Q3 2019 Earnings Call
Good morning, and welcome to the Butterfields third quarter earnings Conference call.
All participants will be listen only mode.
We need assistance. Please said conference specialist I press Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event state court it I would now like to turn the conference over Telesales I felt head of Investor Relations Mr. Phillips. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us.
Today, we will be reviewing Butterfields third quarter 2019 financial results.
Coal I'm joined by Butterfields, Chairman, and Chief Executive Officer, Michael Collins, and Chief Financial Officer, Michael scrapped.
Following their prepared remarks, well open the call up for a question and answer session.
Yesterday afternoon, we issued a press release announcing our third quarter 2019 results. The press release, along with a slide presentation that we were Fercs you during our remarks on this call are available on the Investor Relations section of our website at Www Dot Butterfield Brooks Dot com.
Before I turn the call over to my colleagues 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.
Well a reconciliation of these measures to U.S. gap. Please refer to the earnings press release in 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 FCC filings I will now turn the call over to Michael calls.
Thank you know what and thanks to everyone joining the call today. The third quarter 2019 was notable for solid earnings as well as the early close with the avian ammo channel Islands deal.
Going integration of that business into our existing Garanti bank.
As you may be aware barometer was hit by hurricane compared to a category three storm on September 18.
[noise] Thankfully the island made it through relatively unscathed.
Well this was a powerful hurricane island suffered limited property damage loss of electricity to approximately 80% of rather than the bank with only close for one business day reopening from normal operations on Friday September 20.
Permit is resilient infrastructure and rigorous building codes in combination with Butterfield effective business continuity planning your recovery process is.
A lot of to quickly returned to business as usual. This was the third major hurricane to make landfall in Bermuda and the last five years. So we now have a lot of practice fine tuning our recovery process.
Turning now to some highlights on slide four to earnings dark.
During the third quarter, we reported net income of 42 million or 79 cents per share and 49 million or 91 cents per share on a core basis.
Berfield core return on tangible equity was a healthy 22.5%.
Our earnings continue to benefit from stable and growing fee income expense management, and an expanding balance sheet.
<unk> costs increased 12 basis points during the quarter to 54 basis point contributing to an overall NIM of 2.52%.
As expected the larger multi currency balance sheet that we acquired in the channel Islands is impacting them. However, once the business normalizes, we expect continued growth to long term profitability from this acquisition.
Our strong results once again allowed the board to approve a quarterly cash dividend of 44 cents per common share.
Before I turn the call over to our CFO I wanted to acknowledge the appointment of Mark Lynch Butterfields Board of directors markets had a successful career as an institutional investor Most recently at Wellington Management Company.
It's been a long time supporter Butterfield and a helpful sounding board since the banks recapitalization in 2010.
I look forward to working with Mark and believe the board and our shareholders will benefit from his deep expertise and perspective I'll now turn the call over to Michael scrum to provide further commentary on the third quarter result.
Thank you and good morning, everyone.
In spite checks we provide a summary of net interest income and NIM.
The inclusion of avian Hambro channel Islands balance sheet, that's had an immediate benefit to net interest income.
Net interest income was up 1.4% in the quarter.
Well NIM has decreased 66 basis points compared to the last quarter due to the inclusion of the 80 basis point NIM balance sheet from D.A.B. inadequate Amro acquisition.
Lower yielding U.S. treasury it had to shorten.
Loan yields were lower due to the lower fed funds rate on variable rate mortgages.
And the impact on the lower yielding loan book from maybe.
At 2.81%.
As we season the deposits over the next two years, we expect the larger balance sheet to become more productive, but then expanded securities portfolio.
On slide seven we provide an overview of average customer deposits balances by location currency and contractual nature.
As of September 32019, total deposits, what 12.7 billion up $2.8 billion compared to June Thirtyth 2019.
As you can see into China customer deposits in the channel Islands have increased significantly as a result the acquisition.
Increased euro sterling deposits at below what the percentage of U.S. dollar has to 67% up the total deposits from 80% last quarter.
We continue to expect overall channel islands deposit levels to reduce over the coming 12 months as we start to price these to market rates.
It is important to note that the increase in Butterfields overall deposit costs.
42 basis points to 54 basis point is almost exclusively attributable to the newly acquired deposits, which had a weighted average cost of 99 basis points at the closing date.
On July 15.
Looking now at slide eight.
Fee income was up 5.4% in first quarter due to the new fee revenues from the acquisition.
Foreign exchange revenue custody and asset management fees were all up versus the second quarter.
He income remains a significant contributor to group earnings representing 35% of earnings.
Sizable fee income earnings component has become an increasing the important earning stabilized to help balance revenue from the right dependent and I am most stable fee income from banking and trust.
On slide nine we provide an overview of core non interest expense, which have increased during the quarter to 84.0 million I'm 79.2 million.
This is as expected due to the inclusion of the additional expenses from the recent acquisition.
Oh cost income ratio was slightly above 60% target.
We continue to view cost controls its an important way to help maintain net income and we'll seek to improve efficiencies wherever possible.
Looking outside China, we provide a summary of capital levels, our priorities remain the same balance between regulatory requirements and shareholder returns.
At the closing up you have yet I'm Road Channel Islands acquisition, our T.C.E.T., a reduced to approximately 5.5%, which is below our target range of six to six in the opposite.
They're not backing out target range and expect to assume share repurchases in the fourth quarter.
In addition to our sustainable quarterly common dividends up 44 cents per share. We believe our capital return policy is appropriate to reward shareholders. While also maintaining sufficient funding to invest in and grow the business through the business cycle.
Turning now to slide 11 under discussion of the balance sheets.
Hey, maybe I'm wrong acquisition has significantly increased the size, but the balance sheet with growth in loan and investment.
Securities balances.
We actually invested approximately 138 million in U.S. government guaranteed mortgage backed securities with an average book yield of 2.74% with an average effective duration of 4.26 years during the quarter.
On slide 12, we continue to emphasize no credit risk in our investment portfolio with most of our investments in AAA rated U.S. government guarantee them yes.
I don't focus two thirds residential mortgages with an average loan to value of approximately 50%.
Nonaccrual loans have decreased.
Lately with the trend up low net charge offs continuing into third quarter.
With seasonal transition on the horizon, we've been working to determine how this new reporting framework could impact Butterfield.
At this point, we expected seasonal could increase the collective allowance for credit losses in the range of 20% to 35% as a transitional adjustment on January 1st 2020 .
It's just within the expected range of outcomes being communicated by U.S. banks.
On slide 13, we discussed the average cash and securities balance sheet with a summary interest rate sensitivity analysis.
Well Butterfield remains asset sensitive this has moderated this quarter due to the Multicurrency deposits acquired and the addition of fixed rate securities.
We also expect that higher deposit cost in the channel Islands from the recent acquisitions should decrease in coming quarters.
Additionally, we gradually increasing the duration of our securities portfolio, which should offset some of the interest rate sensitivity and improve yields.
I'll now turn the call back to my colleagues to provide an update on the avian Amro Channel Islands acquisition.
Thank you Michael.
It feels operations are based in highly regarded financial jurisdictions with strong regulatory regimes underpinned by well established called them all principles.
Our growing presence in the channel Islands Diversifies, our credit concentration source of revenue and deposit base, while positioning us for organic growth in Grand doing Jersey, where we currently have relatively small market shares.
I'm very pleased that we were able to close the significant deal ahead of schedule and add a better dollar price than originally anticipated.
Staffing levels are coming in lower and ahead of expectations, which will result in lower than expected redundancy costs associated with the deal.
This benefit together with the other significant expense initiatives across the platform can already be seen in our core expense run rates deposit attrition has been in line with what we anticipated.
We are working closely with clients to determine the most appropriate and mutually beneficial banking options.
The loan book has exceeded our expectations and does not require the full model, 3% credit Mark.
We now expect the operational integration to be completed in the second quarter of 2020, rather than the second half of next year. We're also expecting the tangible book value per share dilution to be better than expected.
Otherwise the expected pro forma financials are coming through as we had anticipated.
Our current business development and M&A focus is on the avian ammo integration. However, we continue to reach out to potential targets.
With that said I would not anticipate any significant deals until this latest acquisition is operationally integrated over the next year.
We're very excited about our prospects for growth and profitability in the channel islands and across all of our current operating locations.
While we cannot control the interest rate environment, we can improve efficiency target strategic in high value low cost acquisitions.
And manage our capital without taking significant additional credit risk, while maintaining a regular dividend and an active share repurchase program.
The profitability of the bank is impacted negatively if interest rates continue to fall. However, we believe that our results should continue to outpace U.S. peers.
Return on tangible common equity in the high teens or low twentys.
In the meantime, we're focused on controlling expenses managing capital and ensuring that successful integration of the avian ammo deal.
Thank you and and with that we'd be happy to take your questions operator.
Thank you well now begin a question answer session ask a question. They press Star then one I touched on sound.
Yes, speakerphone, please pick up your handset before pressing the keys.
Your question. Please press Star then too.
First question say comes from Alex Twerdahl with Sandler O'neil. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
This is maybe a little bit more color on the the planned deposit attrition from the N. deal.
You're seeing the quarter I appreciate that then the weighted average cost of those deposits for the whole thing was 99 basis points, but the deposits that are running offer those higher costing deposits.
Yeah, maybe maybe I'll start so I think we obviously put a model together in April as part of the due diligence on US as previously mentioned, we expected quite a significant attrition into Europe . Our can protect class. We don't have any way really talk to make those deposits through lending.
So that's a marked difference I think from their franchise that was previously there.
As we.
So the three at three and a half billion deposits come on the 15th of July we sort of ended the quarter with the spot balance of around 2.9.
A big part of that was a euros, but also some normal commercial movements in the other currencies.
On a spot basis, we already saw an improvement and deposit cost from from a 99 cents of approximately 13 basis points as that 30 September or and we'll obviously continue that trend.
It's a bit early days to try to find Atlantic spot, it's probably going to be a range, but I think we're we feel that that model is actually pretty pretty pretty well constructed at the time. So you know all other things being equal we should land around the two and a half there and Alex I think one thing we're pretty pleased about is we're retaining a the client base said we're not.
Really losing clients, there's gonna be volatility a in the existing deposits for the existing client base, but so far so good in terms of retaining clients.
Got it and then maybe you can just help us kind of translate that to some.
Some of that attrition to how we should be thinking about the margin.
Going into the fourth quarter and into early next year, obviously, we have a lot of compression putting the two balance sheets, together, which was mostly expected.
But with all its higher cost deposits coming down.
Kind of weigh that against.
The other potential rate cut next week.
You know how should we be thinking about the margin from here do you think there's a little bit more compression. The gallery think what kind of at the point, where maybe actually Oh, sorry reached a bottom.
Yeah. So I just thanks, Alex <unk> as you know that's a few moving pets and and on them. As you said the expected reduction did a car this quarter, although of course and very importantly, anti increased I said that was immediately accretive or on the deposits.
The 80 basis point, and then balance sheet on the 50 into July obviously was merged together with with the existing park and not that was the majority of the impact on them.
If you think about that sort of loans loan assets. There obviously, they continue to be on favorably impacted by reductions in U.S. rights were particularly the Cayman Islands U.S. Prime reference loan book Reprices, you know pretty immediately the Bermuda mortgage park.
As you know as a 90 day lag so the September price adjustment should impact in Q1 next year.
Central London Downs I'm not affected by use fed funds, obviously that tied to the banqueting based right.
And on the security side, we continue to roll over maturities to maintain the IR profile up off the bank.
We expect you know very modest impact of lower long term rights as as current conventional so pricing into sort of to 60 to 80 level.
Which compares sort of roughly with our current running book yield there.
Obviously, the short end is already reset to lower rates this quarter and the out outlook.
Depend on obviously the actions of the fat, although the currency mix here will will help somewhat offset you know default or the full beta impact on the short end.
And to some extent to flatness up the forward curve the rate of attrition of the avian focused we just discussed as well as the rate of deployment of the season deposits a once we get to that to that.
So essentially our current forecast is obviously a hobby due to the time timing of the Abby and we get a full quarter of lowering them in Q4, and then we get to sort of repricing on on the came in loans, but then we should start to see the improved pricing on the books coming through sort of into into next year.
Has a set that's 13 basis point on a spot basis. So we'll see how that lands into next year on and it will just some extent depend on on what the fed does is as you know I'm. It is important that our asset sensitivity is moderated a little bit this quarter, partly because of new deployments and honestly season, then if the longer long.
Sure rated assets have a steeper pick up to them, then obviously that will start to help.
So I know that was a lot of where it's I don't know I don't know if that helps a little bit with some of the drivers at least.
Certainly helps a little bit so I I guess based on what you're saying, it's fair to expect the margin to compress a little bit more in the fourth quarter, just during the fall quarters impact and that you'd be end deal and now obviously the rate environment to then at some of these things reprice may we get them some rebound into the beginning of next year is that fair to yeah yeah.
As I said on the call here as well the it's important to note that it's not the Bermuda demand deposits. Other came in demand deposit costs that are increasing and we're already seeing that cresting into term on C.D. rights from rollovers, obviously into lower rates, so that should help stabilize and maybe turn turn the corner there as well.
Great. Thanks for taking my questions.
Sure.
Next question comes from <unk> with Wells Fargo Securities. Please go ahead.
Hi, good morning.
Wondering just.
Just circling back again on deposits.
Do you guys have any added visibility to the timing of the remaining attrition or is it still kind of working out customer by customer seeing what balances on what the nominations on what could be like though.
Yeah, I would say it's very much.
Early days conversations with customers you can appreciate we have two banks in Guernsey, one was very much larger than our existing bank. We have some customized banked in both bank. So we're getting together the our EMS teams and I'm looking at a crime strategies around.
The total client value really to the bank. Both in terms of deposits you know custody fees banking fees other currency deposits.
And then we're starting communicating and allocating those portfolios to our I'm, saying I'm starting to communicate around particularly around the euros, obviously and.
As we previously sort of talked about the we do anticipate you know some of that euros, maybe economic value I said transition to somebody else and so we do expect some attrition on this on the Sterling and on a dollar park.
And then just a normal commercial movements as we learn to learn about the customers' behavior is this a number of fund families enough financial intermediaries. So they have risk on risk off a that period and volatility around them.
And we'll certainly continue to two to update on that but it's it's kind of a couple of months and is still is still quite a bit of work to do I'm not so I think that you know in terms of getting to a spot estimate actually the model wasn't too far off in terms of what we're seeing now over four quarter period.
But in reality is gonna be a range obviously, yeah. There's we've talked about earlier most important thing to US is obviously to retain the client relationships I think we'll see a those clients that just have euro balances I think those deposits would go pretty quickly, but most of the clients have multicurrency deposits in U.S.
Sterling and euro.
And those are the ones that are a bit more laborious you have to take time to really figure out what other things. They can do with the bank I'm worried if the opportunities we have and so we're somewhat hesitant to run off those euro balances because there's a much broader relationships or it just takes time, but we're pretty much where we thought we would be.
Okay, and then looking out longer term the initial expectation for attrition still holds or as you're going through this exercise in saying that customers have multiple relationships at the bank is the expectation now that the attrition numbers are probably a little bit too conservative there were originally provided.
Well I think I would stick with where where the original guidance was missing you know, we're beginning a process and and obviously.
We have seen some of that impact already obviously, we're also part pricing for lower rates, just because market rates are down and so that's.
Probably offset by slightly better performance on a long Burke from from a full review there.
Yeah.
<unk> I would you know we're still thinking that's that's probably the best estimate at this point.
Okay, and then looking at organic deposit trends in the third quarter.
Any color you can provide on a linked quarter decline and noninterest bearing deposits or any color at all on the on the organic growth this quarter.
Yes, let me turn came into saw some normal commercial movements, we saw about 100 coming off of to bring it up balance sheet and it came in balance sheet you know just.
Not really I'm.
Not any feedback from from relationship managers and in terms of any unusual movements. There I was just normal sort of premiums and claims movements from from captive insurance companies, you know hedge funds moving subscription of redemptions through and came on.
So you know.
Nothing really to point out there.
Okay, and then just what the commentary that the loans.
The loan book looks significantly better than than anticipated should we start seeing some accretion roll through the topline beginning in the fourth quarter and if so kind of what's the expectation for accretion income.
Yes, I mean, you'll note in the in 22 of the financial statements, where you have sort of set out the provisional results of the fair value review that we've undertaken a this quarter, there's still a bit better work to do it's essentially it's a fully allocated acquisition <unk>, we're not anticipating any material goodwill to arise.
The PCR exercise was completed with as you know the model had sort of a 3% credit Mark which was almost a 20 million dollar mark on a Buck you know the provisional disclosures that have to have us at a two to 3 million dollar Mark I'm still sort of landing not but that's just not going to be material that accretion coming through.
And I as we sort of NPV that into the fair value of people.
Okay, and then just one last one for me.
Cost saves from the deal or is that generally embedded in the third quarter number and if not what's the remaining cost saves that we should expect to say.
Yes, It does does.
And I think we've talked a little bit about it at the announcement date does kinda two buckets. There one was the original closing of the deal.
Which you know they had a number of Dutch secondees.
Very senior hardly compensated level in in the Netherlands as part of part of the agreement that they exited the organization on on day. One so that was one bucket that came through and Oh, obviously of that to some of the cost saves coming through already.
This quarter than there was the.
Second bucket, which was really related to more day operational integration [noise]. So because we're running two banks to try to systems you know into Q2 next year.
It's really related to reducing the operational risk profile of this by upgrading our existing system. So the Cline journeys are are you know coherent for for all the clients in India Guernsey location.
We would expect obviously for that too to start to come through in terms of both voluntary exits and some redundancies you know the mid part of next year.
There has obviously been an impact already in the run rate, although I would say usually we you know I think we've talked about last quarter, the 86 or seven level on a quarterly core run rate basis. The voluntary turnover has been a bit more elevated and so that should.
Sure.
Meaning that we should have less redundancy, which which is a positive as part of this.
But I would also expect a few more quarters of some pump it little bit of Bumpiness, a one to 2 million buffer there and the expense run right. Yeah. The management teams in place. It's it's a really good combination of the two organizations. So a lot of the senior Ray ban people or on our executive Committee there and.
Like I said I think the discussions with a it'd be an employees in terms of Hussein going and Caldwell degree debt a good job focusing on retaining the client relationship managers, which is obviously the most important thing [laughter]. So I think we've gotten through a pretty quickly.
Great. Thank you.
[noise] [noise] again, if you have a question. Please press Star then one next question comes from Michael Perito with KBW. Please go ahead.
Hey, guys. Thanks for taking my questions.
Thanks, Mike.
I wanted to start I know I know, we're probably talking about small numbers here, but.
Can you give us the update on that trial islands, just the the loan growth opportunity of <unk>. If there's been any kind of new talks around that and what you got your do I try not to take advantage of some of that any I know, it's not huge number but it seemed like every dollar that you could probably translate to cash would be helpful. So I'm, just trying to get a better sense of where that updated opportunity Stan.
Yeah. So I mean, where you know I think our story has been pretty consistent across the board that we're not a loan growth story I mean, I think group wide grew up to 4.7 billion and loans.
Still 65% of that's residential so it's really residential focus, but even with 4.7 billion, but on the new deposit base, that's still only 30% a land. So that's about where we're going to give be we talk a lot about the channel islands in terms of.
The deposit situation and you know, where we're going to deploy those deposits and at this point our focus has been really funding or our London mortgage portfolio, which has slowed down somewhat with all the Brexit uncertainty, but there's still a really solid a growing portfolio. So that those deposits have been used to fund.
But we do talk about whether there's.
Residential mortgage opportunities and the channel islands at some point it would be very difficult to to grow that organically I think we would probably have to purchase something domestically. So we're considering it but at this point a those sterling deposits are used to fund the London mortgage growth and that's worked quite well and and those are mortgages or both.
Yeah, Jersey, and grandees balance sheet. So the funding situation works here, but we'll keep considering if there's residential sort of high end residential mortgage opportunities, but nothing at this point.
Okay.
And then on the capital side.
It seems like it sounds like you guys expect feedback in the market buying back stock in the fourth quarter.
The team that tangible common ratio was a little trauma or that you guys had initially thought but can you give us maybe a little bit of a longer term update. It seems like you guys are committed to the quarterly dividend ads is what's your some updated thoughts I mean, it would seem like your payout ratios in a naturally drift up a little here with rates coming down I mean, you got comfortable with that is there any parameters around that that.
We should be thinking about and just any general longer term thoughts around capital would be helpful.
Yeah, Mike it's micros problems of kick off so as you know we know we're currently going through a planning process for next year and we look at you know our or retained earnings profile and profitability and obviously the stress you know we stress the dividend rate to ensure that that's sustainable through the cycle and obviously.
We very much believe it is at the current a payout ratio just around the 50% Mark.
We still want to support organic growth, where we can obviously, we're focused on return on risk weighted assets, but also both organic and inorganic growth, which as you know.
Has historically been and sort of relatively modest part of the capital allocation, obviously buybacks for US are are attractive at the current price levels. So that should be part of our thinking there as well.
And then finally, you know if there's a limited opportunities in it in the near term for.
For any further acquisitions will start to message side in terms of how else, we get them the excess capital generation back to shareholders odd into form of off of a special dividend, but I think at this point you know we should expects suddenly the outlook to be stable, where we are I think the the buyer.
Back provides us with a good opportunity.
To deploy excess capital as we're going through this integration rather keep keep looking for additional M&A opportunities to still distiller I could slate of candidates out there that we're looking at so you know hasn't when weve completed the the Onboarding and a full integration there and a baby and.
You know we should be we should be ready to go out to look at all those again I'm. So nothing's really changed that much I think longer term was still conservatively positioned vis-a-vis the Devon coverage.
You know, we still want to allocate and return capital shareholders. So so I.
I think it's you know this there's no change really there.
Got it and then just lastly from me.
On the kinda levering up the amro deposits as they season I know, there's like excuse the quantitative factors such as tied for example, just see how these deposits behave.
Could you give us any more qualitative use our I'll kind of what you're looking for that will give you guys support called for it to start leverage this over time as it is it just having more conversations with these clients as you got progress through the next year, so or were there other tech.
Less tangible items that you guys would be bought her acres interested if there's any more color you provide there.
Yeah, No ops, absolutely. So as you know when we did they.
The HSBC acquisition of the private banks you in Bermuda in 2016, I went through the same process for one other things obviously to the comp basis slightly more into financial intermediary Robin retail space. The bank is much larger than existing bank that we have there. So we can't really double dip on the reserves that were sitting for cash and liquidity.
In the existing bank, although we can backstop part of that from Bermuda.
You know in the current environment that.
You'll covenant actually all the currencies, there's pretty pretty flat. So even though you would end up with a marginal pick up we'd like to sort Atlanta deposit levels stabilize the deposit level, you know run some back testing on on the Boston inflows and outflows.
Get out get our retention levels on on liquidity built out into sort of a three month ladder.
Making sure we meet all the funding and liquidity requirements in Guernsey, and then sort of stopped to ladder. In initially I would I would suggest probably in NFS book and sort of in the medium term going up we'll have some you'll pick up.
Sterling, we would just do a UK T bills.
All those obviously, we'll just continue to latter into the existing both age.
Jim and NFS portfolios.
And euros is where I was sort of looking at you know obviously several risk weighted assets, but but maybe looking at sort of a surprise or those types of things just to see if there was a ton 20 2030 basis point pick up from the from the cost of those over the next year. So I would say you know full quarters and.
You know you've got 200 200 days of of of analysis to look at you should you should start to see us ladder in initially into Interfast with a modest pick up and then we'll start to reduce the sensitivity from the behaviors deposits into both HD M&A NFS over probably a three year period and quality trenches.
Just like we did from.
From the HSBC acquisition in Bermuda.
Helpful. Michael Thank you and I think you guys for taking all my questions appreciate it.
Thanks, Mike Thanks, Mike.
The next question is a follow up some Alex Twerdahl with Sandler O'neil. Please go ahead.
I just want to make sure I understood the expense guidance right. It sounded to me Michael like is that 86 to 87 million is kind of that sort of the base run rate from for expenses up until the second tranche of those cost saves come through is that correct.
I would expect an 85 to 86, so we've seen we've seen.
You know a bit more voluntary turnover on the IB and staffing levels. So again I think you.
You know part part of it as you know we closed.
We only on boarded stopping the 15th of July's, obviously is timing thing there.
The 84 is is that it's a little low for the next couple of quarters, but then we should start to see obviously the cost benefit. So I would say five to six for next couple of quarters, and I'm kind of trending down.
Okay, and I can you remind me.
If I'm remembering correctly, there's a large.
Contract of some sort that you guys that have that comes due at the end of next year that can reduce I think technology expenses that right.
Yeah. So there's a couple of things happening next year and technology and that's obviously what would what we're working through an implant part of the planning process. Most of our IP infrastructure is in fact, we outsource to Dx he or she was a packet which is now Dx C, which is a fairly large burn rate. It does provide us with some business continuity.
If it's a as we sold during the hurricane we can switch over to a different location and work remotely.
But is also very expensive contract I'm trying to kind of modernized our contract to better through that process on the second element is obviously the the amortization on the existing one Butterfield platform that we implemented in 2010 stops to run off in Q2 next year.
We're looking to see we don't at the moment have any significant asset investments. So builds to do those couple of version upgrades of some of the corporate Internet banking platforms et cetera, but those are relatively minor compared to.
You know to the 8 million ASO annual amortization benefit that we starts to fully get in 2021.
Said I suddenly should be should be at an overall improvement they're from from next year and as far as the DMC relationship goes it's a strategic relationship for us.
But obviously, we're always looking to see if we can improve that on as technology modernizes with cloud computing environments. You know, we're trying to get away from the old racks, and you know a bit more a bit more modern so that will change you know the nature of that contract going forward and our support centers in Halifax rubber meeting came in Ambrish.
As for the channel Islands are continuing to be built out. So again were worse slowly gradually moving operational functions and compliance functions.
The Halifax other teams really being built there and so you will see as we set in the past will continue to see sort of gradual cost savings over time, we reduce.
Positions in Bermuda and came in in the channel Islands add positions in the sports centers, they're obviously less expenses.
So it'll be a gradual improvement in expenses, but.
That's the plan and it's it's still being executed.
Okay, and then it it looked to me like you had a little bit of loan growth beyond just what you acquired this quarter.
Obviously very small.
In Bermuda is that.
Is that just bridge financing or is that more permanent loan growth that that will stick around for longer.
Yeah, I mean, obviously that most of the increase from about four to 4.7 as is obviously a band, but we did have.
We do have some some sovereign.
Exposure increases in Bermuda at this point and that was basically a 200 million dollar.
Yes, relatively short term bridge facility to the perimeter government that we partnered with HSBC to provide and that will be taken out.
Pretty much within a year from government sovereign bond issue that that will be upcoming so you know and loan balances are holding up. So you know we have with a significant attrition and run off because we have a pretty short term structure, but.
We're keeping track, particularly the residential side to keep up so again the story is pretty flat with some quarterly increases here and there, but the government exposure will come on and then come off a you know and within a year yeah. We'd Alex we also talked about us enjoying this hotel, obviously that starting now to to draw down on that loan.
That's been that's been that's almost.
More than half belt now so that's a good good well start to flow and sort of those those units coming online as well.
So there's some modest modest growth and to bring it up our cutbank, where we're trying to find but we're not stretching on the underwriting side here to make that happen.
Okay and then just final question just a follow up on the buyback.
It is the plan to I think.
Flashy add to plan to do that 4% of buyback per year, and then that was put on hold that for the Ngls capital rebuilt now you're kind of above the 6% threshold.
And that should grow even more next quarter. So is the pledged to kind of keep capital between six and second half percent Tc, but maybe to accelerate some of that buyback in the near term to do a little bit of catch up for the month that you weren't buying back stock, especially given at the stock seems to be the level, where that's particularly attractive.
Yes sure no one of the current authorization we've had a we have about just shy of 800000 shares left in that authorization.
You know the board we had good discussions with the board around this very supportive of any initiatives. There a current yeah definitely sees the value in terms of the regression line as well.
And as we finalize our planned out would be part of that discussion around capital allocation, which you know is normally happening in the fourth quarter I'm. So you know I would expect you know.
To see as you know being active in the market.
Okay. Thanks for taking my fault.
Thanks, Alex Thanks.
The next question is from Adam Hurwicz Telus. Please go ahead.
A longer term strategic question.
How do we think of the link between earnings growth and asset expansion on the balance sheet.
So maybe I'll kick off and Micah can talk a bit about be inorganic.
You know if you look at a five five year CAGR for for the bank a pretty much Bermuda and came in a relatively saturated markets in terms of our market participation. So.
In came in both under deposit and loan side, we have about 25% to 35% market share.
In Bermuda, it's more like 40 to 45, and so those books really will both on the deposit and loan side should grow in line with GDP roughly yunos.
And so the.
We're excited about organic growth is really in new Jersey in Guernsey market, where we have relatively smaller market shares.
Those find also find out markets both on the deposit on the asset side and a relatively slow growing market, but we should be able to take some market share there. The Josie market. For example is a much larger deposit market than any of the other three markets, where there was about 120 billion pounds.
Customer deposits in that market now a lot of that will be retail or not you know our chosen market segments in financial intermediary.
Banking.
But if we could get to a meaningful say two or 3% that sets of meaningful uplift in terms of the size of the balance sheet.
In terms of the productivity up the balance sheet we.
[noise]. We've previously communicated <unk> continued to communicate will not have big loan growth story and part of that is because we want to lend in our home markets, but not become innocent capacity in wholesale lending.
Because with small bank in operating in islands that have no, let up last resort or central bank and so we need to be very.
Very conservative both on the quantity funding and credit that leads just by the nature of the market for us to have more of an asset sensitive sensitive balance sheet because our.
Assets too.
To deposits already ratio is up 40.
But if you look at harvest density, it's very low at a sub 40 level as well and that's probably because be mostly focus on residential mortgages, because we don't need to poke, 100% risk credit commercial mortgages.
Got it took a deposits because the markets rent are driven by capital formation and know by trade.
So as you think about the growth in the size of the balance sheet, you would say a 2% to 3% organic and then overlaying the capital allocation to M&A you'd end up if you look back over six seven years, you would end up with a sort of 8% CAGR growth on the size of the balance sheet.
On the profitability of the balance sheet will depend on where that is is allocated so in the case of.
Channel Islands goes up.
More like European banks, and that's because the currency mix of those balance sheets is less productive than than the available dollar balance sheets that we could put on in Bermuda on came in but as limited opportunity for us to put those on and premiered on came in because were fairly saturated in terms of up market participation.
So you might put on a 10% hour.
You know business in the channel Islands, but if you can get it at a relatively modest premium to tangible book that net ends up being very accretive even at a very high.
Hi current howery.
I don't know if that gives you a sense of sort of the direction and how we're thinking about the relative growth and the balance sheet versus to put productivity of those balance sheets. The last thing I want to say, we're still looking at fee businesses, we like private trust businesses in particular.
And one of our acquisition criteria as you know it has to have two thirds private trust fees in order for us to consider a fee based business the fee based businesses.
Very capital efficient for us were recognized as a global leader in the private trust fiduciary space and they're very stable and help a moderate.
Some of the earnings arrest that arises from a natural rate environment, Yes, I think that to two things that make us different from a U.S. Bank is Mike was just saying number one is fees.
Will represent about a third 30, 540% of our revenue so that that's a bit unique and that's across FX and trust and banking fees and the second part you know as Michael was describing is.
We're in jurisdictions, where we're always going to have huge amounts of excess capital.
Yes deposits because capital.
Whether its reinsurance or or or high net worth families flows through Bermuda came in the channel Islands.
And we're always going to be probably as far as we're concerned probably about 35% to 40% loans to deposit because all the excess deposits will go into U.S. government agencies at least on the U.S.
Dollar side and that model still produces throughout the cycle mid teens to mid 20% a core are always without stretching for credit rest. So one thing we know about the model is given these excess deposits and the flows through Bermuda and came and we have to be very careful in the credit side. So we really don't do any out of market lending.
Onto one stretch for credit.
And then it just to understand how you approach. This another words over time that 35% fees to overall net revenue is.
Really the target ratio sound as if it keeps on rising overtime.
That's right I mean, obviously depends on the interest rate cycle. So where we are now you know as rates go down that will go up a bit.
And you know on the episodic cycle. It it'll go the other way, but you know essentially add to the trust business in particular, which we've been in for 70 years is very slow growing use water, 2% Trust a year and you may be game that organically.
So that's really an acquisition strategy the only way to really grow the trust businesses is through acquisitions in our existing jurisdictions.
But beyond trust as I said, we've got a good FX business and maybe and provides more FX season, We've got good trust custody fees and and also banking fees. So fees are a big part of our organization and we'll continue to focus on that.
Thank you very much.
Thank you.
This concludes our question and answer session I would now like to turn call back over to Butterfields management for any closing remarks.
Thank you Anita Thank you to everyone for dialing in today, we look forward speaking with you next quarter have a great day.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.