Good morning.

My name is Drew, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2025 earnings call for the Bank of N.T. Butterfield and Sun Limited. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star than 1 on your telephone keypad. To withdraw your question, please press star than 2. Please note this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's second quarter 2025 financial results. On the call, I am joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer, Craig Bridgewater, Group Chief Financial Officer, and Michael Scrum, 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 2025 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 Invest 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 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. I am encouraged by our strong second quarter results, which continue to demonstrate our focus on sustainable profitability and creating shareholder value. Performance was driven by solid net interest income, diversified fee revenue, prudent expense management, and a strong, stable balance sheet. The Butterfield franchise continues to generate long-term value in a dynamic external environment. Marshall Stands is a market leader in offshore banking and wealth management, with universal banking models in Bermuda and the Cayman Islands, complemented by an expanding retail presence in the Channel Islands. Our comprehensive suite of wealth management solutions spans trust services, private banking, asset management, and custody, tailored to meet the sophisticated needs of clients in these island jurisdictions. Our tailored wealth management services are also available to customers in the Bahamas, Switzerland, and Singapore, while we provide high net worth mortgage lending for properties located in prime central London. I will now turn to the second quarter highlights on page four. Butterfield reported high quality financial results in the quarter with net income of $53.3 million and core net income of $53.7 million. dollars. We reported core earnings per share of $1.26, with a core return on average tangible common equity of 22.3% in the second quarter. The net interest margin of 2.64% in the second quarter was a modest decline of six basis points from the prior quarter, with the cost of deposits falling four basis points to 156 basis points from the prior quarter. During the second quarter, the bank completed the early redemption of its $100 million subordinated debt, which resulted in the immediate recognition of $1.2 million of unamortized issuance costs and a two-basis point, one-time negative impact on NIM. With the redemption of the subordinated debt, we also took the opportunity to review the bank's overall capital levels and capital return strategy. Over the past five years, we've increased stable fee revenue through M&A and significantly reduce the number of shares outstanding following our share repurchase As a result, we are now rebalancing our capital return strategy with a 14% increase to the quarterly cash dividend rate to $0.50 per share. The Board has approved this increase in the dividend rate, as well as a new share repurchase authorization of 1.5 million shares to commence following completion of the current program. During the second quarter, we continued to repurchase shares, with a total of 1.1 million shares in the second quarter at an average price of $40.69 per share. Finally, we had a few board composition changes during this quarter. We would like to take a moment to thank Sonia Baxendale for her commitment and guidance during her five-year tenure in Butterfield's Board of Directors. Due to other time commitments and opportunities, Sonia has chosen not to stand for re-election at the bank's AGM this past May, and we wish her all the best in our future endeavors. Yesterday, we also announced the appointment of Andrew Henton to the Board of Directors. Andrew has been serving as director for Butterfield's subsidiary banking business in the Channel Islands, and I am very pleased to welcome him to the group board. Andrew brings an extensive knowledge of governance, private banking, private equity, and investment banking to Butterfield, and I look forward to his continuing contributions. I will now turn the call over DeCray for details in the second quarter.

Thank you, Michael, and good morning. On slide six, we provide a summary of net interest income and net interest margin. In the second quarter, we reported increased net interest income before a provision for credit losses of $89.4 million. The increase was primarily due to an increase in average interest earning assets, partially offset by lower yields on treasury assets. The net interest margin decreased modestly settling at 2.64% compared to 2.7% in the prior quarter. This decline is largely attributed to lower treasury yields, which declined by 27 basis points directly in line with decreased short-term market interest rates, as well as the accelerated amortization of unamortized sub-debt issuance costs, contributing to a one-time two-basis point contraction in NIM. Average loan balances were slightly higher compared to the prior quarter, predominantly driven by the impact of foreign exchange translation from the strengthening of the pound sterling against the U.S. dollar. After the FX translation impact, loan volume decreased by $55 million as we recovered the full outstanding loan balances from a large legacy hospitality facility that was under receivership in Bermuda. Average interest-earning assets in the second quarter increased to $166.7 million to $13.6 Treasury yields were 27 basis points lower at 3.71%. Loan yields were comparable at 6.31%, while average investment yields were one basis point lower at 2.67% due to day count effect. During the quarter, the bank maintained its conservative strategy of reinvesting the proceeds of investment maturities and paydowns into a mix of U.S. agency MBS securities and medium-term U.S. treasuries. Slide 7 provides a summary of non-interest income, which totaled $57 million, a decline of $1.4 million linked quarter, resulting from a number of underlying movements. First, banking fees were lowered due to the seasonal reduction in merchant and intentional money transfer volumes, partially offset by an increase in card volumes. Similarly, a seasonal reduction in volumes led to a decrease in foreign exchange revenue. Custody and other administration fees saw a decline as transaction volumes and assets under custody trended lower. We are pleased to report offsetting positive contributions from an increase in trust revenue attributable to annual fee increases, the repricing of acquired business relationships, new client onboarding, and an increase in special and time-based fees. The capital-efficient fee ratio was consistent with the prior quarter at 39%, continuing to compare favorably to historical peer averages. On slide 8, we present core non-interest expenses. Total non-interest expenses were at $91.4 million, higher than the $98.3 million in the prior quarter, but continuing to be within our expectations. This increase was due to several factors, including the FX impact of a strengthened pound sterling relative to the U.S. dollar and increased performance-based incentive accruals, in addition to lower staff health care costs recorded in the prior quarter. Offsetting these increases was a decrease in payroll taxes, which are classified as indirect taxes. In terms of our expense expectations, we continue to think that a quarterly core expense rate of between $90 million and $92 million for the remainder of the year is appropriate, but continue to monitor inflation and FX fluctuations across the franchise. I will now turn the call over to Michael Scrum to review the balance sheet.

Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period end deposit balances increased to $12.8 billion from $12.6 billion at the prior quarter end. This movement was due to a $260 million effect from the strengthening British pound, which was partially offset by a decrease in actual customer deposits of $30 million. Butterfield's low risk density of 28.6% continues to reflect the regulatory capital efficiency of the balance sheet. On slide 10, we show that Butterfield continues to have a strong overall asset quality with low credit risk in the investment portfolio, which is 100% AA or higher rated U.S. Treasuries and government-guaranteed agency securities. Overall, credit quality of the loan and mortgage portfolio improved during the quarter as the net charge-off rate was negligible. Non-accrual loans as a percentage of gross loans decreased 30 basis points to 2% as we fully recovered a couple of commercial loans at Bermuda. And the allowance for credit losses coverage ratio of 0.6% remained consistent with prior quarters. As mentioned previously, Butterfield's loan portfolio continues to be 70% full recourse residential mortgages, of which 81% have loans to values below 70%. We remain focused on our conservative credit posture with a preference for residential mortgage lending in Bermuda, the Cayman Islands, and the Channel Islands. On slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Duration decreased slightly for the AFS book. Net unrealized losses in the AFS portfolio included in OCI were $120 million at the end of the second quarter, an improvement of $11.4 million, or 8.7% over the prior quarter. We continue to expect improvement with additional burndown of OCR over the next 12 to 24 months of 33% and 42% respectively. Slide 12 summarizes regulatory and leverage capital levels. As Michael Collins mentioned earlier, the Board of Directors has approved an increase in the quarterly dividend rate to $0.50 per share. In addition to the increased quarterly cash dividend rate and new share repurchase program, the bank continues to evaluate potential acquisitions as part of our continued growth priorities. Finally, our tangible book value per share continued to improve this quarter by 3.6% to $23.77 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.

Thank you, Michael. During the second quarter, and now into the third quarter, we've seen encouraging signs of economic growth in our island jurisdictions. Bermuda is currently in its highest tourism season, and by all counts, it is shaping up to be a good year. Bermuda continues to be a premier tourist destination, with headline events such as the Butterfield Bermuda Championship, a PGA event, the Bermuda Triple Crown Billfish International National Fishing Tournament, the SailGP 2026 Series, and the biennial Newport to Bermuda Sailing Race. The reinsurance industry continues to perform well, with added growth and interest in the life reinsurance sector. In Cayman, we continue to see sustained growth across the board, including strong business performance in tourism, real estate, and international business sectors. Jersey and Guernsey are both doing well and continue to be recognized as choice locations for international business. Waterfield has benefited from this environment through the provision of banking, private trust, custody, and fiduciary services. We're also seeing growth in the retail business as we focus on our competitive local credit card offering as well as local banking services. Waterfield continues to be a responsible steward of capital by consistently returning excess funding to shareholders through a quarterly cash dividend and share repurchases when appropriate. In addition, I would like to emphasize that we continue to pursue M&A fee growth, particularly in private trust. The increased dividend and new share repurchase authorization reflect the strength of our business over the past few years and our efforts to increase long-term value for our shareholders. Thank you, and with that, we would be happy to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from David Feaster with Raymond James. Please go ahead.

All right. Good morning, everybody. Maybe I want to start out. You touched on the impact of the Treasury market and the press releases on the margin this quarter. I know you're really disciplined about laddering the book. I was hoping maybe you could touch on your bond investment strategy, just given the shape of the curve and whether that's changed at all and whether your approach has adjusted just given the prospect of declining short-term rates perhaps later this year.

Yeah, good morning, David. It's Michael Scrum. Great question to kick off. I think at the moment we're just reinvesting maturities from the bond portfolio, so we obviously get both HTM and AFS maturities coming back at around 30 to 35 a month, a million, and it's going into a blend of sort of primarily 15-year mortgage-backed securities and sort of 50% of that and then 50% into a Tebow ladder or U.S. Treasury medium-term ladder, so two, three, five years. We're obviously looking for, you know, kinks in the curve. There is quite a lot of movement in the market. As you know, we've seen kind of a gradual steepener, and there's definitely downward pressure on short rates. So it's definitely an active conversation in terms of all the excess liquidity that's sitting on the balance sheet. And then you have the whole Fed, you know, decisions coming up next year. So we're definitely looking at it. At the moment, you know, we feel very comfortable with where the strategy is. It's gradually shortening the overall duration of the investment portfolio. And we're obviously able to reinvest at higher rates. But it is a slow process, and there's a lot of movement in the market. So it's definitely top of mind at the moment. Okay. Okay, that's helpful.

I'll just add, David. Yeah, I mean, as Michael said, we're continuing to invest at higher rates, so we're investing somewhere around kind of 380 basis points and around a three-year duration, so three or 3.1-year duration, so bring the duration in. But as you said, we're very focused on it, looking at any excess liquidity that we have and kind of seeing if it makes sense to kind of invest some of that or pre-invest some of that, given that we're looking at a potentially downward interest rate requirement.

Okay, that's helpful. And then, you know, the last couple quarters, we talked about some transitory, maybe temporary deposits that might be rolling out. In the prepared remarks, I didn't hear anything. I may have missed it. But just kind of curious, an update there, whether anything has changed with those? Have they flown out? Just kind of curious how you think about that as we think about the size of the balance sheet.

Yeah, I mean, I think we still kind of feel that there are some deposits that are subject to leaving the bank or kind of might be looked at as hard money. The fund that we talked about for quite a few quarters that's in liquidation is still, those funds are still here with us. But we still expect those to flow at some point, given the legal process that that's going through. So some of the other, maybe some larger deposits in the kind of wealth management space have flowed out and kind of been put to work, but at the same time have also had some deposits come in as well to replace those. But we don't really kind of behavioralize a lot of that. I mean, it's about 200, or just over 200 when it comes to the fund as a receivership, and it's somewhere around 700 to 800 of, you know, funds that are, you know, above, you know, on those. So can we consider not necessarily sticky at this point and may leave the bank? So we have to see how those act over time, which kind of gets us back to where we think deposits may settle over the long term, over the medium term.

Yeah, and I think, David, sorry, it's Michael. Just in our prepared remarks, I mean, it's tough to see when you have the sterling moving at such a rapid pace or a dollar weakening, and it's obviously due to rate differentials between the markets, as we see divergence between the different rate paths and central banks. So, you know, we try to point out, and you can see a slide in the appendix that points out that, you know, the actual customer outflows that we're seeing on normalization and customer behavior is somewhat masked by a weakening dollar or a strengthening pound.

And that's particularly pronounced this quarter, both on the loan asset side when it comes to period end balances, as well as the deposits yeah that's a good point um and then and then last one you know i just want to touch on the capital side you know michael you touched on a bit in your prepared remarks you you've already already got a really strong balance sheet got the dividend increase we got the increase for purchase authorization but in the you talked about rebalancing your capital return strategy um i was hoping you could maybe elaborate that you know has has there been any shift in your focus. You know, reading the press release, it kind of read like maybe M&A may be a bigger priority today. I'm just kind of curious, you know, if you could elaborate on your capital priorities today.

Yeah, sure. Hi, it's Michael Collins. So, we, you know, first and foremost, you know, dividend is priority, and then obviously M&A, and then share buybacks. We've been in a number of discussions on the M&A side. I will continue to say that we're quite disciplined on pricing, and there is still competition from private equity, which, you know, tries to roll up trust companies and fund admin companies offshore and then take them public or sell it. So we're not going to pay the prices that private equity funds pay for some of these franchises because we probably know them a bit better. So we're still very disciplined, But I can say we are in discussions, and we have been, but we're going to take our time. So in terms of the dividend, we have increased dividend in six years. We got down to 34. You know, today we're 34% payout ratio. This will, you know, take us to 36%. What we're trying to do is we've bought back a lot of shares. I mean, you can see the share count has gone back, gone down quarter after quarter. So we've been very successful at that, which obviously is great for EPS and the share price. But we just felt that we need to rebalance in terms of just paying a bit more on the dividend side as opposed to doing 70% of it on share buybacks. So that's really what it's about. It's not something that we're going to look at every quarter. It's something that we just occasionally review. And as you can see, it's been six years. We still have an extremely healthy dividend payout ratio and yield, so we're happy with that. And, you know, I'll give it to Michael Scrum, but I think, you know, we want to be a little bit over 100% payout ratio.

Yeah, sorry, David. Yeah, it's Michael Scrum. So, as you can also see, our buyback authorization, the board is very supportive of the strategy here in terms of the overall capital deployment. And, you know, so we try and sort of the share of buyback authorization maybe is a little bit smaller than we had in the past, and we try and look at sort of a combined payout ratio between the actual activation of retained earnings through cash dividends plus the amount that we authorize in terms of values. We still want to have room to grow. We still want to have room for M&A. So that authorization is probably scaled down a little bit, But with the proviso that the board is very supportive, we can come back any time. But obviously, share buybacks are always subject to market conditions. So that's really what the rebalancing is there, a little bit higher cash dividend, a little bit smaller share authorization with the proviso that we can come back and ask.

That's helpful. Thanks, everybody.

Thanks, David.

Again, if you have a question, please press star then 1. The next question comes from Timur Basileur with Wells Fargo. Please go ahead.

Good morning, everyone.

Good morning, Timur. Good morning, Timur.

Back on the capital question, CET1 is now closer to 26%, was down somewhere between kind of 17% and 20% pre-pandemic. I get the lender of last resort and the need to hold additional capital, but even that statement seems a little excessive for you guys. I guess, how are you thinking about your level of capital here, and what is ultimately the right level that we should think about that getting to over time?

Yeah, sorry, Tim. Yeah, it's Michael Scrum. It's another great question. I think we're burning down a little bit more than we're earning at the moment, so it'll take a few years to get down into the sort of mid-20s. As you know, we've had Basel IV implementation give us a rate cap boost. Some of that, if you want to think about it that way, was recycled into an improvement in the quality of the capital stack by redeeming disordinated debt and putting more of the interest earnings to the bottom line, effectively, by not having the interest expense on that. That was coming up to a five-year reset to floating and tapering capital relief anyway, and so that seemed to make sense to us to use some of that benefit and some of our access to return to common shareholders. So it will take a few years. We still would love to conclude at a fair value an M&A transaction that would be accretive to shareholders because I think that would ultimately help stabilize our earnings over time through stable fee income and make us less reliant maybe on net interest earnings. So, you know, that's still in the background in terms of keeping that excess capital. It's not a war chest, but it's enough that we could do a sizable deal without having to come back to existing shareholders to ask more capital. And finally, there's always the opportunity for us to come back to this ordinated debt market. but it's just that these rate levels just didn't make any sense for us to reissue at this point. So ongoing conversations, as you know, most of the deals have been sort of sub-30 million outlay in terms of consideration, so there's room for a couple of deals in the excess capital layer, but ultimately we want to, at 25% rate cap, it's questionable whether additional capital would solve any problems.

Yeah, and I think, you know, I think, like Michael hit it on M&A, so we don't want to, you know, reduce capital substantially and then need capital for something that comes up. But I also think, you know, we're looking at the long term, and, you know, we've got a 22% ROE, mid-20% ROEs throughout the cycle with, you know, 35% loans to deposits. So it's a pretty good model, and right now with everything going on, you know, geopolitically and, you know, tariffs with the U.S. and where's inflation going and what's the Fed doing, I think it's probably a decent time to just hold a little capital and see where it plays out. And, you know, as Michael said, it's not a war chest, but, you know, we probably will find something at some point in the future. So we're pretty comfortable where it is, but obviously we want a payout ratio that's sort of 108, 110%, so that we start to get down to the low 20s in terms of total capital as opposed to where we are today.

Yeah, it's a high-class problem for sure.

It's exhausting, Timur.

On the deposit side, again, you know, I think surprising on the ability to bring costs down, given the really low starting point. I think when we spoke last quarter, it didn't seem like there was all that much room to go. And then, you know, here we are with another pretty good result. Where are we at this point in the ability to drive deposit costs lower X any future rate cuts?

Yeah, what we've benefited from, kind of we talked about it in prior quarters, is I guess kind of reduction in the duration of deposits. So in addition to having the ability to reduce the actual rates that we're offering and standing on the deposits for particularly fixed terms, duration is also coming in as well. So where it was at the end of December, you know, it's a lot more on demand or kind of seven days at this particular point in time. So we ran kind of from about 65% that was kind of demand to about kind of 70%. So that's kind of helped with the cost of the deposit as well. So to answer your question, given that movement in duration and the fact that we've been able to drive the cost of the deposits down over time, I think we still can get some reduction, but it's going to be at a slower rate kind of as we go forward. And, of course, that's kind of based on the current kind of – Yeah, sorry, it's Michael.

You can see on the asset sensitivity slide, we're still modestly asset sensitive, but we are obviously exposed to it down 100. So that means we're kind of getting to a flattening NIMH where we can't push deposit costs below zero. I was, you know, maybe a little bit more exposed on that side than the peer group generally. And that is really because of where the starting point is. I think Mike Collins and I have both been in island banking for over 25 years, and a NIM 275.3 is normally where it tops up through rate cycles. Every cycle is different, but there's a number of different dynamics going on there.

Perfect. Thanks for the call, guys.

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

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