Bank of NT Butterfield & Son Ltd (NTB) 2018 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Third Quarter 2018 Earnings Call for The Bank of N.T. Butterfield & Son 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.

Mr. Fields, please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us today as we review Butterfield's third quarter 2018 financial results.

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

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

Yesterday afternoon, we issued a press release announcing our third quarter 2018 results.

The press release, along with a slide presentation that we will refer to during our remarks on the 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 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 and slide presentation.

Today's call 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.

For the third quarter of 2018, Butterfield reported solid results, highlighting the strategic strengths of our differentiated financial services platform, which benefits from a leading presence in Bermuda, Cayman and the Channel Islands, where we provide banking, trust and asset management of product and services.

In the Bahamas, Singapore and Switzerland, we offer wealth management and trust services and in the U.K., we provide residential lending services, exclusively to high net worth clients.

Turning now to the quarterly highlights on Slide 4. During the third quarter, Butterfield generated industry-leading risk-adjusted returns with margin increases, increased loan volumes and steady fee revenue.

We reported net income of $50.4 million or $0.90 per diluted common share.

Core net income was $49.1 million or $0.88 per diluted common share, down slightly from the previous quarter but up 21% compared to the same quarter last year.

Total return on average tangible common equity remained in the mid-20s at 24.9%, down from 27.6% in the prior quarter and up from 22.2% in the third quarter of 2017.

Our net interest margin continue to expand in the quarter as interest rate increases continue to benefit loan yields and investment returns.

The cost of deposits remained low at 20 basis points with a modest 6 basis point increase sequentially as our term deposit CD rates were partially adjusted with market rates.

We remain on schedule to close the Deutsche Bank, banking and custody acquisition in the Cayman and Channel Islands.

This includes setting up a new banking in Jersey, which is a large and attractive banking market, growth opportunity for Butterfield.

I'll now turn the call over to Michael Schrum to provide additional commentary on the third quarter financial results.

Thank you, and good morning, everyone.

On Slide 6, we provide a summary of NIM and net interest income.

Net interest income increased 1% sequentially and up 18.8% compared to the third quarter last year.

Net interest margin improved to 3.37%, up 17 basis points versus the prior quarter.

Yields on the investment portfolio improved 11 basis points to 2.78%, as we reinvested an additional $200 million of floating rate securities into longer duration assets.

Loan yields improved as expected by 10 basis points to 5.54%, benefiting from rate increases, following the U.S. Fed funds rates and the Bank of England base rate.

Turning now to Slide 7. Here we provide a summary of the performance of our fee businesses, which contributed $41.3 million of noninterest income during the third quarter.

The third quarter saw slight reductions in banking and foreign exchange fees compared to the second quarter as the third quarter normally experiences a small seasonal dip in tourism-related cost and FX usage.

On Slide 8, we provide an overview of noninterest expense.

This quarter, we incurred redundancy cost of $2.4 million as 23 full-time predominantly management roles were eliminated across the bank's operating entities.

In addition, we spent $700,000 of setup costs on our new bank in Jersey.

These initiatives are expected to benefit the bank's expense profile going forward.

These 2 items were the primary reasons why our cost income ratio was 62.3% this quarter compared to our target ratio of 60%, and we continue to have a strong expense control focus.

Looking now at Slide 9. We provide a summary of capital levels, specifically Basel III regulatory capital and leverage capital.

Butterfield's Basel III total capital ratio increased 100 basis points to 23.3% in the third quarter, which remains well above, both Bermuda regulatory requirements and the U.S. peer average.

We expect to return to leverage capital target levels once the Deutsche Bank acquisition closes over the coming quarters.

Additionally, we are pleased to confirm that the board again authorized a cash dividend of $0.38 per common share.

The tactical buyback program remains an option for us with the full 1 million share authorization available.

Turning to Slide 10.

We ended the quarter with total assets of $10.4 billion, which is lower than recent quarters following a period of higher trust and hedge fund customer deposit balances.

On average customer deposit balances in the third quarter were $9.4 billion, down from $10.1 billion in the same quarter of 2018.

It is important to note that the deposit outflow in Bermuda was related to a few specific trusts and corporate clients, who chose to purchase or start up new businesses or funds and not related to rates offered by the bank.

While we are retaining these important customer relationships in the bank, it is likely given the use of the funds withdrawn that they will not return to Butterfield in the near term.

In terms of loan growth this quarter, we were pleased to see continued activity from the U.K. business as well as increases in the Bermuda commercial loan book.

Our cost of deposits remained low at 20 basis points as we partially passed on the Fed rates increases to our term deposit or CD product customers.

Looking now at asset quality on Slide 11.

Our loan portfolio was $4.1 billion at the end of the third quarter with 63% comprised to residential mortgages, and we continue to experience high credit performance levels across all loan categories.

Our $4.6 billion investment portfolio remains predominantly high-rated securities with AAA-rated securities, totaling 96.2% of investments at quarter-end.

During the third quarter, we reinvested $200 million of floating rate securities and longer-duration assets into the HTM portfolio.

We are now at target cash levels, and we'll continue to roll over maturities of the existing investment portfolio into higher rates.

Once the Deutsche Bank deposit book is onboarded, we will season these into the investment portfolio over time.

On Slide 12, we discussed the average balance sheet and provide a summary interest rate sensitivity analysis.

Butterfield remains asset sensitive, although we have gradually been booking some of the asset sensitivity into book yields, which reduces the overall interest rate risk profile of the bank.

The overall average duration of the investment portfolio across AFS and HTM categories is now 4.4 years versus 3.3 years at the end of September 2017.

I will now turn the call over to Dan Frumkin for a quick update on the setup of our new Channel Islands bank in Jersey and a quick update on the previously announced acquisitions.

Thank you, Michael.

As you will recall, the Deutsche Bank trust acquisition has closed and been fully integrated.

You will see the uplift in year-on-year trust fees.

The Deutsche Bank banking acquisition is progressing well.

Several accounts have migrated already, proving our ability to successfully convert the business.

Clients have been receptive to moving to Butterfield and our Jersey bank has booked 1 new non-Deutsche Bank relationship, with 3 more expected to close in the near term.

We are excited about the opportunities Jersey presents for the bank.

However, the transition is taking longer than we would like due to the complexity of migrating custody relationships.

Given the nature of the custody relationships, new mandates are required to be executed by the clients.

This has slowed the transfer of balances, which are expected to migrate late in the fourth quarter and through the first quarter of next year.

In addition, balances are trending lower than originally forecast.

While it is still too early to have exact figures transferring, it is expected the balances will be closer to $1 billion.

Given current market rates, the transaction should still be 4% to 5% accretive.

Importantly, the purchase opens up the Jersey market and we did not pay any purchase price for this book of business.

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

Thanks, Dan.

Before I finish my prepared remarks, I would like to acknowledge and thank David Zwiener for his many contributions to Butterfield as Lead Independent Director.

With our earnings release, we announce that David has decided to retire from the bank's Board of Directors.

Jim Burr, a Managing Director of The Carlyle Group, has agreed to expand his current duties on Butterfield's board and will serve as Lead Independent Director.

Jim's expertise in banking and finance has made him a valuable and long-standing contributor to our success.

Butterfield has achieved industry-leading results this quarter demonstrating the value of our strategy and our ability to execute.

We remain focused on managing expenses and positioning our balance sheet throughout the interest rate cycle.

We continue to work to identify geographically appropriate and accretive trust and banking businesses, which would benefit from being a part of Butterfield.

Thank you, and with that, we'd be happy to take your questions.

Operator?

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

First off, I just want to ask, drill in a little bit more into the deposit balances at end of the quarter.

I know, Michael, I appreciate your commentary about some bigger customers investing elsewhere, but is there a little bit of over $9.1 billion as sort of the starting point going into the fourth quarter.

Is that reflective of what you expect the average balance to look like during the quarter?

Do you have some volatility into the end of the quarter as you sometimes do?

Alex, it's Michael Collins, I'll start off and pass it on to Michael.

But just overall, in terms of deposits, if you look at the decline, we've been pretty consistent about talking about the volatility of some of our trust and hedge fund clients, and this is exactly what this has represented.

We have one client that represents over half of the decline in average balances, and not unexpected the reasons are what we've been talking about along, which is they put the money to work somewhere else.

So we still are not seeing any rate sensitivity in our core retail sort of commercial corporate deposit base, but the volatility really is at the top end.

And I would say that's probably -- we feel like, that's kind of a low point in terms of the volatile deposits, but we really haven't seen any movement in our core deposit book.

Yeah, Alex, it's Michael Schrum.

Yes, I think, great question.

So I would just echo what Michael said.

We kind of look at the stable and the volatile bit.

And I think we had a couple of quarters mid-year last year, where we saw a couple of hundred go on and off the balance sheet and, obviously, it's great when it's there.

But clients have bigger checkbooks than I do certainly.

And when they get the distributions from the trust, they pocket for a bit and then they go off and do -- start a new fund or buy a large property.

So it's not really related to the core business.

And as Michael said, we're at a low point with those that dozen or so kind of clients that represent that topic.

So I think you're exactly spot on in terms of that's kind of a good starting point.

There were specific deposits given that they are now in a fund and probably not coming back, but from time to time, as we've seen over the past 8 quarters or so, we'll get others that come back to the balance sheet.

Okay.

So if you look at it right now, how would you -- could you kind of slice up that core business versus the volatile piece as a percentage of the overall portfolio and just kind of ballpark?

Yes, so if I look at the 12-quarter average, and I think initially when we were on the road for the IPO, we kind of said, look the deposit balance probably going to grow at a compound annual growth rate of sort of 2% in line with GDP across the primary operating jurisdiction.

So that's Bermuda, Cayman and, obviously, Guernsey.

We're at a very low point in terms of volatile balance.

So the split right now is -- the remaining is stable.

There's a couple of clients who have still some larger balances but, obviously, we go -- we do go in and talk to the clients.

We monitor outflows and inflows, we talk to the relationship managers and those very important clients, they're still very important clients for the trust business.

The relationships are still with us, they are just doing other things with their money and it's not rate related.

Okay, great.

And then, Dan, can you just as you look out for the Deutsche Bank, it's closing in the next quarter and a half or so.

The billion dollars deposits of line, can you just give us the breakdown of where those deposits are, and how we should be thinking about the investment opportunities associated with them?

Yes, Alex, I'm happy to.

So listen, we get to know more and more as we get closer and closer to actually transitioning the clients.

So I think we have seemingly better transparency than we had 8 or 9 months ago.

So it looks like the mix is going to be as we initially thought.

So of the $1 billion, it's going to be sort of 50% to 60% U.S. dollars, and then I think the remaining 40% is probably split evenly between pounds and euros.

So again, and there is a fair amount of noninterest income, as you know, custody fees, FX.

So that's a few million bucks.

So I think when I initially walked through the math, I think we thought we'd have total revenue off of the book of about $30 million.

I think that's more likely when you figure out, I think as you sit here today, I think it's likely to be closer to $17 million to $20 million because we get a bit of interest rate increases that get to bleed through.

And the expenses, I think, I guided initially at sort of $14 million to $15 million, I think, it's likely to be more around $12 million, so sort of $3 million a quarter.

So a little bit lower expenses.

And again, as we betted in, if we can't find the revenue, then we'll push harder.

So I mean, I think you're looking at total contribution sort of $8 million to $10 million, maybe $11 million.

Once it's bedded in as it settles in towards the tail end of next year.

And I think we initially guided like $15 million to $17 million.

So I don't think it's -- definitely, the balances are lower than we expected and we're disappointed by that.

But the reality is, as I think, it's still a very accretive transaction.

And it opens up the Jersey market for us, which we think, again, we've already had a customer come in and begin a relationship with us.

We have 3 that we're in the process of documenting all sort of custody-related relatively large kind of fun family.

So we're pretty excited about the opportunities that we have in that market.

So similarly pleased with it, just not quite exactly what we thought it was when we started this -- these conversations.

Next question comes from Timur Braziler with Wells Fargo Securities.

First question, Dan, I didn't hear the number for the new expectation of balance to be acquired from Deutsche Bank.

What was that new number, Dan?

It's about $1 billion.

$1 billion.

Okay.

And just given some of your commentary, is it fair to assume that much of that is going to take place in the first quarter?

Or is it progressing to the point now where you think there might actually be some meaningful slippage past the first quarter as well?

No, I think it's going to be -- I think it will be late this quarter and into the first quarter.

So it won't really help average balance this quarter very much, Timur, it's very well may be in spot at quarter end and then some of it will go into the first quarter.

Okay.

And then as you look at reinvesting those balances, just would love to hear your commentary on the expected pace.

It seems like you guys all believe that the balance sheet is probably a little bit smaller than maybe at this point last quarter.

So -- just so the pace of reinvesting those deposits into some higher-yielding assets once they do hit the books?

So I think there's -- I think listen, I think at the end of the day we need to let them season in, we need to understand the underlying volatility of them.

Fund deposits can bounce around a bit.

So we need to make sure that we understand what the average balances are versus peak quarter end spots and work through that process.

So let's just assume we picked them all up by the first quarter, and we're going to need season them for 6 to 12 months to make sure we're comfortable with them as we layer them in.

The one place with the pound deposits that will probably be a little bit more willing to put them to work is they will fund the lending that we're doing out of the U.K., because at the end of the day, we think that's a business model we'll continue to support.

So again, for that, the GBP 200 million to GBP 300 million of deposits we might pick up, we will put those to work in lending out of the U.K., which again is about a 3.5% yield.

So that will happen pretty quickly, but in terms of the U.S. dollars, we need to make sure they season in.

And again, the euros, they're not very exciting at the current rate profile.

But the $500 million to $600 million worth of deposits, we just need to let them season in a bit but short end of the curve, you make pretty good money.

So it's not, again, the short end of the curve, you're almost making as much as I think I said we would make off the investment portfolio when we guided the deal.

I think I said 227 basis points when we had the original conversation.

The reality is short end of the curve, you're not far off of that.

Okay.

Next maybe just switching over to expenses indicated that there had been some employee reduction over the third quarter.

How should we think about the expense base as we head into year-end?

Timur, it's Michael Collins.

So just to start off, over half of some of the expense increase was really 23 redundancies.

I think we had talked about, these were pretty senior redundancies in all 3 or 4 of our jurisdictions, pretty much spread evenly, and it's something we will continue to do every year or 2 as we think about our cost base.

And to that, it was a onetime hit, and obviously, the setup of Jersey was also a bit ahead.

So I think where we're spending, we know where we're spending.

We're spending on cyber, we'll continue to spend on compliance.

We're continuing to spend on setting up our low-cost jurisdictions like Halifax.

So we know where it's going, and the biggest chunk of this actually was the onetime severance redundancy hit.

Yes.

And Timur, maybe I can just give a little bit more color in terms of our WAC.

So we're at sort of 83 core, 3 of that was clearly not something that we would expect to see next quarter.

So maybe a little bit more travel related just to kind of get people trained up as we bring them onboard from Deutsche Bank.

So $79 million to $80 million kind of range is the right number that gives us with the current earnings profile, certainly get back to the $60 million.

I know -- you know that there's always debate about whether those are onetime or nonrecurring.

We certainly feel like they're certainly not repeatable, in fact, the redundancies are going to actually the cost profile of the bank going forward, it's less than a 1-year payback on that.

So heading into 4Q, I think we're back to where we were in 2Q, so $79 million, $80 million.

Then obviously, we get some onboarding of the staff, as Dan talked about, so that adds sort of $3 million and a bit in the quarters going forward.

And then we are kind of starting from there to kind of then think again about efficiencies with our Mauritius operation, Halifax, how do we do things better.

Once we land the business, that will be a key focus for us.

And obviously, if we get less deposits, less revenue, that's going to be the pressure point is going to be in cost.

As we get less deposits, we are also thinking about capital, we don't have to capitalize as many deposits.

We still have the tactical buyback there.

We're still interested in pursuing acquisitions and conversations are still ongoing, and Dan can talk a bit about that.

And then as we come off to planning season as usual, we've done in the past couple of years.

We'll then have a look at the dividend again and the franchise to make sure that, that's sustainable, but still guiding around the approximately 50% payout ratio.

Okay.

So the onboarding of the staff that $3 million or so, a chunk of that should be offset though by the third quarter staff reduction, correct?

Yes, I mean, the third quarter has probably $0.5 million run rate a quarter cost saves and then, obviously, the $3 million is going to be offset by revenue primarily.

So as we look, the $700 million that we incurred this quarter is really setting up these costs, we have an office based now in Jersey, these are things that just come in before the revenues, but we look at -- the DB in Jersey as kind of a standalone as part of the Channel Islands segment and, obviously, want to turn the page and quickly get that to profitability.

Okay.

And then just lastly looking at the loan book, what was the split of growth between U.K. versus Jersey on the residential side?

So there was no growth in Jersey this quarter.

Predominantly, the loan growth came out of the U.K., as you'll recall, all sub-65% loan to value.

We're seeing good traction in that market, that market is a refined market, 3- to 5-year floating.

And so that was the predominant increase in volume coming up.

As you know, the book in both -- Bermuda amortizes faster than origination and then we had a couple of draws, one was obviously the Bermuda government, as you know, through some additional on their commercial lending in Bermuda.

But the majority of it, and I think you can see it in the press release, we kind of split out the resi versus commercial, the commercial was all Bermuda, the resi was all London.

And I would say just to make the point, we're obviously still focused on our current credit risk appetite, so we haven't changed any of our plans in London, still Central London, golden postcodes, I wouldn't say completely immune to Brexit but certainly it's a different client base.

So we're still focused on taking very little credit risk in all our markets.

Next question comes from Will Nance with Goldman Sachs.

Maybe I'll start on the Deutsche transaction, just following up on some of the earlier questions.

I guess, could you maybe give us a little bit more color on what's driving the decline in the estimate of balances that are available?

And I guess, could you kind of assess maybe the risk of further reductions to that or just kind of what's driving -- or do we think this is kind of a good run rate for the deal?

Will, it's Dan.

So listen, I think -- they did a few things.

I think at the core, everybody remember this was sort of a nonstandard transaction with Deutsche where we stepped in and took over businesses, they didn't really hire an investment bank.

They didn't do the work internally themselves.

So the corp dev guys didn't really engage.

So we were getting data from sort of the Managing Director of the Financial Intermediary Group there, who looked after Jersey and the Cayman businesses and the bit, that was sitting in Guernsey.

I think some of the data we received probably wasn't scrubbed as it could have been.

So I think as we've dug in, we realize the part of data where we're seeing, had some clients in it.

Things like Deutsche Bank Group had some money through some subsidiaries.

So obviously, that wasn't going to stay.

There was one large client who we knew wasn't going to stay, it was very clear, wasn't going to stay.

So I think it was a bit of that, and I think there's some noise in the data that we initially had and the Managing Director who was there wasn't coming over to us.

He was never coming over to us, and has since exited the business, which has allowed us to really get stuck in with the one that we are acting as MD.

And Jersey, a lot of skipping on the data a little bit more.

So I think we got a little bit more clarity.

I think also there's been a bit of volatility in the deposit numbers.

So we can't decide whether some of these counterparties have decided to minimize their exposure to Deutsche Bank.

Because the 1 or 2 clients that we've transitioned already, we have seen some positive volatility in those balances.

So they are moving money to us, and they are saying that, that they are moving money back to us.

So we're hopeful that occurs.

I think at this point, we have really good transparency, we're stuck in at the client level.

We're going name by name, we're meeting clients now directly.

We're pretty confident in what we're guiding now.

And I think it was just some underlying data quality issues that we got, that were hard to see through until we could actually get really stuck in.

And two, there is a bit of volatility that has us a bit nervous about what the average balances will be.

Got it, that's helpful, I appreciate that.

I guess maybe just taking a step back, and I appreciate Michael's comments earlier on the capital free up from a lower base of deposits here and given, I guess, the market reaction today, the kind of source of funds that you're getting.

Would you guys look to be more aggressive on the buyback here given what stocks?

Yes, I think we've always said, like, if we can find accretive acquisitions, that's step 1, but they have to be accretive, we have a very high ROE.

Secondly, good dividend to support.

And thirdly, tactical buyback.

We're bullish obviously.

We just finished 2 days of board meetings, very supportive at -- in that regard.

And then, obviously, fourthly if we find that, that we're in between acquisitions or capital was just racking up because of higher ROE profile, we might also consider a special.

We don't want to get to an unsustainable level of dividend payout.

We don't think we are, we are not heading there.

So yes, buyback would definitely be on the table.

And again, you'll look what's happened to the shares today and, obviously, yes, an attractive moment.

Yes.

No, I think that makes sense.

Okay, and maybe switching gears a little bit, I guess, I want to make sure that we all kind of understand the expense guidance a little bit.

So what I was hearing is that the core of this quarter was roughly at that $79 million, $80 million level.

You've got about $3 million and change coming into the run rate.

So I guess starting -- beginning of next year, should we be thinking about building off of that kind of $83 million to $84 million and that's kind of the run rate of expenses that you'll grow off of, once kind of the Jersey banking is all kind of set up and running?

Yes, I think that's right.

Well, I think the -- and I think, we did say, look, it's going to be a bit choppy because some stuff, we're going to have to just enter a release in order to get people into the building, et cetera.

And so that's kind of what you're seeing now.

Obviously, we treat it as core, because we're going to get the revenues.

But we also look at 0-basing expenses all the time and that's why we go in and sort of slightly restart and say, look, we're opening a Singapore office, we need to get more control to the MDs.

That means some people are no longer with the company and that should help the expense base going forward.

So I think that's a good number.

It could be a bit choppy, as I said before, in terms just -- and we'll try and point it out, obviously, hopefully to everybody when we see anything that is kind of not BAU.

Got it.

And if I can slip one more in.

And you mentioned being at target cash levels, I guess the securities yields have gone up quite nicely over the past 12 months.

I guess given you guys have done a lot of repositioning and have laddered out some cash, can you just talk about how you're thinking about the trajectory of the securities balance.

Maybe it's easier to talk about at ex the Deutsche Bank transaction, just to make sure we're kind of on the same page of, kind of, what you're buying and how you're thinking about that yield going forward?

Yes.

No, that's a great question.

And I've made that comment because if you look at our cash and short-term investments, we always guided to around the $1.5 billion level.

And that's really to account for that volatile component of deposits and not getting the vast key tips in terms of relying too much of that when we put it out into high-yielding securities, but also have liquidity locks or potential realizable losses associated with them.

So we are at target levels right now.

You'll recall back in 2016, we did the HSBC transaction.

We kind of seasoned those deposits in and laddered them out.

We guided to $200 million a quarter.

We've kind of roughly done that, and we're now at that level.

So as you look at pre-Deutsche, if you look at the existing book, obviously, we're rolling over about $150 million a quarter just the maturities on the existing book.

Some of those are behaviorised duration 6 years old and coming back at book yields of 2 -- in the 2s, and we're rolling them into the $360 million, $370 million range.

And so that's going to keep having positive impact on NIM from the -- or yield from the investment book.

But it's not going to be at the pace that we've seen over the past 18 months where we've had the volume increase and the sort of opportunistic deployment of the $200 million a quarter as well.

So it will continue to -- I think, it will continue to go up but it will go up at probably a slower pace, not on the NIM, but on an NII basis if that makes sense.

Next question comes from Michael Perito with KBW.

Most of my questions have been asked already.

But I did want to spend maybe a little bit more time on the margin, because it did seem like in the third quarter, a part of that sequential increase was due to the lower kind of liquidity and, I guess, the remix, if you will, on the international side.

So I guess, under that backdrop here, we're at 3.37% today, sounds like less liquidity is coming over from Deutsche.

And, obviously, the cash balances at least conservatively are going to be lower as we move into next year.

So I guess, any initial thoughts kind of how all these pieces come together and what you can kind of expect?

What we can kind of expect from a margin perspective as we move into next year?

Yes, great question, again.

And I would say, we are still expecting, obviously, as the market does additional increases at the short end and that will benefit the cash positions and the T-bill data that we have for cash short-term investments.

So a lot of the NIM expansion is going to depend, obviously, on -- we will continue to reprice loans, obviously, as we have in the past.

Large portion of that book reprices automatically.

We are seeing a bit more interest in 3, 5-year fixed.

So the loan beta may not -- is still going to be strong but maybe not quite as strong as maybe not the quite the 50% passthrough that you've seen over the last 6 or 7, but still upward be trending.

I think the -- a lot of the NIM expansion will depend on what the longer end of the curve does.

So it's still pretty flat, although it's broken out a little bit.

So if we see the 10-year breaking out further, obviously, that will have a more beneficial effect as we roll over maturities into high-yielding assets from the investment book.

So all that to say is if we get a couple of more rate hikes, that's going to be obviously continue to be very beneficial to us.

As you'll see on the asset sensitivity slide, we are less asset sensitive than we were 2 quarters ago.

Duration is a bit longer.

We've always said, we don't need to hit the top of the cycle, we just need to ladder into a rising interest rate environment.

So there's some, I think, stabilization, but still upwardly trending.

I know I'm not giving a specific number, Mike, but it's a little bit tough to guide when the 10 year is bouncing around like it is today.

But we are not changing the asset mix.

We're still investing in 30 Ginnie specific guarantee USA -- U.S. government guaranteed pools.

We feel that's a good continued reduction in asset sensitivity for us, and so we're just continuing to do what we said we were going to already.

That's helpful, Michael.

As it stands today with your current kind of economic projections, I guess, I mean, any initial thoughts may be, specifically, as we think about the first quarter next year once all this billion dollars of deposits are theoretically fully on the balance sheet, what type of spread you think you're going to be able to earn on those?

And would this type of impact you believe to see near term on the NIM from that?

So I think as long -- sorry, Mike, it's Dan.

So as long -- for the portion that's the U.S. dollars, I think as they season in, obviously, it will be a bit of drag, obviously, because it will invested at the short end.

However, as they season in for the 50%, 60% it'll look a lot like the NIM we have now.

I think the reality is for the Great British pounds that we get, the sterling we get, the real at 3.5% on the loans that feels pretty good.

That's what we're doing with our sterling today.

So I think it's all okay.

I think, there will be a bit of a drag as what euros we get.

So if we get 20%, 25% of that in euros, clearly that will be a bit of a drag on the NIM.

But for the most part, the pounds we'll put to work as we already are and the dollars we'll put to work over time as we are, the early part might be a slight drag.

But overall, I think it will look a lot like it is today.

And I don't think euros will be big enough to actually change the overall mix much.

Got it.

Helpful.

Just last question kind of a, I guess it could be a question hard to quantify and apologize if I don't word it correctly.

But just as we think about the deposit base, I think if I'm trying to understand -- I guess it's kind of a 2-part question.

I guess, one, is there -- I guess where does your flexibility go in terms of wanting to maintain versus lose clients over time.

And I guess, secondly, as we think about the makeup of your client deposit rather your deposit base today, is there a way to measure, I mean, how -- what type of money would be able to kind of search for rate elsewhere versus that would be more inclined to stay?

I don't know if I'm wording that in a way that makes a lot of sense.

But I guess, I'm just trying to get a better sense of what portion of the deposit base could in fact perhaps be a bit more at risk from a rate perspective versus could be pretty stable?

Yes, so it's Michael Collins.

I think the original premise of our business model is exactly the same in the sense that we're in 3 jurisdictions, 4 jurisdictions now the bank you saw at Bermuda, Cayman, Guernsey and Jersey that have -- collectively have deposits that are about 3x GDP.

So we're in the center of these sort of global capital flows both on the corporate side, like reinsurance, hedge funds and also private wealth, and the money is in these 4 jurisdictions for a reason.

So there's not a lot of rate shopping.

The money doesn't go back onshore for a higher rate.

There isn't a huge amount of competition in most of our jurisdictions.

So it doesn't really bounce around within the jurisdiction.

So it really will stay in the jurisdictions when it leaves like the experience we've just had recently is, as we talked about it, it's hedge funds, it's some of the big trust clients and it's also industries like biotech.

So we get substantial deposits sort of research and development deposits for a biotech company, that we know are going to have for 6 to 9 to 12 to 18 months and then they end up going.

But they do come back because they start developing other drugs.

So the money is here.

So what you're seeing again is not price sensitivity.

It really is just the nature of our capital flows in the business.

Next question comes from Arren Cyganovich with Citi.

I wondered if you could provide a little more update on the M&A pipeline.

Is there been anything that's moved forward or may be some details on trust versus bank acquisitions, and maybe given in light of the kind of changed expectations around the recent banking acquisition that changes your view of entering into these or how you would enter into these in the future?

Listen, I think it's a great question.

Thanks, it's Dan.

Conversations are ongoing.

I think the Jersey market has given us a platform that has opened up an array of other conversations that we can start to have.

I think Singapore has done the same for us.

We are continuing to talk to trust companies both large and medium size in different jurisdictions, including some global names about their desire to exit or not exit, those conversations continue to be ongoing.

And then on the banking side, like as we've talked about, the Jersey market is a substantial market with several participants in it that may or may not be as committed to that market.

So again, lots of conversations ongoing and we continue to work through them in a methodical way.

I would say that Deutsche acquisition doesn't change our appetite for what we would do.

I think the reality is that if somebody else wanted to give us their banking business in a market we liked for free, we would absolutely take it from them and it is accretive.

I think at the end of the day, we're doing a great job from an operational perspective getting it converted.

The clients are very happy to be with Butterfield.

They're quite committed to the story of being in with an offshore bank.

So the client reception has been great.

So I think overall, the Deutsche acquisition has solidified our position and our belief in our position as the leading offshore provider of these services.

So we're out having those conversations, and we'll continue to chase it and we'll see where it gets to.

The next question comes from Don Worthington with Raymond James.

Let me circle back a little bit to the margin discussion.

You've guided in the past to kind of passing on every other Fed rate hike to customers.

Is that still the intent or would you change that at all?

Yes, Don, great question.

It's Michael Schrum.

As you'll recall, almost 3 quarters about loan book reprices automatically, so that's the Bermuda commercial with every Fed funds hike.

The repricing of the U.K. book is finally coming off the floor, so we saw a better bit of good news when Bank of England increased their base rate there.

The Cayman is of U.S. prime so that reprices automatically.

It's really only the Bermuda bit, the $1.2 billion of Bermuda dollar real estate, resi real estate loans in Bermuda that we have any optionality around and just by way of just going down memory lane.

We said we were going to pass on every other rate hike.

We've passed on 5 out of 7. We modeled the asset sensitivity around the 50% passthrough on the loans.

Obviously, increases in Fed funds and U.S. prime and Bank of England base rate is accretive from a NIM perspective.

Depending on where we -- we took a lot of the NIM expansion in the first part of the cycle, and we obviously look at competitors in the market.

If you take a look at HSBC, they haven't really increased as much.

So those are some of the areas that we consider when we think about whether we increase the Bermuda dollar base rate.

So I think the one and two is probably a good measure, that's how we model it.

We've been better in the past.

We obviously want to continue to do better, but we're also going to consider the competition and what else is happening.

So I think that's probably a good assumption.

Okay, great.

And then on the Bermuda government loan, how was the increase this quarter?

It's in our financials under the government in the loan note, that is $30 million.

Yes, probably about $30 million...

It's in a note fund.

And as you remember that, that's sort of bridge financing for when Bermuda goes to the bond market.

So that's going to increase and that will always come off a bit.

But we have a lot of indirect lending to the government as well so -- it's a good relationship and it works well.

This concludes our question-and-answer session.

I would now like to turn the conference over to management for any closing remarks.

Thank you for joining the call today.

We look forward to speaking with you all soon.

Take care.

Thanks.

This conference has now concluded.

Thank you for attending today's presentation.

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