Sunday, December 8, 2019

A Current AIM International Equity Holding: The Bank of N.T. Butterfield & Son Limited (NTB, $34.30): “Hurricane Season is over in Bermuda”

The Bank of N.T. Butterfield & Son Limited (NTB, $34.30): “Hurricane Season is over in Bermuda”
By: Erik Floyd, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

(The) Bank of N.T. Butterfield & Son Limited (NYSE:NTB) The Bank of N.T. Butterfield & Son Ltd. Provides community banking and wealth management business for individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds in Bermuda, the Cayman Islands, Guernsey, the Bahamas, Switzerland, and the UK.

• The acquisition of ABN AMRO (which closed July 15th) has brought in roughly $3.5B in deposits for NTB and the main focus of 2020 will be to deploy the remaining $2.0B of the cash into the securities portfolio.

 Expenses are forecasted to come down in Late 2020, because of the savings they received from acquiring ABN, by approximately $3.8MM and a roll off of $8MM of annualized Amortization from an old technology expenditure.

 The largest risk to NTB is their geographic risk and customer concentration, with 56.9% of customers located in Bermuda, and 29% in the Cayman Islands. In addition to this, these countries have different regulators than mainland banks.

 NTB has maintained a constantly growing dividend yield that currently pays a 5.3% yield, with a 5 Yr. Dividend Growth of 340% and a 1 Yr. Dividend Growth of 15.8%.

Key points:

The management has consistently exited non-core markets, reduced the risk of the sec. portfolio, and shifted lending focus to residential loans. The main driver is the fee income stream, which generates around 35% of total revenue and anchored by $95B of assets under admin.

Management acknowledged that they will have to find a partner, as they are currently over 2x the Bermuda GDP and still growing, and the economy has no lender of last resort to provide a liquidity backstop. In addition to continual expansion, management is expected to be repurchasing shares, as they started by purchasing back 5% of shares before the ABN transaction, and purchased 150,000 common shares in October.

What has the stock done lately?

The stock has been significantly volatile in the recent months, with a drop at the end of July because of the Q2 Earnings numbers, missing GAAP EPS by $0.20 and Revenue by $3.15M. This caused the stock price to drop by 20.65%, hitting a low at $26.08 on August 14th. Since this, the stock has seen a large increase from $26.08 to $34.55 on November 29th, representing a 30.67% change, which was influenced by a strong Q3 Earnings and a large share repurchase in October.

Past Year Performance:

NTB has been recovering the past year, with a 52 WK L-H ranging from $26.08-$41.84, continuing to be volatile with earnings calls, and news of the acquisition of ABM ARMO. Last October, the stock was selling for $53.11 per share and fell to $30.03 in December, a 43.23% loss, due to the decline in Q3 Earnings aside from estimates. Since its fall last year, the stock bottomed out in August at $26.08 and has since stabled close to its yearly average which is $33.84.

1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet

My Takeaway

NTB should remain in the AIM International Portfolio. NTB has consistently outperformed their benchmark over the last few years and has developed growth traits through acquisitions and specialization. NTB will be focusing on the ABN ARMO transaction and deploying the $2.0B of cash into the securities portfolio through the 2nd half of 2020, but these actions will fully integrate the acquisition and project $350MM of securities growth in 2020. Depending on Fed decisions and reinvestment yields, the 2nd half of 2020 could be a growth driver for NTB, through the completed ABN integration, reduced expenses, and an expanding net interest margin, which would all contribute to accelerate EPS growth.

1 Month Stock Chart from FactSet
Source: FactSet