The Bank of N.T. Butterfield & Son Limited (NTB) Earnings Call Transcript & Summary

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 2026 Earnings Call for the Bank of N.T. Butterfield and 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.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's Second Quarter 2026 Financial Results. On the call, I am 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 remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our second quarter 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 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. Butterfield's second quarter performance demonstrated the strength of our franchise, the value of deep customer relationships and the discipline and execution of our strategy. As a reminder to anyone new to Butterfield, we are a leading offshore bank and wealth management company with franchise-level market shares in Bermuda and the Cayman Islands complemented by an expanding retail banking presence in the Channel Islands. . Additionally, we provide wealth management solutions to high net worth individuals, families and institutions through our offices in the Bahamas, Switzerland, Singapore and the U.K. where we originate high net worth residential mortgages for prime Central London properties. Our business is built around enduring client relationships and a diversified suite of services that includes banking, wealth management, trust, asset management and custody. This diversified business model, combined with our strong capital position, high-quality balance sheet and disciplined risk management framework enables us to generate consistent returns while remaining focused on delivering value for our clients, communities and shareholders. I will now turn to the second quarter highlights on Page 6. Butterfield reported net income of $46.9 million and core net income of $63.9 million. We reported core earnings per share of $1.58 with a core return on average tangible common equity of 25% in the second quarter. The net interest margin was 2.74% in the second quarter, 1 basis point lower than the prior quarter with the cost of deposits increasing 1 basis point to 125 basis points from the prior quarter. We again announced a quarterly cash dividend of $0.50 per share. During the second quarter, we continued to repurchase shares with a total of 300,000 shares. Following the announcement of the agreement to acquire CIBC Caribbean we paused share repurchases on May 28, 2026. We will likely continue this pause or potentially scale back relative to our previous repurchase activity as we evaluate growth prospects and build back capital organically. I am pleased to say that the integration of R&H Guernsey is progressing smoothly. We are already seeing the benefits of combining complementary capabilities while maintaining the high level of service that our clients expect. The successful execution reinforces our confidence in our ability to integrate acquisitions effectively while remaining focused on delivering strong day-to-day operating performance. The second quarter marked an important milestone for Butterfield. The announced agreement to acquire CIBC Caribbean represents a significant step forward in our long-term growth strategy, expanding our scale, expanding our regional footprint and enhancing our ability to serve customers. Opportunities like this one do not come along often. And CIBC Caribbean is a business that we know well. We are excited about the combination for our clients, our employees and our shareholders and our teams are working diligently to prepare for a successful integration following the close of the transaction, which remains subject to the required regulatory approval. We will provide a deal progress update later in the call. I will now turn the call over to Michael Schrum for more details on the second quarter.

Thank you, Michael, and good morning. On Slide 7, we provide a summary of net interest income and net interest margin. In the second quarter, we reported net interest income before provision for credit losses of $95.6 million, an increase of $2.3 million from the prior quarter and an increase of $6.2 million from the second quarter of 2025. The improvement was driven primarily by some growth in interest-earning asset volumes as well as an extra day when compared to the prior quarter. . The net interest margin was 1 basis point lower than the prior quarter at 2.74%. This decrease is primarily due to a 1 basis point increase in deposit costs during the quarter. We continue to expect NIM to be broadly stable with a slight positive bias for the remainder of the year due to continued asset repricing. Balance sheet trends show average loan balances increasing quarter-over-quarter supporting earnings growth while average investment balances remained relatively flat. Overall, the quarter reflects continued asset growth and higher net interest income generation while maintaining a stable margin profile. Slide 8 provides a summary of noninterest income, which increased modestly to $63.4 million in the second quarter of 2026, up $700,000 from the prior quarter and continuing the generally stable trend observed over the past year compared with $57 million in the second quarter of 2025, fee-based revenue has shown solid year-over-year progress. This quarter's improvement was primarily driven by the R&H trust revenues, reflecting onboarding activity related to R&H during the period. This benefit was partially offset by lower foreign exchange revenue due to reduced transaction volumes and lower banking fees. Overall, the results highlight the resilience of the bank's fee income franchise with noninterest income providing a meaningful component to net interest income. The fee income ratio of 40% compares favorably with historical peer averages, underscoring the strength and diversification of the organization's revenue base. On Slide 9, we present core noninterest expenses. Core noninterest expenses increased to $92.9 million in the second quarter of 2026, up 3.3% from the prior quarter primarily reflecting the new expenses from the recently acquired R&H Guernsey business, higher salaries and benefits, technology and communications expenses, property cost and amortization of intangibles contributed to the increase. We would expect a continued quarterly core expense run rate of $93 million to $95 million until the closing of the CIBC Caribbean transaction in the first half of next year. Despite the higher expense base, operating efficiency remains strong. The bank's core efficiency ratio was 57%, slightly higher than the prior quarter's 56.4% but still comfortably better than management's through cycle target of 60%. Slide 10 shows Butterfield's balance sheet remains strong and is stable in the second quarter of 2026, with total assets increasing 2% to $14.3 billion from year-end 2025. Growth was primarily driven from higher balances and short-term investments, while the loan portfolio increased modestly to $4.4 billion and the investment portfolio remained largely unchanged at $5.7 billion. The balance sheet continues to reflect a conservative asset mix supported by substantial liquidity and a low-risk profile. Funding trends were also positive with period-end deposits rising to $12.9 billion from $12.7 billion at year-end and average deposits increasing to $13.1 billion during the quarter. The bank maintained a low-risk density of 27.9%, underscoring the quality of its balance sheet. Overall, the quarter was characterized by steady asset growth, strong deposit gathering and continued balance sheet strength. On Slide 11, we show that Butterfield's asset quality remained strong in the second quarter of 2026, supported by a conservative loan portfolio and high-quality investment holdings. The $4.4 billion loan portfolio is heavily weighted towards full recourse residential mortgages with nearly 79% of those mortgages carrying a loan-to-value ratio of below 70%, underscoring the low-risk profile of the book. The $5.7 billion investment portfolio also remained exceptionally strong with a 100% rated AA or better, reflecting a highly liquid and investment-grade securities portfolio. Credit performance remained resilient despite a modest increase in nonaccrual loans to $96 million or 2.2% of gross loans up from 2.0% in the prior quarter, primarily driven by residential real estate exposures in the Channel Islands and U.K. segment. Importantly, the allowance for credit losses remained stable at $27.8 million representing 0.6% of total loans, while the net charge-off ratio remained effectively 0 highlighting the continued strength of the bank's underwriting standards and overall credit quality. On Slide 12, we present the average cash and securities balances with a summary of interest rate sensitivity. Butterfield continued to maintain a balanced interest rate profile with meaningful earnings upside in a rising rate environment. The investment portfolio duration declined to 4.7 years as fixed rate securities matured. We estimate that a 100 basis point increase in interest rates would increase net interest income by 3.4%, while a 200 basis point increase would increase net interest income by 6.9%. Net unrealized losses on available-for-sale securities increased to $106.7 million at June 30, 2026, from $99.7 million at the end of the previous quarter. However, as securities continue to mature and are reinvested and as market rates evolve, management expects these unrealized losses to improve over time. with OCI projected to improve by approximately 20% over the next 12 months and 43% over the next 24 months based on current forward rate expectations. 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 at 6% to 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. Following our May 28 announcement of the agreement to acquire CIBC Caribbean, we have been making excellent progress towards closing, which we expect to be in the first half of 2027. Our work streams are focusing on securing key regulatory governance, financing and stakeholder approvals required to complete the transaction and prepare for integration. Near-term priorities include filing and completing regulatory licensing applications, finalizing pro forma financials, obtaining Board approval and securing shareholder approval at the AGM in mid-September. In parallel, the team is working through creditor related reverse diligence, jurisdictional stakeholder engagement across key Caribbean markets and communication planning for clients, employees and other stakeholders. A second major work stream is funding and transaction readiness. Refreshed CIBC Caribbean data is incorporated at key milestones, supporting pro forma updates and transaction analysis. These activities collectively aim to achieve closing requirements and maintain deal momentum through the approval process. Overall, we are moving forward at pace. First, securing approvals and transaction prerequisites then advancing financing stakeholder engagement activities while building the operational and framework needed for closing and eventual post-closing integration. We remain on schedule and currently expect all required milestones to be achieved. Finally, I would like to add that financial performance of both companies remains on track and consistent with financial projections underlying the acquisition model. I'll now turn the call back to Michael Collins.

Thank you, Bri. Before we open for Q&A, I just want to reiterate how excited we are to strengthen and grow Butterfield to the CIBC Caribbean acquisition. The combination of Butterfield and CIBC Caribbean creates a leading independent banking platform across the Atlantic and English-speaking Caribbean anchored by top-tier market positions in our current markets of Bermuda and the Cayman Islands and diversification and scale through an expanded presence across 9 new key international financial centers, including Barbados and the Bahamas. The pro forma organization's expanded capabilities are expected to provide enhanced corporate, personal and wealth management services across our combined client bases and to the benefit of all stakeholders. The pro forma combined bank is expected to have approximately $29 billion in assets, $25 billion in deposit, $1.7 billion of tangible common equity and more than $400 million of run rate earnings. This positions the company among the largest independent banks in the region with the balance sheet significantly larger than most Caribbean peers and a stronger platform for growth and profitability. As we look ahead, we remain confident in the strength of our franchise, the quality of our balance sheet and the opportunities before us. While the operating environment continues to evolve, our strategy remains unchanged, delivering sustainable earnings growth, maintaining disciplined risk and capital management, investing in our businesses and creating long-term value for our shareholders. Thank you. And with that, we'd be happy to take your questions. Operator?

[Operator Instructions] The first question will come from David Feaster with Raymond James.

I wanted to touch a bit on the deposit side. You all have done a great job managing deposit costs. I was hoping to get your thoughts on the deposit backdrop and the competitive landscape across your jurisdictions? And it sounds like you think you're going to be able to keep funding costs relatively stable near term, but just wanted to get your thoughts there and any update on those temporary deposits that you've been expecting to flow out.

Yes. David, it's Michael Schrum. Yes. I mean, they keep hanging around. I think the businesses have done a very good job at focusing on cost of deposits and managing client expectations. Going forward with the rate outlook, that may be leading to more difficult conversations. But I think, so far, so good. In terms of the -- and I think the deposit gathering is still something that's a focus for us, obviously, as we can see the earnings coming through. I think the temporary deposits are still hanging around for a little bit, but we're -- the reason why our cash and short-term security is quite elevated at the moment is partly because, obviously, we don't behaviorize those deposits and we continue to expect that they're going to flow out at some point. The other thing that's impacting a little bit is obviously FX minus in the balance sheet from -- particularly from sterling. As you know, we have 22% of our deposits in sterling. And that's remained -- FX rate has remained relatively stable, as you can see in the deck. So not much movement there. But if that were to move again, that could impact the deposit levels and come back sort of over the average life of the deposit, if you will.

Okay. That's helpful. And then Michael Collins, you talked about providing more enhanced services and products to your clients. I guess as you step back after the deal, as you step back and think about the combined company and you've got the dig in further since the announcement, is there anything this combined company is not going to have as you need to build out, are there any products or services that you might need to be upgraded as you look to provide maybe some more sophisticated products or -- just kind of -- just in your attempt to more fully service your clients because of the materially larger platform. Just kind of curious if there's anything that needs to be upgraded or added?

Good question. we're just getting to know their systems and technology franchise, which is actually really quite good. So we're looking at both our systems and their systems. They've got great online banking. They're very digital. The Caribbean is very digital. So they've got great products and services. I think there's more we can do on the wealth management side, both within Butterfield and the broader platform just in terms of providing more services. Online banking they have is good. We're focused on, right now, just improving our online banking just sort of the look and feel. So the technology is great, straight through wire transfers, FX transactions in any currency anywhere in the world immediately without anyone touching it. We have all that, but we really are focused on look and feel the technology now that we've got all that in place. But I think the combination of the 2 organizations, it's a broad array of products they have, more corporate products that we have, they do a little bit of investment banking, which we don't do. So I think we're going to be able to provide huge suite of services to corporates, retail, high net worth across the region.

Yes, David, it's Michael Schrum. I'll just add. Obviously, they do have a sizable trust company in Bahamas and Cayman, which will combine obviously over time with our trust companies so that adds some scale to that business. And I think it's fair to say we are a trust bank. And so I think we will definitely focus on that and distribution to clients. The added scale of the company is going to add some of the opportunities for our corporate clients in Bermuda that we haven't been able to serve properly before, it's difficult to quantify, and we obviously haven't included anything in the projections but there are meaningful opportunities. I think on the flip side, there are some things that they may be doing that we need to have a closer look at to see whether we would like to continue those like equity options trading or whether we want to partner up with CIBC post close and kind of allow customers to transact through us onto their balance sheet. So yes, there's a lot to do, but definitely pretty positive on the wealth side.

That's extremely helpful. And just want to get a pulse on the housing markets and updates on your resi mortgage outlook, we saw a slight increase in nonaccruals. Obviously, that book is extremely well underwritten like you highlighted with low levels of leverage. But are there any jurisdictions that are seeing more pressure? And just how underlying borrowers are holding up in the health of that book broadly? .

It's Bri. I'll take that. Yes. So as you would see, we continue to watch the Channel Islands, specifically the U.K. market. Clearly, there has been softening in that market over time. And that's where you see isolated incidents where we have increased nonaccrual loans, even though nonperforming loans improved quarter-over-quarter significantly. So we are watching the U.K. market very closely. The good news is those portfolios have very low LTVs. And so we have headroom with respect to performance and/or any softening of the markets and property valuations, but that is the space that we're looking at.

And I wish to add -- sorry, David, it's Michael Schrum. Bermuda market is very vibrant right now with multiple offers, probably a strong recovery as I have seen in my 25 years of banking here, there was a post-GFC kind of lull and now it seems to be really picking up with new international businesses setting up. Cayman is sort of cooling off a little bit, but still a very vibrant market in terms of number of transactions. I think the Bermuda market is a bit tougher for us to get into because there's a lot of cash transactions in the market. But certainly, in terms of the robustness of the price discovery, it's very good.