The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q2 2022 Results Conference Call July 26, 2022 10:00 AM ET
Company Participants
Noah Fields – Vice President, Investor Relations
Michael Collins – Chairman and Chief Executive Officer
Craig Bridgewater – Group Chief Financial Officer
Michael Schrum – President and Group Chief Risk Officer
Conference Call Participants
Timur Braziler – Wells Fargo
David Feaster – Raymond James
Michael Perito – KBW
Operator
Good morning. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2022 earnings call for the Bank of N.T. Butterfield and Sun Limited. [Operator Instructions]
Please note, this event is being recorded. I would now like to turn the conference over to Noah Fields, Butterfield’s Head of Investor Relations.
Noah Fields
Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield’s second quarter 2020 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 second 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.
Michael Collins
Thank you, Noah, and thanks to everyone joining the call today. I am very pleased with the bank’s financial and operational achievements during the second quarter of 2022. We have continued to benefit from rising interest rates, disciplined expense management and increased noninterest earnings. This resulted in strong net income and earnings per share growth as well as a very strong quarterly return on tangible common equity. Butterfield continues to be a leading provider of offshore banking and private trust products and services, with operations in highly regarded jurisdictions.
Our banking business benefits from franchise-level market shares of between 30% and 40% in Bermuda and the Cayman Island, with a growing presence in the Channel Islands. In the Bahamas, Switzerland and Singapore, we provide specialized financial services offerings in addition to our prime Central London mortgage products available to high net-worth borrowers.
I will turn now to Slide 4, where we provide a summary of second quarter highlights. Butterfield reported net income for the second quarter of $49.1 million or $0.99 per diluted common share and core net income of $50.2 million or $1.01 per diluted share. Our core return on average tangible common equity was a record 27.8% in the quarter compared to 21.9% in the prior quarter. Our net interest margin improved 23 basis points to 2.26% with the cost of deposits rising 4 basis points to 16 basis points.
The Board of Directors again declared a quarterly cash dividend of $0.44 per share. Share repurchases were paused in the quarter due to increasing OCI marks, which has continued to keep the TCE to TA ratio around 5%. We view share repurchases as an important part of capital management and will recommence share buybacks when appropriate.
I will now turn the call over to Craig Bridgewater to provide more details on the second quarter results.
Craig Bridgewater
Thank you, Michael. I will begin on Slide 6, which provides a summary of net interest income and net interest margin. In the second quarter, we reported net interest income of $82 million, an increase of 8% versus the prior quarter. The increase was due mainly to improved yields on all interest-earning assets. Average investment balances decreased by $82.5 million due to unrealized losses in the AFS portfolio as market interest rates climbed.
New money yields on investments increased to 3.85% up from 2.67% in the previous quarter. We made aggregate reinvestments of $120 million in the second quarter of 2022 versus $257 million in the previous quarter. The majority of our securities [parties] consisted of Freddies, Fannies and some U.S. treasuries. Paydowns continued to decelerate with $172 million of portfolio paydowns in the second quarter of 2022 versus $209 million in the previous quarter.
The average loan balance was down $77.4 million due primarily to a weaker pound sterling, which impacted the translated value of loans denominated in pound sterling. Approximately 39% of our loans are originated in our Channel Islands and U.K. segment, whose operating currency is pound sterling. If we remove the impact of the change in the U.S. dollar pound sterling FX rates, loan balances increased by 4% in our Channel Islands and U.K. segment at 4.4% in total.
Overall loan yields were up 22 basis points versus the second quarter, primarily due to the impact of rate increases in floating rate loans, particularly in Cayman. During the quarter, we had loan originations of $387 million versus $176 million of originations in the first quarter of 2022. This quarter’s increase included a significant loan to the Cayman Islands government.
Turning to Slide 7. Noninterest income was up 3.8% quarter-over-quarter, benefiting from increased trust fees due to the continued onboarding of new business and activity-based fees. Additionally, Noninterest revenues increased from the scheduled recognition of unclaimed customer drafts and checks as well as higher banking fees as a result of increased consumer spending.
As we have noted previously, the noninterest income remains a stable and capital-efficient source of revenues with a fee income ratio of 38.9% during the second quarter.
Slide 8 provides a summary of core noninterest expenses. Total core noninterest expenses were $81.9 million, up marginally from $81.6 million in the prior quarter and within our current targeted range. We are seeing some signs of wage inflation and have affected some salary adjustments, particularly in our more competitive labor markets of Canada, Singapore and the Channel Islands for targeted specialist skills. We are continuing to evaluate the need to make other inflation-related adjustments elsewhere. The core efficiency ratio continued to improve to 60.2%, returning to our through-cycle target of 60%. As an organization, we have been disciplined in the management of expenses, and we will continue to manage core while investing in the infrastructure necessary to conduct our business.
I will now turn the call over to Michael Schrum to review the balance sheet.
Michael Schrum
Thank you, Craig. Slide 9 summarizes regulatory and leverage capital levels. Butterfield’s capital levels continue to be strong and above regulatory requirements. Our TCE to TA ratio of 5.1% has increased slightly as deposit levels have moderated, but the ratio also remained below our internal target range of 6% to 6.5% due to lower marks in our available-for-sale portfolio, resulting from higher long-term U.S. dollar interest rates.
As a reminder, TCE to TA is not a regulatory ratio for Butterfield and the ex-cash TCE to TA ratio was 5.6%. We moved a further $332 million at fair value from AFS to HTM during this quarter to significantly mitigate any further OCI impact on the TCE to TA ratio. We continue to anticipate that the rate-driven OCI marks will keep this ratio below the target range for a few quarters as U.S. dollar interest rates rise, and this is also expected to benefit net interest income.
Our current dividend payout ratio was 46.6% in the second quarter of 2022, having declined from a pandemic high of 60.5% in 2020, and now is more in line with our through-cycle target of approximately 50%.
Turning now to Slide 10. Butterfield’s balance sheet remains strong and conservatively managed with a high degree of liquidity. Period-end deposit balances dropped by approximately $800 million to $13.1 billion versus the prior quarter. We have been anticipating these outflows of pandemic-related deposits, which also include a $251 million foreign exchange impact from the strength of the U.S. dollar.
Average deposit balances are down approximately $500 million to $13.6 billion for the second quarter. Butterfield’s low-risk density of 33.8% continues to reflect the regulatory efficiency and conservative nature of our balance sheet.
On Slide 11, we show that Butterfield’s 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 nonaccrual loans holding at 1.2% of gross loans and a net charge-off ratio of 7 basis points.
Economic activity in our lending jurisdictions continues to improve. However, given the threat of an economic slowdown following the U.S. Fed’s actions to curtail inflation, we are keeping a close — in close contact with borrowers to address any concerns that may be emerging. If we see cash flow challenges for borrowers due to rising rates, we will remain patient lenders, and we have a long track record of working with customers to a system.
On Slide 12, we present the average cash and securities balance sheet, with a summary net interest rate sensitivity analysis. Duration in the FS portfolio fell by 0.2 years following the transfer of approximately $332 million of longer duration securities from AFS to HTM at fair value.
During the past few quarters, we have modeled an increase in NII in a down 100-basis-point parallel shift in the yield curve based on the assumption that we would be able to pass along a portion of the negative rates to the positives. With interest rates now well above 0, the down 100-basis-point scenario has reverted to show a more traditional picture. We continue to expect a sensitivity to result in improving NII as market rates increase.
I will now turn the call back to Michael Collins.
Michael Collins
Thank you, Michael. With tourism and economic activity returning to our core markets, we are well positioned to benefit from a post-pandemic recovery. This was an important quarter for Butterfield as we saw NIM expansion continue to demonstrate our asset sensitivity. M&A also remains an important aspect of Butterfield’s growth story. We continue to evaluate and pursue acquisitions with in-market deals under review or consideration and more activity on the trust side of the business.
Our typical deal takes anywhere from 12 to 18 months from initial discussions to conclusion, with total consideration typically under $50 million and below 8x EBITDA. We recognize the need to carefully evaluate trust acquisitions and are particularly cautious around all aspects of AML and KYC.
We have terminated discussions on a few deals recently due to our low risk tolerance and will continue to be disciplined in our diligence and acquisition strategy. We will inform the market with an update as soon as it is appropriate.
Butterfield remains well positioned for profitability and growth by leveraging our strong balance sheet, capital-efficient noninterest earnings, demonstrated expense control, proven capital management and low credit risk. We continue to create shareholder value with leading positions in operating jurisdictions with high barriers to entry, robust infrastructure, efficient operations and a customer-centric culture.
Thank you. And with that, we’d be happy to take your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Timur Braziler with Wells Fargo.
Timur Braziler
Can we start on balance sheet size? Just looking at the deposit outflows this quarter, I think, in prior conversations, it was identified that there was roughly $1.2 billion of kind of surplus deposits, saw a decline of a little bit over $800 million this quarter, $250 million of that was FX related. So is that implying there’s another, call it, $600 million that you would classify as surplus deposits? Any color on just deposit expectations in the back end of the year would be helpful.
Michael Schrum
Thanks, Timur. It’s Michael Schrum. So I mean, I’ll just kick off with a little bit of history. So as you went back to sort of Q4 2020, we saw that big increase in deposits, obviously related to governments providing stimulus, pandemic-related stimulus and that came on to our balance sheet. In prior quarters, we said sort of approximately $600 million of that is corporate and the other $600 million is probably sort of retail related, so ultimately, onetime pension withdrawals, et cetera.
What we saw this quarter obviously had some FX in it. It’s quite volatile there. But we did also see some of these corporate customers now going back into risk assets effectively. And this was particularly prominent in the Channel Islands segment where we had a large real estate fund that went on risk with the purchase there.
In terms of going forward, I think we still view the deposit balances as elevated. Traditionally, if you go back prior to the pandemic, we would have seen sort of deposit levels inching up in line with GDP growth effectively just because we have 40% market share in our core markets in Cayman and Bermuda. So I think if we were thinking about getting back to a balance sheet, there’s probably another sort of $500-ish million of primarily retail pandemic-related deposits that, over a period, is going to get reactivated into pension assets. But the timing of that, obviously, is a little unknown at this point, but that’s — that will be my sort of guesstimate.
Timur Braziler
Okay. That’s good color. And then maybe just talking through asset sensitivity. Can you just remind us what you have currently priced in through the loan book, primarily on the Bermuda mortgages? What’s kind of been passed along to the customer? And then as a corollary to that, just how you think about the pace of higher mortgage rates versus sensitivity on the credit front?
Craig Bridgewater
Yes. Tim, it’s Craig. Yes. I guess just to focus particularly on the Bermuda book. As you know, any increases in rates have a 90-day notice period. So we would expect, obviously, those rate increases to take place 90 days after we actually announced that we’re going to do that. So that’s kind of historically based on the Fed rate rises this year, 150 basis points. We’ve passed on 100 basis points to the Bermuda base rate. So we did nothing in March. We increased by 50 basis points in May. So essentially, that will become effective in a few weeks’ time in August.
We had an increase of 50 basis points in June when the Fed went 75 basis points. So that will come more in line in September. So that’s kind of how we’re seeing those rate adjustments becoming ineffective. So we would expect in Q3 that we will have, I guess, a higher velocity of net interest income, particularly when it comes to the Bermuda residential book.
Timur Braziler
And have you —
Michael Schrum
I’d just add to that. Obviously, we are seeing more demand for fixed rates. I think customers are wanting to protect our cash flows. And as we sit here today, probably 20%, 22% of the resi loan book is fixed rate 3 to 5 years, which is a good outcome. We need more fixed rate assets anyway. And obviously, customers are reacting appropriately, I think, to also the velocity of rate increases in the market.
Timur Braziler
Okay. And have you made a —
Michael Schrum
Sorry, go ahead.
Timur Braziler
I was just going to ask if you made a decision on potentially this week’s 75 basis point hike as to what you’re going to do with that.
Michael Schrum
We are still discussing it. Obviously, overall — sorry, it’s Michael Scam. Overall, as you know, from our history, we kind of have a 50% loan beta on the Bermuda resi book and a little bit higher than that on the commercial side. So obviously, we’ll sort of react to what our competitors are doing as well in the market and take that into consideration when the Fed actually comes out. But you would expect over the full cycle to be a sort of 50% pass-through.
Timur Braziler
Okay. And then just last 1 for me. Looking at the Channel Island deposits, maybe just talk through early performance. I know you called out in the release that the beta and the deposit book was a little bit higher. Overall, they still have an excellent funding base. Just maybe talk through the Channel Island deposits? And if you can, an updated expectation on overall betas of U.S. cycle?
Craig Bridgewater
Yes. So for Channel Islands, that is, I guess, our most competitive market when it comes to deposits and when it comes to the cost banking. And we’ve actually seen the, I guess, the price pressures in that market over the last few months as well. We obviously have a watch and brief on that. We are working with various customers to make sure that we remain competitive and we do pricing that makes sense in those markets. But to your point, we would expect a higher beta in Channel Islands, but we’ve been managing that quite closely so far and just trying to increase prices where necessary and just make sure that we’re still engaged with our customer.
Michael Schrum
And I’ll just add to that, Craig. Sorry, it’s Michael Scrum. So from a modeling perspective, what goes into the disclosures here is obviously below 50% beta for the Bermuda and Cayman depositors, and 50% on demand for Channel Islands, 80% on fixed, just so you can put the disclosures into context there.
Operator
The next question comes from David Feaster with Raymond James.
David Feaster
Just — maybe just following up on the deposit commentary and just talking about the plans for liquidity deployment. I mean we’re still sitting on over $1.3 billion in cash. if we have $500 million earmarked maybe for some deposit outflows, there’s like $800 million in cash that’s available. Just curious how you think about deploying excess liquidity? Maybe what is a normalized level of cash balances for you? And then just any thoughts on securities, expected cash flows each quarter and just how you’re thinking about securities purchases?
Michael Schrum
Yes. So you probably heard on the commentary — thanks, David, it’s Michael Scrum. You probably heard on the commentary that, that we had a slightly slower prepayment speeds. Obviously, the MBS book is pretty fully extended. So duration doesn’t really move much from this point. Essentially, the way we think about deposits and cash balances is because we operate pervasive multicurrency cash balances, so we actually have sterling savings accounts on our balance sheet in Bermuda. And we operate 4 different banks. We want to make sure each of them have funding and liquidity.
Obviously, we have some reserve in Bermuda, but we normally sort of say 15% to 20% of deposits typically would be in cash or near cash, so in the cash and equivalents and the short-term investment bucket, which is typically a 3-month ladder because we don’t have a Fed window, obviously, to below into. So we always have quite a bit of excess cash, but we obviously do have some opportunity to continue to ladder both from a reinvestment perspective and net new cash.
I think, this quarter, we obviously were a little conservative in terms of we just saw deposit outflows and wanted to make sure that, that sort of stabilizes and then we’ll resume purchases. But certainly, we’ll roll over what comes off the investment portfolio. And that will obviously help NII as well.
David Feaster
That makes sense. And then maybe just touching on asset quality and credit. Obviously, the macro economy is increasingly uncertain, and you alluded to that in your prepared remarks, in the press release, but at the same time, tourism in Bermuda and everything is doing pretty well. Just curious, any high-level thoughts on the health of your local economies, the pulse of your clients and update us on some of the housing trends and mortgage trends across your footprint? Just any commentary would be helpful.
Michael Collins
Yes. So sure. I mean each of our economies are somewhat different. So starting with Bermuda, I’d say GDP is sort of flat to a little bit up. But I would say sort of anecdotally the tourism season is going really well. I mean Hamilton Princesses is completely booked. There’s tons of people around. 40% less air capacity from pre-pandemic. So it’s a bit harder to get here. But generally, the economy is doing okay, it’s kind of holding its own. Cayman continues to grow. So really good GDP growth.
So in Bermuda, in terms of housing costs, rents are maybe up 20% or 30%, so quite a bit. Housing is up as well. But probably sort of upper single digits. In Cayman, the economy is really growing. Population is increasing, housing costs are really sort of up 30% to 40%. So that, I would say, came into a really high-growth market. It’s actually the low season — summer is the low season for tourism, but the economy continues to grow really well, and that’s looking really good for us.
Channel Islands is extremely well run, like came in, no national debt. It’s not really – they’re not really tourist economies. It’s much more sort of international business, funds, trust, so sort of corporate business, but the economy is pretty good. GDP is growing in both Guernsey and Jersey. I’d say housing costs are probably not increasing dramatically, but did so during the pandemic. So I’d say, really, across the board, Bermuda is probably sort of the slowest growing economy, but Cayman’s booming and the Channel Islands is going quite well.
So from a mortgage perspective, we’re planning for some stress. So we have a great calling program, and we’re looking at mortgages that we think maybe could run into trouble and actually being proactive in getting out in front of it in terms of talking to people and trying to help them plan how to pay us back.
But overall, we’re not seeing any sort of stress from a data perspective, but we are planning for some stress and calling our clients where we need to.
David Feaster
Okay. That is very helpful. And then maybe just touching on fees. Could — first, could you maybe just quantify the increase in other revenues from that recognition of unclaimed customer assets? And then just talk about some of the other puts and takes with the fee income line, just given the investments that you’re making, some of the market volatility, uncertainty in the economy. I mean I know some of your business lines are less sensitive to market fluctuations, but just any commentary on the puts and takes for the fee income lines.
Craig Bridgewater
Yes, it’s Craig. We’re happy to kind of walk through each of each of those lines, and each of them are kind of behaving differently, but showing some strength through there. The other income in regards to the unclaimed assets, that number is — it was like kind of $1.8 million. And just to give some kind of background on that, we have a schedule of unclaimed assets that we look at on a quarterly basis. So after 7 years, kind of we look back and see what’s not been claimed and see what we can recognize. So it is a regularly scheduled exercise that we go through. I think the number for this particular quarter is relatively large compared to what we would expect. So we wouldn’t expect that to reoccur at that particular magnitude. So we would expect it to be a lot less than that. But we do see scheduled recognition of these unclaimed assets on a quarterly basis.
I guess the other points of interest is in regards to income, trust income and trust fees. And our strategy there is actually really paying off at the moment. So if you go back a few quarters, we were pretty much getting a fixed fee from our clients. And we weren’t really properly capturing activity-based fees or accounting any — in regards to tax reporting, those types of things. So we do a much better job of actually capturing those fees, and we continue to see that coming through each quarter, whereas the trust fees are actually — they’re holding up and they are basically — were basically recognizing or realizing the value of the services that we’re providing to our plans.
And then foreign exchange revenue is the other one. We’ve talked about the strategy behind that and developing more and more working relationships with our plans particularly on the corporate side, if reinsurance companies, captive companies, et cetera, helping them to manage their FX exposure. And again, we still continue to see strength in that line. So we had $12 million this quarter. We had $12.4 million in Q1, so it’s down a bit. But again, it compares favorably to Q4 of last year where we had, I think, somewhere in the region of $10.9 million — $10.9 million, $11 million. So that continues to — that strategy continues to pay off for us. And then I guess the last 1 of interest is really kind of around the banking fees.
And Michael just kind of talk through what’s happening in our economies, but as our economies continue to open up and continue to have more activity tourisms up, we would expect to continue to recognize increased levels of banking fees, particularly on credit card transactions.
Operator
[Operator Instructions] The next question comes from Michael Perito with KBW.
Michael Perito
I wanted to track back to Timur’s line of questioning and just make sure I was kind of thinking about the balance sheet size correctly here. So if we kind of go back to the end of 2020, it seems like the kind of the core balance sheet was in the low $13 billion range, maybe just for rough math’s sake, let’s say, like $13.25 billion. And if you assume kind of low single-digit growth of that figure over the last 1.5 years, that would imply you guys should be in like the, call it, $13.7 billion plus or minus range by the end of this year, which would suggest you have about $600 million of excess assets still, which seems to jive with the access deposit that you guys provided. I guess you guys generally agree with that cadence? And then as the comment in the investor deck meant to suggest that off of that kind of core number that you’ll be at by the — whatever the duration of time is whether it’s the end of this year, early next year, that low single-digit growth off of that number going forward is what your expectation is today?
Michael Schrum
Mike, it’s Michael Schrum. So I think you just — I think the math is correct, but the quarter maybe one too late. So if you go back to Q3 2020, you got a $12 billion deposit level. We saw a huge inflow in Q4 of 2020, and then we’ve seen further increases in deposit levels into the first half of 2021. And so I would expect, if you start from a $12 billion and then roll forward a couple of years from there, that’s probably more where the balance sheet — we would expect the balance sheet to be —
Michael Perito
Yes. Apologies. I was talking about assets. Assets of like, core $13.25 billion. So like it sounds like we’re on the same page, just I was talking assets you’re talking deposits. Okay. And then so low single-digit growth off of that kind of normalized implied number is in the range of what you guys are expecting moving forward?
Michael Schrum
Yes. I mean it’s as you know, there is some uncertainty around deposit flows. I think we know how to characterize the deposits. I think for a couple of quarters now, we’ve been sort of saying that as government shrink their balance sheet, so — and we go into a tightening cycle, we would expect some outflows here. And I think that’s what we’re seeing now. We do know that we have some retail deposits on here as well. So I think we can kind of characterize those buckets. And certainly, what we’ve seen so far isn’t what we would call the core retail deposit outflows at all. So they’re related to specifically funds and people parking money on our balance sheet really that was stimulus-related and risk-off related corporate deposits.
Michael Perito
Got it. Helpful. And then switching to the efficiency ratio. I think there was a comment in the deck that the 60% level is kind of like your over cycle efficiency ratio expectation. But it’s fair to think that, that’s going to move into the high 50s here as NIM continues to presumably move higher, right? I mean, is that generally a fair assumption? And it sounds like you guys are still pretty focused on trying to limit as much OpEx growth as you can. And in the third quarter, there should be another nice positive benefit to margin.
Michael Schrum
Yes. I mean we would certainly expect as we head into substantially higher rates that we could — we will dip below the 60%. It’s nice to see that the fee lines are contributing to the sort of stability of earnings as well. And we’re not expecting any massive growth in OpEx. We’ve obviously been talking internally about do we put — we’ve got some projects that we can pull forward like the branch refurbishment in Bermuda, where we’re working on some digitization initiatives as well for our customers, which is really trying to accelerate the sort of pandemic behavior that we saw from retail customers in particular, where they were kind of accelerating online because they had to, and we accommodated that. But we think that’s probably going to be a trend that’s going to stick, and so we want to respond to that.
Michael Collins
Yes. And Mike, as you know from the past, we’ve sort of said 60% to our target rate because trust is sort of a people-centric business. So that’s probably 70% efficiency ratio. And the banking, given our market share is probably 50%, so we — when rates are down, we’re in the mid-60s. And when rates are rising, we could easily be in the upper 50s. But over the cycle, probably about 60%
Michael Perito
Got it. And then just lastly for me, I think the dividend payout the last couple of years was a little higher, but it seems like it’s poised to move down here. And I appreciate your comments, Michael Collins on M&A, and it’s helpful. Just curious if maybe you could — and I apologize if I missed this, but just rehash your your updated line of thinking around dividend payout, total payout, buyback appetites? Any color there would be great.
Michael Schrum
Yes. I mean, maybe I’ll just start with — sorry, it’s Michael Schrum, again. So our capital strategy really hasn’t changed very much since the IPO, and I think it’s proven now through the entirety of the cycle, including a low rate cycle that works given the variability of net interest income, obviously arising from the asset sensitivity side of the balance sheet. So we target a 50% through cycle, approximately 50% payout ratio. Obviously, it’s not going to be exactly that. And then we look at the stability of the income, particularly in the fee lines to see if there’s support for any further increases there.
And then, secondly, obviously, we want to make sure we have adequate capital levels — regulatory capital levels to support both organic growth opportunities in our home markets as well as any mitigation strategy for risk-weighted asset growth through customers potentially coming into trouble and migrating down the risk weight spectrum, which we obviously do. And then, thirdly, we would then look at share repurchases, subject to market conditions and M&A dialogue.
Obviously, at the moment, with the sort of TCE being below our target range, that’s kind of what we have sort of thought a lot about in terms of that coming back into range in the next couple of quarters maybe. And so just kind of pause to share repurchases. But effectively, we would look to distribute anything that we don’t need for organic growth or M&A in the form of a combined payout ratio being 50% cash dividend, obviously, it’s a qualified dividend and then share repurchases. And the Board is very supportive of the share repurchase program. It’s just been paused for a couple of quarters here.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Noah Fields for any closing remarks.
Noah Fields
Thank you, Andrew, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Be the first to comment