Bank of N.T. Butterfield & Son Ltd Q3 FY2022 Earnings Call

Good morning, everyone. My name is Sashnavi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2022 Earnings Call for the Bank of N.T. Butterfield and Son Limited. Please note, this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's third quarter 2022 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 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. 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. Butterfield continued to deliver strong earnings across our offshore network of banking and wealth management platforms. We demonstrated 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 with the vast majority of border restrictions having been relaxed and tourism and business travel improving. I will now turn to Slide four, where 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 31.6% in the quarter compared to 27.8% in the prior quarter. Our net interest margin improved by 33 basis points to 2.59% with the cost of deposits rising by 18 basis points to 34 basis points. When compared to the last interest rate cycle, we're experiencing heightened U.S. dollar deposit costs in the Channel Islands, which has grown in recent years through acquisitions and is a more competitive market than Bermuda and Cayman. The Board of Directors again declared a quarterly cash dividend of $0.44 per share. Share repurchases remained on pause in the quarter due to the elevated OCI loss marks which has held the TCE 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 of 6% to 6.5% in merges. 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 in Liechtenstein, which was sold to a separate and unrelated buyer. We're 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 reputational risk transfer. The deal meets all of our longstanding requirements for M&A. For example, it is significantly focused on private trust 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 below 8x EBITDA. The deal is also forecast to increase trust fee income, which had helped to maintain our significant and stable fee income ratio and will position Butterfield as one of the largest private client trust companies in Singapore. We're 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 results.

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 partially offset by higher deposit costs. Cash and short-term investment balances were down during the quarter due to expected client withdrawals or pandemic-related deposits and a strengthening of the U.S. dollar, which impacted FX translations of non-U.S. dollar deposits. Average investment balances decreased by $136.6 million, primarily due to increased unrealized losses in the AFS portfolio as market interest rates climbed and declining paydowns and reinvestment rates. New money yields on investment have decreased slightly to 3.75% from 3.85% in the previous quarter. We made aggregate reinvestments of $90 million in the third quarter of 2022 versus $120 million in the previous quarter. The majority of securities purchased consisted of U.S. Treasuries and Freddie Mac securities with lower durations. Paydowns continue to decelerate with $145 million of portfolio paydowns in the third quarter of 2022 versus $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 on floating rate loans. We had new loan originations of $239 million, at an average yield of 4.28% versus $387 million of originations at 3.63% in the second quarter of 2022. Turning to Slide seven, non-interest income was down 3.6% quarter-over-quarter, primarily due to 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 the success of following a number of commercial claims from floating rate to fixed rate structures. Trust fees declined slightly due to heightened activity-based fees in the prior quarter, which did not recur at the same level in the current quarter. Non-interest 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 non-interest income as expected. Slide eight provides a summary of core non-interest expenses. Total core non-interest expenses were at $81.8 million, in line with $81.9 million in the prior quarter, and slightly 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. The core efficiency ratio continued to improve to 57% and remains below our true 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 regulatory and leverage capital levels. Butterfield's capital levels continue to be above regulatory requirements. Our TCE to TA ratio of 5.0% is similar to that of the prior quarter and continues to be below our internal target range of 6% to 6.5% 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 is not a regulatory ratio for Butterfield and the x cash TCE to TA ratio remains 5.6% and x OCI TCE to TA ratio improved to 8.2%. We continue to anticipate that rate-driven OCI marks will keep this ratio below our internal target range for a few more quarters as U.S. dollar interest rates rise, which is expected to benefit net interest income. Our dividend payout ratio was 43.4% in the third quarter of 2022 and is currently slightly below the bank's through-cycle target of approximately 50%. Turning now to Slide 10. Butterfield's balance sheet remains conservatively managed with a high degree of liquidity. Period and deposit balances reduced by approximately $600 million to $12.5 billion versus the prior quarter end. The decrease in deposits has been anticipated and as you'll see on the next slide, the fall in deposits is a combination of foreign exchange translation and customer withdrawals. Average deposit balances are also down approximately $600 million to $13.0 billion for the quarter. Butterfield's low risk density of 34.9% continues to reflect the regulatory efficiency and conservative nature of our balance sheet. Turning to Slide 11, here we provide 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 decrease in deposits consists of $350 million of actual deposit outflows and $260 million due to currency translation changes from the strong dollar. Loan volumes actually increased from a production standpoint, but that growth was negated by foreign exchange movement. On Slide 12, we show that Butterfield's asset quality remains exceptionally high, with low credit risk and an 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 8 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 5.4 years from 5.5 years due to portfolio runoff. We continue to expect asset sensitivity to result in improving net interest income as market rates increase. However, the sensitivity has reduced due to a higher level of three to five year fixed rate loans and lower sensitivity of Bermuda loan 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 AFS portfolio increased to $240.1 million from $152 million at the end of the last quarter. And I'll turn the call back to Michael Collins.

Thank you, Michael. The strong results in the third quarter are reasons for optimism. However, we recognize the potential for some challenges ahead, and we will continue to closely monitor the credit book as interest rates rise and the global economy potentially cools. We're 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 in 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 ROIs relative to U.S. regional banks. We also have a well-positioned balance sheet that combined with 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 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.

Thank you. We will now begin the question-and-answer session. Our first question comes from Timur Braziler with Wells Fargo. Please go ahead.

Maybe starting on the deposit side, very much appreciate Slide 11. I think that's very helpful. But as you're looking at the deposit base, and kind of what you still see in there as excess or surge deposits. Can you just give us an update on what your expectation is of kind of balance sheet size and trajectory over the next couple of quarters there?

Yes. Thanks, Timur. It's Michael Schrum. Yes, so we outline the FX movement separately on that slide, both on the loans and deposit side. As we've talked about before, we had about $1.4 billion commanded in the form of surge deposits. And we haven't really seen any movement in our core deposits, but we've certainly seen these chunky depositors withdraw over the past couple of quarters. And I would expect that we should see some stabilization going forward on the balance sheet. So at the moment, expecting somewhere between $12 million and $12.5 million of deposits. What we end up as you know, we can have normal variations in that, which kind of leaves you with a total balance sheet size of around $14-ish.

So we've had about $1.4 billion of deposits exit the franchise over the last few quarters. Now, a component of that has been FX. But you think going forward, the pace of those surge deposits, if they haven't left yet, is the 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're originally expecting?

Yes. I think the pace has been a little quicker, but I mean, we were very conservative under the liquidity side. So that suddenly has been beneficial to us. It's hard to predict exactly where we're going to end up there is normal variations within the deposit levels. So I would estimate that we'd probably have a couple hundred more of sort of surge deposits, but they could come and go, a couple of hundred million more. So it's just a little bit difficult to exactly predict if in fact that is going to leave or if that is actually going to going to hang around for a while. It is worth noting though in the Channel Islands, we've had some success in converting some of those surge deposits into some fund products of balance sheets. 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 with the Channel Islands work coming in, in Bermuda?

Yes, we do. This is Craig. In regards to deposits, yes, you're right. The cost of deposits is largely driven by the Channel Islands. Obviously, we've stated before that the Channel Island is a lot more competitive market than Bermuda and Cayman. Bermuda and Cayman have been really adjusting our fixed deposit rates. So no matter what happens on demand deposits, or you want to call it core deposit book in Bermuda and Cayman. But obviously in the Channel Island, there's a lot more competitive. So it'd be change, about 13 basis points is actually attributable to Channel Islands of the change in the cost of deposits from the prior quarter.

And then just last for me kind of a bigger picture question. After the last FOMC 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 costs starting with the last FOMC hike and then the asset side kind of 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?

I think for deposit costs, I think we were, I guess we were able to keep the cost of deposits down during the first phase of the rate hike. So we've been pretty successful in managing those costs really, really tightly. Obviously, other than the Channel Islands, where we have to react to the more competitive environment. We continue to adjust our fixed deposit rates in Cayman and Bermuda. And we think we will continue to react to market forces in those jurisdictions. I think at this point, we can continue to suppress the cost increases on the core demand deposits. Going into Q1, depending on again where the Fed goes, we're going to have to look very carefully as to whether we need to pay on demand deposits.

Okay. One which is actually

Timur on the loan side, obviously, the story is, we're finally starting to see the base rate changes that we did three months ago, coming through as of the end of October. So we're going to start to see, obviously loans repricing. I would say though that about 40% of the total loan book now has rolled into FX. So I think in terms of your original question around asset sensitivity, we actually view that as marginally helpful at this point in the rate cycle, in that that is starting to add some protection from a downgrade scenario. So while we're continuing to see asset sensitivity, the NIM trajectory is going to be still upward sloping, but slower. And on the downside, we're starting to build some of that protection there from customer fixed loans.

Great, thank you. I will step back.

Our next question comes from Will Nance with Goldman Sachs. Please go ahead.

I wanted to ask just on the Credit Suisse deal 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 plan is for the deal, if we think about some percentage of that business coming over the course of the year?

Yes, it's Michael Schrum. That's a great question. We're currently working through the consent process. In the initial phase of integration, we're obtaining customer consents to review files and conduct due diligence before making decisions about the outcomes. After that, we will move on to the general onboarding process. We understand that the total potential client base is approximately 1,500 structures. However, we're not entirely certain, as there is also a client decision-making aspect involved, questioning whether this is a good time to reassess the overall relationship, or if clients are content to continue with Butterfield. As we progress through onboarding and conduct our due diligence, we'll provide more details regarding our expectations about the client population and relevant numbers. If we find that 50% or 60% of the client base is significantly different, potentially up to 80%, it's difficult to predict right now. However, the deal was structured so that we only pay for what we actually receive, so it will ultimately have a mild positive effect on the bank overall and will benefit the Singapore and foreign trust businesses. It's just a bit too early to determine the direction both the bank and clients will take during the due diligence process.

We can say, Will, that the consent process is going well. So 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 even better. So some really good structures, really good names. So we're really pleased with where we are working with the employee base to bring them over. But as Michael said, the best part about the structure is that we can pick and choose the right clients and not take the ones that we are not quite comfortable with at this point. So it's very difficult to estimate because we can't really tell until we get through due diligence through the first half of next year.

Got it. It’s great to hear. And then maybe on a different topic, you mentioned the increasing percentage of the loan portfolio. 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 this something you guys are kind of proactively doing? Is it a function of some of the lending opportunities that you've come across that have just tended to skew more fixed rate? Any color for kind of where the loan volume has come from? And then, what it's been sort of replacing on the balance sheet?

Yes. Good question. I would say we've been actually encouraging it. We've been offering three- and five-year fixed-rate loans in tech currencies, so Bermuda and Cayman for quite a while. But customer preference has always been floating rate in these markets, traditionally. I think as we saw rates starting to go up quite rapidly. One of the ways that we saw an opportunity in the market is to talk to customers about protecting their cash flow and trying to understand what that meant in terms of repayment terms, et cetera. So roundly speaking, 90% of it is from existing floating rate and 10% is net new. But we've sort of been encouraging that three to five year to kind of get customers through what potentially could be a difficult credit cycle or difficult period for them, and actually being helpful to the bank at the same time. So while it's reducing our asset sensitivity somewhat, I think in the broader scheme is probably at this point in the rate cycle pretty helpful overall to the bank.

I will add. This is Craig. So when it comes to the fixed-rate loans, they have been a tool used by both customers as well as our bank. So as Michael said, we had some outreach in regards to clients and just helping them to manage through this process. But we have also had several inbound calls as well, in all our jurisdictions just looking to go from variable to fixed.

Got it. That makes sense. Appreciate you taking my question. Just a clarification, is this mostly on the resi mortgage side or is it both commercial and consumer?

It's both.

Got it. All right. Thanks, guys. Appreciate you taking my questions.

Our next question comes from Michael Perito with KBW. Please go ahead.

I have a couple of follow-up questions. First, regarding the asset sensitivity and net interest margin conversation. Looking at the near term, the margin increased by about 30 to 34 basis points quarter-over-quarter in the third quarter. Conceptually, if I understand correctly, in the fourth quarter, assuming the curve behaves as expected, you anticipate that the benefit will be lower but still significantly higher. I don’t want to be too specific, but are we talking about something in the range of 15 to 20 basis points, considering how the consensus curve unfolds? I’m trying to grasp how much is expected to decrease from an asset sensitivity perspective as you introduce those fixed-rate loans and the deposit costs rise in the Channel Islands.

I guess, kind of, maybe just kind of walk through how we think about it. So it's kind of more about what the drivers are of NIM. And I guess how we would expect that to expand over the next few quarters. So you are right, so we have got less asset sensitivity. So we have more fixed-rate loans, I think we're approaching 40% of the portfolio will be in fixed-rate. So obviously, as we do have rate increases, and there’s going to be a bit muted in regards to how we benefit from those increases. We still have 75 basis points of announced increases in the Bermuda base rate. So that's about kind of, $1.8 million, sorry, about a billion dollars that 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 the cost of deposits as well. So we do expect to continue to see NIM expansion but at a slower rate.

Yes, Mike. It's Michael Schrum. I'll just add to that. I think you're thinking is the right way to think about it. But the asset sensitivity is mostly realized at the long end of the curve right now, because unless that starts to move higher that third of the asset sensitivity is kind of sitting where it is and that's just going to come through rollovers and paydowns in securities book. The short end obviously is still going to react, meaning that we still have $3 billion of cash sitting around and 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 cause some of the NIM expansion but not as pronounced as we've seen probably in the last quarter. So I think that's right.

Thank you for the clarification. I have a broader question. In your opening remarks, you mentioned the goal of achieving a 15 to 25% return on equity and 60% efficiency on average over the cycle. It's clear that in the third quarter, performance exceeded the top end of those forecasts. I'm curious if you believe this level of performance is sustainable in the near term, especially with the projected expense run rate of $82 million to $83 million. Are there any factors we might not be considering that could affect these ranges? Additionally, as you reflect on the changes in your business mix over the last three to five years, particularly regarding geography and balance sheet dynamics, do you foresee the lower end of that return on equity range moving higher due to decreased asset sensitivity? Do you anticipate a more favorable outlook for the company’s profitability with potentially reduced volatility? Thank you.

Sure. I'll start off and then pass it over. So yes, we think it's sustainable. I mean, we've said 15% to 25%, I mean we're up over 31% today but some of that obviously is OCI and the unrealized losses, so sort of normalize that, I think it does get us sort of into the upper mid to upper 20%. 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 a 60% efficiency ratio, which is driven by more people intensive 70% efficiency ratio for Trust and maybe in the top of the cycle like 50% for Banking does get us to about 50% sort of through cycle. So obviously we're in the mid-50s and probably going to outperform that but we don't like to sort of talk about it at the extreme upper end or extreme lower end. 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 that we talked about that's much more competitive. 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.

I wanted to highlight that the return on equity will be positively impacted overall. However, as we look ahead, with the foreign exchange factor over the next few years, there might be some dilution on the ROE. We expect to adjust our outlook to a mid to upper 20s ROE. Regarding our long-term strategy, we are focused on investing in the business to increase fee income from our Trust acquisition. This will help us stabilize and grow our non-correlated income sources in our main banking areas like Bermuda, Cayman, and the Channel Islands. The revenue from Trust fees is capital efficient and does not significantly correlate with the local economic conditions. By pursuing small trust acquisitions, we aim to stabilize fee income and enhance our overall capacity for capital return while ensuring profitability across all our jurisdictions. We expect to maintain a high degree of asset sensitivity due to our balance sheet structure, which is primarily based on floating rates. This structural asset sensitivity will persist, but we anticipate that the stable components of our income statement will grow over time, aligning with our objectives.

Regarding expenses, we have seen effective expense management throughout 2022, and we expect this to continue into Q4 as we work through our budgeting and planning for 2023. We anticipate that salary inflation will be addressed as we approach the new year. Additionally, our core banking system will go live in Q1 next year, initiating its amortization. We are also making some capital improvements to our branches in Bermuda and Cayman. For Q4, we believe we can maintain our previously communicated guidance. Furthermore, we have benefited from fluctuations in pound sterling exchange rates, as 30% to 35% of our expenses are in that currency. Thus, we need to monitor how these exchange rates impact our financial results.

Great. Thank you, guys. That was all very helpful color. Thanks for spending time on my questions. I appreciate it.

The next question comes from David Feaster with Raymond James. Please go ahead.

I just kind of thought you touched on the currency side. I mean, it's having some benefits on the expense front, it obviously weighed on the balance sheet this quarter. I know you guys do some hedging on sterling but just curious given the volatility that we've had as your thoughts on more fully hedging currency risk changed at all and just curious your thoughts on that front?

Yes, maybe I'll start off. It's Michael Schrum. So we view our direct investment sterling denominated subsidiaries, as a structural investment in foreign currency earnings effectively. And so we do use a fair market value hedge for that, so we use deposits that are naturally occurring in Bermuda in sterling to hedge that. We don't run that proprietary book at all. And I think our view on the earnings derived from the Channel Islands in the U.K. is that over a period, over a full cycle those earnings will vary 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 in the traditional sense and native currency on their ROE profile cost income ratio. And we wouldn't want to be on the wrong side of a hedge, right, so that's a risk-taking position. So we view that very much as an economic investment in those countries. I don’t know if I’ve answered your question there, David.

Yes, 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 it. I know you've been very disciplined and are still benefiting from rising rates, but just curious how you think about liquidity deployment and maybe kind of what a normalized level of cash for you might be?

Yes, great questions. Michael Schrum again, I'll start maybe Craig can pitch in as well. So, as you know we're a deposit-funded balance sheet, retail, mid-market corporate. So when we look at cash and short-term securities, because we operate across four different banking jurisdictions in a subsidized structure, all of those subsidiaries need to retain sufficient resources whether it’d be capital funding or liquidity to satisfy the loan pipelines and outflows respectively, and that leaves a significant component of our assets in cash just to try and manage that because we don't have a Fed window or lend of last resort really and so we really are our own treasury. So we manage those inter-company flows with Bermuda having a backstop as well. So the way we think about it is really about 20% of the balance sheet probably I would say, on the back testing basis between 15% and 20% of all of our deposits, total balance sheet is always going to be in cash or short-term securities. So at the moment, we're a little heavy, we've seen a lot of volatility obviously, we've seen deposits come off. As we said that $210 is not particularly constructive at the moment and so we're just really rolling into short and with the OCI hit, we're just rolling everything into short-term at the moment for the next quarter really. And then over the long term, our investment philosophy hasn't changed in that. We need to buy some protection from the asset sensitivity, and the security performance that's why we buy fixed-rate securities through the cycle. But for the next couple of quarters we'll just roll into short-term securities and then as we start to see things stabilize, OCI coming back, etc. then we'll have some more options whether it's some further restructuring in FX the book that we are always on the lookout for that, or whether it's just further deployment of cash into fixed-rate securities longer term.

I believe it was beneficial; we discussed our reinvestment rates in our formal comments. The paydowns we are experiencing are slowing down, which is also affecting our reinvestment rates. As Michael mentioned, this is due to various factors, including the stability of deposits and ensuring we have sufficient liquidity. Additionally, the investment environment needs to be more favorable. Therefore, we have decided to slow down our reinvestment rates for the time being until conditions become more stable.

That makes sense. And then just lastly, touching on asset quality non-accruals did tick down a bit but obviously higher mortgage rates are probably weighing on cash flows from some of your clients and I know you guys are very proactive in reaching out to those that may have some cash flow issues. Just curious overall asset quality trend and what you're hearing from your mortgage clients given the higher rates and then just if you could touch on the overall health of the housing market across your footprint as well.

I'll kick off and then I'm sure others will chime in as well. So again, we realize the asset quality, we're not seeing any indications at this point of any weakening in asset quality. We are having active conversations with all our customers, we've actually kind of looked at the book, looked at kind of the potential for payments to increase some indicators of capacity of customers to be able to absorb those pay increases as well. But we haven't seen any indication that asset quality is going to 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, we're going to start to see it kind of middle of Q1 going into Q2. So we're obviously going to keep a really good eye on it and also consider that as we look at our season provisioning as well that we need any qualitative overlays etc., but right now it's pretty good and we’re happy about that.

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

Thank you very much and thanks to everyone for dialing in today. We look forward to speaking with you in the future. Thanks again. Have a great day.

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