NBT Bancorp Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

NBT Bancorp Inc. is a financial holding company primarily operating in the northeastern United States, providing commercial and retail banking, wealth management, and other financial services to individuals, businesses, and municipalities.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: NBT Bancorp (NBTB) operates as a community-focused financial institution, primarily serving the northeastern U.S. It conducts its business through three main segments: commercial banking (including lending to businesses), retail banking (serving individuals with deposit accounts, mortgages, and loans), and wealth management (offering brokerage, financial planning, and trust services). NBT’s overall strategy is to be a reliable provider of financial services, with strong connections to the communities they operate within.

  • Revenue Distribution: NBT Bancorp generates revenue primarily from net interest income (NII) which is a result of the spread between interest earned on loans and interest paid on deposits, and from fees earned from various banking and wealth management services.
    • The majority of NBT’s revenue is generated by their Net Interest Income which is driven by the spread between interest earned on loans vs interest paid on deposits.
  • Industry Trends: The banking industry is currently undergoing significant transformations including increasing regulatory scrutiny, and technological disruption from fintech companies. Furthermore, banks are facing an evolving interest rate environment which has been impacting their margins. Consolidation is also a theme among regional players. NBT has to adapt to these trends to grow revenue and remain competitive.
  • Competitive Landscape: The competitive landscape is fragmented. Many regional banks compete with each other and larger banks like JP Morgan & Co, Citigroup also compete in areas where they have a physical or digital footprint, and Fintech companies are continuously entering the market, especially in the payment processing sector. NBTB’s competitive advantage stems from its community ties and local expertise, although this is not necessarily sustainable over the long run.

What Makes NBTB Different: NBTB differentiates itself by focusing on community banking. They aim to offer personalized service and to participate in the communities they serve. They leverage technology to deliver services across multiple channels, including in-person at physical branches, over the phone, and digitally through mobile and online banking. However, those differentiators are not sustainable over the long run and their competitive advantage is not very strong.

  • Financials:

    • Net Interest Income: NII has historically been their strongest revenue, and they need to maintain the spread between loans and deposits. They have been focused on increasing the yield on earning assets while limiting liability expenses and maintaining deposit levels.
    • Fee Income: Fee income has a strong correlation with interest rates, as higher interest rates increase fees from investments and trust and wealth services.
    • Operating Expenses: The largest portion of expenses consist of employee compensation, which is mostly variable based on revenue generated and profits and therefore increases as revenues increase. Operating expenses are fairly predictable for banks in comparison to manufacturing companies.
    • Credit Quality: NBT Bancorp has a diversified loan portfolio, which consists of loans with varying levels of risk. Their loan loss reserve is adequate according to the financials. Historically, the company has shown a strong ability to manage risk in their loan portfolio.
    • Capital Levels: Their capital levels have been sufficient, exceeding minimum required capital and well positioned for future growth and uncertainty.

Moat Analysis: 2 / 5 NBTB possesses a narrow moat mainly due to its strong community ties and reputation, which create a degree of customer loyalty and provide an advantage in its region, However, these are not impenetrable, and a competing bank that offers similar rates and services could attract away some of its customers. NBTB has no strong network effects, nor are their products significantly more advanced than peers, and they don’t have cost advantages. In conclusion, their moat is not strong enough to provide a durable competitive advantage. Therefore, I am assigning it a moat rating of 2/5.

  • Legitimate Moat Risks:
    • Increased competition: Other regional or national banks offering the same or similar services can erode the moat.
    • Loss of customer loyalty: If the company does not provide good service, customers can easily go somewhere else.
  • Business Resilience:
    • Even though they don’t have a strong moat, the company is fairly resilient due to its diversification of services and its geographical exposure. The company’s financial ratios are all strong as well.

Understandability Rating: 2 / 5 NBTB’s business model is relatively straightforward, making it easy to understand from a basic concept perspective, since they are a traditional bank. They generate revenues based on the spread between interest earned on loans and interest paid on deposits, combined with fees. However, because of the complexities of banking, such as credit quality, interest rates, loan loss reserves, and regulations, which are not easily understood, it can make the company more difficult to understand for average individual investors. Therefore, I have assigned an understandability score of 2/5.

Balance Sheet Health Rating: 4 / 5 NBTB’s balance sheet appears healthy with sufficient capital, relatively stable levels of debt, and an adequate loan loss reserves. They have the ability to cover any potential issues. I am assigning the company a balance sheet health rating of 4/5.

Recent Concerns and Problems:

  • Interest rate concerns: The increasing and rapidly rising interest rate environment has had a mixed effect on NBTB. Their net interest income increased as interest rates rose, but they also have to pay out higher interest on deposits, limiting the gains. NBTB has hedged itself against interest rate risk by increasing its floating-rate assets, but in 2023 they are seeing the interest rate benefit diminishing and are focusing more on maintaining deposit levels.
  • Economic pressures: The company is not seeing any significant impact from a recession, but still notes that there is some economic uncertainty on the horizon, particularly related to the housing market and inflation. The management is monitoring economic data closely and will take corrective actions if needed.
  • Merger integration: NBTB has been focused on its recent merger with Salisbury, and has provided information on how the integration is going, with them being on track in most of the integration plans.
  • Credit Risk: Management seems to think the credit risk at this time is very manageable, and any losses are anticipated at this time, however they are continuously monitoring their portfolio to ensure this remains true.

In summary, NBTB is a community bank with a narrow moat due to community ties, but the intense and rapidly evolving banking landscape is still a risk. The financial health of the company is excellent with the stock being undervalued and trading at low multiples. Overall, I would consider this to be a medium-risk investment opportunity, but not one with high upside potential due to the limited moat.