Good morning. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2022 Earnings Call for The Bank of N.T. Butterfield & Son Limited.[Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Noah Fields, Butterfield's Head of Investor Relations.

Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's first quarter 2020 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 results. The press release and financial statements, along with the slide presentations 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. We had an excellent start to the year with strong first quarter financial results that continue to demonstrate the benefits of Butterfield's leading market positions in well-regarded offshore jurisdictions. We continue to focus on our profitable banking and wealth management franchises in Bermuda, the Cayman Islands and the Channel Islands. The bank also benefits from our specialized financial services offerings in the Bahamas, Switzerland, Singapore and the U.K., where we offer mortgages to high net worth clients with properties in prime Central London. We are encouraged by the progress we are seeing across our jurisdictions as leisure and business travel increases and the islands once again welcome cruise ships and an increasing number of tourists. Before we get into a discussion of the operating performance, I would like to officially congratulate both Craig and Michael on their new roles. Craig has been with Butterfield since October 2019. And when he joined as Group Head of Finance from KPMG in Bermuda where he was a partner and leader of their banking and asset management practice. As a new member of our Executive Committee, we look forward to Craig's continuing contributions to Butterfield as Group Chief Financial Officer, where he will provide leadership and technical banking and financial expertise. I am also happy to recognize Michael Schrum as Butterfield's new President and Chief Risk Officer. Many of you know Michael, and I'm pleased to have him take on this new role, replacing Sabeth Siddique, who had agreed to remain as a consultant for a period in transition. I would like to thank Sabeth towards his contributions and particularly in risk leadership during the COVID pandemic. More details are available in the press release issued yesterday. I will turn now to Slide 4, where we provide a summary of first quarter highlights. Butterfield reported net income for the first quarter of $44.4 million or $0.89 per diluted common share and core net income of $44.7 million or $0.90 per diluted share. Our core return on average tangible common equity was 21.9% in the quarter compared to 18.8% in the prior quarter. Our net interest margin improved 3 basis points to 2.03%. The Board of Directors declared a quarterly cash dividend of $0.44 per share, while share repurchases continued at a modest pace. I will now turn the call over to Craig Bridgewater to provide more details on the first quarter results.

Thank you, Michael. I will begin with Slide 6, which provides a summary of net interest income and net interest margin. In the first quarter, we reported net interest income of $75.9 million, an increase of $1.4 million or 1.9% versus the prior quarter. The increase was due mainly to improved investment margins on U.S. agency mortgage securities, improved rates on the short-term liquid assets due to the higher U.S. dollar rates and increased yields on the loan portfolio. Higher investment margins were mainly driven by a lower prepayment speeds that reduced the periodic amortization charge and reinvestments of runoff at higher yields. Average investment balances decreased by $39.6 million due to unrealized losses in the AFS portfolio as market interest rates climbed. New money yields increased significantly to 2.67%, up from 1.08% in the previous quarter. The average loan balance was $41.1 million lower due to facility repayments and lower pound-sterling exchange rate. Loan yields were up 8 basis points during the first quarter with blended rates for loan originations at 3.9% for $176 million of new loans, up from 3.82% for $239 million of originations in the fourth quarter. Turning to Slide 7. Noninterest income remains robust and was down $2.8 million compared to the seasonally elevated fourth quarter of 2021, which benefited from higher credit card fees from increased spending and trouble typically experienced around the year-end holidays. The fourth quarter of 2021 also had stronger trust fees due to the onboarding of new business and increased activity-based fees in the quarter. The first quarter of 2022 saw an improved foreign exchange fees and volumes as we continue to market our FX services across business lines. Noninterest income continues to be stable and capital-efficient aspect of our business model with a fee income ratio of 39.5% during the first quarter. Slide 8 provides a summary of core noninterest expenses, which benefited from lower technology and communications related expenses as we completed the parts of the amortization period for the bank's legacy banking system in the fourth quarter of 2021. Total core noninterest expenses were $81.6 million, down from $83.7 million in the prior quarter and slightly below our targeted range of $82 million to $83 million per quarter. With the lower expenses and higher revenues, we were pleased to see the core efficiency ratio improved to 63.7%, moving closer towards our through-cycle target of 60%. As we look out to the rest of the year, we would expect expenses to remain broadly in the $83 million range and the efficiency ratio to continue to benefit from increasing revenues primarily due to expected rising interest rates. I will now turn the call over to Michael Schrum, to review the balance sheet.

Yes. Thank you, Craig. Slide 9 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be strong and well above regulatory requirements. Our TCE/TA ratio of 5% remains below our internal target range of 6% to 6.5% due to the continuing elevated deposit levels and lower mark-to-market values in our available-for-sale portfolio due to higher long-term U.S. dollar interest rates. I would like to reiterate that this is not a regulatory ratio. And if we gross up for cash and AOCI, the TCE/TA ratio would be 8% compared to 7.8% at year-end on the same basis. We continue to anticipate that temporary interest rate-driven OCI marks in the available-for-sale portfolio, we'll keep this ratio below the target range for a period as U.S. dollar interest rates keep increasing, and this should, in turn, benefit net interest income. Turning now to Slide 10. Butterfield's balance sheet continues to be strong and conservatively managed with a high degree of liquidity. Deposit balances held steady at $13.9 billion versus the prior quarter and remained higher than the $13.4 billion 1 year ago. As Craig mentioned, the movement in the investment portfolio during the quarter was made up of reinvestment of paydowns offset by changes in the fair value of the securities held. Butterfield's low-risk density of 33% continues to reflect the efficiency and conservative nature of our balance sheet. On Slide 11, we show that Butterfield's asset quality remains exceptionally high with low credit risk in the investment portfolio, which is comprised of 95% of AAA-rated U.S. Government-guaranteed agency securities. Credit quality continues to remain strong with nonaccrual loans holding at 1.2% of gross loans and the net charge-off ratio of 1 basis point. On Slide 12, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Slowing prepayment speeds helped to extend the duration of the investment portfolio to 4.9 years from 4.2 years. Additionally, during the first quarter, we transferred $650 million of existing debt securities from AFS to HTM as a way to help mitigate the OCI impact from negative marks on the securities' health. We continue to expect asset sensitivity to result in improving NII as market rates increase. Net unrealized losses increased to $133.5 million from $21.8 million as at the end of last year as long-term U.S. dollar rates rose significantly in the quarter. I will now turn the call back to Michael Collins. Thank you.

Thank you, Michael. Since our last earnings call in February, the war in Ukraine has become a worldwide focus with severe implications for global security, the financial markets, supply chains and input prices. We are very saddened to see the devastation occurring in Ukraine and remain committed to implementation of all international sanctions. Butterfield maintains a conservative risk profile and maintains robust predictive controls that have meant that the identified exposure to targets of sanctions has to-date been minable. We have been prepared for a situation such as the one we see now with Russia for some time. Our business generally contains very few clients with Russian ties, and we therefore do not expect the current geopolitical conflict and related sanctions to present significant reputational or financial exposure for the bank. With that said, we continue to monitor for new sanctions and review our client base to ensure we comply fully as this develops. Butterfield operates in some of the best offshore jurisdictions. However, they are small and offer limited organic growth opportunities as Butterfield maintains significant market share. As a result, we also aspire to grow through selective accretive M&A. We continue to actively work with potential targets and remain committed to pursuing opportunities. Our focus remains on our current geographic footprint and private trust businesses and appropriate banking and financial services businesses in the Channel Islands, particularly Guernsey and Jersey and Singapore. We have looked at a number of opportunities in the past year. However, at this point, we have not concluded a deal to either price or AML risk. We have visibility into a number of potential opportunities, and we continue to pursue these where appropriate. The first quarter of 2022 showed the continued strength of Butterfield's leading position as an offshore provider of banking and wealth management with significant market shares in home markets, which are now opening up to post-COVID tourism. We continue to support clients with essential financial services, generating capital and efficient fees in addition to our net interest income, which we expect to grow in an environment that is shaping up to be very constructive for asset-sensitive banks such as Butterfield. Thank you. And with that, we'd be happy to take your questions. Operator?

[Operator Instructions]. The first question comes from Alex Twerdahl with Piper Sandler.

First off, congratulations to Michael and Craig on your promotions. I was hoping, Craig, if you could give us a little bit more on the asset sensitivity. I was wondering if you had at your fingertips, the cash flows that are expected in the securities portfolio over the next quarter or the next year or any metrics you can help us? And then sort of what rates are going off or coming off at versus the reinvestment rates, I think you alluded to earlier.

Yes, sure. Thanks very much for the congratulations. Much appreciate it. You would see in our disclosures, you'll see the asset sensitivity disclosures in there and what we're modeling. Currently, we are reinvesting the paydowns. So we're not actually looking at putting additional liquidity into the investment portfolio at the moment, really because of what's happening with OCI and rates and kind of we're going to see where the rates go. But again, you can see asset sensitivity in the presentation there. So that's kind of how we're running out and just kind of maintaining liquidity at the moment around that.

And if we look at it and we see the 4 year duration, the expectation that roughly 1/4 of the AFS book would see cash flows this year?

Yes. So at the moment, yes, we're going to see -- where rates go and see what OCI volatility goes. At the moment likely going to put more into HTM as we go forward depending on kind of where the markets go.

Okay. And then when I look at the loan yields and the tick up in the loan yield, both in commercial and consumer this quarter, are we seeing the early parts of the rate sensitivity and the impact from the March hike and maybe the movement in sort of the short end of the curve before that even? Or is there something in there that's kind of some fees or something that maybe push those yields a little bit higher than they would normally have been?

So I think what you are seeing is, I guess, the repricing along with market interest rates, particularly with regards to our U.K. and Channel Islands portfolios as well as Cayman. And as you know for Bermuda, we have the Bermuda base rate. And that's one that we will adjust as we see fit as market interest rates change. And as a reminder, for the Bermuda base rates and Bermuda loans, there's a 90 days' notice around those. So when you do see changes in the Bermuda base rates, expecting 90 days delay for the implementation of that.

And then just a final question from me. When you talk about M&A and you look at the TCE ratio at 5%. Does that change the way you think about M&A? I know regulatory ratio is obviously very healthy, but just because I know that, that sort of optical ratio has been something of a consideration of buybacks in the past. Does it also change the outlook on potential M&A?

Yes. Alex, it's Michael Schrum. Thanks for your shout out earlier. I think the -- as we've talked about before, lots of this M&A pipeline is really -- has a kind of a 12 to 18 month digestion time line. So it doesn't really change the work that we do day-to-day, so to speak. In terms of -- and in terms of the hurdle rates, obviously, that would be the same as they were before. We had pretty high hurdle rates. As you know, we have sort of internal IRR of 15%, which kind of corresponds to the high-quality capital stack in order for accretion. So we're pretty picky on that. So I would say it doesn't really change how we view the pipeline or trying to complete a deal. We have lots of room in the capital stack. I mean, obviously, there's nothing immediate to talk about. But it -- for us, it really just -- we continue to just look at things, obviously, marks in investment book, as you saw this quarter is similar to many other banks in the market. And so that does kind of raise questions about fair valuations, et cetera. But I would say no, it doesn't really change how we think about it, the OCI implications of the mark-to-market, obviously, pushes down the ratio. But on the flipside, the earn back is much quicker as we did the value of the deposits it has increased quite significantly.

And Alex, you'll remember, we -- most of the trust acquisitions we look at are under $50 million, usually well under $50 million. So in the absence of something transformational, the vast majority of things we look at are not that expensive.

The next question comes from Tim Switzer with KBW.

Could you guys talk about the drivers of the loan trends for Q1 and kind of how the -- if the trends change over the course of the quarter, anything like that and what you've seen more recently? And like is there any seasonality in Q1 because loans have been lower, I think, for the last 3 years or something. So I was just wondering the seasonality there.

Yes. Thanks Tim. It's Michael Schrum. So there's some FX in there. As you know, we have a significant London -- prime Central London loan book, which has underwritten that 65 LTV. And -- it's mostly interest-only loans, so they roll over every 3 or 5 years. And you know they're tied to Bank of England base rate. Obviously, when we get translation differences coming through and you probably noticed that the sterling-dollar -- sterling has been a bit weaker over the quarter and particularly at the end of the quarter. That does push on the loan balance a little bit. And as that part of the portfolio has grown significantly, that starts to put an impact. I think -- and Craig spoke about the originations early on. But in terms of other trends that we're seeing, we just had a couple of paydowns on the corporate side in Bermuda. And I think there's a lot more detail in Note 6 of our financials as well.

I got it. And are you able to quantify the impact of the FX at all? Or maybe give us a rule of thumb like the sterling moves up or down a certain percent, the impact that has on loan balances?

Yes. I mean -- well, yes, I mean, I don't have it to hand. But roughly speaking, we got $1.4 billion in sterling. And it's a similar impact on the deposit side, right? So at the end of the quarter, translation -- we use quarter end translation. So if you look at the dollar-sterling rate at 31 December and 31 March, and just kind of say, what was the delta there and then multiply by around $1.4 billion, then you kind of get to that number. So I think it was probably a bit -- it was kind of in the like $50 million-ish range this time around. So -- but obviously, that's not a real loan repayment. That's just a translation.

I got you. Yes, it's easy enough to calculate once you have the loan balance number, I guess. How do you expect paydowns to trend with the rates moving higher? Does that -- do you think that will help slow it down at all with your floating rate exposure, is it really not that much of an impact? And are there any categories or markets where it could be -- start moderating more than others?

Yes. Tim, so I'll kick off and maybe Craig can just talk about the loan portfolio. But in the investment portfolio, I would say we're fully extended now in terms of the [ come backs ] hitting our portfolio. So we're not -- with rates moving so much higher in the first quarter, obviously this caused the duration to move up quite significantly, but we should be pretty fully extended on that side. So prepayment speeds are kind of slowing down. And from again, from memory, get a couple of hundred million at this point of quarter in terms of cash flows coming off that book and that will obviously just be reinvested at higher rates.

And on the loan portfolio, we don't expect, I guess, any kind of significant changes in behavior. We are obviously monitoring as we look at potential increases in interest -- market interest rates, obviously, capacity of our customers to continue to pay. And having a real good eye on making sure that if there's any potential problems, we address those early in the process.

And the last question from me. You guys ended the quarter with a pretty large cash position. They increased good amount on in the period basis and on an average. But if you're not planning on purchasing incremental securities, is there anything else you can do with those loan balances that might help push up the yield? Or are you just going to -- I know you're expecting some deposit outflows as well at some point, but -- are there any alternative ways you could increase the yield there beyond just the coming rate hikes?

Yes. So thanks, Tim. Maybe I'll just kick off. And I think when we're seeing this larger move in forward rates, obviously, you've seen the pressure outputs on the marks. And so that leaves us with feeling even more conservative about our cash position. We're also expecting some outflow. I think we obviously keep getting that replaced with more corporate inflows, so it doesn't really show up anywhere. But if you look over a 5-year period, our balance sheet should really sort of increase broadly in line with market increases. And we've seen obviously search deposits come on at the end of 2020 and do expect at some point for those to start flowing off a little bit, and maybe that will happen sooner now that the rate's going up. So we just stay a little bit more conservative, whether it's liquidity management or share repurchases, capital conservation. Obviously, the dividends are #1 priority, that came back down into the 50% payout range this quarter. So that was good to see. But I think from where we're sitting today, with the 210, I don't know sub-20 basis points yesterday and a bias upward bias in short rates, it really just seems like a good idea to not buy more OCI base, if that makes sense.

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, Andrew, 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.