The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q3 2023 Earnings Call Transcript

The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Noah Fields: Thank you. Good morning, everyone, and thank you for joining us. Today we will be reviewing Butterfield’s third quarter 2023 financial results. On the call, I’m joined by Michael Collins, Butterfield’s Chairman and Chief Executive Officer; Craig Bridgewater, Group Chief Financial Officer; and Michael Schrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our third quarter 2023 results. The press release and financial statements, along with a slide presentation that we will refer to during our remarks on this call, are available on the Investor Relations section of our website at www.butterfieldgroup.com.

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

The bank also provides specialized financial services offerings in the Bahamas, Switzerland, Singapore, and the UK, where we offer mortgages to high-net-worth clients with properties in prime Central London. I will now turn to the third quarter of 2023 highlights on Page 4. Butterfield reported positive results with net income of $48.7 million and core net income of $57 million. The non-core expenses of $8.2 million were associated with a groupwide restructuring program implemented in the quarter. We reported a core return on average tangible common equity of 26.1% for the third quarter of 2023 with core earnings per share of $1.16. The net interest margin was 2.76% in the third quarter, a decrease of 7 basis points, with the cost of deposits rising to 152 basis points from 127 basis points in the prior quarter.

Deposit pricing increased across all of our banking jurisdictions as there was a mix shift from demand deposits to term deposits and fixed-term deposits rolled into higher rates due to the rising market interest rates. Our TCE/TA ratio of 6.5% has held steady and continues to be at the conservative end of our targeted range of between 6% and 6.5%. As a result, we increased activity in our share buyback program with repurchases of just over 1 million common shares in the third quarter. The rolling integration of the Credit Suisse trust asset acquisition progressed as planned during the third quarter. Our third closing saw us acquiring assets in the Bahamas and the fourth closing incorporated a total of 50 trust structures, primarily in Guernsey, with an additional five in Singapore.

We are very pleased with the progress so far and the quality of clients onboarded in the deal and continue to expect a final closing of the transaction this quarter, and we are tracking towards the $8 million to $10 million in added trust revenues from the deal in 2024, along with an estimated $6 million of expenses. I will now turn the call over to Craig for more detail on the quarter.

Craig Bridgewater: Thank you, Michael, and good morning, everyone. Looking now at slide 6. Here we provide a summary of net interest income and net interest margin. In the third quarter, we reported net interest income before provision for credit losses of $19.2 million, a decrease of 2.5% versus the prior quarter. The decrease was mainly due to higher deposit costs and a decrease in average balance sheet volumes. During the quarter, the net interest margin decreased 7 basis points due to increased deposit costs which outpaced higher earned yields and Treasury margins. Average interest-earning assets decreased marginally by 1% to $12.95 billion due to deposit outflows as customers activated funds and sought higher-yielding asset classes.

The yield on interest-earning assets increased 12 basis points to 4.22% from 4.1% as investment portfolio runoff continued to be invested at the shorter end of the yield curve. The yield on Treasury assets during the quarter of 4.47% versus 4.06% in the prior quarter and the investment portfolio yield at 2.06%, which was consistent with the second quarter. In addition, the yield on loan balances increased by 9 basis points to 6.51%. Average investment balances decreased by $119.8 million, or 2.1% compared to the prior quarter, mainly due to the scheduled maturity of some US Treasury securities. We remain conservatively positioned in the near-term by placing portfolio runoff into cash and cash equivalents, which continue to offer an attractive return profile without the OCI risk.

Turning to Slide 7. Noninterest income was up 3.6% versus the prior quarter, with higher banking fees due to improved card volumes in Bermuda and Cayman, as well as some fees from loan prepayments. Trust fees also increased compared to the prior quarter as a result of new clients acquired in the Credit Suisse deal, as well as organic growth and higher activity-based fees. Noninterest income continues to be a stable and capital efficient source of revenue with a fee income ratio of 36.7%. Slide 8 provides a summary of core noninterest expenses. Total core noninterest expenses were $84.3 million, a small and expected increase compared to $83.6 million in the prior quarter. The higher expenses are primarily attributable to increased staff-related expenses and higher technology and communication costs related to the investment in IT infrastructure and the banking application upgrade in Bermuda.

Prior to consideration of expenses associated with the servicing of the newly onboarded trust clients, we continue to expect a quarterly expense run rate of between $85 million to $86 million over the next few quarters, given that changes from the restructuring will not be fully implemented until the end of Q2 2024, and we have the full impact of the new cloud hosting fees and the amortization of the upgraded banking application and banking branches to be incurred. We are in the midst of developing our annual operating plan for 2024 and will provide updated expense guidance when we report fourth quarter results. I will now turn the call over to Michael Schrum to review the balance sheet.

Michael Schrum: Thank you, Craig. Slide 9 shows that Butterfield’s balance sheet remains liquid and conservatively managed. Period-end deposit balances decreased to $11.9 billion from the prior quarter end. Deposits ended the quarter down approximately 2.7% and is reflective of typical client activity with some added seasonality. We currently anticipate total deposits stabilizing in the range of between $11.5 billion to $12 billion as competition for deposits has increased, and we see more evidence of a higher-for-longer interest rate environment in the near term. Butterfield’s low-risk density of 34.3% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk-weighted residential mortgage loan portfolio, which now represents 70% of the total loan assets.

Turning now to Slide 10. Here we provide additional detail on our deposit composition by segment. Butterfield’s deposits remain well diversified across its banking jurisdictions, with an uptick in term deposits for the group, primarily driven by Cayman where competition has increased and some clients have moved funds out to term. While this increased the cost of deposits, it is encouraging to see some additional term funding on the balance sheet from regular client activity. Core noninterest-bearing deposits remained at approximately 22% of deposits and $2.6 billion at quarter-end. To date, client deposit activity has been broadly as expected, with the bank seeking to balance deposit volumes against the cost of funds for each market. Turning to Slide 11.

We provide details of loans by type, business segment, and rate type. The chart on the bottom left shows the loan volume movements across our lending jurisdictions, with Bermuda and the London loan portfolio showing net reductions as those portfolios amortized in addition to some increase in prepayments. On the bottom right, fixed rate loans now represent 50% of total loans as clients elected to fix their payments in a rising interest rate environment. Loans are typically fixed for three to five years and should help moderate any potential debt servicing issues. The higher proportion of fixed term loans has also lowered our asset sensitivity over the past six quarters. Turning to Slide 12, we display two charts that demonstrate the conservative nature of Butterfield’s balance sheet versus peers.

Butterfield remains — maintains a high degree of liquidity due to the nature of our markets and as a result of not having access to a central bank or a Fed window. We continue to have significant holdings of cash and cash equivalents, interbank deposits, and short-dated sovereign securities, in addition to liquidity lines with correspondent banks. Butterfield’s loan-to-deposit ratio remains low at 40% with conservative lending standards, and we only offer credit products in our home markets. On Slide 13, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 99% AA rated US Government guaranteed agency securities. The rerating of the portfolio follows Fitch’s August downgrade of the Long-Term Issuer Default Rating of the United States of America.

Credit quality in the loan book also continues to be strong, with non-accrual loans standing at 1.2% of gross loans and a small charge-off rate at 4 basis points. On Slide 14, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Asset sensitivity has continued to decrease during the past couple of years and now suggest a more moderate NII response to changes in market rates. Unrealized losses in the AFS portfolio included in OCI was $238 million at the end of the third quarter, up from $207.3 million at June 30. At the current implied forward curve, we expect the OCI burn-down to be $65 million, or 27% of the total in the next 12 months, and a total decrease of $103 million, or 43% over the next 2 years.

Slide 15 summarizes regulatory capital and leverage capital levels. Butterfield’s capital levels continue to be significantly above regulatory requirements. I will now turn the call back to Michael Collins.

Michael Collins: Thank you, Michael. As mentioned earlier, during the third quarter, we made a difficult decision to implement a groupwide restructuring program that will result in a 9% reduction of our global workforce. This is intended to mitigate inflationary and other expense pressures. The projected $13 million annualized cost savings, once the program is fully implemented, should partially offset earnings at risk from lower interest rates in the future and inflationary pressure on expenses. The restructuring plans considered operational risk mitigation and new business processes and incorporates the placement of some additional non-client-facing functions in our service centers. We expect to continue to operate in all of our jurisdictions without significant changes in products and service offerings.

I’m pleased to say that here in Bermuda, we are concluding a solid 2023 tourism season. In Cayman, which is just entering its high season, we are seeing strong bookings and enhanced airlift and expect significant [Technical Difficulty] coming months. While not directly a driver of our business, healthy visitor numbers increase credit and debit card activity, which is beneficial to the bank and our clients. Our strategy to augment growth through M&A remains important, and we continue to evaluate potential targets in both the banking and private trust sectors. We do not have any specific deals to comment on currently, and Butterfield remains well positioned to continue growing organically while generating top quartile risk-adjusted returns. Thank you, and with that, we’d be happy to take your questions.

Operator?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from David Feaster of Raymond James.

David Feaster: Hi, good morning, everybody.

Michael Collins: Good morning, David.

Craig Bridgewater: Good morning, David.

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

Michael Schrum: Yeah. Good morning, David. It’s Michael Schrum. So maybe just — I’ll just comment a bit on the balance sheet balancing act and Craig can comment a little bit on the NIM trajectory. As we look at loans, obviously, the first thing to mention there is just around a third of that quarter-over-quarter movement was due to FX as we saw dollar strengthening against the pound, some unscheduled prepayments, particularly in the UK book, which generated some additional fees. But the bottom line is probably in this environment, originations are not really going to keep up with the amortization across the markets, and it’s consistent sort of with a general slowdown I think, on new originations across the markets. And I would just mention, we’re keeping consistent underwriting standards through this part of the interest rate cycle.

On the deposit side, we saw some movement again, and as you said, higher-for-longer means some customers activated their funds through either term deposits with us to generate more of a portfolio return on their cash, and we’ve seen — we had some conversations obviously with customers about money funds, returns, et cetera. But overall these are normal commercial movements during this part of the cycle, and I would just say, our depositor concentration remains consistent with prior quarters where the top 20 groups roughly represent 20% of deposits and the rest is pretty diversified down the balance levels. So the normal commercial flows really as I think customers are adjusting to a higher-for-longer period of high interest rates. And obviously, it’s good for us in the sense that we get to wait for some repricing of assets.

We do have some lag repricing coming through the investment portfolio and the loan portfolio. And I’ll just let Craig talk about NIM generally.

Craig Bridgewater: Yeah. Good morning, David, and just to carry on from Michael’s comments, and what we are seeing is customers kind of having a look and kind of use of their deposit levels. And as you mentioned in the formal comments, there’s increased competition for deposit levels. As we stay higher-for-longer, we’re actually going to see — and we saw a mix shift. We saw a mix shift of deposits from demand deposits into term deposits. So customers are seeking that higher yield. And I guess from a relationship perspective, we’re really looking to service our key customer relationships, where necessary, provide a competitive yield to them as they look at other asset classes as well and other uses of their cash. So we’re being very selective and kind of working with customers to kind of build out a ladder and just do what makes sense in regards to the liquidity requirements in the upcoming quarters.

Having said that, and as Michael said, we’re going to see some asset repricing, but we also are going to see increased pressure on pricing of deposits as well. So we do expect to see some compression, at least in the next quarter or two. And then as the asset repricing comes through in kind of towards the end of Q1, we’re going to see the benefits of that. On the loan side, again, yields are increasing, volumes are coming down. Part of that is currency and part of that is volume. But we also, in Bermuda anyway, we do have one more 25 basis point increase coming in at the end of October. So we see the full impact of that in Q4.

David Feaster: Okay, that’s helpful. And then maybe just digging into some of those deposit trends, it sounds like the deposit flows are primarily driven by client activation and utilization of deposits rather than folks leaving the bank. How much of the deposits are you able to retain through the trust and wealth management business? And then I guess, what gives you confidence that balances are going to kind of stabilize here in the range that you gave? Is it just increasingly competitive on rate or just the idea that, again, rates stabilize here and most of the rate-sensitive excess deposits have really been deployed at this point?

Michael Schrum: Yeah. No great questions, David. It’s Michael Schrum. So the first thing on deposits, roughly a third of that, if you look there’s the Slide 17, I think, in the deck, a third of that quarterly movement was due to FX translation. Again, we saw a strengthening dollar against both the pound and euro this quarter. And I think when we look at our core deposit franchises, we see that these are normal commercial movements and deposit concentrations staying where it is. So I think it’s just clients adjusting their expectations and us adjusting accordingly on the pricing. And we obviously want to defend our key strategic relationships. But at the same time, we also know it’s a normal commercial reality that people want to ladder out a little bit and generate some return.

So, I think — again, I think everyone’s going through this adjustment period at the moment, but we feel confident in the current environment, given that we’ve looked at core deposits, we’ve looked at depositor concentration, and the FX movement that we saw last quarter as well.

Craig Bridgewater: I’ll just add that, again, the core deposits remain intact. So about $2.6 billion of core deposits and that’s there. And if we look at trends going back to pre-COVID, that our core deposits and our legacy franchise — deposit franchise is actually up kind of in the 10% to 15% range. So we are maintaining that. And as we have messaged in earlier quarters, some of the corporate deposits in Channel Islands, et cetera, we have seen those. And that’s the nature of the business of those clients that are looking for higher yields. But we feel that a lot of that has happened, and we are now seeing normal movements and we’re seeing again that mix shift into time deposits and we’ll work to maintain those term deposits as they roll over in the coming quarter. So those on average have an average duration of about three months, just above three months. And so they will reprice, and we will be conscious to work with those customers.

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

Michael Schrum: Yeah, David, it’s Michael Schrum. Good questions, again. I think debt service capacity is staying up. The on-schedule prepayments that we’re seeing are coming mainly from the Cayman customer base and our UK, and the rest is really amortization overtaking new originations in Bermuda. So I don’t see any credit deterioration. We do have 50% of the portfolio as fixed, so that will certainly help during this period in the interest rate cycle. But we’ve probably — and we’ve never really been a loan growth story. So I think, again, these are kind of customers reacting to and looking at their own financials and saying, hey, I’m paying a higher rate on a loan. Even if I prepay and pay a little fee to the bank, I can use some of my excess cash.

And given the volatility in other markets, maybe that’s the best decision for them. And so that’s some of the impact that we’re seeing. Obviously, in Central London, as we underwrite to 60%, 65% LTV, you’re really lending to customers at relatively high rates who definitely have the capacity to prepay. And given the market is slowing down in terms of volume of transactions in that market, but prices are holding up, we’re likely to see that for a little bit longer as customers reposition.

Michael Collins: Yes. And, part of — David, part of the repayment scenario in Caymans is because the economy is doing so well, so population growth is into the low 70,000 range, so there’s a lot of excess cash moving around the system. So when rates get to a certain level, a lot of the professionals, who are clients in Cayman, just prepay, there’s no need to keep the loans. So there are good reasons for all of it. And I think, as Michael mentioned, we’ve been through this before in terms of not ever changing our underwriting standards because we haven’t pushed ourselves as a loan growth story. And the most important thing for us is to be consistent across a cycle and make sure that we get repaid.

David Feaster: Makes sense. Thanks, everybody.

Michael Collins: Thanks, David.

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

Michael Perito: Hey guys, good afternoon. Thanks for taking my questions.

Michael Collins: Sure, Mike.

Craig Bridgewater: Hey, Mike.

Michael Perito: I just had a couple quick ones. Number one for Craig on the expense side. So $85 million to $86 million near-term, by the midpoint of next year, I think it was $12 million or $13 million of annualized cost savings expected. Obviously, I imagine there’ll still be some kind of inflationary growth. So just like rough math, is it fair to think of some moderation to that $85 million to $86 million in the back half of next year? Or do you think there’s kind of enough inflationary pressures where that’s not necessarily kind of the right starting point yet and you guys will kind of give us more next quarter?

Craig Bridgewater: Yeah, we’ll come back with some more — I guess some more guidance next quarter, but I think you’re right. So after we have fully implemented the group restructure and going into the second half of next year, I would expect some moderation, and we would expect to see the benefit of that exercise coming through the expense — core expenses going forward. But as I said in my comments, just looking at some of the previously mentioned increases that we’re expecting around the IT infrastructure and the core banking systems coming online, we went live in Cayman at the beginning of this quarter and that went well. We’re obviously continuing to monitor the implementation of that and making sure that everything is working as planned for, as expected.

But obviously, that has a cost implication, and we will actually start to see the amortization of the core banking system in both Bermuda and Cayman coming through in Q4 and into Q1. And then [Technical Difficulty] quite a few people that were actually working on that project, and we were able to get capital treatment for those expenses. They’ll come back into kind of BAU. So that’ll be another headwind. So therefore, I think fill in the bucket for the next couple of quarters and then the second half of next year we would expect to see some benefit coming through. And again, there’s kind of free application of the CS cost as well, and guidance around the CS remains the same at around $6 million.

Michael Perito: Got it. Okay. That’s helpful. And then on the — follow-up question on NIM. It feels like, and correct me if I’m wrong, but it feels like this is probably the least asset-sensitive the balance sheet’s been in quite some time. So I was wondering if you can maybe just give us some updated thoughts around, kind of in a vacuum, how 25 basis point cut to US Fed funds would kind of impact the NIM based on how you’re positioned today as we try to think about various macro scenarios that are kind of being baked into consensus outlooks here.

Michael Schrum: Yeah. Hi, Mike. It’s Michael Schrum. Maybe I’ll kick off. So you mean 25 up, right? Just confirming. There’s a lot of wide array of views out there.

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

Michael Schrum: Yeah. So I mean if you look at the down 100 basis points, it’s not linear in that sense is what you’re asking. So it will depend on how we respond to the cut in terms of loan rates initially. And as you know, there’s a 90-day lag on that in Bermuda and that’s around 50% floating, 50% fixed. So I think the fixed rate loans really have moderated the asset sensitivity and then the realization obviously coming off the floor has further moderated the asset sensitivity. So we’re expecting not very much impact from the first 25 basis points, I would say. And then you can look at the minus 100 basis points and kind of grow into that if there’s further cuts, which obviously is why we’re thinking if there is significant cuts in rates, then we’ll have some protection from the fixed rate loans and from the remaining duration. Obviously, that will start to bring back OCI even quicker.

Michael Perito: Got it. That makes sense. And it’s helpful. And then just lastly for me, a big picture question. Just are you seeing any onshore, at least in the US, there’s a lot of banks pulling back from credit markets and things of that nature going on around liquidity and stuff like that. And just curious if you guys are seeing the early signs of any kind of potentially opportunistic things for you guys to take a look at. Just obviously the balance sheet is pretty well positioned here, lots of liquidity, lots of capital. So just curious if in any of your markets you’re seeing some early signs, maybe some opportunities that could be coming for next year or the year after for growth and just any thoughts there would be helpful. Thanks.

Michael Schrum: Yeah. I mean, as you know, we only really lend in our home markets. We don’t try and become innocent capacity in markets we don’t know. So we only lend primarily residential, a little bit of commercial in Bermuda and Cayman, Central London, and increasingly now the Channel Islands as well. I would say the loan pipeline is pretty healthy at this point, but we are being fairly selective when we go into, what we would call, 100% risk-weighted assets. So [indiscernible] return on risk weighted asset story, so prefer very strongly residential, family-occupied housing that amortizes over a long period, and we can offer fixed rate three to five years to offset some of the cash flow issues there. But we are looking at selectively working with some hospitality newbuilds and mixed use residential new builds in both Bermuda and Cayman.

And there are some interesting things out there, but again we’re being quite selective on the amount of experience that we require people to have to undertake those types of projects and preferably people that we worked with before. So some opportunity — pipelines actually probably on the corporate side is a little stronger than it was this time last year interestingly given the rate environment. But I think the certainty about the supply chain issues has kind of slowed down — has increased a little bit, so people are better able to project their cash flows and presales are very strong still in some developments. So there’s some light out there, but again, we’re not stretching at this point in the cycle.

Michael Collins: Yeah. And I’d say the Bermuda market, just going through them all, is flat to a little bit up but we’ll be opportunistic. Cayman, as I talked about, is growing quite quickly, and our goal there is to pick the right developers for condo developments, have the right amount of presales. So we really stick with a handful of well-known developers that we’ve worked with for years. But there’ll be growth there. Channel Islands is growing quite well. As you know, we’ve had pricing pressure on the deposit side because it is a very corporate market led by investment funds who are obviously very price sensitive. So the goal there is to turn Guernsey and Jersey into much more retail banks that look like Bermuda and Cayman.

So we’re up to about $300 million in retail deposits and about GBP260 million in mortgages. So we’ve had a good start there, actually, and we’ll continue to grow that. The London book, as you know, we won’t lend outside of Central London, so we’re very disciplined and the market has slowed down, particularly on the political side with maybe a Labor government coming in, so that’ll be flattish as facilities refinance. So sort of slightly different in every market, but we’ll be conservative, but definitely there’ll be some opportunities as you said.

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

Michael Perito: That was a good rundown. Thank you guys. I appreciate you taking my question.

Michael Collins: Thanks, Mike.

Operator: [Operator Instructions] And our next question will come from Alex Twerdahl of Piper Sandler. Please go ahead.

Alex Twerdahl: Good morning.

Michael Collins: Good morning. How are you, Alex?

Alex Twerdahl: A couple questions here. First off, the loans that prepaid during the quarter, can you help us just sort of compare the yields that you’re getting on those loans? I know that they vary across the different jurisdictions.

Craig Bridgewater: Yeah, I mean the — the paydowns mainly came from our UK book as well and the Cayman book. I think in the UK book, it would have been — those were fixed early on, so they were rather low rates, so it’s actually kind of been positive to the yield. In Cayman, the average yield on loans is around 7%. So it would have been loans that were probably paying — I would say we’re paying around 5%, 5.5% because again, we saw a lot of loans being fixed early on in the cycle.

Alex Twerdahl: Okay, yeah. That was — I guess that was my question is that if that cash — I guess the paydown cash just goes into cash, it doesn’t wind up necessarily having as big an impact on NII, I guess, at least in the near-term. Just back to the conversation on what happened with loans in the quarter, I know you guys were reaching some capacity limits in the UK with respect to the level of mortgages you want to take on in that market. Now, I know you said that the market has slowed down quite a bit there, but do the paydowns create some additional capacity should that market actually provide the supply?

Michael Schrum: Yeah, absolutely. I mean, we haven’t really set a hard limit around the portfolio, but I think a couple of quarters ago, we were reaching $1 billion. So it was becoming sort of 20%, 25% of the overall loan book. And it is a specialized product, a monoline product for us. It helps activate the deposits coming out of the Channel Islands, the sterling deposits, and kind of provide that interest spread there. So it wasn’t really a regulatory capacity thing. It was more a portfolio consideration around the loans. So we had a soft limit there of 20%, 25% of overall loan volumes. But yeah, we’re definitely active in that market. I think the markets are slowing down, and I think that’s consistent with the wishes of central bankers, obviously.

And — but pricing is still holding up, and so we’re happy to continue to underwrite in that market. It’s been a great credit performance for us. I wouldn’t say unlimited capacity, but we certainly have a lot of capacity if there are borrowers coming into that market. But again, typically the profile of the borrowers is a borrower that perhaps doesn’t need to borrow. And so there is that consideration, right, because we’re not in High Street. We’re in the prime Central London neighborhoods only, and we’re only 60%, 65% LTV underwriting. So, again, there’s a lot of skin in the game for both parties. But yeah, definitely, we’re still very active across all our markets. It’s just when you run an amortizing loan book like we do, amortization sometimes overtakes originations and that’s what’s happening in terms of slowdown, plus the FX impact as well.

But we definitely have ample capacity.

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

Michael Schrum: Yeah, sure. So it’s Michael Schrum again. I mean, principally this quarter — last couple of quarters have been driven — the last quarter increase was driven by one legacy mixed use residential hospitality loan facility, which actually entered receivership post quarter end. It’s been a long road for that one, and I think it’s finally getting to a point where in Bermuda where we’re seeing a good exit point. It’s well collateralized, so we’re not expecting any credit impact from that. But it obviously just has drifted on, and we need to get some — to a recovery position on that. I think overall credit provisions were slightly down this quarter, but consistent with the lower balances that we saw in the quarter.

And we do have a few facilities in London where the exit point was the sale of a property, and they haven’t been able to get their asking price. So maybe there’s some expectation adjustments there. But, again, given the equity that’s in the property, even if it goes 90 days past due, we’re still accruing.

Craig Bridgewater: And technically, we go through a process or evaluation around whether a facility is well secured. So if the answer to that is yes, and in the cases of what you’ve seen, the answer is yes. If they’re well secured, well, we will continue to accrue interest, because, again, we feel that we’ll be able to recover both the principal and the accrued interest in that scenario.

Alex Twerdahl: Okay, great. Thanks for taking my questions.

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

Noah Fields: Thank you, Andrea. And thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.