3Q26 Earnings Conference - BANK OF NT BUTTERFIELD & SON LTD

Financial Performance:

• Reported net income of $61 million ($1.50/share) and core net income of $64.2 million ($1.58/share) for Q3 2026.
• Net interest income (NII) rose $4.4 million year-over-year to $97.2 million; Net Interest Margin (NIM) expanded 2 basis points to 2.76%.
• Non-interest income increased $3.6 million year-over-year to $64.8 million, driven by higher banking volumes and FX activity; B2B revenue constituted 40% of total revenue.
• Return on average common equity (ROACE) stood at 21.3%, while core return on average tangible common equity was 25%.
• Core efficiency ratio improved to 57.8%, well below the 60% through-cycle target, despite a 3.5% sequential rise in expenses.
• Total assets reached $14.3 billion; deposits totaled $12.9 billion with average deposits at $13.1 billion.
• Asset quality remained strong with 78% of residential mortgages carrying LTVs below 70%; non-accrual loans rose to 2.7% of gross loans ($119.6 million) but are well-secured with an expected 0% loss.
• Allowance for credit losses increased to $27 million (0.6% of loans); net charge-off ratio remained low at 0.02%.
• Unrealized losses on the Available-for-Sale (AFS) portfolio increased to $187.3 million due to rising interest rates; 100% of the $5.6 billion investment portfolio is rated AA or better.

Guidance and Future Outlook:

• Guidance confirms quarterly core non-interest expenses will remain in the $93–$95 million range until the CIBC Caribbean acquisition closes.
• NIM is expected to remain flat in the short term due to deposit outflows offsetting asset repricing, with modest tailwinds anticipated from Fed rate increases in 2027.
• Management projects unrealized AFS losses to improve by approximately 21% over the next 12 months and 42% over the next 24 months.
• The combined entity post-acquisition is projected to have $29 billion in assets, $25 billion in deposits, $1.7 billion in tangible common equity, and over $400 million in pro forma run-rate earnings.
• Long-term growth strategy focuses on expanding market share in higher-GDP-growth islands (Barbados, Bahamas) and increasing retail/lending penetration without a heavy push on retail deposit costs.

Business Segments and Product Lines:

• Core Markets: Maintains strong positions in Bermuda and the Cayman Islands; expanding retail banking presence in the Channel Islands.
• Wealth Management: Provides services to high-net-worth individuals and institutions via offices in the Bahamas, Switzerland, Singapore, and the UK.
• Mortgages: Originates residential mortgages for high-net-worth clients on prime central London properties; portfolio heavily weighted toward low-risk, full-recourse loans.
• CIBC Caribbean Acquisition: On track for closure in H1 2027 following shareholder and regulatory approvals; integration teams are active, with no immediate plans for major balance sheet optimization or run-offs.
• New Products/Services: Exploring opportunities in merchant acquiring, non-competitive services, and collateral-backed lending in the Caribbean region.

Market and Competitive Landscape:

• Operates as a leading independent bank in the Atlantic and English-speaking Caribbean, positioning to compete effectively with scale and financial strength.
• Faces competitive lending environments in the Caribbean; strategy involves capturing market share in jurisdictions with lower current penetration rather than aggressive price competition.
• UK regulatory uncertainty (housing tax changes, new government policies) creates friction but also drives demand for liquidity management services in prime central London.
• Regional economic recovery post-pandemic is robust, particularly in tourism-heavy economies like the Bahamas and Barbados, driving potential wealth and property demand.

Risks and Challenges:

• Deposit Volatility: Approximately $500 million in private trust and corporate liquidation fund deposits are expected to exit within weeks, reducing total deposits to an estimated $12–$12.5 billion range.
• Interest Rate Sensitivity: While asset-sensitive, the bank faces rising funding costs and potential loan yield compression as fixed-rate loans reprice to floating rates.
• Unrealized Losses: Fluctuations in the AFS portfolio due to interest rate hikes create temporary book losses, though management projects recovery.
• Geopolitical/Regulatory Risks: Exposure to UK housing market regulations and tax changes; sovereign risk in Caribbean investment holdings (though currently held at high credit quality).
• Integration Risks: Execution risks associated with the CIBC Caribbean deal, including cultural fit and system integration across multiple jurisdictions.

Management Commentary and Tone:

• Tone was highly confident and optimistic, emphasizing franchise resilience, disciplined execution, and the strategic value of the CIBC Caribbean deal.
• Chairman/CEO Michael Collins highlighted the durability of the business model over the last 10 years on the NYSE.
• CFO Michael Scrum expressed confidence in maintaining expense ratios and NIM stability despite short-term deposit fluctuations.
• Management emphasized a conservative risk profile, low risk density (27.3% risk-weighted assets), and a commitment to shareholder returns through dividends and buybacks.

Analyst Questions and Answers:

• NIM & Deposit Impact: Analysts questioned the impact of $500M deposit outflows on NII; Management confirmed NII will be flat short-term but positive medium-term as rates rise and balance sheet stabilizes.
• Loan Yields: Clarified that lower loan yields are primarily due to fixed-to-floating repricing in the portfolio; management expects repricing benefits in 2027 as Bermuda and UK rates adjust.
• Expense Run Rate: Confirmed $93–$95 million quarterly run rate is achievable, noting current quarter's higher expenses were due to non-recurring staff departure costs and partial acquisition integration.
• Acquisition Strategy: Disclosed no intention to run off specific CIBC portfolios; focus is on cultural integration and leveraging sticky deposits in new jurisdictions to grow market share organically.
• Balance Sheet Optimization: Stated CIBC investment portfolios are primarily short-duration US Treasuries; integration may involve minor restructuring to manage sovereign risk and liquidity.

Other Key Points:

• The CIBC Caribbean acquisition will create the leading independent bank in the English-speaking Caribbean, combining complementary wealth management and retail capabilities.
• Management noted that the UK budget announcement introduced short-term macroeconomic uncertainty but did not fundamentally alter the bank's long-term UK mortgage strategy.
• The bank maintains a conservative capital position, with TCE to TA above the 6–6.5% targeted range.
• Integration teams are prioritizing stakeholder outreach with governments, regulators, and employees to ensure a smooth transition.