Q3 2022 Bank of N T Butterfield & Son Ltd Earnings Call

Good morning, everyone. My name, especially now that you know well they have a conference operator today.

This time I would like to welcome everyone to the fourth quarter right.

This call for their backhaul and making lots of feedback from the limited.

All participants will be in other spend only mode.

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After todays presentation, there will be an opportunity to ask questions.

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Your question. Please press Star then two please note that's a bad thing with Basel IV.

I would now like to turn the call over to Mel for you, but I feel a lot of them necessarily.

Uh huh.

Good morning, everyone and thank you for joining US today, we will be reviewing Butterfield third quarter of 2002 financial results.

On the call I'm joined by Michael Collins, Butterfield is 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 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 Dot Butterfield group Dot com.

Okay.

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 Combs.

Thank you Noah and thanks to everyone joining the call today.

Butterfield continues to deliver strong earnings across our offshore network of banking and wealth management platforms. We.

Australia, consistent and solid fee income and remain well positioned for this period of rising market interest rates.

We continue to see improving post pandemic economic activity across our operating jurisdictions, where the vast majority of border restrictions, having been relaxed and tourism and business travel improving.

I will now turn to slide four we provide the third quarter highlights.

Butterfield reported net income for the third quarter of $57 $4 million or $1 15 per diluted common share and core net income of $57 $6 million or $1.16 per diluted share. Our core return on average tangible common equity was 31 six person.

In the quarter compared to 27, 8% in the prior quarter, our net interest margin improved 33 basis point to 2.59% with the cost of deposits rising 18 basis points to 34 basis points.

When compared to the last interest rate cycle, we are experiencing heightened the U S. Dollar deposit costs in the channel Islands, which has grown in recent years through acquisitions and as a more competitive market than Bermuda and Cayman.

The board of directors again declared a quarterly cash dividend of 44 cents per share.

Share repurchases remained on pause in the quarter due to the elevated OCI last March which has held the TCA to ta ratio to around 5%.

We continue to view share repurchases as an important part of capital management and plan to resume share buybacks as a path to our targeted TCE to ta range, 6% to 625% emerges.

During the quarter, we announced the strategically important acquisition of credit Suisse's Trust business in Singapore, The channel Islands and the Bahamas.

This excludes business and Lichtenstein, which was sold to a separate and unrelated buyer.

We were able to structure the acquisition as an asset deal, which will allow butterfield to thoroughly due diligence each client before onboarding and therefore reduce any reputation risk transfer.

The deal meets all of our long standing requirements for a Monday for example.

They frequently focus on private trust is within our existing geographic footprint with a forecasted IRR of more than 15% with a total consideration of less than $50 million and as well as well below eight times EBITDA.

The deal is also forecast to increase trust fee income, which had helped maintain our significant and stable fee income ratio and will position Butterfield is one of the largest private client trust companies in Singapore.

We are excited to welcome new clients and colleagues and anticipate the Onboarding period to complete in the first half of 2023.

I will now turn the call over to Craig Bridgewater to provide more details on the third quarter result.

Thank you Michael I will begin with slide six which provides a summary of net interest income and net interest margin.

In the third quarter, we reported net interest income of $91 $2 million, an increase of 11, 2% versus the prior quarter.

The increase was due mainly to continued improvement of yields on all interest, earning assets, which was passed it partially offset by higher deposit costs.

Cash and short term investment balances were down during the quarter, reflecting the lower deposit levels due to the expected client withdrawals of pandemic related deposits and a strengthening of the U S dollar, which impacted FX translation of non U S dollar deposits.

Average investment balances decreased by $136 $6 million, primarily due to increased unrealized losses in the F. S portfolio as market interest rates climbed and declining pay downs and reinvestment rates.

New money yields on investments decreased slightly to $3 seven 5% down one point from $3 eight 5% in the previous quarter.

Aggregate and reimbursements of $19 million in the third quarter of 2022 versus $120 million in the previous quarter.

The majority of Securities practice consisted of U S treasuries and Fridays with lower durations.

Pay downs continue to decelerate with $145 million of portfolio pay downs in the third quarter of 2022 approaches $172 million in the previous quarter.

The average loan balance was up $56 $2 million driven by an increase in commercial loans in the Cayman Islands, which was partially offset by a weaker pound sterling.

Overall loan yields were up 57 basis points during the third quarter, primarily due to the impact of rate increases from our floating rate loans.

We had new loan originations of $239 million.

Zero to 4.38% versus $387 million of originations at $3 six 3% in the second quarter of 2022.

Yeah.

Turning to slide seven.

Non interest income was down three 6% quarter over quarter, primarily due to the other non interest revenues, which did not benefit from the same scheduled recognition of unclaimed customer drafts and checks that occurred in the prior quarter.

Banking income rose during the quarter due to switching fees a SaaS following a number of commercial claims moving from floating rate to fixed rate structures.

Trust fees declined slightly due to a heightened activity based fees in the prior quarter, which did not recur at the same level in the current quarter.

Noninterest income continues to be a stable and capital efficient source of revenues with a fee income ratio of 35, 6% down from 38, 9% during the second quarter as growth in net interest income outpaced noninterest income as expected.

Slide eight provides a summary of core noninterest expenses total core noninterest and interest expenses were $81 8 million in line with $81 9 million in the prior quarter.

Actually below our current expected range of $82 million to $83 million.

We continue to evaluate the impact of inflation on staffing costs and have enacted targeted salary increases to maintain our competitive positioning.

Our core efficiency ratio continued to improve to 57% remains below our through cycle target of 60%.

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

Thank you Craig.

Slide nine summarizes the regulatory leverage capital levels.

Butterfield capital levels continued to be above regulatory requirements.

Our TCE to Ta ratio of 5.0.

And similar to that of the prior quarter and continues to be below our internal target range of six to six and a half.

Due to higher long term U S dollar interest rates, resulting in lower marks on our available for sale portfolio.

As previously mentioned TCE to Ta.

It's not a regulatory ratio for Butterfield and ex cash TCE to Ta ratio remains at five 6% and X O C O T. A TCE to Ta ratio improved to eight 2%.

We continue to anticipate a rate driven OCI marks well keep this ratio of below our internal target range for a few more quarters.

The us dollar interest rates rise and this is expected to benefit net.

Interest income.

Our dividend payout ratio was 43, 4% in the third quarter of 2022.

And it is currently slightly below with the banks through cycle target of approximately 50%.

Turning now to slide 10.

I don't feel it's balance sheet remains conservatively managed with a high degree of liquidity.

Period end deposit balances reduced by approximately $600 million to $12 $5 billion.

Versus the prior quarter end.

The decrease in deposits has been anticipated and I'm sure. We'll see you on the next slide the fallen deposits is a combination of foreign exchange translation and customer withdrawals.

Average deposit balances are also down approximately $600 million to 13.0 billion, it's about the quarter.

Butterfield learn risk density of 34, 9% continues to reflect the regulatory efficiency and conservative nature of our balance sheet.

Turning to slide 11.

Loan and deposit changes by volume and foreign exchange movements as well as currency by segment.

The chart on the upper left demonstrates the third quarter a decrease in deposits consist of three.

$350 million of actual deposit outflows.

$260 million.

It was due to currency translation changes from the strong dollar.

Okay.

Loan volumes actually increased from a production standpoint, but that growth was negated by foreign exchange movement.

On slide 12, we show that product shows asset quality remains exceptionally high with low credit risk in the investment portfolio, which is comprised of 96% AAA rated U S government guaranteed agency securities.

Credit quality continues to remain strong with non accrual loans holding at 1.2% of gross loans and the net charge off ratio of eight basis points.

On slide 13, we present, the average cash and securities balance sheet with a summary interest rate sensitivity analysis.

The duration of the investment portfolio has decreased marginally during the quarter to five four years from five five years.

Due to portfolio runoff.

We continue to expect our sensitivity to result in improving alright.

As market rates increase however, the sensitivity has reduced due to a higher level of three to five year fixed rate loans.

A lower sensitivity out Bermuda alone base rates.

And heightened U S dollar deposit costs in the channel Islands.

The total value of fixed rate loans has increased by $866 million to $1 8 billion since year end.

Which we expect will help mitigate rate driven credit concerns over the medium term.

Net unrealized losses in the portfolio increased to $241 million from $152 million at the end of the last quarter as well.

Long term U S market interest rates continue to rise.

Now I'll turn the call back to Michael Collins.

Thank you Michael the strong results in the third quarter, a reason for optimism. However, we recognized the potential for some challenges ahead and we will continue to closely monitor the credit book as interest rates rise in the global economy potentially cold.

We are very pleased to announce the acquisition of the credit Suisse Trust business in Singapore, The Bahamas, and Guernsey, We believe the deal structure provides us with flexibility and protection and should result in very high quality business coming across.

Our M&A strategy remains intact, and we continue to hold discussions with potential deal targets and the trust and banking sectors.

I remain optimistic that we will continue to find deals and grow butterfield through M&A and to a lesser extent organically.

Our fee generating business is capital efficient and helps us to consistently generate top quartile Roe realm.

Relative to U S regional banks.

We also have a well positioned balance sheet that combined with the rising interest rates has allowed us to achieve a quarterly core return on tangible common equity of 31, 6% in the third quarter of 2022.

We also reported a core cost efficiency ratio below our target of 60% and third quarter expenses within our targeted range of $82 million to $83 million.

Our strong and liquid balance sheet continues to maintain a loan to deposit ratio below 40%, while our $5 8 billion dollar investment portfolio is more than 95% AAA rated U S Treasuries and agency securities.

Butterfield continues to be well positioned to prosper and grow.

Thank you and with that we'd be happy to take your questions operator.

Yeah.

Okay.

Yeah.

And the question and answer session.

Ask the question Nathan Star then one.

I know you touched on it so if youre using a speakerphone please pick up your handset before.

I'll pass it to Keith.

Just a question has the Natgas and you would like to withdraw your question. Please press Star then two.

At this time, they will pause when we totally dissimilar.

My first question.

Yeah.

Well, it's part of call. Please go ahead.

Hi, good morning.

Good morning Tamar.

Maybe starting on the deposit side very much appreciate slide 11, I think that's very helpful, but as youre looking at the deposit base and kind of what you still see in there as excess their surge deposits can you just give us an update on what your expectation is of kind of balance sheet.

<unk> trajectory over the next couple of quarters there.

Yeah, Thanks, Tim where its Michaels com, yeah. So we outlined the FX movement separately I'm on that slide are both on the loans and deposit side.

So we've talked about before there are a number of you know we had about $1 4 billion come on in the form of search deposits and we.

We haven't really seen any movement in our core deposits, where we've suddenly seen these chunky deposit is a withdrawal.

Over the past couple of quarters, and I would expect that we should see some stabilization going forward on the balance sheet. So you know at the moment <unk>.

Expecting somewhere between 12, and 12 and a half billion of deposits. What we ended up as you know we cannot normal variations in.

Oh, which kind of leaves you with a total balance sheet size of around 14 ish.

Yeah.

Okay. So.

So we had about 1.4.

Billion of deposits exit the franchise over the last few quarters now a component of that has been FX, but do you think going forward.

The pace of those surge deposits I mean, if they havent left yet as a likelihood that they're going to stay on the balance sheet for longer or are we still expecting them to exit maybe just not at the pace you were originally expecting.

Yeah, I think the pace has been a little quicker, but I mean, we were very conservative on the liquidity side. So you know that suddenly has been beneficial to us.

You know, it's hard to predict exactly where we're going to end up there is normal variations and the deposit levels.

So I would I would estimate that we probably have a couple of hundred more of sort of surge deposits, but they could come and go in a couple of hundred million more.

You know so it's just a little bit difficult to exactly predict you know if that in fact is going to leave or if that is actually going to kind of hang around for a while it is worth noting though and in in the channel Islands. We've had some success in converting.

Some of the surge deposits into some of our fund products off balance sheet. So so that's been helpful as well.

Got it Okay, and then looking at the increase in the cost of deposits from 20 to 44 basis points in the quarter was that all driven by channel Islands. Do you guys have the breakout of deposit costs kind of by geography, what the channel Islands, where it came in in Bermuda.

Yeah.

Yeah, we do so at a this business this is Craig.

In regards to deposits yeah, you're right the cost of deposits is largely driven by the channel Islands. Obviously, we've kind of stated before that's finalized a lot more competitive market.

In Bermuda, and Cayman, So Bermuda and Cayman will get moving really adjusting our fixed deposit rates I'm. So no nothing that I haven't seen anything one didn't want demand deposits. What do you want a core deposit book in Bermuda and Cayman.

But obviously, you're trying to widen it there's a lot more competitive.

So that ought to be change about 13 basis points is actually attributable to kind of items.

The change in the cost of deposits from the prior quarter.

Okay.

And then just last for me kind of a bigger picture question. After the last Apple M. C hike, how should we think about your asset sensitivity profile do you expect deposits to lag the last hike or should we think of deposit cost stopping with the last F. O M. C hike and then the asset side.

China continues to reprice and fixed rates rolling off new production coming on how should we think about margin and deposit costs. Following the last hike.

So I think from a deposit cost I think we were because we were able to keep the cost of deposits down.

Down during the Covid I guess, its first phase of the rate hike.

We've been pretty successful in.

Kind of managing those costs really tightly obviously other than the kind of orders we have to react to the more competitive environment. We continue to adjust our fixed deposit rates are in Cayman and in Bermuda.

And we think we will continue to react to August market forces in the U S jurisdictions I think at this point we can.

Tim you too I guess suppressed the cost increases on the core demand deposits going.

Going into Q1, depending on again, where the fed goes we're gonna have to look very carefully as to whether we need to pay on demand deposits.

Okay, but one or two that actually tomorrow.

On the loan side, obviously, you know the story.

You know, where we're finally, starting to see that base rate.

Changes that we did three months ago coming through at the end.

Of October so we're going to start to see obviously loans repricing I would say, though that you know about 40% of the total loan book now is rolled into fixed so I think in terms of your original question around sensitivity, we actually view that as marginally helpful. At this point in the rate cycle and that you know what that is.

Starting to add some protection from a downrate scenario, so while we're continuing to see asset sensitivity the NIM trajectory, it's going to be.

Still upward sloping, but slower and on the on the downside was starting to build some of that protection there from from customer fix a fixed loans.

Great. Thank you I'll step back.

Our next question comes from right.

Goldman Sachs. Please go ahead.

Hey, guys. Good morning, I wanted to ask on just the credit Suisse still realizing that you guys may not have final numbers, yet because you need to kind of go client by client and underwrite, but I guess are there any stats you can kind of share on just the scale of the business that you are going to be evaluating and kind of I guess what the.

What the Tam is for this deal if we think about you know some percentage of that are out of that business coming over over the course of the year.

Yeah, I think it's so it's Michael Schrum. Good question I think the reason why I'm, so where we're actually getting through the consent process right now so in the initial phase of the integration if you will.

It was getting getting customer consents, so that we can actually review our files.

Files in DD to files, and then make a decision about oh come without DD process.

And then move on to turn on boarding process.

Obviously, we do understand what the addressable universe.

Our clients are which is sort of approximately 1500 structures.

You know, having SAP, which went up quite I mean, there is an element of uptick of client decisioning and here as well in terms of is this the time to look at the overall relationship or are we happy to just kind of move along with with Butterfield. So certainly as we get through to the on boarding process throughout D. D. We will share more information.

Around the what we what our expectation is in terms of the population and some of the some of the numbers around that.

But you know if we end up with you know 50, 50 or 60% of the population.

Know that that is.

Is vastly different than maybe 80% and so it's a little bit tough to say right now, but the deal was structured in a way that we only pay for what we can while we get so ultimately.

It will be marginally accretive to the bank overall it will be helpful for for the Singapore business and for our trust business in general.

But it's just a little bit early to kind of see how see which way.

Both the bank and the client is going to jump in terms of the DD process. We can say well that are the consent process is going well sell all the letters are out we're getting responses. We've had a number of client meetings and so far the quality of the client base is as we would expect or or even better. So it's a really good.

Structured really good names. So we're really pleased where we are working with the employee base to bring them over but as Michael said, it's the.

The best part about this structure is that we can pick and choose and pick the right clients and and not take the ones that were not quite comfortable with at this point so.

It's very difficult to estimate because we can't really tell until we get through D. D are through the first half of next year.

Got it that's great to hear and then maybe on a different topic you mentioned the increasing percentage of the loan portfolio. That's that's shifted over to fixed rate. Just wondering if you could provide a bit more details on how that process has evolved I mean is that something you guys are kind of proactively doing is it a function of some of the lending opportunities that you have.

That you've come across that I've, just tended to skew more more fixed rate.

Any color for kind of where the loan volume has come from and then you know what it's been what it's been sort of replacing on the balance sheet.

Yeah.

Yeah. Good question I would say, we've been actually encouraging it been offering three and five year fixed fixed rate loans and pegged currencies, so Bermuda and Cayman.

For quite a while but customer preference has always been floating rate and in these markets traditionally.

I think as we as we saw.

Rates starting to go up quite rapidly.

One of the ways that we saw an opportunity in the market has to talk to customers about protecting their cash flow and trying to understand what that meant in terms of repayment terms et cetera. So wrong way of saying you know 90% of it is from existing floating rate and 10% isn't that new.

But we've sort of been encouraging the three to five year to kind of get get customers through what potentially it could be.

Difficult credit cycle.

Or difficult period for them and actually being helpful. Helpful to the bank at the same time, so while it's reducing our sensitivity somewhat.

You know I think I think in a broader scheme is probably at this point the rate cycle pretty helpful. Overall to the bank.

Yeah.

Yes.

How does that this is correct. So I'm really going to be fixed rate loans have been a tool being used by both alright.

Alright.

Both customers as well as obviously bang so.

Michael was that we had some outreach.

Costs declined since it's helping them to manage through this process.

All of us at several inbound calls as well.

In all our jurisdictions just looking to go from variable to fixed.

Got it that makes sense I. Appreciate you taking my question just a clarification is that mostly on the Oh, the resi mortgage side or is it both commercial and consumer.

It's both it's both.

Got it alright. Thanks, guys. Appreciate you taking my questions.

Thanks.

Question comes from Michael Perito with <unk>.

Yeah.

Yeah.

Hey, guys. Thanks for taking my questions.

Good morning, Mike.

A couple just really a couple of follow ups just one on the.

Asset sensitivity NIM conversation you know as we look to just near term here I mean, the margin was up about I think 30 year 34 basis points quarter over quarter and in the third quarter. So I mean, it might just conceptually kind of understanding you guys correctly like in the fourth quarter here. If we assume the curve kind of plays out as expected right now that you would expect that benefit to be.

Lower but still kind of materially higher I mean, like I don't want to get too specifically, but are we talking more like 15 to 20 basis points. Just if the consensus curve kind of plays out just trying to understand how much kind of this is coming off from an asset sensitivity standpoint, as you guys add some of those fixed rate loans and the deposit cost pick up on the channel Islands.

Yeah.

Yes, I think Tom I guess kind of maybe just kind of walk through how we how we think about it.

So it's kind of more about what the drivers are of NIM.

I guess, how are we would expect that to expand over the next next few quarters.

So you're right. So the gaps less asset sensitivity, obviously, we have more fixed rate loans I think we're approaching 40% multi port for Adobe and fixed rate and so obviously as we do have rate increases then it's going to be a bit muted in regards to how we.

Benefit from those increases.

Still have 75 basis points of announced increases in the Bermuda base rate.

Because that's about kind of $1 $8 million I'm sorry.

About a $1 billion.

Ed will.

Benefit from that additional 75 basis points and then obviously, we will see what the fed does going forward.

But then that will also be tempered by also pressures on your cost of deposits as well. So we do expect that to continue to go up so I think you'll still continue to see NIM expansion, but at a slower rate.

Yes, Mike sorry, it's Michael Schrum, I'll, just add to that I think you were thinking is the right way to think about it but you know the asset sensitivity is it's mostly realized at the long end of the curve right now because that that's all that stuff starts to move higher.

You know that that third of the sensitivities kind of sitting where it is and that's just going to come through rollovers and pay downs in the Securities book.

The short end, obviously, you're still gonna react, meaning that we still have $3 billion of cash sitting around.

That's still going to react to whatever the fed funds does essentially so most of the asset sensitivity is going to sit at the short end of the curve and that's going to obviously caused some NIM expansion, but not as not as pronounced as we've seen probably in the last quarter. So I think that's right.

Okay.

Very helpful guys. Thank you for clarifying and then.

You know just kind of a big picture question here I mean in your opening remarks, I think you guys mentioned it I mean, and I know you've talked about it for years kind of the the 15 to 25 ROE through the cycle and 60% you know on average fishing see through the cycle, but you're obviously in the third quarter here very much kind of better than the top end of those ranges in and.

I guess, you know kind of a two part question one I mean, I guess it seems like that will probably be sustainable near term here would you agree or are there any other areas, particularly with the 82 to 83 million of expense run rate. It seems like that will remain the case, but just curious if there's anything else. We're not maybe thinking about that could impact those those ranges and then secondly, just as you think about how the business.

Mix has changed over the last three to five years from a geography standpoint and in some of the different dynamics on the balance sheet. I mean does the lower end of that through the cycle Roe range.

Does that move higher with with with some of the with one less of the asset sensitivity. I mean, do you think you're kind of reaching a higher forward outlook for kind of the profitability of the company with maybe a little less volatility or just just curious how you guys are thinking about those dynamics. Thank you.

Sure sure I'll start off and then pass it over so yeah. We think it's sustainable I mean, we've said, 15% to 25% I mean, we're up over 31% today, but you know some of that obviously is OCI and the unrealized losses. So you sort of normalize that I think it does get us sort of into the upper upper mid to upper <unk>.

So I think that that guidance is still true and we look at this going back through multiple interest rate cycles over the years in different environments.

And the 60% efficiency ratio, which is driven by a more people tend to have 70% efficiency ratio a ratio for trust and maybe in the top of the cycle like 50 per cent for banking does get us.

About 60% sort of through cycles.

So obviously, we're in the mid fifties and probably going to outperform that but we don't like to sort of talk about it at the extreme upper Android extreme lower and so I think 15 to 25 is still about right based on our business and it has changed since we have a bigger channel islands business as we've talked about.

That's much more competitive.

The the environment looks a lot like Bermuda and Cayman, but it's much more competitive so NIM expansion is much more limited there, but I'll let Michael.

No I was just kind of mentioned you always see eye point, obviously, you know awful.

To the RV overall, but as that comes back.

Over the next over the duration radio too.

As far as you know.

$3 seven as you know that's going to start to dilute the already a little bit.

So it probably adjusted we would view that as kind of a mid <unk> mid to upper.

20th are we in terms of the longer term question.

That's kind of what we're.

Trying to do I guess, while still investing in the business in terms of generating more fee income from the trust acquisition, so stabilizing and growing non correlated income to our whole jurisdictions b being our banking jurisdictions, Bermuda and Cayman and channel Islands, whereas the trust fee revenue.

Is annuity revenue capital efficient.

And the underlying economic activity in that business doesn't correlate.

Particularly to the to the domestic economic picture.

Where we are and so doing these small add on trust acquisitions, ultimately will help stabilize the fee income and give US you know.

We had a better platform for capital return overall, whilst making all of our jurisdictions profitable.

So you know hopefully.

I think the asset activities, maybe a cyclical component here.

We will still remain very asset sensitive just the structure of our balance sheet being 40% land.

Mostly floating rate you noticed.

Just a structural asset sensitive balance sheet I'm.

So I think that will continue but the stabilization of the stable component of the update.

The income statement should grow over time, and that's kind of where we are where we've been aiming.

And if I could sneak in on the question around expenses.

I think obviously, we've seen some really good expense management.

Throughout 2022.

We expect that to continue going into Q4.

You know, we're going through our budgeting.

Budgeting or planning process at the moment. So we can kind of see what 'twenty 'twenty three looks like.

But we expect a bit of a probably crashed the salary inflation.

Being able to address that going into 2023, and then as it's been scripted in prior calls we also will see I'll call. It banking system coming online in Q1 of next year.

So we've been upbeat beginning amortization of that and then also in doing some you know some capital improvement to our branches in Bermuda and Cayman as well so.

Well I think for Q4, I think we hope you'll still be able to kind of stick to the guidance that would be that'd be that'd be put out there.

And I guess the last thing I'd mentioned is that you know obviously, we've been able to benefit from the volatility in these Tom Sterling exchange rate as well. So you know a lot about say, 30% to 35% of our expenses are denominated in pound Sterling.

So being able to benefit from that but we have to just keep all anyone that exchange rates have been taught it affects the income statement.

Okay.

Great. Thank you guys. That's all very helpful color. Thanks for spending time with my questions appreciate it.

Thanks, Mike.

Yeah.

Hum.

Hum.

Sure.

Oh, Oh Oh.

Hey, good morning, everybody.

Good morning.

Good morning.

I'm just kind of point you touched on the currency side I mean, it's having some benefits on the expense front. It obviously weighed on the balanced this quarter I know you guys do some hedging on Sterling.

But just curious given the volatility that we've had.

Your thoughts on on more fully hedging currency risk at all and just curious your thoughts on that front.

Yeah, maybe maybe I'll start off it's Michael described so.

You are.

Direct investment in our Sterling denominated subsidiaries.

You know as the structural structural investment in foreign currency earnings effectively.

And so you know we do use of EVAR market value hedge for that so we use deposits that are naturally occurring in Bermuda.

In sterling to to hedge that.

We don't run a proprietary or at all and I think our view on the earnings derived from the channel Islands and the U K is that over.

Over a period over a full cycle those earnings will vary with with the Sterling in terms of the dollar value of those but ultimately the average earnings are going to come back. So we really measure those subsidiaries.

Traditional sense and native currency.

They're all re profile our cost income ratio.

And we wouldn't want to be on the wrong side of a hedge right. So that's that.

That's a risk taking position so we view that very much as an as an economic investment in in those in those countries.

Okay.

So I don't know if I answer your question Matt David.

Yeah, No that was helpful. Thank you and maybe just curious how you think about you talked about having we're still sitting on 3 billion in cash just.

Curious, how you think about liquidity deployment more broadly and maybe some of the timing of that.

<unk> been very disciplined and are still benefiting from rising rates, but just curious.

How are you thinking about liquidity deployment, and maybe kind of what you know a normalized level of cash for you might be.

Yeah, great great questions, Michael scrum again, I'll start and maybe Craig can pitch in as well.

As you know with deposit funded balance sheet retail midmarket corporate.

So when we look at cash and short term securities because we operate across four different banking jurisdictions and a subsidiary rise structure all of those subsidiaries need to retain sufficient resources, whether it be capital funding or liquidity too.

To satisfy their.

Our loan pipelines and in and outflows risk.

Respectively, and that leaves a significant component of <unk>.

All of our assets in cash just to try and manage that because we don't have a fed window Orlando Plaza resort really that's what we're really our own treasury. So we manage those intercompany flows.

With Bermuda, having that backstop as well.

So the way we think about it is really about 20% of the balance sheet.

Probably.

I would say on a back testing basis between 15 and 20%.

Of of.

All of our deposits sorry, all of our total balance sheet is always going to be in cash and short term securities.

So at the moment very little heavy we've seen a lot of volatility obviously, we've seen deposits come off as you as you said the 210 isn't particularly constructive at the moment and so we're just really rolling into short and with the OCI hit we're just throwing everything into short term at the moment for the next quarter really.

And then over the over the long term, our investment philosophy hasn't changed and that we need to buy some protection from the asset sensitivity in the Securities book and that's why we buy fixed rate securities through through the cycle, but from for the next couple of quarters will just roll into.

Short term securities and then as we start to see things stabilize OCI coming back et cetera.

And we'll have we'll have some more options whether it's you know some further restructuring in the RFS work that we're always on the lookout for that or whether it's just further deployment of cash into fixed rate securities and longer term.

Yeah that makes sense.

Yeah.

It was indeed in the formal comments, we kind of talked about reinvestment rates.

And I guess the pay downs that we are seeing coming through so Peter Paydowns are slowing down but are also slowing down our reinvestment rates as well.

Yeah somebody reason that Michael just talked about in regards to you know stability of deposits and just making sure we have adequate liquidity on hand, and then even just the investment environment being constructive as well.

We decided to just slow down.

Asking rates for now.

Until things get a bit more stable.

That makes sense.

And then just lastly, touching on asset quality non accruals did tick down a bit, but obviously higher higher mortgage rates are are probably weighing on cash flows are from some of your clients and I know you guys are very proactively reaching out to those that may have some cash flow that he's just curious you know overall asset quality trained.

And what Youre hearing from your your mortgage clients are given higher rates and then just if you could touch on the overall health of the housing market across your footprint as well.

Uh huh.

Kickoff.

I'm sure all of this work with my team as well so again with regards to asset quality, we're not seeing any indications at this point.

Any any weakening asset quality.

Having active conversations with all of our customers, we've actually kind of looked at the book looked at.

Triple payments to increase some.

Some indicators up golf capacity of customers to be able to absorb those pay increases as well.

But we haven't seen any indication that asset quality is gonna be impaired in any way, obviously with the lag in adopting the Bermuda dollar base rate increases.

Our estimate is that if anything is going to come through and are starting to see it.

Kind of middle of Q1.

Into Q2.

Obviously going to keep a really good eye on it.

And also consider that as we look at our CTO provisioning as well that we need any qualitative overlays et cetera.

But right now it's it's it's it's pretty good and we're happy about that.

Okay that makes sense thanks, everybody.

Hey, thanks.

Okay.

Have a question please press star one.

Kim.

That's one follow up.

Please go ahead.

Hi, Thanks for the follow up I'm actually just keeping that conversation going from the last question looking at your London mortgage book I mean, it seems like.

London housing market has been a bit of a mess.

Maybe what are you seeing there for a potential credit issues with just some of the reductions in value and then maybe longer term. How are you thinking about that portfolio going forward and is that going to be a headwind to kind of balance sheet growth as some of that production over the last couple of years rolls.

Off or is there an expectation that that book of business remains more or less flat going forward.

So we're not we're not seeing really any pressure so far in the London book.

The the market we're in as you know our central London. So.

If there are any price decreases it's it's nothing substantial we've underwritten it very conservatively, so 60% loan to value of five year interest only its been about five years. So a lot of doses are rolling over and we're re underwriting them.

So we get another look at the credit quality. So that the timing is quite good actually but not seeing a lot of stress and and our plan is really not necessarily to grow that portfolio, it's really try to keep it steady because.

Because as we said in the past, we don't want London to be more than a quarter of our total loan book restart looked like a very very different bank, where we are growing is rolling out our retail.

Business in the channel Islands, so that's going quite well so.

We've got over 700 retail clients now.

Approaching a couple of hundred million Sterling in mortgages, which is well ahead of our plan I think we've talked about $500 million over over five years, and we're well on the way to that we're rolling out our credit card products are.

Early next year, and we do think as we become more of a retail bank, particularly in the mortgage side. There's some really good retail deposit funding on both islands. So we think over time, we can start to convert.

I'm getting deposits from some of the financial intermediaries, which as you know are very competitive on the pricing perspective to more retail funding that actually will provide us with with spreads and margins that will never looked like Bermuda and Cayman, but it'll start to look a little bit more like those two places. So you know London, we don't see.

Stress at this point, we think it is really well under written try to keep it flat, but the growth is going to come from rolling out retail mortgages, and Guernsey and Jersey.

Got it that's great color. Thank you.

Okay.

Okay.

Yes.

Yeah.

Okay with that question and answer if possible.

The conference back over to pay off.

Okay.

Thank you very much and thanks to everyone for dialing in today, we look forward to speak with in the future.

Thanks, again have a great day.

The conference has now concluded.

Today's presentation all of America.