Earnings Call Transcript - NTB Q4 2022

Operator, Operator

Good morning. My name is Dave, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2022 Earnings Call for The Bank of N.T. Butterfield & Son Limited. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield’s Head of Investor Relations.

Noah Fields, Head of Investor Relations

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield’s fourth quarter and full year 2022 financial results. On the call, I’m joined by Michael Collins, Butterfield’s Chairman and Chief Executive Officer; Craig Bridgewater, Group Chief Financial Officer; and Michael Schrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our fourth quarter and full year 2022 results. The press release along with the slide presentation that we will refer to during our remarks on this call, are available on the Investor Relations section of our website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today’s discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the Company’s performance. For a reconciliation of these measures to U.S. GAAP, please refer to the earnings press release and slide presentation. Today’s call and associated materials may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings. I will now turn the call over to Michael Collins.

Michael Collins, Chairman and CEO

Thank you, Noah, and thanks to everyone joining the call today. Butterfield’s excellent results in the fourth quarter and full year 2022 benefited from strong positioning in our core banking and private trust markets in Bermuda, the Cayman Islands and the Channel Islands. In addition to these locations, we provide specialized financial and trust services in Singapore, The Bahamas and Switzerland as well as United Kingdom based mortgage lending and high-end Central London. The Bank’s geographic footprint is strategically based across best-in-class offshore banking and trust locations. Our revenue generating operating jurisdictions are efficiently supported in market and in addition by our service centers in Mauritius and Halifax, Canada. I will now turn to the full year highlights on page 4. Butterfield had an excellent year with net income of $214 million and core net income of $215.7 million. Operating results have increased with rising market rates and resulted in a core return on average tangible common equity at 28.6% for 2022. In addition to higher net interest income, non-interest earnings were up 4% and expenses held steady, despite some inflationary cost pressures. I was also pleased to see tangible book value per common share recover by 15.7% in the fourth quarter. The net interest margin increased to 2.41% from 2.02% in 2021 with the cost of deposits rising to 34 basis points from 11 basis points in 2021. The current cycle deposit costs differ somewhat from previous cycles, as a result of our larger banking presence in the Channel Islands, which is more corporate than retail based and therefore more competitive. We continue to pursue an active capital management strategy and have paid out around 40% of earnings in quarterly cash dividends. We are beginning to see our TCE to TA ratio improve towards our targeted range and expect to recommence share repurchases. The Board has approved a new share repurchase authorization for 2023 of up to 3 million common shares which will replace the expiring authorization at the end of February 2023. One of our growth vectors is in-market accretive acquisitions and we are making good progress towards the first closing in the Private Trust asset deal with Credit Suisse that we announced in September last year. Throughout 2023, we’ll be taking over the administration and servicing of selected Private Trust client structures in Singapore, Guernsey and The Bahamas. We still expect the timing of the onboarding to occur progressively by jurisdiction with the first smaller tranche of Singapore clients coming across at the end of the first quarter, and Guernsey and The Bahamas in the second and third quarters. Our compliance team continues to conduct extensive due diligence at the client level and we are generally pleased with the quality of business so far. I will now turn the call over to Craig for more detail in the quarter.

Craig Bridgewater, Group CFO

Thank you, Michael, and good morning. I will begin with slide 6 where we provide the fourth quarter highlights. Butterfield reported net income for the fourth quarter of $63.1 million or $1.26 per diluted common share and core net income of $63.2 million or $1.27 per share. Our core return on average tangible common equity increased to 34.9% in the quarter from 31.6% in the prior quarter. Our net interest margin improved 20 basis points to 2.79% with the cost of deposits rising 44 basis points to 78 basis points. The Board of Directors again declared a quarterly cash dividend of $0.44 per share. We did not conduct share repurchases during the fourth quarter, although as Michael mentioned, we expect to resume share buybacks as we approach our targeted TCE/TA range of 6% to 6.5% due to deposit stabilization and sustained improvement in OCI marks. I will now turn to slide 7, which provides a summary of net interest income and net interest margin. In the fourth quarter, we reported net interest income before provision for credit losses of $94.6 million, an increase of 3.7% versus the prior quarter. The increase was due mainly to continued improvement of yields on all interest earning assets, which was somewhat offset by higher deposit costs. Average cash and short-term investment balances were down $280.1 million during the quarter, driven by expected customer deposit outflows on the funding side. Average investment balances decreased by $152.5 million. We deployed the $108 million of portfolio maturities and short-dated instruments in the fourth quarter of 2022 compared to $90 million in the previous quarter. The average loan balance was down $83.3 million, driven by net maturities in Bermuda and Cayman. Overall, loan yields were up 74 basis points during the fourth quarter, primarily due to the impact of previously announced rate increases on floating rate loans. We had new loan originations of $204 million at an average yield of 5.48% versus $239 million at 4.83% in the third quarter of 2022. Turning to slide 8. Non-interest income was up 10% quarter-over-quarter, primarily due to higher banking fees, which benefited from increased seasonal credit and debit card transaction activities and higher trust revenue from new business and increased activity-based fees. Non-interest income continues to be a stable and capital efficient source of revenues with a fee income ratio of 37.1%, up from 35.6% during the third quarter. Slide 9 provides a summary of core non-interest expenses. Total core non-interest expenses were $84.5 million and 3.3% higher than $81.8 million in the prior quarter and slightly above our targeted run rate. The higher expenses are primarily the result of increased staff-related costs, mostly from performance-based incentive accruals and severance costs. The core efficiency ratio continued to improve to 55.6% and remains below our true cycle target of 60%. I will now turn the call over to Michael Schrum to review the balance sheet.

Michael Schrum, President and Group Chief Risk Officer

Thank you, Craig. Slide 10 summarizes regulatory and leverage capital levels. Butterfield’s capital levels continue to be significantly above regulatory minimum requirements. Our tangible leverage ratio of 5.6% has improved from 5.0% in the prior quarter due to improved OCI marks in our available-for-sale portfolio. As we see sustained improvements in the TCE to TA ratio towards our target range of 6% to 6.5%, we plan to recommence share repurchases subject to market conditions. It is important to note that the TCE to TA is not a regulatory ratio for Butterfield and the ex-cash ratio also improved to 6.5% and excluding OCI on the securities book, the TCE to TA ratio remained at 8.2%. Turning now to slide 11. Butterfield’s balance sheet remains conservatively managed with a high degree of liquidity. Period-end deposit balances increased by approximately $530 million to $13 billion versus the prior quarter-end. The stabilization and increase in deposits came from higher customer volumes as well as the impact of foreign exchange translation of non-U.S. dollar deposits, reversing some of the decline we saw in the third quarter of 2022. Butterfield’s low risk density of 33.9% continues to reflect the regulatory capital efficiency of the balance sheet with a low risk weighted residential mortgage loan portfolio, which now represents 70% of the total loan assets. Turning to slide 12, here we provide loan and deposit changes by volume and foreign exchange movement, as well as currency by segment. The chart shows the $530 million fourth quarter increase in deposits, which consists of $290 million of underlying deposit inflows, and $240 million due to currency translation changes from a weaker U.S. dollar. New loan originations decreased as expected, but that decline was more than offset by foreign exchange movement. On slide 13, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 96% AAA rated U.S. government guaranteed agency securities. Credit quality in the loan book also continues to remain robust with non-accrual loans holding at 1.2% of gross loans, and the loan net charge-off ratio, which is up 3 basis points from the prior quarter to 11 basis points. On slide 14, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. The duration of the investment book held steady during the quarter at 5.4 years. We continue to expect asset sensitivity to result in improving NII with higher market rates. Butterfield’s interest rate sensitivity has moderated somewhat due to a higher proportion of fixed rate loans and continued relatively higher sensitivity of U.S. dollar deposits to market rates in the Channel Islands. I will now turn a call back to Michael Collins.

Michael Collins, Chairman and CEO

Thank you, Michael. I am pleased to note that Butterfield became a member of the UN Global Compact in 2022, which is a public confirmation of our commitment to responsible business practices in the areas of human rights, labor, the environment and anti-corruption. Our ESG program includes a specific focus on climate change and sustainable infrastructure, education and wellbeing, and workforce equity. Butterfield’s results continue to validate the strengths of our best-in-class operating jurisdictions, sustainable non-interest income, and disciplined expense management that helped drive the efficiency ratio below 60%. As we enter 2023, we believe that Butterfield’s return on common equity will continue to support overall growth objectives and investor returns. Our longstanding strategy remains focused on limiting credit exposure in our conservative investment portfolio, growth through targeted acquisitions, and thoughtful capital management. Our core markets and market conditions remain constructive for Butterfield’s continuing success, given the proven relatively low risk and high return profile of our business model across recent interest rate and economic cycles. I look forward to working alongside our great teams of people in 2023 and beyond, to help clients achieve their financial goals and enhance shareholder value. Thank you. And with that we’d be happy to take your questions.

Operator, Operator

Our first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Alex Twerdahl, Analyst

I wanted to ask about the deposit flows you had during the fourth quarter. Obviously, nice to see the reversal after a couple of quarters of outflows. As you look forward into ‘23, do you think that now that deposits are kind of back closer to where they were pre-pandemic that we should see some deposit stability or is there still some at-risk deposit or do you think that maybe there could actually be some inflows over the next couple of months?

Michael Schrum, President and Group Chief Risk Officer

Good morning, Alex. It’s Michael Schrum. So maybe I’ll just kick off. Obviously, in the slide deck, you can see the FX movement, which is quite significant in terms of the underlying values that we put on the balance sheet. The underlying deposit flows, as you said, we’ve seen sort of a post-pandemic outflow, net outflow, still a bit elevated, I would say. So, I think we still believe when we look at the retail has held very steady, corporate, particularly in Bermuda and Cayman, is a bit more volatile in terms of business flows. So, I still think we will land somewhere in the region of $12.5 billion. So, we’re still a little bit elevated right now. But obviously, we are trying to carefully balance the rate, the cost of deposits with the flows as well. So, I think we’ve done a decent job of that, even though cost deposits are ticking up. But that’s the balance of this part of the cycle. So, I think we are still sort of looking at 12.5%, maybe a little bit higher, maybe a little bit lower, but thereabout.

Alex Twerdahl, Analyst

Okay. In the same vein, regarding cash flows from the investment portfolio, I recall last year expectations were for cash flows to convert into cash. Have you adjusted your strategy? Are you considering reinvesting more, given that expectations for stability have improved?

Michael Schrum, President and Group Chief Risk Officer

Yes, the answer is yes. It's somewhat related to geography, as we have a latter T-bill portfolio in our cash and short-term securities. This setup is beneficial because it prevents additional Other Comprehensive Income from affecting the TCE. We're essentially waiting before we begin the transition back. We were pleased to see a recovery in TCE this quarter, aided by some of the OCI marks improving slightly. We tend to be quite conservative, and short-term rates remain relatively favorable. However, over time, we aim to transition to fixed-rate assets in our investment portfolio. We might need a couple more quarters to evaluate how rates evolve before we re-ladder and return to normal operations.

Alex Twerdahl, Analyst

Okay. That’s great. You mentioned the deposit pressures starting to increase a bit, particularly in the Channel Islands. Could you give us a clearer understanding of your thoughts on overall deposit betas in the different regions?

Michael Schrum, President and Group Chief Risk Officer

Yes. So I’ll kick off and then Craig can also chime in. Obviously, the exit run rates are a bit higher. If you look at the March, particularly on the term deposit side, it has really largely been due to the Channel Islands, where again we don’t have a significant enough market share to have an impact on the pricing in those markets. And we’re still trying to grow market share, obviously there. And it is just a more competitive environment. And our banks there are primarily mid-market commercial banks. And so again, there’s more price sensitivity in those markets. In terms of how we think about the betas in Bermuda and Cayman, that hasn’t really changed very much in terms of the deposit beta. So, I think for demand, we model something like a 30% beta, and I think we’ve outperformed that across the cycles. And in term deposits, we sort of model a 70%. Again, we want to have the opportunity to give customers a reasonable rate if they go onto term with us. And obviously there’s the money fund as well. So, those on a back-testing basis are pretty conservative assumptions for those two markets, really. And then the Channel Islands, we’re obviously a little bit newer to the market, and so we’re modeling it at a little bit more aggressive deposit betas. These are through cycle. I think we’re sort of peaking in terms of deposit betas right now in Channel Islands, but they’ve been pretty close to a 100% actually.

Craig Bridgewater, Group CFO

I believe that in the Channel Islands, we are predominantly a corporate bank at this time. Recently, we initiated our mass affluent retail program, and we currently have over 200 million sterling in mortgages and around 100 million in deposits. I expect that as we expand our retail book, funding in the Channel Islands will become somewhat less expensive over time. However, at present, our focus remains on the corporate side, and I anticipate that this will evolve to resemble what we see in Bermuda and Cayman, though it will take some time to achieve that.

Operator, Operator

Our next question comes from Timur Braziler with Wells Fargo Securities. Please go ahead.

Timur Braziler, Analyst

Regarding the buyback, I want to clarify that you are indeed increasing it and are optimistic about the TCE trajectory. Are you still waiting to reach that 6% level before reengaging, or have you already started? Additionally, I believe there is still a 2 million share authorization available until the end of February. Will you be utilizing that along with the 3 million shares, or is the 3 million shares intended to exceed last year’s purchases to make up for shares that were not bought in 2022?

Craig Bridgewater, Group CFO

Thanks, Timur. To set the stage, as we aim to return to our target range of 6% to 6.5%, we’re considering whether to re-enter the market and start our share repurchases. Currently, we’re at about 5.6% as of the end of December, and we’re seeing favorable conditions. Additionally, we prefer to have an approved program in place. We have an existing authorization that expires at the end of February, which is currently available to us. Yesterday, we announced a renewal program to repurchase 3 million shares, effective until next February, and we will continue to evaluate this. We had our Board meetings yesterday, and the Board approved the program, showing strong support for resuming share repurchases, depending on market conditions. We are encouraged by the recent positive activity in our shares. We are actively discussing the possibility of restarting share buybacks, and we have both the current and new programs available to us.

Michael Schrum, President and Group Chief Risk Officer

Yes, it's Michael Schrum, and I can add to that. We expect the pace to be slower in the first half of the year. We want to see conditions stabilize, including deposit levels and OCI. That's our internal perspective.

Timur Braziler, Analyst

Got it. I appreciate that. And then you had mentioned that you extended a large line of credit to the Cayman government. Can you quantify the size of that? And as you are looking at the loan book through ‘23, is there any kind of visibility to other chunky activities taking place, or does that come up a little bit more, I don’t want to say unexpected, but is that situation a little bit more fluid and seeing that pipeline there?

Craig Bridgewater, Group CFO

Yes. The size of the line of credit extended to the Cayman Islands government in 2022 was in the mid-teens. It has been amortizing and paying down over the last few months, so it is currently around 12 to 13. We continue to focus on these important relationships. There are no significant opportunities in the pipeline at the moment, but as new prospects arise, we are ready to consider them, provided that the terms, conditions, and pricing are appropriate.

Timur Braziler, Analyst

Great. And then just last for me, looking at your expectation on the deposit side, the fact that we still have some lagging rates to be put into the Bermuda mortgages. Just looking at net interest margin and kind of putting all that together, is the expectation here kind of steady as she goes, as these two dynamics work out at least in the first quarter or do you see slowing or maybe even reversal as you start getting more pressure on the funding base and asset yields slow down a little bit?

Michael Collins, Chairman and CEO

Yes, that’s a great question. The first thing to consider is where market rates are. Our exit run rates for the fourth quarter indicated that net interest margin expansion was happening at a slower pace compared to the increases we saw in Q3 and Q4. There was a significant increase in Q3 followed by a more moderate rise in Q4. It's also important to note that we have two announced base rate increases in the Bermuda residential book that will take effect in Q1. When looking at everything together, cash and short-term securities will continue to rise, and while loans will increase slightly, about 40% of those are fixed. Additionally, as we start to re-ladder our securities, we expect them to reinvest at higher rates as we see tangible common equity returning. Therefore, we foresee a path for continued expansion as long as the rates market remains favorable, which is currently the case, with some fluctuations but still room for further growth.

Timur Braziler, Analyst

Got it. And what’s the magnitude of the two announced base increases on the Bermuda book?

Michael Schrum, President and Group Chief Risk Officer

Both 25 basis points.

Timur Braziler, Analyst

25 each, so 50?

Michael Schrum, President and Group Chief Risk Officer

Yes.

Timur Braziler, Analyst

Great. Thank you.

Michael Schrum, President and Group Chief Risk Officer

Sorry, Tim. I have to correct myself. So, sorry, that Cayman facility is in the region of 150. I was actually thinking, I was thinking it’ll be tenure when I said kind of mid-teens, so that’s actually tenure of it. But it’s in the region of 150.

Timur Braziler, Analyst

Okay. That’s 150 million commitment. And that’s fully drawn down, or is that only a part of that is...

Michael Schrum, President and Group Chief Risk Officer

Yes.

Timur Braziler, Analyst

Okay, great. Thanks for the color. I appreciate it.

Operator, Operator

Our next question comes from David Feaster with Raymond James.

David Feaster, Analyst

I would just want to maybe get a quick economic update from you all. We’ve got the restrictions now lifted in the island economies, great to see the uptick in the banking fees. Obviously, there’s some seasonal benefits there, but just curious, the pulse of your local economies from your perspective. How inflation and higher rates are impacting the local businesses there? And then just any expectations for that banking fee line item as well?

Michael Collins, Chairman and CEO

Yes. Thanks for the questions. I mean, I think all the economies in our jurisdictions are actually doing quite well. It is seasonal in a sense. So obviously, the fourth quarter came in sort of late November, Thanksgiving through December is actually really busy. That’s their high season. But on the other hand, Bermuda is the low season from a tourism perspective. So, it balances out, Bermuda’s holding its own. Reinsurance industry is doing well. We’ve sort of have a whole new type of reinsurance company over the last 5 to 10 years, life reinsurers. So, as property catastrophe is actually waned a bit, Bermuda’s reinvented itself again. So, reinsurance and international business is doing well. We do have a bit of a problem in terms of flight capacity, which Cayman doesn’t have. Cayman has tons of flights. Bermuda today has fewer flights, and we’re working with the airlines to try to get more capacity. But economy’s doing reasonably well. Cayman is doing very well, so expanding population growth, lots of new people sort of setting up there, and the Channel Islands is doing quite well as well. So all the economies are doing well, everything’s open. Bermuda, I think, will have a good summer season. So, so far so good. In terms of cost-of-living Bermuda, Cayman have always been very expensive. So, I think inflation isn’t any surprise here. We’ve talked in the past, we haven’t seen any credit stress at this point, but we’re keeping an eye on it as rates go up. But so far there’s enough indigenous wealth and saved wealth in Bermuda in particular that we haven’t seen any real credit stress. So, we’ll keep an eye on it, but we’re quite positive about the way all four economies are looking on the banking side.

David Feaster, Analyst

Okay. That’s helpful. And maybe to the point on credit, it was great to see the decrease in non-accruals. Obviously, we’re not seeing anything significant. Could you maybe just talk about what drove that decline? And then just curious on your mortgage clients, and how they’re holding up with higher rates on those floating rate mortgages and your approach to working with those borrowers that may be struggling more, and whether there’s just anything on the credit front that you’re watching or maybe concerned about at this point. Sounds like there might not be much, but just wanted to touch on that.

Craig Bridgewater, Group CFO

Hi, David. It’s Craig. To address the first question about the decreases in non-accrual, we had a non-accrual loan that was paid down, so that’s come off the books, which is a positive development for our credit loan book this quarter. This was a facility in the UK, and it was an unusual circumstance that led to this outcome. We don’t expect this to happen again, but it has been resolved. Moving forward, in Bermuda specifically, our credit risk management team has been diligently working to understand clients’ situations and how the increased interest rates in 2022 might affect loan affordability. We are closely monitoring this, and thus far, we haven’t observed any signs of declines in credit quality. There have been no missed payments, and nothing unusual related to missed payments or days past due. Typically, around Christmas, some people might neglect their mortgage payments for that month as they focus on holiday celebrations with family, but that’s a seasonal behavior and not something we consider unusual.

Michael Collins, Chairman and CEO

It's a different market because we do not engage in credit scoring. We have very few mortgages, and the average mortgage size is considerably larger than in the U.S. In both Cayman and Bermuda, we know each property well. When a borrower faces difficulties, we have a good understanding of how to restructure the loan and know the property's market value. This allows us to underwrite each mortgage individually. The market is quite unique, and because of its smaller size, we tend to receive early insights when certain borrowers encounter challenges. However, at this time, we are not observing any issues, even considering the Christmas season, which is significant in the islands.

David Feaster, Analyst

That’s right. That’s helpful. Thank you. And then, maybe just touching on the acquisition. Just curious, it sounds like we might be getting some revenues here in the first quarter. Just kind of curious how due diligence has been going? I know it’s a time-consuming process. Whether you are seeing more clients that meet your thresholds than you’d initially expected? And then just, if you could provide us any financial impacts from the deal or is it still just too early to tell?

Michael Schrum, President and Group Chief Risk Officer

Hi, David. It’s Michael Schrum. Yes, the teams are diligently working on processing client consents for due diligence, and it's progressing well. It’s a bit slower due to many client questions, but the discussions have been positive. Once we finish the due diligence process, we follow a checklist for fiduciary obligations and any potential issues we identify. We also verify if there are any missing documents. So far, our initial focus has been on Singapore and the Bahamas, and we have encountered high-quality client files, which are slightly younger than those from Guernsey. We're excited to close the first group of clients by the end of the first quarter. There are still a few details being sorted out, but this will benefit both the Singapore entity and our overall fee income. Although it's not a large acquisition, there are still aspects to confirm regarding which clients will transition and which staff will be servicing them. We'll provide an update at the end of the quarter once we have clarity on the final client list and discuss our pipeline. Overall, the deal remains within our planned parameters. Some clients are excellent trust clients, presenting further opportunities for us in the future. The initial focus has been on moving the process along. The differences in risk appetite are minimal, and any variations are being assessed by an arbitration committee to determine if we can accept them under certain conditions. This discussion has been constructive. Overall, things are going well. We've had great conversations with some families in Singapore, and Michael and I have discussed the process and expectations with them. I’m pleased with the quality and the cooperation from Credit Suisse throughout this process. They are quite busy, but they are committed to completing this with us, which has been very helpful. Regarding financials, it's still early and there are some moving parts, but we are eager to discuss the upcoming quarter.

Michael Collins, Chairman and CEO

Yes, we are really pleased with the quality of our clients. What we're observing is a transfer of generational wealth in Asia. The source of funds is quite clear, as we see industrial companies passing down wealth through generations. This process takes time and effort, as it requires client consent. Credit Suisse has been extremely supportive and helpful throughout this process. While it will take some time, we are very satisfied with the quality of our clients.

Operator, Operator

Our next question comes from Tim Switzer with KBW. Please go ahead.

Tim Switzer, Analyst

I had a quick follow-up on your M&A activities. I know you've been dedicating a lot of time to due diligence. Are you still interested in potentially acquiring another trust business this year if the right opportunity arises, or is that not a priority at the moment? Also, regarding bank M&A, I realize there are limited options, but is that still something you're considering?

Michael Schrum, President and Group Chief Risk Officer

Thank you for the question, Tim. This is Michael Schrum. We are still interested in pursuing opportunities, but these transactions often take time and can face unexpected challenges during negotiations. There are ongoing discussions, and it took nearly a year to finalize the CS deal from our initial talks to where we are now. Following that, it takes additional time to establish and integrate the team. We are actively engaging in conversations and see promising opportunities both in Singapore and other markets. Post-COVID, many larger franchise banks are reevaluating their business, viewing it as complex and slow-growing in small regions. We would certainly be open to potential acquisitions, though the process may be lengthy and may not align with both parties’ timelines. Our appetite remains, and the parameters for acquisition are unchanged; we are willing to pay up to eight times EBITDA before synergies, with a maximum investment of $50 million. If a significant opportunity arises, we would certainly consider it. For smaller acquisitions, we can manage integration effectively, which should contribute positively to our high return on equity at this time. The benchmarks for internal rates of return for deals are set at 15%, but they must also be strategically beneficial. There are still a few solid opportunities available, although nothing concrete to announce yet. These prospects may fluctuate, but there is ongoing interest within the bank and the trust company.

Tim Switzer, Analyst

Okay, great. And for the margin outlook, you guys talked about you expect a little bit of expansion still. It seems like in Q1, but what’s the trajectory over the rest of 2023, assuming we get maybe another 50 basis points of hikes or something from the Fed. If the Fed pauses, is there a moderation in the margin in the back half of the year, as deposit costs continue to rise, but loan yields settle out or do you think you’d be able to maintain the NIM?

Michael Collins, Chairman and CEO

Yes. We see the drivers of the NIM expansion as a moderation in loan activity, particularly with higher rates affecting new originations. There is a fixed component that is somewhat flawed, but retail loans are still performing well for us. A significant factor will be the re-laddering of cash as we stabilize deposits. While the current exit run rate on cash is low, it is improving as T-bills roll over. This will change as we move into longer-dated fixed rate maturities. We anticipate that deposit costs will ease for now, but it will depend on market conditions, as we need to stay competitive in fixed income. This is the first rate cycle since our ABN acquisition in sterling in the Channel Islands, so it's a learning experience. Our model assumptions remain conservative, and with another 100 to 200 basis points, we are expecting moderation in asset sensitivity but not a complete flattening.

Tim Switzer, Analyst

Yes. That all makes sense. Thank you. That’s all for me.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Butterfield for any closing remarks.

Noah Fields, Head of Investor Relations

Thank you, Dave. And thanks to everyone for dialing in today. We look forward to speaking with you next quarter. Have a great day.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.