Image source: The Motley Fool.
The Bank of N.T. Butterfield & Son Limited (NTB 2.48%)
Q4Â 2018 Earnings Conference Call
Feb. 20, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year End 2018 Earnings Call for The Bank of N.T. Butterfield & Son Limited. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) 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. Please go ahead.
Noah Fields -- Head of Investor Relations
Thank you. Good morning everyone, and thank you for joining us today as we review Butterfield's fourth quarter and year end 2018 financial results. On the call, I am joined by Butterfield's Chairman and Chief Executive Officer, Michael Collins; Chief Financial Officer, Michael Schrum; and Chief Operating Officer, Dan Frumkin.
Following their prepared remarks, we will open up the call for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our fourth quarter 2018 results. The press release, along with a slide presentation that we will refer to during our remarks on the call are available on the Investor Relations section of our website, at www.butterfieldgroup.com.
Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussion will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For a reconciliation of these measures to US GAAP, please refer to the earnings press release and slide presentation. Today's call may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings.
I will now turn the call over to Michael Collins.
Michael Collins -- Chairman and Chief Executive Officer
Thank you, Noah, and thanks to everyone joining the call today. I am pleased to report that our business performed well in 2018 and it's a good reminder of the strength of our operating model. For those of you who may be new to the Butterfield story, we are a Bermuda headquartered Bank, with shares traded on the New York Stock Exchange and here in Bermuda on the Bermuda Stock Exchange.
Our service offerings include leading retail banking, trust and asset management services in Bermuda Cayman and in the Channel Islands, wealth management and trust business in The Bahamas, Singapore and Switzerland. And finally, we offer lending services to high net worth clients in the UK. To best support our revenue generating operations, we maintain cost effective support centers in Canada and Mauritius.
Turning now to slide four. Butterfield reported its second consecutive year of record profitability, with net income of $195 million, up 27.4% over 2017, and a core return on average tangible common equity at 25.6%, an increase of 320 basis points compared to the 22.4 % in 2017. Our strong results were driven by a well positioned investment portfolio, conservatively underwritten loan book, with growth in Central London to high net worth clients, diversified fee businesses, disciplined expense and capital management.
We are pleased to have completed the acquisition of Deutsche Bank's Global Trust Solutions business and integrated the majority of Deutsche Bank's banking business in Cayman and the Channel Islands. The onboarding of the Global Trust Solutions business has gone well and we continue to see the benefit that the stress business brings, particularly potentially new trust opportunities in Asia, as well as the future cost benefits of the Mauritius service center.
The Deutsche Bank banking business in Cayman and the Channel Islands, has been mostly onboarded late in the fourth quarter, and we still expect 4% to 5% accretion in 2019. Our newly licensed bank in Jersey has received a positive reception in the market, while we continue to focus on the final stages of onboarding of former DB clients and staff. We remain excited about the long-term prospects for growth and profitability in Jersey.
In the UK, we have had a good year developing our high net worth residential mortgages. This is a very conservatively underwritten book, exclusively in Central London, with loan to value averages just below 60%. With client deposits coming on in the Channel Islands, lending in Central London residential properties remains an appealing deployment option. We view capital management as an important lever to create shareholder value. As we announced yesterday, the Board has increased the quarterly common share dividend by 16% to $0.44 per share, which represents approximately a 5% yield at recent share prices. This is in addition to the $2.5 million share repurchase program authorized by the Board in December. We believe this balanced capital discipline will create flexibility and attractive shareholder yield combined with EPS growth over time, while ensuring that the qualified cash dividend remains sustainable.
I'll now turn the call over to Michael Schrum to provide detailed commentary on the fourth quarter results.
Michael Schrum -- Group Chief Financial Officer
Thank you, Michael, and good morning everyone. On slide six, you can see the fourth quarter was a very strong finish to the year for Butterfield. We reported net income of $50.9 million or $0.92 per diluted share and core net income of $51.1 million or $0.92 per share. Core net income was up 4% compared to the prior quarter and up 21% compared to the fourth quarter of 2017. Core return on average tangible common equity rose to 25.8% from 24.9% in the prior quarter. This is the eighth consecutive quarter with core returns in excess of 20%, as we continue to generate a sustainable and strong return profile.
The net interest margin increased 1 basis point compared to the prior quarter as term deposit interest cost increases were outpaced by higher yields from investment and loans. As expected, we saw deposit levels stabilize during the quarter, with additional client deposits added toward the end of the quarter in Jersey from the Deutsche Bank acquisition.
On slide seven, we provide a summary of NIM and net interest income. Over the past few quarters, we benefited from upward US interest rate movements, which have favored asset yields, while our cost of deposits have held fairly steady and remained really inexpensive. In the fourth quarter, the overall cost of deposits increased 7 basis points to 27 basis points, due to higher rates paid on term deposit -- to term deposit holders. Yields on investments in the quarter increased 9 basis points sequentially and rose 60 basis points compared to the fourth quarter of 2017. The new deposits from the Deutsche Bank acquisition were onboarded late in the fourth quarter and are expected to contribute more meaningfully in 2019.
On slide eight, we've provided some further detail on average deposit balances in terms of geography, currency and contractual nature. The currency mix has held fairly steady over the past year on average, but we do expect the pound sterling to increase as a percentage of the total as deposits continue to grow in the Channel Islands. Demand deposit costs have increased 2 basis points, while term deposits have increased inline with US short-term rates in the quarter.
As we have discussed previously, there can be significant deposit movements from quarter-to-quarter due to large trust and fund clients managing their normal commercial flows. Historically, these types of more dynamic deposit relationships can contribute as much as $1.5 billion, and could be as low as $500 million. At the end of the quarter, we remain toward the low end of that range for those large deposit relationships.
Turning now to slide nine, our capital efficient non-interest income increased 10.8% to $45.7 million in the fourth quarter of 2018 compared to the prior quarter, and was up 7.9% versus the year ago quarter. We normally see an increase in fee revenue during the fourth quarter due to increased banking, FX and credit card usage around the holiday season, as well as tourism spending in Cayman.
On slide 10, we provide an overview of core non-interest expense, which totaled $83.1 million for the fourth quarter of 2018 and was flat versus prior quarter. This was inline with expectations. The cost to income ratio has improved sequentially and through a focus on cost savings continues to trend toward the 60% target.
Looking now at slide 11, we provide a summary of capital levels, specifically Basel III regulatory capital and leverage capital. Capital levels remain on the high-end of our targeted range and we're pleased to report this quarter authorized a significant increase in the common dividend rate to $0.44 per quarter. We're confident that the combination of the cash dividend and active share repurchases provide the required flexibility, while we continue to pursue accretive acquisitions of banking and trust businesses in existing jurisdictions.
Turning to slide 12, we ended the quarter with total assets of $10.7 billion, approximately the same as at the end of 2017. Loans increased into high net worth Central London lending book, as well as Bermuda commercial loans. At the end of the fourth quarter, we had an inflow of client deposits in Jersey from Deutsche Bank, which is expected to begin contributing more fully to earnings in 2019.
Looking now at asset quality on slide 13. Our loan book was $4 billion at the end of the fourth quarter, with residential mortgages representing 65.3%. Non-accrual loans increased slightly to $48.7 million, but we remain comfortable with the composition and quality of the loan book and are not currently seeing any specific problem areas. Our $4.3 billion investment portfolio remains highly rated, with 96.3% of securities rated AAA, primarily in explicitly guaranteed US government Ginnie Mae Securities.
On slide 14, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis. The balance sheet profile remains structurally, moderately asset sensitive, although, we continue to reduce that aggregate exposure and we have gradually been extending duration and booking asset sensitivity into higher booked yields. The interest rate sensitivity gap between Butterfield & US peers continues to decrease as we roll over maturities.
I will now turn the call back to Michael Collins for concluding remarks.
Michael Collins -- Chairman and Chief Executive Officer
Thank you, Michael. 2018 was a year of record profitability in Butterfield's history, with core returns on equity in the mid 20s. As we enter our 161st year of continuous operations, I believe Butterfield is really well positioned for continued profitability and growth. As a bank that specializes in offshore financial services, I believe we are operating from the right locations with strong regulatory oversights and great people. We have franchise level market shares in Bermuda and Cayman, strong fee generating businesses with the opportunity to grow in the Channel Islands organically and through acquisitions. We continue to seek out potential strategic acquisitions that are financially accretive.
Before we open up for Q&A, I would just like to thank the Butterfield staff, Management Team and Board of Directors for your hard work and dedication in 2018 and look forward to making 2019 another successful year.
Thank you. And with that, we'd be happy to take your questions. Operator?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today will be from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler -- Wells Fargo Securities -- Analyst
Hi, good morning, gentlemen.
Michael Collins -- Chairman and Chief Executive Officer
Good morning, Timur.
Timur Braziler -- Wells Fargo Securities -- Analyst
First question is on the deposits. If you can provide any kind of puts and takes on what occurred this quarter? What was the actual balance that was brought in from the Channel Islands and the Cayman deposits? And I guess what happened within the larger trust relationships? Any additional pressure from that portfolio?
Michael Schrum -- Group Chief Financial Officer
Yeah. Thanks, Timur. It's Michael Schrum. I'll maybe kick-off and then Dan can give a bit of an update on the integration activities on the DB book. But fundamentally, the deposit levels stabilized in the quarter and our core franchise deposits are holding up really well. I think, as we mentioned last quarter, a reasonable way to think about deposit levels would be to start at the end of Q3 period end balance of just over $9 billion, I think it was $9.1 billion, given that we had some outflow last quarter.
And in terms of the DB book, that's been coming online in rolling closes. So as we discussed last quarter, Cayman completed late in Q3 with approximately a quarter of the total, so about $250 million (ph), so that was sort of in the end -- ending number there. Channel Islands and Jersey rolling close in late Q4, adding another half of the total book, so another $0.5 billion, getting us to the $0.95 billion (ph) level at the end of the quarter, but obviously the averages are a bit lower than that just because of the timing of that.
And then finally, we expect another quarter of client deposits to be onboarded in 1Q. And it would therefore be our expectations that we should see an uplift at the end of Q1 by another $0.25 billion, which would then complete the rolling closes for the Deutsche Bank acquisition. As we've discussed previously as well, the expected currency mix and somewhat lower productivity levels of the deposits will kind of create some NIM dynamics in Q1, as well as the fact that we obviously didn't pay anything for the business. It was essentially free and we didn't pay any consideration to the seller. So it should be still at the accretion levels that we talked about.
And I'll just hand over to Dan to maybe give a little bit more of an update summary of the integration activities.
Daniel Frumkin -- Chief Operating Officer
Thanks, Michael. So the integration is going well. Client response remains positive. The take on activity is on plan with the rolling closes. And again, I would just caution that in quarter one, the rolling closes are staged toward the back-end of the quarter just like quarter four. So when you're thinking about average balance sheet for the first quarter, I would not build it in the increase in deposits, it will come at the very tail-end of the quarter again, just because of the way we structure them.
And that deposit book is a deposit book we've been quite pleased with although it is, it's fund families mostly, so it's a bit of volatility, there's monies in and out, so spot has always been tricky and it does have meaningful fund flows. And as Michael says, it's a mix of pounds, euros and dollars. And staff has come onboard again the onboarding process with staff is great. We're doing some cultural events in the first quarter to get everybody integrated. We currently have about 70 of the 75 staff we're going to have in place. The majority of those staff have rejoined us in January.
So there will be some uptick in expenses associated with the higher staffing levels as we've highlighted previously. So again, I think it's going really well, we're really happy. As we said last quarter, Cayman has been fully integrated for a quarter. Those clients continue to operate well with good transaction levels and Cayman and -- I mean Guernsey and Jersey are making really good progress.
Timur Braziler -- Wells Fargo Securities -- Analyst
Okay. And I understand, just from a liquidity standpoint the pressure or the perceived pressure on margin. But as far as the rates on those deposits coming in, are they much different from what's currently on the balance sheet?
Daniel Frumkin -- Chief Operating Officer
No, not really. It's -- not at all actually.
Timur Braziler -- Wells Fargo Securities -- Analyst
Okay. And then just looking at the existing balance sheet, what portion of the term deposits have already been repriced at higher levels and what are still -- what's still kind of in the pipeline to be repriced at these higher levels?
Michael Schrum -- Group Chief Financial Officer
Yeah, it's a great question. So the majority of the term deposits have relatively short tenures, so three to six months. So the majority of that will have been moved through the cycle already. Obviously without any further Fed rate moves, we would expect for those deposits rate levels to stay flat as well. We're not looking here to get ahead of the market, obviously, but we're looking to just stay sort of competitive with -- in the jurisdictions that we're in.
Michael Collins -- Chairman and Chief Executive Officer
And the only thing I'd add to that, Timur is, we're not seeing a big shift from non-interest bearing to term. So again, you're not seeing term balances grow meaningfully, it's just the repricing of the existing bank book.
Timur Braziler -- Wells Fargo Securities -- Analyst
Understood. And then just one last one for me, to the extent that you could provide any additional information on some of the disclosure from the December Financial Times article? Any new information would be great there.
Michael Collins -- Chairman and Chief Executive Officer
Yeah. So basically, we haven't been contacted by the German prosecutor or anybody. So we're working through the client base and thus far haven't done anything that would give us any concern. But really our sense was, we were sort of a byproduct of the story. And at this point, don't expect any real outcome from it. So no contact whatsoever at this stage.
Timur Braziler -- Wells Fargo Securities -- Analyst
Okay, great. Thank you.
Operator
The next question will be from Michael Perito with KBW. Please go ahead.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Hey, good morning, guys.
Michael Collins -- Chairman and Chief Executive Officer
Hey, good morning, Mike.
Michael Schrum -- Group Chief Financial Officer
Good morning, Mike.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
A couple of questions, I wanted to address. I guess one on the margin, so Michael Schrum, you've just mentioned, if you assume no more Fed fund hikes, your expectation will be that the deposit pricing pressure will kind of slow. But I was curious, how should we think about your internal kind of base rate and the movement of that relative to what, we could see from US Fed funds here? If Fed funds here. If Fed funds stabilize, does that stabilize as well right away or is there kind of a lag behind it? And if Fed funds starts to decrease, I mean what's -- how do you guys -- can you just walk us through a little bit about how you're thinking about that? And just the relationship between your internal base rate and the US Fed funds, if -- as we see maybe the mix here changing a little with the slowdown in hikes, future hikes, rather?
Michael Schrum -- Group Chief Financial Officer
Yeah, I mean, it kind of directly ties into why we didn't see further margin expansion or NIM expansion this quarter, because obviously as you'd recall, that's a 90 day lag on any repricing that we do on the Bermuda dollar loan book. And we didn't reprice since in September, we sort of passed -- didn't pass that on to customers with the Fed funds there, but we did in December and we would obviously expect that to come through in 2Q more fully in terms of margin.
So I think -- as I think about the NIM that there are a couple of things happening, we should see some stabilization in deposit costs. Obviously, there shouldn't be a lot of -- more pressure in there. There'll be a bit on the loan book NIM expansion, there's a little bit from the investment book rolling over a couple of basis points, as we roll into higher rates on maturities. But given the convexity of those instruments in the investment book, we'll continue to ladder out and season in the new monies that are coming in -- as you can see our cash balances and short-term securities were quite elevated at the end of the quarter. So that it held at the short-end and then we'll start to sort of season those into the book, overall, which should have a modest NIM expansion effect as well.
And then obviously, the challenges or the headwinds there, are going to be, how do we deploy the sterling deposits. At the moment we're running a short sterling position because we anticipate more sterling to come on, and they're productively engaged in loan assets in the UK. But over time, that would be some form of guilt and obviously lower productivity levels there. So that will -- all things being equal have a downward -- downdraft on the NIM. So as I think through the whole year, there will be -- there should be some modest expansion coming throughout the year from the different asset classes. But I think the loans are kind of without any further Fed funds increases, we wouldn't expect to reprise loans again. At this point, we tend to move inline with the Fed funds up and down with some lag.
Michael Collins -- Chairman and Chief Executive Officer
And Mike, I would also say that I think our general outlook is, we've obviously kind of reached the top of the cycle and we're not expecting any real expansion from NIM going forward, which has really focused our conversation to what we need to do and it's becoming much more of an intense expense focus and in using our Halifax and Mauritius offices to reduce our expenses in the higher cost jurisdictions. So it's the management team that actually has been through both sides in interest rate cycle in Bermuda and Cayman. So I think we have a pretty good sense when NIM flattens out, what our next moves are. So we're really intensely focused on expenses over the next six months.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Yes, I do want to spend a minute there, but I just have one quick follow-up. So I mean Michael, I guess you kind of just addressed this. But, so I mean it would seem like then, while there could be maybe a drift down in the first half of this year because of all this liquidity that's coming on, this 3.35% to 3.40% margin is kind of a stabilization number that you guys will be comfortable from an outlook perspective maintaining?
Michael Collins -- Chairman and Chief Executive Officer
Yeah, I think so. I don't see any reason why that would be further eroded and it should definitely expand our NII obviously, but it will be at the short end of the curve and then it will be -- if -- the only way that we might see a meaningful uptick on investment progress if the long-end stops moving a bit. So at the moment, most of that asset sensitivity is kind of baked in to running book yields now, there's obviously some prepayment risk associated with those in terms of duration. But we've been extending duration and that there is no real reason why we should see a meaningful downdraft in the NIM.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. And then on the expense side, it sounds like there could be a tick up coming in the first quarter. But you guys, I think I saw a comment in the -- these slides, it said there were some redundancy expenses, which I'm curious. So I guess two part question I guess. What is kind of the run rate on expenses, once this deal is fully integrated and those redundancy expenses are presumably moderated? And then second, what are some of the actions being looked at to make the overall franchise more efficient, now that some of the benefits of the higher shorter-term interest rates is kind of played itself out?
Michael Collins -- Chairman and Chief Executive Officer
To start-off, I think overall, the focus is clearly becoming more efficient in our operational processing, automating everything and then moving what we can to Halifax and Mauritius and getting cost down that way. But I think that's one of the ways we can do it. There are other programs we're working on that we'll talk about next quarter that I think we'll give you a sense of how you reduce expenses in Island population, where when you reduce headcount it has effect on the community, it has effect on your clients and we have a pretty good sense of how to do that without hurting our franchise. So we'll talk a bit more about that in Q2, but I'll let Michael be a bit specific.
Michael Schrum -- Group Chief Financial Officer
Yeah, so I think in terms of expenses and you're right, there was kind of a redundancy in this quarter. I think if you go back to Q1 and Q2, we always said, we're going to probably end with the DB integration at an $84 million, $85 million run rate, a quarter. And I think at $83 million, there's still some staff to come on in Jersey. And so, I think that still holds $84 million, $85 million, that still gets us to kind of the $60 million (ph) number, pretty close if you backed out the redundancy cost there, that was really just a bit of a late one from the previous redundancies that we have in Q2.
So I think that run rate kind of holds once we get the Channel Islands DB staff fully transferred in. And I think it's inline with expectations, I'm not seeing anything there. I would say obviously we're fighting any kind of headwinds with -- as Michael said, becoming more efficient setting up new operations, onboarding new staffs, and then embedding that and getting to a BAU is going to be a sort of focus for the next couple of years, right, in Jersey and that's going to definitely generate some efficiencies and we're pushing pretty hard on that.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Helpful. And then just last one for me. On the capital side, I apologize I jumped on the call a little bit late, so I'm sorry if I missed some commentary you guys made about this. But if I'm -- I think if I'm interpreting the numbers right, you guys did $1 million the old -- completed the old $1 million share repurchase authorization at the end of last year. It looks like you did maybe another $300,000 of the new $2.5 million share authorization you guys put out before year end. So you got about $2.2 million left, just curious about how we should be thinking about your appetite for that and utilizing that over the course of 2019?
Michael Collins -- Chairman and Chief Executive Officer
Yeah. So again -- I think again, we haven't really changed our thinking about this, now I'm hopeful that, we're still looking obviously at the M&A opportunities there, but we're also conscious that we're at the very high-end of our target range and the previous four, five acquisitions we've made have been reasonably small in terms of the size of consideration and capital draw even from a balance sheet side point of view in terms of tangible.
So I think we're conscious. We want to commit to continuing to have a healthy dividend first and sustainable dividend first and foremost. And then obviously looking at accretive acquisitions, and Dan can talk a bit about that. And then thirdly, share repurchases is a good way for us I think we're certainly feeling that eight times, nine times earnings is a very good price point for us to be in there. So I don't think we're looking at sort of a massive acceleration of that, we want to be mindful of market dynamics and opportunities for others as well. But I think it could be a meaningful EPS accretion over time. And then fourthly, obviously if we run our capacity there, we would also consider specials, but that would probably be our last priority in that mix.
So again, it's kind of consistent with what we said before. We're obviously mindful of price to book dynamics as well. But we do feel that, it's a low risk and quite accretive way to deploy capital.
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Helpful. Thank you guys for taking my questions. Appreciate it.
Michael Collins -- Chairman and Chief Executive Officer
Thanks, Mike.
Michael Schrum -- Group Chief Financial Officer
Thanks, Mike.
Operator
The next question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead .
Alex Twerdahl -- Sandler O'Neill -- Analyst
Hey, good morning guys.
Michael Collins -- Chairman and Chief Executive Officer
Hey, Alex.
Michael Schrum -- Group Chief Financial Officer
Hey, Alex.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Just wanted to make sure I fully understand your comments earlier on the deposit flows. S it sounds to me like the $1 billion or so that you guided to that was going to come onboard with the Deutsche deal, it's still very much on track to be $1 billion with $250 million being already in the numbers. Last -- at the end of last quarter $500 million coming on this quarter and another $250 million coming on at the end of the first quarter, is that correct?
Michael Collins -- Chairman and Chief Executive Officer
Yeah, that's how we're thinking about it, Alex. I would say though that deposit gathering is not sort of a linear or exact science, clients do take money and -- but that's kind of -- that's exactly how we think about it.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And so, that would just imply that organic or legacy deposits were down a little bit over $100 million in the fourth quarter, is that correct?
Michael Collins -- Chairman and Chief Executive Officer
Yeah, I think deposits come and go, right? And we -- as we said before, we have some trust in clients. We're still at the lower end of that sort of deposit range of significant depositors, right? So we would expect some positive -- more positive momentum on those. But again, they come and go, so --
Michael Schrum -- Group Chief Financial Officer
And there is nothing systemic we're seeing it, Alex, it's just typical flows. So I mean, there's nothing, we're not -- again, we go through every deposit above a very small level, we go through to make sure it's not rate driven and everything else, and we're just not -- we're not seeing anything actually and we've actually, yeah -- so just typical flows.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. So I mean at the end of, I guess maybe the second quarter or so, you guys kind of had a heads up or you sort of knew or had some inclination that there would be some outflows in the third quarter related to larger deposits, that were part to the Bank, part of that sort of volatile piece and at this time, there's nothing to suggest that, you know, I know that the -- that volatile piece you're saying is kind of toward cyclical lows, but there's nothing that would suggest any outflows in the first quarter from that or any meaningful outflows into the first quarter from that segments, right?
Michael Collins -- Chairman and Chief Executive Officer
No, not that we're aware of, but again, you don't know what you don't know. But not that we're aware of.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. Great. And then --
Michael Schrum -- Group Chief Financial Officer
Going back to the big deposit outflows, as we've talked about last time, those are really two clients, and majority of it was one client which we knew, would eventually going to be put to work. And so that's the nature of our balance sheet and that's kind of the way it works. So I mean, it can come in and go out, but the big client that went out that those deposits aren't coming back as they put it to work in the market. So --
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And then Dan, in the past regard to the -- in regard to the deal you kind of gave out some sort of deal metrics, as sort of what the expectations were for fee income and expenses in NII et cetera. It seems to me like the NII probably doesn't change of like of like, given the size of the balances haven't really changed. With the fee income piece or the expenses associated with those Deutsche deposits, is there a little bit more clarity now on kind of what that might shake out to in 2019?
Daniel Frumkin -- Chief Operating Officer
And so, I think we guided that it would be 4% to 5% accretive and when stabilized, so we think that's right, Alex, with everything.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And then for like the fee income this quarter was relatively elevated relative to last quarter and the year ago quarter. Is any of that already coming from the new deposits sort of coming online? Is that -- was it getting a little taste of what we could expect in 2019 or you think it's there's really just more seasonality in the fourth quarter that drove higher fee income this quarter?
Michael Schrum -- Group Chief Financial Officer
So I think it's a combination of a few things. One is you noticed the trust fees, I think were the largest component of our non-interest income, fee line for the second quarter in a row I think, but for the first time in history. That's really is a reflection of the GTS acquisition as we've seen those fees come through and be sticky and stay and been able to grow some of those fees marginally, but -- some growth. I think that's the first thing. There is a bit of seasonality, so if you look at fourth quarter of '17 versus fourth quarter of '18, in banking fees, there is a little bit of Christmas spending that occurs on the cards, there's just a little bit more funds flow that comes through, a little bit more of FX, people drive a little bit through that period. So there is a bit of seasonality.
And then, yes, we are seeing some custody in FX fees in the Cayman business, as well as a bit in the Channel Islands associated with the Deutsche Bank acquisition, so it's a bit of a mix. Now those custody in FX fees aren't huge, but they're not insignificant either. So it's a combination of all those events.
Daniel Frumkin -- Chief Operating Officer
Yeah, the way I would think about it, so if I look at the delta of three between banking and FX, probably half of that might be sort of what you'd consider seasonality, which is sort of card usage, merchant acquiring, as well as credit card usage.
Michael Collins -- Chairman and Chief Executive Officer
That's very -- part of -- the biggest part of seasonality is just, as you know, Cayman is a big winter Christmas destination for tourists and that always bumps up. So every fourth quarter is a bit high.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay. And then do you just have the breakout for the UK mortgages handy at the end of the quarter?
Michael Schrum -- Group Chief Financial Officer
I don't, sorry.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Okay.
Michael Collins -- Chairman and Chief Executive Officer
When you say breakout, you --
Michael Schrum -- Group Chief Financial Officer
Balance --
Alex Twerdahl -- Sandler O'Neill -- Analyst
Yeah, the balance.
Michael Schrum -- Group Chief Financial Officer
Because we didn't disclose the financials, right because --
Alex Twerdahl -- Sandler O'Neill -- Analyst
I guess, we'll get it with the 20-F next week, but --
Michael Schrum -- Group Chief Financial Officer
You'll get it with the 20-F.
Michael Collins -- Chairman and Chief Executive Officer
Yeah, one of the reasons why -- I mean, this is our first year of sort of being an accelerated filer if you will for the 20-F with the full integrated reporting. And so that's one of the reasons why we wanted to kind of give a bit more time to kind of close off the books, so a bit later, reporting this year, than some of the peers. But obviously, it's -- going forward that should be more in line.
Michael Schrum -- Group Chief Financial Officer
But you'll see in the 20-F, I think it's fair to say that you will see further growth in the residential loan book out of the UK, and while overall loans have remained sort of flattish, with the exception of the Bermuda government loan moving up, that's really been a mix shift for us, which bleeds through into the loan margin a bit.
So I mean, but again, you'll see that in the 20-F, Alex. I just -- I can't remember the exact numbers of some and I don't want to guess. So -- but the trend is right, you will see more of the UK mortgages and the mix of our loan book has continued to just show slightly, which does have a slight negative impact on loan margins.
Michael Collins -- Chairman and Chief Executive Officer
Completely accretive to NII.
Michael Schrum -- Group Chief Financial Officer
But a bit on loan margin.
Michael Collins -- Chairman and Chief Executive Officer
Yeah.
Alex Twerdahl -- Sandler O'Neill -- Analyst
I agree and understood. I just wanted to ask though, there was an article in the Wall Street Journal about a week and a half ago about higher in UK, real estate, and I think it's something that's being kind of under pressure for quite some time, but maybe it's gotten a little bit more publicity with the whole Brexit thing going on. Is there anything that you're looking at? I know your LTVs are extremely conservative and the market you're playing in is a little bit unique. But from your standpoint with respect to the supply for these types of mortgages, for the credit quality for everything, I mean is there anything that's kind of changing or that is -- would sort of change your methodology and your standards with respect to Brexit and kind of some things are going out the real estate market over there?
Michael Collins -- Chairman and Chief Executive Officer
No, I definitely not. I think we stuck to our underwriting guidelines of 60% LTVs. Any of -- these are sort of three to five year rolling mortgages, so they're pretty short-term. We've really been disciplined about location, so we've really stayed in Central London, we haven't sort of drifted out outside of that area. And I'd say a number of things happening in the UK in terms of stamp duty and concerns about Brexit, but there is a store wealth in those three or four neighborhoods in Central London that is never going to drop sort of 40% or 50%.
So we're really confident about the book, it's a growing part of our loan portfolio, it's obviously the biggest growth area and while everything in the UK will be affected somewhat by Brexit depending on which way it goes, I think this is the most insulated part of the market and each loan is individually underwritten, we know the properties inside and out, we know the clients inside and out. So it's a very carefully underwritten book.
Alex Twerdahl -- Sandler O'Neill -- Analyst
Thank you for taking all my questions.
Michael Collins -- Chairman and Chief Executive Officer
Thanks.
Michael Schrum -- Group Chief Financial Officer
Thanks, Alex.
Operator
(Operator Instructions) The next question will be from Will Nance with Goldman Sachs. Please go ahead.
William Nance -- Goldman Sachs -- Analyst
Hey guys. Thanks for taking my questions. Most of the questions been asked. I guess the one I had, I guess, with interest rates being less of a driver of earnings growth going forward, how are you feeling about the potential, and I guess the bandwidth for further M&A, once we get past the Deutsche acquisition?
Michael Collins -- Chairman and Chief Executive Officer
Yeah. So I'll pass it over to Dan. But I think overall, our strategy really hasn't changed. We've got incredible franchises in Bermuda and Cayman with dominant market shares and high barriers of entry. But our growth area other than overlap acquisitions in Bermuda and Cayman, is to continue to be the Channel Islands. So we continue to see opportunities and we're very focused on it.
Daniel Frumkin -- Chief Operating Officer
So I would say again, well, there's lots of conversations going on. And again, it's that sort of natural cycle, people are getting through their year end results. I think, they have made some strategic decisions as they gone through the strategy reviews in anticipation at year end. They're now at a place where they can breath again and those conversations have different levels of traction. And again, we're very focused on banking in the Channel Islands, for those who might want to exit that market including custody operations and we are very focused in the trust base in markets we currently operate. And again there is a fair amount of activity, I don't know if any of it will bear fruit, but we're having a fair number of conversations.
William Nance -- Goldman Sachs -- Analyst
Got it. And just I noticed some of the tax compliance cost this quarter. Any thoughts on when we might see some resolution on that?
Michael Collins -- Chairman and Chief Executive Officer
Yeah. The DOJ. Yeah, I mean there hasn't really been a lot of traction, but there is some activity in terms of reviews and supplying data which is driving a bit of cost. But it's really just kind of a watching brief to some extent. But it is kind of working its way through, it's just not quite clear to us what would trigger a resolution still.
Michael Schrum -- Group Chief Financial Officer
There is still --
Michael Collins -- Chairman and Chief Executive Officer
There is no bad news.
Michael Schrum -- Group Chief Financial Officer
Still contact and open communication in a very good relationship, I think between the parties. So whereas Michael said, we're working through it.
William Nance -- Goldman Sachs -- Analyst
Understood. Okay, thanks guys for taking my questions.
Michael Collins -- Chairman and Chief Executive Officer
Thanks, Mike.
Michael Schrum -- Group Chief Financial Officer
Thanks, Will.
Operator
The next question is from Don Worthington of Raymond James. Please go ahead.
Donald Worthington -- Raymond James -- Analyst
Thank you. Good morning, everyone.
Michael Collins -- Chairman and Chief Executive Officer
Good morning, Don.
Michael Schrum -- Group Chief Financial Officer
Good morning, Don.
Donald Worthington -- Raymond James -- Analyst
Again just a question on the provisions, what the outlook might be there? You've had reserve releases each quarter in '18, and what your thoughts are in terms of provisioning going forward?
Michael Collins -- Chairman and Chief Executive Officer
Yeah, it's a great question. And -- the releases really have been about sort of look -- the backward looking, so pre-seasonal if you will, provisioning models. And the fact that some of the larger losses have dropped out of the -- of our five year look back. And therefore, some of those qualitative overlays around hospitality and C&I loans have kind of dropped out of the history, if you will. And so that's created those general provision releases.
I think we're at a level now where the coverage is looking as it should, there's no sort of qualitative overlays left there. We're still not seeing any problem spots in terms of the loans. But I would probably expect for -- I would probably not expect for those releases to continue. I would expect for us to be sort of at the level we are now, we're preparing to seasonal implementation obviously at the end of this year. Again, not expecting a whole lot of movement there, but clearly, that's a work in progress as well. So we're kind thinking -- it's going to be event driven, if we get any specifics, and the channel is kind of where it needs to be.
Michael Schrum -- Group Chief Financial Officer
And all I would add to that is that the mix of the loan portfolio being mostly residential, it's sort of two-thirds resi at the moment. It's very different than you'd see in a US regional bank. And for those who know our resi portfolio should have less volatility than commercial real estate or C&I lending or asset-based lending to retailers or any of the other types of stuff that might be embedded in a US regional bank.
Donald Worthington -- Raymond James -- Analyst
Okay, great. Thank you.
Operator
Our next question will be from Arren Cyganovich with Citi. Please go ahead.
Arren Cyganovich -- Citi -- Analyst
Thanks. The longer-term target for the efficiency ratio is around 50%. What's the time frame do you think it will take you to achieve that?
Michael Collins -- Chairman and Chief Executive Officer
Yeah. So I think we've been close a couple of quarters, we had obviously a redundancy cost, that's kind of not going to recur. But I don't see -- at the levels we're forecasting expenses right now, absent any other headwinds, it's a matter of quarters really, we're pretty close this quarter. We are continuing to see elevated pre-funding, if you will of Jersey until we get the business fully embedded in. We're taking the staff, we have a full space there, we have computer setup and all that kind of stuff. So that's a bit of -- it's just a bit of timing gap, but it's a matter of quarters really. And then, that will sort of bet down effectively. And then obviously, if we get further rate rises, that could drift down further. But I think we're pretty much there.
Arren Cyganovich -- Citi -- Analyst
Okay. And then on the net interest margin, I think you talked about it being expected to be kind of flattish going forward. I think I originally had expected the NIM to compress a little bit after you layered on a portion of the lower yielding investment securities. I know, I think that -- maybe it's the Great Britain -- the British pound or the small segment of euro that was going have a negative impact. Is that going to drag down the NIM going, once this is fully integrated to the Deutsche Bank deposit base?
Michael Collins -- Chairman and Chief Executive Officer
Yeah, I mean it would tend -- that bet would tend to have a downdraft impact on the NIM. But then, as -- if the longer-term rates stay where they are, we're still rolling over into higher rates on the investment portfolio in dollars, so that's tending to have a couple of basis points the other way. Then the mortgage repricing tends to be sort of a six basis point 90 day lag type of thing, so -- upwards, and then flat from there. So, there's a couple of things over the next three to four quarters. And I think we'll certainly keep updating that a dragging NIM in either direction. I think the lower deposit levels, particularly the lower euro deposits in the Channel Islands is going to have a beneficial effect relative to our previous expectation. So we actually -- that would have been otherwise a drag on NIM in Q1. So it's good, that's why I kind of sort of saying flattish -- we'll keep updating obviously, but that's our expectation, flat to a little bit up.
Arren Cyganovich -- Citi -- Analyst
Okay. Thank you.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Michael Collins -- Chairman and Chief Executive Officer
Thank you, and thanks to everyone for joining us today. We look forward to speaking with you soon. Have a great day.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 46 minutes
Call participants:
Noah Fields -- Head of Investor Relations
Michael Collins -- Chairman and Chief Executive Officer
Michael Schrum -- Group Chief Financial Officer
Timur Braziler -- Wells Fargo Securities -- Analyst
Daniel Frumkin -- Chief Operating Officer
Michael Perito -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Alex Twerdahl -- Sandler O'Neill -- Analyst
William Nance -- Goldman Sachs -- Analyst
Donald Worthington -- Raymond James -- Analyst
Arren Cyganovich -- Citi -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
