Bank of N.T. Butterfield & Son Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 8 speakers on the call.

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2023 Earnings Call for the Bank of NT Butterfield and Son Limited. All participants will be in listen only mode. Please note this event is being recorded.

Operator

I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's 3rd quarter 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 Schrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question and answer session.

Speaker 1

Yesterday afternoon, we issued a press release announcing our Q3 2023 results. The press release and financial statements, along with a 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 U. S.

Speaker 1

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.

Speaker 2

Thank you, Noah, and thanks to everyone joining the call today. I am pleased with Butterfield's performance during the Q3 and believe that these results demonstrate our continued focus on a stable, low risk density balance sheet, while delivering consistent and growing non interest income and balanced capital management. As a reminder, Butterfield has market leading bank franchises in Bermuda and the Cayman Islands and a growing retail banking presence in the Channel Islands with wealth management provided in all three jurisdictions. Banking services consist of deposit taking, cash management and lending solutions for individual, business and institutional clients. Wealth Management Services include trust, private banking, asset management and custody.

Speaker 2

The bank also provides specialized financial service offerings in the Bahamas, Switzerland, Singapore and the UK, where we offer mortgages to high net worth clients with properties in Prime Central London. I will now turn to the Q3 of 2023 highlights on Page 4. Butterfield reported positive results with net income of $48,700,000 and core net income of $57,000,000 The non core expenses of $8,200,000 were associated with a group wide restructuring program implemented in the quarter. We reported a core return on average tangible common equity of 26.1% for the Q3 of 2023 with core earnings per share of $1.16 The net interest margin was 2.76% in the 3rd quarter, a decrease of 7 basis points with the cost of deposits rising to 152 basis points from 127 basis points in the prior quarter. Deposit pricing increased across all of our banking jurisdictions as there was a mix shift from demand deposits to term deposits and fixed term deposits rolled into higher rates due to the rising market interest rates.

Speaker 1

Our TCE to TA ratio

Speaker 2

of 6.5% has held steady and continues to be at the conservative end of our targeted range of between 6% and 6.5%. As a result, we increased activity in our share buyback program with repurchases of just over 1,000,000 common shares in the 3rd quarter. The rolling integration of the Credit Suisse Trust Asset acquisition progressed as planned during the Q3. Our 3rd closing saw us acquiring assets in the Bahamas and the 4th closing incorporated a total of 50 trust structures, primarily in Guernsey with an additional 5 in Singapore. We are very pleased with the progress so far and the quality of clients onboarded in the deal and continue to expect the final closing of the transaction this quarter, and we are tracking towards the $8,000,000 to $10,000,000 in added trust revenues from the deal in 2024, along with an estimated $6,000,000 of expenses.

Speaker 2

I will now turn the call over to Craig for more detail on the quarter.

Speaker 3

Thank you, Michael, and good morning, everyone. Looking now at Slide 6, here we provide a summary of net interest income and net interest margin. In the Q3, we reported net interest income before provision for credit losses of $19,200,000 a decrease of 2.5% versus the prior quarter. The decrease was mainly due to higher deposit costs and a decrease in average balance sheet volumes. During the quarter, the net interest margin decreased 7 basis points due to increased deposit costs, which outpaced higher earn yields and treasury margins.

Speaker 3

Average interest earning assets decreased marginally by 1% to $12,950,000,000 due to deposit outflows as customers activated funds and saw higher yielding asset classes. The yield on interest earning assets increased 12 basis points to 4.22% from 4.1% as investment portfolio runoff continued to be invested at the shorter end of the yield curve. The yield on treasury assets during the quarter of 4.47% versus 4.06% in the prior quarter and the investment portfolio yielded 2.06% which was consistent with the 2nd quarter. In addition, the yield on loan balances increased by 9 basis points to 6.51%. Average investment balances decreased by $119,800,000 or 2.1% compared to the prior quarter, mainly due to the scheduled maturity of some U.

Speaker 3

S. Treasury securities. We remain conservatively positioned in the near term by placing portfolio runoff into cash and cash equivalents which continue to offer an attractive return profile without the OCI risk. Turning to Slide 7, non interest income was up 3.6% versus the prior quarter with higher banking fees due to improved card volumes in Bermuda and Cayman as well as some fees from loan prepayments. Trust fees also increased compared to the prior quarter as a result of new clients acquired in the Credit Suisse deal, as well as organic growth and higher activity based fees.

Speaker 3

Non interest income continues to be a stable and capital efficient source of revenue with a fee income ratio of 36.7%. Slide 8 provides a summary of core non interest expenses. Total core non interest expenses were $84,300,000 a small and expected increase compared to $83,600,000 in the prior quarter. The higher expenses are primarily attributable to increased staff related expenses and higher technology and communication costs related to the investment in IT infrastructure and the banking application upgrade in Bermuda. Prior to consideration of expenses associated with servicing of the newly onboarded trust plans, we continue to expect a quarterly expense run rate of between $85,000,000 to $86,000,000 over the next few quarters given that changes from the restructuring will not be fully implemented until the end of Q2 2024 and we have the full impact of the new cloud hosting fees and the amortization of the upgraded banking application and banking branches to be incurred.

Speaker 3

We are in the midst of developing our annual operating plan for 2024 and will provide updated expense guidance when we report 4th quarter results. I will now turn the call over to Michael Schrum to review the balance sheet.

Speaker 4

Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period end deposit balances decreased to $11,900,000,000 from the prior quarter end. Deposits ended the quarter down approximately 2.7% and is reflective of typical client activity with some added seasonality. We currently anticipate total deposits stabilizing in the range of between $11,500,000,000 to $12,000,000,000 as competition for deposits has increased and we see more evidence of a higher for longer interest rate environment in the near term.

Speaker 4

Butterfield's low risk density of 34 point 3% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk weighted residential mortgage loan portfolio, which now represents 70% of the total loan assets. Turning now to Slide 10. Here we provide additional detail on our deposit composition by segment. Butterfield's deposits remain well diversified across banking jurisdictions with an uptick in term deposits for the group primarily driven by Cayman where competition has increased and some clients have moved funds out to term. While this increased the cost of deposits, it is encouraging to see some additional term funding on the balance sheet from regular client activity.

Speaker 4

Core non interest bearing deposits remained at approximately 22% of deposits and $2,600,000,000 atquarterend. To date, client deposit activity has been broadly as expected with the bank seeking to balance deposit volumes against the cost of funds for each market. Turning to Slide 11, we provide details of loans by type, business segment and rate type. The chart on the bottom left shows the loan volume movements across our lending jurisdictions with Bermuda and the London loan portfolio showing net reductions as those portfolios amortized in addition to some increase in prepayments. On the bottom right, fixed rate loans now represent 50% of total loans as clients elected to fix their payments in a rising interest rate environment.

Speaker 4

Loans are typically fixed for 3 to 5 years and should help moderate any potential debt servicing issues. The higher proportion of fixed term loans has also lowered our asset sensitivity over the past 6 quarters. Turning to Slide 12, we displayed 2 charts that demonstrate the conservative nature of Butterfield's balance sheet versus peers. Butterfield remains 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 lines with correspondent banks.

Speaker 4

Butterfield's loan to deposit ratio remains low at 40% with conservative lending standards, and we only offer credit products in our home markets. On Slide 13, 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. The rerating of the portfolio follows Fitch's August downgrade of the long term issuer default rating of the United States of America.

Speaker 4

Credit quality in the loan book also continues to be strong with non accrual loans standing at 1.2% of gross loans and a small charge off rate at 4 basis points. On Slide 14, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. As sensitivity has continued to decrease during the past couple of years and now suggest a more moderate NI response to changes in market rates. Unrealized losses in the EFS portfolio included in OCI was $238,000,000 at the end of the third quarter, up from $207,300,000 at June 30. At the current implied forward curve, we expect the OCI burn down to be $65,000,000 or 27% of the total in the next 12 months and a total decrease of $103,000,000 or 43% over the next 2 years.

Speaker 4

Slide 15 summarizes regulatory capital and leverage capital levels. Butterfield's capital levels continue to be significantly above regulatory requirements.

Speaker 2

I will now turn the call back to Michael Collins. Thank you, Michael. As mentioned earlier, during the Q3, we made a difficult decision to implement a group wide restructuring program that will result in a 9% reduction of our global workforce. This is intended to mitigate inflationary and other expense pressures. The projected $13,000,000 annualized cost savings once the program is fully implemented should partially offset earnings at risk from lower interest rates in the future and inflationary pressure on expenses.

Speaker 2

The restructuring plans considered operational risk mitigation and new business processes and incorporates the placement of some additional non client facing functions in our service centers. We expect to continue to operate in all of our jurisdictions without significant changes in products and service offerings. I'm pleased to say that here in Bermuda, we are concluding a solid 2023 tourism season. In Cayman, which is just entering its high season, we are seeing strong bookings and enhanced airlift and expect significant tourism activity in the coming months. While not directly a driver of our business, healthy visitor numbers increase credit and debit card activity, which is beneficial to the bank and our clients.

Speaker 2

Our strategy to augment growth through M and A remains important and we continue to evaluate potential targets in both the banking and private trust sectors. We do not have any specific deals to comment on currently and Butterfield remains well positioned to continue growing organically while generating top quartile risk adjusted returns. Thank you. And with that, we'd be happy to take your questions. Operator?

Operator

And our first question will come from David Feaster of Raymond James. Please go ahead.

Speaker 5

Hi, good morning everybody.

Speaker 3

Good morning, David. Good morning, David.

Speaker 5

I was hoping to maybe I mean you talked about kind of the impacts of a higher for longer environment. I'm curious, have your thoughts changed assuming that we are in the higher for longer environment, have your thoughts changed on how you manage the balance sheet and rate sensitivity and just kind of that balance sheet optimization. And as you think about the margin trajectory in a higher for longer environment, ultimately, it seems like this is a huge positive for you, especially once things start to stabilize. But curious how you think about the margin trajectory assuming the rate environment kind of stays here?

Speaker 4

Yes. Good morning, David. It's Michael Schrum. So maybe just I'll just comment a bit on the balance sheet balancing act and Craig can comment a little bit on an inventory. As we look at loans, obviously, the first thing to mention there is just around a third of that quarter over quarter movement was due to FX as we saw the dollar strengthening against the pound.

Speaker 4

Some unscheduled prepayments particularly in the UK book, which generates some additional fees. But the bottom line is probably in this environment, originations are not really going to keep up with the amortization across the markets. And it's consistent sort of with a general slowdown, I think, on new originations across the markets. And I would just mention we are keeping consistent underwriting standards through this part of the interest rate cycle. On the deposit side, we saw some movement again.

Speaker 4

And as you said, higher for longer means some customers activated their funds through either term deposits with us to generate more of a portfolio return on their cash. And we have seen we have had some conversations obviously with customers about money funds, returns, etcetera. But overall, these are sort of normal commercial movements during this part of the cycle. And I would just say our deposit of concentration remains sort of consistent with prior quarters, where the top 20 groups roughly represent 20% of deposits and the rest is pretty diversified down the balance levels. So the normal commercial flow is really as I think customers are adjusting to a higher for longer period of higher interest rates.

Speaker 4

And obviously, it's good for us in the sense that we get to wait for some repricing of assets. We do have some lag repricing coming through the investment portfolio and balloon portfolio and I'll just let Craig talk about NIM, generally.

Speaker 3

Yes. Good morning, David. And just to kind of carry on from Michael's comments and what we are seeing is customers kind of having a look and kind of use of their deposit levels. And as we mentioned in the formal comments, there's increased competition for deposit levels as you stay higher for longer. We're actually going to see and then and we saw a mix shift.

Speaker 3

We saw a mix shift of deposits from demand deposits into term deposits. So customers are seeking that higher yield. And I guess from a relationship perspective, we're really looking to service our key customer relationships where necessary provide a competitive yield to them as they look at other asset classes as well and other uses of their cash. So we're being very selective and kind of working with customers to kind of build out a letter and just do what makes sense in regards to the liquidity requirements in the next in the upcoming quarters. Having said that, and as Michael said, we're going to see some asset repricing, but we also are going to see increased pressure on pricing of deposits as well.

Speaker 3

So we do expect to see some compression at least in the next quarter or 2. And then as the asset repricing comes through in kind of towards the end of Q1, we're going to see the benefits of that. On the loan side, again, yields are increasing, volumes are being coming down, part of that is currency and part of that is volume. But we also in Bermuda, in Bermuda, anyway, we do have one more 25 basis point increase coming in at the end of October. So we see the full impact of that in Q4.

Speaker 3

Okay.

Speaker 5

That's helpful. And then maybe just digging into some of those deposit trends. It sounds like the deposit flows are primarily driven by client activation and utilization of deposits rather than folks leaving the bank. Just how much of the deposits are you able to retain through the trust and wealth management business? And then I guess what gives you confidence that balances are going to kind of stabilize here in the range that you gave?

Speaker 5

Is it just increasingly competitive on rate or just the idea that again rates stabilize here and most of the rate sensitive excess deposits have really been deployed at this point?

Speaker 4

Yes. No, great questions. David, it's Michael Schrum. So, I mean, the first thing on deposits, roughly a third of that, if you look at the Slide 17, I think in the deck, a third of that quarterly movement was due to FX translation. Again, we saw a strengthening dollar against both the pound and euro this quarter.

Speaker 4

And I think when we look at our deposit franchises, we see that these are normal commercial movements and deposit concentrations kind of staying where it is. So I think it's just clients adjusting their expectations and us adjusting accordingly on the pricing and we obviously want to defend our key strategic relationships. But at the same time, we also know it's a normal commercial reality that people want to ladder out a little bit and generate some returns. So I think, again, I think everyone is going through this adjustment period at the moment. But we feel confident in the current environment given that we've looked at the core deposits, we've looked at deposit concentration and the FX movement that we saw last quarter as well.

Speaker 3

I'll just add that, again, the core deposits remain intact. So, about $2,600,000 of core deposits and that's there. And if we look at kind of trends going back to kind of pre COVID and that they are our core deposits and our legacy franchise deposit franchise is actually up kind of in the 10% to 15% range. So we are maintaining that and as we have messaged in earlier quarters some of the corporate deposits, the in the Channel Islands etcetera, we have seen those and that's kind of the nature of the business of those clients that are looking for higher yields. But we feel that a lot of that is has happened and we are now seeing kind of normal movements and we're seeing again that mix shift into time deposits and we'll work to maintain those term deposits as they roll over in the coming quarter.

Speaker 3

So those on average have kind of an average duration of about 3 months, that's about 3 months. And so they will reprice and we will be conscious to be working with those customers.

Speaker 5

Okay. That's helpful. And then maybe just touching on the resi mortgage trends that you're seeing, curious how much of the decline in balances this quarter is customers paying down and deleveraging just given higher rates and using excess liquidity on that versus maybe you working with borrowers and maybe pushing some folks out just given increased concern there. Just how are borrowers balance sheets and debt coverage holding up in a higher rate environment? How you think about credit trending in assuming that we kind of stay in a higher for longer environment?

Speaker 4

Yes. David, it's Michael Skarm. Good questions again. I think debt service capacity is staying up. The unscheduled prepayments that we're seeing are coming mainly from the Cayman customer base and our UK.

Speaker 4

And the rest is really amortization, but we're taking new originations in Bermuda. So I don't see any credit deterioration. We do have 50% of the portfolio is fixed. So that will certainly help during this period in the interest rate cycle. But we probably and we have never really been a loan growth story.

Speaker 4

So I think, again, these are kind of customers reacting to and looking at their own financials and saying, hey, I'm paying higher rate on a loan, even if I prepay and pay a little fee to the bank, I can use some of my excess cash and given the volatility in other markets, maybe that's the best decision for them. And so that's some of the impact that we're seeing. Obviously, in Central London, as we underwrite to 60%, 65% LTV, you're really lending to customers at relatively high rates who definitely have the capacity to prepay and given the market is slowing down in terms of volume of transactions in that market, but prices are holding up. We're likely see that for a little bit longer as customers reposition.

Speaker 2

Yes. And part of David, part of the repayment scenario in Cayman is just because the economy is doing so well. So population growth is into the low 70,000 range. So there's a lot of excess cash moving around the to keep the loan. So there are good to keep the loan.

Speaker 2

So there are good reasons for all of it. And I think, as Michael mentioned, we've been through this before in terms of not ever changing our underwriting standards because we haven't pushed ourselves as a loan growth story and the most important thing for us is to be consistent across the cycle and make sure that we get repaid.

Speaker 6

Makes sense. Thanks everybody.

Speaker 3

Thanks. Thanks David.

Operator

The next question comes from Michael Perito of KBW. Please go ahead.

Speaker 6

I just had a couple of quick ones. Number 1, for Craig on the expense side. So $85,000,000 to $86,000,000 near term. At by the midpoint of next year, I think it was $12,000,000 or $13,000,000 of annualized cost savings expected. Obviously, I imagine there'll still be some kind of inflationary growth.

Speaker 6

So just like rough math, I mean, is it fair to think of some moderation to that $85,000,000 to $86,000,000 in the back half of next year? Or do you think there's kind of enough inflationary pressures where that's not necessarily kind of the right starting point yet and you guys will kind of give us more next quarter?

Speaker 3

Yes. I mean, we'll come back with some more, I guess, some more guidance next quarter, but I think you're right. So after we have fully implemented the group restructure and going into the second half of next year, I would expect some moderation and we expect to see the benefits of that exercise coming through the expense and core expenses going forward. But kind of as I said in my comments, just looking at some of the previously mentioned increase that we're expecting around the kind of IT infrastructure and the core banking systems coming online. We went live and came in at the beginning of this quarter and that went well.

Speaker 3

We're obviously continuing to monitor the implementation of that and making sure that kind of everything is working as planned for as expected. But obviously that has a cost implication and we will actually start to see the amortization of the core banking system in both Bermuda and Cayman coming through in Q4 and into Q1. And then also we had quite a few people that were actually working on their project and we were able to kind of get capital treatment for those expenses. They'll come back into kind of DAU. So that will be another headwind.

Speaker 3

So therefore, I think kind of fill in the bucket for the next couple of quarters and then the second half of next year we would expect to see some benefit coming through. And again, this is kind of pre application of the CS costs as well. And guidance around the CS remains the same at around 6,000,000 dollars

Speaker 6

Got it. Okay. That's helpful. And then on the follow-up question on NIM. It feels like and correct me if I'm wrong, but it feels like this is probably the least asset sensitive the balance sheet's been in quite some time.

Speaker 6

So I was wondering if you can maybe just give us some updated thoughts around kind of in a vacuum how 25 basis point cut to U. S. Fed Funds would kind of impact the NIM based on how you're positioned today as we try to think about various macro scenarios that are kind of being baked into consensus outlooks here?

Speaker 4

Yes. Hi, Mike. It's Michael Schrum. Maybe I'll kick off. So you mean 25% up, right?

Speaker 4

Just confirming, there's a lot of wide array of views out there.

Speaker 6

No, yes, yes. No, I mean, I'm asking if it's not saying that this is our house view, but if there were a 25 basis point cut to Fed funds, like this just feels like the least asset sense that the balance sheet has been in some time. So just trying to get some updated thoughts about how you think I mean, I'm assuming the NIM would still contract, but perhaps a lot less than maybe prior cycles, just trying to get some parameters around how you're thinking of that?

Speaker 4

Yes. So, I mean, if you look at the down 100, it's not linear in that sense is what you're asking. And so it will depend on how we respond to the cut in terms of loan rates initially. And as you know, there's a 90 day lag on that in Bermuda, and that's around 50% floating, 50% fixed. So I think the fixed rate loans really have moderated the asset sensitivity and then the realization obviously coming the floor has further moderated the sensitivity.

Speaker 4

So we're expecting not very much impact from the first 25, I would say. And then you can look at the minus 100 and kind of grow into that if there's further cuts, which obviously is why we're thinking if there is significant cuts in rates, we'll have some protection from the fixed rate loans. And from the remaining duration, obviously, that will start to bring back OCI even quicker.

Speaker 6

Got it. No, that makes sense. And it's helpful. And then just to lastly for me, kind of a big picture question. Just are you seeing any onshore, at least in the U.

Speaker 6

S, there's a lot of banks pulling back from credit markets and things of that nature going on around liquidity and stuff like that. And just curious if you guys are kind of seeing the early signs of any kind of potentially opportunistic things for you guys to take a look at? Just obviously the balance sheet is pretty well positioned here, lots of liquidity, lots of capital. So just curious if in any of your markets you're seeing some early signs, maybe some opportunities that could be coming for next year or the year after or for growth? And Just any thoughts there would be helpful.

Speaker 6

Thanks. Yes.

Speaker 4

I mean, as you know, we only really lend in our home markets. We don't try and become in markets we don't know. So we only lend primarily residential, a little bit of commercial in Bermuda and Cayman, Central London and increasingly now the Channel Islands as well. I would say the loan pipeline is pretty healthy at this point, but we are being fairly selective when we go into what we would call 100% risk weighted assets, so right return on risk weighted assets story. So prefer very strongly residential family occupied housing that amortizes over a long period and we can offer fixed rate 3 to 5 years to kind of offset some of the cash flow issues there.

Speaker 4

But we are looking at selectively working with some hospitality new builds and mixed use residential new builds in both Bermuda and Cayman. And there are some interesting things out there, but again, we're being quite selective on the amount of experience that we require people to have to undertake those types of projects and preferably people that we've worked with before. So some opportunity, pipeline is actually probably on the corporate side, it's a little stronger than it was this time last year, interestingly, given the rate environment. But I think the certainty about the supply chain issues has kind of slowed down a little it's increased a little bit. So people are better able to project their cash flows and presales are very strong still in some developments.

Speaker 4

So there's some light out there, but again, we're not stretching at this point in the recycle.

Speaker 2

Yes. And I'd say the Bermuda market just going through the mall is flat to a little bit up, but we'll be opportunistic. Cayman, as I talked about, is growing quite quickly. And our goal there is to pick the right developers for condo developments, have the right amount of presales. So we really stick with a handful of well known developers that we've worked with for years, but there'll be growth there.

Speaker 2

Channel Islands is growing quite well. As you know, We've had pricing pressure on the deposit side because it is a very corporate market led by investment funds who are obviously very price sensitive. So the goal there is to turn currency and New Jersey into much more retail banks that look like Burbn and Cayman. So we're up to about $300,000,000 in retail deposits and about $260,000,000 in mortgages. So we've had a good start there actually and we'll continue to grow that.

Speaker 2

The London book is we won't lend outside of Central London. So we're very disciplined and the market has slowed down particularly from the on the political side with maybe a labor government coming in. So that will be flattish as facilities refinance. So sort of slightly different in every market, but we will be conservative, but definitely there will be some opportunities as you said.

Speaker 3

But Evan, if I may kind of, we did still have originations in the quarter. So we do have a pretty healthy pipeline. Obviously, everyone is navigating the interest rate environment, but we did have originations kind of just above $100,000,000 during the quarter. So we are still writing business, maintaining underwriting standards and just kind of meeting the customers where they are in their needs.

Operator

And our next question will come from Alex Twerdahl of Piper Sandler. Please go ahead.

Speaker 7

Good morning.

Speaker 6

Good morning, Alex.

Speaker 7

Couple of questions here. First off, the loans that prepaid during the quarter, can you help us just sort of compare the yields that you're getting on those loans? I know that they kind of vary across the different jurisdictions.

Speaker 3

Yes, I mean, the pay downs mainly came from our U. K. Book as well and the Cayman book. I think in the U. K.

Speaker 3

Book, it would have been I mean, those were fixed early on, so they were kind of rather low So it's actually kind of been positive to yield. In Cayman, the average yield on loans is around 7%. So it would have been loans that were probably paying I would say you're paying around kind of 5%, 5.5%, because again, we saw a lot of loans being fixed early on in the cycle.

Speaker 7

Okay. Yes, that was I guess that was my question is that if that cash I guess the pay down cash just goes into cash, it doesn't wind up necessarily having as big an impact on NII, I guess, at least in the near term. Just back to the conversation on what happened with loans in the quarter, I know you guys were kind of reaching some capacity limits in the U. K. With respect to the level of mortgages you want to take on in that market.

Speaker 7

Now I know you said that the market has slowed down quite a bit there, but do the pay downs create some additional capacity? Should that market actually provide the supply?

Speaker 4

Yes, I mean, absolutely. I mean, we haven't really set a hard limit around the portfolio, but I think a couple of quarters ago, we were reaching kind of $1,000,000,000 So it was becoming sort of 20%, 25% of the overall loan book and it is a specialized product, a mono line product for us. It helps activate the deposits coming out of the Channel Islands, the sterling deposits and kind of provide that interest spread there. So it wasn't really a regulatory capacity thing. It was more of that portfolio consideration around the loans.

Speaker 4

So we have sort of a soft limit there of 20%, 25% of overall loan volumes. But yes, I mean, we're definitely active in that market. I think the market is the markets are slowing down. And I think that's consistent with the wishes of central bankers, obviously. And but pricing is still holding up.

Speaker 4

And so we're happy to continue to underwrite in that market. It's been a great credit performance for us. And I mean, I wouldn't say unlimited capacity, but we certainly have a lot of capacity if we wanted to if there are borrowers coming into that market. But again, typically the profile of the borrowers is borrower that perhaps doesn't need to borrow. And so there is that consideration, right, because we're not sort of in High Street.

Speaker 4

We're in the prime central London neighborhoods only. We're only 60, 65 LTV underwriting. So again, there's a lot of skin in the game for both parties. But yes, definitely, we're still very active across all our markets. It's just when you run an amortizing Lundberg like we do, amortization sometimes overtakes originations, and that's kind of what's happening in terms of slowdown, plus the FX impact as well.

Speaker 4

But we definitely have ample capacity.

Speaker 7

Okay. And then one thing that just kind of caught my eye in the filing was the loans that are past due and still accruing seem to have been increasing over the last couple of quarters. You guys obviously haven't added to the ACL and your charge offs have been really low. Can you just maybe walk us through what's happening there and just give us a little bit more color around those increases?

Speaker 4

Yes, sure. So it's Michael Skram again. I mean principally this quarter last couple of quarters have been driven the last quarter increase was driven by 1 legacy mixed use residential hospitality loan facility, actually entered receivership post quarter end. It's been a long road for that one. And I think it's finally getting to a point where in Bermuda where we're seeing a good exit point.

Speaker 4

It's well collateralized. So we're not expecting any credit impact from that, but it obviously just has kind of drifted on and we need to get some to a recovery position on that. I think overall credit provisions were slightly down this quarter, but consistent with the lower balances that we saw in the quarter. And we do have a few facilities in London where the exit point was the sale of a property and they haven't been able to get there their asking price. So maybe there's some expectation adjustments there.

Speaker 4

But again, given the equity that's in the property, even if it goes 90 days past due, we are still accruing.

Speaker 3

Yes. And then tactically, we kind of go through a process or evaluation around whether a facility is well secured. So if the answer to that is yes and in the cases of what you've seen, the answer is yes. If the well is secured well, we will continue to accrue interest because again we feel that we'll be able to recover both the principal and the accrued interest in that scenario.

Speaker 7

Okay, great. Thanks for taking my questions.

Operator

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

Speaker 1

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

Speaker 6

Have a great day. Thank you.

Operator

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

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Earnings Conference Call
Bank of N.T. Butterfield & Son Q3 2023
00:00 / 00:00
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