Bank of N.T. Butterfield & Son Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 9 speakers on the call.

Operator

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 Q4 and Full Year 2023 Earnings Call for the Bank of NC, Butterfield and SunLinked. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask 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, sir.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's Q4 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 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 Q4 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 and may cause actual results to differ materially from those contemplated by these statements.

Speaker 1

Additional information regarding these risks can be found in our SEC filings. I will now turn the call over to Michael

Speaker 2

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 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.

Speaker 2

The bank also offers specialized financial services in the Bahamas, Switzerland, Singapore and in the U. K, 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 4. Butterfuel had an excellent year with net income of $225,500,000 and core net income of $231,500,000 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 noninterest earnings.

Speaker 2

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 percent in 2022, with the cost of deposits rising to 140 basis points from 34 basis points in 2022. We've continued to carefully balance the cost of deposits with the competitive landscape in our banking jurisdictions, and we continue to see mix shift to higher cost term products, while our core noninterest 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.

Speaker 2

And throughout the year, we have paid out approximately 38 percent of earnings in quarterly dividends. In addition, during 2023, bank repurchased just over 3,000,000 shares at a total value of $88,000,000 On December 5, the Board approved a new share repurchase authorization for 2024 of up to 3,500,000 common shares, which came into effect on December 15. As anticipated, during the Q4, 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.

Speaker 2

I will now turn the call over to Craig for details on the Q4.

Speaker 3

Thank you, Michael, and good morning, everyone. I will now turn to the 4th quarter highlights on Page 6. Butterfield reported strong financial results in the Q4 of 2023 with net income of $53,500,000 and core net income of $55,300,000 We reported core earnings per share of $1.15 with a core return on average tangible common equity of 25.4% for the Q4 of 2023. The net interest margin was 2.73% in the 4th quarter, a decrease of 3 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 rolled Board has again approved a quarterly cash dividend of $0.44 per share, Board has again approved a quarterly cash dividend of $0.44 per share.

Speaker 3

We also continue to repurchase shares during the quarter with buyback totaling 1,200,000 shares at an average price of $28.28

Speaker 2

per share.

Speaker 3

Turning to Slide 7. Here, we provide a summary of net interest income and net interest margin. In the 4th quarter, we reported net interest income before provision for credit losses of $86,900,000 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 Q4 of 2023 of $12,600,000 were sequentially 2.5% lower, driven by a decrease in average deposit levels.

Speaker 3

The yield on interest earning assets increased 17 basis points to 4.39% from 4.22 percent 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% than the 3rd quarter. In addition than the Q3. In addition, the yield on loan balances also increased by 17 basis points to 6.68%. Average investment balances decreased by $204,400,000 or 3.7 percent to $5,290,000,000 compared to the prior quarter, mainly due to pay downs and maturities, the proceeds of which were invested in short term treasury assets.

Speaker 3

Since year end, we have recommenced using proceeds from maturities and pay downs 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.

Speaker 3

Slide 8 provides a summary of non interest income, which totaled $60,000,000 up 15.4% versus the prior quarter due to expected 4th quarter seasonal increases in card services, incentive revenues and transaction volumes and higher foreign exchange volumes. Trust fees increased 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%. In the coming quarters, we expect the levels of non interest income to return a quarterly run rate in the $52,000,000 to $53,000,000 range. On Slide 9, we present core noninterest expenses.

Speaker 3

Total core non interest expenses were $90,400,000 a 7.2% increase compared to $84,300,000 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 $88,000,000 in the second half of twenty twenty four. 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 benefit of the group wide course restructure announced in Q3. I will now turn the call over to Michael Schrum to review the balance sheet.

Speaker 4

Thank you, Craig. Slide 10 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period end deposit balances increased slightly to $12,000,000,000 from $11,900,000,000 at the prior quarter end, and this reflects further stabilization in the deposit base. Butterfield's low risk density of 34 point 0 percent 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.

Speaker 4

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 percent of total loans as the 3 to 5 year fixed rate product in the rising rate environment has been popular with clients.

Speaker 4

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.

Speaker 4

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 8 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 4th quarter due to a lower investment portfolio duration and higher levels of cash an improvement of $71,400,000 or 31% from the prior quarter.

Speaker 4

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 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.

Speaker 2

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 time line at the top of the page, after our initial announcement in September of 2022, there have been 7 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.

Speaker 2

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 joined Butterfield to help service the 5 60 new trust clients we have now onboarded. New assets under administration total approximately $24,000,000,000 We expect annual fees from the new business to total approximately $9,000,000 with new annual expenses of around $6,000,000 We also expect to continue to grow this book over time. In total, we recognized a new intangible asset of $27,300,000 with around onethree of the total consisting of deal and onboarding expenses.

Speaker 2

I look forward to continuing our business development efforts and our search for other trust and banking M and A opportunities to help continue our profitable growth. The turmoil in the regional banking space last year allowed us to demonstrate the benefit 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 and A. In 2024, we will build on the successes of 2023 with a strong focus on client experience and continuing to create shareholder value.

Speaker 2

Thank you. And with that, we would be happy to take your questions. Operator?

Operator

Thank you. We will now begin the question and answer Our first question comes from Michael Perito with KBW. Please proceed.

Speaker 5

Hi. This is Mike's associate Andrew filling in. Thanks for taking my questions.

Speaker 2

I just

Speaker 5

wanted to start on the non interest income side. Were there any seasonality in fees in Q4? Or and what would be a good launch point for 2024 run rate wise on the fee side?

Speaker 3

Good morning. It's Craig. Yes, so in Q4, we do season kind of have kind of seasonally high fee income and driven by card volumes, obviously with the Christmas shopping season is a big driver as well as at year end 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.

Speaker 3

So those 2 clients that also drove increases in revenue as well. If you look at kind of normalizing that, kind of mentioned in the formal remarks, I think we're going to go down to about $52,000,000 on a quarterly basis. So it does kind of so we got about $8,000,000 of additional income that we had in Q4. But we would expect that to normalize back into Q1 around the $52,000,000 mark.

Speaker 5

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 twenty twenty four?

Speaker 3

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, if 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. K.

Speaker 3

Probably U. S. Prime in Cayman and the U. K. Treasury rate U.

Speaker 3

K. 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.

Speaker 6

Yes. Sorry, and it's Michael Schrom. Just adding to that. On Slide 15, we have the sort of sensitivity, which gives you an indication of the impact of a parallel shift of 100%. So fairly modest impact really net interest income, minus 1.5 percent overall, so down 100%.

Speaker 6

So it's clearly something we're watching pretty closely, particularly on term deposit products and cost of deposits as we kind of sit at the probably at the peak of rates right now. But I think on the flip side, we've seen a significant improvement in the OCI mark as well as rates have kind of stabilized. So 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.

Speaker 5

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 and 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?

Speaker 6

Yes, 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 in the Q4, we did quite a quite 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.

Speaker 6

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 stabilized and coming back.

Speaker 6

The burn down is happening of the remaining OCI and we're laddering into higher rates. So 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 excess regulatory capital, and we'll just continue with that risk light business dynamic that has been successful in terms of having the ROE and then reflecting that back to shareholders, both in terms of dividends and share buybacks.

Speaker 5

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

Operator

The next question comes from David Feaster with Raymond

Speaker 7

Jay. 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 assets and liabilities repriced on a lag. Could you just help us remind us of the lag impacts of it?

Speaker 7

My gut would say that probably the first cut or 2 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.

Speaker 3

Yes. So, yes, kind of quite a bit to unpack there. Obviously, we're looking at 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.

Speaker 3

And obviously, Cayman kind of moves with U. S. Prime and the currency in Jersey book and the UK book moves up on the U. S. Space rate.

Speaker 3

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, so putting some more duration back into the portfolio again. And obviously, we're going to get an increase in the yields the investment portfolio.

Speaker 3

So we're yielding at like 2% now. What we're investing in now is more of a 4 handle, so kind of 4.29%, 4.30%. So we expect I mean, obviously, it's going to take quite a bit to add that back in, but we should expect to see some increase in yield on the asset side. And we do have actually, we had kind of quite a significant £125,000,000 UK gilts just mature at the end of January. So kind of reinvesting that at current rates that's an expected pickup.

Speaker 3

And we have some 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.

Speaker 3

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 3 months. So we're really just going have to look at the rate pricing that is kind of on that duration. So that stays mature in 3 months' time. And we'll probably they'll probably get reinvested on 3 month durations as well. So that will actually follow kind of market rates at the time of kind of reinvestment.

Speaker 3

Yes.

Speaker 6

And just sorry, it's Michael Schrum. Just on the timing, David. Well, first of all, on the resi side, you'll note that 51 percent of it is now fixed. We see the breakdown on Page 12, it's 50% loan beta on the Bermuda resi side. Obviously, U.

Speaker 6

K. 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 U.

Speaker 6

K. And Channel Islands, Burke, it's immediate but following Bank of England.

Speaker 7

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

Speaker 6

On the term, yes. So obviously on demand would be immediate on interest bearing demand and non interest bearing, although we're not paying a lot of non interest bearing. But on term, obviously, we wait for the rollover. The average of the term work is just around 3 months. So there will be a little bit of a lag coming off the top.

Speaker 7

Okay, Perfect. And then maybe just digging into, Michael, your comments on growing 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, just given the increased footprint in that market?

Speaker 7

Just curious how you think about growing that book?

Speaker 4

Yes. So great question. So I mean, the reason why it's

Speaker 6

a pretty small book overall, but 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 for 2 years and then but there is some inflation adjustments that we can do on that BERC in the meantime. 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 or properties, companies, like we do in other parts of our business. And so that should drive higher fee income.

Speaker 6

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 3 kind of elements to the growth, which 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.

Speaker 2

Yes. 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 expand the type of assets in the trust. And most of these are really trusts originally that were sort of rappers for asset management. And by encouraging clients put in businesses and art and real estate, it takes on a much more complexity and justifies higher fees.

Speaker 2

So gradually that will help. And as Michael said, I mean, the Singapore choice of Singapore is the domiciled versus Hong Kong or some other places we could have been makes a lot of sense and we're top 5 in Singapore at this point.

Speaker 7

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. So I'm just curious as you how do you feel like the health of your clients is at this point? What are you hearing from them?

Speaker 7

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?

Speaker 6

Yes. 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 certainly in Bermuda and Cayman. So as you know, the LTV profile is really has been amortized down to sort of sub-sixty percent.

Speaker 6

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 due can be cured. Obviously, we've adopted the customers and financial difficulty disclosures as well.

Speaker 6

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 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 the London, so Bermuda Resi probably a spot to just kind of keep an eye on. The UK book, again, really well collateralized. We have an election coming up in the U. K.

Speaker 6

There's some as you know, we're Prime Central London, only 60, 65 LTE lending standards. So 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 resnomdom rules and changing inheritance tax rules and that obviously has a market impact overall. So something that we're watching closely and staying in touch with our customers there as well.

Speaker 2

Yes. And I think we've I've said in the past that we've intentionally 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 2.50 pounds £1,000,000 in terms of mortgages there. So we're expanding there. Michael hit it on the head.

Speaker 2

You have to keep an eye on Bermuda, although nothing really at this point. And Cayman is doing really well in terms of growth in the economy and population. So very unlikely we'd see stresses there. So far, so good.

Speaker 7

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

Speaker 2

Yes. No, Bermuda, it's doing well. Prices have risen in 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.

Speaker 2

Cayman has got a lot more land, but population is over 80,000 now. So they've expanded population, so demand has increased as well. And Guernsey and Jersey markets have always been pretty stable to rising. So islands, given limited supply, always have sort of a baseline in terms of values.

Operator

The next question comes from Alex Durdal with Piper Sandler.

Speaker 8

Just back to the margin, 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?

Speaker 3

I think it's quite a bit we saw quite a bit of fixing in the channel audience kind of early on in the cycle and then we saw quite a bit of fixing in Bermuda. So a lot of the quite a few of the commercial loans fixed in Bermuda. So that's kind of a large component of that 51% from a this is for kind of Bermuda and China Wildens and the U.

Speaker 6

K. And again, 3 to 5 years. So we're 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.

Speaker 8

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 if we get maybe a Fed cut, deposit costs come down

Speaker 7

a little bit, but if we

Speaker 8

get a Bank of England cut, maybe there's a lot more room for deposit costs to come down?

Speaker 6

Yes, I mean, it's Channel 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, etcetera. 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.

Speaker 6

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.

Speaker 8

Okay. On expenses, Craig, you gave a little bit of color and expectations for expenses for the second half of twenty twenty four, 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 1st two quarters of 2024? I mean, is there going to be a little bit more noise in there as some of these IT systems, etcetera, come fully online?

Speaker 3

Yes, yes. That's about right. So I think kind of obviously, there will be at the higher end of that guidance, given that the cost restructuring will come 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 there's 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.

Speaker 8

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?

Speaker 3

Yes. I mean, I think the provisioning was really driven by some fees, some legal fees on a kind of legacy loan that we have, our 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 M and A allowance as we go along. So that's a part of it and then also some settlements of some from the facilities as well.

Speaker 3

So it was being charged off.

Speaker 8

Okay. I mean, so I guess without those things, would it be fair to assume that 2024? Yes, it's tough.

Speaker 6

I mean, it does depend on actual experience as well. I think the model probably would 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, still a couple of spots that we're watching. Freight stay high for longer, obviously, that is going to drive some client experiences or potentially client difficulties that we're going to have to resolve. And then that becomes an input into the model.

Speaker 6

But all other things being equal, that seems about the right level. But again, just subject to, obviously, actual experience. So at the moment, anything that's coming out the other end end in terms of sales of properties is holding value. So 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.

Speaker 8

Okay. Thank you for taking my questions.

Speaker 3

Thanks.

Operator

Our next question comes from Timur Braziler with Wells Fargo. Please proceed.

Speaker 8

Hi, good morning.

Speaker 2

Good morning, Timur.

Speaker 8

On the bond book laddering back into bonds, what's the duration you're putting on there? And if I'm not mistaken, I think it was something like $125,000,000 a quarter to that cash flow. Is that still the right number?

Speaker 3

Yes. So currently, kind of our last investments, kind of the MBS securities, so the kind of on the MBS securities, kind of it's about 3 years at the moment. So it's kind of behavioral duration. And then the other investments we've been making is in U. S.

Speaker 3

Treasuries, a

Speaker 2

2 year U. S. Treasuries.

Speaker 3

And then on the gilts, the most recent investment we made, £125,000,000 is 6 months currently.

Speaker 8

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

Speaker 3

It's about $30,000,000

Speaker 8

dollars 30,000,000 a quarter. Okay.

Speaker 3

$30,000,000 a month, sorry, month, yes, dollars 30,000,000 a month.

Speaker 8

$30,000,000 Okay, got it.

Speaker 4

Yes. So

Speaker 6

Tim, I would say sorry, it's Michael Scrum. I would say, we're still staying sort of short, medium here. Obviously, there's still some discussion about when the Fed is going to cut. So and what the terminal rate is, in particular, is quite important to us. And again, we're not a mark to market shop.

Speaker 6

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.

Speaker 8

Got it. And then circling back to term deposits, and I apologize if you addressed 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 cost creep?

Speaker 3

So I guess on term deposits, we're kind of in the 4% range. And there's a kind of there's a kind of basically kind of being renewed at a similar level. Obviously, kind of there's smoke pricing as necessary. So that's I'd 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.

Speaker 3

And again, the kind of 3 month average maturity on the term deposit book at the moment.

Speaker 8

Got it. Okay. And then maybe just more broadly on deposits. I think in quarters past, you talked to an 11,500,000,000 dollars 12,000,000,000 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.

Speaker 8

Is there anything maybe idiosyncratic in 4Q that's seasonal in nature? Or are we really at a floor here and you're seeing signs of real stability in the deposit book?

Speaker 6

Yes, I mean, sorry, Tim, it's Michael Schrum. I think we are seeing the stability in the deposit book. 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 claims settlements to the extent that those insurance companies have claims to settle.

Speaker 6

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 Q3, we see some outflows. And then in the Q4, we see and we're talking $500,000,000 ish, right? So we and in the Q4, we typically see some inflows from funds building up, hedge funds building up, cash positions.

Speaker 6

And then Q1, 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 the 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.

Speaker 2

Yes. And it was really interesting during the whole year to see how deposits behave. 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.

Speaker 2

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 and we've got well over $300,000,000 in deposits and $250,000,000 in mortgages. So we actually have a retail book at this point and obviously, the retail pricing will be much more attractive going forward. But they all act a little bit differently and disproportionately to competition. So we understand it pretty well at this point.

Speaker 2

But we think most of the hot money spend, 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.

Speaker 8

Thank you. I appreciate the color.

Operator

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.

Speaker 1

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Bank of N.T. Butterfield & Son Q4 2023
00:00 / 00:00
Remove Ads