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 third quarter 2026 earnings call for The Bank of N.T. Butterfield & Son 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 then one on your telephone keypad. To withdraw your question, please press star then two. 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. Please go ahead.
Thank you. 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 seven, 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 eight 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 nine, 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 costs, 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 U.S. 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 U.S. 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.
Thank you, Bri. We remain enthusiastic and optimistic about the acquisition of CIBC Caribbean. We believe the combination will result in a stronger regional banking franchise with enhanced capabilities across corporate banking, personal banking, and wealth management, creating the leading independent bank in the Atlantic and English-speaking Caribbean. Together, we will be better positioned to meet the evolving needs of our clients while delivering benefits to all stakeholders. With approximately $29 billion in assets, $25 billion in deposits, $1.7 billion in tangible common equity, and more than $400 million in run rate earnings on a pro forma basis, the combined bank will have the scale, financial strength, and earnings power to compete effectively and drive sustainable earnings and growth.
September marked 10 years since Butterfield's New York Stock Exchange listing, and during that time, we have delivered a consistent record of performance, generating returns on equity of approximately 15%-25% while growing profits and earnings per share. Over that period, we have demonstrated the durability of our business model across varying economic and interest rate environments. Our success has been built on a high-quality business model with fee income contributing approximately 40% of revenues and a disciplined approach to risk and expense management that has allowed us to generate strong returns without relying on elevated credit or investment risk. Combined with thoughtful capital deployment, strategic acquisitions, and significant shareholder returns through dividends and share repurchases, this has enabled us to create meaningful long-term value. We see the acquisition of CIBC Caribbean as the next step in that journey, enhancing our scale, capabilities, and market position.
We look forward to welcoming our new colleagues and clients to Butterfield. Thank you. With that, we will be happy to take your questions. Operator?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are 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. Again, it is star, then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Tim Switzer with KBW. Please go ahead.
Hey, good morning. Thank you for taking my questions.
Hey, Tim.
First one I have is just a little bit more of commentary on the NIM outlook. Could you maybe talk about what impact you've seen so far from rate hikes across the U.S. and your other jurisdictions that are impacted? Then what your expectations would be on the impact going forward?
Yeah. Good morning, Tim. It's Michael Schrum. Yeah, obviously, things are bouncing around a little bit with us finally landing on deposit levels that we'd sort of foreshadowed over the last year or so. Then obviously NIM is pulling through broadly with somewhat of a lag at a 50% overall beta. So in the short term, we expect NIM to be relatively flat. So it will be deposit outflows offset by asset repricing, effectively in the investment and the short-term cash bucket, and some modest uptake in cost of deposits. So generally speaking, on a core basis, we would expect NIM to be flat in the short term, with a modest tailwind into the next year coming from the previously announced Fed rate increases and then possibly depending on what happens with some further upward adjustments. Good news overall.
There's a bit of fluctuation in deposit levels, but I think broadly speaking, loans have been flat, and obviously we've sort of held on the repricing of Bermuda base rate affecting mortgage holders for the last hike. So that would probably give us some further opportunities into 2027.
Got it. That was very helpful. You touched on this, but can you help us get an idea of the NII impacts of the deposits that are moving off the balance sheet? It sounds like the NIM is staying flat with the move. Do I just take, say, $400+ million of deposits and use your normalized NIM that's $11 million or so annually?
Yeah, we expect NII, again, to be relatively flat. Obviously, there's a little bit of seasonality on the balance sheet as well. So typically, Cayman deposits. We get more inflows in the fourth quarter.
Seasonal variations obviously can impact a little bit. But I think generally speaking, we should expect NII to be flat in the short term with a positive bias in the medium term. Exactly as you said, there are multiple moving parts there, but it should be a net positive that rates are going up obviously over time.
Got it. Okay. Very helpful. Thank you.
Thank you. The next question comes from Evan Kwiatkowski with Raymond James. Please go ahead.
Hey, good morning, guys.
Good morning.
I just wanted to touch on the deal first. Could you update us on any intention to pursue balance sheet optimization opportunities with the deal, whether it be repositioning anything on the loans or security side? And then just curious if there's any businesses or portfolios on the CIBC Caribbean side you're looking to grow further or conversely run off?
Yeah, maybe I'll just kick off. On the optimization, obviously, the CIBC Caribbean entities still report to CIBC in Toronto. We've started to take a look at obviously, their investment portfolios and had some good conversations around liquidity contingency and starting to sort of talk about what types of investments they have. Most of that is going to be U.S. Treasury, is relatively short-dated. So not as big of a rate impact on the fair market valuation of that. They do have some sovereign securities in both the Bahamas and Barbados that we're taking a look at in terms of either marketability or commitments that we've made to those governments. So there will probably be some further work we'll do before closing, to just familiarize ourselves. And I think at closing, we'll obviously take a look and see if we need to restructure a little bit.
As you know, moving to our model is mainly we don't have any credit risk in the investment portfolio, so we want to kind of make sure we're not doubling down on sovereign risk as well. But obviously subject to sensitivities in those individual jurisdictions. So I think good conversation so far. Nothing really untoward in that, and some liquidity and some securities, but good to see that it's mainly U.S. Treasury-based.
Yeah, I think we're very happy with the footprint. So each of these jurisdictions have very sticky deposits. They have a lot of similarities, but they are very different, which gives us great diversification across the deposit base. We've got all of our regulatory applications in. We've gotten a very warm welcome from all the governments and central banks. Spent a lot of time down there and spent a lot of time with our new CIBC Caribbean colleagues. It's a great cultural fit, really good rapport, and it's a really good bank. It's really well run, and great systems, great people. So we're very excited about it. But currently we're very happy with the entire footprint.
Yes. And recall we previously mentioned the extensive due diligence that we performed on both the investment portfolio and credit book. It's a well-performing book. It largely aligns with our underwriting standards and risk expectations.
I think, if you look over the longer term, we are more retail bank. They're more of a corporate bank. So we're seeing what are the opportunities in the retail space, whether it's residential mortgage-backed lending, collateral-backed lending. Then obviously trying to see if there's any other additional things that maybe we could pick up, such as merchant acquiring and non-competitive services as well. So pretty positive overall, but this would be a transition over the medium to longer term.
That's really helpful. Then maybe just switching to the loan side, seemed like mortgage was pretty stable quarter-over-quarter. I'm just curious how you think about growth in the single- family resi portfolio in general against a higher rate backdrop, and whether you expect any significant changes in demand if we get further rate hikes.
Yeah. Obviously, that sort of is the intent of the rate hikes we are reviewing. We do not really see any credit pressures. Maybe with the exception a little bit in our London book. But those non-performers are really coming through liquidity pressures in that book and uncertainty about the macroeconomic environment. You probably saw the U.K. budget was announced this morning. No surprises there from a housing perspective, but there are some longer-term uncertainty in that market surrounding the regulatory changes that they have made, particularly to resident non-dom regime, and some of the tax changes they have made, some additional friction costs in the form of stamp duty, et cetera. Stability is better, obviously, for that book. I think people are sort of nervous when there is new prime ministers coming in with a greater degree of frequency.
But we are seeing some good traction in terms of obviously other areas are kind of facing uncertainty, primarily the Middle East. So we are seeing people coming back and maybe renting into Central London. So that is sort of supporting some of the liquidity aspects. But we have done a pretty detailed look at the London book, and I think we are pretty happy with that being temporary. But the question is, how long is temporary? It has been going on for a little bit.
Got it. If I could sneak one more in, if I could round it off on the expense side. Just curious if this high $90 million per quarter range is a reasonable core run rate. I know you have mentioned before some opportunities for expense savings, relocating people to Halifax. Just curious if you still see that as an opportunity or if there is anything else you are looking at in terms of optimizing the expense base. Thanks.
Yeah, good question. Obviously, expenses were a little high this quarter. A number of sort of non-recurring things impacting that. We still believe, are confident that we can get to a $93 million-$95 million. That should be the run rate going forward. I think we have kind of gotten to the less meaningful impact of the Halifax move. We almost have 300 people up there, and we want to retain client faces in our jurisdictions. So we are kind of looking at the twos and threes as opposed to the 10s and 20s, but I think there is still more opportunity in that space. We are kind of being also focusing on quantifying the synergies from the deal as they come through.
I think we're sort of thinking there's some more opportunities, but we're kind of pausing a little bit on that on a BAU side, but still kind of confident that we'll get into that range in the short term.
That's great. Thanks for all the color, guys.
Thanks.
Thank you. Again, if you have a question, please press star then one. The next question comes from Robert Rutschow with Wells Fargo. Please go ahead.
Hi, good morning, everybody.
Good morning.
Good morning.
Just a housekeeping question on the deposit outflow. I assume most of that will come out of cash, or do you expect to maintain the size of the balance sheet? Then, I was wondering if you could give a little bit more color on the decline in loan yields overall and whether that should bounce back going forward.
Yeah, maybe I'll kick off. Certainly, yes, you're right. The balance sheet will be smaller by $500 million. We have a lot of $3.8 billion cash in short-term securities, so not really affecting our liquidity position. These were expected outflows and treated as contractual funding, if you will, from all of our regulatory submissions, and certainly our models have already factored that in as at last quarter end. It was a mixture of liquidation money, and I think we've talked about this before. It's a longstanding fund that was going into voluntary liquidation. The fund was sitting on a balance sheet. We knew it was coming out. So the balance sheet will be smaller by coming into a deposit range of $12 billion-$12.5 billion, and I think that's kind of what we said previously.
Yes, that will come out of cash in the first instance, so obviously affecting the size of the returns in the NII. Behind that is obviously a rising interest rate environment, so that's kind of helpful in that regard. In terms of loan yields, I think we have this in an appendix; we've seen mainly the ARMs that we have in our book resetting to floating at this point. We've sort of lagged the repricing of the Fed rate increase, particularly in Bermuda. As you know, the U.K. BoE rate has recently moved. We're expecting some repricing there. Generally speaking, I think that loans are stable. It's a competitive environment. I'm not expecting loans to reprice upwards at this point, although the fixed- to- floating piece is definitely the remixing piece that's impacting the loan yield effectively.
Okay, thanks. That's helpful. Just a question on the deal. I guess some of the acquired islands that you're going into appear to have a little bit faster GDP growth. When you're thinking about synergies with the deal, anything you might do to sort of lean into better growth in those new markets?
Yeah. I mean, as I said, they're all very different jurisdictions, but all recovering from COVID quite well. Barbados, the IMF came in, they got their debt- to- GDP way down, growing quite well, and Bahamas as well.
Yeah. I think the thing to look at there is obviously we have challenges in our growth trajectories with the islands where we have large market share. In Bermuda and Cayman in particular, we have really nice market share. Some of these new islands, we have a lower market share. When you look at the business mix between the retail and corporate work, and particularly lending and deposits, I think there's a real opportunity there to grow some of that in line with GDP, which is, as you said, growing faster than some of the other small islands. But take a little bit of market share as well as part of that, then maybe over time, sort of moderate some of their corporate lending. Again, this would be sort of a long-term project. We're not thinking a big push in retail.
We're sort of thinking take our market share initially and just focus a little bit more on that.
Yeah, I think that Barbados, Bahamas, certainly Cayman, Barbados, Bahamas, and Turks and Caicos are strong market shares. All the other islands do quite well. So it adds up quite well. I think going forward, we're going to focus a lot on Cayman and Barbados. They're different economies. So Barbados is a tourist economy, but also a big domestic economy, a large population. If you've been to the Bahamas recently, in terms of wealth management and properties and real estate, it's incredibly good at this point. So everything seems to be growing quite well. The whole region's kind of coming back from COVID. Tourism's up. So we're pretty excited about the opportunities. We're not projecting a lot of cost synergies. Our focus is to support the governments and communities. There's unions as well, so we're making commitments to support everyone across the board.
It will be very lucrative over time, but we're going to take our time.
Great. Thanks for taking my question.
Thanks.
Thank you. That concludes our question- and- answer session. I would like to turn the call back to Noah Fields for closing remarks.
Thank you, Drew, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter, and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.