David Feaster: Okay, that’s helpful. And then maybe just touching on the resi mortgage trends that you’re seeing, curious how much of the decline in balances this quarter is customers paying down and deleveraging just given higher rates and using excess liquidity on that versus maybe you working with borrowers and maybe pushing some folks out, just given increased concern there. Just how are borrowers’ balance sheet and debt coverage holding up in a higher rate environment? And how you think about credit trending in — assuming that we stay in a higher-for-longer environment?
Michael Schrum: Yeah, David, it’s Michael Schrum. Good questions, again. I think debt service capacity is staying up. The on-schedule prepayments that we’re seeing are coming mainly from the Cayman customer base and our UK, and the rest is really amortization overtaking new originations in Bermuda. So I don’t see any credit deterioration. We do have 50% of the portfolio as fixed, so that will certainly help during this period in the interest rate cycle. But we’ve probably — and we’ve never really been a loan growth story. So I think, again, these are kind of customers reacting to and looking at their own financials and saying, hey, I’m paying a higher rate on a loan. Even if I prepay and pay a little fee to the bank, I can use some of my excess cash.
And given the volatility in other markets, maybe that’s the best decision for them. And so that’s some of the impact that we’re seeing. Obviously, in Central London, as we underwrite to 60%, 65% LTV, you’re really lending to customers at relatively high rates who definitely have the capacity to prepay. And given the market is slowing down in terms of volume of transactions in that market, but prices are holding up, we’re likely to see that for a little bit longer as customers reposition.
Michael Collins: Yes. And, part of — David, part of the repayment scenario in Caymans is because the economy is doing so well, so population growth is into the low 70,000 range, so there’s a lot of excess cash moving around the system. So when rates get to a certain level, a lot of the professionals, who are clients in Cayman, just prepay, there’s no need to keep the loans. So there are good reasons for all of it. And I think, as Michael mentioned, we’ve been through this before in terms of not ever changing our underwriting standards because we haven’t pushed ourselves as a loan growth story. And the most important thing for us is to be consistent across a cycle and make sure that we get repaid.
David Feaster: Makes sense. Thanks, everybody.
Michael Collins: Thanks, David.
Operator: The next question comes from Michael Perito of KBW. Please go ahead.
Michael Perito: Hey guys, good afternoon. Thanks for taking my questions.
Michael Collins: Sure, Mike.
Craig Bridgewater: Hey, Mike.
Michael Perito: I just had a couple quick ones. Number one for Craig on the expense side. So $85 million to $86 million near-term, by the midpoint of next year, I think it was $12 million or $13 million of annualized cost savings expected. Obviously, I imagine there’ll still be some kind of inflationary growth. So just like rough math, is it fair to think of some moderation to that $85 million to $86 million in the back half of next year? Or do you think there’s kind of enough inflationary pressures where that’s not necessarily kind of the right starting point yet and you guys will kind of give us more next quarter?
Craig Bridgewater: Yeah, we’ll come back with some more — I guess some more guidance next quarter, but I think you’re right. So after we have fully implemented the group restructure and going into the second half of next year, I would expect some moderation, and we would expect to see the benefit of that exercise coming through the expense — core expenses going forward. But as I said in my comments, just looking at some of the previously mentioned increases that we’re expecting around the IT infrastructure and the core banking systems coming online, we went live in Cayman at the beginning of this quarter and that went well. We’re obviously continuing to monitor the implementation of that and making sure that everything is working as planned for, as expected.
But obviously, that has a cost implication, and we will actually start to see the amortization of the core banking system in both Bermuda and Cayman coming through in Q4 and into Q1. And then [Technical Difficulty] quite a few people that were actually working on that project, and we were able to get capital treatment for those expenses. They’ll come back into kind of BAU. So that’ll be another headwind. So therefore, I think fill in the bucket for the next couple of quarters and then the second half of next year we would expect to see some benefit coming through. And again, there’s kind of free application of the CS cost as well, and guidance around the CS remains the same at around $6 million.
Michael Perito: Got it. Okay. That’s helpful. And then on the — follow-up question on NIM. It feels like, and correct me if I’m wrong, but it feels like this is probably the least asset-sensitive the balance sheet’s been in quite some time. So I was wondering if you can maybe just give us some updated thoughts around, kind of in a vacuum, how 25 basis point cut to US Fed funds would kind of impact the NIM based on how you’re positioned today as we try to think about various macro scenarios that are kind of being baked into consensus outlooks here.
Michael Schrum: Yeah. Hi, Mike. It’s Michael Schrum. Maybe I’ll kick off. So you mean 25 up, right? Just confirming. There’s a lot of wide array of views out there.
Michael Perito: No, yeah, yeah. No, I’m asking if — not saying that this is our house view, but if there were a 25 basis point cut to Fed funds, like, this just feels like the least asset-sensitive the balance sheet has been in some time. So just trying to get some updated thoughts about how you think. I’m assuming the NIM would still contract, but perhaps a lot less than maybe prior cycles. Just trying to get some parameters around how you’re thinking of that.
Michael Schrum: Yeah. So I mean if you look at the down 100 basis points, it’s not linear in that sense is what you’re asking. So it will depend on how we respond to the cut in terms of loan rates initially. And as you know, there’s a 90-day lag on that in Bermuda and that’s around 50% floating, 50% fixed. So I think the fixed rate loans really have moderated the asset sensitivity and then the realization obviously coming off the floor has further moderated the asset sensitivity. So we’re expecting not very much impact from the first 25 basis points, I would say. And then you can look at the minus 100 basis points and kind of grow into that if there’s further cuts, which obviously is why we’re thinking if there is significant cuts in rates, then we’ll have some protection from the fixed rate loans and from the remaining duration. Obviously, that will start to bring back OCI even quicker.
Michael Perito: Got it. That makes sense. And it’s helpful. And then just lastly for me, a big picture question. Just are you seeing any onshore, at least in the US, there’s a lot of banks pulling back from credit markets and things of that nature going on around liquidity and stuff like that. And just curious if you guys are seeing the early signs of any kind of potentially opportunistic things for you guys to take a look at. Just obviously the balance sheet is pretty well positioned here, lots of liquidity, lots of capital. So just curious if in any of your markets you’re seeing some early signs, maybe some opportunities that could be coming for next year or the year after for growth and just any thoughts there would be helpful. Thanks.
