Earnings Call Transcript - NTB Q4 2023

Operator, 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 Fourth Quarter and Full Year 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. 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.

Noah Fields, Head of Investor Relations

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 am 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. Yesterday afternoon, we issued a press release announcing our fourth quarter and full year 2023 results. The press release, 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. 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. 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.

Michael Collins, Chairman and CEO

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 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. 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 noninterest 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 a competitive landscape in our banking jurisdictions, and we continue to see a mixed 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, 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 5, 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.

Craig Bridgewater, Group CFO

Thank you, Michael, and good morning, everyone. I will now turn to the fourth quarter highlights on Page 6. 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 continued to increase at a modest pace across all of our banking jurisdictions as fixed term deposits rolled 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 $0.44 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 7. 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%. Average investment balances decreased by $204.4 million, or 3.7% to $5.29 billion compared to the prior quarter, mainly due to pay downs and maturities, the proceeds of which were invested in short-term treasury assets. 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. Slide 8 provides a summary of noninterest income, which totaled $60 million, up 15.4% 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 increased as revenues were earned from the clients acquired from Credit Suisse during the year. Noninterest 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 noninterest income to return to a quarterly run rate in the $52 million to $53 million range. On Slide 9, we present core noninterest expenses. Total core noninterest expenses were $90.4 million, a 7.2% increase compared to $84.3 million in the prior quarter. The higher core noninterest 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 client book of trust clients taken into consideration with the expected benefit of the group-wide cost restructure announced in Q3. I will now turn the call over to Michael Schrum to review the balance sheet.

Michael Schrum, President and Group Chief Risk Officer

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, reflecting further stabilization in the deposit base. Butterfield's low-risk 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 noninterest-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 the 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 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 nonaccrual 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 fourth quarter due to a lower investment portfolio duration and higher levels of cash and cash equivalents. Unrealized losses in the AFS portfolio, including OCI, were $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.

Michael Collins, Chairman and CEO

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, Operator

Our first question comes from Michael Perito with KBW. Please proceed.

Andrew Stimpson, Analyst

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

Michael Collins, Chairman and CEO

Sure.

Andrew Stimpson, Analyst

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

Craig Bridgewater, Group CFO

Hi, good morning. It's Craig. Yes, so in Q4, we do experience seasonal high fee income driven by card volume. The Christmas shopping season is a significant driver, as well as at year-end, we receive incentive payments from the credit card companies that will be included. And then obviously, we had some increased revenue coming in from the assets acquired from Credit Suisse, so those new clients also drove increases in revenue as well. If you look at normalizing that, as mentioned in the formal remarks, I think we're going to go down to about $52 million on a quarterly basis. So we did have about $8 million of additional income that we had in Q4, but we expect that to normalize back into Q1 around the $52 million mark.

Andrew Stimpson, Analyst

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?

Craig Bridgewater, Group CFO

I think we still anticipate that we will have a NIM trough in Q1. If you look at overall net interest income, we would expect it to decrease for a few reasons. Obviously, with rates coming down, that's going to have impacts on our loan yields. Loan yields, particularly in Cayman and Guernsey, move with U.S. prime, and the U.K. treasury rate in Guernsey. In Bermuda, we still expect to follow a 50% beta on the way down, likely starting with every other kind of 25 basis point cut.

Michael Schrum, President and Group Chief Risk Officer

Yes, sorry, and it's Michael Schrum. Just adding to that on Slide 15, we have the sort of asset sensitivity which gives you an indication of the impact of a parallel shift of 100. So, a 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 and cost of deposits, as we kind of sit at probably at the peak of rates right now. But on the flip side, we've seen a significant improvement in the OCI mark as well as rates have 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.

Andrew Stimpson, Analyst

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? Would it be kind of like a trust deal again that you would be looking for following the close of the Credit Suisse deal?

Michael Schrum, President and Group Chief Risk Officer

Yes. The Board is overall very supportive of the buyback as a way to augment the shareholder return here. Obviously, always subject to market conditions. But you will see in the fourth quarter, we did 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 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 with 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 ensure 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. The bottom line is we seem to have a lot of capital; OCI seems to be stabilized and coming back. The burndown is happening of the remaining OCI, and we're laddering into higher rates. Capital levels are right now are above our 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 we have had success in generating ROE and reflecting that back to shareholders, both in terms of dividends and share buybacks.

Andrew Stimpson, Analyst

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

Operator, Operator

The next question comes from David Feaster with Raymond James.

David Feaster, Analyst

Hi. Good morning, everybody.

Noah Fields, Head of Investor Relations

Good morning, David.

Michael Collins, Chairman and CEO

Good morning, David.

David Feaster, Analyst

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 reprice on a lag. Could you just help us remind us of the lag impacts of it? My gut 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.

Michael Collins, Chairman and CEO

Yes. So quite a bit to unpack there. We're not 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 expect to employ 50% beta on the Bermuda loan book. Cayman moves with U.S. Prime, and the currency in Jersey and the U.K. book moves with the U.S. base rate. That's on the asset side. In terms of investments, we are actually starting to re-ladder back into the portfolio, so previously we have been investing kind of maturities and excess cash into the short ends of treasury assets. We are now starting to ladder back into the portfolio, so we're putting some more duration back into the portfolio again, and obviously, we're going to get an increase in yields on the investment portfolio. We do have significant U.K. gilt maturing at the end of January, so we intend to reinvest that at current rates. We have some U.S. treasuries maturing during the year as well, more around August timeframe. Our expectations is there should be a pickup on the asset side. On the deposit side, obviously, we're going to continue to look to manage the cost in deposits. Right now, the breakdown in deposits and the average maturity on deposits is around three months. We'll have to look at the repricing of those on their duration.

David Feaster, Analyst

Okay.

Michael Schrum, President and Group Chief Risk Officer

Just on the timing, David, you'll note that 51% of the residential portfolio is now fixed. The Bermuda resi side will follow a 50% loan beta and obviously, U.K. and Channel Islands book is immediate, but following the Bank of England. In terms of deposits, demand would be immediate for interest-bearing demand and non-interest-bearing, although we're not paying a lot on non-interest-bearing.

David Feaster, Analyst

Yes.

Michael Schrum, President and Group Chief Risk Officer

But on term, we wait for the rollover. The average of the term book is around three months, so there will be a bit of a lag coming off the top.

David Feaster, Analyst

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

Michael Collins, Chairman and CEO

Yes. So a great question. The book is relatively small overall, but there is a standstill in the agreement in terms of the existing book and the fees that we are charging. We are going through and reviewing that book currently. The standstill is for two years, and there are some inflation adjustments that we can make. In the meantime, particularly in Singapore where the market is growing rapidly in the private trust space and maturing, we have seen most of the customers tend to use the trust product for financial assets. There are definitely opportunities there to expand that client book with non-financial assets such as properties, which we do in other parts of our business. That should drive higher fee income. There's market growth, growth in the book not on the book that we've acquired, but with the clients that we acquired. We also expect that, as we are a sizable private trust company in Singapore, we should see a lot more inbound interest in terms of RFPs as clients recognize our name in the market. There are three key elements to growth that we anticipate, and overall, I think we are quite excited about the market growth and our presence now.

Michael Schrum, President and Group Chief Risk Officer

Generally, when we do these acquisitions, we also have a fee standstill agreement for a period of time. As Michael said, the real opportunity is to expand the type of assets in the trust. Most of these trusts were simply wrappers for asset management, and by encouraging clients to put in businesses, in art, and real estate, it takes on much more complexity and justifies higher fees. Gradually, that will help. The choice of Singapore as a domicile versus Hong Kong or other places makes sense, and we are currently ranked top five in Singapore.

David Feaster, Analyst

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

Michael Collins, Chairman and CEO

Yes. A great question, David. First, most of our loans are residential, so they are well secured. We have conservative lending standards, and most of our loans are amortizing in Channel, Bermuda, and Cayman. The LTV profile has been amortized down to below 60%, so there are lots of opportunities to assist customers during this period of high rates. We are seeing some of that in the Bermuda resi book. Still, there is no real concern from a collateral perspective; most of anything that goes past due can be cured. We are monitoring customers and financial difficulty disclosures, and we are not seeing a whole lot, particularly in Bermuda. We are hopeful for improved tourism this summer that could inject cash into consumers' pockets, particularly outside of the international business sector where we've observed significant growth. In London, the situation is pretty stable, with only 60% to 65% LTV lending standards. We are watching it closely, especially with the upcoming U.K. elections, as potential rule changes are being discussed.

Craig Bridgewater, Group CFO

Yes. I said in the past that we've intentionally kept the London portfolio relatively flat, and that continues to be the case. We are also building out our retail mass affluent bank in Guernsey and Jersey, with over GBP250 million in mortgages at this point. The Bermuda housing market has performed well, with prices rising over the last few years, primarily driven by limited supply. The international business and reinsurance sectors are doing exceptionally well, particularly the life businesses that have set up on the island. The Cayman market has a larger land capacity, but the population is growing, which has increased demand.

David Feaster, Analyst

Perfect. That's helpful. Thanks, everybody.

Operator, Operator

The next question comes from Alex Twerdahl with Piper Sandler.

Alex Twerdahl, Analyst

Good morning, guys.

Michael Collins, Chairman and CEO

Good morning.

Alex Twerdahl, Analyst

Just back to the margin, a question on the fixed versus floating loans. Is that skewed towards any one of the geographies? 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.

Michael Collins, Chairman and CEO

I think there's quite a bit of fixing in the Channel Islands early on in the cycle, and we saw quite a bit of fixing in Bermuda. Many of the commercial loans in Bermuda are fixed, and that's a large component of that 51% from business, particularly from Bermuda and Channel Islands as well as the U.K.

Craig Bridgewater, Group CFO

Again, three to five years, with no particular quarter where that's heavier than others. We're probably about 12 months to 15 months away from sorting those re-pricings.

Alex Twerdahl, Analyst

Got it. And then, I guess, sort of the same question asked a little bit differently on the deposit side. If I remember correctly, the Channel Islands had a much higher beta in terms of deposits on the way up. Would the expectation be that if we get 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?

Craig Bridgewater, Group CFO

Yes. The Channel Islands, as we talked about before, are very competitive, and we aren't a rate setter in that market. We have to follow what the market is doing. Some of the high street banks there are market-leading. Both dollars and sterling have had higher deposit betas in the Channel Islands than in our other markets. We expect to follow that market and have already seen some long-term rates being cut in that region. It’s the one area where we really need to focus on the cost of deposits on the way down from that term bucket.

Alex Twerdahl, Analyst

Okay. On expenses, Craig, you gave a little bit of color and expectations for expenses for the second half of '24. I presume that incorporates all the cost savings from the recent restructuring you announced last quarter. What should we think about regarding expenses for the first two quarters of 2024? Will there be more noise as some of these IT systems, etc., come fully online?

Craig Bridgewater, Group CFO

Yes. That's about right. So I think obviously, there will be at the higher end of that guidance as the cost structure will come fully online by the end of Q2. Compared to Q3, we will add other costs associated with the acquisition and employees coming on board, amortization of that intangible asset we have accrued on our balance sheet, and then amortization of the new IT systems and hosting fees.

Alex Twerdahl, Analyst

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

Craig Bridgewater, Group CFO

Yes. The provisioning was really driven by some fees, specifically legal fees on a legacy loan that we have, an art loan. We incurred fees while going through the collection process on that art loan, which we are accruing for and adding to the allowance as we go along. That's a significant part of it, along with settlements of some loan facilities as well.

Alex Twerdahl, Analyst

Okay. So I guess without those factors, it would be fair to assume that provisioning should drop down below $1 million a quarter starting in 2024.

Craig Bridgewater, Group CFO

Yes. It does depend on actual experience as well. The model would likely push for more stable provisioning given that macroeconomic inputs are going to be more stable, along with actual performance. We have seen that anything emerging from the sales of properties is holding value, so we do not believe that costs to sell or anything like that will drive higher provisions. Overall, it will come down to actual experience.

Alex Twerdahl, Analyst

Okay. Thank you for taking my questions.

Michael Collins, Chairman and CEO

Thanks.

Operator, Operator

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

Timur Braziler, Analyst

Hi. Good morning.

Michael Collins, Chairman and CEO

Good morning.

Timur Braziler, Analyst

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

Michael Collins, Chairman and CEO

Yes. Currently, our last investment is in the MBS securities, with about three years at the moment in behavioral duration. The other investments we've made are in two-year U.S. treasuries, and on the gilt, our most recent investment of GBP125 million is currently six months.

Timur Braziler, Analyst

Okay. And just the amount cash flowing quarterly.

Michael Collins, Chairman and CEO

$30 million.

Craig Bridgewater, Group CFO

$30 million a month. Sorry.

Timur Braziler, Analyst

$30 million a quarter. Okay.

Michael Schrum, President and Group Chief Risk Officer

Yes. We're still staying short-medium here, obviously, with ongoing discussions about when the Fed is going to cut and what the terminal rate is being quite important. We're not a mark-to-market shop, so we need to keep the duration matching some of the behavioralized deposits to balance the interest rate risk profile. Currently, laddering, but we're staying in the medium term with a mix of MBS of 15 years and some shorter-dated treasuries.

Timur Braziler, Analyst

Got it. And then circling back to term deposits. 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 generally speaking, in the next couple of quarters, assuming no Fed activity, how should we think about additional deposit cost creep?

Michael Collins, Chairman and CEO

On term deposits, we're in the 4% range, rolling over at a similar level. There is bespoke pricing as necessary that take us above that on specific deposits. That's a good guide around the term deposits; the average maturity on the term deposit book is currently three months.

Timur Braziler, Analyst

Got it, okay. And then more broadly on deposits. In previous quarters, you mentioned an $11.5 billion to $12 billion floor. They seem to have stabilized here. Is the near-term strategy to renew some of the term deposits? Is there anything idiosyncratic in Q4 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?

Michael Schrum, President and Group Chief Risk Officer

Yes. We're seeing stability in the deposit book. There is some seasonality, as mentioned previously; a lot of our clients are captive insurance clients, and they have premium flows and claims flows. Pre-quarter ends, we see premium inflows, and post-quarter ends we see claims settlements if the insurance companies have claims to settle. Typically, that seasonality is evident in Bermuda, with renewal dates of January 1 and July 1, and then in Cayman, generally in the third quarter we see outflows followed by inflows in the fourth quarter.

Craig Bridgewater, Group CFO

It was interesting to observe how deposits behaved throughout the year. Bermuda was flat to up as there are very few banks here. Cayman was a little more competitive. We think we've washed out the fund money that was being invested. In the Channel Islands, we bought corporate banks, which were much more competitive. As mentioned, we're somewhat price followers in that market. We have a good plan to go into retail and currently have well over GBP300 million in deposits and GBP250 million in mortgages. Our retail book exists now, and retail pricing will be much more attractive moving forward. Each region acts a bit differently and disproportionately according to competition. All of this allows us to understand the market dynamics well at this point, and we believe that most of the hot money has been washed out, resulting in a sense of stability.

Timur Braziler, Analyst

Thank you. I appreciate the color.

Operator, Operator

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

Noah Fields, Head of Investor Relations

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

Operator, Operator

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