Bank IPOs have had a strong year in an otherwise lackluster IPO market. On Friday, the latest IPOs in the sector, Bank of N.T. Butterfield (NTB) and FB Financial Corp (Pending: FBK), are looking to have strong debuts.
The recent performance of financial IPOs and these two firms' fundamentals are compelling reasons to invest in both. But the stronger of the two is Bank of N.T. Butterfield. Consider taking a long position in N.T. Butterfield.
Recent Strength in Banking IPOs
The seven banking IPOs last quarter have made average gains of 11.8%, one important reason to watch NT Butterfield and FB Financial. One recent example is First Hawaiian Bank, which debuted Aug. 8. The strong underwriters and fundamentals behind FHB have helped that IPO to advance more than 14% since it priced at the high end of its predicted range early last month. Another recent, strong, example is HarborOne Bank, which priced at $10/share on June 30. Shares of HarborOne, the largest co-operative bank in New England, have gained nearly 54% since that bank's IPO.
The Two Offerings
N.T. Butterfield will offer 10.6 million shares. The expected price range for the N.T. Butterfield shares is $22 to $25. If shares of N.T. Butterfield were to price at the midpoint of the expected range, the bank would have a market cap of $1.2 billion.
FB Financial Group, which is also planning to launch its IPO this Friday, is aiming to raise approximately $122 million. FB Financial will be offering 5.88 million shares of common stock. Of those shares, 882,352 will be offered as an overallotment option.
Both Upcoming Bank IPOs have Strong Underwriters
One indicator to consider when evaluating upcoming IPOs is the strength of the firm's underwriters. NT Butterfield's roster of underwriters and co-managers includes Goldman Sachs, Sandler O'Neill, Keefe, Bruyette & Woods and Citigroup. FB Financial's underwriters includes J.P. Morgan, UBS Investment Bank and Keefe, Bruyette & Woods. Co-managers for the FB Financial offering include Raymond James, Stephens and Sandler O'Neill + Partners. All these firms are heavyweights.
Given the quality of underwriters, a strong performance in the days following both IPOs would be a compelling reason to hold allocations or early purchases through the end of the IPO quiet periods. The release of reports from the underwriters after the expiration of the IPO quiet period often serves to boost the stock. Pay close attention to how these two IPOs perform early on and consider acquiring additional shares ahead of the expiration of the quiet periods.
Comparing Business Models
N.T. Butterfield offers both specialized financial and banking services. The bank, which operates in Bermuda, Cayman, Guernsey, Switzerland, The Bahamas, and United Kingdom, offers standards like checking accounts, savings accounts as well as portfolio management and brokerage. In addition, N.T. Butterfield offers commercial credit products, money and treasury market services, payroll services and private banking.
On June 30, N.T. Butterfield had more than $11 billion in assets, $10.1 billion consumer deposits and $3.9 billion in net loans. Additionally, the bank had $101.3 billion in trust assets under administration, and $4.8 billion in assets under management.
FB Financial, by contrast, has a much more regional model. The bank is headquartered in Nashville, Tenn. and has 45 branches in Tennessee, Georgia and Alabama. Additionally, F.B. Financial wholly owns FirstBank, a subsidiary, which is the third largest bank in Tennessee overall.
F.B. Financial has considerably fewer assets compared to N.T. Butterfield. As of June 30, F.B. Financial reported that it had $2.9 billion in assets, $2.5 billion in deposits and $2.1 billion in loans.
A Look at the Competition
Due to their considerably different business models, N.T. Butterfield and F.B Financial will face different competitive pressures. With its global reach and wide range of services, N.T. Butterfield will face competition from some large, multi-service banks, including one of its underwriters: J.P. Morgan.
F.B Financial will face competition on a more local level. A number of banks have just entered or are planning to enter the Tennessee marketplace. In metropolitan Tennessee areas, like Nashville, F.B. Financial's subsidiary FirstBank could feel the impact of this recent competition.
One factor to be wary of with F.B Financial is the over-concentration of the bank's loan portfolio in real estate. Of F.B. Financial's loan portfolio over 75% is real estate. A concentration this large leads to concerns about a downturn in real estate values. The real estate market in Nashville has not recovered completely from the 2008 downturn and any additional pressure on that local market could put the bank on uneven footing.
N.T. Butterfield Has the Edge
While the strong recent performance of financial IPOs makes the debut of both banks attractive, N.T. Butterfield's recent financial results and geographic diversity make it the better pick.
N.T. Butterfield generated $379.5 million in net revenue before provision for credit and other losses in 2015. This was an increase of more than $6 million from the bank's 2014 net revenue. While N.T. Butterfield's net income decreased from $102.2 million in 2014, to $77.7 million in 2015, management provides a reasonable explanation: The difference was driven by non-core expenses like business acquisition and restructuring.
Either way, the financial sector has been an interesting one to watch and invest in during an otherwise anemic year for IPOs.
As of the writing of this story, the author did not have positions in N.T. Butterfield or F.B. Financial. The author anticipates he will become long one or both of these stocks when their respective IPOs occur.