Good day. My name is Austin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2018 Earnings Call for The Bank of N.T. Butterfield & Son Limited. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. [Operator Instructions] 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 as we review Butterfield's second quarter 2018 financial results. On the call, I am joined by Butterfield's Chairman and Chief Executive Officer, Michael Collins; Chief Financial Officer, Michael Schrum; and Chief Operating Officer, Dan Frumkin. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a news release announcing our second quarter 2018 results. The press release, along with a slide presentation that we will refer to during our remarks on the call, are available on the Investor Relations section of our website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today's 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 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. The second quarter of 2018 continued to demonstrate the strength and value of Butterfield's specialized financial services platform. We are located in well-regulated international financial centers including Bermuda Cayman and the Channel Island where we provide market-leading banking, trust and asset management services. The Bahamas, Singapore and Switzerland, where we focus on wealth management and trust services and the U.K. where we offer residential lending services, exclusively to high net worth clients. We're making progress towards including acquisition of Deutsche Bank's banking business that was announced in February, which includes adding new clients in our existing markets of Cayman and Guernsey. We are also establishing a new bank in Jersey, where we've already received a requisite licenses to operate. The Channel Island segment represents an exciting growth opportunity for Butterfield due to its large corporate deposit and banking market and one where the nature of the customer base is a bit similar to Bermuda and Cayman. Over time, we expect growing market share in this segment as Bermuda and Cayman represent finite in slower growing markets with leading Butterfield market shares. We remain on track for the acquisition to close in stages throughout the second half of 2018. Turning now to the quarterly highlight on slide 4, Butterfield's favorable earnings momentum continued into the second quarter as our asset sensitivity balance sheet benefited from higher interest rates, while our growing noninterest income outpaced expenses. We reported second quarter core net income of $51.7 million or $0.93 per diluted share, an increase of 14.8% compared to the prior quarter. Our net interest margin increased 15 basis points in the quarter to 3.20% while our cost of deposits increased two basis point to 14 basis points. I believe that we reported a cost income ratio of 59% in the second quarter, although our targeted 50% and we'll continue to actively manage expenses in a prudent manner. We reported a core return on average tangible common equity of 27.6% in the second quarter. This return on equity is sustained by a long-standing leading market share in Bermuda and Cayman where low-cost deposits underpin the successful and stable commercial and retail lending operation. In addition, our banking business provides capital efficiencies and help support our conservative and highly liquid balance sheet. We remain committed to achieving positive results without taking outsized risk and staying within markets and in line to business that we know and can leave. I'll now turn the call over to Michael Schrum to provide additional commentary on the second quarter financial results.

Thank you and good morning, everyone. I'll cover the second quarter performance in further detail. On Slide 6, we provide an overview of net interest income. In the second quarter, net interest income increased $7.5 million or 9.4% to $87.4 million compared to the prior quarter. The net interest margin of 3.2% increased 15 basis points from 3.05% in the last quarter in line with expectations. NIM grew due to higher volume and yields. Interest-earning assets averaged almost $11 billion with a yield of 3.39% as we continue to add new money to the investment portfolio in May 2018 when rates backed up. Turning now to Slide 7, noninterest income increased 5.5% sequentially with the majority of the increase due to the newly acquired and integrated trust business. Butterfield's fee income ratio of 32.7% remains a stable diversified and capital efficient source of revenue. Slide 8 provides details regarding Butterfield's core noninterest expenses of $77.6 million. Expenses ticked slightly higher sequentially due to the new teams supporting the on-boarded GTS business as expected. As Michael mentioned, we've now been able to achieve our goal of 60% cost income ratio in the second quarter as we continue to maintain a strong cost focus across the bank. Slide 9 provides a summary of relative regulatory capital and leverage capital levels. In the second quarter, Butterfield's Basel III total capital ratio increased to 22.3% due to the issuance of replacement Tier 2 subordinated debt at marginally lower cost to the common shareholders. The issuance was part of our capital maintenance program. All existing capital ratios are conservatively above regulatory minima and we are able to fully support the announced Deutsche Bank banking and custody acquisition and integration with our existing capital footprint. On a leveraged capital basis, we expect this will be within…

Thank you, Michael. The second quarter demonstrated Butterfield's earnings power, which we intend to maintain through excellence across the retail, wealth management and custody products and services. We plan to continue to position the balance sheet to improve interest income as well as manage our capital and liquidity conservatively. We're very pleased with the progress we're making to integrating and close the Deutsche Bank acquisition and we're working to identify other perspective targets. We continue to engage in constructive dialogues with trust and banking businesses in our existing geographic markets. We plan to continue to build shareholder value through the maintenance of our lean positions in Bermuda and Cayman and to build out of our well-regarded franchise in high quality international financial centers through both organic growth and acquisitions. Thank you and with that, we'd be happy to take your questions. Operator?

[Operator Instructions] And our first question today comes from Timur Braziler with Wells Fargo, please go ahead.

Hi good morning, guys.

Good morning.

Maybe starting on the asset sensitivity profile, looking at the deposit book, obviously betas there remain as good as we've seen anywhere in the space. So looking at the non-interest-bearing DDA component, that's declined now two consecutive quarters, I'm wondering if you're seeing any kind of shift in customer mentality and more broadly speaking as we head into the backend of the year kind of what are the expectations for deposit growth?

Yeah thanks, Timur. It's Michael Schrum. Yeah, so great question. As you noticed, we had a modest two basis point increase in the cost of deposit if you blend out the interest-bearing deposits with the non-interest-bearing. We have and are continuing to intend to offer a reasonably priced fixed rate product to add some maturity to the deposit liability side of the balance sheet, although that's not predominantly the market convention either in Bermuda and Cayman. So we have seen sort of a little bit of a decline in the non-interest bearing in favor of interest-bearing. We do continue to review the flows every week to look for asset sensitivity -- sorry to look for deposit betas and so far again we haven't really seen any big moves by customers and we also delegate to all the relationship managers, relationship-based pricing as required. So I think looking out to the remainder of the year, if customer behavior continues to want to ladder out, then we will be very much in favor of that, even at a slightly higher cost, it allows us obviously greater flexibility on the asset side of the balance sheet.

And Timur, this is Michael Collins. The two basis point increase to 14 basis point was really driven by one very large trust client. So we are sort of tactical about deposit pricing for our bigger clients, but we don't have to re-price the whole book as we talked about in the past because of our market dynamics for Bermuda and Cayman.

Okay. That’s helpful. And just to clarify the June rate hike, you do plan on passing that along through the resi portfolio. Is that correct?

We did not at the first time, through the June rate hikes first time. We did not increase the Bermuda in our base rate for residential mortgages we did for commercial, but not for residential. So we increased consistently up to this point. We took a breather in June, but obviously we're predicting and hoping for two more rate increases. So we're starting to take the gas off a little bit on that side, but we're looking at probably doing every other one going forward. I would think consistently we've been increasing, so we did not do that one.

And just to confirm again, that's actually will be put in the model as every other one. But you're really seeing the NIM expansion on loan side this quarter as the lag effect obviously from the March hike -- sorry from the December hike and then you'll sort of full quarter effect of that and then obviously at the short end of the curve, we've seen significant improvement in NIM as well.

Okay. Great. And then maybe just switching gears to the GTS acquisition in the release, it looks like you received a small refund as part of that deal, given some client attrition it seems like between announcement and closing. I'm just wondering what -- what that deal looked like thus far, kind of relative to initial expectations and is there any additional risk that more clients end up are transferring out of the legacy GTS.

So, it's Dan. So I think the deal was structured well so that there was a relatively robust price adjustment for any shifts in revenue, which we sort of anticipated occurring, which is why we negotiated the deal that way. I think in terms of the closures, they were closures that were pretty well flagged to us ahead of time. They were closed for various purposes under the Deutsche Bank regime they were identified for closure. So that has worked through. In terms of the clients that we've onboarded and interacted with the reaction has been extremely positive. So we're not anticipating any further reductions in the revenue line, other than what was slated for closure and adjusted as part of the price. In terms of the financial performance, you know it's a little below breakeven in the first quarter as we sort of embedded in. Pretty much as we expected, as we said when it's fully stabilized it'll be accretive and it will grow over the next five years, given the opportunities we get. And we have started to see some introductions from the Deutsche Bank wealth managers that are really quite attractive, in particular one large one in Asia that we would not have gotten access to, had it not been for our presence in Singapore and the Deutsche Bank relationship. So, I think it's pretty much as we would expect it. We're glad we structured the deal the way we did because it really made it even more attractive acquisition for us from a initial purchase price and the revenue and expense that we guided initially and the accretion that we guided seems to be about right. It so doesn't move the needle much. It's still very much a strategic acquisition.

Understood. Thank you.

Your next questions from Will Nance with Goldman Sachs. Please go ahead.

Hey guys, good morning.

Good morning, Will.

So, maybe I'll start with a little bit more of a longer-term question I think implied forward they're kind of seeing rates move towards I guess what some would call terminal rates over the next couple of years and you guys have seen a lot of margin expansion I guess. How do you think over the long-term about managing the volatility of earnings that that comes with, the short duration balance sheet? And I guess what are some of the steps that you would take to kind of inflate yourselves longer term?

Yeah, great question. Will, I think I'll maybe just start off with the current asset sensitivity. We still have about $1 billion of Ginnie floaters in the book yielding 245. So, obviously benefiting again from that sort of barbell structure and still remain pretty asset sensitivity or disposed to higher rates particularly as we go into hopefully a bit of a steeper yield curve as well. OCI remains relatively contained. So that's part of this balancing act as we -- as we continue to go into maybe the second half of the rate curve and duration is pretty short, but extending slightly. We do get a fair amount of runoff in the book of repayment. So in the quarter we did a gross 400 or net 200, 360 and I think that's as expected and maybe a little bit more aggressive than we had advertised per quarter, but as you know we kind of also paused a few quarters where the yield curve was just really, really flat. I think the question around the structural asset sensitivity on the balance sheet is one that we are also looking at as you -- as you know, that the ratio really creates that sort of earning to risk profile. We probably can't eliminate that entirely through conventional duration management on the balance sheet and obviously there are other ways of doing that through derivatives, etcetera, which unfortunately aren't as kind of on a GAAP reporting basis, but we are looking at all of those things. In the meantime obviously, we continue to grow the fee line which is very capital efficient and non-sensitive to rates. And we're also moving into the Channel Islands, which has a different rate cycle than the U.S. rate cycle. So over time that will become a meaningful part of the equation as well. But there is no real answer to the structure element. I think so far we have managed many of the tactical piece of that through staying short as rates started to come off and then latter in as we are getting towards the top and always still looking at it, so would say.

Got it. That makes sense. And then I guess it's nice to see you guys hitting the below 60 target now. I guess given we're still seeing a couple of rate rises, the commercial re-prices next quarter, acquisitions get more accretive. Where are you guys thinking in terms of just updated thoughts on efficiency targets going forward?

Well I think we're pretty cautious about where we think it would go simply because we know we have to continue to spending on compliance. We're spending quite a bit more on cyber risk now. So our risk trends over the last few years have been started with credit after the financial crisis then went into real focus on AML and KYC. Spent a lot of money there and now we're transitioning to really picking up spend on cyber. So we need to continue to invest in the business, but just with our asset sensitivity and where we are in the cycle and our pricing power, we probably will see the efficiency ratio probably going down into the mid-50s I would say, just based on the model that we operate. So I would say mid-50s, but we will continue to spend certainly on compliance and even more on cyber risk, but mid-50s I think is where I would say.

Got it. That's very helpful and if I can just squeeze one more in, is there any -- do you have any thoughts on just the cadence of client acquisition from the Deutsche acquisition? And just how much we could see coming on next quarter versus the back half? And you guys have given pretty detailed guidance on what that means when it does come over. I'm just trying to get a sense of the timing.

So we have done, it's Dan, well we have done a couple of rolling closings, two rolling closings in Cayman. We've done one rolling closing in Guernsey. The first rolling closing actually occurred was tied in terms of the balances overall, but it did prove that we could make the transaction and the transition smooth for the client. So we moved about 91 clients about $20 million in the first one which was pre-quarter end and then since quarter end we've done about another 60 or 70 clients and about another $50 or $60 million in Cayman. So again that's working and Guernsey was very tiny. We hope to do the first roll enclosing in Jersey in August. But again I don't think you'll start to see substantial balances move until the fourth quarter, because a lot of the larger balances are tied to custody relationships and some of those custody relationships, we need to work through, those transitions are slightly more difficult, but in terms of getting the data feeds built right, in terms of client onboarding, in terms of all of the CD we have proven the concept and can do it in an automated fashion. So we're really pleased with the progress we're making, but as we've always said, there will be a bet in the third quarter. I wouldn't expect much and you'll see a more substantial number in the fourth quarter, with maybe a smaller tail in January of next year

Got it. That's helpful. All right. Thank you. Thank you for taking my questions.

[Operator Instructions] The next question comes from Michael Periot with KBW. Please go ahead.

Hey, good afternoon, guys.

Good afternoon, hey Mike.

I wanted to ask a question, kind of piggybacking one with the prior questions is about expenses and as you guys, as the trust business now is expanding its global reach. I know it's a very people heavy business, but is there any -- it sounds like maybe there is some compliance and regulatory type investments being made for future growth. But are there any other like kind of technology or anything like that on your radar in terms of kind of upgrading your trust platform as you guys know presumably expanding into a more global platform that we should be thinking about?

So Mike it's Dan, how are you? So listen no, I think it's the short answer. So, I think at the core our current platforms are built for purpose and scalable. So, we run an average in for trust, it's a relatively known brand. It's now installed on all offices across the globe. Everybody is using it and while we need to make further revisions, enhancements to it over time, I don't think it's a wholesale replacement, just revisions and enhancements. In terms of the core banking infrastructure, the reality is our core banking infrastructure is again fit for purpose, actually relatively new. So I don't envision us making many changes. I'll let Michael talk about the characteristics around the depreciation schedule, because that actually has a meaningful impact in terms of where we're reaching in that cycle. So, no, we really do have pretty good core cash that allows us to scale up as necessary. So the Jersey banking assets for getting are going to go onto the platform that we're already using Guernsey. We already have that problem set up. We've already proven and can take the assets. The custody platform we're going to use in Jersey, is the same custody platform we're using in Guernsey. It could be 10 times, 20 times the size we are today and still be the same platform. The same is true in Bermuda and Cayman. So, there really is in a big system spend required in terms of core potential and I'll Michael talk about the depreciation.

Yeah. Thanks Dan. So, as Dan said, I think we have a couple of version upgrades is how I'd put it, which is you know not a new implementation in core banking system, but actually allowing our particularly our commercial customers, better access online to upload payroll files as far as messaging etcetera. And a little bit of couple of upgrades on some of the apps that we're running as well, which are all going to be additionally benefiting customers in terms of access and they'll certainly enhance that channel. In terms of the core banking administration as Dan said, we implemented that in 2010 and the amortization or depreciation on that it was a 10-year depreciation schedule. So that should release on a net basis around $7 million annualized starting in 2020. So I think that's a meaningful thing to keep an eye on as well and as we are not looking ready to replace that infrastructure, but just keep running it and upgrading it there won't be any meaningful new coming in as a result of that.

Great, helpful. Thank you. And then I did get on a few minutes late, so if you guys made some comments about this, I apologize. But just on the capital front, can you maybe just remind us what kind of the state of opportunities is out there for you guys right now. And then as you think about your capital ratios today, obviously they're going to build rather quickly. At what point do you guys really start to kind of look it internally anyway. At what point do you really start to consider your more aggressive stances with some other deployment options, whether it would be dividends or share purchases. It doesn't seem like it would be a near-term event, because capital levels are fine today and it seems like there's a lot of acquisitions, but at what point if we -- hits in the middle of next year and no acquisitions come to fruition. How do you guys think about that dynamic?

Yeah, so I think a great question. We had a very good discussion of that at the Board Meeting as well. Obviously, we're enlarging the footprint of the company and providing some more resilience to the earnest of risk profile of the company. As you see our rate cap ratio is really primarily improved through the capital maintenance of the Tier 2, which really was just making it something more capital effective at lower cost. So, I think that was -- that was just something that was good to see and also good to see that we have access to that Tier of capital. If we did find something more substantial in the acquisition space, on a leverage basis, we're still -- we're above target levels, but we're still below U.S. peer levels. I think I've made some comments earlier about capitalizing the deposits that are coming on Board, which will put our leverage ratio down back into the 6% to 6.5% range, which we are very comfortable with, given the credit content of the balance sheet overall being mainly a deposit-driven balance sheet. Traditionally and this hasn't really changed traditionally, we've gone through our planning for the next three years in December and that gets approved by the Board. Clearly that plan is very much a bottom-up approach and we plan on existing interest rates not even market rate. So we don't plan for rate increases that's important for the cost discipline across the organization. And then we kind of set the dividend at approximately 50% payout ratio as long as that remains a sustainable number through the cycle and that's sort of what we've done so far. In terms of what other options we would consider, we do have the tactical buyback in play at the moment. It's a million shares. So it's pretty small in the overall scheme of things, but it could've help avoid some share creep related to compensation schemes, etcetera. We haven't done any repurchases because we kind of want to see where this acquisition lands. Obviously in Q4, we have committed some capital into Jersey and we're getting some capital back from London. So that all seems to be kind of working its way through, but we would also consider special dividend, if we didn't find an accretive acquisition. Obviously, I think we've highlighted and we will continue to have dialogue around acquisitions, but if it doesn't come through, I think the Board understands like we're not building a war chest here. We want to get the money back to shareholders and we remain disciplined around that.

Helpful. And then just let me call around kind of the pipeline of acquisition opportunities.

So, it's Dan. I continue to have various conversations. It is late July, coming into August. So there is -- but there's conversations ongoing both in the general allowance banking sector and with various trust companies. Whether they bear fruit or not, I don't know. Mike, you know at the end of the day we're trying to pull stuff out. It's not like I get a bunch of deal books across my desk. We really have identified targets and really try to -- and then try to work our way into next year. They realize we're better strategic owner of the business than they are. And then we'll continue to push and see what we can find.

Perfect. Thank you guys, I appreciate the color.

Fair thanks. Thank Mike.

And at this time, I'm showing no further questions. So I'd like to turn the conference back over to Noah Fields for any closing remarks.

That concludes our call for today. Thank you for joining us. Have a great day.

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