Q2 2024 The Bank of NT Butterfield & Son Ltd Earnings Call

Nick: Good morning. My name is Nick, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2024 earnings call for the Bank of N.T. Butterfield & Son Ltd. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Good morning, My name is Nick and I will be your conference operator today at this time I would like to welcome everyone to the second quarter 'twenty 'twenty four earnings call for the bank of N T Butterfield and some limited.

Noah Fields: I would now like to turn the call over to Noah fields, Butterfields head of Investor Relations.

Noah Fields: Thank you. Good morning, everyone, and thank you for joining us.

Noah Fields: Thank you good morning, everyone and thank you for joining US today, we will be reviewing Butterfield second quarter 2024 financial results.

Noah Fields: Today, we will be reviewing Butterfield's second quarter 2024 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 second quarter 2024 results.

Noah Fields: On the call I'm joined by Michael Collins, Butterfield, 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 Change: Yesterday afternoon, we issued a press release announcing our second quarter 2024 results.

Speaker Change: 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 Dot Fairfield group Dot com.

Yeah.

Noah Fields: 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'd 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.

Speaker Change: Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussion will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance.

Speaker Change: For a reconciliation of these measures to U S. GAAP. Please refer to the earnings press release and slide presentation.

Noah Fields: Today's call and associated materials may also contain certain forward-looking statements that 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 filing. I will now turn the call over to Michael Collins.

Speaker Change: 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.

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

Michael W. Collins: Thank you, Noah. Thanks to everyone joining the call today. I am pleased with Butterfield's performance in the second quarter as we achieved strong profitability supported by client-focused products and services, a stable balance sheet, diversity income, and disciplined Expense Management. In Bermuda and the Cayman Islands, we benefited from our market-leading bank and trust business, while we continue to develop our mass affluent product offerings in the channel. We also benefited from our specialized financial services offerings in the Bahamas. Switzerland, Singapore, and the United Kingdom, where we provide mortgage lending in high-end central London.

Michael W. Collins: Thank you Noah and thanks to everyone joining the call today I am pleased with Butterfields performance in the second quarter as we achieved strong profitability supported by client focused products and services and a stable balance sheet.

Speaker Change: Diversity income and disciplined expense management.

Michael W. Collins: In Bermuda, the Cayman Islands, we benefited from our market, leading bank and trust businesses, while we continue to develop our mass affluent product offerings in the channel Islands.

Michael W. Collins: We also benefited from our specialized financial services offerings in the Bahamas.

Michael W. Collins: Switzerland, Singapore, and the United Kingdom, where we provide mortgage lending and high in Central London.

Michael W. Collins: I will now turn to the second quarter highlights on page 4. Butterfield reported strong financial results in the second quarter, with net income of $50.6 million and core net income of $51.4 million. We reported core earnings per share of $1.11 with a core return on average tangible common equity of 23.3% for the second quarter of 2024. The net interest margin was 2.64% in the second quarter. A decrease of four basis points from the prior quarter, with the cost of deposits rising to 189 basis points from 178 basis points in the prior quarter. Net interest margin compression has slowed this quarter as deposit cost increases modestly outpaced asset repricing.

Michael W. Collins: I will now turn to the second quarter highlights on page four.

Michael W. Collins: Butterfield reported strong financial results in the second quarter with net income of $56 million and coordinate income of $51 $4 million.

Michael W. Collins: We reported core earnings per share of $1.11 with a core return on average tangible common equity of 23, 3% for the second quarter of 2024.

Michael W. Collins: The net interest margin was 2.64% in the second quarter.

Michael W. Collins: A decrease of four basis points from the prior quarter with the cost of deposits rising to a 189 basis points.

Michael W. Collins: From 178 basis points in the prior quarter.

Michael W. Collins: Net interest margin compression has slowed this quarter as deposit cost increases modestly outpaced asset repricing.

Michael W. Collins: Yeah.

Michael W. Collins: The Board again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter, purchasing a total of 1.1 million shares at an average price of $33.48 per share. The Board also approved a new share repurchase program for up to 2.1 million shares through to the end of 2024, which demonstrates our continued confidence in the bank's performance and supports our capital management strategy of producing consistent and attractive shareholder returns and efficient use of capital.

Michael W. Collins: The board has again approved a quarterly cash dividend of 44 cents per share.

We also continued to repurchase shares during the quarter.

Michael W. Collins: We're just being a total of $1 1 million shares at an average price of $33 48 per share.

Michael W. Collins: The board also approved a new share repurchase program.

Michael W. Collins: We're up to $2 1 billion shares through to the end of 2024, which demonstrates our continued confidence in the bank's performance and supports our capital management strategy of producing consistent and attractive shareholder returns and efficient use of capital.

Michael W. Collins: Yesterday, we also announced that Stephen E. Cummings, a highly qualified and experienced financial services industry professional, has joined Butterfield's board as an independent director. He is a great addition to our board and will further strengthen our governance and financial expertise. I look forward to working with him. I will now turn the call over to Craig for details on the second quarter.

Speaker Change: Yesterday, we also announced that Stephen EE Cummings of highly qualified and experienced financial services industry professional <unk>.

Speaker Change: Has joined Butterfields board as an independent director.

Speaker Change: He's a great addition to our board and will further strengthen our governance and financial expertise and I look forward to working with them.

Speaker Change: I will now turn the call over to Craig for details on the second quarter.

Craig Bridgewater: Thank you. Thank you, Michael, and good morning.

Craig: Thank you. Thank you Michael and good morning on slide six we provide a summary of net interest income and net interest margin.

Craig Bridgewater: On Slide 6, we provide a summary of net interest income and net interest margin. In the second quarter, we reported an increased net interest income before provision for credit losses of $87.4 million. The net interest income benefited from a higher volume of average interest earning assets. Average interest earning assets in the second quarter of 2024, of $13.3 billion, were 1.8% higher than the prior quarter, driven by an increased average deposit volume. The yields on interest-earning assets and treasury assets were each up seven basis points compared to the prior quarter.

Craig: In the second quarter, we reported increased net interest income before provision for credit losses of $87 $4 million.

Craig: The net interest income benefited from a higher volume of average interest earning assets.

Craig: Average interest, earning assets in the second quarter of 2024, I'll start teen $3 billion, where at 1.8% higher than the prior quarter driven by an increased average deposit volumes.

Craig: The yield on interest, earning assets and treasury assets were each up seven basis points compared to the prior quarter.

Craig Bridgewater: The investment portfolio yielded 2.3%, which was seven basis points higher than the prior quarter, reflecting the continued reinvestment of maturities from lower-yielding securities of approximately $30 million per market. During the second quarter, the bank continued to reinvest in a mix of U.S. agency MBS securities and medium-term U.S. treasury bonds.

Craig: The investment portfolio yield of two 3%, which was 70 basis points higher than the prior quarter, reflecting the continued reinvestment of maturities from lower yielding securities of approximately $30 million per month.

Craig: During the second quarter. The bank continued to reinvest into a mix of U S Agency MBS Securities and medium term U S treasuries.

Craig Bridgewater: Average investment balances decreased by $31.6 million to $5.17 billion compared to the prior quarter, primarily due to maturity. Slide 7 provides a summary of non-interest income, which totaled $55.6 million, an increase versus the prior quarter primarily due to higher trust fees. An increase in the Equity Pickup from a Portfolio Investment and Higher Unclaimed Imbalances that were recognized as income. These favorable changes were partially offset by lower banking and FX fees due to lower transaction volume.

Craig: Average investment balances decreased by $31.6 million to $5, one $7 billion compared to the prior quarter, primarily due to maturities.

Craig: Slide seven provides a summary of noninterest income, which totaled $55 $6 million, an increase versus the prior quarter, primarily due to higher trust fees and increase in the equity pickup from a portfolio of investments and higher unplanned balances that were recognized into income.

Craig: These favorable changes were partially offset by lower banking and FX fees due to lower transaction volumes.

Michael L. Schrum: Non-interest income continues to be a stable and capital-efficient source of revenue through the cycle, with a fee-income ratio of 39 percent experienced for this quarter. Slide 8 represents core non-interest expenses. Total Core Non-Interest Expenses were $90.3 million, a 3.9% increase compared to $86.9 million in the prior quarter. The increase in core non-interest expenses is primarily due to higher performance-based incentive accruals and inflationary increases in staff health care benefits. Additionally, we expect additional calls from the recently upgraded core banking software, as well as some consulting and legal calls, which we do not expect to continue in future quarters.

Craig: Noninterest income continues to be a stable and capital efficient source of revenue through the cycle, where the fee income ratio of 39% experienced for this quarter.

Craig: On slide eight represents core noninterest expenses.

Craig: Total core noninterest expenses were $19 $3 million, a three 9% increase compared to $86 9 million in the prior quarter.

Craig: The increase in core noninterest expenses is primarily due to higher performance based incentive accruals and inflationary increases in staff health care benefits.

Craig: Expected additional costs from the recently upgraded core banking software as well as some consulting and legal costs, which we do not expect to continue in future quarters.

Michael L. Schrum: As communicated previously, we continue to expect a quarterly expense run rate of $88 million in the second half of 2024. This includes the increased expenses resulting from the amortization and servicing of our new cloud-based IT investments and core banking system and branch upgrades, as well as the costs of our new team servicing the acquired book of trust clients. All while taking into consideration the expected benefit of the group-wide course restructure announced in the third quarter of 2023. I will now turn the call over to Michael Schrum to review the balance sheet.

Craig: As communicated previously we continue to expect a quarterly expense run rate of $88 million in the second half of 2024.

Craig: Contemplates the increased expenses, resulting from the amortization and servicing of our new cloud based our I T investments and core banking system and branch upgrades as well as the costs of our new teams servicing their quiet book up trust clients, Oh, well, it's taken into consideration the expected benefit of the group wide cost restructure.

Craig: Obviously, the third quarter of 2023.

I will now turn the call over to Michael Schrum to review the balance sheet.

Michael L. Schrum: Thank you, Craig. Slide nine shows that Butterfield's balance sheet remains liquid and conservatively managed. Period end deposit balances increased to $12.5 billion from $12.1 billion at the prior quarter end and $12.0 billion at the end of 2023, continuing to show the stability of our deposit base. However, despite the recently elevated deposit levels, we continue to expect a medium-term deposit level range of between $11.5 billion and $12 billion. Butterfield's low risk density of 33.5% continues to reflect the regulatory capital efficiency of the balance sheet, with the Lower Risk Weighted Residential Mortgage Loan Portfolio continuing to represent 69% of our total loan assets.

Michael L. Schrum: Thank you Craig Slide nine shows the Butterfield <unk> balance sheet remains liquid and conservatively managed.

Michael L. Schrum: Period end deposit balances increased to $12 $5 billion from $12 1 billion at the prior quarter end.

Speaker Change: 12 zero billion at the end of 2023, continuing to show the stability of our deposit base.

Speaker Change: Despite the recently elevated deposit levels.

Speaker Change: Continue to expect a medium term deposit level a range of between 11 and a half billion dollars $12 billion.

Speaker Change: Butterfield slow risk density of 33.5% continues to reflect the regulatory capital efficiency of the balance sheet.

Speaker Change: With a lower risk weighted residential mortgage loan portfolio continuing to represent 69% of our total loan assets.

Michael L. Schrum: On slide 10, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is now 100% comprised of AA or higher rated U.S. government guaranteed agency securities. Loan asset quality has also continued to perform adequately, with non-accrual loans consistent with the prior quarter at 1.5% of gross loans, a net charge-off rate of one basis point, and an allowance for credit losses coverage ratio of 0.5%.

Speaker Change: On Slide 10, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is now 100% comprised of double a or higher rated U S government guaranteed agency securities.

Speaker Change: Loan asset quality has also continued to perform adequately with non accrual loans consistent with the prior quarter at one 5% of gross loans.

Speaker Change: Net charge off rate of one basis point.

Speaker Change: And an allowance for credit loss losses coverage ratio of 0.5%.

Michael L. Schrum: Our past due and accruing facilities are expected to remain somewhat elevated over the next few quarters due to a sizable legacy hospitality facility in Bermuda working through a receivership and sale process, which we expect to conclude late this year. However, the economic conditions of the markets we lend into remain favorable, and we are well collateralized with the significant majority of our loans to values below 70%. The Bank actively works with borrowers to help them understand and meet their obligations, particularly if they're experiencing difficulty.

Speaker Change: Our past due and accruing facilities are expected to remain somewhat elevated over the next few quarters due to a sizable legacy hospitality facility in Bermuda working through a receivership and sale process, which we expect to conclude late this year.

Speaker Change: The economic conditions of the markets, we lend into remained favorable and we are well collateralized with the significant majority of our loans to values below 70%.

Speaker Change: The bank actually works with borrowers to help them understand and meet their obligations, particularly if they're experiencing difficulties.

Michael L. Schrum: On slide 11, we present the Average Cash and Securities Balance Sheet with a Summary Interest Rate Sensitivity. Asset sensitivity increased modestly in the second quarter of 2024 due to a temporary inflow of client funds, which were held in short-term assets. Net unrealized losses in the EFS portfolio included in OCI were $176.8 million at the end of the second quarter, in line with the prior quarter.

Speaker Change: On slide 11, we present, the average cash and securities balance sheet with a summary interest rate sensitivity.

Speaker Change: Asset sensitivity increased modestly in the second quarter of 'twenty 'twenty four due to a temporary inflow of client funds, which were held in short term assets.

Speaker Change: Net unrealized losses in DFS portfolio included in OCI, where $176 $8 million at the end of the second quarter in line with the prior quarter.

Michael L. Schrum: At current forward rates, AFS OCI is expected to improve by $50 million or 28% over the next 12 months and $82 million or 46% in the next 24 months, allowing for reinvestment in higher yielding securities. Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements. While not a regulatory requirement, our TCE to TA ratio of 6.5% is at the conservative end of our target range of 6 to 6.5% and is indicative of the health of our overall capital levels.

At current forward rates.

Speaker Change: OCI is expected to improve by $50 million or 28% over the next 12 months and $82 million or 46% in the next 24 months, allowing for reinvestment in higher yielding securities.

Speaker Change: Slide 12, summarizes regulatory and leverage capital levels Butterfields capital levels continue to be conservatively above regulatory requirements.

Speaker Change: While not a regulatory requirement our TCE to Ta ratio of six 5% is at the conservative end of our target range of six to six 5% and is indicative of the health of the overall capital levels.

Michael W. Collins: I'll now turn the call back to Michael Collins.

Speaker Change: I'll now turn the call back to Michael Collins.

Michael W. Collins: Thank you, Michael. During the first week of July, Hurricane Beryl quickly intensified into a Category 5 hurricane with a destructive path through the southeastern Caribbean and eventually passing just south of the Cayman Islands, came in fortunately was spared a direct hit and avoided any significant damage. Our operating jurisdictions are well prepared to handle hurricanes and other natural disasters. The bank has contingency plans available to help recover quickly from any outages. We will continue to develop Butterfield's growth story organically and through M&A.

Speaker Change: Thank you Michael during the first week of July Hurricane barrel quickly intensified into a category five hurricane with a destructive path through the south eastern Caribbean and eventually passing just south of it became an island.

Came in unfortunately was spurred a direct hit and avoided any significant damage.

Speaker Change: Our operating jurisdictions are well prepared to handle hurricanes and other natural disasters and.

Speaker Change: The bank has contingency plans available to help recover quickly for any outages.

Michael W. Collins: We are in regular dialogue with potential sellers, participate in bid processes, and seek to acquire appropriately positioned trust or banking businesses in the right offshore jurisdictions, in the absence of M&A. We forecast long-term organic balance sheet growth rates to be in line with the blended GDP rates for our jurisdictions, which we estimate to be around 2-4%. In addition to organic growth, earnings per share are augmented by share repurchases over time, and we continue to focus on operating efficiency.

Speaker Change: We will continue to develop butterfields growth story organically and through M&A.

Speaker Change: We are in regular dialogue with potential sellers participate and been bid processes and seek to acquire appropriately positioned trust or banking businesses and the write off short jurisdictions.

Speaker Change: In the absence of M&A.

Speaker Change: We forecast long term organic balance sheet growth rate will be in line with the blended GDP rates for our jurisdictions, which we estimate to be around 2% to 4%.

Speaker Change: In addition to organic growth earnings per share is augmented by share repurchases over time, and we continue to focus on operating efficiency.

Michael W. Collins: Butterfield's ability to create shareholder value benefits from our leading market positions, a strong balance sheet, recurring fee income, improving operating efficiency, and Thoughtful Capital Management. These help to generate a profitable and stable franchise, which will benefit all of our stakeholders. Operator? I will now begin the question and answer session.

Speaker Change: But it feels the ability to create shareholder value benefits from our leading market positions, our strong balance sheet recurring fee income improving operating efficiency and thoughtful capital management.

Speaker Change: These helped to generate a profitable and stable franchise, which will benefit all of our stakeholders. Thank you and with that we would be happy to take questions operator.

Nick: I will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Feaster with Raymond James. Please go ahead.

Speaker Change: Well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from David Feaster with Raymond James. Please go ahead.

David Pipkin Feaster: Hey, good morning, everybody.

David Pipkin Feaster: Hey, good morning, everybody.

Unknown Executive: Morning, David. Good morning.

Speaker Change: Good morning, David Good morning, maybe just starting on deposits.

David Pipkin Feaster: Maybe just starting on deposits, you know, the deposit growth was great to see, obviously, primarily driven by the Channel Islands. I guess, first, could you just touch on what drove that increase and maybe some of the deposit trends you're seeing across your jurisdictions? And then, you know, going back to your expectations for deposits declining to $11.5 to $12 billion, I guess, what's driving the expectations for that decline?

David Pipkin Feaster: Deposit growth was great to see obviously, primarily driven by the channel Islands I guess first could you just touch on what drove that increase and maybe some of the deposit trends you're seeing across your jurisdictions and then.

Speaker Change: You know going back to your expectations for deposits declining to 11, and a half of 12 billion I guess, what's driving the expectations for for the for that decline.

Craig Bridgewater: Hi David, it's Craig. So I'll start out. I think kind of over, I guess we still think that the deposit will settle between $11.5 to $12 million. During the quarter, we saw some kind of large deposit inflows come in, but we don't expect those to stay around for a long time. So towards the end of June, we saw about kind of $300. We know that one relates to kind of a customer that's a startup that's going to deploy those funds over the next couple of months.

Speaker Change: Yes, Hi, David It's Craig.

Craig: I'll start out.

I think on a.

Craig: I guess, we still think that the deposit rossetto between 11, and a half to 212 million.

Speaker Change: During the quarter, we saw some kind of large deposit inflows come in but we don't expect it to stay around for a long time.

Speaker Change: So towards the end of June we saw about 300.

Speaker Change: 300 million come in we know that no one relates to kind of a customer would have to start up that's going to deploy those.

Those funds will be next couple of months we've.

Craig Bridgewater: We've kind of talked about some other deposits that are actually in kind of liquidation proceedings. We still expect those to flow at some point. And then, kind of another kind of large customer deposit relates to an investment management company.

unknown: [inaudible]

Speaker Change: We've kind of talked about some other deposits that are actually in.

Speaker Change: And I'm kind of liquidation proceedings do you expect do you expect it to flow at some point and then kind of another cut at Cosmo customer deposit it relates to our investment.

Speaker Change: Investment management company. So again, they would we would expect those to be deployed.

Speaker Change: A few months as well so we still think that no our guidance around kind of you know 11 $5 million to $12 million steel is still relevant.

David: Okay David.

David: Michael Scott, Doug just add to that if you look at the average deposit levels at 12 12. One three you know there was the exit run rate. Obviously other period end balance was a bit elevated and so you know we you know we have line of sight to a a couple of large clients.

As Craig mentioned I'm, just wanted to kind of push out of that.

David Pipkin Feaster: Okay, that's great. And then it's great to see the strength in the trust business this quarter. Sounds like somewhat due to special fees. I'm curious about some of the trends that you're seeing on the trust side broadly. And then it looks like, you know, AUM and the trust business are up, and there was a decent decline on the custody side. So just kind of curious about some of the trends there and what you think about, you know, the trust business.

Speaker Change: Okay. That's great and then it is great to see the strength in the trust business. This quarter sounds like somewhat due to special fees I'm curious just some of the trends that you're seeing on the truck side broadly and then it looks like you know AUM in the in the trust business were up and there was a decent decline in the <unk>.

Speaker Change: Custody side, so just kind of curious some of the trends there and how you think about you know the trust business going forward.

Michael L. Schrum: Yeah. So, David, it's Michael Schrum.

Speaker Change: Yes, so David it's a it's Michael Schrum.

As you know we are we close to credit Suisse. Our on boarding of the client portfolio in Singapore, and Guernsey and there's still some a few clients coming in.

Michael L. Schrum: As you know, we closed a credit suisse onboarding of the client portfolio in Singapore and Guernsey, and there are still a few clients coming in after the closing, but just kind of coming in via the referral method. From time to time, we do get restructuring or special reporting fees from these. I wouldn't sort of equate the AUC or AUT to the revenue on this because a lot of those underlying assets are non-financial assets and invest in things like shares in companies and intangibles, and they sort of get revalued from time to time, and so that can kind of jump up and down, but doesn't really relate to the revenue.

Speaker Change: Sort of after after the closing, but just kind of coming in via the referral method.

Speaker Change: You know from time to time, we do get restructuring, especially reporting fees off those I wouldn't sort of equate the AUC or U T 222, the revenue on this because a lot of those underlying assets are nonfinancial assets and you know invest like she hasn't companies and intangibles.

Speaker Change: They sort of get revalued from time to time, and so that can kind of jump up and down but it doesn't really relate to two the revenue are the revenues really driven off sort of annual fee, which is sort of the recurring bid on it and then the special one time based fees, so a little bit more like a law firm on consulting firm Ware.

Craig Bridgewater: The revenue is really driven by this sort of annual fee, which is sort of the recurring bit of it, and then the special or time-based fees, so a little bit like a law firm or consulting firm where we record the time, and then we bill that to the client. And occasionally, big families have restructuring where new kids are added to the trust or people move jurisdictions, and so we need to rotate some of the assets around, and the whole purpose of that trust is the orderly succession of assets through generations.

Speaker Change: We recall at the time and then we build up to the client.

Speaker Change: And occasionally big families have restructuring, where where are new kids are added to the trust or people move jurisdictions and so we need to rotate some of the assets around and the whole purpose of that trust is orderly succession of assets through generation and so we feel pretty positive about the trend.

Craig Bridgewater: And so we feel pretty positive about the trend. Obviously, the credit suisse book has really brought Singapore to a level where we are getting much more inbound referrals, so the pipeline is looking pretty good. I think the global trends in the trust business are probably a migration towards the higher end, just the cost of service. A trust is going up with all the tax reporting and all the extra AML and compliance that's required around that, so the entry point really for somebody paying our level of fees is migrating north in terms of wealth.

Speaker Change: Obviously, the credit Suisse spoke because really broad.

Speaker Change: Singapore to a level, where we are getting much more inbound referrals and pipelines are looking pretty good.

Speaker Change: You know I think you know the global trends in a trust business that property and migration towards.

Speaker Change: Hi, Randy just the cost to serve as.

Randy: I Trust, it's growing up with all of the tax reporting and all dish Oh, the extra AML and compliance that's required around that so.

Randy: The entry point really for for for somebody paying our level of fees is.

Randy: Migrating north in terms of in terms of wealth.

Craig Bridgewater: But there are still plenty of opportunities out there, and especially in Asia, which is probably a bit of a younger market than Europe, for example. We see some maturity in that market, and that will bring extra fees to us over time. I mean, the assets we acquired from Credit Suisse are performing as we expected. Kind of at the close, we kind of gave you some ideas around what we expected that revenue to be, and that's actually tracking kind of along those lines as well. So that's a positive. But as Michael mentioned, the kind of those assets coming on board has led to an increased pipeline, particularly in Singapore, where we're seeing a lot more activity, a lot more referrals.

Randy: But there's still plenty of opportunities out there and especially in Asia, which is.

Randy: Probably a bit of a younger market.

Randy: In Europe for example.

Randy: Hum.

Randy: We see some maturity in that market and that will bring extra fees to us overtime.

Randy: Okay.

Speaker Change: How does that but I'd be I mean, the assets. We acquired from credit Suisse builds are performing as we expected kind of let me close that you kind of gave you some ideas around what do we expect that revenue to be in that sexually trucking kind of.

Speaker Change: Along those lines as well so that's a that's a positive but.

Speaker Change: But as Michael mentioned kind of if those assets coming on board has led to increased increase pipeline, particularly in Singapore, but.

Michael: But we've seen a lot more activity a lot more referrals and that's I'm kind of giving us a positive trend.

Speaker Change: What type of business.

David Pipkin Feaster: Okay. That's great.

Speaker Change: Okay. That's great and then maybe just hoping that you could touch on some of the rising mortgage trends youre seeing it looks like mortgage non accruals actually improved a bit I'm just curious maybe the health of what what's your from your perspective kind of the health of your borrowers. How are you working with those borrowers that you know may be struggling and just any.

David Pipkin Feaster: And then maybe just hoping that you could touch on some of the residential mortgage trends you're seeing. It looks like mortgage non-accruals actually improved a bit. I'm just curious about, from your perspective, the health of your borrowers. How are you working with those borrowers that, you know, may be struggling, and just any other trends that you're seeing in the housing market across the country.

Speaker Change: Other trends that you're seeing in the housing market across your jurisdictions.

Michael L. Schrum: Yes, it's Michael Scrum. So, let's start with Bermuda. It's pretty stable in Bermuda. Rental yields are pretty good. And so, whether it's first home buyers or investment purposes, values are holding up. And we're seeing that obviously when we see transactions in the market. And so, that's good.

Speaker Change: Yeah. So it's Michael's problems, so let's start with Bermuda, it's pretty stable in Bermuda, a rental yields are pretty good and so whether its first home buyers or or investment purposes.

All of us are holding up and we're seeing that obviously when when when we see transactions in the market and so that's that's good there's always a small island you know a lack of supply because by nature of the market is pretty small and we do all the manual underwriting ourselves, obviously, we lend them conservative Conservative Prime.

Michael L. Schrum: There's always, on a small island, a lack of supply because, by nature, the market is pretty small. And we do all the manual underwriting ourselves. Obviously, we land on conservative parameters. And it's a well-seasoned book as well.

Speaker Change: It is and it is a well seasoned book as well.

Michael L. Schrum: Cayman, a bit newer, a bit more frothy in terms of recent valuations. But again, we're fairly cautious, and a little bit more competitive with some of the Canadian banks in that market. But we're sort of taking our time and saying, look, we want to be a consistent provider of credit to the market and not sort of stretch at this point in the rate cycle. But again, good levels of transactions going on. So, quite a lot of building going on in Cayman as well. So, mixed-use condos, hospitality.

<unk> came in a bit newer a bit more frothy in terms of recent valuations, but again, we're fairly cautious compare a little bit more competitive with.

Speaker Change: Some of the Canadian banks in that market, but we are sort of taking our time and saying look we want to be a consistent provider of credit into the market and not sort of stretch at this point in the rate cycle.

Speaker Change: But again good good levels of transactions going on so quite a lot of building going on and came in as well so a mixed use condor hospitality.

Michael L. Schrum: We obviously prefer the sort of condo lending rather than the hospitality lending piece of that, but there's certainly a lot of activity there. But on the flip side, we've seen recently, with rates being where they are, quite a bit of prepayment in that book as well. And so, you know, that is what it is.

Speaker Change: We obviously would prefer that there's sort of a condo lending rather than the hospitality lending piece of that.

But there's certainly a lot of activity there, but on the flip side, we've seen recently with rates being where they are quite a bit of prepayment in that book as well.

Speaker Change: And and you know so.

Michael L. Schrum: I think we're not really a loan growth story in that sense. But, you know, we're a consistent provider of credit on, you know, conservative underwriting guidelines internally. London is, you know, continuing to perform very well. You know, there's obviously been a recent election there. And so there's some noise and liquidity, you know, that isn't coming to market, if you will, because people are waiting for the next government to lay out their policy platform around, particularly eligibility. So people want to be resident in the UK, but maybe non-domicile for tax purposes. How is that going to work going forward?

Speaker Change: That is what it is I think we're not not really a loan growth story in that sense, but you know were consistent provider of credit cards.

Speaker Change: Cause you know conservative underwriting guidelines.

Speaker Change: Internally.

Speaker Change: London is.

<unk> performed very well.

Speaker Change: There's obviously been a recent election, there and so there's some noise in liquidity.

Speaker Change: That is not coming to market. If you will because people are waiting. The next government is going to lay out there their policy platform around particularly our eligibility. So people want to be resident in the U K, but maybe not domiciled for tax purposes, how how is that going to work going forward.

Speaker Change: But there's.

Michael L. Schrum: There's some reform that's been advertised around the landlord-tenant relationships and the leasehold relationships there. And so I think people are sitting a little bit more on the sidelines in the UK. But again, valuations are holding up in Prime Central London. You know, it's just taking a bit longer for inventory to turn there, really.

Speaker Change: There's some reform that's been advertised around the landlord tenant relationships and leasehold relationships there and so I think people are sitting a little bit more on the sidelines in the UK, but again valuations holding up in prime Central London.

Michael L. Schrum: And I think tourism in Bermuda has been good this year, so we've seen pretty good performance on the underlying resi mortgages. I think, you know, early on in the rapidly rising interest rate environment, we had some concerns coming out of COVID with the Bermuda resi port, but it's actually kind of, we've seen some of those returning to performing. So that's a good news story there.

Speaker Change: You know, it's just taking a bit longer for inventory to turn their reading and I think tourism in Bermuda has been good. This year. So we've seen pretty good performance on the underlying whereas the mortgages I think earlier.

Speaker Change: Early on in the rapidly rising interest rate environment. We had we had some concerns coming out of Covid with the Bermuda resi bought but it's actually kind of we've seen some of those returning to performing so that's that's that's a good news story there.

Michael L. Schrum: So again, steady, steady sort of stretching for credit. We're seeing the numbers going a little bit backwards at this point in the rate cycle, but we expect the activity to kind of pick up again when it's coming down a little bit. The only place it's a little bit slow would be in the Channel Islands, simply because, you know, we've developed a good mass affluent bank with lots of accounts now, a good deposit base. We've issued credit cards, but mortgages are sort of flat, simply because of the rate structure at this point. But when rates start moving down, that'll pick up as well.

Speaker Change: So again steady steady sort of we're not stretching for credit we're seeing it.

Speaker Change: Book are growing a little bit backwards at this point in the rate cycle, but we expect the activity to kind of pick up again.

Speaker Change: You know, it's come down a little that only place it's a little bit slow would be in the channel Islands simply because you know we've developed a good mass have one bank with a lots of accounts now a good deposit base, we've issued credit cards, but mortgages are sort of flat simply because of the rate structure at this point.

Speaker Change: But when rates start moving down that that will pick up as well.

David Pipkin Feaster: That's a great caller. Thanks, everybody.

Speaker Change: That's great color thanks, everybody.

David: Thanks, David.

Nick: Again, if you have a question, please press star then 1. The next question comes from Tim Switzer with KBW. Please go ahead.

Speaker Change: Again, if you have a question. Please press Star then one.

Speaker Change: The next question comes from Tim Switzer with K B W. Please go ahead.

Timothy Jeffrey Switzer: Thank you for taking my questions. Elevated liquidity levels you guys had this quarter as deposits came in and increased your asset sensitivity a little bit. Yeah, I know you guys have talked about deposits normalizing a little bit. Are there any other actions you guys want to take to maybe lower the asset sensitivity over time beyond just the normalization and liquidity?

Timothy Jeffrey Switzer: Hi, Thank you for taking my questions. My first question was around.

Timothy Jeffrey Switzer: I'll elevated liquidity levels you guys had this quarter as deposits came in an increase in your asset sensitivity a little bit.

Speaker Change: Yeah, I know you guys talked about deposits normalizing a little bit.

Speaker Change: Or are there any other actions you guys wanted to take to maybe lowered the asset sensitivity every time beyond just the normalization of liquidity.

Michael L. Schrum: Yeah, it's a good question. Who is it? It's Michael Scrum.

Michael L. Schrum: Yeah. It's a good question, it's Michael scrub. It is good question.

Michael L. Schrum: It's a good question. We, you know, we're just naturally as sensitive because, you know, we're 40% lent, right? So, essentially, our behavioralized deposits are, you know, seasoned over time, and the lending preference in our lending markets is for floating rates. And so that gives rise to that sort of what we call structural sensitivity for us. We feel pretty good about the OCI burndown path that we're on. Obviously, there are always discussions around, should we be doing something different in the securities portfolio and re-ladder at this point. But I think at the moment we're pretty committed to this path.

Speaker Change:

Michael L. Schrum: Naturally asset sensitive because.

Speaker Change: With 40% land right, so essentially a behavioral as deposits are.

Speaker Change: Seasons overtime and.

Speaker Change: The lending preference in our in our lending markets as for floating rate and so.

Speaker Change: So that gives rise to that sort of what we call structural asset sensitivity for us.

Speaker Change: You know, we're pretty we feel pretty good about the OCI burned down you know path that we're on you know obviously, there's always discussions.

Speaker Change: Around should we be doing something different and securities portfolio and reload or at this point.

Speaker Change: But I think at the moment, we're pretty committed to the path we have I think our visibility now.

Michael L. Schrum: We have, I think, a visibility now of a rate path or at least the direction of the rate path that gives us some confidence around OCI burndown and therefore tangible portfolio growth. But, you know, it's something that we often discuss in terms of the longer term, what is the level of the fixed rate that we want to have on the books, whether it's loans or investment securities versus floating rates. And because we don't have a lender of last resort or a central bank, we're naturally just going to have a lot of liquidity because, essentially, we need to manage our own treasury operations across the four different banking jurisdictions.

Speaker Change: Great paths or at least.

Speaker Change: A direction of rate path that gives us some confidence around OCI burned down and therefore, our tangible book value growth.

Speaker Change: But you know it's something that we often discuss in terms of longer term what is the level of fixed rate.

Speaker Change: We want to have on the books, whether it's loans or or or investment securities versus floating rate.

Speaker Change: And because we don't have a lender of last resort our central Bank. We are naturally just going to have a lot of liquidity because essentially we need to manage our own treasury operations across the four different banking jurisdictions and so that gives rise to a further increase in asset sensitivity because it's obviously we test.

Michael L. Schrum: So that gives rise to a further increase in our sensitivity because, obviously, we test; we use VAR and MinMax inflows and outflows to estimate how much cash we need to hold. So I think the reality is, having been in Bermuda Banks for a long time, we're yet to see some structural action, but I think we're probably always going to be a bit more sensitive through the cycle. I think the fees give us a great buffer. They're very stable and capital efficient. But other than that, it's an ongoing discussion, but I really have nothing really to report.

Speaker Change: Use bar and Min Max inflow outflows to kind of estimate how much cash we need to hold.

Speaker Change: So I think the reality is we having been in Bermuda banks.

Speaker Change: For a long time you know.

Speaker Change: Yet to see.

Speaker Change: Some start structural action, but I think you know we were probably always going to be a bit more asset sensitive through us through the cycle I think the fees gave us a great sort of buffer there very stable capital efficient.

Speaker Change: But other than that you know, it's an ongoing discussion, but but nothing really to report.

Timothy Jeffrey Switzer: Okay, I understand that's helpful. And with the expenses dropping back down to $88 million, that's a good amount of expenses dropping out of the run rate there.

Speaker Change: Okay I understand that that's helpful.

Speaker Change:

Speaker Change: And with the U S.

Speaker Change: Vince is dropping back down to $88 million to get them out of expenses dropping out of the run rate there how should we think about.

Timothy Jeffrey Switzer: The expense run rate in 2025, you know, assuming we only get a few rate cuts and knowing you guys have different levers you've historically been able to pull, what are your, you know?

Speaker Change: The expense run rate in 2025, I'm, assuming we only get a few rate cuts and knowing you guys have different leverage you've historically been able to pull what are you are there any investment plans in the pipeline.

Speaker Change: My lead to some more growth back in 2025 from the 88 million dollar level.

Craig Bridgewater: Yeah, it's Craig here. I think if we look at expenses, kind of going into 2025, really, inflation is probably the one thing that we need to be looking at as well. So kind of, we do expect, you know, well, you'll see how inflation works in regards to kind of salary inflation, as well as suggested general costs of professional services as well. But obviously, that's kind of unpredictable at this point, depending on kind of where the rate environment goes and what we're going to see. But if we assume inflation is going to be kind of at historic levels, we definitely have to apply that.

Speaker Change: Yeah, it's it's.

Craig: It's Craig here.

Speaker Change: I think if you look at expenses I'm kind of getting to me.

Speaker Change: 25, really some I mean inflation is probably the one thing that we need to be looking at as well so kind of we do expect you know.

Speaker Change: You'll see how a patient walks in regards to kind of salary inflation. That's why not just your general thoughts are professional services as well.

Speaker Change: So again.

Speaker Change: Obviously, that's kind of unpredictable at this point, depending on kind of where the rate environment goes.

Well, what we're gonna see but if we assume inflation is going to be kind of at historic levels, we definitely have to apply that.

Speaker Change: In addition, we are making some investments when it comes to continued investments in our it infrastructure.

Craig Bridgewater: In addition, we are making some investments when it comes to continued investments in our IT infrastructure. We are implementing an upgraded core accounting system this year and into Q1 of next year. Once that becomes live, obviously, there's going to be increased amortization on that as well, and other IT assets that we're investing in. So, in summary, I think, you know, kind of taking the 88, which we expect to kind of get to in the second half of this year, given some of the one-offs that we did see in this quarter, and then applying, you know, a reasonable rate of inflation going into 2025.

Speaker Change: But look we are implementing upgraded core accounting system.

Speaker Change: Correct.

Speaker Change: This year and into Q1 of next year, but once that becomes life, obviously, there's going to be increased amortization on that as well with other kind of I T assets that we're investing in.

Speaker Change: So I think in summary, I think you know kind of taking the 88, <unk>, which we expect to kind of get to in the second half of this year.

Speaker Change: Given somebody one off that we did see in this quarter.

And then applying.

Speaker Change: You know a reasonable rate of inflation going into 2025.

Craig Bridgewater: We're not expecting any significant kind of increases in headcount or those types of things or investments in other infrastructure. We continue to kind of have our long-term strategy around, you know, really leveraging the Halifax Service Center, which helps us with expense management in the longer term. And I think...

Speaker Change: Not expecting any significant kind of increases in head count or those types of things are investments in our infrastructure.

Speaker Change: Continue to kind of have our long term strategy of bonds, no really leveraging our Halifax Service Center.

Speaker Change: <unk>, which helps us with expense management time in India in the longer term.

Michael L. Schrum: I think, Tim, it's Michael Schrum. The only thing I'd add to that is, you know, we're still committed to the 60% through cycle cost income ratio. And, you know, we're roughly around that at the moment. You know, from time to time, it can be a bit higher, and we always try and look at, you know, if we see a path where revenue is dropping, you know, how do we either generate additional revenue, or how do we use the cost lever? So we kind of, you know, we were pretty disciplined around that process to try and get to 60%.

Timothy Jeffrey Switzer: And I think Tim it's Michael Scott the only thing I'd add to that as you know, we're still committed to the 60% through cycle cost income ratio and you know where we're roughly around there.

Timothy Jeffrey Switzer: At the moment.

Timothy Jeffrey Switzer: From time to time, it can be a bit higher and we always try and look at if we see a path where we had no.

Timothy Jeffrey Switzer: Revenues dropping you know how do we either generate additional revenue or how do we use the cost lever.

Speaker Change: So we kind of put you know we've.

We're pretty disciplined around that process to try and get to the 60%.

Timothy Jeffrey Switzer: Okay, great. That's really helpful. Thank you for taking the time to answer my questions.

Speaker Change: Okay, Great. That's really helpful. Thank you for taking my questions.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.

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

Michael W. Collins: Thank you, Nick, and thanks to everyone for dialing in today. We know it's a busy day for calls, and we look forward to speaking with you again next quarter. Have a great day.

Speaker Change: Thank you Nick and thanks to everyone for dialing in today, we know it's a busy day for calls and we look forward to speaking with you again next quarter have a great day.

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

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

Speaker Change: Okay.

Speaker Change: [music].

Okay.

Speaker Change: [music].

Michael Collins: Michael Collins, Michael Collins, David Feaster, Timur Braziler