Bank of N.T. Butterfield & Son Limited — 2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022; comparisons are with 2021 unless noted. This is an annual report, not a standalone fourth-quarter filing. Financial statements use U.S. GAAP and U.S. dollars.
Business context
Butterfield is a Bermuda-headquartered bank and wealth manager operating principally in Bermuda, the Cayman Islands, and the Channel Islands and UK. It provides retail, corporate and private banking, lending, trust, custody, and asset-management services. In 2022, 44% of net revenue came from Bermuda, 32% from Cayman, and 19% from the Channel Islands and UK.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total net revenue, GAAP | $549.3 million | $499.7 million | Up 9.9% |
| Net interest income before credit provision | $343.6 million | $299.8 million | Up 14.6% |
| Net interest margin | 2.41% | 2.02% | Up 39 basis points |
| Non-interest income | $206.6 million | $198.1 million | Up 4.3% |
| Net income | $214.0 million | $162.7 million | Up 31.5% |
| Diluted earnings per share | $4.29 | $3.26 | Up 31.6% |
| Core efficiency ratio, non-GAAP | 58.9% | 65.5% | Improved |
Net revenue before credit provision and other gains or losses was $550.2 million. The difference from GAAP total net revenue reflects the credit provision and other gains and losses. Core net income was $215.7 million, a non-GAAP measure that excludes items management deems non-core.
- Balance sheet: Total assets were $14.3 billion, down 6.7%; loans net of allowance were $5.10 billion, down 2.8%; deposits were $12.99 billion, down 6.3%.
- Credit: The credit-loss provision was $2.4 million, versus a $3.1 million recovery in 2021. Non-accrual loans were $63.1 million, or 1.2% of gross loans, compared with $61.0 million and 1.2%. Allowance for credit losses was $25.0 million, or 0.5% of loans.
- Liquidity: Cash, short-term investments, resale agreements, and securities totaled $8.8 billion, or 61.3% of assets, compared with 63.3% in 2021. Management said working capital was sufficient and the Bank complied with minimum LCR and NSFR requirements; the filing text does not provide the actual year-end ratios.
- Capital: CET1 and Tier 1 ratios were 20.3%, total capital was 24.1%, and leverage was 6.7%, all above stated regulatory minimums. Shareholders’ equity fell 11.5% to $864.8 million, principally reflecting investment valuation losses, dividends, and repurchases.
- Debt: Long-term subordinated debt was $172.3 million. The Bank reported no outstanding certificates of deposit, commercial paper, senior notes, or repurchase-agreement borrowings at year-end.
- Cash flow: Operating activities provided $219.3 million, investing activities provided $292.0 million, and financing activities used $506.8 million. Cash and cash equivalents ended at $2.10 billion, down from $2.18 billion.
Material changes and unusual items
- Higher market rates lifted loan and investment yields and drove the increase in net interest income. Deposit interest expense also rose: deposit funding cost increased to 34 basis points from 11 basis points, amid repricing pressure, especially in the Channel Islands.
- Deposits declined as pandemic-related surplus balances normalized and the stronger U.S. dollar reduced the translated value of non-U.S.-dollar deposits. Loans also declined, partly because of foreign exchange effects and commercial facility repayments.
- The securities portfolio had $761.3 million of net unrealized losses at year-end, versus $0.4 million of net unrealized gains in 2021, primarily due to rising long-term U.S. interest rates. The Bank transferred approximately $1.0 billion of AFS securities to HTM during 2022. Management reported no investment credit impairment and said it did not intend, and was not likely required, to sell the loss-position securities before recovery.
- The Bank reported $1.7 million of non-core expenses, including costs related to a senior executive’s departure and tax-compliance matters. The U.S. Department of Justice inquiry was resolved in 2021 through a three-year non-prosecution agreement and a $5.6 million payment; the filing describes residual professional fees in 2022.
- Net income benefited from a $1.1 million net other gain, mainly reversal of a prior-year defined-benefit settlement accounting adjustment. The 2022 credit provision reflected weaker macroeconomic forecasts and an extended Cayman government facility.
Outlook, management commentary, and risks
- The filing gives no specific earnings or revenue guidance. Management expects rising rates, all else equal, to support net interest income, while noting that deposit costs may rise and loan demand, asset values, and borrower credit quality may be pressured.
- Interest-rate simulations estimated that a parallel +100-basis-point shock would increase 12-month net interest income by 1.6%; a −100-basis-point shock would reduce it by 5.6%. These are model estimates and exclude potential management actions.
- The Bank expects its three-year technology modernization program to finish toward the end of 2023, with planned total spending of $30 million to $40 million funded from existing cash resources.
- The September 2022 agreement to acquire Credit Suisse trust businesses in Singapore, Guernsey, and The Bahamas was expected to close in the latter half of 2023; completion and integration remain subject to execution and relevant approvals.
- The Board declared $1.76 per common share in 2022 dividends. A $0.44 interim dividend was declared for March 2023. Dividends remain discretionary and subject to Bermuda Monetary Authority approval. A new authorization permits repurchase of up to 3.0 million shares through February 29, 2024; actual repurchases are not assured.
- Key risks include dependence on a few small regional economies and deposit funding, absence of a central-bank lender of last resort in major operating jurisdictions, interest-rate and investment valuation risk, residential-property concentration, inflation and recession, foreign-exchange movements, cybersecurity and operational controls, regulatory and financial-crime compliance, and acquisition execution.
Most important facts for investors to verify
- Whether deposit balances stabilize and deposit repricing continues to lag asset-yield increases, particularly in the Channel Islands and UK.
- How the $761.3 million of unrealized securities losses, including HTM fair value below carrying value, affect capital, liquidity, or earnings if securities must be sold.
- Whether credit quality holds up as rates and living costs rise, especially in the residential mortgage portfolio, which represented about 70% of gross loans.
- Actual LCR and NSFR ratios, deposit concentration and uninsured balances, and the Bank’s ability to manage liquidity without a lender of last resort.
- Completion, cost, and expected contribution of the technology program and Credit Suisse trust-business acquisition.
- Whether future dividends and share repurchases remain consistent with capital needs, regulatory approval, and the Bank’s investment and liquidity position.