The Bank of N.T. Butterfield & Son Limited 2026 Q3 Earnings Call

Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's third quarter 2026 financial results. On the call, I'm joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer, Michael Schrum, President and Chief Financial Officer, and Bri Hidalgo, 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 third quarter of 2026 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 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, and 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. Our third quarter performance reflects the strength and resilience of Butterfield, the depth of our client relationships, and the disciplined execution of our strategy, all of which position us well for continued long-term growth. Butterfield is a leading offshore bank and wealth manager with strong market positions in Bermuda and the Cayman Islands, complemented by a growing retail banking presence in the Channel Islands. We also provide wealth management services to high-net-worth individuals, families, and institutions through our offices in the Bahamas, Switzerland, Singapore, and the U.K. In the U.K., we originate residential mortgages for high-net-worth clients for properties in prime Central London. I will now turn to highlights from the quarter on page six.

Third quarter results reflected continued strength across the franchise, with net income of $61 million, or $1.50 per share, and core net income of $64.2 million, or $1.58 per share. Profitability remains strong, with a return on average common equity of 21.3% and core return on average tangible common equity of 25%. Net interest margin improved by 2 basis points to 2.76%, despite a 2-basis-point increase in deposit costs to 1.27%. We also continued to return capital to shareholders through our quarterly cash dividend of $0.50 per share. Finally, we continue to make progress in the acquisition of CIBC Caribbean, with closing expected in the first half of 2027. We will provide some additional details about the progress later in the call. I will now turn the call over to Michael Schrum for more details on the third quarter.

Thank you, Michael, and good morning. On slide 7, we provide a summary of net interest income and net interest margin. In the third quarter, we reported net interest income before provision for credit losses of $97.2 million, an increase of $1.6 million from the prior quarter, or an increase of $4.4 million from the third quarter in 2025. The net interest margin of 2.76% was 2 basis points higher than the prior quarter and 3 basis points higher than the third quarter of 2025. Net interest income and margin benefited from continued reinvestment into higher-yielding securities and stronger treasury portfolio returns. Although these gains were partly offset by lower loan yields and slightly higher funding costs. Balance sheet volumes remained stable during the quarter, with average investment balances largely unchanged and average loan balances increasing modestly compared to the second quarter.

Slide 8 provides a summary of non-interest income, which continued to trend favorably, increasing $1.4 million to $64.8 million in the third quarter of 2026. Compared with the third quarter of 2025, non-interest income increased $3.6 million. The quarter's improvement was due primarily to higher banking revenues and stronger foreign exchange activity. Banking revenues benefited from increased card transaction volumes as well as a modest non-recurring contract fee renewal, while foreign exchange revenue reflected higher client volumes. Fee-based revenue represented 40% of total revenues during the quarter, compared favorably to historical peer averages and highlighting the quality and stability of our overall earnings. On slide 9, we present core non-interest expenses. Core non-interest expenses increased 3.5% from the prior quarter, reflecting the full quarter of operating expenses from R&H Guernsey acquisition compared with the partial quarter in the second quarter.

Excluding acquisition-related cost, expenses were also impacted by higher salaries and benefits, primarily due to staff departure costs as well as increased other operating expenses. Our core efficiency ratio is 57.8%, remaining below our through cycle target of 60% and highlighting our continued focus on expense management. We continue to expect quarterly core non-interest expenses to be in the range of $93 million-$95 million until we close the CIBC Caribbean transaction. Slide 10 shows that Butterfield's balance sheet remains strong and highly liquid, with total assets increasing to $14.3 billion from $14.1 billion at year-end 2025. Growth was driven primarily by higher deposit balances while loan and investment balances remained relatively stable. Deposits increased to $12.9 billion, and average deposits rose to $13.1 billion from $12.6 billion at the prior year-end, reflecting continued client confidence.

Deposits remained elevated at the quarter end, but we have received notice prior to quarter end that approximately $500 million worth of deposits would exit within weeks. This represents a handful of private trust and corporate liquidation fund deposits in a mix of demand and interest-bearing accounts. This would bring the deposit levels to our previously estimated range of $12 billion-$12.5 billion, where we expect for it to remain. Loans ended the quarter at $4.4 billion and investments at $5.6 billion, both largely unchanged from the prior quarter, highlighting the stability of our balance sheet. We also maintain a conservative risk profile with risk-weighted assets representing just 27.3% of total assets, reflecting low-risk density on our balance sheet. On slide 11, we show that Butterfield's asset quality remained acceptable in the third quarter of 2026, reflecting the continued strength of our conservative loan portfolio and high-quality investment holdings.

Our $4.4 billion loan portfolio remains heavily weighted towards full recourse residential mortgages, with 78% of those mortgages carrying loan-to-value ratios below 70%. This reflects the conservative underwriting standards and low-risk profile of our loan book. Our $5.6 billion US Treasury and agency investment portfolio also maintained its exceptional credit quality with 100% of holdings rated double A or better, demonstrating the strength and liquidity of the investment portfolio. Credit performance remained solid despite the increase in non-accrual loans to $119.6 million, or 2.7% of gross loans, up from 2.2% in the prior quarter, driven primarily by residential real estate exposures in the Channel Islands and U.K. segment. Importantly, these facilities remain well-secured, and we do not expect any credit losses. The allowance for credit losses improved modestly to $27 million, representing 0.6% of total loans, while the net charge-off ratio was low at 0.02%.

On slide 12, we present the average cash and securities balances with a summary of interest rate sensitivity. Our investment portfolio remained conservatively positioned during the quarter, with duration increasing to 4.9 years, reflecting slower expected prepayments on fixed-rate investments and a steeper US Treasury yield curve. Our balance sheet continues to be asset sensitive, although interest rate sensitivity has moderated from the prior quarter due to lower Treasury interbank placements used to manage short-term deposit flows. Our asset sensitivity continues to be above that of the U.S. peer group. As expected, the increase in longer-term interest rates resulted in higher unrealized losses within the available-for-sale portfolio, which increased to $187.3 million at the quarter end from $106.7 million in the second quarter.

Based on current implied forward rates, we expect the unrealized losses within accumulated other comprehensive income related to the AFS portfolio to improve by approximately 21% over the next 12 months and 42% over the next 24 months. Slide 13 summarizes regulatory and leverage capital levels. The board of directors has once again approved a quarterly dividend of $0.50 per share. TCE to TA continues to be conservatively above our targeted range of 6%-6.5%. I will now turn the call over to Bri Hidalgo to provide an update on the CIBC Caribbean transaction.

Bri? Thank you, Michael. Turning to the acquisition of CIBC Caribbean, the transaction remains on track with regulatory approvals, financing activities, and integration planning progressing as expected.

During the quarter, we received shareholder approval for the acquisition and submitted the required regulatory applications. We have continued our engagement with employees, clients, governments, and our regulators across our markets, including employee town halls and advancing stakeholder outreach efforts. In parallel, dedicated integration teams have been established and are actively planning for a successful transition and realization of the strategic benefits of the transaction. We are also preparing for a debt issuance to support the acquisition. Overall, we remain on schedule for regulatory approvals and anticipate closing in the first half of 2027. I will now turn the call back to Michael Collins.