Bank of N.T. Butterfield & Son (NYSE:NTB) reported fourth-quarter results on Feb. 12, banking another solid quarter. Earnings were down, falling from $3.50 per share in 2018 to $3.30 in 2019, as the offshore bank worked to integrate a recent acquisition to expand its presence in the Channel Islands off the coast of France and invested in expanding its existing banking presence in the Cayman Islands. 

Despite the costs of expansion and the acquisition resulting in a change in its deposit mix that affected the profitability of its loan book, Butterfield remains highly profitable, and its prospects are better than they were one year ago. That's not something so readily apparent based on its stock performance; shares are down 5% over the past year, and off more than 37% from the all-time high in 2018. 

Steps leading to columns outside a bank.

Image source: Getty Images.

That decline has come even with Butterfield's dividend up 38%, supported by almost 42% growth in earnings over the past three years. While investors might eschew Butterfield (there's a good chance you've never even heard of it), its management continues to play the long game, expanding its presence in key markets and diversifying its business.

There's no getting around it: Butterfield is my favorite high-yield bank stock; it might even be my favorite bank stock, period. Keep reading to learn more about this excellent under-the-radar bank and what makes it especially compelling right now. 

Key metrics are moving in the right direction

Net interest margin is an important metric for bank stocks. It measures how much of the interest it charges it keeps after paying interest on deposits and other sources of capital. After its recent acquisition of the Channel Islands banking business from Dutch ABN AMRO Bank, Butterfield saw its net interest margin fall sharply from 3.38% in the fourth quarter of 2018 to 2.59%.

However, this was expected, because of the change in its loan and deposit mix following the acquisition, and management's efforts to integrate its new Channel Islands bank operations is starting to pay off. Net interest margin improved slightly from the third to the fourth quarters, and management says it's likely to continue improving. 

Management credited the Channel Islands expansion with helping boost non-interest income almost 7% in the quarter, largely from fees it earns for various banking services. 

These other important metrics remain very strong and are starting to improve

It's been less than a year since Butterfield spent $208 million to acquire ABN AMRO's Channel Islands banking business, so it's still not completely clear what kind of returns investors will see from those new assets. However, we can see how it has affected Butterfield in some important metrics in the interim: return on assets, and return on equity:

NTB Return on Assets Chart

NTB Return on Assets data by YCharts

Yes, both metrics have contracted over the past year, largely as a result of its recent acquisition but also because of interest rate declines, as much of its debt exposure is to U.S. mortgage-backed securities. However, Butterfield continues to substantially outperform the 1% and 10% respective benchmarks that banks aim for. 

Moreover, my expectation is that we will see these metrics trend back upward; just as with net interest margin, Butterfield reported a sequential improvement in both from the third quarter to the fourth quarter in 2019. 

An under-the-radar buy 

Whether you're looking for income, growth, or a good value with a solid margin of safety, I think Butterfield should be on your radar.

It's very profitable, as the metrics show, and I expect we should see earnings begin to grow in the near future as management gets its legs fully underneath it after last year's expansion into the Channel Islands. The dividend yields over 5% at recent prices and is well protected, with a payout ratio below 40%.

Lastly, Butterfield stock is cheap. Shares trade for 10.3 times 2019 earnings. That's 20% to 30% cheaper than some of the biggest U.S. banks, and to put it bluntly, Butterfield's return profile is significantly better than most. 

Put it all together, and you have a highly profitable bank trading at a lower valuation than its less profitable peers. With that big 5% dividend yield, Butterfield is a great stock to buy and hold, even if it takes the market some time to come around.