Good morning. My name is Dovan, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 Earnings Call for the Bank of N.T. Butterfield & Son Limited. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's first quarter 2024 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 first quarter 2021 results. The press release and financial statements 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 first quarter 2024 results continue to benefit from our leading market positions and highly regarded international financial centers. As a reminder, we operate well-established banking wealth management franchises in Bermuda, Cayman Islands, and the Channel Islands. We also offer specialized financial services in the Bahamas, Switzerland, Singapore and the U.K., where we provide mortgages to high net worth clients with properties in prime Central London. I will now turn to the first quarter highlights on Page 4. Butterfield reported strong financial results in the first quarter, with net income of $53.4 million and core net income of $55 million. We reported core earnings per share of $1.17, with a core return on average tangible common equity of 24.5% for the first quarter of 2024. The net interest margin was 2.68% in the first quarter, a decrease of 5 basis points from the prior quarter, with the cost of deposits rising to 178 basis points from 172 basis points in the prior quarter. The increase in deposit costs was primarily the result of continued mix shift from demand deposits to term products, as well as term deposit rollovers. The Board has again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter, totaling 1.2 million shares at an average price of $30.40 per share. Before I turn the call over to Craig, I would like to welcome Butterfield's new General Counsel and Group Chief Legal Officer, Simon Des-Etages. Simon joins us following the planned retirement of Sean Morris. Simon has over 30 years of legal experience in London, New York and Bermuda, with the majority of that time spent in the banking sector. I am confident Butterfield will benefit from his extensive experience advising banks on legal and regulatory matters. I will now turn the call over to Craig for details of the first quarter.

Thank you, Michael, and good morning. On Slide 6, we provide a summary of net interest income and net interest margin. In the first quarter, we reported net interest income before provision for credit losses of $87.1 million, a small increase versus the prior quarter. The net interest income benefited from an increase in average interest-earning assets, but was muted by lower NIM and one less day than the fourth quarter. Average interest earning assets in the first quarter of 2024 of $13 billion was 3.2% higher than the prior quarter, driven by an increase in average deposit levels. The yield on the interest-earning assets was flat at 4.39%. The year-on treasury assets during the quarter was comparable to the prior quarter at 4.71% and the investment portfolio yielded 2.23%, which was 7 basis points higher than the prior quarter, reflecting the one-off of lower yield securities and increased yields or more recent purchases. Throughout the first quarter, the bank reinvested maturities, paydowns, and some excess liquidity into a mix of U.S. agency MBS securities and medium-term U.S. treasuries. The yield on loan balances decreased by 10 basis points to 6.58%, principally attributed to net paydowns and higher dulling loans. Average investment balances decreased by $86.3 million or 0.07% to $5.2 billion compared to the prior quarter, mainly due to maturities and changes in the fair value of the securities held. Slide 7 provides a summary of noninterest income, which totaled $55.1 million, down 8.1% versus the prior quarter, primarily due to seasonally higher card services fees included in banking revenue in the fourth quarter of the year. Trust fees declined as a result of lower activity-based fee income while fees from asset management increased as a result of higher assets under management. Noninterest income continues to be a stable and capital-efficient source of revenue through the cycle with a fee income ratio of 38.6%. On Slide 8, we present core noninterest expenses. Total core noninterest expenses were $86.9 million, a 3.8% decrease compared to $19.4 million in the prior quarter. The decline in core noninterest expenses is primarily attributable to lower salary and benefit costs as performance-based incentive accruals decreased from the prior quarter. Expenses in the first quarter also benefited from incurring less technology and communications cost. We continue to expect a quarterly run rate for expenses to settle around $88 million per quarter in the second half of 2024. As discussed previously, this contemplates the increased expenses resulting from the amortization of our new cloud-based IT investments and core banking system and branch upgrades, as well as costs for our new team servicing the acquired book contrast clients, all while taking into consideration the expected benefit of the group-wide restructure announced in the third quarter of 2023. I will now turn the call over to Michael Schrum to review the balance sheet.

Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period-end deposit balances increased to $12.1 billion from $12 billion at the prior quarter end, indicative of the stabilization in the deposit base. We continue to expect a medium-term deposit level range between $11.5 billion and $12 billion, with the understanding that deposit flows can be cyclical due to the nature of some of the trust and larger institutional depositors. Butterfield's low-risk density of 34.4% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk-weighted residential mortgages, now representing 69% of our total loan assets. On Slide 10, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is now 100% comprised of at least AA-rated U.S. government-guaranteed agency securities. Loan asset quality also continues to be excellent with nonaccrual loans remaining at 1.3% of gross loans and net charge-off of 1 basis point, and our allowance for credit losses coverage ratio is consistent with the prior quarter at 0.5%. In terms of credit trends, we have additional disclosures in Note 6 to the financial statements. I would just point out that our past due and accruing facilities are expected to continue to be somewhat elevated over the next few quarters due to a sizable legacy hospitality facility in Bermuda, working through a receivership and sale process, which we expect to conclude later this year. We remain well secured and continue to expect full recovery of all pass-through and accruing loan assets. On Slide 11, we present the average cash and securities balance sheet with a summary interest rate sensitivity. Asset sensitivity increased in the first quarter of 2024 due to a lower asset duration with higher levels of cash and cash equivalents, along with durations of investments and fixed rate loans trending lower. Unrealized losses in the AFS portfolio included in OCI was $178.2 million at the end of the first quarter, an unfavorable movement of $14.3 million or 9% from $163.9 million at 31 December 2023, due to an increase in long-term market interest rates. At current forward rates, AFS OCI is expected to improve by $52 million or 29% in the next 12 months, and $83 million or 47% in the next 24 months, allowing for reinvestment in high-yielding assets and tangible book value growth. Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements. While not strictly a regulatory ratio, our TCE to TA ratio of 6.7% remains above our targeted range of 6% to 6.5%, and is indicative of the health of our overall capital levels. I'll now turn the call back to Michael Collins.

Thank you, Michael. The outlook for tourism in Bermuda and Cayman is very positive with improved airlift and a good pipeline of cruise ships scheduled to visit the Island. Bermuda continues to maintain its status as a world-class jurisdiction to host high-profile international events. Early next month, SailGP, an offshoot of the America's Cup sailing race, will be hosting televised races in Bermuda. Butterfield is a proud supporter of the event as we were with the America's Cup. In November, the TJ will once again hold the Butterfield Bermuda Championship in Bermuda at the Port Royal Golf course, where the event has been held since 2019 and is televised internationally. In Cayman, the peak season for tourism is winding down as we head towards summer after a great season. Available visitor statistics show air arrivals heading back towards records with bed capacity continuing to increase. In addition to Bermuda and Cayman, the Channel Islands also benefited from strong economic contributions for international business. At the end of 2023, the Bermuda government tabled legislation on moving to a corporate income tax from 2025. The legislation will implement a minimum corporate income tax of 15% on multinational enterprises with total global revenues in excess of EUR 750 million in at least 2 of the previous 4 accounting periods and will fall within the scope of the Pillar 2 global minimum tax rules. During the fourth quarter of 2023 reporting cycle, we saw a number of Bermuda reinsurers announce deferred tax assets in preparation for the expected implementation of a first-ever corporate income tax in Bermuda. We do not expect the tax to impact Butterfield directly in the near future, but we will be monitoring the progress closely. At this point, reinsurers are mostly planning to accept the changes and maintain their significant and economically important operations in Bermuda. In Cayman, the government has taken a less active approach legislatively with a wait-and-see position. Butterfield continues to benefit from capital efficient and recurring noninterest income, disciplined expense management and net interest earnings. The bank has consistently maintained top quartile returns relative to U.S. regional banks with operating returns on tangible equity in the range of 16% to 28% over the most recent economic cycle. Our strong returns require active capital management, which we deliver through regular quarterly cash dividends and share repurchases. Additionally, capital is utilized to support organic growth and contemplate potential M&A activity. We remain committed to exploring growth opportunities through acquisitions and are regularly in contact with targets to assess potential prospects. We continue to look for accretive deals primarily in private trust while also building organically from previous acquisitions, and we'll remain disciplined to ensure M&A is consistent with our strategic and financial objectives. Thank you. And with that, we would be happy to take your questions. Operator?

The first question comes from Tim Switzer with KBW.

Could you guys talk about the level of non-interest income in Q1? It was a little bit above the run rate you guys talked about last quarter, and a lot of it was the FX revenue, which there might be some one-timers in there. Could you talk about what drove the upside and what your expectations are going forward?

Yes. This is Craig, and I can speak to that. So you're right. We do see increases in FX revenue and it's really due to just a handful of significant transactions that took place in our Channel Islands segment. The bulk of the FX revenue on a quarter-to-quarter basis is really from the paid currencies in Cayman Islands versus U.S. dollar, as well as Bermuda dollars versus U.S. dollar. And that accounts for somewhere around 70% of that FX revenue on a quarter-to-quarter basis. And then just depending on client volumes and client transactions, the FX would tend to kind of vary from quarter to quarter. So, this quarter, we had, again, a handful of large transactions in our Channel Islands segment. The other piece is that we've also seen some positive results coming through on our asset management fees. We are seeing more inflows into our money market fund as an example. And I think as rates stay higher for longer, obviously, customers are going to continue to see higher yields on their investment-ready excess cash. So, we have seen some favorable flows into our money market funds, as well as just increases in the fair value of those core further that are managed by asset management. So that's largely driving the first quarter on interest income.

Okay. What are your expectations moving forward? Is some of that sustainable and repeatable in the upcoming quarters?

As long as we see high rates for an extended period, we expect to maintain good levels in our money market fund. We're generating fees from those, which will have a positive impact. The performance of equity markets will play a role in supporting our assets under management. We may see our levels either stay the same or increase slightly, depending on market conditions. Additionally, we anticipate cyclical increases, particularly in Bermuda as the tourism season begins, which will lead to higher credit card volumes and subsequently drive banking fees. Historically, we also see a seasonal increase in banking activities in Q4.

Okay. That's helpful. And my other question is, I know you guys like to hold a lot of liquidity on the balance sheet, but cash increased a little bit. It's around 24% of earning assets. Can you remind us like what your target liquidity level is? And if there's any opportunity for you to deploy cash into either loan opportunities or higher-yielding securities?

Yes. Thanks, Tim. So it's Michael Schrum. I'll kick off and maybe Craig can chime in as well. You're absolutely right. As we see the maturities in the investment portfolio kind of coming back, we've been sort of building the cash position a little bit here. Just one, it's not adding any OCI risk at the moment. We've had some deposit stabilization and some volatility prior to that, obviously, after the regional bank sort of volatility last year. And so, we've just been kind of building the cash position a little bit. I think in a stable environment, 15% to 20% of deposits typically would be what we call working capital or cash positions, which is, again, because we don't have a Central Bank or a lender of last resort; we don't have a Fed window. So we have to manage our treasury effectively. And because we have pervasive multicurrency accounts across a number of different markets, that ends up with liquidity flows kind of being a little bit higher than you might otherwise normally see. So, I think there are definitely opportunities for us to think about laddering out just as a reminder, cash and short-term securities are up to 1 year. So there's a little bit of some repricing lag on that, but there's not a substantial duration. So again, we'd just like to continue to see the investment portfolio run down a little bit. And then as that happens, then we're rolling it into higher-yielding securities. I'll let Craig add anything.

During the quarter, we noticed an increase in deposits, which contributed to our higher levels of liquidity. Alongside managing our investment portfolio and its reinvestment, we also experienced an increase in profits. However, we need to observe how deposits behave before committing to longer-term asset investments.

Michael, your comments about the expected medium-term deposit range being $11.5 billion to $12 billion, implies maybe a little bit of expected outflow over the next couple of quarters, which I know is not atypical for the sort of the middle of the year. But do you, in fact, have line of sight on some deposits that are flowing out or expected to flow out in the near-term? And then would those deposits be noninterest-bearing? Or would they have some costs associated with them that we can take into consideration in our modeling?

Yes, that's a good question, Alex. We do have a number of depositors reflected on the balance sheet, but the company is currently in liquidation and navigating through the courts, which makes it hard to determine how these will be managed. As you've noted, we expect some developments in the near to medium term, depending on the duration of the court process and the resulting liquidation. Typically, these would be noninterest-bearing deposits. Additionally, we have some high-cost deposits and are observing a mix shift. The normalization process is still in progress, with some inflows, including from money funds. However, we may still need two or three more quarters to ensure stability. After the post-COVID era and the extensive monetary policy measures, we're entering a higher interest rate environment. This is part of the typical stabilization period we are experiencing. We do have some visibility regarding deposits, but we are also encountering normal volatility.

Okay. And then you guys have made a pretty considered effort to reduce the asset sensitivity in the loan portfolio over the last couple of years. Is that process and that effort kind of done at this point? I mean, is the sort of the mix between the fixed and the variable. Is that kind of what it's going to be at this point?

Yes, I believe so. You can never predict interest rates; one day there are two cuts, and the next day there are increases over the long term. If we assume that the Fed has finished raising rates, most customers may be inclined to switch to floating rates, particularly more sophisticated ones. Therefore, we likely won’t see many customers opting for 3- to 5-year fixed rates right now. Each market will be different, but I would estimate that we are around 50% for the medium-term. These will be priced through to 2027, and there aren't any significant tranches in those repricings. However, as they come up, I believe we will see that fixed percentage of the total remain stable or potentially decline.

In terms of mergers and acquisitions, Michael, can you discuss whether you are still seeking to acquire a private trust business? Considering the changes in geographies and the expansion of that business following the Credit Suisse transaction, are there any regions that are currently more appealing than they were a couple of years ago, either from a synergy perspective or another angle? Additionally, could you remind us of the overall criteria for acquisition opportunities and whether there have been any changes in your appetite for the revenues you seek from the size of the businesses over the past couple of years?

Yes. It's Michael Collins. So geography-wise, that hasn't changed. So whether on the banking side in terms of Bermuda and Cayman, Guernsey, New Jersey, or on the trust side, if you add in Geneva and Singapore and Bahamas, that hasn't changed. So the offshore world is very small, and there are some very good jurisdictions and there are some jurisdictions that aren't quite as good. So we know what they are, but we're in the right places. Singapore, obviously, is a particular growth area. We're top 5 or 6 private trust company in Singapore now. We would never imagine that we could sort of compete in the banking world there. So we know exactly where we want to be, which is fee income. So geographies are exactly the same. And when you look at trust, private trust companies, the good ones are pretty much across those geographies. So that's going to stick. In terms of criteria, it's still going to be private trust. There's obviously other fee income businesses, like private equity likes, company administration, fund administration, which is very technology-intensive. We don't want to be in those businesses. We want to stay in private trust, which we've been in for 70 years. So, we're going to stick to that. The only thing I'd say is in terms of our price appetite, so basically, 8x EBITDA, maybe a little bit more at 10x EBITDA, if it's a bigger acquisition opportunity. And the 2 ways we can do it is a small trust company or a larger trust company. If we acquire a larger trust company and it's from a reputable seller, then we can acquire as a legal entity, if it's a little more difficult, we would just do sort of an asset purchase and choose each trust one by one. So essentially, nothing's changed. I would say if it's the right opportunity, we might consider paying a bit more. But in terms of geography and what we would be buying, it's consistent.

The next question comes from Eric Spector with Raymond James.

This is Eric on the line for Dave Feaster. Congrats on a good quarter, and I appreciate you taking the questions. I just wanted to start on NII and NIM. Kind of mentioned rate sensitivity is up a little bit quarter-over-quarter. Just curious kind of how you think about NIM in a higher for longer environment. And if you're considering any actions to manage rate sensitivity here going forward?

It's Craig. We previously mentioned that we expect NIM to reach its lowest point in Q1 and Q2, and we believe that remains the case. We anticipate some improvement in overall NIM towards the end of Q2, though this will largely depend on the cost of funds. We're actively monitoring deposit pricing and the average duration of long-term deposits, which is around 3 months. We're closely observing the reprice rates as we operate in a higher prolonged rate environment, which may continue to exert pricing pressures on deposits. Consequently, we're being cautious about this, which may offset any potential increases in NIM based on the current market situation. On a positive note, we plan to ladder back out the industry portfolio, and you will notice an increase in the yield on our investment portfolio, totaling $223 million for Q1. As we continue to reinvest in the portfolio at higher rates, we expect to see positive contributions from this area. However, the cost of deposits and funding is likely to keep NIM stable or trending upwards at this time.

Yes. This is Michael Schrum. If you consider OCI, the investment portfolio is quite substantial in relation to the balance sheet. After experiencing the increase in rates and creating sizable negative positions in held-to-maturity securities, which are entirely unrealized, we are cautious about gradually investing while maintaining some liquidity. We need to navigate through various phases of the economic cycle. Earnings are stable, and when we mention a prolonged period of higher rates, it's important to consider potential rate increases while remaining aware of the risks associated with our positions and avoiding adding to those risks as we progress.

Got it. Got it. That's helpful. And then just curious, I mean, you talked a little bit about M&A, but just kind of curious about capital return more broadly. There's obviously been pretty active repurchasing stock the last few quarters, and TCE is now above that 6% to 6.5% level in regular capital. I'm just curious how you think about capital priorities and your appetite for repurchases? Do you expect a similar pace that we've seen in the last couple of quarters? And just kind of any color there would be helpful?

Yes, thanks, Eric. It's Michael Schrum. We're currently in Cayman for our board meetings. The Board is very supportive of the current levels, which are reasonably attractive valuations. We're keeping an eye on both the M&A pipeline and organic growth opportunities, especially in lending, where there's significant potential in Cayman. The economy is thriving, with many construction projects underway, leading to positive capital consumption and helping to offset the amortization in our loan portfolio. We're committed to our current strategy, with the first priority being the dividend, which we have maintained at $0.44 a share. We are also focused on supporting our core markets through organic growth and managing any credit issues, although we are not seeing significant deterioration. There has been some minor migration with a few larger loans and legacy positions, but we are confident in the underlying valuations, which should not lead to excessive risk-weighted assets. Thirdly, we are exploring M&A opportunities and stock buybacks. We have a lot of capital available, and our intention is to return it to shareholders. We have been active in this regard and plan to continue, depending on market conditions. If necessary, we'll increase our activity later in the year.

Got it. That's helpful. And then just one last one for me. Curious if you could provide just an update, I mean, given that the core banking system upgrade was completed this quarter. Just curious how that went? And then maybe just some color on the Credit Suisse acquisition, the first full quarter since the final tranche closed. Just curious to provide some color on just trends broadly there and how have a team brought on has been done?

Sure, I can start and Craig can add some insights as well. Upgrading our core banking system is always a challenging task. It's not usually seen as a positive unless it comes with new functionalities. We completed a like-for-like conversion along with significant upgrades, transitioning to cloud infrastructure. This has slightly altered our expense and capital outlook, particularly with the shift to Software-as-a-Service instead of capital depreciation. Overall, we performed well without any write-offs, although there were a few issues that affected clients, for which we apologize, but all clients remain with us. We’re looking forward to rolling out additional features now that we have a stable platform that operates more efficiently for clients. Our call centers managed the increased traffic well, with much of it related to the implementation of the one-time password functionality and new login screens, leading to more user guidance. Internally, everything went smoothly; our training program was effective, and we encountered no significant reconciliation issues post-implementation. At this point, it seems that the operational risks were primarily at the launch, which we have moved past, and we can now focus on adding new features. Regarding Credit Suisse, Craig will discuss that further.

Yes. The IT upgrade is progressing as planned, and we are managing the expenses related to it along with the hosting fees. A key goal of the upgrade was to ensure we are operating on the latest version, which we are. The positive aspect is that we are now preparing to implement a new system setup and incorporate it into our regular maintenance routine. On the Credit Suisse front, everything is going well. The assets, client relationships, and personnel have successfully transitioned, and the teams are settling in. Trust has been actively engaging with these teams through town halls to ensure a smooth integration. Our focus now is to provide excellent service to these clients, understand their needs, and see how we can leverage their relationships.

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

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

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