Bank of N.T. Butterfield & Son Ltd Q2 FY2023 Earnings Call

Good morning. My name is Nicky and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call is being recorded and I will be standing by should you need any assistance. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Thank you. Good morning, everyone and thank you for joining us. Today, we will be reviewing Butterfield's second quarter 2023 financial results. On the call, I'm joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer; Craig Bridgewater, Group's Chief Financial Officer; and Michael Schrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our second quarter 2023 results. The press release and financial statements along with a slide presentation that we will refer to during our remarks on this call are available on the Investor Relations section of our website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For a reconciliation of these measures to US GAAP please refer to the earnings press release and slide presentation. Today's call and associated materials may also contain certain forward-looking statements, which are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings. I will now turn the call over to Michael Collins.

Thank you, Noah and thanks to everyone joining the call today. The second quarter results continued to demonstrate the strength of Butterfield's leading bank franchise and market position as well as our conservative and well-managed balance sheet. We delivered consistent quarter-over-quarter non-interest income and expense discipline which helped offset lower net interest income. As a reminder, Butterfield is comprised of well-established bank and private trust businesses located in premier offshore jurisdictions. We maintain leading bank market shares in Bermuda and the Cayman Islands with targeted growth in the Channel Islands. In the Bahamas, Switzerland, and Singapore, we provide private trust services in addition to our prime Central London mortgage offerings available to high net-worth borrowers. I will now turn to the second quarter 2023 highlights on page 4. Butterfield reported solid results with net income of $61 million and core net income of $57 million. We reported a core return on average tangible common equity of 26.3% for the second quarter of 2023 with core earnings per share of $1.14. The net interest margin was 2.83% in the second quarter, a decrease of five basis points with the cost of deposits rising to 127 basis points from 110 basis points in the prior quarter. Deposit pricing increased across jurisdictions as fixed-term deposits rolled into higher rates due to rising market interest rates. Our business in the Channel Islands which has a higher proportion of corporate banking customers continues to be the most competitive market and the most significant contributor to the increase in the cost of deposits. Our TCE to TA ratio of 6.5% has improved the conservative end of our targeted range of between 6% and 6.5%. As a result, we have been able to continue with the execution of our balanced capital return strategy accelerating our share buyback program in the second quarter with a repurchase of 723,000 shares in the quarter. We expect to continue repurchasing shares throughout 2023 subject to market conditions. Our liquidity position and strong capital profile also allowed us to redeem our 2018 issuance of $75 million, 5.25% subordinated debt in June, which will lower our interest expense going forward. The redemption had a one-time $900,000 interest cost impact in the quarter due to the accelerated amortization of issuance costs. I am also pleased that we completed the second closing of our planned acquisition of trust assets from Credit Suisse. To-date, 374 relationships representing $21.1 billion of assets under administration have now transferred to Butterfield, significantly expanding our footprint in Asia. Work is continuing on a client due diligence for subsequent tranches, which will include additional relationships in Singapore as well as Guernsey and the Bahamas. We continue to expect to add between $8 million to $10 million in annual trust fees from the deal in 2024, with anticipated associated running costs of around $6 million per annum. I will now turn the call over to Craig for more detail in the quarter.

Thank you, Michael and good morning everyone. Looking now at slide 6, here we provide a summary of net interest income and net interest margin. In the second quarter, we reported net interest income before provision for credit losses of $92.5 million, a decrease of 5% versus the prior quarter. The decrease was mainly due to lower average balance sheet volumes, higher deposit costs and the accelerated amortization of issuance costs from the 2018 subordinated debt issue. During the quarter, the net interest margin decreased five basis points, due to increased deposit costs and the early redemption of the subordinated debt which had a three basis point negative impact on NIM in the quarter. Average interest-earning assets fell 4.5% to $13.1 billion, due to customer deposit outflows. The yield on interest-earning assets increased 12 basis points to 4.1%, from 3.98% as investment portfolio runoff was invested in cash and short-term securities at the shorter end of the yield curve. The yield on treasury assets during the quarter was 4.06%, versus an investment portfolio yield of 2.07%. Average investment balances were down $105.5 million or 1.8% compared to the prior quarter as paydowns and maturities were deployed into cash and short-term investments. We continue to evaluate the market interest rate environment and expect to resume investment into longer-dated securities over time subject to market conditions. Turning to slide 7. Non-interest income was unchanged sequentially quarter-over-quarter, as increased asset management, trust and foreign exchange revenues offset lower banking and other income earnings. Non-interest income continues to be stable and a capital efficient source of revenues with a fee income ratio of 35.5%. During the quarter, we saw the impact of the fresh tranche of clients onboarded from Credit Suisse and increased ad hoc services on cost revenue. Slide 8 provides a summary of core non-interest expenses. Total core non-interest expenses were $83.6 million and improved compared to the $84.1 million in the prior quarter. The lower expenses are primarily attributable to lower staff-related costs, partially offset by higher technology and communications expenses related to the implementation of the new core banking system upgrade in Bermuda. Expenses were somewhat better than expected this quarter. However, we anticipate a quarterly run rate of between $85 million to $86 million over the next few quarters due to the investment in bank branch upgrades in Bermuda and Cayman, as well as the costs associated with the go-live of the cloud-based core banking system in Bermuda and the expected completion of a similar upgrade in Cayman during the second half of 2023. I will now turn the call over to Michael Schrum to review the balance sheet.

Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains conservatively managed with a high degree of liquidity. Period-end deposit balances decreased to $12.2 billion from the prior quarter end. The decline in deposits of approximately $150 million is the result of typical client activity and some seasonality. As the year has progressed, we now expect to see post-pandemic stabilization of total deposit levels at around $12 billion. This is broadly in line with the longer-term deposit trends prior to the pandemic and adjusted for the 2019 acquisition of ABN AMRO Channel Islands. Butterfield's low risk density of 34.3% continues to reflect the regulatory capital efficiency of the balance sheet with the low risk-weighted residential mortgage loan portfolio which now represents 71% of total loan assets. Turning now to slide 10. We provide additional detail on our deposit composition by segment. Butterfield's deposits remained well diversified across jurisdictions, with Bermuda holding the largest deposit share, followed by Cayman and then the Channel Islands. We continue to offer term deposit product alternatives for clients seeking additional yield and we are seeing consistency in the mix with core non-interest-bearing deposits remaining at approximately 23% of deposits and a $2.8 billion at quarter end. As we have discussed in the past, deposit balances can fluctuate quarter-to-quarter, as our larger corporate and trust clients manage their commercial interests. Turning to slide 11, we provide details on loans by type, business segment, and rate typing. The chart on the bottom left shows the growth of loans in Cayman and the Channel Islands, compared to Bermuda, which has seen a net reduction as the portfolio amortizes. On the bottom right, we have seen a significant increase in the proportion of fixed-rate loans in 2022 and the first half of 2023. The larger proportion of fixed-rate loans is expected to help stabilize yield and mitigate any potential credit issues. The recent change in mix has also significantly decreased the overall asset sensitivity over the past five quarters. Turning to slide 12. We display two charts that demonstrate the conservative nature of Butterfield's balance sheet versus peers. A high degree of liquidity is a structural feature for Butterfield, as our banking entities do not have access to a central bank or a Fed window. Butterfield has significant holdings of cash and cash equivalents into bank deposits and short-dated sovereign securities, as well as liquidity facilities with correspondent banks. Butterfield's loan-to-deposit ratio remains low at 41%, as we have conservative lending standards and only offer credit products in our home markets. On slide 13, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 95% AAA-rated US government-guaranteed agency securities. Credit quality in the loan book also continues to be strong with non-accrual loans standing at 1.2% of gross loans and a very small charge-off rate at two basis points. On slide 14, we present the average cash and securities balance sheet with a summary of interest rate sensitivity analysis. We continue to model modest asset sensitivity to result in improved net interest income with higher market rates. Unrealized losses in the AFS portfolio included in OCI stood at $207.3 million at June 30, 2023. At the current implied forward curve, we expect the OCI burn down to be $68 million or 33% of the total in the next 12 months and an expected decrease in OCI of $105 million or 51% in 24 months. Slide 15 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be significantly above regulatory requirements. Our tangible leverage capital ratio has further improved to 6.5% from 6.3% at the end of the prior quarter. This has allowed us to gradually increase share repurchase activity this quarter, in addition to our regular dividend. I will now turn the call back to Michael Collins.

Thank you, Michael. As a management team, we regularly evaluate our operations, capital levels, and efficiency. Our current outlook anticipates the Fed holding rates at an elevated level for a period and then begin to ease economic conditions to encourage growth. As a result, we will sharpen our focus on efficiency, credit risk mitigation, and expense management, with a continued emphasis on conservative liquidity and capital management. We have successfully navigated interest rate cycles in the past and remain well positioned for a more moderate rate environment when that emerges. Over the past year, we have upgraded our core banking system in Bermuda and onboarded the first two tranches of the Credit Suisse trust clients while navigating the challenges of the recent liquidity crisis. Following the official end of the global pandemic, we now look forward to continued recovery in tourism activity, and we will continue to focus on delivering exceptional services and products to our customers to help them reach their financial objectives. Thank you. And with that, we'd be happy to take your questions. Operator?

Thank you. I will take our first question from Eric Spector with Raymond James. Please go ahead.

This is Eric on the line for David Feaster. I appreciate you guys taking the questions. Just wanted to touch on the funding side, to start off. So looking at the period end balances versus the averages, it looks like there might have been some migration towards the end of the quarter. Just curious, if you could provide some color on flows throughout the quarter, whether you're seeing non-interest-bearing balances to stabilize. And then how they're trying to adhere early in 3Q, and how deposit costs are trending as well? I appreciate any color on that. Thank you.

Yes. Good morning, Eric. It's Michael Schrum. I will start off just on the balance side and then Craig can talk a little bit more about the cost of deposits and how that's trending. I think when we look at average balances, you're absolutely right, there's been some movement throughout the quarter. Mostly, it's sort of normal commercial movement really. We're not seeing a lot of pressure. So, we're kind of thinking stabilization is mostly what we've seen towards the end of the quarter. So at this point, I think the period end balance is probably a good reflection of where we see things shaking out. Obviously, there's ongoing conversations with customers around balance sheet strategies, as well as laddering strategies. But I think what we've seen is market rates kind of stabilizing a little bit. So we've also seen our deposit base kind of stabilize. And I think coming out of the pandemic, and then the central banks kind of shrinking their balance sheets, we've certainly seen the impact of that with a higher rate environment as well. And we continue to balance the cost of deposits versus the flows. But so far, what we've seen is really normal commercial flows. I'll let Craig just talk about the cost of deposits.

Yes. And I guess, just to add to that in regards to just the mix, if you kind of look at Slide 10 of our presentation, the mix of deposits between non-interest-bearing, interest-bearing demand deposits, as well as term deposits is relatively stable. On a group basis, you can see it has remained stable. We did see a little bit of mix shift in Bermuda and Cayman. And that's just a result of customers looking to get increased yield and kind of putting some duration on those deposits. We're seeing average duration is about three months, 3.5 months is the average duration. And as a result, we will expect to see a little bit of ticking up in the cost of deposits as those roll over as they mature. But overall, as Michael said, we are seeing some stability; the beta cycle to date is 24%, and we're modeling somewhere around 27%. So we're going to see some more creeping up in the cost of deposits, we think over the next couple of quarters as well.

Great. I appreciate all the color. Just wanted to touch on the loan growth side. You saw some continued declines this quarter. Just curious, your thoughts on the lending environment and growth and how pipelines are trending and your appetite for growth going forward?

Thank you, Eric. First, I want to clarify that we've never positioned ourselves as a loan growth story. We've consistently maintained that we expect low single-digit growth, aligning with the economies we operate in. Our lending is focused solely on our home markets where we have in-depth knowledge, and we prioritize lower risk assets, like residential mortgages, which offer better diversification and regulatory capital efficiency. Most of our lending is residential, and we hold all loans on our balance sheet, benefiting from the amortization process over time. This approach has led to a solid loan-to-value profile as older vintages have significantly amortized, with some having terms of up to 20 or 25 years. We intentionally shifted our loan book from being mainly commercial about six or seven years ago to predominantly residential today. We do not lend outside our home markets, focusing primarily on prime central areas in Bermuda, Cayman, and the Channel Islands. Recently, we've initiated a single residential program there as well. We continue to identify good opportunities, particularly in the Cayman Islands where we see notable growth. Bermuda has shown some decline quarter-over-quarter, while London has remained mostly stable, but we have promising prospects in both residential and commercial lending in the Cayman Islands. Generally, we anticipate low single-digit growth, and while the current environment is a bit sluggish due to interest rates, we consider ourselves a consistent lender through the economic cycle. As rates stabilize and we gain more clarity on cash flows, we expect to see gradual improvement in growth. However, we don't take excessive risks with credit.

Yeah. I think we'll always be about 40% loans to deposits, that's about what's right for us.

Got it. That's helpful. And then just wanted to touch upon just liquidity deployment strategy plans, like 13% of your balance sheet is now in cash. And I know you obviously want to be prudent with that, but just curious your plans for deploying excess liquidity with a normalized level of cash balance and it was good to see that the debt repayment during the quarter. Is there any appetite for further debt paydowns? Just curious any color on that end?

Yeah. So it's Michael Schrum again. So we're running the AFS and HTM broke down a little bit. You can see that the balances are coming through the maturities there. It will take a little bit of time. But as a result of that, we're also getting the OCI burn down and improvement in tangible book value as a result of that. I think for the last nine months, we've really just put all the maturities into cash and short-term securities because there was a significant amount of uncertainty around where central banks ultimately are going to end up doing, and we didn't want to increase or exacerbate the OCI risk any more than what was already in the book. And so that's worked out quite well for us in terms of the short end. We are conscious though that we do need fixed-rate assets. At the moment, we have also swapped quite a lot of our customers who have actually originated quite a lot of fixed-rate loans. So that's providing some duration on the balance sheet that is non-investment assets related. And so ultimately, we do need to start laddering back out. And I think we're probably at that point pretty close here in the next couple of quarters where we have now recovered a significant amount of TCE. We're back in the range where we need to be and I think we're kind of reaching the slowly crest of the rate cycle. We do have a couple of pretty chunky maturities coming out here in the next couple of quarters. So I think you ultimately would want a systematic way of laddering out the balance sheet. We do have a lot of cash on our balance sheet, approximately 20% of the balance sheet is always going to be held in cash because we don't have a central bank that will act as a last resort, and we deal in multiple currencies across all the four different balance sheets. And so that results in a holdback position that's significant because we have to fund our own deposit flows. But as we see deposit flows stabilizing and TCE recovering, we want to kind of put that back on a systemic track over the next couple of quarters.

Great. Thank you for taking the questions, and I’ll step back.

We'll take our next question from Timur Braziler from Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Timur.

Maybe sticking on the bond book. Can you just talk through the dynamic again as to what drove yields in the bond book lower this quarter? And then I guess bigger picture question, as we look out at margin and NII going forward just some of the headwinds this quarter, is the expectation that we're going to get top line growth and NIM expansion from here given the forward rate curve?

Yeah. Hi Timur, it's Craig. I think the slight decrease in the yield on the investment portfolio is really driven by the increase in paydowns. So we're getting paydowns of above $30 million a month, about $100 million a quarter. So it's an increase in paydowns over the quarter as well as amortization of premiums or discounts, I'm sorry, on the securities. That's what drove it down. Well, so coupons actually remained flat. It was really the amortization that drove it down slightly by about two basis points on that. In regards to the outlook, I think that NIM will remain flat as to where we are now. We do have some headwinds in regards to cost of deposits, but we also have some tailwinds as well. So again, we paid off the subordinated debt. So that's going to result in increased savings. And then obviously, we're not going to have that accelerated amortization coming through every quarter as well. And then we also have seen some rate increases; we saw a Fed increase last week. In Bermuda, we passed that on to the personal base rate 25 basis points. So we have that one that will come through in October, obviously, on 90 days notice. And we have another one coming through becoming effective next week that we announced back in May. So I think we have some tailwinds, but they'll be offset by cost of deposits, and as term deposits roll over into higher rates, that would offset that. So we're thinking level to where we are now.

Okay. And then, looking at slide 14, the asset sensitivity profile, I guess I'm a little surprised by the still the magnitude of decline on a negative 100 basis point move, especially given your comments about laddering out kind of longer term in the bond book again. In reality, is that, I guess, included in that negative 5% expectation? And what should we expect from the deposit base on the way down? Are you going to be able to move as quickly, or does the addition of Channel Islands and kind of that competitive dynamic limit your ability to move rates on deposits down in tandem with the falling rates?

Yeah. Thanks Timur, it's Michael Schrum. So the negative 100 is obviously a parallel shock that we model. Most of that from where we are today really relates to the fact that there will be a lag in cost of deposits coming down on term deposits. But we obviously flowed on non-interest-bearing deposits right away because we're paying zero on that obviously. And a lot of the even interest-bearing demand deposits in Bermuda and Cayman are also paying zero. So that's going to have a pretty pronounced effect. And we're not at the floors on the fixed-rate loans and the first $100 million, so that's really why you're seeing that minus 5%. I think we continue to model obviously modest asset sensitivity in the current environment. And some of the things that we're looking at at the moment are obviously how can we moderate that down scenario as we get towards the top of the cycle through additional fixed-rate assets in the investment profile.

Okay. That's helpful. And then just last for me. I appreciate you reiterating the $10 million in revenue, $6 million in expenses for CS. I guess, what's included in the existing numbers? How much of that $10 million and $6 million is captured in the second quarter balances?

Yeah, hi Timur, it's Craig. We closed the fresh tranche at the end of Q1, so we have a full quarter's impact from that. We generated around $600,000 in revenue from those newly acquired relationships during the quarter, while expenses were about $400,000. This includes salaries and the onboarding of those employees to get them operational. So, for the first tranche, that's $600,000 in revenue and $400,000 in expenses. When we reconvene in Q3, I'll have an update on what we're continuing to earn from those relationships year-to-date.

Got it. Okay. So, the vast majority of both revenue and expenses are still to come?

Yes, we had our first close at the end of the first quarter and just completed another close. Additionally, we had a smaller close in the Bahamas at the end of July, which was just yesterday. We will have another close at the end of September in Guernsey, followed by a later close at the end of November. By year-end, we should be complete, with Singapore coming onboard and Guernsey closing at the end of September.

We'll take our next question from Michael Perito with KBW. Please go ahead.

Hey, guys. How are you doing?

Good morning, Mike.

Good morning. Thanks for taking my questions. Just a couple follow-ups. So, just on Timur's last line of questioning, the tenant's six. So, Craig, the $85 million to $86 million near-term expense run rate that will capture the six that needs to come in correct, or would that be theoretically on top of it, particularly in the fourth quarter if all the closings call as you just laid out?

Yes. The guidance we provided represents the full annual run rate expected for 2024. As we implement various tranches this year, it will contribute more proportionately to the overall figure, but that is the complete annual run rate. The $85 million to $86 million guidance includes operating expenses, as well as costs associated with the new core banking upgrade, its amortization, and cloud-based fees. Additionally, costs will rise due to the opening of new branches, including the recently opened branch in Bermuda and ongoing upgrades in Cayman. We anticipate these cost increases as these locations become operational. The Bermuda branch has launched this quarter, and the Cayman refurbishments are currently in progress.

Yes. We are definitely focused on managing expenses given the current interest rate environment. We are developing a program that we will discuss in the upcoming quarters, but we are particularly concentrating on total compensation expenses in relation to our net interest margin. We expect to make progress on expenses in the near future.

Got it. So the $85 million $86 million near term maybe a little upward pressure on that if the deal closes as expected and then opportunities in 2024 to hopefully reduce net expense growth that you'll communicate in the coming quarters?

Yes.

Fair. Okay. Perfect. And on the NIM, also following up on Timur's question. So I mean stable in the mid-280s from here, but is it fair? I mean obviously the NIM bottomed, I think just below two in the prior zero cycle. I mean is it just structurally with the fixed assets you've put on, the idea would be that the rate of attrition if rate cuts did indeed occur which obviously the forward curve is not pulling in now, but you would expect something more optimistic than that as long as kind of the current duration of the asset side of the balance sheet holds stable. Is that generally there? I mean it seems if I just want to make sure that that's how you guys were thinking about it?

Yes, it's Michael Schrum. If you examine the asset sensitivity disclosures, we believe there is a chance for some modest NIM expansion as we progress. However, in the near term, we anticipate it to be in the mid-280s. The absence of subordinated debt will certainly enhance NII in the upcoming quarters. In the medium term, if we experience a prolonged elevated rate cycle, that would be beneficial for us.

Got it. Okay. Lastly, regarding non-interest income, you mentioned it has been relatively stable on a core basis for the past two quarters. Considering some seasonal increases and incoming fees, should we expect that the quarterly run rate might improve in the second half of the year? Does that align with your budgeting, or how should we consider the potential for that run rate over the next six months based on current information?

I think based on what we know today, that's a reasonable run rate subject to seasonality. As we reach Q4, particularly during the Christmas and shopping season, we typically see an uptick in banking fees, which we would anticipate. However, aside from seasonality, as we incorporate the Credit Suisse assets, we expect the current run rate to serve as a fair indicator of future performance.

Got it. Great. Thanks. And then just one last kind of bigger picture question for me. You guys mentioned the cloud-based core on the Bermuda platform now. Can you just maybe give us a little bit more flavor on what that means exactly? So like how much of your core base system is in the cloud today? And what do you guys view as kind of the biggest benefits of that moving forward as you think about managing the tech costs particularly the technical debt and then being more nimble to move forward if opportunities arise to plug-in upgrades. We just would love a little bit deeper in terms of what that looks like and what the benefits could be longer term as you guys see it?

Yes. Sorry, Mike you broke up a little bit. I think you were asking about what are the sort of longer-term benefits of having the IT migration? Is that?

Yes. Sorry. Can you guys hear me okay?

It's breaking up a bit. Sorry.

No, sorry it was just about the cloud core-based system and what some of the benefits of that would be longer term, why it's worth the investment today as you guys see it?

We're currently undergoing a transition from a 10-year amortization period to a five-year period, which will be beneficial from a financial perspective despite maintaining a similar run rate. Moving to a cloud-based system reduces the need for a large internal IT team, as previously we had a significant contract with DXC and owned all our server racks. Now, with a Software-as-a-Service model, Oracle, who owns the banking system, takes on maintenance responsibilities. While there is a single point of failure, this also means that if any service issues arise, we can rely on Oracle, a major vendor in the industry, with whom we have a strong partnership. This shift will enable us to implement more frequent updates, leading to faster market introductions of new features. The recent upgrade was a substantial migration that not only updated the version but also added significant new functionalities as we transitioned to the cloud. Overall, this change allows us to focus more on banking rather than IT, which will ultimately enhance our time-to-market for new products and features.

Great. Thanks, guys and sorry for the technical issues. I appreciate you taking my questions.

Thanks, Michael.

Thanks, Mike.

We will take our next question from Alex Twerdahl with Piper Sandler. Please go ahead.

Hi. Good morning.

Good morning, Alex.

Hi. First question for me. Just can you talk us through a little bit with the loan fixing moving to fixed rate the 51% you've done sort of what those new loans look like? I think you alluded to there being some floors on some of them. But just so we fully understand exactly what the product is in terms of the new time frame on them and new duration and what could impact them in the future? And then also just maybe the geographic breakdown or the breakdown by product on what's been fixed so far?

I'll start by addressing the shift to fixed loans. As you're aware, we've seen a substantial rise, with fixed loans increasing from about 21% at the start of last year to 51% currently. This reflects a significant change as we balance fixed and variable loans. Much of this shift is happening with our larger commercial clients in Bermuda and Cayman. We are also assisting residential customers in understanding their cash flow needs moving forward. Most of our commercial clients are now using fixed loans, and while we anticipate the pace of this increase to slow, it has helped them secure and manage their cash flows. Additionally, with the current trend of decreasing interest rates, this provides some protection. To recap, the fixed loans are typically for two or three years within a longer loan term, and at the end of that period, we will need to renegotiate whether to maintain a fixed rate or revert to a variable rate.

Okay. So yes, perfect. That's incredibly helpful. And so, in the residential like you alluded to the residential rate increases in Bermuda, the way that's going to impact the residential portfolio. You said some of that maybe has moved to fixed, but it's certainly not 51% that's on the residential book?

Yes. I mean, I think at this point, we're not seeing any credit stress if that was the question I think on the residential book. It does help that we have a higher proportion of fixed-rate loans that at this point in the cycle than we've ever seen in the past, so that happened pretty quickly. So I think two things, it will help us on the way down obviously, but it's clearly helped us on delinquencies and 30-day delinquencies in Bermuda and Cayman are pretty much where they've been. So we're not seeing any credit stress at this point. Some of it is because it's fixed, but I think both islands are pretty flushed with cash right now. So I think we're seeing a little bit better experience in this part of the cycle than we have seen in the past. And I'd just also point out obviously, we don't have any commercial real estate exposure. So it's two-thirds residential, one-third commercial, and the commercial is really pretty straightforward stuff. So, we're pretty pleased where we are with the credit portfolio right now.

We haven't observed a notable increase in delinquency rates. There was a slight uptick in 30-day delinquencies, but looking at 60 and 90 days, things are aligning with our expectations. This suggests that the increases are isolated incidents and are being addressed before reaching 90 days past due and non-accrual. The rise in non-accrual noted in our presentations pertains to specific facilities, particularly related to late interest payments that have been resolved after the quarter ended. We typically keep these in non-accrual status for one to two months to ensure they are back on track before moving them back to pass status. We are actively collaborating with our customers to understand their situations; some have been resolved while others are pending property sales. In the first quarter, there was a divorce proceeding involving asset sales to satisfy loan proceeds, but it is a lengthy legal process for that particular facility.

Got it. The press release mentioned an increase in the allowance for credit losses related to credit cards, alongside deteriorating economic conditions. Are you observing anything specific in the credit card sector, or is it primarily linked to the shift in economic conditions and its effect on the modeling?

Yes, it's more tied to economic conditions and kind of just looking at the forward-looking rates or GDP rates or macroeconomic rates. We actually are seeing kind of good performance in credit cards. That's good. We're keeping a very close eye on that. We kind of think that potentially credit cards could be a leading indicator to other issues when it comes to customers and being able to satisfy their commitments and then potentially have some issues around other credits in the residential, but we're actually seeing good performance on credit cards which is a good thing to see at this point in the rate cycle.

Yes. We're not really seeing utilization moving up either. People are paying off their credit card and using it as normal really.

Great. I have a final question regarding capital and M&A. It seems that with the AOCI you mentioned coming back over the next 24 months, combined with your earnings, you will likely exceed your TCE ratio target of 6.5% before long. As you consider capital return and how to utilize the capital, are you leaning more towards pursuing additional M&A, increasing the buyback, or what is your thought process regarding updates to the long-term TCE targets and how you plan to achieve those targets?

Yes, thanks, Alex, it's Michael Schrum. We have set a target of 6% to 6.5% on TCE. We hold a significant amount of cash on the balance sheet, which we need to capitalize. You're correct about the AOCI burn down; we might see TCE increase if forward rates remain stable. We're not overly worried about being slightly high from a TCE perspective. We believe that the credit quality of our portfolio will allow us to maintain a lower leverage compared to our peers. Given where we are in the cycle, especially after the recent regional bank crisis in the US, having extra resources might slightly affect our ROE, but it's a reasonable approach right now. Regarding capital return, we are indeed focused. We see the current scenario as cyclical and prefer share repurchases, allowing us to adjust our approach as needed. The Board remains committed to maintaining a stable dividend rate of $0.44 per share each quarter. We're also examining our acquisition pipeline and engaging in ongoing discussions. We're prioritizing finalizing the Credit Suisse deal by the end of this year, but we are also considering other potential business acquisitions, which will influence how much capital we allocate for share repurchases. We have increased our buyback this quarter as TCE has rebounded, and we plan to continue this strategy, depending on market conditions.

Perfect. Thank you for taking my questions.

Thanks, Alex.

It appears that we have no further questions at this time. I would now like to turn the program over to management for closing remarks.

Thank you, Nicky, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.