The Bank of N.T. Butterfield & Son Limited (NTB) 6-K Q2 2017 Financial Results

INDEX TO FINANCIAL STATEMENTS

Unaudited Consolidated Financial Statements	Page
Consolidated Balance Sheets (unaudited) as of 30 June 2017 and 31 December 2016	2
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended 30 June 2017 and 2016	3
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended 30 June 2017 and 2016	4
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended 30 June 2017 and 2016	5
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended 30 June 2017 and 2016	6
Notes to the Consolidated Financial Statements (unaudited)	7

1

The Bank of N.T. Butterfield & Son Limited

Consolidated Balance Sheets (unaudited)

(In thousands of US dollars, except share and per share data)

	As at
	30 June 2017		31 December 2016
Assets
Cash and demand deposits with banks - Non-interest bearing	104,731		110,741
Demand deposits with banks - Interest bearing	403,025		326,437
Cash equivalents - Interest bearing	1,212,077		1,664,473
Cash due from banks	1,719,833		2,101,651
Securities purchased under agreement to resell	183,934		148,813
Short-term investments	293,727		519,755
Investment in securities
Trading	6,598		6,313
Available-for-sale	3,254,448		3,332,738
Held-to-maturity (fair value: $1,292,438 (2016: $1,046,828))	1,297,072		1,061,103
Total investment in securities	4,558,118		4,400,154
Loans
Loans	3,631,300		3,614,725
Allowance for credit losses	(43,461	)	(44,247	)
Loans, net of allowance for credit losses	3,587,839		3,570,478
Premises, equipment and computer software	164,804		167,773
Accrued interest	17,683		22,780
Goodwill	20,736		19,622
Intangible assets	40,776		42,289
Equity method investments	13,864		13,482
Other real estate owned	13,338		14,199
Other assets	64,080		82,549
Total assets	10,678,732		11,103,545
Liabilities
Customer deposits
Bermuda
Non-interest bearing	1,750,211		1,733,684
Interest bearing	3,579,456		4,213,417
Non-Bermuda
Non-interest bearing	578,584		651,329
Interest bearing	3,562,232		3,411,423
Total customer deposits	9,470,483		10,009,853
Bank deposits
Bermuda	119		344
Non-Bermuda	8,209		23,452
Total deposits	9,478,811		10,033,649
Employee benefit plans	140,725		139,967
Accrued interest	1,858		2,143
Pending payable for investments purchased	52,433		—
Other liabilities	118,028		100,044
Total other liabilities	313,044		242,154
Long-term debt	117,000		117,000
Total liabilities	9,908,855		10,392,803
Commitments, contingencies and guarantees (Note 10)
Shareholders' equity
Common share capital (BMD 0.01 par; authorised voting ordinary shares 2,000,000,000 and non-voting ordinary shares 6,000,000,000) issued and outstanding: 54,581,724 (2016: 53,284,872)	546		533
Additional paid-in capital	1,150,197		1,142,608
Accumulated deficit	(250,529	)	(287,677	)
Less: treasury common shares, at cost: nil (2016: 2,066)	—		(42	)
Accumulated other comprehensive loss	(130,337	)	(144,680	)
Total shareholders’ equity	769,877		710,742
Total liabilities and shareholders’ equity	10,678,732		11,103,545

The accompanying notes are an integral part of these consolidated financial statements.

2

The Bank of N.T. Butterfield & Son Limited

Consolidated Statements of Operations (unaudited)

(In thousands of US dollars, except per share data)

	Three months ended				Six months ended
	30 June 2017		30 June 2016		30 June 2017		30 June 2016
Non-interest income
Asset management	5,949		5,291		11,789		9,479
Banking	10,941		10,022		20,984		18,687
Foreign exchange revenue	7,537		8,424		15,843		16,748
Trust	11,253		10,803		22,643		20,948
Custody and other administration services	1,922		2,331		3,934		4,550
Other non-interest income	1,101		1,029		2,048		2,006
Total non-interest income	38,703		37,900		77,241		72,418
Interest income
Interest and fees on loans	45,950		47,318		89,957		94,735
Investments (none of the investment securities are intrinsically tax-exempt)
Trading	—		595		—		1,558
Available-for-sale	16,062		13,463		31,936		25,177
Held-to-maturity	8,876		5,166		17,435		10,455
Deposits with banks	4,461		1,989		7,940		3,589
Total interest income	75,349		68,531		147,268		135,514
Interest expense
Deposits	2,669		3,042		5,462		6,525
Long-term debt	1,224		1,111		2,417		2,205
Securities sold under repurchase agreements	—		43		—		112
Total interest expense	3,893		4,196		7,879		8,842
Net interest income before provision for credit losses	71,456		64,335		139,389		126,672
Provision for credit losses	(513	)	(5,306	)	(174	)	(4,964	)
Net interest income after provision for credit losses	70,943		59,029		139,215		121,708
Net trading gains (losses)	128		(264	)	285		769
Net realised gains (losses) on available-for-sale investments	1,709		(2	)	1,778		(78	)
Net gains (losses) on other real estate owned	138		(2	)	206		(309	)
Net other gains (losses)	11		99		(60	)	(790	)
Total other gains (losses)	1,986		(169	)	2,209		(408	)
Total net revenue	111,632		96,760		218,665		193,718
Non-interest expense
Salaries and other employee benefits	37,384		32,187		73,379		63,425
Technology and communications	13,389		14,129		26,338		28,585
Professional and outside services	6,087		5,365		12,331		9,428
Property	5,351		5,123		10,273		10,142
Indirect taxes	4,505		2,777		8,701		7,395
Marketing	2,369		976		3,332		1,924
Amortisation of intangible assets	1,076		1,283		2,106		2,335
Restructuring costs	633		700		1,074		5,159
Other expenses	4,525		4,207		8,786		8,287
Total non-interest expense	75,319		66,747		146,320		136,680
Net income before income taxes	36,313		30,013		72,345		57,038
Income tax expense	(263	)	(240	)	(438	)	(504	)
Net income	36,050		29,773		71,907		56,534
Cash dividends declared on preference shares	—		(3,617	)	—		(7,274	)
Preference shares guarantee fee	—		(447	)	—		(909	)
Net income attributable to common shareholders	36,050		25,709		71,907		48,351
Earnings per common share
Basic earnings per share	0.66		0.55		1.33		1.04
Diluted earnings per share	0.65		0.54		1.30		1.02
Dividend per share	0.32		0.10		0.64		0.20

The accompanying notes are an integral part of these consolidated financial statements.

3

The Bank of N.T. Butterfield & Son Limited

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands of US dollars)

	Three months ended			Six months ended
	30 June 2017	30 June 2016		30 June 2017	30 June 2016
Net income	36,050	29,773		71,907	56,534
Other comprehensive income (loss), net of taxes
Net change in unrealised gains and losses on translation of net investment in foreign operations	787	(2,850	)	1,145	(4,437	)
Accretion of net unrealised (gains) losses on held-to-maturity investments transferred from available-for-sale investments	40	100		88	(145	)
Net change in unrealised gains and losses on available-for-sale investments	6,498	10,193		11,349	29,322
Employee benefit plans adjustments	743	(581	)	1,761	(1,017	)
Other comprehensive income (loss), net of taxes	8,068	6,862		14,343	23,723
Total comprehensive income	44,118	36,635		86,250	80,257

The accompanying notes are an integral part of these consolidated financial statements.

4

The Bank of N.T. Butterfield & Son Limited

Consolidated Statements of Changes in Shareholders' Equity (unaudited)

	Six months ended
	30 June 2017				30 June 2016
	Number of shares		In thousands of US dollars		Number of shares		In thousands of US dollars
Common share capital issued and outstanding
Balance at beginning of period	53,284,872		533		47,293,253		473
Issuance of common shares	1,296,852		13		—		—
Balance at end of period	54,581,724		546		47,293,253		473
Preference shares
Balance at beginning/end of period	—		—		182,863		2
Additional paid-in capital
Balance at beginning of period			1,142,608				1,225,344
Share-based compensation			3,483				3,581
Share-based settlements			289				(7,662	)
Cost of issuance of common shares			22				—
Issuance of common shares, net of underwriting discounts and commissions			3,796				—
Sale of treasury common shares			(1	)			—
Balance at end of period			1,150,197				1,221,263
Accumulated deficit
Balance at beginning of period			(287,677	)			(368,618	)
Net income for period			71,907				56,534
Common share cash dividends declared and paid, $0.64 per share (2016 $0.20 per share)			(34,759	)			(9,350	)
Cash dividends declared on preference shares, nil per share (2016: $40.00 per share)			—				(7,274	)
Preference shares guarantee fee			—				(909	)
Balance at end of period			(250,529	)			(329,617	)
Treasury common shares
Balance at beginning of period	2,066		(42	)	924,031		(16,350	)
Purchase of treasury common shares	—		—		88,821		(1,452	)
Sale of treasury common shares	(380	)	13		—		—
Share-based settlements	(1,686	)	29		(474,103	)	8,370
Balance at end of period	—		—		538,749		(9,432	)
Accumulated other comprehensive income (loss)
Balance at beginning of period			(144,680	)			(90,497	)
Other comprehensive income (loss), net of taxes			14,343				23,723
Balance at end of period			(130,337	)			(66,774	)
Total shareholders' equity			769,877				815,915

The accompanying notes are an integral part of these consolidated financial statements.

5

The Bank of N.T. Butterfield & Son Limited

Consolidated Statements of Cash Flows (unaudited)

(In thousands of US dollars)

	Six months ended
	30 June 2017		30 June 2016
Cash flows from operating activities
Net income	71,907		56,534
Adjustments to reconcile net income to operating cash flows
Depreciation and amortisation	25,435		25,635
Provision for credit (recovery) losses	174		4,964
Share-based payments and settlements	3,783		3,882
Net realised (gains) losses on available-for-sale investments	(1,778	)	78
Equity pick up on private equity partnership investment	—		(65	)
(Gain) loss on sale of premises and equipment	—		(8	)
Net (gains) losses on other real estate owned	(206	)	309
(Increase) in carrying value of equity method investments	(753	)	(605	)
Fair value adjustments of a contingent payment	—		895
Changes in operating assets and liabilities
(Increase) decrease in accrued interest receivable	5,171		(1,055	)
(Increase) decrease in other assets	19,542		(66,208	)
Increase (decrease) in accrued interest payable	(399	)	(323	)
Increase (decrease) in employee benefit plans and other liabilities	14,677		15,466
Cash provided by operating activities	137,553		39,499
Cash flows from investing activities
(Increase) decrease in securities purchased under agreement to resell	(35,121	)	—
Net (increase) decrease in short-term investments	228,071		(40,824	)
Net change in trading investments	(285	)	315,000
Available-for-sale investments: proceeds from sale	202,794		32,256
Available-for-sale investments: proceeds from maturities and pay downs	245,364		317,025
Available-for-sale investments: purchases	(366,904	)	(1,257,409	)
Held-to-maturity investments: proceeds from maturities and pay downs	50,759		24,895
Held-to-maturity investments: purchases	(235,820	)	(60,484	)
Net (increase) decrease in loans	21,855		35,201
Additions to premises, equipment and computer software	(7,837	)	(4,668	)
Proceeds from sale of other real estate owned	1,067		2,995
Dividends received on equity method investments	372		404
Cash disbursed for business acquisition	—		(9,075	)
Cash provided by (used in) investing activities	104,315		(644,684	)
Cash flows from financing activities
Net increase (decrease) in demand and term deposit liabilities	(624,368	)	1,036,619
Net increase (decrease) in securities sold under agreement to repurchase	—		21,975
Proceeds from issuance of common shares, net of underwriting discounts and commissions	13		—
Common shares repurchased	—		(1,452	)
Proceeds from stock option exercises	3,827		407
Cash dividends paid on common shares	(34,759	)	(9,350	)
Cash dividends paid on preference shares	—		(7,319	)
Preference shares guarantee fee paid	—		(909	)
Cash provided by (used in) financing activities	(655,287	)	1,039,971
Net effect of exchange rates on cash due from banks	31,601		(68,482	)
Net increase (decrease) in cash due from banks	(381,818	)	366,304
Cash due from banks at beginning of period	2,101,651		2,288,890
Cash due from banks at end of period	1,719,833		2,655,194

The accompanying notes are an integral part of these consolidated financial statements.

6

The Bank of N.T. Butterfield & Son Limited

Consolidated Statements of Cash Flows (unaudited)

(In thousands of US dollars)

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 licence 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 six geographic segments: Bermuda, the Cayman Islands, and Guernsey, where its principal banking operations are located; and The Bahamas, Switzerland, and the United Kingdom, 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 Guernsey, Bahamas, and Switzerland segments, the Bank offers wealth management. In the United Kingdom segment, the Bank offers residential property lending.

On 16 September 2016, the Bank's common shares began to trade on the New York Stock Exchange under the symbol "NTB". On 21 September 2016, the Bank completed its offering of 5,957,447 common shares, at $23.50 per share. The proceeds, net of the underwriting discounts and commissions, were $131.6 million.

Note 2: Significant accounting policies

The accompanying unaudited interim consolidated financial statements of the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and should be read in conjunction with the Bank’s audited financial statements for the year ended 31 December 2016.

In the opinion of Management, these unaudited interim consolidated financial statements reflect all adjustments (consisting principally of normal recurring accruals) considered

necessary for a fair statement of the Bank’s financial position and results of operations as at the end of and for the periods presented. The Bank’s results for interim periods are not necessarily indicative of results for the full year.

The preparation of financial statements in conformity with US GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While Management believes that the amounts included in the unaudited interim consolidated financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Bank’s principal estimates include:

• 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

On 1 January 2016, the Bank changed its financial statements' reporting currency from Bermuda dollars to United States ("US") dollars for all periods presented. Assets, liabilities, revenues and expenses denominated in Bermuda dollars are translated to US dollars at par.

The following accounting developments were either issued during the six months ended 30 June 2017 or are accounting standards pending adoption:

In January 2017, the Financial Accounting Standards Board ("FASB") published Accounting Standards Update No. 2017-03 Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) - Amendments to SEC Paragraphs Pursuant to Staff Announcement at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this update reflect the SEC Staff Announcement "Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin [SAG] Topic 11.M)". It applies to ASU 2014-09 Revenue from Contracts with Customers (Topic 606), ASU 2016-02 Leases (Topic 842), and ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments required by this ASU are reflected in the ASU discussions for 2014-09, 2016-02 and 2016-13 that are discussed in the following paragraphs.

In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued converged final standards on revenue recognition. The FASB issued Accounting Standards Update No. 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The core principle of the new standards is that revenue is recognized when a customer obtains control of a good or service compared to the existing model that is based on the transfer of risks and rewards. As a result of the change, revenue could be recognized earlier or later than under current GAAP and in addition, the update could require extensive new disclosures. The effective date for this update is the same as for Accounting Standards Update No. 2015-14 Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date which defers the effective date of ASU 2014-09 by one year resulting in the effective date being fiscal years, and interim periods with in those fiscal years, beginning after 15 December 2017. Earlier application is permitted only as of annual reporting periods beginning after 15 December 2016, including interim reporting periods within that reporting period. The Bank has determined that this standard will affect non-interest income items that are fee generating but does not expect the impact to have a significant effect. The Bank plans to apply the modified retrospective method for initial transition.

In February 2016, the FASB published Accounting Standards Update No. 2016-02 Leases (Topic 842) which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. This update is effective for public business entities for fiscal years, and interim periods with in those fiscal years, beginning after 15 December 2018. Early application is permitted. The Bank has determined that this standard will have an effect due to the recognition of lease assets and lease liabilities currently classified as operating leases, which will result in the recognition of assets and corresponding lease liabilities.

In June 2016, the FASB published Accounting Standards Update No. 2016-13 Financial Instruments – Credit Losses. The amendments in this update provide a new impairment model, known as the current expected credit loss model 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 an SEC filer, the effective date for this update for fiscal years beginning after 15 December 2019, including interim periods within those fiscal years. The Bank is assessing the impact of the adoption of this guidance.

In January 2017, the FASB published Accounting Standards Update No. 2017-04 Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test, and therefore an entity should perform its annual, or interim,

7

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit and an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update should be adopted on a prospective basis by a public business entity that is a US Securities and Exchange Commission filer for its annual or any interim goodwill impairment tests in fiscal years beginning after 15 December 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after 1 January 2017. The Bank is assessing the impact of the adoption of this guidance.

In March 2017, the FASB published Accounting Standards Update No. 2017-07 Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The amendments in this update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this update are effective for public business entities for annual periods beginning after 15 December 2017, including interim periods within those annual periods. Early adoption is permitted. The amendments in this update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic post-retirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. The Bank has determined that this standard will have an effect on the presentation of other components of net benefit cost in the consolidated statements of operations and statements of comprehensive income as the Bank currently reflects those items with the service cost component.

In March 2017, the FASB published Accounting Standards Update No. 2017-08 Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update are effective for public business entities for annual periods beginning after 15 December 2018, including interim periods within those annual periods. Early adoption is permitted. The Bank has determined that this standard will apply depending on the investments held at the time of adoption, but does not expect the impact to have a significant effect.

In May 2017, the FASB published Accounting Standards Update No. 2017-09 Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting . The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for public business entities for annual periods beginning after 15 December 2017, including interim periods within those annual periods. Early adoption is permitted. As the Bank has outstanding share-based payment awards, it was determined that this standard will apply if any modifications occur in the future.

Note 3: Cash due from banks

	30 June 2017			31 December 2016
	Bermuda	Non-Bermuda	Total	Bermuda	Non-Bermuda	Total
Non-interest bearing
Cash and demand deposits with banks	26,459	78,272	104,731	28,690	82,051	110,741
Interest bearing¹
Demand deposits with banks	237,118	165,907	403,025	138,123	188,314	326,437
Cash equivalents	532,316	679,761	1,212,077	976,557	687,916	1,664,473
Sub-total - Interest bearing	769,434	845,668	1,615,102	1,114,680	876,230	1,990,910
Total cash due from banks	795,893	923,940	1,719,833	1,143,370	958,281	2,101,651

¹ Interest bearing cash due from banks includes certain demand deposits with banks as at 30 June 2017 in the amount of $190.6 million (31 December 2016: $305.3 million) that are earning interest at a negligible rate.

Note 4: Short-term investments

	30 June 2017			31 December 2016
	Bermuda	Non-Bermuda	Total	Bermuda	Non-Bermuda	Total
Unrestricted
Maturing within three months	89,034	50,267	139,301	36,953	80,360	117,313
Maturing between three to six months	23,101	109,540	132,641	343,723	40,825	384,548
Maturing between six to twelve months	—	4,010	4,010	—	—	—
Total unrestricted short-term investments	112,135	163,817	275,952	380,676	121,185	501,861
Affected by drawing restrictions related to minimum reserve and derivative margin requirements
Interest earning demand deposits	16,512	1,263	17,775	17,894	—	17,894
Total short-term investments	128,647	165,080	293,727	398,570	121,185	519,755

8

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 5: Investment in securities

Amortised Cost, Carrying Amount and Fair Value

On the consolidated balance sheets, trading and available-for-sale ("AFS") investments are carried at fair value and held-to-maturity ("HTM") investments are carried at amortised cost.

	30 June 2017					31 December 2016
	Amortised  cost	Gross  unrealised  gains	Gross  unrealised  losses		Fair value	Amortised  cost	Gross  unrealised  gains	Gross  unrealised  losses		Fair value
Trading
Mutual funds	5,724	1,432	(558	)	6,598	5,724	1,091	(502	)	6,313
Total trading	5,724	1,432	(558	)	6,598	5,724	1,091	(502	)	6,313
Available-for-sale
US government and federal agencies	2,577,191	9,324	(18,364	)	2,568,151	2,448,207	6,773	(24,578	)	2,430,402
Non-US governments debt securities	27,205	149	(381	)	26,973	27,895	178	(1,053	)	27,020
Corporate debt securities	294,470	847	(588	)	294,729	513,881	2,139	(1,545	)	514,475
Asset-backed securities - Student loans	13,290	—	(797	)	12,493	13,290	—	(797	)	12,493
Commercial mortgage-backed securities	151,246	304	(640	)	150,910	151,855	43	(1,352	)	150,546
Residential mortgage-backed securities	202,375	234	(1,417	)	201,192	200,288	56	(2,542	)	197,802
Total available-for-sale	3,265,777	10,858	(22,187	)	3,254,448	3,355,416	9,189	(31,867	)	3,332,738
Held-to-maturity¹
US government and federal agencies	1,297,072	5,085	(9,719	)	1,292,438	1,061,103	2,528	(16,803	)	1,046,828
Total held-to-maturity	1,297,072	5,085	(9,719	)	1,292,438	1,061,103	2,528	(16,803	)	1,046,828

¹ For the six months ended 30 June 2017 and the year ended 31 December 2016, non-credit impairments recognised in accumulated other comprehensive loss ("AOCL") for HTM investments were nil.

Investments with Unrealised Loss Positions

The Bank does not believe that the AFS and HTM investment securities that were in an unrealised loss position as of 30 June 2017 (and 31 December 2016), which were comprised of 151 securities representing 59% of the AFS and HTM portfolios' fair value (31 December 2016: 170 and 76%, respectively), represent an other-than-temporary impairment ("OTTI"). Total gross unrealised losses were 1.2% of the fair value of affected securities (31 December 2016: 1.5%) and 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 following describes the processes for identifying credit impairment in security types with the most significant unrealised 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 securities do not have any credit losses, given the explicit guarantee provided by the issuing government.

The unrealised losses in Corporate debt securities relate primarily to 6 debt securities that are all of investment grade with ratings ranging from A- to AA- . Management believes that the value of these securities will recover and the current unrealised loss positions are a result of interest rate movements.

Investments in Asset-backed securities - Student loans are composed primarily of securities collateralised 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-collateralisation, 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 Commercial mortgage-backed securities relate to 8 senior securities rated AAA and one senior security rated A that possess significant subordination, a form of credit enhancement expressed hereafter as the percentage of pool losses that can occur before the senior securities held by the Bank will incur its first dollar of principal loss. No credit losses were recognised on these securities as there are no delinquencies over 30 days on the underlying mortgages and the weighted average credit support and the weighted average loan-to-value ratios ("LTV") range from 5% - 36% and 30% - 59%, respectively.

Investments in Residential mortgage-backed securities relate to 11 securities which are rated AAA or AA+ and possess significant credit enhancement as described above. No credit losses were recognised on these securities as the weighted average credit support and the weighted average LTV ratios range from 5% - 18% and 55% - 67%, respectively. Current credit support is significantly greater than any delinquencies experienced on the underlying mortgages.

9

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

In the following tables, debt securities with unrealised losses that are not deemed to be OTTI are categorised 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 amortised cost basis. During 2016, Management revised the methodology for considering the time period during which an investment has been in an unrealized loss by looking at monthly positions rather than annually.

	Less than 12 months			12 months or more
30 June 2017	Fair value	Gross  unrealised  losses		Fair value	Gross unrealised losses		Total  fair value	Total gross unrealised losses
Available-for-sale securities with unrealised losses
US government and federal agencies	1,001,634	(14,977	)	526,194	(3,387	)	1,527,828	(18,364	)
Non-US governments debt securities	—	—		22,360	(381	)	22,360	(381	)
Corporate debt securities	70,499	(588	)	—	—		70,499	(588	)
Asset-backed securities - Student loans	—	—		12,493	(797	)	12,493	(797	)
Commercial mortgage-backed securities	115,073	(640	)	—	—		115,073	(640	)
Residential mortgage-backed securities	126,167	(1,010	)	17,976	(407	)	144,143	(1,417	)
Total available-for-sale securities with unrealised losses	1,313,373	(17,215	)	579,023	(4,972	)	1,892,396	(22,187	)
Held-to-maturity securities with unrealised losses
US government and federal agencies	798,478	(9,719	)	—	—		798,478	(9,719	)
	Less than 12 months			12 months or more
31 December 2016	Fair value	Gross  unrealised  losses		Fair value	Gross unrealised losses		Total fair value	Total gross unrealised losses
Available-for-sale securities with unrealised losses
US government and federal agencies	1,558,636	(21,932	)	266,094	(2,646	)	1,824,730	(24,578	)
Non-US governments debt securities	21,681	(1,053	)	—	—		21,681	(1,053	)
Corporate debt securities	214,506	(1,545	)	—	—		214,506	(1,545	)
Asset-backed securities - Student loans	—	—		12,493	(797	)	12,493	(797	)
Commercial mortgage-backed securities	134,195	(1,352	)	—	—		134,195	(1,352	)
Residential mortgage-backed securities	181,556	(2,542	)	—	—		181,556	(2,542	)
Total available-for-sale securities with unrealised losses	2,110,574	(28,424	)	278,587	(3,443	)	2,389,161	(31,867	)
Held-to-maturity securities with unrealised losses
US government and federal agencies	937,080	(16,803	)	—	—		937,080	(16,803	)

10

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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. During 2017, management revised the following disclosure so that securities not due at a single maturity date (primarily asset-backed and mortgage-backed securities) are presented as such.

	Remaining term to maturity
30 June 2017	Within  3 months	3 to 12  months	1 to 5  years	5 to 10  years	No specific or single  maturity	Carrying  amount
Trading
Mutual funds	��	—	—	—	6,598	6,598
Available-for-sale
US government and federal agencies	—	—	—	—	2,568,151	2,568,151
Non-US governments debt securities	—	1,364	3,250	22,359	—	26,973
Corporate debt securities	15,222	158,648	120,859	—	—	294,729
Asset-backed securities - Student loans	—	—	—	—	12,493	12,493
Commercial mortgage-backed securities	—	—	—	—	150,910	150,910
Residential mortgage-backed securities	—	—	—	—	201,192	201,192
Total available-for-sale	15,222	160,012	124,109	22,359	2,932,746	3,254,448
Held-to-maturity
US government and federal agencies	—	—	—	—	1,297,072	1,297,072
Total investments	15,222	160,012	124,109	22,359	4,236,416	4,558,118
Total by currency
US dollars	15,222	160,012	124,109	22,359	4,236,249	4,557,951
Other	—	—	—	—	167	167
Total investments	15,222	160,012	124,109	22,359	4,236,416	4,558,118

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.

	30 June 2017		31 December 2016
Pledged Investments	Amortised  cost	Fair  value	Amortised  cost	Fair  value
Available-for-sale	165,545	167,146	211,342	212,995
Held-to-maturity	209,332	208,153	320,942	315,635

Sale Proceeds and Realised Gains and Losses of AFS Securities

	Six months ended
	30 June 2017
	Sale proceeds	Gross realised gains	Gross realised (losses)
Corporate debt securities	202,700	1,683	—
Pass-through note	95	95	—
Net realised gains (losses) recognised in net income	202,795	1,778	—

	Six months ended
	30 June 2016
	Sale proceeds	Gross realised gains	Gross realised (losses)
US government and federal agencies	32,256	—	(78	)

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.

11

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 6: Loans

The "Bermuda" and "Non-Bermuda" classifications purpose is to reflect management segment reporting as described in Note 12: Segmented information.

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, business and government loans are generally repayable over terms not exceeding five years. 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 30 June 2017 is 5.07% (31 December 2016: 4.78%).

	30 June 2017						31 December 2016
	Bermuda		Non-Bermuda		Total		Bermuda		Non-Bermuda		Total
Commercial loans
Government	92,160		15,661		107,821		94,504		17,908		112,412
Commercial and industrial	156,368		142,748		299,116		130,171		201,652		331,823
Commercial overdrafts	24,667		3,325		27,992		22,594		2,767		25,361
Total gross commercial loans	273,195		161,734		434,929		247,269		222,327		469,596
Less specific allowance for credit losses	(566	)	—		(566	)	(577	)	—		(577	)
Net commercial loans	272,629		161,734		434,363		246,692		222,327		469,019
Commercial real estate loans
Commercial mortgage	357,510		209,266		566,776		363,982		217,640		581,622
Construction	24,500		16,505		41,005		24,500		4,385		28,885
Total gross commercial real estate loans	382,010		225,771		607,781		388,482		222,025		610,507
Less specific allowance for credit losses	(769	)	—		(769	)	(750	)	—		(750	)
Net commercial real estate loans	381,241		225,771		607,012		387,732		222,025		609,757
Consumer loans
Automobile financing	12,919		6,530		19,449		13,077		6,905		19,982
Credit card	54,544		19,999		74,543		57,730		20,811		78,541
Overdrafts	7,661		3,257		10,918		2,380		3,202		5,582
Other consumer	31,085		56,422		87,507		30,798		63,186		93,984
Total gross consumer loans	106,209		86,208		192,417		103,985		94,104		198,089
Less specific allowance for credit losses	(274	)	—		(274	)	(275	)	(3	)	(278	)
Net consumer loans	105,935		86,208		192,143		103,710		94,101		197,811
Residential mortgage loans	1,175,194		1,220,979		2,396,173		1,205,468		1,131,065		2,336,533
Less specific allowance for credit losses	(8,692	)	(1,020	)	(9,712	)	(9,559	)	(574	)	(10,133	)
Net residential mortgage loans	1,166,502		1,219,959		2,386,461		1,195,909		1,130,491		2,326,400
Total gross loans	1,936,608		1,694,692		3,631,300		1,945,204		1,669,521		3,614,725
Less specific allowance for credit losses	(10,301	)	(1,020	)	(11,321	)	(11,161	)	(577	)	(11,738	)
Less general allowance for credit losses	(25,035	)	(7,105	)	(32,140	)	(24,950	)	(7,559	)	(32,509	)
Net loans	1,901,272		1,686,567		3,587,839		1,909,093		1,661,385		3,570,478

12

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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

The following tables summarise the past due status of the loans. The aging of past due amounts are determined based on the contractual delinquency status of payments under the loan and this aging may be affected by the timing of the last business day at period end. Loans less than 30 days past due are included in current loans.

30 June 2017	30 - 59 days	60 - 89 days	More than 90 days	Total past  due loans	Total current	Total loans
Commercial loans
Government	—	—	—	—	107,821	107,821
Commercial and industrial	2,974	—	7,502	10,476	288,640	299,116
Commercial overdrafts	—	—	64	64	27,928	27,992
Total commercial loans	2,974	—	7,566	10,540	424,389	434,929
Commercial real estate loans
Commercial mortgage	15,294	392	5,397	21,083	545,693	566,776
Construction	—	—	—	—	41,005	41,005
Total commercial real estate loans	15,294	392	5,397	21,083	586,698	607,781
Consumer loans
Automobile financing	61	36	232	329	19,120	19,449
Credit card	322	148	198	668	73,875	74,543
Overdrafts	—	—	2	2	10,916	10,918
Other consumer	1,191	55	650	1,896	85,611	87,507
Total consumer loans	1,574	239	1,082	2,895	189,522	192,417
Residential mortgage loans	26,795	2,591	46,180	75,566	2,320,607	2,396,173
Total gross loans	46,637	3,222	60,225	110,084	3,521,216	3,631,300
31 December 2016	30 - 59 days	60 - 89 days	More than 90 days	Total past  due loans	Total current	Total loans
Commercial loans
Government	—	—	—	—	112,412	112,412
Commercial and industrial	2,712	—	584	3,296	328,527	331,823
Commercial overdrafts	—	—	2	2	25,359	25,361
Total commercial loans	2,712	—	586	3,298	466,298	469,596
Commercial real estate loans
Commercial mortgage	377	—	5,964	6,341	575,281	581,622
Construction	175	—	—	175	28,710	28,885
Total commercial real estate loans	552	—	5,964	6,516	603,991	610,507
Consumer loans
Automobile financing	86	23	225	334	19,648	19,982
Credit card	366	177	392	935	77,606	78,541
Overdrafts	—	—	17	17	5,565	5,582
Other consumer	720	564	999	2,283	91,701	93,984
Total consumer loans	1,172	764	1,633	3,569	194,520	198,089
Residential mortgage loans	26,122	4,345	50,262	80,729	2,255,804	2,336,533
Total gross loans	30,558	5,109	58,445	94,112	3,520,613	3,614,725

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.

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.

13

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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.

30 June 2017	Pass	Special  mention	Substandard	Non-accrual	Total gross  recorded  investments
Commercial loans
Government	101,919	277	5,625	—	107,821
Commercial and industrial	285,383	5,090	1,141	7,502	299,116
Commercial overdrafts	25,628	1,474	826	64	27,992
Total commercial loans	412,930	6,841	7,592	7,566	434,929
Commercial real estate loans
Commercial mortgage	493,357	65,258	2,764	5,397	566,776
Construction	41,005	—	—	—	41,005
Total commercial real estate loans	534,362	65,258	2,764	5,397	607,781
Consumer loans
Automobile financing	18,854	300	23	272	19,449
Credit card	74,345	—	198	—	74,543
Overdrafts	10,785	131	—	2	10,918
Other consumer	85,475	1,355	49	628	87,507
Total consumer loans	189,459	1,786	270	902	192,417
Residential mortgage loans	2,259,199	35,404	61,215	40,355	2,396,173
Total gross recorded loans	3,395,950	109,289	71,841	54,220	3,631,300
31 December 2016	Pass	Special  mention	Substandard	Non-accrual	Total gross  recorded  investments
Commercial loans
Government	104,611	301	7,500	—	112,412
Commercial and industrial	325,924	4,122	1,194	583	331,823
Commercial overdrafts	22,976	2,145	238	2	25,361
Total commercial loans	453,511	6,568	8,932	585	469,596
Commercial real estate loans
Commercial mortgage	502,918	71,038	1,702	5,964	581,622
Construction	28,885	—	—	—	28,885
Total commercial real estate loans	531,803	71,038	1,702	5,964	610,507
Consumer loans
Automobile financing	19,309	360	28	285	19,982
Credit card	78,149	—	392	—	78,541
Overdrafts	5,533	32	—	17	5,582
Other consumer	91,348	1,564	360	712	93,984
Total consumer loans	194,339	1,956	780	1,014	198,089
Residential mortgage loans	2,200,807	36,739	58,087	40,900	2,336,533
Total gross recorded loans	3,380,460	116,301	69,501	48,463	3,614,725

14

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Evaluation of Loans For Impairment	30 June 2017		31 December 2016
	Individually  evaluated	Collectively  evaluated	Individually  evaluated	Collectively  evaluated
Commercial	15,072	419,857	9,686	459,910
Commercial real estate	22,074	585,707	21,893	588,614
Consumer	1,376	191,041	1,746	196,343
Residential mortgage	115,863	2,280,310	113,065	2,223,468
Total gross loans	154,385	3,476,915	146,390	3,468,335

Changes in General and Specific Allowances For Credit Losses

	Six months ended 30 June 2017
	Commercial		Commercial  real estate	Consumer		Residential  mortgage		Total
Allowances at beginning of period	3,377		16,224	965		23,681		44,247
Provision taken (released)	77		593	62		(558	)	174
Recoveries	—		—	589		153		742
Charge-offs	(10	)	—	(879	)	(885	)	(1,774	)
Other	4		20	1		47		72
Allowances at end of period	3,448		16,837	738		22,438		43,461
Allowances at end of period: individually evaluated for impairment	566		769	274		9,712		11,321
Allowances at end of period: collectively evaluated for impairment	2,882		16,068	464		12,726		32,140

	Six months ended 30 June 2016
	Commercial		Commercial  real estate		Consumer		Residential  mortgage		Total
Allowances at beginning of period	8,723		6,512		2,763		31,304		49,302
Provision taken	2,034		2,074		(403	)	1,259		4,964
Recoveries	51		13		739		66		869
Charge-offs	(131	)	(1,818	)	(789	)	(1,937	)	(4,675	)
Other	(16	)	(96	)	(58	)	(129	)	(299	)
Allowances at end of period	10,661		6,685		2,252		30,563		50,161
Allowances at end of period: individually evaluated for impairment	590		3,227		274		12,901		16,992
Allowances at end of period: collectively evaluated for impairment	10,071		3,458		1,978		17,662		33,169

15

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Non-Performing Loans (excluding purchased credit-impaired loans)	30 June 2017			31 December 2016
	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
Commercial and industrial	7,502	—	7,502	583	—	583
Commercial overdrafts	64	—	64	2	—	2
Total commercial loans	7,566	—	7,566	585	—	585
Commercial real estate loans
Commercial mortgage	5,397	—	5,397	5,964	—	5,964
Consumer loans
Automobile financing	272	—	272	285	2	287
Credit card	—	198	198	—	392	392
Overdrafts	2	—	2	17	—	17
Other consumer	628	36	664	712	300	1,012
Total consumer loans	902	234	1,136	1,014	694	1,708
Residential mortgage loans	40,355	7,309	47,664	40,900	8,476	49,376
Total non-performing loans	54,220	7,543	61,763	48,463	9,170	57,633

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 troubled debt restructuring (‘‘TDR’’) even if full collectability is expected following the restructuring. During the six months ended 30 June 2017, the amount of gross interest income that would have been recorded had impaired loans been current was $1.6 million (30 June 2016: $1.0 million).

	Impaired loans with an allowance				Gross  recorded  investment of  impaired loans  without an  allowance	Total impaired loans
30 June 2017	Gross  recorded  investment	Specific  allowance		Net loans		Gross  recorded  investment	Specific  allowance		Net loans
Commercial loans
Commercial and industrial	575	(566	)	9	7,950	8,525	(566	)	7,959
Commercial overdrafts	—	—		—	454	454	—		454
Total commercial loans	575	(566	)	9	8,404	8,979	(566	)	8,413
Commercial real estate loans
Commercial mortgage	1,673	(769	)	904	6,488	8,161	(769	)	7,392
Consumer loans
Automobile financing	145	(75	)	70	127	272	(75	)	197
Overdrafts	—	—		—	2	2	—		2
Other consumer	199	(199	)	—	429	628	(199	)	429
Total consumer loans	344	(274	)	70	558	902	(274	)	628
Residential mortgage loans	30,677	(9,323	)	21,354	59,475	90,152	(9,323	)	80,829
Total impaired loans	33,269	(10,932	)	22,337	74,925	108,194	(10,932	)	97,262

Specific allowance excludes $0.4 million recognized relating to purchased credit-impaired loans.

16

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

	Impaired loans with an allowance				Gross  recorded  investment of  impaired loans  without an  allowance	Total impaired loans
31 December 2016	Gross  recorded  investment	Specific  allowance		Net loans		Gross  recorded  investment	Specific  allowance		Net loans
Commercial loans
Commercial and industrial	579	(577	)	2	1,048	1,627	(577	)	1,050
Commercial overdrafts	—	—		—	2	2	—		2
Total commercial loans	579	(577	)	2	1,050	1,629	(577	)	1,052
Commercial real estate loans
Commercial mortgage	1,722	(750	)	972	5,944	7,666	(750	)	6,916
Consumer loans
Automobile financing	155	(75	)	80	130	285	(75	)	210
Overdrafts	—	—		—	17	17	—		17
Other consumer	253	(203	)	50	459	712	(203	)	509
Total consumer loans	408	(278	)	130	606	1,014	(278	)	736
Residential mortgage loans	30,330	(9,961	)	20,369	52,043	82,373	(9,961	)	72,412
Total impaired loans	33,039	(11,566	)	21,473	59,643	92,682	(11,566	)	81,116

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

Average Impaired Loan Balances and Related Recognised Interest Income

	30 June 2017		31 December 2016
	Average gross  recorded  investment	Interest  income  recognised¹	Average gross  recorded  investment	Interest  income  recognised¹
Commercial loans
Commercial and industrial	5,076	30	1,661	64
Commercial overdrafts	228	6	14	—
Total commercial loans	5,304	36	1,675	64
Commercial real estate loans
Commercial mortgage	7,914	74	15,496	237
Consumer loans
Automobile financing	279	—	192	—
Overdrafts	10	—	14	—
Other consumer	670	—	1,043	—
Total consumer loans	959	—	1,249	—
Residential mortgage loans	86,263	1,243	81,901	2,201
Total impaired loans	100,440	1,353	100,321	2,502

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

Loans Modified in a TDR

As at 30 June 2017, the Bank had nil 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 31 December 2016, the Bank had one loan which was formerly a residential mortgage that was modified in a TDR during the preceding 12 months that subsequently defaulted with a recorded investment of $0.9 million.

17

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

TDRs entered into during the period

	Six months ended 30 June 2017
	Number of  contracts	Pre- modification  recorded investment	Modification: interest  capitalisation	Post- modification   recorded  investment
Commercial loans	2	386	—	386
Commercial real estate loans	2	1,112	—	1,112
Residential mortgage loans	14	9,556	607	10,163
Total loans modified in a TDR	18	11,054	607	11,661

	Six months ended 30 June 2016
	Number of contracts	Pre- modification recorded investment	Modification: interest capitalisation	Post- modification recorded investment
Residential mortgage loans	10	6,883	—	6,883
Total loans modified in a TDR	10	6,883	—	6,883

	30 June 2017		31 December 2016
TDRs outstanding	Accrual	Non-accrual	Accrual	Non-accrual
Commercial loans	1,413	—	1,044	—
Commercial real estate loans	2,764	1,512	1,702	1,539
Residential mortgage loans	49,797	5,288	41,473	5,006
Total TDRs outstanding	53,974	6,800	44,219	6,545

Purchased Credit-Impaired Loans

The Bank acquired certain credit-impaired loans as part of the 7 November 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.

	Six months ended 30 June 2017
	Contractual  principal		Non-accretable difference		Accretable  difference		Carrying  amount
Balance at beginning of period	8,016		(1,617	)	(811	)	5,588
Advances and increases in cash flows expected to be collected	54		16		(16	)	54
Reductions resulting from repayments	(1,259	)	2		83		(1,174	)
Reductions resulting from changes in allowances for credit losses	—		(217	)	—		(217	)
Reductions resulting from charge-offs	(70	)	70		—		—
Accretion	—		(6	)	6		—
Balance at end of period	6,741		(1,752	)	(738	)	4,251

	Year ended 31 December 2016
	Contractual  principal		Non-accretable difference		Accretable  difference		Carrying  amount
Balance at beginning of period	8,709		(2,248	)	(631	)	5,830
Advances and increases in cash flows expected to be collected	166		408		(396	)	178
Reductions resulting from repayments	(464	)	—		216		(248	)
Reductions resulting from changes in allowances for credit losses	—		(172	)	—		(172	)
Reductions resulting from charge-offs	(395	)	395		—		—
Balance at end of period	8,016		(1,617	)	(811	)	5,588

18

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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 summarise 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. During 2016, Management revised the method for determining the geographic location of cash and cash equivalents from the location of the branch to the location of the head office holding custody.

	30 June 2017					31 December 2016
Business sector	Loans		Off-balance  sheet	Total credit  exposure		Loans		Off-balance  sheet	Total credit  exposure
Banks and financial services	329,840		401,373	731,213		321,680		393,148	714,828
Commercial and merchandising	283,710		158,896	442,606		266,976		139,264	406,240
Governments	108,935		1,112	110,047		112,857		709	113,566
Individuals	2,259,650		125,629	2,385,279		2,299,852		108,810	2,408,662
Primary industry and manufacturing	48,516		8,431	56,947		34,304		2,095	36,399
Real estate	438,993		3,118	442,111		418,946		12,467	431,413
Hospitality industry	144,645		1,064	145,709		142,707		4,353	147,060
Transport and communication	5,690		—	5,690		5,665		—	5,665
Sub-total	3,619,979		699,623	4,319,602		3,602,987		660,846	4,263,833
General allowance	(32,140	)	—	(32,140	)	(32,509	)	—	(32,509	)
Total	3,587,839		699,623	4,287,462		3,570,478		660,846	4,231,324

	30 June 2017						31 December 2016
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	110,474	—		—	110,474		14,242	—		—	14,242
Barbados	—	5,625		—	5,625		—	7,500		—	7,500
Belgium	3,441	—		—	3,441		1,722	—		—	1,722
Bermuda	24,858	2,075,858		339,021	2,439,737		23,505	2,105,195		322,554	2,451,254
Canada	480,417	—		—	480,417		514,861	—		—	514,861
Cayman	39,406	676,547		242,233	958,186		40,356	706,994		231,211	978,561
Guernsey	1	294,714		35,419	330,134		1	337,037		107,081	444,119
Japan	23,776	—		—	23,776		20,963	—		—	20,963
New Zealand	8,075	—		—	8,075		785	—		—	785
Norway	60,198	—		—	60,198		42,477	—		—	42,477
Saint Lucia	—	100,000		—	100,000		—	65,117		—	65,117
South Africa	1,947	—		—	1,947		71	—		—	71
Sweden	991	—		—	991		1,550	—		—	1,550
Switzerland	6,987	—		—	6,987		5,833	—		—	5,833
The Bahamas	2,103	20,499		—	22,602		2,822	23,860		—	26,682
United Kingdom	784,023	446,736		82,950	1,313,709		1,224,263	357,284		—	1,581,547
United States	650,721	—		—	650,721		876,642	—			876,642
Other	76	—		—	76		126	—		—	126
Sub-total	2,197,494	3,619,979		699,623	6,517,096		2,770,219	3,602,987		660,846	7,034,052
General allowance	—	(32,140	)	—	(32,140	)	—	(32,509	)	—	(32,509	)
Total	2,197,494	3,587,839		699,623	6,484,956		2,770,219	3,570,478		660,846	7,001,543

19

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 8: Customer deposits and deposits from banks

By Maturity
	Demand			Term
30 June 2017	Non-interest  bearing	Interest bearing	Total demand deposits	Within 3  months	3 to 6  months	6 to 12  months	After 12 months	Total term deposits	Total deposits
Customers
Bermuda
Demand or less than $100k¹	1,750,211	2,841,376	4,591,587	10,772	5,098	11,369	15,043	42,282	4,633,869
Term - $100k or more	N/A	N/A	—	545,015	58,948	48,196	43,639	695,798	695,798
Total Bermuda	1,750,211	2,841,376	4,591,587	555,787	64,046	59,565	58,682	738,080	5,329,667
Non-Bermuda
Demand or less than $100k	578,584	2,657,595	3,236,179	20,849	5,019	4,746	525	31,139	3,267,318
Term and $100k or more	N/A	N/A	—	668,668	93,351	101,877	9,602	873,498	873,498
Total non-Bermuda	578,584	2,657,595	3,236,179	689,517	98,370	106,623	10,127	904,637	4,140,816
Total customer deposits	2,328,795	5,498,971	7,827,766	1,245,304	162,416	166,188	68,809	1,642,717	9,470,483
Banks
Bermuda
Demand or less than $100k	119	—	119	—	—	—	—	—	119
Non-Bermuda
Demand or less than $100k	—	4,161	4,161	—	—	—	—	—	4,161
Term and $100k or more	N/A	N/A	—	3,948	—	—	100	4,048	4,048
Total non-Bermuda	—	4,161	4,161	3,948	—	—	100	4,048	8,209
Total bank deposits	119	4,161	4,280	3,948	—	—	100	4,048	8,328
Total deposits	2,328,914	5,503,132	7,832,046	1,249,252	162,416	166,188	68,909	1,646,765	9,478,811
	Demand			Term
31 December 2016	Non-interest  bearing	Interest bearing	Total demand deposits	Within 3  months	3 to 6  months	6 to 12  months	After 12 months	Total term deposits	Total deposits
Customers
Bermuda
Demand or less than $100k¹	1,733,684	3,013,401	4,747,085	14,091	4,309	9,068	16,380	43,848	4,790,933
Term - $100k or more	N/A	N/A	—	1,013,159	37,550	60,952	44,507	1,156,168	1,156,168
Total Bermuda	1,733,684	3,013,401	4,747,085	1,027,250	41,859	70,020	60,887	1,200,016	5,947,101
Non-Bermuda
Demand or less than $100k	651,329	2,794,799	3,446,128	20,295	4,108	4,145	783	29,331	3,475,459
Term and $100k or more	N/A	N/A	—	440,674	119,519	17,590	9,510	587,293	587,293
Total non-Bermuda	651,329	2,794,799	3,446,128	460,969	123,627	21,735	10,293	616,624	4,062,752
Total customer deposits	2,385,013	5,808,200	8,193,213	1,488,219	165,486	91,755	71,180	1,816,640	10,009,853
Banks
Bermuda
Demand or less than $100k	340	—	340	4	—	—	—	4	344
Non-Bermuda
Demand or less than $100k	—	19,751	19,751	—	—	—	—	—	19,751
Term and $100k or more	N/A	N/A	—	3,601	100	—	—	3,701	3,701
Total non-Bermuda	—	19,751	19,751	3,601	100	—	—	3,701	23,452
Total bank deposits	340	19,751	20,091	3,605	100	—	—	3,705	23,796
Total deposits	2,385,353	5,827,951	8,213,304	1,491,824	165,586	91,755	71,180	1,820,345	10,033,649

¹ As at 30 June 2017, $75 million (31 December 2016: $150 million) of the Demand deposits - Interest bearing bear a special negligible interest rate. The weighted-average interest rate on interest-bearing demand deposits as at 30 June 2017 is 0.06% (31 December 2016: 0.06%).

20

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

By Type and Segment	30 June 2017			31 December 2016
	Payable on demand	Payable on a fixed date	Total	Payable on demand	Payable on a fixed date	Total
Bermuda
Customers	4,591,586	738,081	5,329,667	4,747,086	1,200,016	5,947,102
Banks	119	—	119	341	4	345
Cayman
Customers	2,394,945	403,833	2,798,778	2,606,305	417,750	3,024,055
Banks	4,161	4,048	8,209	19,615	3,701	23,316
Guernsey
Customers	803,147	475,946	1,279,093	781,119	185,457	966,576
The Bahamas
Customers	38,088	24,857	62,945	58,703	13,417	72,120
United Kingdom
Banks	—	—	—	135	—	135
Total Customers	7,827,766	1,642,717	9,470,483	8,193,213	1,816,640	10,009,853
Total Banks	4,280	4,048	8,328	20,091	3,705	23,796
Total deposits	7,832,046	1,646,765	9,478,811	8,213,304	1,820,345	10,033,649

Note 9: 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 expense related to these plans is included in the consolidated statements of operations under Salaries and other employee benefits. 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 United Kingdom jurisdictions and the defined benefit post-retirement medical plan is in Bermuda.

The Bank includes an estimate of the 2017 Bank contribution and estimated benefit payments for the next ten years under the pension and post-retirement plans in its financial statements for the year-ended 31 December 2016. During the six months ended 30 June 2017, there have been no material revisions to these estimates.

	Three months ended				Six months ended
	30 June 2017		30 June 2016		30 June 2017		30 June 2016
Defined benefit pension expense (income)
Interest cost	1,335		1,489		2,653		2,982
Expected return on plan assets	(2,043	)	(2,296	)	(4,058	)	(4,598	)
Amortisation of net actuarial loss	548		425		1,116		851
Total defined benefit pension expense (income)	(160	)	(382	)	(289	)	(765	)
Post-retirement medical benefit expense (income)
Service cost	16		29		32		59
Interest cost	1,176		1,198		2,352		2,396
Amortisation of net actuarial losses	878		683		1,757		1,366
Amortisation of prior service credit	(190	)	(1,586	)	(380	)	(3,172	)
Total post-retirement medical benefit expense (income)	1,880		324		3,761		649

21

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 10: Credit related arrangements, repurchase agreements and commitments

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, whilst 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 recognised 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.

	30 June 2017			31 December 2016
Outstanding financial guarantees	Gross	Collateral	Net	Gross	Collateral	Net
Standby letters of credit	224,693	216,372	8,321	242,437	242,437	—
Letters of guarantee	4,863	4,777	86	4,772	4,772	—
Total	229,556	221,149	8,407	247,209	247,209	—

Commitments

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 utilised facility. At 30 June 2017, $107.6 million (31 December 2016: $110.3 million) of standby letters of credit were issued under this facility.

Outstanding unfunded commitments to extend credit	30 June 2017	31 December 2016
Commitments to extend credit	467,303	412,568
Documentary and commercial letters of credit	2,764	1,069
Total unfunded commitments to extend credit	470,067	413,637

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 30 June 2017, the Bank had nine open positions (31 December 2016: eight) in resell agreements with a remaining maturity of less than 30 days involving pools of mortgages issued by US federal agencies. The amortised cost of these resell agreements is $183.9 million (31 December 2016: $148.8 million) and are included in securities purchased under agreement to resell on the consolidated balance sheets. As at 30 June 2017, there were 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 of 30 June 2017, a provision of $5.5 million (31 December 2016: $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 and on the consolidated statements of operations under other expenses.

22

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 11: 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 segment as reflected in management segment reporting described in Note 12: 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 United Kingdom 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 are all 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 United Kingdom segment was impaired (included in premises, equipment and computer software on the consolidated balance sheets). This determination was based upon the realisable value of this software upon completion of the orderly wind down. A total of $5.1 million was expensed in the fourth quarter of the year ended 31 December 2015 and was included in impairment of fixed assets on the consolidated statements of operations of the relevant period.

	Expense recognised by period				Amounts paid by period		Exit cost liability
	Six months ended 30 June 2017	Years 2015 and 2016	Costs to be recognised in the future	Total exit costs expected to be incurred	Six months ended 30 June 2017	Years 2015 and 2016	As at 30 June 2017	As at 31 December 2016
Staff redundancy expenses	181	3,444	51	3,676	296	3,329	—	115
Professional services	327	3,833	195	4,355	397	3,763	—	70
Lease termination expenses	425	—	488	913	425	—	—	—
Other expenses	141	1,172	1,213	2,526	141	1,172	—	—
Total	1,074	8,449	1,947	11,470	1,259	8,264	—	185

Note 12: Segmented information

The Bank is managed by its CEO on a geographic basis. The Bank's six geographic segments are Bermuda, Cayman, Guernsey, Switzerland, The Bahamas and the United Kingdom. The geographic segments are determined based on the country's balance sheet size and by regulatory reporting requirements in the respective jurisdiction. Each region has a managing director who reports directly to the CEO. The Group CEO and the region 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 upon 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 of the Bank's audited financial statements for the year ended 31 December 2016. 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 upon the percentage of the total loan funded by each jurisdiction participating in the loan.

Bermuda provides a full range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized businesses through five 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 Bank's head offices and accordingly, retains the unallocated corporate overhead expenses.

The Cayman segment provides a comprehensive range of retail, commercial and private banking services. Retail services are offered to individuals and small to medium-sized businesses through three branch locations and through internet banking, mobile banking, ATMs and debit cards. Retail services include deposit services, consumer and mortgage lending, credit cards and property/auto insurance. Commercial banking includes commercial lending and mortgages, cash management, payroll services, remote banking and letters of credit. Treasury services include money market and foreign exchange activities. Cayman’s wealth management offering comprises investment management, advisory and brokerage services and Butterfield Trust (Cayman) Limited, which provides trust, estate and company management.

The Guernsey segment provides a broad range of services to private clients and financial institutions including private banking and treasury services, internet banking, administered bank services, wealth management and fiduciary services.

The Switzerland segment provides fiduciary services. The Bahamas segment provides fiduciary and ancillary services.

The United Kingdom segment previously provided a broad range of services including private banking and treasury services, internet banking and wealth management and fiduciary services to high net worth individuals and privately owned businesses. As described in Note 11, during the year-ended 31 December 2015, the Bank commenced an orderly wind down of the deposit taking and investment management businesses in the United Kingdom segment. The United Kingdom segment now provides mortgage services for high value residential properties.

23

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Total Assets by Segment	30 June 2017		31 December 2016
Bermuda	6,026,763		6,765,125
Cayman	3,122,848		3,393,256
Guernsey	1,538,096		1,132,663
Switzerland	3,363		2,173
The Bahamas	72,981		81,604
United Kingdom	43,764		151,866
Total assets before inter-segment eliminations	10,807,815		11,526,687
Less: inter-segment eliminations	(129,083	)	(423,142	)
Total	10,678,732		11,103,545

	Net interest income			Provision for credit losses		Non-interest income		Revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Three months ended 30 June 2017	Customer	Inter- segment
Bermuda	44,258	297		(881	)	19,848		63,522		1,965		65,487		47,893		17,594
Cayman	21,392	—		456		10,827		32,675		25		32,700		14,879		17,821
Guernsey	5,533	(318	)	(88	)	5,813		10,940		(2	)	10,938		9,521		1,417
Switzerland	—	—		—		912		912		—		912		864		48
The Bahamas	20	21		—		979		1,020		—		1,020		1,287		(267	)
United Kingdom	253	—		—		1,171		1,424		(2	)	1,422		1,985		(563	)
Total before eliminations	71,456	—		(513	)	39,550		110,493		1,986		112,479		76,429		36,050
Inter-segment eliminations	—	—		—		(847	)	(847	)	—		(847	)	(847	)	—
Total	71,456	—		(513	)	38,703		109,646		1,986		111,632		75,582		36,050

	Net interest income			Provision for  credit losses		Non-interest  income		Revenue  before gains  and losses		Gains and  losses		Total net revenue		Total expenses		Net income
Three months ended 30 June 2016	Customer	Inter- segment
Bermuda	39,975	452		(3,377	)	18,198		55,248		271		55,519		37,120		18,399
Cayman	19,704	80		(1,204	)	10,583		29,163		1		29,164		14,983		14,181
Guernsey	3,540	(67	)	(543	)	6,403		9,333		(434	)	8,899		8,809		90
Switzerland	—	—		—		1,035		1,035		—		1,035		901		134
The Bahamas	10	6		—		1,145		1,161		—		1,161		1,207		(46	)
United Kingdom	1,106	(471	)	(182	)	1,242		1,695		(7	)	1,688		4,673		(2,985	)
Total before eliminations	64,335	—		(5,306	)	38,606		97,635		(169	)	97,466		67,693		29,773
Inter-segment eliminations	—	—		—		(706	)	(706	)	—		(706	)	(706	)	—
Total	64,335	—		(5,306	)	37,900		96,929		(169	)	96,760		66,987		29,773

	Net interest income			Provision for credit losses		Non-interest income		Revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Six months ended 30 June 2017	Customer	Inter- segment
Bermuda	86,523	548		(335	)	39,423		126,159		2,279		128,438		91,833		36,605
Cayman	42,452	(11	)	145		22,381		64,967		18		64,985		30,207		34,778
Guernsey	9,947	(529	)	16		11,466		20,900		(67	)	20,833		18,634		2,199
Switzerland	—	—		—		1,867		1,867		—		1,867		1,637		230
The Bahamas	35	32		—		2,000		2,067		—		2,067		2,409		(342	)
United Kingdom	432	(40	)	—		1,752		2,144		(21	)	2,123		3,686		(1,563	)
Total before eliminations	139,389	—		(174	)	78,889		218,104		2,209		220,313		148,406		71,907
Inter-segment eliminations	—	—		—		(1,648	)	(1,648	)	—		(1,648	)	(1,648	)	—
Total	139,389	—		(174	)	77,241		216,456		2,209		218,665		146,758		71,907

24

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

	Net interest income			Provision for credit losses		Non-interest income		Revenue before gains and losses		Gains and losses		Total net revenue		Total expenses		Net income
Six months ended 30 June 2016	Customer	Inter- segment
Bermuda	78,391	841		(3,767	)	32,424		107,889		106		107,995		72,688		35,307
Cayman	38,348	222		(1,403	)	21,260		58,427		(814	)	57,613		30,145		27,468
Guernsey	7,321	(134	)	(569	)	12,894		19,512		(924	)	18,588		17,946		642
Switzerland	—	—		—		1,939		1,939		—		1,939		1,711		228
The Bahamas	20	16		—		2,419		2,455		—		2,455		2,588		(133	)
United Kingdom	2,592	(945	)	775		2,770		5,192		1,224		6,416		13,394		(6,978	)
Total before eliminations	126,672	—		(4,964	)	73,706		195,414		(408	)	195,006		138,472		56,534
Inter-segment eliminations	—	—		—		(1,288	)	(1,288	)	—		(1,288	)	(1,288	)	—
Total	126,672	—		(4,964	)	72,418		194,126		(408	)	193,718		137,184		56,534

Note 13: 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 over-the-counter (“OTC”) transactions that are privately negotiated 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 minimise 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 investments hedges and derivatives not formally designated as hedges as described below.

Fair value hedges consist of designated interest rate swaps and are used to minimise 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 31 December 2011, the Bank cancelled 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 amortised to net income over the remaining life of each individual loan, which could extend to year 2029, using the effective interest method.

25

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Net investment hedges includes designated currency swaps and qualifying non-derivative instruments and are used to minimise 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 recognised 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 minimise 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 19 for details on the amount recognised 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 recognised 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 recognised in foreign exchange income.

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.

30 June 2017	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	77,670	12,516	—		12,516
Derivatives not formally designated as hedging instruments	Currency swaps	10	506,275	615	(15,355	)	(14,740	)
Subtotal risk management derivatives			583,945	13,131	(15,355	)	(2,224	)
Client services derivatives	Spot and forward foreign exchange	131	3,004,111	14,129	(13,459	)	670
Total derivative instruments			3,588,056	27,260	(28,814	)	(1,554	)
31 December 2016	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	77,670	15,744	—		15,744
Derivatives not formally designated as hedging instruments	Currency swaps	11	676,856	5,901	(3,013	)	2,888
Subtotal risk management derivatives			754,526	21,645	(3,013	)	18,632
Client services derivatives	Spot and forward foreign exchange	106	2,039,141	15,410	(15,267	)	143
Total derivative instruments			2,793,667	37,055	(18,280	)	18,775

In addition to the above, as at 30 June 2017 foreign denominated deposits of £34.5 million (31 December 2016: £34.5 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.

26

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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.

	Gross fair  value  recognised	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
30 June 2017						Gross fair value of derivatives		Cash collateral  received / paid		Net exposures
Derivative assets
Spot and forward foreign exchange and currency swaps	27,260	(16,067	)	11,193		—		(7,846	)	3,347
Derivative liabilities
Spot and forward foreign exchange and currency swaps	28,814	(16,067	)	12,747		—		—		12,747
Net negative fair value				(1,554	)
	Gross fair  value  recognised	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
31 December 2016						Gross fair value of derivatives		Cash collateral  received / paid		Net exposures
Derivative assets
Spot and forward foreign exchange and currency swaps	37,055	(6,959	)	30,096		(6,811	)	(8,292	)	14,993
Derivative liabilities
Spot and forward foreign exchange and currency swaps	18,280	(6,959	)	11,321		(6,811	)	—		4,510
Net positive fair value				18,775

The following tables shows 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. During 2016, Management revised the following disclosures to segregate the gains and losses attributable to the specific types of derivatives.

		Three months ended			Six months ended
Derivative instrument	Consolidated statements of operations line item	30 June 2017		30 June 2016	30 June 2017		30 June 2016
Spot and forward foreign exchange	Foreign exchange revenue	484		89	526		52
Currency swaps, not designated as hedge	Foreign exchange revenue	(10,014	)	11,151	(17,627	)	9,108
Currency swaps - Net investment hedge	Foreign exchange revenue	706		37	1,182		303
Total net gains (losses) recognised in net income		(8,824	)	11,277	(15,919	)	9,463
Derivative instrument	Consolidated statements of comprehensive income line item	30 June 2017		30 June 2016	30 June 2017		30 June 2016
Currency swaps - Net investment hedge	Net change in unrealised gains and (losses) on translation of net investment in foreign operations	(2,993	)	5,189	(4,410	)	6,668
Total net gains (losses) recognised in comprehensive income		(2,993	)	5,189	(4,410	)	6,668

27

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 14: 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 of the Bank's audited financial statements for the year ended 31 December 2016.

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 the Group Asset and Liability Committee.

Financial instruments in Level 1 include actively traded redeemable mutual funds.

Financial instruments in Level 2 include corporate bonds, 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 six months ended 30 June 2017 and the year ended 31 December 2016.

	30 June 2017				31 December 2016
	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 recognised at fair value on a recurring basis:
Financial assets
Trading investments
Mutual funds	6,431	167	—	6,598	6,091	222	—	6,313
Total trading	6,431	167	—	6,598	6,091	222	—	6,313
Available-for-sale investments
US government and federal agencies	—	2,568,151	—	2,568,151	—	2,430,402	—	2,430,402
Non-US governments debt securities	—	26,973	—	26,973	—	27,020	—	27,020
Corporate debt securities	—	294,729	—	294,729	—	514,475	—	514,475
Asset-backed securities - Student loans	—	—	12,493	12,493	—	—	12,493	12,493
Commercial mortgage-backed securities	—	150,910	—	150,910	—	150,546	—	150,546
Residential mortgage-backed securities	—	201,192	—	201,192	—	197,802	—	197,802
Total available-for-sale	—	3,241,955	12,493	3,254,448	—	3,320,245	12,493	3,332,738
Other assets - Derivatives	—	11,193	—	11,193	—	30,096	—	30,096
Financial liabilities
Other liabilities - Derivatives	—	12,747	—	12,747	—	11,321	—	11,321

Level 3 Reconciliation

The Level 3 Asset-backed securities - Student loans is a federal family education loan programme 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.

Significant increases (decreases) in any of the preceding inputs in isolation could result in a significantly different fair value measurement. Generally a change in assumption used for the probability of defaults is accompanied by a directionally similar change in the assumption used for the loss severity.

	Six months ended 30 June 2017	Year ended 31 December 2016
	Available-  for-sale investments	Available-  for-sale investments
Carrying amount at beginning of period	12,493	12,161
Realised and unrealised gains (losses) recognised in other comprehensive income	—	332
Carrying amount at end of period	12,493	12,493

28

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Items Other Than Those Recognised at Fair Value on a Recurring Basis:
		30 June 2017				31 December 2016
	Level	Carrying amount	Fair  value	Appreciation / (depreciation)		Carrying amount	Fair  value	Appreciation / (depreciation)
Financial assets
Cash due from banks	Level 1	1,719,833	1,719,833	—		2,101,651	2,101,651	—
Securities purchased under agreement to resell	Level 2	183,934	183,934	—		148,813	148,813	—
Short-term investments	Level 1	293,727	293,727	—		519,755	519,755	—
Investments held-to-maturity	Level 2	1,297,072	1,292,438	(4,634	)	1,061,103	1,046,828	(14,275	)
Loans, net of allowance for credit losses	Level 2	3,587,839	3,582,386	(5,453	)	3,570,478	3,566,812	(3,666	)
Other real estate owned¹	Level 2	13,338	13,338	—		14,199	14,199	—
Financial liabilities
Customer deposits
Demand deposits	Level 2	7,827,766	7,827,766	—		8,193,213	8,193,213	—
Term deposits	Level 2	1,642,717	1,643,619	(902	)	1,816,640	1,817,564	(924	)
Deposits from banks	Level 2	8,328	8,328	—		23,796	23,796	—
Long-term debt	Level 2	117,000	118,736	(1,736	)	117,000	117,683	(683	)

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

29

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 15: Interest rate risk

The following tables set out the assets, liabilities and shareholders' equity and off-balance sheet instruments 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.

30 June 2017	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	1,615		—		—		—	—	105		1,720
Securities purchased under agreement to resell	184		—		—		—	—	—		184
Short-term investments	157		133		4		—	—	—		294
Investments	1,498		35		128		351	2,539	7		4,558
Loans	3,370		64		14		91	45	4		3,588
Other assets	—		—		—		—	—	335		335
Total assets	6,824		232		146		442	2,584	451		10,679
Liabilities and shareholders' equity
Shareholders’ equity	—		—		—		—	—	770		770
Demand deposits	5,503		—		—		—	—	2,329		7,832
Term deposits	1,250		162		166		69	—	—		1,647
Other liabilities	—		—		—		—	—	313		313
Long-term debt	92		—		25		—	—	—		117
Total liabilities and shareholders' equity	6,845		162		191		69	—	3,412		10,679
Interest rate sensitivity gap	(21	)	70		(45	)	373	2,584	(2,961	)	—
Cumulative interest rate sensitivity gap	(21	)	49		4		377	2,961	—		—
31 December 2016	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	1,991		—		—		—	—	111		2,102
Securities purchased under agreement to resell	149		—		—		—	—	—		149
Short-term investments	135		385		—		—	—	—		520
Investments	1,343		15		81		665	2,290	6		4,400
Loans	3,339		53		57		81	38	2		3,570
Other assets	—		—		—		—	—	363		363
Total assets	6,957		453		138		746	2,328	482		11,104
Liabilities and shareholders' equity
Shareholders’ equity	—		—		—		—	—	711		711
Demand deposits	5,828		—		—		—	—	2,385		8,213
Term deposits	1,492		166		92		71	—	—		1,821
Other liabilities	—		—		—		—	—	242		242
Long-term debt	92		—		—		25	—	—		117
Total liabilities and shareholders' equity	7,412		166		92		96	—	3,338		11,104
Interest rate sensitivity gap	(455	)	287		46		650	2,328	(2,856	)	—
Cumulative interest rate sensitivity gap	(455	)	(168	)	(122	)	528	2,856	—		—

30

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note16: Earnings per share

Earnings per share have been calculated using the weighted average number of common shares outstanding during the period 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.

Prior to their conversion into common shares on 31 March 2015, outstanding contingent value convertible preference ("CVCP") shares were classified as participating securities as they were entitled to dividends declared to common shareholders on a 1:1 basis and were therefore included in the basic earnings per share calculation.

During the six months ended 30 June 2017, options to purchase an average of 1.3 million (30 June 2016: 2.8 million) common shares were outstanding. During the six months ended 30 June 2017, the average number of outstanding awards of unvested common shares was 0.9 million (30 June 2016: 0.8 million). Only awards for which the sum of 1) the expense that will be recognised in the future (i.e. the unrecognised 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 unrecognised 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.

A warrant, outstanding until the Bank repurchased it in December 2016, to purchase 0.43 million common shares issued to the Government of Bermuda in exchange for the Government's guarantee of the preference shares, with an exercise price per share of $34.72 was not included in the computation of earnings per share for any period during the year ended 31 December 2016 because the exercise price was greater than the average market price of the Bank‘s common shares.

	Three months ended			Six months ended
	30 June 2017	30 June 2016		30 June 2017		30 June 2016
Net income	36,050	29,773		71,907		56,534
Less: Preference dividends declared and guarantee fee	—	(4,064	)	—		(8,183	)
Net income attributable for common shareholders	36,050	25,709		71,907		48,351
Basic Earnings Per Share
Weighted average number of common shares issued	54,418	47,293		53,990		47,293
Weighted average number of common shares held as treasury stock	—	(543	)	(1	)	(705	)
Weighted average number of common shares (in thousands)	54,418	46,750		53,989		46,588
Basic Earnings Per Share	0.66	0.55		1.33		1.04
Diluted Earnings Per Share
Weighted average number of common shares	54,418	46,750		53,989		46,588
Net dilution impact related to options to purchase common shares	497	375		753		413
Net dilution impact related to awards of unvested common shares	665	225		628		368
Weighted average number of diluted common shares (in thousands)	55,580	47,350		55,370		47,369
Diluted Earnings Per Share	0.65	0.54		1.30		1.02

Note 17: 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 respectively 5.0 million and 7.5 million shares.

Stock Option Awards

1997 Stock Option Plan

Prior to the capital raise on 2 March 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:

31

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Time vesting condition

50% of each option award is granted in the form of time vested options and vests 25% on each of the second, third, fourth and fifth anniversaries of the effective grant date.

In addition to the time vesting conditions noted above, the options will generally vest immediately:

• by reason of the employee’s death or disability,

• upon termination, by the Bank, of the holder’s employment, unless if in relation with the holder’s misconduct, or

• in limited circumstances and specifically approved by the Board, as stipulated in the holder’s employment contract.

In the event of the employee’s resignation, any unvested portion of the awards shall generally be forfeited and any vested portion of the options shall generally remain exercisable during the 90-day period following the termination date or, if earlier, until the expiration date, and any vested portion of the options not exercised as of the expiration of such period shall be forfeited without any consideration therefore.

Performance vesting condition

50% of each option award is granted in the form of performance options and vests (partially or fully) on a “valuation event” date (date any of the 2 March 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 realises a predetermined multiple of invested capital (“MOIC”)). On 21 September 2016, it was determined that a valuation event occurred during which a new investor realised 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 Options
	Number of shares transferable upon exercise (thousands)						Weighted average  exercise price ($)		Weighted average  remaining life (years)		Aggregate  intrinsic value  ($ thousands)
Six months ended 30 June 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 period	116		1,950		2,066		132.13	11.57
Exercised	—		(1,412	)	(1,412	)	—	11.52			30,845
Forfeitures and cancellations	(46	)	—		(46	)	161.76	—
Outstanding at end of period	70		538		608		113.26	11.70	1.14	2.98	12,070
Vested and exercisable at end of period	70		538		608		113.26	11.70	1.14	2.98
	Number of shares transferable upon exercise (thousands)						Weighted average  exercise price ($)		Weighted average  remaining life (years)		Aggregate  intrinsic value  ($ thousands)
Six months ended 30 June 2016	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 period	218		2,608		2,826		135.19	11.60
Exercised	—		(35	)	(35	)	—	11.69			167
Forfeitures and cancellations	(57	)	(4	)	(61	)	143.63	11.50
Resignations, retirements, redundancies	—		(28	)	(28	)	—	11.50
Outstanding at end of period	161		2,541		2,702		132.19	11.60	1.68	4.18	11,687
Vested and exercisable at end of period	161		1,235		1,396		132.19	11.60	1.68	4.45

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.

Employee Deferred Incentive Plan (“EDIP”)

Under the Bank’s EDIP Plan, shares were 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 2012 and 2011

Under the Bank’s 2012 and 2011 ELTIP, shares were awarded to Bank employees and executive management, based on predetermined vesting conditions. Two types of vesting conditions upon which the shares were awarded comprise the ELTIP: 1) 50% of each share award was granted in the form of time vested shares, generally vesting equally over a three-year period from the effective grant date; and 2) 50% of each share award was granted in the form of performance shares, generally vesting upon the achievement of certain performance targets in the three-year period from the effective grant date.

Executive Long-Term Incentive Share Plan (“ELTIP”) - Years 2017, 2016, 2015, 2014 and 2013

The 2017 ELTIP was approved on 27 February 2017. Under the Bank’s 2017, 2016, 2015, 2014 and 2013 ELTIP, performance shares were awarded to executive management. These shares will generally vest upon the achievement of certain performance targets in the three-year period from the effective grant date.

32

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Changes in Outstanding ELTIP and EDIP awards (in thousands of shares transferable upon vesting)
	Six months ended
	30 June 2017				30 June 2016
	EDIP		ELTIP		EDIP		ELTIP
Outstanding at beginning of period	215		640		226		606
Granted	128		223		113		213
Vested (fair value in 2017: $8.5 million, 2016: $6.9 million)	(102	)	(148	)	(118	)	(302	)
Resignations, retirements, redundancies	—		—		(2	)	(8	)
Outstanding at end of period	241		715		219		509

Share-based Compensation Cost Recognised in Net Income
	Six months ended
	30 June 2017			30 June 2016
	Stock option  plans	EDIP and  ELTIP	Total	Stock option plans	EDIP and ELTIP	Total
Cost recognised in net income	—	3,483	3,483	258	3,323	3,581

Unrecognised Share-based Compensation Cost	30 June 2017	31 December 2016
EDIP	4,701	2,040
ELTIP
Time vesting shares	4,122	2,988
Performance vesting shares	6,876	3,802
Total unrecognised expense	15,699	8,830

Note 18: Share buy-back plans

The Bank initially introduced two share buy-back programmes on 1 May 2012 as a means to improve shareholder liquidity and facilitate growth in share value. Each programme 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 programme.

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 programme, 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 programme 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 Programme

On 19 February 2016, the Board approved, with effect from 1 April 2016, the 2016 common share buy-back programme, authorising the purchase for treasury of up to 0.8 million common shares.

	Six months ended	Year ended 31 December
Common share buy-backs	30 June 2017	2016	2015	2014	2013	2012	Total
Acquired number of shares (to the nearest 1)	—	97,053	250,371	856,734	403,848	726,005	2,334,011
Average cost per common share	—	16.36	19.42	19.86	13.89	12.40	16.31
Total cost (in US dollars)	—	1,588,189	4,862,248	17,018,412	5,610,907	8,999,061	38,078,817

Preference Share Buy-Back Programme

On 26 February 2015, the Board approved, with effect from 5 May 2015, the 2015 preference share buy-back programme, authorising the purchase for cancellation of up to 5,000 preference shares.

	Six months ended	Year ended 31 December
Preference share buy-backs	30 June 2017	2016	2015	2014	2013	2012	Total
Acquired number of shares (to the nearest 1)	—	—	183	560	11,972	4,422	17,137
Average cost per preference share	—	—	1,151.55	1,172.26	1,230.26	1,218.40	1,224.46
Total cost (in US dollars)	—	—	210,734	656,465	14,728,624	5,387,777	20,983,600

33

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 19: Accumulated other comprehensive loss

	Unrealised (losses) on translation of net investment in foreign operations		HTM  investments		Unrealised  gains (losses)  on AFS  investments		Employee benefit plans
30 June 2017							Pension		Post-retirement  healthcare		Subtotal -  employee benefits plans		Total AOCL
Balance at beginning of period	(20,152	)	(979	)	(22,680	)	(63,232	)	(37,637	)	(100,869	)	(144,680	)
Other comprehensive income (loss), net of taxes	1,145		88		11,349		384		1,377		1,761		14,343
Balance at end of period	(19,007	)	(891	)	(11,331	)	(62,848	)	(36,260	)	(99,108	)	(130,337	)
	Unrealised (losses)  on translation of  net investment in  foreign  operations		HTM  investments		Unrealised  gains (losses)  on AFS  investments		Employee benefit plans
30 June 2016							Pension		Post- retirement  healthcare		Subtotal -  employee benefits plans		Total AOCL
Balance at beginning of period	(13,645	)	(2,350	)	(57	)	(46,331	)	(28,114	)	(74,445	)	(90,497	)
Transfer of AFS investments to HTM investments	—		1,442		(1,442	)	—		—		—		—
Other comprehensive income (loss), net of taxes	(4,437	)	(145	)	29,322		789		(1,806	)	(1,017	)	23,723
Balance at end of period	(18,082	)	(1,053	)	27,823		(45,542	)	(29,920	)	(75,462	)	(66,774	)

Net Change of AOCL Components		Three months ended				Six months ended
	Line item in the consolidated statements of operations, if any	30 June 2017		30 June 2016		30 June 2017		30 June 2016
Net unrealised gains (losses) on translation of net investment in foreign operations adjustments
Foreign currency translation adjustments	N/A	4,884		(11,796	)	6,910		(16,195	)
Gains (loss) on net investment hedge	N/A	(4,097	)	8,946		(5,765	)	11,758
Net change		787		(2,850	)	1,145		(4,437	)
Held-to-maturity investment adjustments
Net unamortised gains (losses) transferred from AFS	N/A	—		1,442		—		1,442
Amortisation of net gains (losses) to net income	Interest income on investments	40		100		88		(145	)
Net change		40		1,542		88		1,297
Available-for-sale investment adjustments
Gross unrealised gains (losses)	N/A	8,207		10,191		13,127		29,244
Net unrealised (gains) losses transferred to HTM	N/A	—		(1,442	)	—		(1,442	)
Transfer of realised (gains) losses to net income	Net realised gains (losses) on AFS investments	(1,709	)	2		(1,778	)	78
Net change		6,498		8,751		11,349		27,880
Employee benefit plans adjustments
Defined benefit pension plan
Amortisation of actuarial losses	Salaries and other employee benefits	548		425		1,116		851
Change in deferred taxes	N/A	—		(140	)	—		(140	)
Foreign currency translation adjustments of related balances	N/A	(493	)	37		(732	)	78
Net change		55		322		384		789
Post-retirement healthcare plan
Amortisation of net actuarial losses	Salaries and other employee benefits	878		683		1,757		1,366
Amortisation of prior service credit	Salaries and other employee benefits	(190	)	(1,586	)	(380	)	(3,172	)
Net change		688		(903	)	1,377		(1,806	)
Other comprehensive income (loss), net of taxes		8,068		6,862		14,343		23,723

34

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

Note 20: Capital structure

Authorised Capital

On 16 September 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 25 July 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 6 September 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 of 6 September 2016, the par value of each issued common share and each authorised but unissued common share was reduced from BM$0.10 to BM$0.01 and the authorised 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 following the Reduction in Par Value, from the holders thereof. All share, share‑based payments and dividend information presented in these consolidated financial statements and accompanying footnotes has been retroactively adjusted to reflect the decreased number of shares resulting from this action.

Prior to the Reverse Share Split, the Bank’s total authorised 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) 100,200,001 preference shares of par value US$0.01 and (iv) 50 million preference shares of par value £0.01.

Preference Shares

On 22 June 2009, the Bank issued 200,000 Government guaranteed, 8.00% non-cumulative perpetual limited voting preference shares (the “preference shares”). The issuance price was US$1,000 per share. The preference share buy-backs are disclosed in Note 18: Share Buy-Back Plans.

The preference share principal and dividend payments are guaranteed by the Government of Bermuda. At any time after the expiry of the guarantee offered by the Government of Bermuda, and subject to the approval of the BMA, the Bank would have been able to redeem, in whole or in part, any preference shares at the time issued and outstanding, at a redemption price equal to the liquidation preference plus any unpaid dividends at the time.

Holders of preference shares were entitled to receive, on each preference share only when, as and if declared by the Board of Directors, non-cumulative cash dividends at a rate per annum equal to 8.00% on the liquidation preference of US$1,000 per preference share payable quarterly in arrears. In exchange for the Government's commitment, the Bank issued to the Government a warrant that, upon issuance, allowed the purchase of 427,960 common shares of the Bank at an exercise price of $70.10 per share. The warrant which, after adjustments in accordance with anti-dilution terms allowed for the purchase of 432,028 shares with an exercise price of $34.72 per share was repurchased and cancelled by the Bank in December 2016.

On 15 December 2016, the Bank effected a mandatory redemption of its preference shares by paying a make-whole redemption payment (the "make-whole redemption price") of USD $1,180.00 per preference share to preference shareholders of record as at 1 December 2016. The make-whole redemption price comprises the sum of the dividend per preference share for the current quarter, the $1,000 liquidation preference per preference share, discounted for present value, and the present value of future dividend payments through 22 June 2019. Following the payment of the make-whole redemption price, all issued and outstanding preference shares were redeemed, cancelled and reverted to authorised but unissued preference shares of the Bank. The preference shares were also delisted from both the BSX and the Luxembourg Stock Exchange.

Dividends Declared

During the six months ended 30 June 2017, the Bank paid cash dividends of $0.64 (30 June 2016: $0.20) for each common share as of the related record dates. During the six months ended 30 June 2016, the Bank declared the full 8.00% cash dividends on preference shares. As the preference shares were completely redeemed on 15 December 2016, there were nil cash dividends on preference shares for the six months ended 30 June 2017.

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 prior written approval 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 approval for all dividends declared during the periods under review.

Regulatory Capital

Effective 1 January 2016, the Bank’s regulatory capital is determined in accordance with current Basel III guidelines as issued by the Bermuda Monetary Authority (“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. Prior to 1 January 2016, the Bank’s regulatory capital was determined in accordance with Basel II guidelines as issued by the BMA.

The Bank is fully compliant with all regulatory capital requirements and maintains capital ratios in excess of regulatory minimums as at 30 June 2017 and 31 December 2016. The following table sets forth the Bank's capital adequacy in accordance with the Basel III framework:

35

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

	30 June 2017				31 December 2016
	Actual		Regulatory minimum		Actual		Regulatory minimum
Capital
Common Equity Tier 1	712,645		N/A		666,847		N/A
Tier 1 capital	712,645		N/A		666,847		N/A
Tier 2 capital	90,640		N/A		102,709		N/A
Total capital	803,285		N/A		769,556		N/A
Risk Weighted Assets	4,200,225		N/A		4,365,440		N/A
Leverage Ratio Exposure Measure	11,131,226		N/A		11,516,303		N/A
Capital Ratios (%)
Common Equity Tier 1	17.0	%	8.8	%	15.3	%	8.1	%
Total Tier 1	17.0	%	10.3	%	15.3	%	9.6	%
Total Capital	19.1	%	15.9	%	17.6	%	15.3	%
Leverage ratio	6.4	%	5.0	%	5.8	%	5.0	%

Note 21: Business combinations

Bermuda Trust Company Limited and the Private Banking Investment Management of Operations of HSBC Bank Bermuda Limited Acquisition

On 29 April 2016, the Bank and two of its subsidiaries, Butterfield Trust (Bermuda) Limited ("BTBL") and Butterfield Asset Management Limited ("BAM"), acquired for a total purchase price of $21.8 million: 1) all outstanding shares of Bermuda Trust Company Limited ("BTCL", a wholly–owned subsidiary of HSBC Bank Bermuda Limited ("HSBCBB")), 2) certain assets of the asset management services operations of HSBCBB and 3) certain assets of the private banking services operations of HSBCBB. The acquisition is in line with the Bank's growth strategy of developing core businesses in existing markets and was undertaken to add scale to the Bank capacity in these market segments where the Bank had already a significant presence and a long history.

The acquisition date fair value of consideration transferred amounted to $21.8 million comprising cash settlement of $7.0 million paid on 29 April 2016, a second payment of $2.1 million made on 6 May 2016, and contingent considerations payable in the second half of 2016 and evaluated at $12.7 million. The contingent considerations were dependent on the trust and asset management clients retention by BNTB before the end of the contingency period in September 2016 and the amount paid was $12.7 million.

The fair value of the net assets acquired and allocation of purchase is summarised as follows:

	As at
	29 April 2016
Total consideration transferred	21,778
Assets acquired
Intangible assets	21,443
Other assets	3,345
Total assets acquired	24,788
Liabilities acquired	3,010
Excess purchase price (goodwill)	—

The purchase price paid by the Bank was for BTCL's net tangible value as well as intangible assets of $21.4 million in the form of customer relationships in all three segments with an estimated finite useful life of 15 years.

The Bank incurred transaction expenses related to this acquisition in the amount of $4.3 million, of which $3.3 million were expensed during the year ended 31 December 2016 (including $0.7 million of legal and professional fees) and $1.0 million were expensed during the year ended 31 December 2015 (including $1.0 million of legal and professional fees).

For the year ended 31 December 2016, the amount of revenues and earnings relating to the acquired HSBC Bermuda operations that are not inextricably merged into the Bank’s operations are $9.8 million and $5.0 million respectively.

36

The Bank of N.T. Butterfield & Son Limited

Notes to the Consolidated Financial Statements (unaudited) (continued)

(In thousands of US dollars, unless otherwise stated)

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 operations from HSBC Bermuda, assuming the transaction had been effected on 1 January 2016. 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 have been prepared based on the actual results realised by the Bank from operating the acquired activities, when such activities were not yet inextricably merged into the Bank's operations.

	Three months ended	Six months ended
Unaudited pro forma financial information	30 June 2016	30 June 2016
Total net revenue	97,922	198,366
Total non-interest operating expense	67,589	139,590
Pro forma net income post business combination	30,333	58,776

Note 22: Related party transactions

Financing Transactions

As of 17 May 2005, the Bank established a programme to offer loans with preferential rates to eligible Bank employees, subject to certain conditions set by the Bank and provided that such employees meet certain credit criteria. Loan payments are serviced by automatically debiting the employee’s chequing or savings account with the Bank. Applications for loans are handled according to the same policies as those for the Bank's retail banking clients. The Bank's ability to offer preferential rates on loans depends upon a number of factors, including market conditions, regulations and the Bank's overall profitability. The Bank has the right to change its employee loan policy at any time after notifying participants.

Certain directors and executives of the Bank, companies in which they are principal owners, and trusts in which they are involved, have loans 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 to preferential rates as described in the preceding paragraph. As at 30 June 2017, related party director and executive loan balances were $37.6 million (31 December 2016: $12.1 million). During the six months ended 30 June 2017, new issuance of loans and change in directorships to directors and executives were $30.4 million and repayments and change in directorships were $4.9 million (year ended 31 December 2016: $27.6 and $25.1 million). All of these loans were considered performing loans as at 30 June 2017 and 31 December 2016.

Capital Transaction

Up to 28 February 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 28 February 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, which provided, amongst other rights, the right to designate two persons for nomination for election by the shareholders as members of the Bank's Board of Directors, was terminated. Prior to 30 April 2015, Canadian Imperial Bank of Commerce ("CIBC”) held approximately 19% of the Bank's equity voting power. On 30 April 2015, the Bank completed the transaction with CIBC to repurchase for cancellation approximately 77% of CIBC's shares for $15.00 per share, or a total of $120 million, representing 8,000,000 common shares. The remaining 23% of CIBC's shareholding in Butterfield (representing 2.3 million shares) were acquired by Carlyle Global Financial Services, L.P. and subsequently sold to other investors.

Financial Transactions With Related Parties

The Bank holds seed investments in several Butterfield mutual funds, which are managed by a wholly-owned subsidiary of the Bank. As at 30 June 2017, these investments have a fair value of $5.0 million with an unrealized gain of $1.4 million (31 December 2016: $5.0 million and $1.1 million) and were included in trading investments at their fair value. During the six months ended 30 June 2017, the Bank earned $3.3 million (30 June 2016: $2.8 million) in asset management revenue from funds managed by a wholly-owned subsidiary of the Bank.

Note23: Subsequent events

On 25 July 2017, the Board of Directors declared an interim dividend of $0.32 per common share to be paid on 28 August 2017 to shareholders of record on 14 August 2017.

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