capital	103,243		N/A		121,521		N/A
Total capital	952,064		N/A		967,564		N/A
Risk Weighted Assets	4,897,851		N/A		4,321,354		N/A
Leverage Ratio Exposure Measure	14,377,474		N/A		11,139,677		N/A
Capital Ratios (%)
CET 1 capital	17.3	%	10.0	%	19.6	%	9.4	%
Tier 1 capital	17.3	%	11.5	%	19.6	%	10.9	%
Total capital	19.4	%	16.3	%	22.4	%	15.6	%
Leverage ratio	5.9	%	5.0	%	7.6	%	5.0	%

Note 26: 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, 2019 , 2018 , and 2017 , the Bank did not record any unrecognized tax benefits or expenses and has no uncertain tax positions as at December 31, 2019 , 2018 , and 2017 .

The Bank records income taxes based on the enacted tax laws and rates applicable in the relevant jurisdictions for the years ended December 31, 2019 , 2018 , and 2017 . For the years ended December 31, 2019 , 2018 , and 2017 , the Bank did not incur any interest or pay any penalties.

	Year ended
Income taxes in consolidated statements of operations	December 31, 2019		December 31, 2018		December 31, 2017
Current tax expense	1,860		721		856
Deferred tax (recovery) expense	( 3,231	)	563		231
Total tax (benefit) expense	( 1,371	)	1,284		1,087

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Reconciliation between the Effective Income Tax Rate and the Statutory Income Tax Rate

	Year ended
	December 31, 2019				December 31, 2018				December 31, 2017
	$		%		$		%		$		%
Income tax expense in international offices taxed at different rates	695		0.4	%	876		0.4	%	232		0.2	%
Prior year tax adjustments	160		0.1	%	( 79	)	—	%	( 55	)	—	%
Change in valuation allowance	( 2,429	)	( 1.4	)%	432		0.2	%	597		0.4	%
Other - net	203		0.1	%	55		—	%	313		0.2	%
Income tax (benefit) expense at effective tax rate	( 1,371	)	( 0.8	)%	1,284		0.7	%	1,087		0.7	%

Deferred income taxes	December 31, 2019		December 31, 2018
Deferred income tax asset
Tax loss carried forward	8,427		6,261
Pension liability	968		789
Fixed assets	( 691	)	( 746	)
Allowance for compensated absence	15		14
Deferred income tax asset before valuation allowance	8,719		6,318
Less: valuation allowance	( 4,839	)	( 5,955	)
Net deferred income tax assets	3,880		363
Deferred income tax liability
Other	( 14	)	( 5	)
Net deferred income tax assets	3,866		358

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, 2019 , a valuation allowance of $ 4.8 million ( December 31, 2018 : $ 6.0 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 $ 48.1 million ( December 31, 2018 : $ 34.4 million ). Of these losses available to carry forward, $ 45.6 million ( December 31, 2018 : $ 34.4 million ) have an indefinite life.

Note 27: 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.

---

	As at March 29, 2018
Total consideration transferred	24,680
Assets acquired
Cash due from banks	3,958
Intangible assets (estimated useful life of 15 years)	16,932
Other assets	4,548
Total assets acquired	25,438
Liabilities acquired (included in Other liabilities on the balance sheet)	4,626
Excess purchase price (Goodwill)	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.

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, it is expected that ABN AMRO Channel Islands' business and employees will be 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:

	As at July 15, 2019
Total consideration transferred	201,107
Assets acquired
Cash due from banks	3,016,859
Loans	654,503
Intangible assets - Customer relationships	24,371
Other assets	31,674
Total assets acquired	3,727,407
Liabilities assumed
Deposits	( 3,493,239	)
Other liabilities	( 33,061	)
Total liabilities assumed	( 3,526,300	)
Excess purchase price (Goodwill)	—

The acquired customer relationships intangible assets have an estimated finite useful life of 15 years .

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.

		Year ended
Unaudited pro forma financial information		December 31, 2019		December 31, 2018
Total net revenue		555,341		563,786
Total non-interest operating (expense)		( 372,796	)	( 351,320	)
Pro forma net income post business combination		182,545		212,466

Note 28: 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, 2019 and December 31, 2018 . 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, 2017	30,575
Loans issued during the year	77,269
Loan repayments and the effect of changes in the composition of related parties	( 10,649	)
Balance at December 31, 2018	97,195
Loans issued during the year	45,602
Loan repayments and the effect of changes in the composition of related parties	( 104,156	)
Balance at December 31, 2019	38,641

Consolidated balance sheets			December 31, 2019		December 31, 2018
Deposits			12,838		17,232
	Year ended December 31
Consolidated statement of operations	2019		2018		2017
Interest and fees on loans	1,887		4,533		1,100

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			December 31, 2019		December 31, 2018
Loans			9,888		10,180
Deposits			342		352
	Year ended December 31
Consolidated statement of operations	2019		2018		2017
Interest and fees on loans	677		635		647
Total non-interest expense	1,717		1,769		1,939

Capital Transaction

Up to February 28, 2017, investment partnerships associated with The Carlyle Group held approximately 14 % of the Bank's equity voting power along with the right to designate two persons for nomination for election by the shareholders as members of the Bank’s Board of Directors. On February 28, 2017, as a result of a secondary public offering, the Carlyle Group sold their holdings in the Bank, and as a result, the investment agreement between the Bank and the Carlyle Group was terminated.

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		December 31, 2019		December 31, 2018
Equity securities
Fair value		7,142		6,176
Unrealized gain		2,142		1,176

---

As at December 31, 2019 , 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			December 31, 2019		December 31, 2018
Loans			16		1,843
Deposits			3,492		36,655
	Year ended December 31
Consolidated statement of operations	2019		2018		2017
Asset management	10,273		9,412		7,697
Custody and other administration services	1,452		1,376		1,036
Other non-interest income	1,458		972		122

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Note 29: 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)
	As at
	December 31, 2019		December 31, 2018
Assets
Cash and demand deposits with banks - Non-interest-bearing	38,615		21,677
Demand deposits with banks - Interest-bearing	118,583		316,872
Cash equivalents - Interest-bearing	329,494		364,714
Cash due from banks	486,692		703,263
Securities purchased under agreements to resel l	142,283		27,341
Short-term investments	44,512		13,736
Investment in securities
Equity securities at fair value	7,420		6,495
Available-for-sale	1,252,749		1,345,408
Held-to-maturity (fair value: $1,030,183 (2018: $1,076,979))	1,003,248		1,088,564
Total investment in securities	2,263,417		2,440,467
Net assets of subsidiaries - Banks	610,217		415,227
Net assets of subsidiaries - Non-banks	10,303		24,195
Loans to third parties, net of allowance for credit losses	2,046,406		1,949,701
Loans to subsidiaries - Banks	13,241		12,754
Loans to subsidiaries - Non-banks	56,951		56,020
Accrued interest	13,172		12,824
Other assets, including premises, equipment and computer software, equity method investments, receivables from subsidiaries and other real estate owned	194,724		203,599
Total assets	5,881,918		5,859,127
Liabilities
Customer deposits
Non-interest bearing	1,430,409		1,378,539
Interest bearing	2,972,847		3,117,063
Total customer deposits	4,403,256		4,495,602
Bank deposits	199,572		154,101
Total deposits	4,602,828		4,649,703
Employee benefit plans	110,347		117,203
Accrued interest	4,017		2,908
Other liabilities, including payables to subsidiaries	57,483		63,648
Total other liabilities	171,847		183,759
Long-term debt	143,500		143,322
Total liabilities	4,918,175		4,976,784
Total shareholders’ equity	963,743		882,343
Total liabilities and shareholders’ equity	5,881,918		5,859,127

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The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Operations
(In thousands of US dollars)
	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
Non-interest income
Banking	24,870		23,506		22,836
Foreign exchange revenue	10,613		11,727		11,623
Custody and other administration services	7,625		—		—
Other non-interest income	5,650		6,330		4,570
Dividends from subsidiaries - Banks	122,776		60,000		50,000
Dividends from subsidiaries - Non-banks	23,371		19,095		16,060
Total non-interest income	194,905		120,658		105,089
Interest income
Interest and fees on loans	132,104		133,124		118,092
Investments	68,721		73,698		61,928
Deposits with banks	9,156		12,932		10,661
Total interest income	209,981		219,754		190,681
Interest expense
Deposits	17,410		6,709		5,011
Long-term debt	7,876		6,949		4,955
Securities sold under agreement to resell	13		33		—
Total interest expense	25,299		13,691		9,966
Net interest income before provision for credit losses	184,682		206,063		180,715
Provision for credit recoveries (losses)	( 3,088	)	6,823		4,618
Net interest income after provision for credit losses	181,594		212,886		185,333
Net gains (losses) on equity securities	925		( 329	)	511
Net realized gains (losses) on available-for-sale investments	1,053		758		4,241
Net gains (losses) on other real estate owned	( 5	)	( 323	)	( 2,416	)
Net other gains (losses)	2		—		258
Total other gains (losses)	1,975		106		2,594
Total net revenue	378,474		333,650		293,016
Non-interest expense
Salaries and other employee benefits	77,923		75,949		72,440
Technology and communications	36,008		36,466		33,051
Professional and outside services	27,954		22,696		20,685
Property	6,927		6,693		6,438
Indirect taxes	15,355		14,669		12,900
Non-service employee benefits expense	5,879		6,427		7,854
Marketing	4,372		3,034		3,384
Amortization of intangible assets	169		169		169
Other expenses	9,260		4,230		4,351
Total non-interest expense	183,847		170,333		161,272
Net income before equity in undistributed earnings of subsidiaries	194,627		163,317		131,744
Equity in undistributed earnings of subsidiaries	( 17,552	)	31,867		21,508
Net income	177,075		195,184		153,252
Other comprehensive income, net of tax	61,430		( 19,475	)	15,628
Total comprehensive income	238,505		175,709		168,880

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The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Cash Flows
(In thousands of US dollars)
	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
Cash flows from operating activities
Net income	177,075		195,184		153,252
Adjustments to reconcile net income to operating cash flows
Depreciation and amortization	21,734		21,425		23,982
Provision for credit (recovery) losses	3,088		( 6,823	)	( 4,618	)
Share-based payments and settlements	17,716		12,582		8,410
Net realized (gains) losses on available-for-sale investments	( 1,053	)	( 758	)	( 4,241	)
Net (gains) losses on other real estate owned	5		323		2,416
(Increase) decrease in carrying value of equity method investments	( 290	)	( 1,033	)	( 1,152	)
Dividends received from equity method investment	385		376		307
Equity in undistributed earnings of subsidiaries	17,552		( 31,867	)	( 21,508	)
Changes in operating assets and liabilities
(Increase) decrease in accrued interest receivable	( 347	)	( 755	)	2,886
(Increase) decrease in other assets	7,155		( 11,160	)	12,167
Increase (decrease) in accrued interest payable	1,109		1,737		( 519	)
Increase (decrease) in employee benefit plans and other liabilities	( 4,862	)	( 2,523	)	22,282
Cash provided by (used in) operating activities	239,267		176,708		193,664
Cash flows from investing activities
(Increase) decrease in securities purchased under agreement to resell	( 114,942	)	151,428		( 29,956	)
Short-term investments other than restricted cash: proceeds from maturities and sales	—		106,221		610,164
Short-term investments other than restricted cash: purchases	( 32,953	)	( 18,953	)	( 267,579	)
Net change in equity securities at fair value	( 925	)	329		( 511	)
Available-for-sale investments: proceeds from sale	114,058		681,656		205,257
Available-for-sale investments: proceeds from maturities and pay downs	204,105		340,114		324,907
Available-for-sale investments: purchases	( 196,652	)	( 156,271	)	( 595,526	)
Held-to-maturity investments: proceeds from maturities and pay downs	137,622		82,853		59,424
Held-to-maturity investments: purchases	( 53,228	)	( 525,637	)	( 199,145	)
Net (increase) decrease in loans to third parties	( 99,793	)	15,184		( 46,391	)
Net (increase) decrease in loans to bank subsidiaries	( 487	)	764		40,689
Net (increase) decrease in loans to non-bank subsidiaries	( 930	)	1,812		( 2,713	)
Additions to premises, equipment and computer software	( 14,009	)	( 9,830	)	( 14,777	)
Proceeds from sale of other real estate owned	1,102		5,896		1,795
Injection of capital in subsidiary	( 175,107	)	( 64,029	)	( 12,802	)
Return of capital from a subsidiary	12,972		8,244		12,376
Cash provided by (used in) investing activities	( 219,167	)	619,781		85,212

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The Bank of N.T. Butterfield & Son Limited (parent company only)
Condensed Statements of Cash Flows
(In thousands of US dollars)
	Year ended
	December 31, 2019		December 31, 2018		December 31, 2017
Cash flows from financing activities
Net increase (decrease) in demand and term deposit liabilities	( 64,027	)	( 603,925	)	( 811,322	)
Proceeds from issuance of common shares, net of underwriting discounts and commissions	—		—		13
Issuance of subordinated capital, net of underwriting fees	—		73,218		—
Repayment of long-term debt	—		( 47,000	)	—
Common shares repurchased	( 81,534	)	( 48,443	)	—
Proceeds from stock option exercises	349		3,318		4,546
Cash dividends paid on common shares	( 93,636	)	( 83,704	)	( 69,731	)
Cash provided by (used in) financing activities	( 238,848	)	( 706,536	)	( 876,494	)
Net increase (decrease) in cash, cash equivalent and restricted cash	( 218,748	)	89,953		( 597,618	)
Cash, cash equivalents and restricted cash: beginning of yea r	716,999		627,046		1,224,664
Cash, cash equivalents and restricted cash: end of yea r	498,251		716,999		627,046
Components of cash, cash equivalents and restricted cash at end of yea r
Cash due from banks	486,692		703,263		604,993
Restricted cash included in short-term investments on the consolidated balance sheets	11,559		13,736		22,053
Total cash, cash equivalents and restricted cash at end of yea r	498,251		716,999		627,046
Supplemental disclosure of cash flow information
Cash interest paid	24,190		15,428		9,447
Supplemental disclosure of non-cash items
Transfer to (out of) other real estate owned	—		2,041		—
Initial recognition of right-of-use assets and operating lease liabilities	133		—		—

Note 30: Subsequent events

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