Bank of N T Butterfield & Son Ltd
NYSE:NTB
Earnings Call Analysis
Q4-2023 Analysis
Bank of N T Butterfield & Son Ltd
Butterfield showed robust financial results in 2023, particularly with a net income of $225.5 million and a core net income of $231.5 million. Investors would be impressed by a significant core return on average tangible common equity (ROATCE) of 27% for the year. The bank capitalized on the high-interest-rate environment, which drove net interest income and noninterest earnings up, though this also brought increased expenses. Notably, the net interest margin rose from 2.41% to 2.80% through effective balancing of deposit costs amidst competition.
In pursuit of shareholder value, Butterfield repurchased over 3 million shares for $88 million and announced a new authorization to buyback up to 3.5 million more shares in 2024. Further, the bank strategically augmented its asset portfolio with the acquisition of trust assets from Credit Suisse during the fourth quarter.
While Butterfield's fourth-quarter performance was strong, with core net income reaching $55.3 million and core EPS at $1.15, it experienced a slight decline in net interest margin to 2.73%. The bank's net interest income before provision for credit losses dipped by 3.8% relative to the previous quarter due to a modest decrease in interest-earning assets. Yet, the bank maintained shareholder returns, declaring a steady cash dividend of $0.44 per share.
Investors should take note of the 17 basis point increase in yield on interest-earning assets, which contributed to improved interest income. Moreover, noninterest income surged by 15.4% in the quarter, buoyed by seasonal upticks and the integration of the Credit Suisse asset acquisition. However, expect noninterest income to normalize to the $52 million to $53 million range in the near future.
Quarterly expenses, climbing by 7.2% to $90.4 million, were influenced by IT infrastructure updates and property maintenance, but Butterfield projects a stabilization of expenses around $88 million in the second half of 2024, factoring in new IT investments and a group-wide cost restructure initiative.
Ending the quarter, Butterfield's deposits mildly grew to $12.0 billion, showcasing stability and a liquid, conservatively managed balance sheet. The bank's diverse deposit base and regulatory capital efficiency, highlighted by a low risk density of 34.0% and a substantial residential mortgage loan portfolio, continue to exhibit financial fortitude.
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Good morning. My name is Nihugi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [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, sir.
Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and full year 2023 financial results. On the call, I'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 fourth quarter and full year 2023 results. The press release, along with the slide presentation that we will refer to during our remarks on this call, are available on the Investor Relations section of our website at www.butterfieldgroup.com.Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For a reconciliation of these measures to U.S. GAAP, please refer to the earnings press release and slide presentation. Today's call and associated materials may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings.I will now turn the call over to Michael Collins.
Thank you, Noah, and thanks to everyone joining the call today. I am pleased with Butterfield's performance in 2023 as we completed a number of important projects, including the implementation of our upgraded core banking system in Bermuda and Cayman, the onboarding of trust assets acquired from Credit Suisse and executed a significant cost reduction program, which should improve operating efficiencies and help offset inflationary pressures and the expected impact of lower market interest rates and net interest income.Butterfield continues to benefit from leading bank market shares in Bermuda and Cayman Islands with an expanding retail banking presence in the Channel Islands. Wealth management services in Bermuda, the Cayman Islands and the Channel Islands include trust, private banking, asset management and custody. The bank also offers specialized financial services in The Bahamas, Switzerland, Singapore and in the U.K., where we provide mortgages to high-net-worth clients with properties in prime Central London.I will now turn to the full year highlights on Page 4. Butterfield had an excellent year with net income of $225.5 million and core net income of $231.5 million. This resulted in a core return on average tangible common equity of 27% for 2023. The bank earned higher net interest income in an elevated market interest rate environment as well as increased noninterest earnings. The strong revenues were somewhat offset by higher expenses, which trended higher due to inflationary pressures, the investments in our core banking system and branches and costs associated with the Credit Suisse asset acquisition.The net interest margin increased to 2.80% from 2.41% in 2022 with the cost of deposits rising to 140 basis points from 34 basis points in 2022. We've continued to carefully balance the cost of deposits with the competitive landscape in our banking jurisdictions, and we continue to see mix shift to higher-cost term products, while our core noninterest-bearing deposit franchises remains somewhat insulated.Tangible book value per common share increased by 21.2% to end the year at $19.29. This was due to an improved OCI position normalization to a smaller balance sheet post-COVID as well as retained earnings for the year. We remain committed to actively managing our capital and throughout the year, we have paid out approximately 38% of earnings in quarterly dividends. In addition, during 2023, the bank repurchased just over 3 million shares at a total value of $88 million. On December 5, the Board approved a new share repurchase authorization for 2024 of up to 3.5 million common shares, which came into effect on December 15.As anticipated, during the fourth quarter, we completed the acquisition of trust assets from Credit Suisse. I'm very happy with the quality of business that we have successfully onboarded and have been impressed with talented new colleagues that have also come across to Butterfield. I will circle back at the end and walk through some of the highlights of the deal.I will now turn the call over to Craig for details on the fourth quarter.
Thank you, Michael, and good morning, everyone. I will now turn to the fourth quarter highlights on Page 6.Butterfield reported strong financial results in the fourth quarter of 2023 with net income of $53.5 million and core net income of $55.3 million. We reported core earnings per share of $1.15 with a core return on average tangible common equity of 25.4% for the fourth quarter of 2023. The net interest margin was 2.73% in the fourth quarter, a decrease of 3 basis points sequentially from the prior quarter with the cost of deposits rising to 172 basis points from 152 basis points in the prior quarter.Deposit costs continued to increase at a modest pace across all of our banking jurisdictions as fixed term deposits rolled into higher rates as well as a mix shift in deposits from demand deposits to term deposits. The Board has again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter with buybacks totaling 1.2 million shares at an average price of $28.20 per share.Turning to Slide 7. Here, we provide a summary of net interest income and net interest margin. In the fourth quarter, we reported net interest income before provision for credit losses of $86.9 million, a decrease of 3.8% versus the prior quarter. The lower net interest income resulted from a decrease in the volume of interest-earning assets and higher deposit costs, which were partially offset by improved asset yields.Average interest-earning assets in the fourth quarter of 2023 of $12.6 billion were sequentially 2.5% lower, driven by a decrease in average deposit levels. The yield on interest-earning assets increased 17 basis points to 4.39% from 4.22% in the prior quarter as investment portfolio runoff continue to be invested at the short end of the yield curve and increases in rates on loans produced improved interest income.The yield on treasury assets during the quarter was 4.72% versus 4.47% in the prior quarter, and the investment portfolio yield at 2.16%, which was 10 basis points higher than the third quarter. In addition, the yield on loan balances also increased by 17 basis points to 6.68%. Average investment balances decreased by $204.4 million or 3.7% to $5.29 billion compared to the prior quarter, mainly due to paydowns and maturities, the proceeds of which were invested in short-term treasury assets.Since year-end, we have recommenced using proceeds from maturities and paydowns as well as some excess liquidity to ladder out in the investment portfolio investing in a mix of U.S. agency MBS securities and medium-term U.S. treasuries.Slide 8 provides a summary of noninterest income, which totaled $60 million, up 15.4% versus the prior quarter due to expected fourth quarter seasonal increases in card services, incentive revenues and transaction volumes and higher foreign exchange volumes. Trust fees increased as revenues were earned from the clients acquired from Credit Suisse during the year. Noninterest income continues to be a stable and capital-efficient source of revenue with a fee income ratio of 41.3%. In the coming quarters, we expect the levels of noninterest income to return to a quarterly run rate in the $52 million to $53 million range.On Slide 9, we present core noninterest expenses. Total core noninterest expenses were $90.4 million, a 7.2% increase compared to $84.3 million in the prior quarter. The higher core noninterest expenses are primarily attributable to the completion of the recent IT infrastructure and core banking upgrades and the timing of property maintenance activities across the group as well as performance-based remuneration incentive accruals associated with strong earnings.We expect the quarterly run rate for expenses to stabilize around $88 million in the second half of 2024. This incorporates the expected uplift in expenses from the amortization of our new cloud-based IT investments and core banking system and branch upgrades as well as recently onboarded colleagues, servicing the client book of trust clients while also taken into consideration the expected benefit of the group-wide cost restructure announced in Q3.I will now turn the call over to Michael Schrum to review the balance sheet.
Thank you, Craig.Slide 10 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period-end deposit balances increased slightly to $12.0 billion from $11.9 billion at the prior quarter end, and this reflects further stabilization in the deposit base. Butterfield's low risk density of 34.0% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk-weighted residential mortgage loan portfolio, which now represents 69% of our total loan assets.On Page 11, we provide additional detail on our deposit composition by segment. Compared to the prior year, Butterfield's deposits remain well diversified across our banking jurisdictions with noninterest-bearing demand deposits, representing 22% of total group deposits. Client deposit activity levels remain generally as expected, with the bank seeking to balance deposit volumes against cost of funds for each market.Turning to Slide 12. We provide annual measures for loans by type, business segment and rate type. The chart on the top left breaks out the residential loan portfolios by location, which has remained stable. On the bottom right, fixed rate loans now represent 51% of total loans as the 3- to 5-year fixed rate product in the rising rate environment has been popular with clients.Turning to Slide 13. The 2 charts demonstrate the conservative nature of Butterfield's balance sheet and versus peers. Butterfield maintains a high degree of liquidity due to the nature of our markets and as a result of not having access to a central bank or a Fed window. We continue to have significant holdings of cash and cash equivalents, interbank deposits and short-dated sovereign securities in addition to liquidity and repo lines with correspondent banks. Butterfield's loan-to-deposit ratio remains at 40% with conservative lending standards.On Slide 14, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 99% AA-rated U.S. government-guaranteed agency securities. Credit quality in the loan book also continues to be strong with nonaccrual loans standing at 1.3% of gross loans and a low charge-off rate of 8 basis points.On Slide 15, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Asset sensitivity did increase in the fourth quarter due to a lower investment portfolio duration and higher levels of cash and cash equivalents. Unrealized losses in the AFS portfolio included in OCI was $163.9 million at the end of the fourth quarter, an improvement of $71.4 million or 31% from the prior quarter.Slide 16 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory minimum requirements. While not a regulatory ratio, our TCE to TA has also increased above our target range of 6% to 6.5% this quarter and is indicative of the health of our overall capital levels.I will now turn the call back to Michael Collins.
Thank you, Michael.Before we conclude our prepared remarks, I would like to provide a summary of highlights from our recently completed Credit Suisse trust asset acquisition. On Slide 17 of the presentation, we have provided information to help frame the deal. As you will see from the time line at the top of the page, after our initial announcement in September of 2022, there have been 7 distinct closings. The deal was structured as an asset purchase rather than an entity purchase, which has given us the flexibility to review and select each client to help us take only the clients that are consistent with our risk tolerance. This process has been time consuming, but has resulted in a high-quality book of business. Of significance, the deal increases Butterfield's presence in Singapore, where we continue to expect significant growth in the private trust market. We are pleased to have more than 20 new colleagues during Butterfield to help service the 560 new trust clients we have now onboarded.New assets under administration totaled approximately $24 billion. We expect annual fees from the new business to total approximately $9 million with new annual expenses of around $6 million. We also expect to continue to grow this book over time. In total, we recognized a new intangible asset of $27.3 million, with around 1/3 of the total consisting of deal and onboarding expenses. I look forward to continuing our business development efforts and our search for other trust and banking M&A opportunities to help continue our profitable growth.The turmoil in the regional banking space last year allowed us to demonstrate the benefit of Butterfield's strong market positioning, conservative balance sheet and liquidity management and client relationship banking model. This model continues to demonstrate strength and resilience from a high fee to income ratio, limited credit risk in our investment portfolio, a 40% loan-to-deposit ratio, a high degree of liquidity and a robust deposit base diversified across jurisdictions, sectors and currencies. We are well positioned for the future and expect growth to be both organic and driven by potential M&A. In 2024, we will build on the successes of 2023 with a strong focus on client experience and continuing to create shareholder value.Thank you. And with that, we would be happy to take your questions. Operator?
[Operator Instructions] Our first question comes from Michael Perito with KBW.
This is Mike's associate Andrew, filling in. I just wanted to start on the noninterest income side. Were there any seasonality in fees in Q4? Or -- and what would be a good launch point for 2024 run rate wise on the fee side?
It's Craig. Yes. So in Q4, we do season -- kind of have kind of seasonally high fee income and driven by card volumes. So obviously, with the Christmas shopping season is a big driver as well as at year-end, we get incentive payments from the credit card companies as well. That will be included. And then obviously, we had some increased revenue coming in from the assets acquired from Credit Suisse. So those new clients. That also drove increases in revenue as well.If you look at kind of normalizing that, kind of mentioned in the formal remarks, I think we're going to go down to about $52 million on a quarterly basis. So just kind of -- so we've got about $8 million of additional income that we had in Q4, but we would expect that to normalize back into Q1 around the $52 million mark.
Great. And then just moving to the margin. How would you expect the NIM to react if we get rate cuts in the back half of 2024?
I think we still think that we will have a NIM trough in Q1. We will have -- I guess, kind of if you look at overall net interest income, we would expect overall net interest income to come to reduce for a few reasons. Obviously, if rates coming down, that's going to have impact on our loan yields. So if you look at loan yields for -- particularly in Cayman and Guernsey. There was a move, one with U.K. -- I'll tell you U.S. prime in Cayman and the U.K. treasury rate in Guernsey and Jersey. In Bermuda, we still would expect to follow a 50% beta on the way down, likely starting, I guess, with every other kind of 25 basis point cut.
Yes, sorry, and it's Michael Schrum. Just adding to that. On Slide 15, we have this sort of asset sensitivity, which gives you an indication of the sort of impact of a parallel shift of 100. So a fairly modest impact really on net interest income, minus 1.5% overall for down 100. So it's clearly something we're watching pretty closely, particularly on term deposit products and cost of deposits. as we kind of said probably at the peak of rates right now. But I think on the flip side, we've seen a significant improvement in the OCI mark as well as rates have kind of stabilized. So we feel pretty good about where we are right now. We are modestly asset sensitive. But obviously, there's still a lot of volatility in market rates.
Great. Appreciate the color there. And just lastly for me. On the capital side, the new buyback announcement in Q4, should we expect buybacks incrementally near term? And then I also appreciate all the color on M&A pipelines and whatnot. Just looking for a little bit more color there. Would it be kind of like a trust deal again that you would be looking for following the close of the CS deal?
Yes. I mean, we -- the Board is overall very supportive of the buyback as a way to kind of augment the shareholder return here. Obviously, always subject to market conditions, but you'll see in the fourth quarter, we did quite a significant amount of buybacks. I think what we were looking for was deposit stabilization initially, some stabilization or at least lower volatility in market rates to kind of ensure that we felt that we were post-COVID and that we were essentially understanding the rate, the cost of deposit dynamics and the NIM dynamics.In terms of other opportunities, we're obviously still looking. I would say, the pipeline is looking a little bit better in terms of opportunity set for us. It's primarily private trust fee-based businesses such as the one that we just completed with Credit Suisse. I think we have a pretty good template of how we would want to do that in order to make sure that we have a risk profile that matches our existing tolerance of the newly acquired assets. Although the Credit Suisse deal was pretty small in scale, there are still some others out there.But the bottom line is we seem to have a lot of capital. OCI seems to be stabilizing and coming back. The burn down is happening of the remaining OCI and we're laddering into higher rates. So where capital levels are right now is kind of above our TCE range of -- normalized TCE range of 6%, 6.5%. And regulatory capital, we have plenty of excess regulatory capital, and we'll just continue with that risk-light business dynamic that we've -- that has been successful in terms of the ROE and then reflecting that back to shareholders, both in terms of dividends and share buybacks.
Great. Appreciate all the color.
The next question comes from David Feaster with Raymond James.
Maybe just following up on the rate cut side. I know -- just curious how you think about some of the timing of it, right? Because I know some of these -- the assets and liabilities reprice on a lag. Could you just help us remind us of the lag impacts of it. My gut would say that probably the first cut or 2 is probably the most severe impacts. And then because again you got the repricing side as well to help offset that. So just help us think about that. And then just overall thoughts on managing rate sensitivity, whether there's any appetite to maybe go longer and deploy some of that excess liquidity?
Yes. So kind of quite a bit to unpack there. Obviously, we're looking at -- we're not kind of different from the market. So we're looking at forward rates that are out there in the market rates and not necessarily taking any position that's different from that. Kind of as mentioned earlier, we are going to employ -- expect to employ 50% beta on the Bermuda loan book. And obviously, Cayman kind of moves with U.S. prime and the Guernsey and Jersey book and the U.K. book moves with kind of the U.S. base rate. So kind of the -- that's on the asset side.On the -- I guess, on the loan side. On investments, we are actually starting to re-ladder back into the portfolio. So up to now, we've been investing kind of maturities and excess cash into the short ends of treasury assets. We're now starting to ladder back into the portfolio, supporting some more duration back into the portfolio again. And obviously, we're going to get an increase in the yields on the investment portfolio. So we're yielding at like 2%. Now what we're investing in now is [ more of 400s ], so kind of 429, 430. So we expect -- I mean, obviously, it's going to take quite a bit to ladder that back in, but we should expect to see some increasing yield on the asset side.And we do have -- actually just we had kind of quite a significant GBP 125 million U.K. gilts just matured at the end of January. So kind of reinvesting that at current rates, that's we expected to pick up. And we have some -- we also have kind of U.S. treasuries maturing during the year as well, more around August time frame. So expecting some pickup on the asset side.On the deposit side, obviously, we're going to continue to look to manage the cost of deposits. Right now, I guess you see the breakdown in deposits and the average maturity on deposits at the moment -- on term deposits, I should say, is around 3 months. So really, just going to have to look at the repricing of those kind of on that duration. So that's those mature in 3 months' time. And we'll probably -- they'll probably get reinvested on 3-month duration as well. So that will actually follow kind of market rates at the time of kind of reinvestment.
Yes. And just -- sorry, it's Michael Schrum. Just on the timing, David. Well, first of all, on the resi side, you'll note that 51% of it is now fixed. We see the breakdown on Page 12. It's -- yes, 50 loan beta -- 50% loan beta on the Bermuda resi side. Obviously, U.K. and U.S., any floating rate product there would float immediately. I think Cayman now has a 30-day lag on implementing new rates and Bermuda has a 90-day lag to allow adequate notice to customers for a change in rate in the U.K. and Channel Islands book, it's immediate but following Bank of England.
Okay. And the deposit -- is there a lag on the deposit repricing side? Or is that immediate?
On the term -- yes, so obviously, on demand would be immediate on interest-bearing demand and noninterest-bearing, although we're not paying a lot of noninterest bearing, obviously. But on term, obviously, we wait for the rollover. The average of the term book is just around 3 months. So there will be a little bit of a lag coming off the top.
Okay. Perfect. And then maybe just digging in, Michael, your comments on growing the acquired book from Credit Suisse. I'm just curious maybe -- where do you see opportunity? Is it to expand or deepen the relationships that you have there and cross-sell some of those clients? Or are you seeing more opportunity just for organic client additions, just given the increased footprint in that market. Just curious how you think about growing that book.
Yes. So great question. So I mean, the reason why -- it's a pretty small book overall, but -- and there is a standstill in the agreement in terms of the existing book and the fees that we are charging. So we're obviously going to go -- we're going through and reviewing that. But that standstill is for 2 years and then -- but there is some inflation adjustments that we can do on that book in the meantime. I think in particular, in Singapore, where the market is growing quite rapidly in the private trust space and maturing, we've seen most of the customers tend to use the trust product for financial assets. But there's definitely opportunities there to expand that client book with nonfinancial assets, or properties companies like we do in other parts of our business. And so that should drive higher fee income.So there's market growth. There's growth in the book not on the book that we've acquired, but with the clients that we've acquired. And then finally, I think because we're now sort of a pretty sizable private trust company in Singapore, we're seeing a lot more inbound in terms of just getting RFPs and people sort of recognize the name in the market as well. So there's those 3 kind of elements to the growth which when you look at the book, it's pretty small, but I think we're pretty excited about the market growth and the presence that we have there now, which is becoming a better known name.
Yes. And generally, when we do these acquisitions, we also have a fee standstill agreement for a period of time. And then as Michael said, the real opportunity is actually expand the type of assets in the trust and most of these are really trusts originally that were sort of wrappers for asset management and by encouraging clients to put in businesses and art and real estate, it takes on a much more complexity and justifies higher fees. So gradually, that will help. And as Michael said, I mean, the Singapore -- choice of Singapore as a domicile versus Hong Kong or some other places we could have been, makes a lot of sense, and we're top 5 in Singapore at this point.
Okay. And then maybe last one for me, just touching on asset quality. It's held really steady. You guys have obviously done a great job locking in some rates for your clients. But I'm just curious as you -- how do you feel like the health of your clients is at this point? What are you hearing from them? And as you dig into the book, are there any spots that you're maybe watching more closely or seeing any weakness, either by geography or just curious how you're approaching overall asset quality and what you're seeing at this point?
Yes. So I mean, great question, David. The first thing is, obviously, mostly resi, so well secured. We have conservative lending standards and most of our loans are amortizing in Bermuda and Cayman. So as the LTV profile has really -- has been amortized down to sort of sub-60%. So lots of skin in the game, lots of opportunities to help customers during a period where rates are pretty high. And we are seeing some of that in the Bermuda resi book, I would say. But again, not a real concern from a collateral perspective, most of -- anything that goes past due can be cured. Obviously, we've adopted the customers and financial difficulty disclosures as well. And we're not seeing a whole lot, but it's definitely something that we're watching, particularly in Bermuda and hopeful that we see better tourism this summer that puts more cash into people's pockets and sort of outside of the international business sector where we've seen significant growth.And then in London -- so Bermuda resi, probably a spot to just kind of keep an eye on. The U.K. book, again, really well collateralized. We have an election coming up in the U.K. There's some -- as you know, we're prime Central London, only 60%, 65% LTV lending standards. So again, not a big concern, but if there are rule changes with potentially a labor government coming in, they've been talking about getting rid of res non-dom rules and changing inheritance tax rules. And that obviously has a market impact overall. So something that we're watching pretty closely and staying in touch with our customers there as well.
Yes. And I think we've -- I said in the past that we've intentionally kept the London portfolio relatively flat, and that continues to be the case. But we are building out our retail mass affluent bank in Guernsey and Jersey and we're sort of over GBP 250 million in terms of mortgages there. So we're expanding there. Michael hit it on the head. We have to keep an eye on Bermuda, although nothing really at this point. And Cayman is doing really well in terms of growth in the economy and population. So very unlikely we'd see stresses there. So so far, so good.
And the housing market is doing pretty well. Any thoughts on that?
Yes. No, Bermuda, it's doing well. Prices have risen in the last few years, and it's really obviously driven by the fact it's only 20 square miles. So there's a limited supply and international business and reinsurance is still doing quite well, particularly the life businesses that have set up on the island. So there's still a lot of demand. Cayman's got a lot more land, but population is over 80,000 now. So they've expanded population, so demand's increased as well. And Guernsey and Jersey markets have always been pretty stable to rising. So Islands, given limited supply, always have sort of a baseline in terms of values.
Perfect. That's helpful.
The next question comes from Alex Twerdahl with Piper Sandler.
Just back to the margin. A question on the fixed versus floating loans. Is that skewed towards any one of the geographies? Like -- and I guess, really, what I'm trying to get at is whether or not skewed towards Bank of England versus Fed in terms of expectations for rate cuts for the fixed versus floating pieces.
Yes, I think it's quite a bit -- so quite a bit of fixing in the Channel Islands kind of early on in the cycle, and then we saw quite a bit of fixing in Bermuda. So a lot of the -- quite a few of the commercial loans fixed in Bermuda. So that's kind of a large component of that 51% from kind of Bermuda and Channel Islands and the U.K.
And again, 3 to 5 years. So we are obviously looking at repricing ladder. There isn't a particular quarter where that's heavier than others, and we're probably out of -- probably about 12 months -- 12 to 15 months away from sort of those repricings at the moment in terms of the fix.
Okay. And then, I guess, sort of same question asked a little bit different on the deposit side. If I remember correctly, the Channel Islands were much higher beta in terms of deposits on the way up would be the expectation that if we get maybe a Fed cut, deposit costs come down a little bit. But if we get a Bank of England cut, maybe there's a lot more room for deposit costs to come down.
Yes. I mean, it's -- Channel Islands, as we talked about before, is very competitive. And so we're kind of not a rate setter in that market. So we have to kind of follow what the market is doing, some of the high street banks there are kind of market leading. So HSBC, RBS, et cetera. So both dollars and sterling actually in deposit betas have been much higher in the Channel Islands than any of our other markets, but we would definitely expect to follow that market and we would expect the bigger banks to -- we've already seen some of the longer-term rates being cut in that market. And that's the one area where we really have to focus in terms of the cost of deposits right on the way down on the term bucket.
Okay. On expenses, Craig, you gave a little bit of color and expectations for expenses for the second half of '24. And I presume that is fully incorporating all the cost saves from the recent restructuring that you announced last quarter. What should we think about in terms of expenses for the first 2 quarters of 2024? I mean, is there going to be a little bit more noise in there as some of these IT systems, et cetera, come fully online?
Yes. Yes, that's about right. So I think kind of -- obviously, there will be at the higher end of that guidance given that the cost restructure will come -- be fully implemented by the end of Q2. But in the meantime, compared to, I guess, kind of going back to a Q3 base and then adding on costs associated with the acquisition and there's employees coming onboard, amortization of that intangible asset that we've kind of now accrued on the balance sheet and then the amortization of those kind of new IT systems and hosting fees.
Okay. And then just final question for me, back on credit. I think the press release cited a higher provision related to credit card. Maybe you can talk a little bit about what you're seeing there and what drove that higher provision.
Yes. I mean I think the provisioning was really driven by some fees -- so legal fees on a kind of legacy loan that we have, an art loan. So it's kind of going through the collection process on the art loan, and so incurring fees and kind of accruing for that or adding that to the allowance as we go along. So that [ -- there's a lot of ] part of it, and then also some settlements of some loan facilities as well. So [indiscernible] has been charged off [indiscernible] driving it.
Okay. I mean, so I guess without those things, it would be fair to assume that provisioning should drop down below $1 million a quarter starting in 2024?
Yes, it's tough -- I mean, it does depend on actual experience as well. I think the model probably would push out more stable provisioning given that the macroeconomic inputs are going to be more stable. And then the actual performance, which is what we talked about before, still a couple of spots that we're watching. If freight stay high for longer, obviously, that is going to drive some client experiences or potentially client difficulties that we're going to have to resolve and then that becomes an input into the model. But all other things being equal, that seems to be at the right level. But again, just subject to, obviously, actual experience. So at the moment, anything that's coming out the other end in terms of sales of properties is holding value. So we're not sort of thinking that cost to sell or anything like that, it's going to drive higher provisions. So it's really going to be down to actual experience.
[Operator Instructions] Our next question comes from Timur Braziler with Wells Fargo.
On the bond book laddering back into bonds, what's the duration you're putting on there? And if I'm not mistaken, I think it was something like $125 million a quarter cash flow. Is that still the right number?
Yes. So currently, kind of our last investments kind of with the MBS securities. So the kind of -- on the MBS securities is kind of -- it is about 3 years at the moment. So the kind of behavioral duration. And then the other investments we've been making is in the U.S. treasuries, so two-year U.S. treasuries. And then on the gilts, the most recent investment we made, GBP 125 million is 6 months currently.
Okay. And just the amount of cash flowing quarterly?
Say again, sorry?
The amount of the cash flowing off of the bond book quarterly?
It's about $30 million.
$30 million a quarter. Okay.
$30 million a month, sorry. $30 million a month.
$30 million. Okay, got it.
Tim, I would say -- sorry, it's Michael Schrum. I would say, we're still staying sort of short, medium here. Obviously, there's still some discussion about when the Fed is going to cut, so -- and what the terminal rate is, in particular, is quite important to us. And again, we're not a mark-to-market shop. So we just got to kind of keep the duration sort of matching some of the behavioralized deposits on -- to sort of balance the interest rate risk profile. But obviously -- so at the moment, we're laddering in, but we're kind of staying in the medium term with a mix of MBS 15 years I think and some shorter-dated treasuries.
Got it. And then circling back to term deposits, and I apologize if you addressed this during David's question. But just term deposits repricing, where are they rolling off from what levels? Where are you repricing those? And I guess, just generally speaking, in the next couple of quarters, assuming no Fed activity, how should we be thinking about additional deposit cost creep?
So I guess on term deposits were kind of in the 4% range. And there's a kind of -- basically kind of being renewed at a similar level. Obviously, kind of this bespoke pricing as necessary. So that's, I would say, 4% on average, but it's a bespoke pricing kind of -- that may take us above that on specific audits, but that's kind of a good guide around the term deposits. And again, the kind of kind of 3 months average maturity on the term deposit book at the moment.
Got it. Okay. And then maybe just more broadly on deposits. I think in quarters past, you talked to an $11.5 billion to $12 billion as more or less a floor. They seem to have stabilized here, at least the near-term strategy is going to be to renew some of the term deposits. Is there anything maybe idiosyncratic in 4Q that's seasonal in nature? Or are we really at a floor here and you're seeing signs of real stability in the deposit book?
Yes. I mean -- sorry, Tim, it's Michael Schrum. I think we are seeing the stability in the deposit book. There is some seasonality, as we've talked about before, a lot of our clients are captive insurance clients, and they have premium flows and claims flows. So typically, pre-quarter ends, we see premium inflows and then post quarter ends, we see claims settlements to the extent that those insurance companies have claims to settle. And that's also -- that seasonality is also prevalent. So typically, that in Bermuda would be renewal dates, so Jan1, July 1. And then in Cayman, typically in the third quarter, we see some outflows. And then in the fourth quarter, we see -- and we're talking $0.5 billion-ish right? So we -- and in the fourth quarter, we typically see some inflows from funds building up -- hedge funds building up cash positions. And then first quarter, we see some outflows there. So there's a little bit of seasonality. I think $11.5 billion to $12 billion is a good number. We came in obviously at the top of the range. It was nice to see the core deposit franchises are stable. And it really is a question, I think, of trading off the cost of deposits versus the size of the balance sheet over time, right, as we always do.
Yes. And it was really interesting during the whole year to see how deposits behave. Bermuda was actually flat to up because there's obviously very few banks here. Cayman was a little bit more competitive. We think we've washed out sort of the fund money that was being invested. And then as we know in the Channel Islands, we bought corporate banks. So much more competitive. As Michael said, we're kind of a price follower as opposed to setter, but we've got a good plan there to go into retail. And we've got well over GBP 300 million in deposits and $250 million in mortgages. So we actually have a retail book at this point. And obviously, the retail pricing will be much more attractive going forward. But they all act a little bit differently and disproportionately to competition. So we understand it pretty well at this point. But we think most of the hot money has been, whether it's a huge trust deposits or funds in Cayman, most of that's been washed out, and it does feel pretty stable right now.
Appreciate the color.
Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Noah for any closing remarks.
Thank you, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.