Bank of N.T. Butterfield & Son Limited (The)

Good morning. My name is Nihugi, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter and full year 2023 earnings call for the Bank of NC, Butterfield, and Sunlipset. All participants will be in a listen-only mode. To do this system, please press the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star, then one, on your telephone keypad. To withdraw your questions, please press star then two. Please note, this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Please go ahead, sir. Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and full year 2023 financial results. On the call, I'm joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer. Craig Bridgewater, Group Chief Financial Officer, and Michael Scrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question and answer session. Yesterday afternoon, we issued a press release announcing our fourth quarter and full year 2023 results. The press release, along with the slide presentation that we will refer to during our remarks on this call, are available on the investor relations section of our website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For a reconciliation of these measures to this GAAP, please refer to the earnings press release and slide presentation. Today's call and associated materials may also contain certain forward-looking statements which are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings. I will now turn the call over to Michael Collins.

Thank you, Noah, and thanks to everyone joining the call today. I am pleased with Butterfield's performance in 2023 as we completed a number of important projects, including the implementation of our upgraded core banking system in Bermuda and Cayman, the onboarding of trust assets acquired from Credit Suisse, and executed a significant cost reduction program which should improve operating efficiencies and help offset inflationary pressures and the expected impact of lower market interest rates on net interest income. Butterfield continues to benefit from leading bank market shares in Bermuda and Cayman Islands with an expanding retail banking presence in the Channel Islands. Wealth management services in Bermuda, the Cayman Islands, and the Channel Islands include Trust, private banking, asset management, and custody. The bank also offers specialized financial services in the Bahamas, Switzerland, Singapore, and in the UK, where we provide mortgages to high net worth clients with properties in prime central London. I will now turn to the full year highlights on page four. Butterfield had an excellent year with net income of $225.5 million, and core net income of $231.5 million. This resulted in a core return on average tangible common equity of 27% for 2023. The bank earned higher net interest income in an elevated market interest rate environment, as well as increased non-interest earnings. The strong revenues were somewhat offset by higher expenses, which trended higher due to inflationary pressures the investments in our core banking system and branches, and costs associated with the Credit Suisse asset acquisition. The net interest margin increased to 2.80% from 2.41% in 2022, with the cost of deposits rising to 140 basis points from 34 basis points in 2022. We have continued to carefully balance the cost of deposits with the competitive landscape in our banking jurisdictions, and we continue to see mixed shift to higher cost term products, while our core non-interest bearing deposit franchises remain somewhat insulated. Tangible book value per common share increased by 21.2% to end the year at $19.29. This was due to an improved OCI position, normalization to a smaller balance sheet post-COVID, as well as retained earnings for the year. We remain committed to actively managing our capital, and throughout the year, we have paid out approximately 38% of earnings in quarterly dividends. In addition, during 2023, the bank repurchased just over 3 million shares at a total value of $88 million. On December 5th, the Board approved a new share repurchase authorization for 2024 of up to 3.5 million common shares, which came into effect on December 15th. As anticipated, during the fourth quarter, we completed the acquisition of trust assets from Credit Suisse. I'm very happy with the quality of business that we have successfully onboarded and have been impressed with talented new colleagues that have also come across to Butterfield. I will circle back at the end and walk through some of the highlights of the deal. I will now turn the call over to Craig for details on the fourth quarter.

Thank you, Michael, and good morning, everyone. I will now turn to the fourth quarter highlights on page six. Butterfield reported strong financial results in the fourth quarter of 2023 with net income of $53.5 million and core net income of $55.3 million. We reported core earnings per share of $1.15 with a core return on average tangible common equity of 25.4% for the fourth quarter of 2023. The net interest margin was 2.73% in the fourth quarter, a decrease of three basis points sequentially from the prior quarter, with the cost of deposits rising to 172 basis points from 152 basis points in the prior quarter. Deposit costs continue to increase at a modest pace across all of our banking jurisdictions as fixed-term deposits roll into higher rates, as well as a mixed shift in deposits from demand deposits to term deposits. The Board has again approved a quarterly cash dividend of 44 cents per share. We also continue to repurchase shares during the quarter with buybacks totaling 1.2 million shares at an average price of $28.20 per share. Turning to slide seven. Here we provide a summary of net interest income and net interest margin. In the fourth quarter, we reported net interest income before provision for credit losses of $86.9 million a decrease of 3.8% versus the prior quarter. The lower net interest income resulted from a decrease in the volume of interest-earning assets and higher deposit costs, which were partially offset by improved asset yields. Average interest-earning assets in the fourth quarter of 2023 of $12.6 billion were sequentially 2.5% lower, driven by a decrease in average deposit levels. The yield on interest-earning assets increased 17 basis points to 4.39% from 4.22% in the prior quarter as investment portfolio runoff continued to be invested at the shorter end of the yield curve, and increases in rates on loans produced improved interest income. The yield on Treasury assets during the quarter was 4.72% versus 4.47% in the prior quarter, and the investment portfolio yielded 2.16% which was 10 basis points higher than the third quarter. In addition, the yield on loan balances also increased by 17 basis points to 6.68 percent. Average investment balances decreased by $204.4 million, or 3.7 percent, to $5.29 billion compared to the prior quarter, mainly due to paydowns and maturities, the proceeds of which were invested in short-term Treasury assets. Since year-end, we have recommenced using proceeds from maturities and paydowns, as well as some excess liquidity to ladder out in the investment portfolio, investing in a mix of U.S. agency MBS securities and medium-term U.S. treasuries. Slide 8 provides a summary of non-interest income, which totaled $60 million, up 15.4 percent versus the prior quarter due to expected fourth-quarter seasonal increases in card services, incentive revenues and transaction volumes, and higher foreign exchange volumes. Trust fees increase as revenues were earned from the clients acquired from Credit Suisse during the year. Non-interest income continues to be a stable and capital-efficient source of revenue with a fee income ratio of 41.3 percent. In the coming quarters, we expect the levels of non-interest income to return to a quarterly run rate in the $52 to $53 million range. On slide nine, we present core non-interest expenses. Total core non-interest expenses were $90.4 million, a 7.2% increase compared to $84.3 million in the prior quarter. The higher core non-interest expenses are primarily attributable to the completion of the recent IT infrastructure and core banking upgrades and the timing of property maintenance activities across the group, as well as performance-based remuneration incentive accruals associated with strong earnings. We expect the quarterly run rate for expenses to stabilize around $88 million in the second half of 2024. This incorporates the expected uplift in expenses from the amortization of our new cloud-based IT investments and core banking system and branch upgrades, as well as recently onboarded colleagues servicing the Quiet Book of Trust clients are also taking into consideration the expected benefits of the Group Y course restructure announced in Q3. I will now turn the call over to Michael Scrum to review the balance sheet.

Thank you, Craig. Slide 10 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period end deposit balances increased slightly to $12.0 billion from $11.9 billion at the prior quarter end, and this reflects further stabilization in the deposit base. Butterfield's lowest density of 34.0% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk-weighted residential mortgage loan portfolio, which now represents 69% of our total loan assets. On page 11, we provide additional detail on our deposit composition by segment. Compared to the prior year, Butterfield's deposits remain well diversified across our banking jurisdictions, with non-interest-bearing demand deposits representing 22% of total group deposits. Client deposit activity levels remain generally as expected, with the bank seeking to balance deposit volumes against cost of funds for each market. Turning to slide 12, we provide annual measures for loans by type, business segment, and rate type. The chart on the top left breaks out the residential loan portfolios by location, which has remained stable. On the bottom right, fixed rate loans now represent 51% of total loans, as the three to five year fixed rate product in the rising rate environment has been popular with clients. Turning to slide 13, the two charts demonstrate the conservative nature of Butterfield's balance sheet and versus peers. Butterfield maintains a high degree of liquidity due to the nature of our markets and as a result of not having access to a central bank or a Fed window. We continue to have significant holdings of cash and cash equivalents, interbank deposits, and short-dated sovereign securities in addition to liquidity and repo lines with correspondent banks. Butterfield's loan-to-deposit ratio remains at 40% with conservative lending standards. On slide 14, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 99% AA-rated U.S. government guaranteed agency securities. Credit quality in the loan book also continues to be strong with non-accrual loans standing at 1.3% of gross loans and a low charge-off rate of eight basis points. On slide 15, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Asset sensitivity did increase in the fourth quarter due to a lower investment portfolio duration and higher levels of cash and cash equivalents. Unrealized losses in the EFS portfolio, including no CI, was $163.9 million at the end of the fourth quarter, an improvement of $71.4 million, or 31% from the prior quarter. Slide 16 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory minimum requirements. While not a regulatory ratio, our TCE to TA has also increased above our target range of 6% to 6.5% this quarter and is indicative of the health of our overall capital levels. I will now turn the call back to Michael Collins.

Thank you, Michael. Before we conclude our prepared remarks, I would like to provide a summary of highlights from our recently completed Credit Suisse Trust Asset Acquisition. On slide 17 of the presentation, we have provided information to help frame the deal. As you will see from the timeline at the top of the page, after our initial announcement in September of 2022, there have been seven distinct closings. The deal was structured as an asset purchase rather than an entity purchase, which has given us the flexibility to review and select each client to help us take only the clients that are consistent with our risk tolerance. This process has been time consuming, but has resulted in a high quality book of business. Of significance, the deal increases Butterfield's presence in Singapore, where we continue to expect significant growth in the private trust market. We are pleased to have more than 20 new colleagues join Butterfield to help service the 560 new trust clients we have now onboarded. New assets under administration total approximately $24 billion. We expect annual fees from the new business to total approximately $9 million, with new annual expenses of around $6 million. We also expect to continue to grow this book over time. In total, we recognize a new intangible asset of $27.3 million, with around one-third of the total consisting of deal and onboarding expenses. I look forward to continuing our business development efforts and our search for other trust and banking M&A opportunities to help continue our profitable growth. The turmoil in the regional banking space last year allowed us to demonstrate the benefits of Butterfield's strong market positioning, conservative balance sheet and liquidity management, and client relationship banking model. This model continues to demonstrate strength and resilience from a high fee-to-income ratio limited credit risk in our investment portfolio, a 40% loan-to-deposit ratio, a high degree of liquidity, and a robust deposit base diversified across jurisdictions, sectors, and currencies. We are well-positioned for the future and expect growth to be both organic and driven by potential M&A. In 2024, we will build on the successes of 2023 with a strong focus on client experience and continuing to create shareholder value. Thank you, and with that, we would be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, you may would like to withdraw your question. Please press star then two. At this time, we will pause momentarily to assemble our work first. Our first question comes from Michael Perito with KDW. Please proceed.

Hi, this is Mike's associate, Andrew, filling in. Thanks for taking my questions. Sure, thanks. I just wanted to start on the non-interest income side. Were there any seasonality in Season Q4 or... and what would be a good launch point for 2024 run rate-wise on the fee side?

All right, good morning, it's Craig. Yeah, so in Q4, we do have kind of seasonally high fee income and driven by card volumes. So obviously with the Christmas shopping season, this is a big driver. As well as at year-round, we get incentive payments from the credit card companies as well. That will be included. And then obviously we had some increased revenue coming in from the assets acquired from Credit Suisse, so those two clients, that also drove increases in revenue as well. If you look at kind of normalizing that, kind of mentioning in the formal remarks, I think we're going to go down to about $52 million on a quarterly basis. So just kind of, so we got about $8 million of additional income that we had in Q4. But we would expect that to normalize back into Q1 around the $52 million mark.

Great. Thanks. And then just moving to the margin, how would you expect the NIM to react if we get rate cuts in the back half of 2024?

I think we still think that we will have a NIM trough in Q1.

We will have, I guess, kind of if you look at overall net interest income, we would expect net interest, overall net interest income to come to reduce for a few reasons. Obviously, with rates coming down, that's going to have impacts on our loan yields. So if we look at loan yields for particularly in Cayman and Guernsey, those move, one with U.S. Prime in Cayman, than the UK treasury rate in Guernsey and Jersey. In Bermuda, we still would expect to follow a 50% beta on the way down, likely starting, I guess, with every other kind of 25 basis point cut.

Yeah, sorry, and it's Michael Scrum. Just adding to that, on slide 15, we have this sort of S sensitivity, which gives you an indication of the sort of impact of a parallel shift of 100. So fairly modest impact really on net interest income, minus 1.5% overall for down 100. So it's clearly something we're watching pretty closely, particularly on term deposit products, cost of deposits, as we kind of sit at probably at the peak of rates right now. But I think, you know, on the flip side, we've seen a significant improvement in the OCI mark as well as rates have kind of stabilized. So You know, we feel pretty good about where we are right now. We are modestly asset sensitive, but obviously there's still a lot of volatility in market rates.

Great. Appreciate the color there. And just lastly for me, on the capital side, the new buyback announcement in Q4, should we expect buybacks incrementally near term? And then also appreciate all the color on M&A pipelines and whatnot, just looking for a little bit more color there. Would it be kind of like a trust deal again that you would be looking for following the close of the CS deal?

Yeah, I mean, the board is overall very supportive of the buyback as a way to kind of augment the shareholder return here. Obviously, always subject to market conditions, but you will see, you know, in the fourth quarter we did quite a significant increase quite a significant amount of buybacks. I think what we were looking for was deposit stabilization initially, some stabilization or at least lower volatility in market rates to kind of ensure that we felt that we were post-COVID and that we were essentially understanding the rate, the cost of deposit dynamics and the NIM dynamics. In terms of other opportunities, we're obviously still looking, I would say the pipeline is looking a little bit better in terms of opportunity set for us. It's primarily private trust fee-based businesses, such as the one that we just completed with Credit Suisse. I think we have a pretty good template of how we would want to do that in order to make sure that we have a risk profile that matches our existing tolerance of the newly acquired assets. although the Credit Suisse deal was pretty small in scale. There are still some others out there. But the bottom line is we seem to have a lot of capital. OCI seems to be stabilizing coming back. The burndown is happening of the remaining OCI, and we're laddering into higher rates. So, you know, where capital levels are right now is kind of above our TCE range of – normalized TCE range of 6, 6.5. And regulatory capital, we have plenty of payment access regulatory capital, and we'll just continue with that risk-light business dynamic that has been successful in terms of credit and the ROE, and then reflecting that back to shareholders, both in terms of dividends and share-by-banks.

Great. Appreciate all the color. Thanks for taking my questions.

The next question comes from David Feaster with Raymond J. Hi, good morning, everybody.

Maybe just following up on the rate cut side. I know, just curious how you think about some of the timing of it, right? Because I know some of these, you know, the assets and liabilities reprice on a lag. Could you just Help us remind us of the lag impacts of it. My guts would say that probably the first cut or two is probably the most severe impacts. And then, because again, you got the repricing side as well to help offset that. So just help us think about that. And then just overall thoughts on managing rate sensitivity, whether there's any appetite to maybe go longer and deploy some of that excess liquidity.

Yeah, so yeah, kind of quite a bit to unpack there.

You know, obviously we're looking at, we're not, we're not kind of differing from the market, so we're looking at forward rates that are out there in the market rates and not necessarily taking any position that's different from that. As mentioned earlier, we are going to employ, expect to employ 50% beta on the Bermuda Loan book. And obviously Cayman kind of moves with U.S. Prime and the currency in Jersey book and the U.K. book moves with kind of the U.S. space rate. So kind of the, that's on the asset side. On the, I guess on the loan side, on investments, we are actually starting to re-ladder back into the portfolio. So up to now we've been investing kind of maturities and excess cash into the short end, so treasury assets. We're now starting to ladder back into the portfolio, supporting some more duration back into the portfolio again. And obviously, we're going to get an increase in the yields on the investment portfolio. So we're yielding at like 2% now. What we're investing in now is more of a full handle, so kind of 429, 430. So we expect – I mean, obviously, it's going to take quite a bit to ladder that back in, but we should expect to see some increasing yield on the asset side. And we do have, actually, we had kind of quite a significant 125 million pounds sterling UK gilts just matured at the end of January. So kind of reinvesting that at current rates, that's an expected pickup. And we have some, you know, we also have kind of U.S. treasuries maturing during the year as well, more around August timeframe. So expecting some pickup on the asset side. On the deposit side, obviously, we're going to continue to look to manage the cost of deposits. Right now, I guess you see the breakdown in deposits, and the average maturity on deposits at the moment, on-term deposits, I should say, is around three months. So, really, that's going to have to look at the repricing of those kind of on that duration. So, that's mature in three months' time, and they'll probably get reinvested on three-month durations as well. So that will actually follow kind of market rates at the time of kind of reinvestment.

Yeah, I'm just, sorry, it's Michael Scrum. Just on the timing, David, well, first of all, you know, on the Resi side, you'll note that, you know, 51% of it is now fixed. If you see the breakdown on page 12, it's, yeah, 50 loan beta, 50% loan beta on the Bermuda Resi side. Obviously, UK and U.S., any floating rate product there would float immediately. I think Cayman now has a 30-day lag on implementing new rates, and Bermuda has a 90-day lag to allow adequate notice to customers for a change in rate. And in the UK and Channel Islands book, it's immediate but following Bank of England.

Okay. And the deposit, is there a lag on the deposit repricing side, or is that immediate?

On the term, yeah, so obviously on demand would be immediate, on interest-bearing demand and non-interest-bearing, although we're not paying a lot on non-interest-bearing. But on term, obviously we wait for the rollover. The average of the term work is around three months, so there will be a little bit of a lag coming off the top.

Okay, terrific. And then maybe just digging in, Michael, your comments on growing, you know, the acquired book from Credit Suisse. I'm just curious, maybe, where do you see opportunity? Is it to expand or deepen the relationships that you have there and cross-sell some of those clients? Or are you seeing more opportunity just for organic client additions, you know, just given the increased footprint in that market? Just curious how you think about growing that book.

Yeah, so great question. So I mean, the reason why it's a pretty small book overall, and there is a standstill in the agreement in terms of the existing book and the fees that we are charging. So we're obviously going to go, we're going through and reviewing that book. That standstill is for two years. And then, but there is some inflation adjustments that we can do on that book in the I think in particular in Singapore where the market is growing quite rapidly in the private trust space and maturing, we've seen most of the customers tend to use the trust product for financial assets, but there's definitely opportunities there to expand that client book with non-financial assets, so properties, companies, you know, you know, like we do in other parts of our business. And so that should drive higher fee income. So there's market growth. There's growth in the book, not on the book that we've acquired, but with the clients that we've acquired. And then finally, I think because we're now sort of a pretty sizable private trust company in Singapore, we're seeing a lot more inbound in terms of just getting RFPs – And people sort of recognize the name in the market as well. So there's those three kind of elements to the growth, which, you know, when you look at the book, it's pretty small, but I think we're pretty excited about the market growth and the presence that we have there now, which is becoming a better-known name.

Yeah, and generally when we do these acquisitions, we also have a fee standstill agreement for a period of time. And then, as Michael said, the real opportunity is actually to expand the type of assets into trust, and most of these are really trusts originally that were sort of wrappers for asset management. And by encouraging clients to put in businesses and art and real estate, it takes on much more complexity and justifies higher fees. So gradually that will help. And as Michael said, I mean, the Singapore – Choice of Singapore as a domicile versus Hong Kong or some other places we could have been makes a lot of sense, and we're top five in Singapore at this point.

Okay. And then maybe last one for me, just touching on asset quality. It's held really steady. You guys have obviously done a great job locking in some rates for your clients, but I'm just curious as you – You know, how do you feel like the health of your clients is at this point? You know, what are you hearing from them? And as you dig into the book, are there any spots that you're maybe watching more closely or seeing any weakness either by geography or just curious how you're approaching overall asset quality and what you're seeing at this point?

Yeah, so, I mean – Great question, David. The first thing is, obviously, it's mostly resi, so well-secured. We have conservative lending standards, and most of our loans are amortizing in Sonia, Bermuda, and Cayman. So as, you know, the LTV profile really has been amortized down to sort of sub-60%, so lots of skin in the game, lots of opportunities to help customers during a period where rates are pretty high. And we are seeing some of that. in the Bermuda Resi book, I would say. But again, not a real concern from a collateral perspective. Most of anything that goes past through can be cured. Obviously, we've adopted the customers and financial difficulty disclosures as well. And we're not seeing a whole lot, but it's definitely something that we're watching, particularly in Bermuda, and hopeful that we see you know, better tourism this summer that put small cash into people's pockets and sort of outside of the international business sector where we've seen significant growth. And then in London, so Bermuda Resi probably a spot to just kind of keep an eye on. The UK book, again, really well collateralized. You know, we have an election coming up in the UK. There's some As you know, we're Prime Central London, only 60-65 LTV lending standards. So, you know, again, not a big concern. But if there are rule changes with potentially a labor government coming in, they've been talking about getting rid of RES non-DOM rules and changing inheritance tax rules. And that obviously has a market impact overall. So something that we're watching pretty closely and staying in touch with our customers there as well.

Yeah, I think we've said in the past that we've intensely kept the London portfolio relatively flat, and that continues to be the case. But we are building out our retail mass affluent bank in Guernsey, New Jersey, and we're sort of over 250 pounds, a million pounds in terms of mortgages there. So we're expanding there. Michael hit it on the head. We have to keep an eye on Bermuda, although nothing really at this point in Cayman. is doing really well in terms of growth in the economy and population. So, very unlikely we'd see stresses there. So, so far, so good.

And the housing market's doing pretty well. Any thoughts on that?

Yeah, no, in Bermuda, it's doing well. Prices have risen the last few years, and it's really obviously driven by the fact it's only 20 square miles. So there's a limited supply and international business and reinsurance is still doing quite well, particularly the life businesses that have set up on the island. So there's still a lot of demand. Cayman's got a lot more land, but population is over 80,000 now. So they've expanded population. So demand's increased as well. And Guernsey and Jersey markets have always been pretty stable to rising. So islands you know, given limited supply, always have sort of a baseline in terms of values. Perfect.

That's helpful. Thanks, everybody. The next question comes from Alex Durdall with Piper Sandler.

Good morning, guys.

Good morning.

Just back to the margin, a question on the fixed versus floating loans. Is that skewed towards any one of the geographies? And I guess really what I'm trying to get at is whether or not it's skewed towards Bank of England versus Fed in terms of expectations for rate cuts for the fixed versus floating pieces.

Yeah. I think we saw quite a bit of fixing in the Channel Islands kind of early on in the cycle, and then we saw quite a bit of fixing in Bermuda. So quite a few of the commercial loans fixed in Bermuda. So that's kind of a large component of that 51% from Bermuda and Channel Islands and UK.

And again, three to five years. You know, we are obviously looking at repricing, a repricing ladder. There isn't a particular quarter where that's heavier than others, and we're probably about 12 months, 12 to 15 months away from sort of those repricings at the moment in terms of the fix.

Okay. And then I guess sort of same question, that's a little bit different on the deposit side. If I remember correctly, the Channel Islands were much higher beta in terms of deposits on the way up. would be the expectation that, you know, if we get maybe a Fed cut, deposit costs come down a little bit. But if we get a Bank of England cut, maybe there's a lot more room for deposit costs to come down.

Yeah, I mean, China Islands, as we talked about before, is very competitive. And so we're kind of not a rate setter in that market. So we have to kind of follow what the market is doing. Some of the high street banks there are kind of market leading. So HSBC, RBS, et cetera. So both dollars and sterling actually in deposit betas have been much higher in the Channel Islands than any of our other markets. But we would definitely expect to follow that market. And we would expect the bigger banks to, we've already seen some of the longer term rates being cut in that market. And that's the one area where we really have to focus in terms of the cost of deposits right on the way down on the term bucket.

Okay. On expenses, Craig, you gave a little bit of color and expectations for expenses for the second half of 24, and I presume that is fully incorporating all the cost saves from the recent restructuring that you announced last quarter. What should we think about in terms of expenses for the first two quarters of 2024? I mean, is there going to be a little bit more noise in there as some of these IT systems, et cetera, come fully online?

Yeah, yeah, that's about right. So I think kind of, obviously, there will be at the higher end of that guidance, given that, you know, the cost restructure will come, you know, be fully implemented by the end of Q2. But in the meantime, compared to, I guess, kind of going back to a Q3 base, going back to a Q3 base and then adding on costs associated with the acquisition and those employees coming on board, amortization of that intangible asset that we've kind of now accrued on the balance sheet. And then the amortization of those kind of new IT systems and hosting fees.

Okay. And then just final question for me back on credit. I think the press release cited a higher provision related to credit card. Maybe you can talk a little bit about what you're seeing there and what drove that higher provision.

Yeah, I mean, I think the provisioning was really driven by some fees, so legal fees on a kind of legacy loan that we have, an art loan. So it's kind of going through the collection process on the art loan. And so incurring fees and kind of accruing for that or adding that to the allowance as we go along. So that's part of it. And then also some settlements of some of those facilities as well. So those being charged off.

Okay. I mean, so I guess, you know, without those things, would it be fair to assume that provisioning should drop down below a million bucks a quarter, you know, starting in 2024?

Yeah, it's tough. I mean, it does depend on actual experience as well. I think the model probably would be push out more stable provisioning, given that the macroeconomic inputs are going to be more stable. And then the actual performance, which is what we talked about before, you know, still a couple spots that we're watching. You know, if rates stay high for longer, obviously that is going to drive some client experiences, you know, or potentially client difficulties. that we're going to have to resolve. And then that becomes an input into the model. But all other things being equal, you know, that seems about the right level. You know, but again, you know, just subject to obviously actual experience. So, you know, at the moment, anything that's coming out the other end, you know, in terms of sales of properties is holding value. So, you know, we're not sort of thinking that cost to sell or anything like that is going to drive higher provision. So it's really going to be down to actual experience

Okay, thank you for taking my questions.

Thanks.

Again, if you have a question, please press the star one. Our next question comes from Timur Bresler with Wells Fargo. Please proceed.

Hi, good morning. Good morning, Timur. On the bond book, uh, laddering back into bonds, uh, what's the duration you're putting on there? And if I'm not mistaken, I think it was something like $125 million a quarter that cash flows. Is that still the right number?

Yeah. So currently kind of our last investments, um, kind of at the MBS securities. So the kind of on the MBS securities kind of is about three, three years. at the moment, so the kind of behavioral duration. And then the other investments we've been making is in U.S. Treasuries, so two-year U.S. Treasuries. And then on the gilts, the most recent investment we made, 125 million pounds sterling, is six months currently.

Okay. And just the amount of cash flowing quarterly? Say again, sorry? The amount of the cash flowing off of the bond book quarterly?

It's about $30 million.

$30 million a quarter, okay.

$30 million a month, sorry, a month, yeah, $30 million a month.

$30 million, okay, got it.

Yeah, so Tim, I would say, sorry, it's Michael Scrum, I would say, you know, we're still staying sort of short-medium here. Obviously, there's still, you know, some discussion about when when the Fed's going to cut and what the terminal rate is in particular is quite important to us. And again, we're not a mark-to-market shop, so we just got to kind of keep the duration sort of matching some of the behavioralized deposits to sort of balance the interest rate risk profile. But obviously, So at the moment, we're laddering in, but we're kind of staying in the medium term with a mix of MBS, 15 years, I think, and some shorter-dated treasuries.

Got it. And then circling back to term deposits, and I apologize if you address this during David's question, but just term deposits repricing, where are they rolling off from what levels? Where are you repricing those? And I guess just generally speaking, in the next couple of quarters, assuming no Fed activity, how should we be thinking about additional deposit costs creep?

So I guess on term deposits, we're kind of in the 4% range.

And there's a kind of basically kind of being renewed at a similar level. Obviously, kind of this bespoke pricing as necessary. So that's, I would say, 4% on average, but it's a bespoke pricing kind of that may take us above that on specific deposits. But that's kind of a good guide around the term deposits. And again, the kind of three-month average maturity on the term deposit book at the moment.

Okay, and then maybe just more broadly on deposits, I think in quarters past you talked to an $11.5 billion, a $12 billion as more or less a floor. They seem to have stabilized here. At least the near-term strategy is going to be to renew some of the term deposits. Is there anything maybe idiosyncratic in 4Q that's seasonal in nature, or are we really at a floor here? you're seeing signs of real stability in the deposit book.

Yeah, I mean, sorry, Tim, it's Michael Scrum. I think we are seeing the stability in the deposit book. You know, there is some seasonality, as we've talked about before. A lot of our clients are captive insurance clients, and they have premium flows and claims flows. So typically, pre-quarter ends, we see premium inflows, and then post-quarter ends, we see premiums. you know, claims settlements to the extent that those insurance companies have claims to settle. And that's also, that seasonality is also prevalent. So typically that in Bermuda would be renewal dates of Jan 1, July 1. And then in Cayman, typically in the third quarter, we see some outflows. And then in the fourth quarter, we see And we're talking half a billion-ish, right? And in the fourth quarter, we typically see some inflows from hedge funds building up cash positions. And then the first quarter, we see some outflows there. So there's a little bit of seasonality. I think 11.5 to 12 is a good number. We came in, obviously, at the top of the range. It was nice to see that core deposit franchises are stable. And it really is a question, I think, of trading off the cost of deposits versus the size of the balance sheet over time, right, as we always do.

Yeah, and it was really interesting during the whole year to see how deposits behaved. Bermuda was actually flat to up because there's obviously very few banks here. Cayman was a little bit more competitive. We think we've washed out sort of the fund money that was being invested. And then As we know, in the Channel Islands, we bought corporate banks, so much more competitive. As Michael said, we're kind of a price follower as opposed to setter, but we've got a good plan there to go into retail. We've got well over $300 million sterling in deposits and $250 million in mortgages, so we actually have a retail book at this point. Obviously, the retail pricing will be much more attractive going forward, but we're they all act a little bit differently and disproportionately to competition. So we understand it pretty well at this point. But we think most of the hot money's been, whether it's huge trust deposits or funds in Cayman, most of that's been washed out and it does feel pretty stable right now.

Thank you. I appreciate the call.

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Noah for any closing remarks.

Thank you, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.