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Why You Should Take a Closer Look at This Under-the-Radar Bank

Bank of N.T. Butterfield & Son (NYSE: NTB) may not be a household name, but the international bank is a savvy operator with the numbers to back up investor optimism.

In this episode of "Beat and Raise" recorded on Nov. 4, Fool contributor Jason Hall details the company's third-quarter earnings report and explains what makes the bank stock unique.

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Jason Hall: I've been talking a lot about banks and financial services companies here lately and I'm going to be talking about one, it seems to just show up as one of my favorite businesses on a regular basis, and that's Bank of N.T. Butterfield & Son. This is an interesting bank, most of its operations are in Bermuda and the Cayman Islands, and the Channel Islands off the coast of Europe in the English channel. It targets that a lot of international leads-that's a good way to think about it-a lot of high net wealth individuals. It also does a lot of banking for the businesses in those places too, so it has some ties to travel and tourism as well.

Here's the high note, the company reported on the 27th, so this is last week. Net revenues for a bank is essentially largely a couple of things. It's fees that it earns and interest that it earns from the loans and the financial services it provides. Reported net revenues of $125 million in the quarter, that was up about two percent. Earnings per share of 80 cents per share. That met expectations was exactly where analysts were expecting. It's 31 percent higher than the year over year quarter. Management doesn't give any outlook, they don't offer any financial guidance at all.

When you start reviewing the earnings call transcript and looking through their filings, there's some important metrics that jump out. Core efficiency ratio is 66.3 percent. This is the percentage of their revenues that cover operating expenses. Now, 66.3 percent is higher than other banks that are pretty popular in the Foolish universe, like Axos Financial, which is largely an internet bank, and then Live Oak Bancshares, which has a really interesting model of business lending, but this is a great efficiency ratio for these high touch banks like this that really rely a lot on people meeting with their clients.

The return on assets, I see I left that field blank, but it was 1.1 percent, which trending in the right direction. Return on equity, 16.2 percent. Those metrics are really important. One and 10, you hear those benchmarks, return on assets and return on equity respectively. If you're doing better than one percent and 10 percent, you're doing really well. 16.2 percent return on equity is very, very, very good. The board maintained the quarterly dividend at 44 cents per share. It's held it there for a couple of years. Was able to hold that through the pandemic as its earnings generally stay quite high. You see, it earned 80 cents a share in the quarter, pays out about 44 cents a share in dividend. The dividend is very protected by earnings. It's a little more than half of its earnings. It has a very highly liquid balance sheet. About 64 percent of its assets or cash or liquid investments as a comparison, Live Oak Bank's has about 63 percent of its assets or loans.

This is a very liquid balance sheet compared to most other banks, very, very conservatively managed. Couple of things I'm watching closely, the rate of growth. I'm really paying a lot of attention. It's slowed a little bit, but there's a lot of factors for that. One of those factors is the tourism impact on some of its business and its key markets. Particularly as the COVID surges happen, that sort of thing, it's having some impact. They're starting to see more travels people live with COVID. Restrictions are lifted in the areas that it operates in. Again, I think that's more of just a near term risk. Again, you look at the earnings that it produces, it's a solid bank. The yield is quite high where the stock price is today, conservatively managed and it's in really good position going forward investment as a dividend growth investment.

Jason Hall owns shares of Axos Financial, Bank of N.T. Butterfield & Son, and Live Oak Bancshares. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axos Financial, Bank of N.T. Butterfield & Son, and Live Oak Bancshares. The Motley Fool has a disclosure policy.


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