Prepared remarks
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. All participants will be in a listen-only mode. Should you need assistance, to ask a question, you may press *, then 1 on a touch tone phone. To withdraw your question, please press *, and then 2. 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 Weld Collins, Butterfield's Chairman and Chief Executive Officer; Michael L. 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 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 Weld 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 Weld 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 disciplined 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 thousand 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 Currency is progressing smoothly. We are already seeing the benefits of combining complementary capabilities while maintaining the high level of service 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, regional footprint and enhancing our ability to serve customers. Opportunities like this 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 approvals. Bri will provide a deal progress update later in the call. I will now turn the call over to Michael L. 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 provisions 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 non-interest income, which increased modestly to $63.4 million in the second quarter of 2026, up $700 thousand 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 higher 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 non-interest 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 non-interest expenses. Core non-interest 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 costs and amortization of intangibles contributed to the increase. We would expect a continued quarterly core expense run rate of $93 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%, 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 in 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 remains 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 below 70%, underscoring the low risk profile of the book. The $5.7 billion investment portfolio also remained exceptionally strong, 100% rated AA or better, reflecting a highly liquid and investment-grade securities portfolio. Credit performance remained resilient despite a modest increase in non-accrual 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 zero, 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. 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 $101 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.
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 workstreams 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 workstream is funding and transaction readiness. Refreshing 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 and stakeholder engagement activities, while building the operational and GSA 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 is consistent with the financial projections underlying the acquisition model. I will now turn the call back to Michael Weld Collins.
Thank you, Bri. Before we open for Q&A, I just want to reiterate how excited we are to strengthen and grow Butterfield through the CIBC Caribbean acquisition. The combination of Butterfield and CIBC Caribbean creates a leading independent banking platform 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 nine new 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 to the benefit of all stakeholders. The pro forma combined bank is expected to have approximately $29 billion in assets, $25 billion in deposits, $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 a 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. With that, we would be happy to take your questions. Operator?
Questions and answers
Thank you. We will now begin the question and answer session. To ask a question, please press *, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press * and then 2. At this time, we will pause momentarily to assemble the roster. The first question will come from David Feaster with Raymond James. Please go ahead.
Good morning, everybody. 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. It sounds like you think you are going to be able to keep funding costs relatively stable near term, but I just wanted to get your thoughts there and any update on those temporary deposits that you have been expecting to flow out?
Yes, thanks. Good morning, David. They have kept hanging around. I think the teams have done a very good job focusing on cost of deposits and managing client expectations. Going forward, given the rate outlook, that may lead to more difficult conversations with clients, but so far, so good. Deposit gathering remains a focus for us as we see the earnings coming through. The temporary deposits are still present, and the reason why our cash and short-term securities are quite elevated at the moment is partly because we do not fully behavioralize those deposits. We continue to expect that they will flow out at some point. The other factor is foreign exchange movements in the balance sheet, particularly from sterling. We have 22% of our deposits in sterling, and that FX rate has remained relatively stable, as you can see in the deck. If that were to move again, it would impact deposit levels and smooth out over the average life of the deposits.
Okay, that is helpful. And then, Michael Weld Collins, you talked about providing more enhanced services and products to your clients. As you step back and think about the combined company and dig in further since the announcement, is there anything the combined company will not have that you need to build out? Are there any products or services that might need to be upgraded as you look to more fully service your clients given the materially larger platform? Just curious if there is anything that needs to be upgraded or added.
Good question. We are still getting to know their systems and technology franchise, which is actually quite good. We are reviewing both our systems and theirs. They have strong online banking and are very digital; the Caribbean market is digital-forward. They have great products and services. There is more we can do on the wealth management side, both within Butterfield and across the broader platform, in terms of providing additional services. On online banking, they are as good as what we have; our focus now is improving the look and feel. The technology is solid — straight-through wire transfers and FX transactions in any currency globally without manual intervention. We have much of that capability already, but we will focus on improving the user experience. The combination of the two organizations offers a broad array of products. They have more corporate products than we do and do some investment banking activities, which we do not currently do. We expect to be able to provide a substantial suite of services to corporates, retail and high-net-worth clients across the region.
Yes, David. I will just add that they have a sizable trust company presence in The Bahamas and Cayman, which will combine over time with our trust businesses, adding scale to that segment. We are a trust-capable bank, and we will focus on distribution to clients. The added scale should create new opportunities for our corporate clients in Bermuda that we previously could not serve as effectively. It's difficult to quantify today and we have not included any incremental assumptions in our projections, but there are meaningful opportunities. Conversely, there are some activities they currently perform that we will review to determine whether we want to continue them — for example, equity options trading — or whether we would prefer to partner post-close and allow customers to transact through an alternative channel. So there is a lot to do, but we are definitely positive on the wealth side.
That is extremely helpful. Thank you. I also wanted to get a pulse on the housing markets and updates on your residential mortgage book. We saw a slight increase in non-accruals. Obviously that book is very well underwritten, as you highlighted, with low levels of leverage. Are there any jurisdictions that are seeing more pressure? How are underlying borrowers holding up and what is the health of that book broadly?
I'll take that. As you might expect, we continue to watch the Channel Islands, specifically the U.K. market. There has been some softening in that market over time and that is where we have seen the isolated incidents that increased non-accrual loans, even though non-performing loans improved quarter over quarter. We are watching the U.K. market closely. The good news is those portfolios have very low loan-to-value ratios, so we have headroom relative to performance in the event of further softening in markets and property valuations. That is the area we are monitoring most closely.
And I would add that the Bermuda market is very vibrant right now, with multiple offers and probably as strong a recovery as I've seen in my 25 years of banking here. There was a post-global financial crisis lull and now activity is picking up with new international businesses setting up. Cayman is cooling off a little, but still a very active market in terms of transactions. Bermuda is a bit tougher for us to penetrate because many buyers transact in cash, but in terms of price discovery and robustness, it's very good.
I would add that in the Channel Islands of Guernsey and Jersey, we are continuing to build out our retail and mass-affluent bank without branches. We don't need a huge physical platform; we have about $650 million in deposits and around $350 million in mortgage balances. That has performed well and is becoming a stickier retail deposit franchise than we initially expected.
So that is good. That is awesome. Thank you.
The next question will come from Emily with KBW. Please go ahead. Emily, your line is open on our end. It might be muted on yours.
Hey, everyone. Sorry about that. This is Emily stepping in for Timothy Switzer. Thanks for taking my question. Good morning. As it relates to the CIBC transaction, can you walk us through some of the dynamics across these new jurisdictions outside of your legacy markets? Maybe provide an update on what you have been seeing and where you expect the most opportunity to come from. I believe the Barbados economy appears to be improving, so perhaps discuss dynamics around there.
Since we last spoke, we have been primarily focused on regulatory applications and filings, which are a critical step in the closing process. We successfully completed the first round and went on-site with our local management team, meeting with several executive leaders domestically within Barbados and The Bahamas. We received positive feedback not only from initial regulatory interactions but also from team member interactions. We are on track to complete under our existing timeline, and there has been positive movement forward. Working with local teams, we have seen that CIBC Caribbean maintains a robust credit book with strong underwriting criteria and standards, which is evident in their financial performance figures. Everything is holding up well operationally and financially.
I'll add that we have been focused on the larger components of the transaction and there is still some discovery to be done in the smaller islands. We expect to find some valuable opportunities there. Barbados is very robust and is pivoting more toward retail residential activity that mirrors our existing platform, which should create medium-term opportunities. Bahamas will bring a roughly 25% market share for the combined organization and Cayman will consolidate with what we already have onto the combined platform, providing meaningful scale. Some of the smaller markets remain under review, but early feedback is positive, and the team on the ground, particularly in Barbados, is enthusiastic about the network effects of the combined franchise.
Across all the islands, we are seeing post-COVID recovery. Barbados had IMF support but is recovering and growing well. Tourism in The Bahamas is extremely strong; you see significant economic activity and investment flows. Cayman will provide substantial market share and we already have strong familiarity with that market. Overall, market shares across the jurisdictions are very attractive and the timing is favorable as these economies recover and grow. It is a great time to pursue this opportunity.
That is really helpful. Thank you. And then on capital deployment, you noted plans to focus on organic growth post-CIBC with buybacks likely remaining on pause or at lower levels post-close. Would you be comfortable returning to buybacks once the total capital ratio returns to the low-20% range that you target? What are the puts and takes on capital deployment?
We have been clear that we know we will need to raise some financing. Our preference is to bolster CET1 as much as possible to support ratings. That said, we will need to access the subordinated debt market, which we are preparing for and would likely execute in Q4 after the shareholder vote and other milestones. Over the medium term, capital priorities should return to their historical pattern. We are also evaluating the impact of the new corporate income tax regime and whether there is benefit to having some leverage on the balance sheet. Near term, expect capital to build meaningfully over the next few quarters as we integrate R&H and pause repurchases. Our aim is ultimately to return value to shareholders through dividends or buybacks once we reach a comfortable capital position, likely in the low-twenties percentage range for total capital. At that point, modest buybacks would be on the table alongside dividend considerations.
That is great. Thank you for taking my questions, and congrats on the quarter.
Thank you.
This concludes our question and answer session. I will now turn the conference back over to Noah Fields for any closing remarks.
Thank you, Nick, 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.