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. To ask a question, you may press Star, then one on a touch-tone phone. To withdraw your question, please press Star, then two. 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.
Thank you. Good morning, everyone, thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and full year 2022 financial results. On the call, I am 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 a 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.
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 in 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 four. 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 of 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 three 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. 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 on the quarter.
Thank you, Michael. Good morning. I will begin with slide six, 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, and 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 to TA range of 6%-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 $108 million of portfolio maturities in 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 activity 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 results 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 through cycle target of 60%. I will now turn the call over to Michael Schrum to review the balance sheet.
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%-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, the ex-cash ratio also improved to 6.5%. Excluding OCI on a 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 a 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 consist 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 a 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 a low net charge-off ratio, which is up three 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 the call back to Michael Collins.
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 well-being, and workforce equity.
Butterfield results continue to validate the strengths of our best-in-class operating jurisdictions, sustainable non-interest income, and disciplined expense management that help 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 long-standing 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 in enhancing shareholder value. Thank you. With that, we'd be happy to take your questions. Operator?
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
Morning, Alex.
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. You look forward into 2023, you know, do you think that, you know, now that deposits are kinda 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 see some inflows over the next couple of months?
Morning, Alex Twerdahl. It's Michael Schrum. Maybe I'll just kick off. Obviously, in the slide deck, you can see the FX movement, which is, you know, quite significant in terms of the underlying, you know, 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.
They're still a bit elevated, I would say. I think we still believe when we look at the retail has held very steady. Corporate, particularly in Bermuda and Cayman, it's a bit more volatile in terms of business flows. You know, I still think we'll land somewhere in the region of $12.5 billion. We're still a little bit elevated right now.
Obviously, we're trying to carefully balance the rate, the cost of deposits with the flows as well. I think we've done a decent job of that even though, you know, cost of deposits are ticking up. You know, that's the balance at this part of the cycle. I think we're still sort of looking at 12 and a half, maybe a little bit higher, maybe a little bit lower, but thereabouts.
Okay. Then, you know, in the same, I guess, correlated to that, you know, as you think about cash flows from the investment portfolio, I think last year it was, you know, mostly just expecting the cash flows to kind of turn into cash. Have you changed the strategy? Are you thinking about reinvesting some more, you know, just given a little bit more stability expectations?
Yeah. Yes, is the short answer. I mean, it's geography to some extent. We have a ladder T-bill portfolio in our cash and short-term securities. Obviously, that's helpful in terms of not having any more OCI coming into the AFS book impacting TCE. Again, we're just kind of sitting there until we kind of start the march back and we were pleased to see a recovery obviously of the TCE this quarter, helped by some of the OCI marks coming back a little bit.
I'd say, you know, as well, we're pretty conservative, so we're gonna kind of. You know, short-term rates are still pretty productive, but over time, obviously, we want the fixed rate assets in the investment portfolio. You know, maybe a couple of quarters more and see how rates develop, and then we should be re-laddering out and going back to BAU.
Okay, that's great. You know, you talked a little bit about the deposit pressures, starting to pick up a little bit, you know, specifically in the Channel Islands. I was wondering if you could help us just get a little bit better sense for how we're thinking about or how you're thinking about overall deposit betas in the various jurisdictions.
Yeah. I'll kick off and then Craig can also chime in. Obviously, the exit run rates are a bit higher if you, if you look at, you know, the march, particularly on the, on the term deposit side. You know, 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. It is just a more competitive environment.
Our banks there are primarily mid-market commercial banks, and so again, there's more price sensitivity in those markets. You know, 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. I think for demand, we model something like a 30% beta, and I think we've outperformed that across the cycles. In term deposits, we sort of model a 70%.
Again, we wanna have the opportunity to give customers a reasonable rate if they go on to term with us. Obviously there's the money fund as well. Those on a back testing basis are pretty conservative assumptions for those two markets really. Then the Channel Islands, we're obviously a little bit newer to the market. 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 100% actually.
I think part of it is, you know, Alex Twerdahl, in Channel Islands, we're very much of a corporate bank today. We've launched our mass affluent retail initiative recently. We have over GBP 200 million in mortgages now, and over about GBP 100 million in deposits. Over time, I think, the Channel Islands funding will become somewhat less expensive as we grow the retail book. Today it's very much a corporate book, but I think that will change over time. It'll start to look a little bit more like Bermuda and Cayman, but it'll take some time to get there.
Thank you for taking my questions.
Thanks.
Our next question comes from Timur Braziler with Wells Fargo Securities. Please go ahead.
Hi. Good morning.
Morning, Timur.
On the buyback, I just wanna make sure I'm hearing you correctly. You're re-upping it. You're optimistic about the trajectory of TCE. I guess, are you still waiting to get to that 6% level before you reengage, or are you starting to reengage already?
As a follow-up, you know, there's still, I think it's a two million share authorization remaining through the end of February. Could we actually see you guys tapping into that in addition to the three million shares, or is the three million shares kind of a little bit higher than the prior year to serve as a catch up for kind of shares not purchased during 2022?
Right. Thanks, Timur. I guess probably a few points just to tee it up is, you know, Jack kind of always said that, you know, as we see a pathway back into our range of 66.5%, you know, we'll give consideration to whether we go back into the market and commence our share repurchases. As you note, you can see that we are kind of marching towards that.
So at the end of December, I think we're like 5.6 and, you know, we're kind of still seeing positive conditions around that. Secondly, you know, we always like to have a program that's authorized. So to your point, we do have the existing one that expires at the end of February. So that's available to us.
What we did announce yesterday is, you know, a renewal or replacement program of 3 million shares to take us through to next February, and we'll continue to look at that. We're really happy that, you know, we just finished our board meetings yesterday. The board approved that, and we're very supportive of going back into the market for share repurchases, obviously subject to market conditions.
We are seeing some nice activity on the shares this morning, which is good to see. Yeah, we are kind of having internal discussions and looking at recommencing share buybacks. We do have the current program available to us as well as come March 1st, we have the new program.
Yeah, I think Timur Braziler, sorry, it's Michael Schrum, can add to that. I think the pace will probably be slower in the first half of the year is what we would expect. We just want to see conditions kind of stabilize both deposit levels and OCI. You know, I think that's how we think about it internally.
Got it. Appreciate that. Then, you had mentioned that you extended a large line of credit to the Cayman government. Can you quantify the size of that? As you're looking at the loan book through 2023, is there any kind of visibility to other chunky activities taking place, or does that come up a little bit more, kind of wanna say unexpected, but, is that situation a little bit more fluid in seeing the pipeline there?
The size of the one that was extended during 2022 was kind of mid-teens to the Cayman Islands government. Obviously, that's kind of been also amortizing and paying down over the last couple of months as well. It's kinda somewhere around $12-$13 at this point. That is. Obviously, we continue to kind of focus on those relationships, those significant relationships.
Nothing significant in the pipeline at the moment, but as those opportunities come up, we are always kind of willing to put our heads in the ring as long as the terms and conditions are appropriate, the pricing is appropriate, you know, we'll extend those types of facilities.
Great. Just last for me, looking at your expectation on the deposit side, the fact that we still have some lagging rates to be input into the Bermuda mortgages. 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? 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?
Yeah, great. Good question. I mean, obviously the first thing is it depends on where market rates are. I would say our exit run rates for the fourth quarter were continue to have that that NIM expansion at a slower pace than what we've seen in Q3 and Q4. Obviously you saw the big uptick, you know, in Q3 and then a slightly more moderate uptick in NIM in Q4.
It's worth just mentioning, we still have two announced base rate increases in the Bermuda residential book, which are coming through in Q1. You know, when you put it all together, you know, the cash and short-term securities will continue to trend up. Loans will trend up a little bit, but there's about 40% fixed in that.
obviously, securities, when we start to re-ladder, should reinvest at a much higher rate as we start to see TC coming back. you know, we kind of see a path of a longer expansion as long as the rates market remains constructive for us, which is, you know, somewhere where we're sitting at the moment, a little bit higher, a little bit lower, there's still additional expansion to come.
Got it. What's the magnitude of the two announced base increases on the Bermuda book?
25 basis points.
$25 each? $50?
Yeah. Yeah.
Yeah. Great. Thank you.
Sorry. Sorry, Tim, I have to correct myself. Sorry. That Cayman facility is in the region of $150. I was actually thinking it'd be tenure when I said kind of, you know, mid-teens. That's basically tenure of it. But it's in the region of $150.
Okay. It's a $150 million commitment, and that's fully drawn down or is that?
Yeah.
Only a part of that is... Okay, great. Thanks for the color. I appreciate it.
Thanks.
Our next question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning.
I just wanted to maybe get a quick economic update from y'all. You know, 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. Just curious, the pulse of your local economies from your perspective, you know, how inflation and higher rates are impacting the local businesses there, and then just any expectations for that banking fee line item as well.
Yeah. Thanks for the question. 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. On the other hand, Bermuda is the low season from a tourism perspective, so it balances out.
Bermuda is holding its own. Reinsurance industry is doing well. We've sort of have a whole new type of reinsurance company over the last five to 10 years, life reinsurers. As property catastrophe has actually waned a bit, Bermuda's reinvented itself again. 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. We're working with the airlines to try to get more capacity. The economy's doing reasonably well. Cayman is doing very well, expanding population growth. Lots of new people sort of setting up there.
The Channel Islands is doing quite well as well. All the economies are doing well. Everything's open. Bermuda, I think, will have a good summer season. Far so good. In terms of cost of living, Bermuda, Cayman have always been very expensive. You know, 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. So far, you know, there's enough indigenous wealth and saved wealth in Bermuda in particular, that we haven't seen any real credit stress. We'll keep an eye on it. You know, we're, you know, quite positive about the way all four economies are looking on the banking side.
Okay. That's helpful. And maybe to the point on credit, you know, 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? 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 may be, you know, concerned about at this point? Sounds like there might not be much, but just wanted to touch on that.
Hi. Hi, David. It's Craig. I guess to answer the first question in regards to the decreases, in. In non-accruals, we actually had a non-accrual loan that was paid down. That's kind of come off the books. That was a very positive development in regards to our credit loan book during the quarter. It was a facility in the UK and a very kind of unusual circumstance, if you will, that caused it to come up, and something that we necessarily wouldn't see or expect to reoccur. That was settled, and that was paid down, so that's good news.
Just going forward, in Bermuda in particular, our credit risk management team has been working really close, really hard to get a good understanding of, you know, clients' experiences, the potential impacts, on loan affordability or payment affordability on loans, as the interest rates have increased, over 2022. Very focused on that. So far we haven't seen anything come through, no indications of any decreases in credit quality. No missed payments, kind of not seen anything unusual when it comes to missed payments or days past due.
Usually kind of around Christmas time, people do ignore their mortgage payments at least for the month as they go into Christmas and wanna make sure they have a good Christmas and kinda, you know, kinda bringing happiness to their family. That's kind of seasonal, and that's, we don't see that as being unusual.
Yeah. It's a different market in the sense that, you know, we, as you know, we don't do credit scoring. We have so few mortgages, and the average size of the mortgage is much higher than you'd see in the U.S. We actually, in both Cayman and Bermuda, we actually know each property. When someone's getting into trouble and struggling a bit, you know, we've got our arms around it.
We actually know how to restructure it. We know what it'll sell for. It, it is really, you know, underwriting, you know, mortgage by mortgage, so it's a very different market. It's such small places that I think we get intelligence very early when certain borrowers are struggling, but we're just not seeing it at this point.
Yeah.
Irrespective of Christmas.
Yeah.
Is very, very important in the islands.
That's right. That's helpful. Thank you. Maybe just touching on the acquisition. Just curious, it sounds like we might be getting some revenues here in the first quarter. just kinda curious how due diligence has been going. I know it's a time-consuming process. whether you're seeing more clients that meet your thresholds than you had initially expected. If you could provide us any financial impacts from the deal, or is it still just too early to tell?
Hi David, it's Michael Schrum. Teams are working, you know, very diligently on pushing both the consents through the system, so we need client consent in order to actually do the due diligence. That's going pretty well. Little bit slow. A lot of questions from clients around, "Hey, what's this for?" You know. Needing to explain what's happening. It's a good conversation.
Once we start the DD process, we have sort of a check-checklist for fiduciary and for, obviously, any flags that we see on the file. We also check for missing documents. You know, so far what we've seen, we started really with Singapore and Bahamas, has been very high quality of client files.
It's also a slightly younger book than the Guernsey book, and we're very pleased that we're gonna be closing the first tranche of clients at the end of the first quarter here. There's still a few moving pieces. It's not gonna be material, but it is, you know, it's obviously helpful both for the Singapore entity, and it's helpful for, you know, for our fee income as a whole. It's not a large acquisition, and there's still some moving parts around which clients are actually coming across. I think, and there's some movement in which staff are coming to service the clients.
You know, we'll definitely come back at the end of the quarter when we have certainty around the closing population and talk a bit about what the pipeline is as well. I think overall, the deal is still within the stated parameters. The clients are some of them are fantastic trust clients, and there's a lot of additional opportunity for us to look at going forward. The initial push here has really been to just kinda get it through the system. I would say there's very few differences in the risk appetite.
There are some, and that's been put to sort of an arbitration committee, to kind of discuss and figure out whether we reject or whether there's some way that we could take them on in a conditional way. That discussion has been productive. I think overall it's going well. There are some great clients, Michael and I have been on early calls in Singapore, you know, talking to some of the families, talking them through the process, and what they can expect to happen. Very pleased with the quality, very pleased with the way that Credit Suisse has cooperated as well during this process. They've obviously got a lot going on.
I think they are very committed to getting this done with us. That's been very helpful as well. Yeah, financials, like, you know, it's a little early still. There's still some moving pieces. We're definitely keen to come and talk about it next quarter.
I think we're really happy about the quality of the clients. I think what we're seeing is, you know, generational wealth in Asia. The source of funds is pretty straightforward because you can see, you know, industrial companies going down through generations. We're, you know, it's a process. It takes a long time to move trust. It's laborious. You've got to get client consents. You know, Credit Suisse is being extremely supportive and helpful. It'll take some time, I think we're very happy with the quality of clients.
That's terrific. All right. Thanks, everybody.
Thank you.
Again, if you have a question, please press star then one. Our next question comes from Tim Switzer with KBW. Please go ahead.
Hey, good morning. Thanks for taking my questions.
Hi, Tim. Morning, Tim.
I had a quick follow-up on, I guess your M&A pursuits and interest. You know, you guys have been spending a lot of time doing this due diligence. You know, do you still have appetite to maybe, you know, acquire another trust business this year if you find the right opportunity? Or is that kind of on the back burner for now? You know, similar question, if, you know, I know bank M&A, you don't have too many options, but, you know, is that still of interest to you as well?
Yeah. No, thanks for the question, Tim. It's Michael Schrum. The answer is, you know, we're still interested and these things have a tend to have a long gestation period, and they tend to be, you know, a few curveballs as you go through the negotiations. There's still active dialogue. The CS deal took the better part of a year to kind of get from initial conversations to something that worked for everybody. It's, you know, another year to kind of get the team stood up and integrate.
In terms of just having conversations and making that pipeline work, there are still some great opportunities for us out there, both in Singapore but also in our other jurisdictions, where I think coming out of COVID, some of the bigger franchise banks are looking at that business as a complex, slow-growing business in small places.
We would definitely be the natural buyer eventually. It just is the gestation period is a bit longer and sometimes it, you know, sometimes it doesn't work for both parties at the same time. Definitely still an appetite. You know, our parameters are still the same, you know, we're paying up to 8x EBITDA pre synergies in market, maximum outlay of $50 million.
If something bigger did come along, we would always take a look at it. You know, so smaller acquisitions, we can get our arms around it, we can integrate it, and it's accretive with the high ROEs that we're posting at the moment. Obviously, the hurdle rates for the IRRs for the deals are still at 15, but they've got to be a certain 15 in order to be accretive.
You know, these things, these are not financial acquisitions. They're kind of strategic moves for the sellers and for us. Yeah, still, you know, definitely a handful of good opportunities. Nothing to talk about yet. You know, maybe they end up going away and coming back again. Who knows? There's still appetite in the bank and the trust company.
Okay, great. For the margin outlook, you guys talked about you expect a little bit of expansion still, it seems like in Q1. You know, what's the trajectory over the rest of 2023 assuming, you know, 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? Do you think you'll be able to maintain the NIM?
We would see it as, you know, the drivers of the NIM expansion really are, as you correctly said, you see a moderation in the loan, both in terms of new originations are starting to moderate at higher rates. There's obviously a fixed component that's, you know, that's flawed, if you will. You know, retail loans on the exit run rates are still up a fair bit for us. What's gonna kick in in a more meaningful way for us is the re-laddering of the cash as we see deposit stabilization. You know, the exit run rate on the cash is pretty low, but it's definitely getting there in terms of just the T-bills rolling over.
That will just continue really as we, as we roll into longer dated fixed rate maturities. Then deposit costs, we would expect that to moderate in terms of cost for now, but it just depends on what the market then does. We have to remain competitive, certainly in fixed term, bucket. Obviously that's where, you know, this is the first rate cycle we've done since the ABN acquisition in Sterling, in the Channel Islands. So this is a bit of a learning experience. I think our model assumptions are still very conservative.
As you can see on the asset sensitivity, you know, with another 100 basis point, you know, even 200 basis points, we're not expecting, you know, we're expecting moderation in the asset sensitivity, but not flatlining, if that makes sense.
Yeah, that all makes sense. Thank you. That's all for me.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Butterfield for any closing remarks.
Thank you, Dave. Thanks to everyone for dialing in today. We look forward to speaking with you next quarter. Have a great day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.