Bank of NT Butterfield & Son Ltd (NTB) 2017 Q4 法說會逐字稿

Good morning.

My name is Keith, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Fourth Quarter and Year-end 2017 Earnings Call for The Bank of N.T. Butterfield & Son Limited.

(Operator Instructions)

I would now like to turn the conference over to Noah Fields, Butterfield's Head of Investor Relations.

Good morning, everyone, and thank you for joining us today as we review Butterfield's Fourth Quarter and Year-end 2017 Financial Results.

On the call, I am joined by Butterfield Chairman and Chief Executive Officer, Michael Collins; Chief Financial Officer, Michael Schrum; Chief Operating Officer, Dan Frumkin.

Following their prepared remarks, we will open the call up for a question-and-answer session.

This morning, we issued a news release announcing our fourth quarter and year-end 2017 results.

The press release, along with a slide presentation that we will refer to during our remarks on the call, is available on the Investor Relations section of our website.

Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussion 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.

Today's call may also contain certain forward-looking statements, which are subject to risks and uncertainties.

Please refer to the forward-looking statement disclosure contained in our SEC filings for a full discussion of the company's risk factors.

I will now turn the call over to Michael Collins

Thank you, Noah, and thanks to everybody for joining the call today.

2017 was a very successful year for Butterfield as we continue to build out our highly profitable banking franchise across our global -- growing global footprint, which includes Bermuda and Cayman where we offer leading retail banking, trust and asset management services; the Bahamas, Switzerland and Guernsey where we focus on wealth management trust; and the U.K. where we offer lending services to high-net-worth clients.

When we close the acquisition of Deutsche Bank's Global Trust Solutions business that was announced in October, we will have a foothold for expansion in Asia with a trust office in Singapore.

As previously noted, we expect the deal to close in the first half of 2018.

Turning now to Slide 4. 2017 was a record year of profit for Butterfield both on a net income and core net income basis, which increased 32% and 15%, respectively.

Core return on average tangible common equity was 22.4%, a 200 basis point improvement over 2016.

I'm very pleased that the Board of Directors recognized the improved earnings run rate of our business and has increased the quarterly common share dividend by 19% to $0.38 per share.

In addition, the board also approved a share repurchase program for up to 1 million shares, which will be implemented as a tool to help us manage our capital.

Our solid 2017 results were driven by an improving rate environment, low-cost deposits and robust capital-efficient fee earnings.

Results were strong across all revenue lines and jurisdictions.

We continued our efforts to manage expenses and expect to see the core efficiency ratio improve as we complete the final stages of closing large projects such as the Halifax service center build-out and Sarbanes Oxley compliance.

Further to the Global Trust Solutions acquisition we announced in October, this morning, we announced that we are acquiring Deutsche Bank's banking businesses in Cayman, Guernsey and Jersey.

These businesses provide services to financial intermediaries and corporate and private clients and are very similar to our existing banking operations.

This acquisition strengthens our positions in Cayman and Guernsey and includes operations in Jersey, which is the largest of the Channel Islands.

We expect this transaction to increase our deposit base by about 20% once completed before the end of the year.

Due to the terms of the transactions, we are not able to disclose financial details, but believe this will be another successful acquisition.

We continue to believe there are significant M&A opportunities as a consolidator of bank-owned wealth management businesses that are in line with our long-term growth strategy.

I'll now turn the call over to Michael Schrum to provide commentary in the fourth quarter financial results.

Thank you, Michael, and good morning, everyone.

I'll now cover the fourth quarter performance in some further detail.

Starting on Slide 6, we present our summary income statement and net interest income.

Fourth quarter core net income was $42.2 million corresponding to $0.76 earnings per share and a core return on average tangible common equity of 22.3%.

Both net interest income and noninterest income noted increases this quarter.

In the fourth quarter, net interest income increased $9.3 million to $76.1 million compared to the fourth quarter of 2016.

We continue to see expansion of net interest margin to 2.87%, an increase of 6 basis points compared to last quarter due to continued repricing of the loan portfolio and increased yields.

Interest-earning assets averaged $10.5 billion with a yield of 3.03% as we benefited from yield improvements across all asset classes.

Turning now to Slide 7. Butterfield's capital efficient and growing fee revenue generated businesses continued a strong fourth quarter totaling $42 million, an increase of 11% compared to the prior quarter.

Noninterest income increased with banking and foreign exchange revenues leading the favorable movement compared to the third quarter of 2017, due to the success of a year-end promotion for card users, increased FX volumes and higher commissions.

Butterfield's fee income ratio continues to lead the peer group, helping us achieve top-tier returns on equity.

Slide 8 provides detail regarding Butterfield's core noninterest expenses of $78.9 million.

Our expenses were significantly elevated in the quarter as we completed multiple accelerated programs, such as Sarbanes Oxley and other compliance-related projects.

We also incurred some office setup cost in Singapore ahead of the GTS acquisition.

Additionally, we increased the year-end's performance-related compensation accruals in the fourth quarter to align with the 2017 employee bonus pools to the record financial performance for the year.

We consider the first year SOX compliance expenses to be core, but not recurring as the scope moves from implementation to business as usual.

As a result, we expect our core cost income ratio, excluding any M&A-related cost, to moderate and get us back to around a 60% cost income ratio.

Slide 9 provides summary of capital levels, specifically relative to Basel III regulatory capital and leverage capital.

Butterfield's Basel III total capital ratio held steady at 19.9% in the fourth quarter, which remains well above both Bermuda regulatory requirements and the U.S. peer average.

Our common equity to total asset ratio increased by 10 basis points to 7.1%, which continues to be at the high end of our targeted range.

As we have now completed our 2018 planning cycle, the Board of Directors approved management's recommendation to increase the quarterly dividend by 18.8% to $0.38 per common share as well as authorize a share repurchase program of up to 1 million common shares for the coming year.

We recommended both these actions as a means of improving shareholder return and providing tools to help optimize capital levels.

Finally, I'm pleased to note that the new Deutsche Bank client deposits and regulatory capital requirements in Jersey will be managed within the existing capital pace, which in turn will activate excess capital and move leverage and regulatory capital ratios back to our target range of between 6% and 6.5% on a leveraged capital basis.

I will now hand it over to Dan to discuss the balance sheet.

Thank you, Michael.

We continue to manage the balance sheet to optimize efficiency and profitability while emphasizing strong risk management.

Slide 10 provides a summary of the bank's balance sheet at the end of the year.

We ended the year with total assets of $10.8 billion, an uptick of 1.9% from the end of the third quarter.

We have been maintaining a highly liquid position with 49% of total assets comprised of cash and equivalents, short-term investments and investment assets.

Our liquidity allows us to strategically invest in higher-yielding securities as the rate environment improves.

Average deposit balances of $9.5 billion increased from $9.4 billion last quarter.

As we have commented previously, we tend to see variation from quarter-to-quarter in our deposit base as our larger trust clients manage their commercial interests.

Turning to Slide 11.

Looking now at asset quality, our loan portfolio was $3.8 billion at the end of the fourth quarter comprised primarily of residential mortgages and to a lesser extent, commercial real estate loans.

As we previously discussed, these commercial real estate loans are predominantly indirect reinsurance exposure in Bermuda.

Loan balances increased by approximately $100 million from the prior quarter, due primarily to a new loan to the government of Bermuda as well as continued growth of our U.K. residential mortgage portfolio.

Group nonaccrual loans totaled $43.9 million at December 31, 2017, compared to $48.7 million at the end of the previous quarter.

The net charge-off ratio was 12 basis points for the quarter.

Our $4.7 billion investment portfolio increased by $93 million or 2% as we see yields move.

As the yields on the long end of the curve increase and hopefully, we see some steepening, our prudence over the last couple of quarters puts us in a very good position.

Again, highly rated securities continue to represent the majority of our investment portfolio with AAA-rated securities totaling 93% of investments at year-end.

Turning to Slide 12.

You will see that Butterfield continues to be more interest rate-sensitive than our U.S. peers.

I will now turn the call back over to Michael Collins for closing remarks.

Thank you, Dan.

Before we conclude, I would like to comment on our current view of the potential effects of U.S. tax reform on Butterfield.

Based on commentary from various sources such as reinsurers, captive reinsurers, rating agencies, the Bermuda government and others, we do not anticipate any meaningful impact to the jurisdictions in which we operate.

We view any impact as marginal and do not expect significant changes to the reinsurance or captive insurance markets in Bermuda or the hedge fund industry in Cayman as a result of U.S. tax reform.

With strong earnings in 2017 and an excellent finish to the year in the fourth quarter, I remain optimistic that we are well positioned to benefit from rising rates, improving expense efficiency, growing noninterest earnings and a focused M&A strategy.

Our strong results in recent transactions with Deutsche Bank should provide the market with a proof of concept that we can deliver and execute on stated goals.

And finally, we are very thankful to all of our staff across the group who dedicate themselves to delivering market-leading products and services to our very valued customers.

Butterfield's record results and success finding high-quality earnings-accretive acquisition targets in the trust sector serve as continued validation of our specialized banking model, focused on creating value for shareholders.

With that, we'd be happy to take your questions.

Operator?

(Operator Instructions) And the first question comes from Alex Twerdahl with Sandler O'Neill.

First off, I know you can't disclose the terms of the deal that you announced this morning, but is there anything else you can give us in terms of is it a similar deal to the HSBC transaction from 2015 in terms of coming with deposits, fee income?

Anything else you can kind of give us to help with the modeling?

Thanks, Alex.

It's Michael Collins.

I think it is fair to say that the deposit side of this has some similarities to the HSBC transaction.

Dan Frumkin really drove the acquisition.

So I'll pass it over to him and let him give you a little more detail.

So listen, let me walk you through.

I'm happy to disclose in response to your question a bit more detail that should allow hopefully everybody to model it.

So as Michael said in his note, it's about 20% of existing deposits.

For ease, let's just call that $2 billion worth of deposits.

I think it makes the math easier.

You need to remember, we are a multicurrency balance sheet, and this is a multicurrency acquisition as well.

So of the $2 billion, $1 billion, about half of it will be U.S. dollars and then 25% will be pounds and 25% will be euros.

So if we just -- and the business has very little lending and the cost of deposits are really minimal.

So if we go through the earnings, if you assume that we'll take the U.S. dollars and put half in cash, half in investments, which I think is a pretty conservative assumption, and again this is as it bends in over time than when it stabilize, so this is probably late '18, early '19 by the time we get to that point.

Cash, we're earning about 86 basis points on cash at the moment, $500 million.

That's a little over $4 million worth of earnings.

In investments, I think our investment yield, as we published, is 227 basis points.

That times $0.5 billion is a little over $11 million.

So those 2 things added together gets you almost $16 million of income.

On the pounds, we expect to use about 300 million of the 0.5 billion we'll get in pounds to fund our U.K. lending proposition.

So this gives us more scope to increase lending in the U.K. and naturally fund it through these deposits.

So that earns about 3% gross yield on those loans.

So 300 million times 3% is about 9 million.

Then you have 200 million left over that we split between cash and investments.

Again, 1-month gilts are T-bills.

U.K. T-bills are earning about 27 basis points, so that would be about 300,000.

And 3-year gilts are about 81 basis points, so that would be about 800,000.

So the 9 million for loans plus the little bit left over gets you a little over 10 million.

So between the U.S. dollars and the pounds, you're at about 26 million of earnings.

We'll earn nothing on the euros.

Although rates are moving, so you might -- we might, but at the moment, just assume nothing to keep the math simple.

And then there is some FX, some custody revenue, some noninterest income that we think will be about 5 million annual run rate.

So all of that gets you to about 31 million of additional revenue.

The issue really becomes is the -- and from a cost perspective, there's complete overlap in Guernsey and Cayman.

I don't think there'll be much incremental cost, a few people, but nothing overly substantial.

But we do have to stand up Jersey.

Again, it's a brand-new island for us, a bit like the conversation we had about Singapore.

It's a strategically important island for us.

It actually opens up some strategic optionality for us going forward in terms of other opportunities, but we do have to build the bank there.

We've already been given a banking license that has some conditions to meet, but they're all relatively standard.

So we're well down the path in standing it up.

We also get more people in Mauritius.

So in terms of expenses, I think, roughly, you could assume 90 people in Jersey at 100,000 a person is 9 million.

35 people in Mauritius at 50,000 a person is 1.8 million.

And then we have a lease to lease some premises, and there's some other expenses as you would expect, let's call that 3 million.

So you end up with about 14 million in expenses against the 31 million in revenue.

So it should contribute when stabilized on an annual basis, about 17 million a year or sort of be 9% plus or minus accretive.

Is that helpful, Alex?

That was -- yes, that was very helpful.

I try to be.

You could just put that in the release.

Actually, we really could have.

And then my other question is just in terms of how you -- do you plan to invest the cash that you have on hand right now?

We've obviously seen a pretty good run up in the 10-year up to 2.90%.

It's something you've been sort of holding off on investing for a long time throughout 2017.

Should we expect there should be some accelerated investing of cash in the first quarter of 2018?

Or can you just give us an update on sort of the strategy for how you're going to ladder on the existing cash on the balance sheet into securities now?

Yes -- no, Alex, thanks.

it's Michael Schrum.

Great question.

I think the strategy is still the same, but the new 2.50% is probably 2.90%.

So I would say absolutely spot on.

We should see some acceleration in that.

Don't forget we have quite a bit of runoff on the existing book as well, so that would just reladder out.

And then finally, we're sort of at our stated target in terms of the cash and short-term investments right now, but we could probably -- we'll be looking again at that to try to make sure that we are optimizing that as much as possible as well.

But you're absolutely right in what you're saying, it will be acceleration.

And the next question comes from Michael Perito with KBW.

A couple of questions for me.

I guess just a follow-up on the last question on the margin.

I think with the 10-year where it is, you had a hike in December, maybe just a more broad question.

I mean, I think earlier in the year, you guys had said to kind of get to a 3-plus percent margin, you need a little bit more movement on the short end, a 10-year that's working in your favor a bit more.

I mean, do you think the environment at this point is getting closer to that being a realistic expectation at some point, maybe in the middle to back half of next year?

Yes.

I mean, I think on the margin side, obviously, you saw some expansion this quarter.

As you know on the loans side, we still have a quarter to go from the September rise that's going to come through that 90-day lag.

We're at 2.87% right now.

I could see a path there this year for sure.

Some of it depends a little bit on what happens in the U.K obviously if Bank of England sort of starts coming off at 50, which there's some noise about now.

And then obviously, it also depends on the short end, how many moves we get, as you know, this year.

But certainly, it would be a realistic modeling assumption, I think.

Okay.

And I wondered if we could just spend a minute on the expense side of things.

Can you maybe -- you guys kind of verbally mentioned some things, some -- whether they're not recurring or onetime in nature, but can you maybe just give us some dollar amounts of some of the larger items that were accelerated and pulled in the 4Q and maybe some thoughts on -- or you guys maintain the efficiency ratio outlook?

It sounds like it's at about 60%.

But I mean, is that maybe including a bit higher revenues and a higher expense run rate right now than kind of high 60 million?

Are we in the low 70 million type of run rate right now, I guess, excluding all the M&A stuff at this point?

Yes.

Sorry, it's Michael Schrum again.

Thanks, Mike.

And obviously as you correctly said, we continued to reiterate the 60% cost income ratio guidance in the near term.

And you're right, the fourth quarter was noisy and elevated for a couple of reasons.

We started to see that planned outperformance with the 20% ROE margin expansion, net income sort of accelerating in Q3 and Q4.

This is our first year as a public company, and we sort of had a comp consultant look at all of the way we compensate for our financial performance, et cetera, in the sort of second quarter, third quarter, and decided to kind of realign the employee bonus pools in Q4 to sort of more closely align to pay-for-performance philosophy.

That was one of the observations there.

Obviously, record financial performance for the full year '17, so that created probably, and you can see that in the pack as well $4.5 million delta in Q4.

Some of that, we'll certainly look at earlier in '18, that's fair to say.

And that cycle just kind of needs to be betted in, and all of that is really related to the financial performance of the company.

And secondly, we had a significant professional services fee in the first year of our SOX compliance with an increased burn rate in the fourth quarter as we kind of sprinted to the finish of a full year 1 accelerated implementation.

I think we discussed that previously, and it was a consequence of transitioning from being an emerging growth company to a large accelerated filer, which kind of brought that time horizon in for full year 1, internal controls and SOX certifications to a 1-year program as opposed to a 5-year program.

But we kind of knew that up front, but it was certainly a bit of a heavy lift in year 1, I would say, and that's not unusual probably for new public companies.

Thirdly,, we had some start-up costs in preparation for the GTS acquisition, including some setup cost for our new Singapore operation.

So for the SOX bit, you can see that coming through in the professional services, which is probably just over 2 for the quarter.

Most of that was sort of what we'd consider first -- sorry, 2 for -- 2 delta around sequential.

And the last bit was probably about $1 million or so, just some leases and some employment contracts and some professional services again in terms of setting up Singapore operation.

When I sort of step back and look at the cost base year-on-year, we invested sort of over 20 million in 3 important programs really, upgrading the BSA ML compliance infrastructure, all the way from client on-boarding to payment screening.

That's certainly a lot more robust than it was.

Sarbanes Oxley, again, there weren't really any significant issues on our control environment, but you have to redocument and update all the documentation in year 1. year 1 also included a significant amount of script testing for key control reports across 3 different jurisdictions.

So it's a bit -- you can probably hear it's a bit more painful than maybe we have thought going into it.

But nevertheless, we had a good outcome.

And thirdly, setting up our group service center in Halifax, which had some indicative costs in year 1. I think they're all 3 very important programs, and they continue to improve the operational risk profile and internal controls at the bank.

But they're now moved to a business as usual in 2018.

We don't have the first year costs recurring in that.

So if we look at that year-on-year, you should see the run rate normalize in the short term and the current revenue base can support a 60% cost income ratio for the existing business portfolios.

You're absolutely right, we'll see some take on expenses as we go into integrating the acquisitions.

Okay.

So I mean, I guess taking that all in, it sounds like, excluding anything M&A-related near term, 60% cost income is still the right number.

But like I said, maybe a bit higher margin, revenues are a bit higher, but the expense run rate should normalize in the lower 70 million-ish-type range versus kind of target that of high 60s previously.

Is that a fair summarization?

Yes, I think 70 to 72, a couple of percent inflation may be offset slightly by the start-up expense save program.

But I would agree with you that's -- we're still very focused on it.

But yes, it is -- the cost of being a public company is a bit higher than not, but for good reason.

Okay.

That was very helpful, Michael.

Just one last question for me, maybe for Dan, just although the rundown on the DB deal and accretion was very helpful, how much -- as you mentioned, that 9% figure, it seems like it's more of a '19 figure once this deal is all done.

And you guys mentioned, there are some -- it seems like some tranches or deposits that will be coming over at different times.

Can you maybe just talk or give us a little bit more color on the timing over 2018 of how these deposits are going to come on board?

And any other -- I guess, just -- that would be helpful.

Okay.

So Mike, I -- it's a great question.

So we really don't anticipate picking up much in terms of deposits.

And so you get into the latter stages of the second quarter, really.

I think it will be -- and even then, I don't know that we'll start to see same inflows until really the fourth quarter.

So there's a chunk of the deposits that are tied to custody agreements and custody arrangements.

And moving the custody assets, and then all in custody assets is just a process, and that process will take us.

So we think the majority of the deposits will be on our books by the fourth quarter, with a little bit in the -- end of the second, a little bit in the third on the majority and the rest on by the fourth quarter.

We will think we'll help the business up and running, stabilized, all staff moved across that we're taking by the fourth quarter.

So I think you'll start to see that normalized run rate late fourth quarter into 2019 really.

I think, Mike, by the time we get it done.

The big bang date for staff to move across is scheduled for very early in the fourth quarter, at which point we would think we would have picked up the majority of deposits.

So December, forbid the first month maybe where it's normalized and then for all of '19.

Yes?

Perfect.

And actually, guys, I'm sorry, I'm going to speak one more.

But just any more specific thoughts on the closing of the Global Trust deal?

And did these 2 deals kind of take you guys out of the M&A arena for 6 months or so here?

Or how do you guys -- how do you think about that, Michael?

I don't think -- I wouldn't say it would take us out of the M&A arena for 6 months.

But as you know, there's a long lead time in these discussions.

I think it does a number of things.

I mean, I think it cements our position as the kind of go-to acquirer for offshore trust companies as onshore banks continue to sell them.

And I think this most recent transaction cements our position as a go-to acquirer for subsidiaries, offshore subsidiaries of onshore banks that are getting out of the market.

I think what we've been able to do, particularly Dan and his team, is I think people are interested in talking to us because first of all, I think we're practical, easy to work with, and we've gotten a reputation for treating the -- not only the customers, but the employees very well, because I think what we understand in these markets, particularly the trust side, the employee is really on their clients.

So it's really important that we treat them well.

And so I think banks and trust companies that are thinking about selling their offshore subsidiaries will naturally think of us.

So I think we have a lot more M&A opportunity, given these 2 transactions.

But to your point, 2018 is really going to be focused on finishing up GTS as quickly as possible, and that integration is going well.

And then this new transaction, which obviously somewhat transforms our balance sheet, given the size of the deposit base, is going to be our focus too.

So we'll keep working on it, talking to people, but these are really our 2 focuses for the year.

What I would say, Mike, just for a little specificity, on GTS, we're still anticipating early second quarter close at worst.

We've had over 90% of the staff except employment offers with us, and that deal was always about the staff.

We're having very good client take-up.

We - our group Head of Trust was in Asia with their private, DB's private banking and wealth team.

I just talked to the gentleman who runs Switzerland for us.

He's off to South America again with DB's wealth management and private banking.

So I think the transaction is going very well.

In terms of this transaction, well, it will utilize capital because our balance sheet will get bigger in terms of just trying to keep TC to TA.

It doesn't really use much, if any, capital to actually make the acquisition.

So it really is -- it hasn't necessarily used up capital we may have available to do a transaction or ways we could do it, because it's just -- it's the structure of transaction.

(Operator Instructions) And the next question comes from Will Nance with Goldman Sachs.

Congratulations on finding another acquisition.

I think a lot of my questions at this point have been answered.

Maybe I'll circle back to the margin, and just see if you guys have any thoughts on kind of near-term margin dynamics lag -- or sorry, any impact from a commercial book, lag impact from the second quarter on the residential book, and just any thoughts on kind of the trajectory there?

So I would say -- Will, it's Dan.

We saw a bit of uptick to -- from the resi book, as you know, from the rate move.

We've not yet decided to do what we'll do if they move in March.

But again, the only decision we make really is on the residential side.

So again, we would pick up if there's a rate move in March.

We would pick up on the commercial side, the full rate move.

We just have some thinking to do on the residential side to see what unfolds.

We're not really seeing any pricing pressure on the deposit side.

We have launched a couple of new term deposit accounts to try to create flexibility for our client base, take-up on those has been quite muted.

So again, we're not really seeing a big movement.

So I think you should expect margin to expand.

I think will start to be able to take some of the floaters we have sitting in the investment portfolio now, (inaudible) floaters and start to move some of that into a bit higher-durated, longer-durated assets, which should pick up a couple of 150 to 200 basis points in yield, which will help the margin.

So I think it's fair to model out margin expansion as we get through 2018.

Especially with 3 rate moves and opportunities in the investment portfolio that we're now seeing, I would expect margin to expand.

Got it.

That's helpful.

And then maybe just on the acquisition, you mentioned there's not a whole lot of lending in the existing business.

Does having the banking license open you up to further lending opportunities on those markets?

Is there much of a lending market there?

And just kind of what is your thought on kind of growth in the loan portfolio?

It sounds like you're having more powder to kind of grow the U.K. mortgage book and entering a new market.

Yes.

So Will, it's a great question.

I think, initially, this business we're acquiring is very much like the Guernsey and Bermuda and Cayman.

It's a financial intermediaries business.

So it's not a local branch-based business.

It tends to be trust company fund families and the like, which great, great custody opportunities for us, good noninterest income as well as a sizable deposits that create interest income for us.

So there's not a natural retail offering where we will be doing lending, but we are thinking about what we could do in the Guernsey and Jersey markets.

Lending opportunities, residential running opportunities, the markets are quite muted compared to what you would see in the U.K. or even the scale of our Bermuda lending opportunities.

So if we did do something, I don't think it's a big needle mover.

The reality is that the U.K. is going quite well.

Finding some more native pound funding was a really attractive part of this transaction, and so I would hope that we would be able to continue to stretch our legs in the U.K. The Bermuda and Cayman books are holding up as we've always modeled, broadly flat, a little bit up with some sovereign lending we've done, and there's a bit of activity in Cayman that we're unable to lend into.

But again, I don't know how much of a loan growth story we are, but there might be a bit.

Yes?

Got it.

No, that's very helpful.

And just finally, a very administrative question on my end.

Just when you think about the 2 acquisitions you guys have outstanding, are there any kind of like shareholder regulatory approvals that you guys still need?

I guess what is -- what's the process look like from here?

So Will, it's Dan again.

So we have a complete approval from Deutsche who've gone through their regulatory regimes.

We have our board approval.

We are -- we still do need regulatory approval for -- from the BMA.

We -- although we had preliminary conversations and would anticipate hopefully would be forthcoming.

So there's a little bit of regulatory hurdles to clear.

But it's very different than that question if I was sitting in the U.S. So the regulatory hurdles are meaningfully shorter, smaller, closer to the ground than the hurdles you would find, I think if I was in the U.S. So we're pretty confident.

And as I said, we've already -- we started conversations with the Jersey regulator in August of last year about getting a banking license and investment license in Jersey in anticipation that this deal may happen.

So we've been working with the Jersey regulator and Guernsey regulator for more than 6 months in anticipation.

And CEMA's already given consent in Cayman, and it didn't require CEMA approval based on the scale of the transaction.

So I think we're in good shape, Will, to just move forward.

It's really going to be clients that determine the base of the transfer because it really is up to the clients about how we can make sure it's least disruptive for them.

And the next question comes from Timur Braziler with Wells Fargo.

My first question, back to the loan growth, what was the size of the Bermuda government loan this quarter?

So we had about 50 go out to the Bermuda government, and it may grow more than that, but we had about 50 to go out.

It won't be huge.

It might be 2 or 3x that size by the time we're done.

And it may -- it's sort of more bridge facility over time because that will end up going back to the bond market.

So we've been very helpful over the past few years in terms of bridging them in between bond issues.

So it won't always be there as well.

And was much of the remaining linked quarter growth, was much of that coming out of the U.K. portfolio?

Yes.

So I guess as we look at that business, it's a couple of consecutive quarters now of pretty strong growth.

I guess relative to your initial expectations and entering that space, I guess what's driven the outperformance?

And is this type of growth something that there's a decent pipeline for especially now that it can be kind of self-funded?

I guess the pipeline on that geography would be really appreciated.

So again because where we're our focus are -- it's Dan again.

So where we're focused is in the high-end or ultra high net worth or certainly upper end of high-net-worth individuals in a nice bridge in Kempson & Chelsea, that market is huge.

It's probably -- in terms of market values, it's probably a couple of trillion dollars probably.

So we're taking a very small sliver of the overall activity that goes on.

We believe we still have room.

And that our offering, it's very bespoke, very custom tailored, very manual, very personal interactions.

So we think we have room to grow and continue to pick up a little bit more share, because we're not doing -- the kinds of bond we're doing is not the mass volume, and there is an opportunity there.

We just hired in a new team from another lending shop, which we were glad to pick up.

And so I think there is -- I think there's an opportunity for us to continue to grow.

Again, we're not really a big loan growth story team, all right?

It will be -- it will help, but I don't think it's transformational, if that makes sense.

Right.

No, that's good color.

And then just maybe looking at the Bermuda resi book.

I know we're still waiting for the September hike to be reflected in those figures.

Is the December hike going to be passed along?

Or has that been decided earlier?

So yes, it's Michael Schrum, Timur.

So the December when we passed on through to the base rate as well, and that obviously has a 90-day lag on it as well.

So I think one other cross the margins, but the commercial and resi, we had a bit of noise in the previous quarters.

They're actually fairly well behaved this quarter, above in terms of volumes and NII.

And you can clearly see that although you're not getting the full flow-through on the resi side of 25 bps because it's somewhat muted by the volume rate variance coming out a bit lower-yielding U.K. mortgages, you're still seeing that sort of 12 basis points uptick coming through.

Okay.

But as we look on a go-forward basis, should we now expect to get more in the rhythm of every other rate hike?

Or is that still pretty discretionary for each rate increase?

Yes, I mean, it's pretty discretionary.

That's -- as you know, that's what we model in our asset sensitivity.

So we're still very asset-sensitive.

I think in the early part of the cycle, we all kind of in an agreement that we should -- we were uncertain what was sort of happening to the funding rates in the market.

I think there's a bit more uncertainty about that, and it's fair to say just like with everybody else, everyone gets a little bit harder and a little bit more discussion around it.

So -- but I think it's fair to say it will be a good modeling assumption to put every other one in just like we've done.

Yes, because I think it's just looking forward with inflation obviously hardening, I think we can kind of be a bit more balanced as we go forward.

I think we're nervous in the early stages of the rate turn that obviously was going to reverse it up quickly.

So I think your thoughts are right.

Okay.

And then just switching back to expenses for one more for me here.

Can you quantify what the total pull forward of expenses were in the fourth quarter as we kind of remove some of the noise from finishing off this year and some of the pull forward expense?

What's a clean number that we should be looking at as we enter 2018?

Yes, I think -- I mean, I clearly don't look at this in a considerable amount of detail.

So I think we posted 78, I think, for the quarter, which was significantly higher than what we would want on a 4-quarter average basis, if you will.

So I think if you said sort of 70 to 72, it would probably not be a bad number to use for that.

It's a little bit higher than I think the previous guidance.

There's a little bit of inflation in there, and then there's a little bit of structure expense saved from obviously the Halifax initiatives as well.

And then as we -- there's a bit of timing.

That's just an existing businesses, and that will get you comfortably to the 60% just with the current revenue base if you pull forward the rate move that's still coming in.

So I think that's kind of a good number to use.

Obviously, as we expand the franchise, we'll try and get good color around what that means.

I think Dan's given some initial numbers about what that looks like in expenses, and we'll certainly give more color as we start to onboard people and make sure that you have a good number there.

Okay.

But it seems like a lot of the more or less onetime or kind of accelerated expenses occurred in the fourth quarter, those should be shed pretty quickly and getting to your run rate starting pretty much in the beginning of the year.

Yes, I know we've said sort of the near term.

Obviously, we're just completing SOX with the 20th process because we had the first year full integrated audit.

But that's half the quarter, if you will, and then it pans down and sort of think about what SOX year 2 looks like.

And some of the new programs coming on are much smaller, I think, clearly, things like data loss prevention and cyber, et cetera, but they're much more fleshed out already and much smaller than the heavy lifting we've done on SOX and some of the compliance infrastructure on AML that we've done over the last year.

Okay, that's helpful.

And then maybe just one more if I can.

On the M&A front, congrats on getting a second deal you announced.

Was part of this deal kind of triggered by the October announcement of the GTS transaction?

I guess how closely are these related?

Was this something that you were looking at even back then and just took a little bit of time to get on paper?

Or kind of how did the -- that the time frame from October to now work out with these 2 announcements?

So Timur, it's a good question.

They're sort of related.

I would say that the corporate development team, the team that we've developed a good working relationship team with at Deutsch was really how to get through the GTS transaction to free up enough headspace to be able to work on this transaction.

So they were always going to be more sequential.

But the underlying business teams are meaningfully different.

So from an integration perspective on our part, it really is banking and custody in Cayman, Guernsey and Jersey.

That doesn't overlap really with our trust operations.

So that while we're integrating the trust business, the banking folks can get on with integrating this business.

So it really does work.

So they were sort of related, but not as tied as the HSBC transaction was where the trust and the asset management and the wealth business sort of wrapped up into one thing.

This is by no means all wrapped up and actually reported within the DB hierarchy to different people.

So no, it really was just getting the corp dev team freed up.

But I think, overall, I think Deutsch's view that we're able to execute GTS, and again as I said earlier, that we're able to execute it and be practical and easy to work with and really treat their people well, I think that gave them a lot of confidence that we were the right buyer for the second business.

So very different businesses, but I think related in the sense that we are developing a reputation of an acquirer that does what we say we're going to do.

And the next question comes from Don Worthington of Raymond James.

A couple of things.

One, were there any repurchases this quarter?

No.

On the capital, we came out with a dividend and a new plan.

The old share repurchase plan lapsed immediately after or shortly after the IPO.

As you know, we've raised primary equity in the IPO in '16.

And so we really wanted to build that cushion in on the capital before sort of evolving to capital management framework to where we are now.

Okay.

And then are you still kind of targeting a payout ratio of about 50%?

Yes, that's exactly right.

And we've sort of reconfirmed, good discussions in the board meetings.

I think we certainly are targeting around the 50%.

I think everyone's conscious that we also want to make sure that we have enough tools in the tool belt to return capital, and we don't let the dividend run into a nonsustainable level, which clearly isn't the case at the moment as we're expanding the franchise.

But they were good -- that was a good discussion to have there.

And yes, it's still 50%, around 50%.

Okay, great.

And then just in terms of -- on the noncore expenses, do you expect -- or I guess I should say how much longer do you think this tax compliance review cost will be part of your noncore expenses?

Yes, I mean this was triggered by an event that happened in 2013, and we spend a lot of time on this going through all of our files and e-mails back to make sure that we had good line of sight to how many people were banking from all the different countries, et cetera.

I mean to some extent, this noise goes away in the future because of the common reporting standard and FATCA.

Unfortunately, and I think we're certainly at the end of where we've given everything that we can to the U.S. Attorney's office, and we're sort of waiting for that to kind of work its way through the system.

Unfortunately, sometimes that doesn't happen on the time frame that you would like for it to happen, but I think we're hopeful that we're getting closer to a resolution that's productive.

And as there are no more questions at the present time, I would like to return the call to management for any closing comments.

Thank you, Keith, and thanks to everyone for dialing in today.

We look forward to speaking with you again next quarter.

Have a great day.

Thank you.

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