The Bank of N.T. Butterfield & Son (NTB) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported net income of $57.4 million or $1.15 per diluted common share for Q3 2022, with core net income at $57.6 million or $1.16 per diluted share [10] - Core return on average tangible common equity improved to 31.6% from 27.8% in the prior quarter [11] - Net interest margin increased by 33 basis points to 2.59%, while the cost of deposits rose by 18 basis points to 34 basis points [11] - Total core non-interest expenses were $81.8 million, consistent with the prior quarter [21] Business Line Data and Key Metrics Changes - Net interest income rose to $91.2 million, an increase of 11.2% compared to the previous quarter, driven by improved yields on interest-earning assets [16] - Non-interest income decreased by 3.6% quarter-over-quarter, primarily due to a lack of scheduled recognition of unclaimed customer drafts and checks [19] - Trust fees slightly declined due to lower activity-based fees compared to the prior quarter [20] Market Data and Key Metrics Changes - Average investment balances decreased by $136.6 million, primarily due to unrealized losses in the AFS portfolio as market interest rates increased [17] - Average deposit balances fell by approximately $600 million to $13.0 billion for the quarter, attributed to foreign exchange translation and customer withdrawals [25][27] - The company’s asset quality remained high, with non-accrual loans at 1.2% of gross loans and a net charge-off ratio of 8 basis points [28] Company Strategy and Development Direction - The company announced the acquisition of Credit Suisse's Trust Business in Singapore, the Channel Islands, and the Bahamas, which is expected to enhance trust fee income and position the company as a leading private client trust company in Singapore [13] - The M&A strategy remains intact, with ongoing discussions for potential deals in the trust and banking sectors [34] - The company aims to maintain a loan-to-deposit ratio below 40% while focusing on capital-efficient fee-generating businesses [36] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the strong results in Q3 but acknowledged potential challenges ahead due to rising interest rates and a cooling global economy [32] - The company plans to closely monitor the credit book as interest rates rise [32] - Management remains confident in the company's ability to grow through M&A and organically, with a focus on maintaining a strong balance sheet [34] Other Important Information - The Board declared a quarterly cash dividend of $0.44 per share, with share repurchases paused due to elevated OCI loss marks [12] - The company’s TCE to TA ratio was 5.0%, below the internal target range of 6% to 6.5% due to higher long-term U.S. dollar interest rates [23] Q&A Session Summary Question: Update on deposit base and balance sheet trajectory - Management expects stabilization in the deposit base, estimating deposits between $12 billion and $12.5 billion [38] Question: Increase in cost of deposits - The rise in deposit costs was primarily driven by the competitive market in the Channel Islands, with a 13 basis point increase attributed to that region [40] Question: Asset sensitivity profile post-FOMC hike - Management indicated that while deposit costs may lag behind rate hikes, they expect continued NIM expansion, albeit at a slower rate [41][59] Question: Credit Suisse acquisition details - The integration process is ongoing, with approximately 1,500 structures to evaluate, and management is optimistic about the quality of the client base [47][49] Question: Fixed-rate loan portfolio evolution - The company has been encouraging a shift to fixed-rate loans, with 90% of the new fixed-rate loans coming from existing floating-rate clients [51] Question: Asset quality trends and mortgage client health - Management reported no current indications of asset quality deterioration, actively monitoring clients for potential cash flow issues [80] Question: Currency risk hedging strategy - The company uses fair market value hedges for its sterling-denominated subsidiaries and views them as structural investments [74] Question: Liquidity deployment strategy - Management maintains a disciplined approach to liquidity deployment, currently holding $3 billion in cash, with plans to invest in fixed-rate securities as conditions stabilize [75][77]