Good morning. My name is Nick and I will be your conference operator today. At this time, I would like to welcome everyone to the Second 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 second 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 second quarter 2024 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'd 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 US 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. Thanks to everyone joining the call today. I am pleased with Butterfield's performance in the second quarter as we achieved strong profitability supported by client-focused products and services, a stable balance sheet, diverse fee income, and disciplined expense management. In Bermuda and the Cayman Islands, we benefited from our market-leading bank and trust businesses, while we continue to develop our mass affluent product offerings in the Channel Islands. We also benefited from our specialized financial services offerings in the Bahamas, Switzerland, Singapore, and the United Kingdom where we provide mortgage lending in high-end Central London. I will now turn to the second quarter highlights on page 4. Butterfield reported strong financial results in the second quarter, with net income of $50.6 million and core net income of $51.4 million. We reported core earnings per share of $1.11 with a core return on average tangible common equity of 23.3% for the second quarter of 2024. The net interest margin was 2.64% in the second quarter, a decrease of 4 basis points from the prior quarter, with the cost of deposits rising to 189 basis points from 178 basis points in the prior quarter. Net interest margin compression has slowed this quarter as deposit cost increases modestly outpaced asset repricing. The board has again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter, purchasing a total of 1.1 million shares at an average price of $33.48. The board also approved a new share repurchase program for up to 2.1 million shares through to the end of 2024, which demonstrates our continued confidence in the bank's performance and supports our capital management strategy of producing consistent and attractive shareholder returns and efficient use of capital. Yesterday, we also announced that Stephen E. Cummings, a highly qualified and experienced financial services industry professional has joined Butterfield's board as an independent director. He is a great addition to our board and will further strengthen our governance and financial expertise and I look forward to working with him. I will now turn the call over to Craig for details on the second quarter.

Thank you, Michael. And good morning. On slide 6, we provide a summary of net interest income and net interest margin. In the second quarter, we reported increased net interest income before provision for credit losses of $87.4 million. The net interest income benefited from a higher volume of average interest-earning assets. Average interest-earning assets in the second quarter of 2024 of $13.3 billion were 1.8% higher than the prior quarter, driven by an increased average deposit volume. The yields on interest-earning assets and treasury assets were each up 7 basis points compared to the prior quarter. The investment portfolio yielded 2.3%, which was 7 basis points higher than the prior quarter, reflecting the continued reinvestment of maturities from lower yielding securities of approximately $30 million per month. During the second quarter, the bank continued to reinvest into a mix of US agency MBS securities and medium-term US treasuries. Average investment balances decreased by $31.6 million to $5.17 billion compared to the prior quarter, primarily due to maturities. Slide 7 provides a summary of non-interest income, which totaled $55.6 million, an increase versus the prior quarter, primarily due to higher trust fees, an increase in the equity pick-up from a portfolio investment, and higher unclaimed balances that were recognized into income. These favorable changes were partially offset by lower banking and FX fees due to lower transaction volumes. Non-interest income continues to be a stable and capital-efficient source of revenue through the cycle with a fee-income ratio of 39% experienced for this quarter. On slide 8, we present core non-interest expenses. Total core non-interest expenses were $90.3 million, a 3.9% increase compared to $86.9 million in the prior quarter. The increase in core non-interest expenses is primarily due to higher performance-based incentive accruals and inflationary increases in staff healthcare benefits, expected additional costs from the recently upgraded core banking software, as well as some consulting and legal costs which we do not expect to continue in future quarters. As communicated previously, we continue to expect a quarterly expense run rate of $88 million in the second half of 2024. This contemplates the increased expenses resulting from the amortization and servicing of our new cloud-based IT investments and core banking system and branch upgrades, as well as the cost of our new team servicing the acquired book of trust clients, all whilst taking into consideration the expected benefit of the group-wide cost 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 $12.5 billion from $12.1 billion at the prior quarter end and $12.0 billion at the end of 2023, continuing to show the stability of our deposit base. Despite the recently elevated deposit levels, we continue to expect a medium term deposit level range of between $11.5 billion and $12 billion. Butterfield's low risk density of 33.5% continues to reflect the regulatory capital efficiency of the balance sheet with a lower risk rate of residential mortgage loan portfolio continuing to represent 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 AA or higher rated US government guaranteed agency securities. Loan asset quality has also continued to perform adequately with non-accrual loans consistent with the prior quarter at 1.5% of gross loans, a net charge-off rate of 1 basis point, and an allowance for credit losses coverage ratio of 0.5%. Our past due and accruing facilities are expected to remain somewhat elevated over the next few quarters due to a sizeable legacy hospitality facility in Bermuda working through a receivership and sale process, which we expect to conclude late this year. The economic conditions of the markets we lend into remain favorable, and we are well collateralized with the significant majority of our loans to values below 70%. The bank actively works with borrowers to help them understand and meet their obligations, particularly if they're experiencing difficulties. On slide 11, we present the average cash and securities balance sheet with a summary interest rate sensitivity. Asset sensitivity increased modestly in the second quarter of 2024 due to a temporary inflow of client funds, which were held in short-term assets. Net unrealized losses in the AFS portfolio included in OCI were $176.8 million at the end of the second quarter, in line with the prior quarter. At current forward rates, AFS OCI is expected to improve by $50 million or 28% over the next 12 months and $82 million or 46% in the next 24 months, allowing for reinvestment in higher yielding securities. Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements. While not a regulatory requirement, our TCE/TA ratio of 6.5% is at the conservative end of our target range of 6% to 6.5% and is indicative of the health of the overall capital levels. I'll now turn the call back to Michael Collins.

Thank you, Michael. During the first week of July, Hurricane Barrel quickly intensified into a Category 5 hurricane with a destructive path through the Southeastern Caribbean and eventually passing just south of the Cayman Islands. Cayman fortunately was spared a direct hit and avoided any significant damage. Our operating jurisdictions are well prepared to handle hurricanes and other natural disasters, and the bank has contingency plans available to help recover quickly from any outages. We will continue to develop Butterfield's growth story organically and through M&A. We are in regular dialogue with potential sellers, participate in bid processes, and seek to acquire appropriately positioned trust or banking businesses in the right offshore jurisdictions. In the absence of M&A, we forecast that the long-term organic balance sheet growth rate will be in line with the blended GDP rates for our jurisdictions, which we estimate to be around 2% to 4%. In addition to organic growth, earnings per share is augmented by share repurchases over time and we continue to focus on operating efficiency. Butterfield's ability to create shareholder value benefits from our leading market positions, a strong balance sheet, recurring fee income, improving operating efficiency, and thoughtful capital management. These help to generate a profitable and stable franchise, which will benefit all of our stakeholders. Thank you. And with that, we would be happy to take questions.

The first question comes from David Feaster with Raymond James.

Maybe just starting on deposits, the deposit growth was great to see, obviously, primarily driven by the Channel Islands. I guess, first, could you just touch on what drove that increase and maybe some of the deposit trends you're seeing across your jurisdictions? And then going back to your expectations for deposits declining to $11.5 billion to $12 billion, I guess, what's driving the expectations for that decline?

It's Craig. So I'll start out. I guess we still think that the deposits will settle between $11.5 billion to $12 billion. During the quarter, we saw some kind of large deposit inflows come in, but we don't expect those to stay around for a long time. So towards the end of June, we saw about kind of $300 million come in. We know that one relates to kind of a customer that's a startup that's going to deploy those funds over the next couple of months. We've kind of talked about some other deposits that are actually in kind of liquidation proceedings. We still expect those to flow at some point. And then kind of another kind of large customer deposit relates to an investment management company. So again, we would expect those to be deployed over the next few months as well. So we still think that our guidance around kind of $11.5 billion to $12 billion is still relevant.

It's Michael Schrum. Just to add to that. If you look at the average deposit levels at $12.3 billion, the exit run rate, obviously, of the period end balance was a bit elevated. And so, we have line of sight to a couple of large clients, as Craig mentioned, and just wanted to foreshadow that.

It is great to see the strength in the trust business this quarter. Sounds like somewhat due to special fees. I'm curious about some of the trends that you're seeing on the trust side broadly. And then it looks like AUM in the trust business were up and there was a decent decline in the custody side. So just kind of curious some of the trends there and how you think about the trust business going forward.

It's Michael Schrum. As you know, we closed the Credit Suisse onboarding of the client portfolio in Singapore and Guernsey and there's still some – a few clients coming in sort of after the closing, but just kind of coming in via the referral method. From time to time, we do get restructuring or special reporting fees of those. I wouldn't sort of equate the AUC or AUT to the revenue on this because a lot of those underlying assets are non-financial assets and invest like shares in companies and intangibles and they sort of get revalued from time to time, and so that can kind of jump up and down, but doesn't really relate to the revenue. The revenue is really driven off this sort of annual fee, which is sort of the recurring bit of it, and then the special or time-based fee. So a little bit more like a law firm or consulting firm where we record the time and then we bill that to the client. Occasionally, big families have restructuring where new kids are added to the trust or people move jurisdictions, and so we need to rotate some of the assets around. And the whole purpose of that trust is orderly succession of assets through generations. And so, we feel pretty positive about the trend. Obviously, the Credit Suisse book has really brought Singapore to a level where we are getting much more inbound referrals, so the pipeline's looking pretty good. I think the global trends in the trust business are probably a migration towards higher end, just the cost of service. A trust is going up with all the tax reporting and all the extra AML and compliance that's required around that. So the entry point really for somebody paying our level of fees is migrating north in terms of wealth. But there's still plenty of opportunities out there, especially in Asia, which is probably a bit of a younger market than Europe, for example. We see some maturity in that market and that will bring extra fees to us over time.

The assets we acquired from Credit Suisse, those are performing as we expected. Kind of at the close, we kind of gave you some ideas around what we expect that revenue to be, and that's actually tracking kind of along those lines as well, so that's a positive. But as Michael mentioned, kind of those assets coming onboard have led to an increased pipeline, particularly in Singapore. We're seeing a lot more activity, a lot more referrals, and that's kind of given us a positive trend around the trust business.

Maybe just hoping that you could touch on some of the residential mortgage trends you're seeing. It looks like mortgage non-accrual has actually improved a bit. I'm just curious, maybe the health of – from your perspective, kind of the health of your borrowers, how are you working with those borrowers that may be struggling and just any other trends that you're seeing in the housing market across your jurisdictions?

It's Michael Schrum. So let's start with Bermuda. It's pretty stable in Bermuda. Rental yields are pretty good. And so, whether it's first home buyers or investment purposes, the values are holding up and we're seeing that obviously when we see transactions in the market. So that's good. There's always, in the small island, lack of supply because, by nature, the market is pretty small and we do all the manual underwriting ourselves. Obviously, we land on conservative parameters and it's a well-seasoned book as well. Cayman, a bit newer, a bit more frothy in terms of recent valuations. But, again, we're fairly cautious – a little bit more competitive with some of the Canadian banks in that market. But we're sort of taking our time and saying, look, we want to be a consistent provider of credit into the market and not sort of stretch at this point in the rate cycle. But again, good levels of transactions going on. So quite a lot of building going on in Cayman as well. So mixed-use condo, hospitality, we obviously prefer the sort of condo lending rather than hospitality lending piece of that. But there's certainly a lot of activity there. But on the flip side, we've seen recently, with rates being where they are, quite a bit of prepayment in that book as well. And so, that is what it is. I think we're not really a lone-growth story in that sense. But we're a consistent provider of credit on conservative underwriting guidelines internally. London continues to perform very well. There's obviously been a recent election there. And so, there's some noise and liquidity that is not coming to market, if you will, because people are waiting for what the next government is going to lay out there at the policy platform around particularly eligibility. So people want to be resident in the UK, but maybe non-domicile for tax purposes. How is that going to work going forward? There's some reform that's been advertised around the landlord-tenant relationships and the leasehold relationships there. And so, I think people are sitting a little bit more on the sidelines in the UK. But again, valuations are holding up in prime central London. It's just taking a bit longer for inventory to turn there, really. And I think tourism in Bermuda has been good this year. So we've seen pretty good performance on the underlying residential mortgages. I think early on in the rapidly rising interest rate environment, we had some concerns coming out of COVID with the Bermuda residential book. But it's actually kind of – we've seen some of those returning to performing. So that's a good news story there. Again, steady sort of – we're not stretching for credit. We're seeing the number going a little bit backwards at this point in the rate cycle. But we expect the activity to kind of pick up again when we see it coming down a little bit.

The only place it's a little bit slow would be in the Channel Islands simply because we've developed a good mass affluent bank with lots of accounts now, good deposit base. We've issued credit cards, but mortgages are sort of flat simply because of the rate structure at this point. But when rates start moving down, that will pick up as well.

The next question comes from Tim Switzer with KBW.

My first question is around elevated liquidity levels. You guys said this quarter's deposits came in and increasing your asset sensitivity a little bit. Yeah, I know you guys have talked about deposits normalizing a little bit. Are there any other actions you guys want to take to maybe lower the asset sensitivity over time beyond just the normalization in liquidity?

It's Michael Schrum. It's a good question. We're just naturally asset sensitive because we're 40% lent, right? Essentially, our deposits are seasoned over time and the lending preference in our lending markets is for floating rate. And so, that gives rise to that sort of what we call structural asset sensitivity for us. We feel pretty good about the OCI burn down path that we're on. Obviously, there's always discussions around, should we be doing something different in securities portfolio and re-ladder at this point. But I think, at the moment, we're pretty committed to the path. We have, I think, a visibility now of a rate path or at least a direction of rate path that gives us some confidence around OCI burn down and, therefore, a tangible book value growth. But it's something that we often discuss in terms of longer term, what is the level of fixed rate that we want to have on the books, whether it's loans or investment securities versus floating rate. And because we don't have a lender of last resort or a central bank, we're naturally just going to have a lot of liquidity because, essentially, we need to manage our own treasury operations across the four different banking jurisdictions. And so, that gives rise to a further increase in asset sensitivity because, obviously, we test – we use VAR and min max inflow/outflows to estimate how much cash we need to hold. So I think the reality is, we – having been in Bermuda banks for a long time – are yet to see some structural action. But I think we're probably always going to be a bit asset sensitive through the cycle. I think the fees give us a great sort of buffer. They're very stable, capital efficient. But other than that, it's an ongoing discussion, but nothing really to report.

I understand. That's helpful. And with the expenses dropping back down to $88 million, that's a good amount of expenses dropping out of the run rate there. How should we think about the expense run rate in 2025, assuming we only get a few rate cuts and knowing you guys have different levers you've historically been able to pull? Are there any investment plans in the pipeline that might lead to some more growth back in 2025 from the $88 million level?

It's Craig here. I think if we look at expenses kind of going into 2025, really, inflation is probably the one thing that we need to be looking at as well. So kind of, we do expect – we'll see how inflation works in regards to kind of salary inflation, as well as sort of suggested general cost of professional services as well. So, again, obviously, that's kind of unpredictable at this point, depending on kind of where the rate environment goes and what we're going to see. But if we assume inflation is going to be kind of at historic levels, we definitely have to apply that. In addition, we are making some investments kind of when it comes to continued investments in our IT infrastructure. We are implementing our upgraded core accounting system in this year and into Q1 of next year. Once that becomes live, obviously, there's going to be increased amortization on that as well and other kind of IT assets that we're investing in. I think in summary, I think kind of taking the $88 million, which we expect to kind of get to in the second half of this year, given some of the one-offs that we did see in this quarter and then applying a reasonable rate of inflation during into 2025, we're not expecting any significant kind of increases in headcount or those types of things or investments in other infrastructure. We continue to kind of have our long-term strategy of really leveraging Halifax Service Center, which helps us with expense management in the longer term.

Tim, it's Michael Schrum. The only thing I'd add to that is we're still committed to the 60% through cycle cost-income ratio and we're roughly around there at the moment. From time to time, it could be a bit higher and we always try and look at if we see a path where revenue is dropping, how do we either generate additional revenue or how do we use the cost lever? So we're pretty disciplined around that process to try and get to the 60%.

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

Thank you, Nick. And thanks to everyone for dialing in today. We know it's a busy day for calls, and we look forward to speaking with you again next quarter. Have a great day.

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