Bank of NT Butterfield & Son Ltd (NTB) 2019 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Second Quarter 2019 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.

Thank you.

Good morning, everyone, and thank you for joining us today.

Today, we will be reviewing Butterfield's second quarter 2019 financial results.

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

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

Yesterday afternoon, we issued a press release announcing our second quarter 2019 results.

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

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

I am very pleased with Butterfield's progress during the second quarter where we continued to produce strong financial results, created new avenues for profitable growth with the acquisition of ABN AMRO (Channel Islands) and implemented structural efficiency initiatives to maintain our industry-leading return profile.

We continue to focus on our core profitable banking and wealth management franchises in Bermuda and the Cayman Islands as well as our growing presence in the Channel Islands.

We also offer specialized financial services in the Bahamas, Switzerland, Singapore and the U.K.

Turning now to Slide 4, the earnings deck.

During the second quarter, we reported net income of $39 million or $0.72 per share and $51 million or $0.95 per share on a quarterly basis.

Butterfield's core return on tangible equity of 24.6% should be amongst the top quartile of U.S. regional peer banks.

In the quarter, we achieved growth in banking fees, a core efficiency ratio of 60.3% and stable period-end deposit volumes.

Deposit costs remain favorable at 42 basis points, with an overall NIM of 3.18%.

The Board also approved a quarterly cash dividend of $0.44 per common share.

At recent share price levels, that equates to a yield of just over 5%.

Last week, we closed the previously announced acquisition of ABN AMRO (Channel Islands) Limited.

The closing proceeded slightly ahead of schedule and went very well.

We continue to expect that the operations will become fully integrated with our existing Channel Islands bank within 12 months.

The deal is an overlap in terms of service offerings and the client portfolios.

In addition, the banking system we use in the Channel Islands is the same as ABN AMRO, which greatly simplifies account migration and integration.

With this deal, we have obtained 130 new banking colleagues and over 3,000 customers, and we look forward to keeping you informed as we combine the 2 businesses at business operations in the Channel Islands.

I will now turn the call over to Michael Schrum to provide further commentary on the second quarter results.

Thank you, and good morning, everyone.

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

Net interest income was $85.2 million, a 3% decrease compared to last quarter.

NIM was 13 basis points lower in the quarter compared to the prior quarter due to yield pressure at the short end of the curve, an uptick in term deposit costs from rollovers and new lower-margin multicurrency deposits that arrived at the end of the first quarter.

On Slide 7, we provide an overview of average customer deposit balances by location, currency and contractual nature.

In the second quarter, term deposits increased marginally to 24.1% from 22.5% in the prior quarter.

Pound sterling dropped to 14.1% of deposits, but other, which is primarily euros, increased to 6.4%.

As discussed last quarter, we had a $300 million temporary inflow of deposits at the end of the first quarter, and as anticipated, those same funds left our balance sheet early in the second quarter.

From quarter-to-quarter, we can experience significant inflows and outflows in our deposit levels due to last -- large trust and fund clients managing their normal commercial flows.

It is also worth noting that as we move forward with the acquired ABN AMRO (Channel Islands) business, that comes with a significant component of non-U.

S. dollar currencies, particularly the sterling and euros.

Looking now at Slide 8. Fee income was higher in the second quarter, with noninterest income up 2% as credit card fees helped improve banking income.

Fee income relative to interest income continues to help moderate earnings at risk due to interest rate movements.

On a relative basis, we continue to see higher fee income ratios than U.S. regional banking peers.

On Slide 9, we provide an overview of core noninterest expense, which resulted in a core efficiency ratio of 60.3% at target levels.

The second quarter had some significant restructuring costs that impacted noninterest expense, including the closure of a bank branch in Bermuda, voluntary early retirement program in Bermuda, redundancies in Jersey and costs associated with the departure of the group senior executive.

Improving operating efficiency continues to be very important to us as we seek to maintain earnings momentum during this part of the interest rate cycle.

We will continue to look for ways to drive costs lower, with emphasis on utilizing our lower-cost service centers where possible.

Looking now at Slide 10, we provide a summary of capital levels.

Dividends and share repurchases will remain key capital management tools together with selective M&A opportunities, and we remain actively focused on returning excess capital to shareholders.

The share buyback program is temporally paused until we complete the initial onboarding of ABN AMRO clients and deposits, which we expect to be completed during the third quarter.

We're also pleased that the Board approved a $0.44 per share qualified dividend.

To put our capital management in perspective, during the last 12 months, we've returned $191 million or 99.4% of net income to shareholders in a combination of common share dividends and share buybacks.

Turning now to Slide 11 and a discussion of the balance sheet.

At the end of the second quarter, deposits were $9.9 billion, in line with where we expected given the movements of temporary deposits at the end of the first quarter.

Loan balances were flat, with growth in U.K. residential loans being offset by commercial loan repayments elsewhere.

During the quarter, we also put $130 million of new money to work in Ginnie Mae fixed-rate securities at an average yield of 2.99% and an average duration of 3.9 years.

Turning to asset quality on Slide 12.

The nonaccrual loans remained well within expectations and are specific to individual circumstances.

We're not seeing any systemic credit issues in any of the markets in which we lend.

Our $4.5 billion investment portfolio remains highly rated, with 96.8% of securities rated AAA primarily in guaranteed U.S. government agency securities.

On Slide 13, we discuss the average cash and securities balance sheet with a summary of interest rate sensitivity analysis.

While we remain asset-sensitive, our relatively large noninterest income contribution helps to moderate our exposure to interest rates.

As we think about interest rate sensitivity at a more granular level over the next few years, it is clear that the bank's net interest income is impacted differently by what happens with both overnight market rates as well as longer-term dollar rates.

As an example, using the 30 June balance sheet, a quarterly down-ramp scenario of 4 consecutive 25 basis point rate cuts could contain the negative 9.8% interest income shock scenario shown on the slide to around 3% assuming the tenure stays at the current levels.

Offsetting the run rate of the cost restructuring initiatives already announced and implemented, we should expect that impact to moderate further to about 1.5% in bottom line terms.

We monitor and model a range of rate scenarios, and we'll continue to manage liquidity and funding conservatively while deploying excess funding gradually to build earnings resiliency and reduce asset sensitivity.

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

Thank you, Michael.

When Butterfield listed its shares in the New York Stock Exchange in September 2016, we presented a strategic plan for pursuing growth and profitability.

I am pleased to say that much of what we've set out to achieve is being accomplished.

We have increased deposits, created loan growth opportunities through our London-based lender, improved fee income through pricing refinements, repositioned jobs in lower-cost jurisdictions, managed capital to improve returns and executed M&A deals to realize growth in chosen premier international financial centers.

Importantly, with the close of the ABN AMRO deal, we have achieved a geographic balance with deposits more evenly distributed between Bermuda, Cayman and the Channel Islands.

This is helpful as each jurisdiction has its own business cycle.

Recent forecast expect the Cayman Islands to benefit from GDP growth of between 3% and 4% in 2019, with the Channel Islands between 1% and 2% and Bermuda around 1%.

As we look forward, we are focused on integrating and growing the Channel Islands operations while continuing to dialogue around new M&A opportunities within our current geographic footprint.

With the combination of a strong capital return profile, healthy growth prospects and conservative risk posture, I believe we remain really well positioned for continued success in 2019 and beyond.

Thank you.

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

Operator?

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

First off, just wanted to drill into the noninterest expense line.

The core expenses of $79.2 million came in pretty meaningfully lower than kind of where you are targeting last quarter, which I think was around $84 million.

So maybe Michael, you can just start by talking about whether or not that -- is $79.2 million, kind of pre-ABN AMRO, is a good run rate kind of for the sort of base operation before that you'll get integrated on top of it?

Or if there's anything else in there that we should be mindful as we kind of think about what happened in the second quarter going forward?

Yes.

Thanks, Alex.

Great question because expenses did come in a bit lower.

So as we mentioned, we are very focused on efficiency.

You can see these noncore items in this quarter.

And we get benefit -- we started to benefit from those efficiencies on a lower run rate of core expenses this quarter already, particularly the branch closure obviously and the early retirement program.

There are sort of 3 smaller accrual items in this quarter, which further reduced this quarter expenses by about $1.5 million to $2 million, which were year-to-date adjustment on the bonus accruals given the rate outlook, so a little downward tick there, better-than-expected medical claims.

The bank happily self-insures our health care plans, and we had a better-than-expected claims development in the first half of the year, so that was a positive on expenses.

And then I think finally, maybe more of a timing issue following the voluntary retirement program, there may be sort of a couple of -- a few roles that will need to be backfilled, so that has not obviously come onboard yet, so that's helped a little bit more this quarter as well.

So while we expect that low quarterly run rate due to the restructuring initiatives, a more normalized run rate might be around the 85 -- 81.5 to 82 range, which is still a meaningful reduction.

And that's before the ABN deal, which historically has been around $5.5 million to $6 million on a quarterly expense range.

So hopefully that sort of gives you a bit more detail around what happened in the quarter as well.

That's great.

And the $5.5 million to $6 million on ABN, that's sort of pre-cost saves, right?

Exactly.

So that's -- it's sort of historical if you look at their last year's financials, et cetera.

Great.

And then maybe you can just -- while we're talking on ABN AMRO, maybe just give us an update now that the deal is closed on what the pro forma balance sheet looks like in terms of the size of the deposits that are coming over as well as the currency denomination that they're in?

Okay.

I'll start off.

So the closing went pretty much as it's expected, maybe a little bit earlier than we had thought.

In terms of the balance sheet deposit levels, it's really pretty much dead on what we said before, so sort of about GBP 2.8 billion.

We still expect some reasonable attrition as we get another client base.

3,000 new clients, 130 employees, and we're working through both the credit look and all the accounts as we speak.

And as we get to know the client base a bit better, we'll have a better sense of where deposits are going.

But we have sort of forecasted around 35%, 40% attrition, which we still are comfortable with in terms of those sorts of numbers.

So no real issues in the closing, no real issues in terms of client perception of Butterfield.

It's always a little different when you go from an ABN, which is partially owned by the Dutch government to smaller bank like Butterfield, but we worked through with clients, and they all seem comfortable with our credit quality and our balance sheet, so it's all smooth sailing at this point.

Very good.

And you're still on track for the same EPS accretion expectations that you have announced, which I think was, if I'm not mistaken, 3% to 5%?

Yes -- no, that's exactly right.

That's what we announced on the 25th of April.

I think obviously, dollar rates are going to be a bit lower, but I think we still feel comfortable in terms of those conservative estimates that we put out.

There's still quite a lot of work to do as you can imagine, both legal amalgamation and then a few IT changes.

So effectively, at the moment, we're operating 2 separate banks, one for ABN clients.

So we're trying to gapping all the product sets and the pricing, so we have one approach to the market, et cetera.

So we look forward to give you much more update.

It's one weekend, but it's gone well so far.

The next question comes from Will Nance of Goldman Sachs.

So as the NIM was down 12 basis points this quarter, and I know LIBOR moved in the quarter and we saw some live data in the time deposit book, I guess was there anything to call out more out of an ordinary in the numbers, particularly in the security deals being down 15 basis points?

Was that maybe premium am related?

And then maybe stepping back and putting ABN AMRO aside for the moment because I know you guys -- I know that will have an impact on the margin.

Could you just talk about your margin expectations if we do get 3 to 4 rate cuts over the next 12 months?

Yes.

Thanks, Will.

Let's start with the last one, which I think I kind of covered a little bit on the call.

But to get a ramp scenario, obviously, we get an opportunity to react on the loan pricing, et cetera.

So we do monitor wide range of sort of scenarios, which I think we've -- I said a ramp scenario of 20 -- of 4 cuts would sort of impact NII by about 3%, so it's down from the short scenario of minus 100 parallel of 9.8.

And obviously, offsetting part of that would be some of the cost mitigation that we already put in place.

Now I mean, that depends on where the long end goes, but that's sort of all other things being equal.

If the long end starts moving down, obviously, that exacerbates the reinvestment yield problem for us.

But essentially, as we talked about last quarter, we highlighted sort of the currency mix of deposits in the Channel Islands and lower rates on U.K. mortgage originations replacing loan volume amortization in high-yielding Bermuda loan book.

So those 2 factors overall sort of unfavorable impact on NIM by sort of a handful of basis points this quarter.

Of course, we've seen (inaudible) 40%, 45% drop -- base point drop in the 10-year and short end money market has come down about 20, 25 basis points in anticipation of low Fed rate funds -- or funds rate.

So as you know, the bank doesn't have access to that window, and we've run a short key bill book for liquidity, and this has had an unfavorable yield impact of 19 basis points on the $2 billion, as you can see on Slide 6 of the presentation there.

And additionally, duration has shortened due to the refinance rates.

Reinvestment rates have come down on the overall securities book, which was expected.

And again, premium am, as we think about that, it's probably a handful of basis points.

We don't have a lot of -- we don't -- we didn't buy a lot of securities at above [5s], sort of in the 103, 104 range across the book.

So that isn't a big factor.

But obviously, as we think about premium am versus -- or duration versus weighted average life of the book, the duration's coming more than the weighted average life of the book, if you will.

On deposit side, we had a positive OCI for the first time since 2017.

And as we already mentioned, we're focused on offsetting some of the NIM pressure with cost reductions.

But I would stress, we continue to manage credit risk appetite liquidity capital very conservatively so we can continue to extend duration with the new monies that we're putting to work and provide additional earnings support for both dividend and organic growth and also reengaging in share repurchase activity later on in the year.

Got it.

That's very helpful.

And if I can circle back on the 3% number.

I think in your operate scenario, you guys assumed a 50% deposit beta and the Bermuda base rate moving every other time.

Can you talk about your assumptions in the down rate scenario, and just how you expect those variables to play out?

Yes.

So the shocks -- the shock-rate scenarios are symmetrical in terms of assumption set.

So it's 50-term beta and I think 70-term deposit beta and in Bermuda and Cayman, and 90 in the Channel Islands, which is a bit more competitive than non-USD currency rates.

In terms of the steepening and ramp scenarios, we're basically going forward the reinvestment rates with a flat tenure essentially, and that's what moderates the impact.

So obviously, again, that's kind of just to show how that is now particularly symmetrical in terms of the asset sensitivity.

It's at the short and at the long end.

So we get a down ramp of just over 3%, one that gives us opportunity to lag on repricing of the loans.

We can move term deposit pricing down.

That's what we already started to do.

And we get a further accretion coming through the reinvestment of securities.

But that's kind of -- the down 100 shock is definitely sort of an outlier, but I know that's a common measure that everyone uses.

So I just wanted to provide a little bit more granular detail this quarter.

I think in terms of the impact on NIM, I don't think we put that out anywhere, but you can kind of calculate back what's into those.

Got it.

That's helpful.

And if I could squeeze one more in, just on some of the purchase accounting marks for the acquisition.

Given what rates have done, is it possible that we could see a little bit less tangible book value dilution on the date of the close?

And I guess if that were the case, would that -- would you guys feel comfortable reinstating the buybacks a little bit sooner?

Yes.

I mean, we’ve seen -- so first of all we've seen sterling will be a little bit lower.

So since the announcement, we had -- the price was fixed in sterling at GBP 161 million.

There's not going to be any price adjustment because deposit volumes were essentially as expected.

But because sterling was down a little bit, with regard with the PPI at the moment, as you can imagine, allocating the intangibles.

But overall, the dollar value of that has come down by a couple of million bucks.

And then the -- in terms of the dilution, I think on day 1, our model had us dipping into sort of mid-5s in terms of tangible.

I think the biggest factor there is the deposit attrition that's going to impact that.

The changes in rates is really kind of minimal compared to as an impact on tangible relative to deposit attrition.

So as we're going through, right now, we're looking at obviously harmonizing the pricing across 2 different product sets.

Actually ABN had some products that we would like to introduce in terms of pooling or dual currency accounts.

So I think that will be a net positive in the market.

That should lead into new-to-bank customers.

But clearly, the euros, given that we don't have an asset deployment strategy in euros, would be one that we're looking at very closely from probably month 1 onwards, and that's when we would expect to see that repricing to start.

(Operator Instructions) The next question comes from Timur Braziler of Wells Fargo.

Wanted to follow up on one of Will's questions just to make sure I heard this right.

So in terms of the Bermuda resi book and the down rate environment, is there still as much discretion as to what you do with that pricing?

Or is there going to be more political pressure to lower those rates with every U.S. cut?

Yes.

So I'll start and hand the question over to Michael Collins.

But the -- I just want to reiterate.

The way we've modeled this is a little beta of 50, both up and down.

So essentially, every other move.

The question is would you move the first one.

We'd make a decision every time debt funds moves as you know, and there's a 90-day lag on the repricing due to notice to customers.

And I think obviously, it's something that we're watching very closely this peak, in particular, and there's 2 sort of Bermuda dollar-based rates.

The rest of the book really reprices with market rates.

So in Cayman, it will be as prime that we'll reprice pretty much automatically, and in the U.K., it's the bank lending base rate.

So Bermuda, we did the $1.1 billion of mortgages and the just over $600 million commercial.

Now the 2 portfolios got some level of discretion over, but I'll let Michael talk a little bit more about it.

Yes.

And also Tim, we have 2 Bermuda dollar-based rates here: one for commercial and one for residential, so we actually can kind of bifurcate it and move differently for different groups.

I mean, I would say, the fact that we have as much discretion on the way down as on the way up because each of the banks of Bermuda control their own base rates, but we are also really focused on treating customers fair.

And I think as Michael said, it's really more about timing.

So 50% beta is about right, and we start to figure out what our view is in terms of what the Fed's going to do and whether they do one and stop or do a bigger one and stop or they do it gradually.

So we have discretion, but we just have to look at it on the day and see what's happening around us.

Okay.

That's good color.

And then I'm hoping you can provide some color on timing of deposit attritions.

Is that, again, your discretion, or is that working with the customer base?

And I guess how fast do you expect that deposit attrition going to fully come through?

Yes.

I think I mean, I think we're really focused initially on reviewing client portfolios.

So what's happening right now is, as part of the due diligence, we looked on a risk basis at file levels, but we needed to get to completion before we could really get into both the credit files in terms of any potential impairment that might be in there.

Again, we looked at sample of files to NTB.

As the RM start to work together across the 2 banks really and have to go through the portfolios and the relationships with both banks and we've got to harmonize the product set and the pricing, we want to be very transparent with customers about what our intentions are.

But it's a weak game.

And it's a little bit early to kind of -- I mean we've modeled, I think, as Michael said, 35%, 40% on the basis that -- of the information that we had at the time.

We'd like to do better, but we also want to make sure those -- the customers that are retained have a production relationship with the bank.

That's kind of win-win.

So it's a little early to -- I think the model that we've given previously is the one that we're currently sticking with, which has a linear sort of 4-quarter attrition per venture, but how it's actually going to happen, it will depend on how the RMs actually work with the clients.

Okay.

And then just one last one for me.

Obviously, the shape of the yield curve has changed pretty drastically since you guys announced the ABN AMRO deal.

Maybe just talk about the reinvestment of that liquidity.

I guess, I was a bit surprised to hear that the accretion hasn't really changed given the change in the yield curve and where some of that liquidity is going to be potentially reinvested.

Is there maybe a change in duration?

Or I guess what are your guys thoughts on timing and ability to redeploy those -- that liquidity, both profitably and in a timely manner?

No, it's great question.

So what we did when we put the model together was treat essentially this as contractual funding in the model, which means matched duration in year 1, which means everything short.

And as you can see in our guidance from the 25th of April, the way the average cost of deposits, 54 basis points, the actual yield was fairly low on those deposits.

So I think as we now have onboarded potentially all -- we've onboarded the balance sheet, we started looking at it, the dollar seemed sticky.

We'd like to obviously have a hold back to ensure we have adequate liquidity, but we have received all the regulatory approvals of streaming limits as part of that.

So we feel a bit more comfortable that we are able to cover those positions between the whole book that we have in Bermuda and Guernsey.

And so I think for us, we would like to think about taking advantage of the backup in the yields, for example, to put 10% of dollars out pretty early because I think the -- I think that's still in the safe zone, if you will.

So that's what's changed really is the time from when we announced the deal to the closing, we've learned a lot about the clients.

We've been very pleased with the closing process.

And I think we can be comfortable with a little bit more duration on the dollar book given the large fallback that we have in Bermuda as well.

And remember, Timur, that the sterling deposits from ABN are going to help us fund the wanted mortgage book, which is still growing.

I would say slowed down a little bit due to, obviously, Brexit uncertainty, but still steady progress there.

And that sterling liquidity from ABN actually is going to help quite a bit.

Okay.

And if the legacy kind of transactional liquidity position within that $1.5 billion to $2 billion, do you have an updated kind of liquidity target for the combined entity?

Well, yes.

I mean, we do.

But we put everything pretty short on day 1. So what we need to do is update the bar.

But we have a significant amount of upstreaming limits.

So I think the regulator has been very understanding that we need to be able to manage liquidity between the banking centers, which has been very helpful in this process.

So I would say, we will keep most of the book fairly short.

So if we said it was, say, $3.5 billion to $4 billion because we expect large attrition, we're going to keep it fairly short in the first 6 months, but you could expect maybe 10% of the dollars, which is $130 million, $150 million moving out a little bit sooner.

And as we release some of the reserves that we have in Bermuda and use the short dollar position that we have in Guernsey, it's a bit of a back stop for liquidity as well.

Our next question comes from Michael Perito of KBW.

I apologize if this was addressed already.

I kind of been jumping back and forth in a few calls.

But I wanted to talk a little bit about capital.

Just as the potential for rate cuts build, I just wanted to get updated thoughts maybe on how you're thinking about your profitability relative to capital deployment.

I mean -- I guess asking the question another way, presumably, your profitability will be challenged to improve if rate -- if the Fed starts cutting short-term rates.

How do you -- how should we think about kind of your outlook on dividend and payout?

I mean is there any potential for alteration?

Or you think it will pretty much be the same as where it's been?

And any color there will be helpful.

No, that's great.

Mike, thanks for the question.

So obviously, we stress test the earnings profile quite significantly, and the audit committee and the Board wanted to see that before they approve the dividend.

So we normally target around a 50% payout ratio as we have done historically.

We've been lagging a little bit because earnings has been moving up faster, but it's normally sort of set for the year but approved every quarter.

At the current rate scenarios that we're running, that could maybe get to 70% payout ratio, but we would -- we don't think that this is going to threaten in any way the dividend that we've set.

That's just the cyclical movement of payout ratio effectively.

What it may affect obviously as earnings are -- this downward pressure in NIM is how much cost savings can really offset part of that, and then what's the capacity relative to organic growth and buyback capacity that remains out of the capital.

So we're thinking about the same way.

It's a different part of the cycle, but we feel very, very confident in terms of dividend.

The buyback, as we've talked about just in terms of the ABN, a tangible is kind of dipping in because it's a large balance sheet on the day 1. It's dipping under the 6 target range.

But there -- we'll still earn it back fairly quickly in a couple of quarters, so we suspect later on this year, we'll be able to restock the buyback.

Okay.

And then just on the -- obviously, the prior rate has been a great backdrop for you guys.

But in a more challenging rate environment, obviously, the fee contribution you have is helpful.

And I'm just curious -- and again apologies if you spent some time on this already, but just can you talk about any other initiatives on the fee side, whether geographical line of business that you think could be helpful in growing revenues even if it's in a down rate environment?

Yes.

So I think it's fair to say in our banking markets, particularly our legacy markets, Bermuda and Cayman, where we've got really good market shares, we've increased fees over the last number of years pretty consistently.

I think there's probably less room to do that going forward simply because the economy is growing at different rates.

And I think we're reasonably priced where we are.

So I think just in terms of fee increases, it's unlikely that you'd see us doing anything substantial.

In terms of increasing our sort of 33% of our revenue that's fee income, that's -- really would be through acquisition.

So looking at trust acquisitions, as we've done in the past, whether smaller or medium-sized or bigger is where we would grow.

Very hard to grow trust fees organically simply because you pick up a small number of trust every year and a few trusts retire, but it's pretty much a flat business.

So that growth is going to have to come through basically acquisitions.

I would say, in places like Cayman are growing sort of 4% to 5% GDP, so we will see some natural increase in fees just based on volume increases, but not so much, I think, going forward in terms of fee increase.

So real focus has got to be on the down part of the cycle is expenses and continuing to see what we can actually do things more efficiently.

The only thing I'd add to that, I mean, the ABN business actually does come with a significant amount of custody fees and banking fees as well.

So it's -- obviously, that's helpful.

It's not going to have a meaningful up adjustment on the combined entity from a fee to total revenue, but it does add some further stability on the fee side.

And those custody fees tend to be similar to our trust fees in the sense that they're not market-sensitive.

The next question comes from Arren Cyganovich of Citi.

I guess just thinking about the down rate environment, how does that affect the conversation that you have for M&A opportunities across your landscape?

Does that increase or decrease the likelihood of folks wanting to sell?

Yes.

I mean, it's a great question.

I would say, it's the same.

I mean, it's very much as it has been sort of a pool strategy, so there's very few sort of -- there's very decks floating around.

We do have a lot of scientific couple that are kind of more active, but it's not really -- it's driven by strategic divestiture really more so than the rate environment, I would say.

In terms of the trust businesses, the dialogue's ongoing, certainly both with smaller but also with some of the private equity-backed private trust companies.

But again, they tend to be more strategic in nature so it's whether you want to hold presence in the market, it's not -- doesn't tend to be as much around the rate environment.

Also, in the markets that we're talking about, there's a significant amount of non-USD deposits.

So again, it's -- if you look at it at the euros and sterling books, those haven't really moved in terms of rate outlook.

Yes.

And we're -- I mean, we're still obviously having discussions.

But I think it's fair to say we're really acutely focused on integrating ABN and getting that right.

It's a pretty big acquisition for us.

And obviously, 130 new colleagues and trying to make sure the culture is right and the risk profile is right.

So we'll continue to have discussions, but our focus right now is really on integration.

That's helpful.

And then I guess just thinking about the deposit rate, you have a little bit of a lag where deposit pressure would rise in the second quarter.

Are we now at a peak in terms of your deposit pricing?

And should we get rate cuts?

Would you expect that to migrate downward over -- and obviously, I know you've talked about this on the call already, but just trying to think of the cadence that we could expect there.

Yes.

No, it's great question.

So we've seen a little bit of migration into fixed-term deposits or CDs.

As I noted on the call, it's gone up from 22% to 24% of deposits, which actually, we just didn't want to lag the market too much.

We've obviously looked at longer date of rates over the last month or so and have been, although we're adjusting those very shortly just to make sure that they're in line with the market.

In terms of the overnight of demand or even interest-bearing where we pay 0 interest, that obviously isn't going to be adjusted in any way.

But as we adjust the CD rates, the call and notice accounts will be adjusted as well.

And there'll be a clause -- the dialogue box in all 3 of the banking markets both Channel Islands, Bermuda and Cayman.

So I think you should think -- as we talked about last quarter, a flattening out because we haven't really changed CD rates since December, so it's just a repricing or the rollovers, that kind of repricing to higher rates.

And that's kind of a NIM slight deposit cost increase that you've seen this quarter.

But it is flattening out, and you should start to see that, well, sort of cresting and certainly, that's all for us here.

Okay.

That's pre-ABN AMRO, I would say.

Yes.

This concludes our question-and-answer session.

I would like to turn the conference back over to Noah Fields for any closing remarks.

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

We look forward to speaking with you again next quarter.

Have a great day.

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