Merger Will Expand Presence In Upstate New York And Seize Semiconductor Corridor Opportunities

Key Takeaways

• Merger with Evans Bancorp expands geographic reach, potentially increasing market share and driving future revenue growth in Upstate New York.
  
• Strong earnings growth supported by an improved net interest margin, diverse noninterest income sources, and consistent dividend growth signals shareholder confidence.
  
• Integration risks from the Evans Bancorp merger, declining loan yields, higher expenses, and rising nonperforming assets threaten NBT Bancorp's revenue and earnings stability.

Catalysts

A financial holding company, provides commercial banking, retail banking, and wealth management services.

• NBT Bancorp's agreement to merge with Evans Bancorp expands its geographic footprint into the Western region of New York, positioning it to achieve the largest deposit market share in Upstate New York. This is likely to drive future revenue growth through increased customer base and market reach.
  
• NBT Bancorp's unique position in the Upstate New York semiconductor chip corridor positions the company to provide financial services for structural investments and residential lending, potentially boosting earnings.
  
• The bank's improvement in net interest margin for three consecutive quarters, bolstered by lower funding costs, indicates potential for enhanced future net interest income, impacting overall earnings positively.
  
• Noninterest income is a significant aspect of NBT Bancorp's total revenue, with growth in fee-based segments such as retirement plan administration, wealth management, and insurance likely contributing to sustained revenue growth.
  
• NBT Bancorp's consistent dividend growth, supported by strong capital flexibility from productive earnings generation, suggests confidence in continued earnings growth and shareholder returns.

NBT Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NBT Bancorp's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.2% today to 31.0% in 3 years time.
• Analysts expect earnings to reach $280.7 million (and earnings per share of $5.11) by about January 2028, up from $140.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 15.5x today. This future PE is about the same as the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 5.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

NBT Bancorp Future Earnings Per Share Growth

Risks

• The merger with Evans Bancorp may present integration risks and increased operating expenses, which could impact net margins and earnings in the short term.
  
• A decline in loan yields driven by a 9 basis point drop in the fourth quarter of 2024, along with potential re-pricings downward with falling short-term rates, could exert pressure on overall revenue growth.
  
• The increase in expenses, primarily driven by higher compensation and benefits costs, could affect net margins if not offset by corresponding revenue increases.
  
• The rise in nonperforming assets, particularly a commercial real estate loan moved to nonaccrual status, suggests potential credit risks that could lead to increased provisioning and lower net income.
  
• Economic shifts or competitive pressures within their expanding geographic footprint, especially regarding the semiconductor industry and related growth expectations, could impact future revenue diversification and earnings stability if projected growth and market penetration do not materialize as planned.

Valuation

• The analysts have a consensus price target of $54.0 for NBT Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $904.8 million, earnings will come to $280.7 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $46.09, the analyst's price target of $54.0 is 14.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.