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NBT Bancorp (NBTB) announced on Monday that it will acquire Alliance Financial Corporation (ALNC) for $233 million, or $48 per share. Shares of NBT Bancorp fell 2.9% in Monday's trading session.

The Deal

NBT announced that it has entered into an agreement under which Alliance Financial Corporation will be merged with NBT's own business.

NBT Bancorp will finance the deal entirely in stock. Shareholders in Alliance Financial Corporation will receive 2.1779 shares of NBT's common stock. In a reaction to the offer, shares of Alliance Financial rose 16.2% in Monday's trading session to $45.79 per share. Shares of NBT fell 2.9% to $21.50 in a reaction to the announcement. Based on Monday's closing price, the deal values Alliance at $46.82 per share. Consequently, shares of Alliance are trading 2.2% below value of the offer.

CEO Martin Dietrich commented on the deal, "NBT and Alliance both trace their roots in central New York community banking back over 150 years and remain committed to this approach to providing financial services today. This agreement represents an exciting opportunity for our customers and communities, creating an even stronger locally-focused bank to serve central New York and thereby enhance stockholder value."

Alliance has 28 banking locations in central New York. Alliance has $1.4 billion in total assets, $890 million in net loans and $1.1 billion in deposits. Based on Alliance's 2011s annual net profits of $13.1 million, the deal values the bank at 18 times annual earnings.

NBT Bancorp expects to close the deal in the second quarter of 2013. The deal is subject to customary regulatory approval, and approval of NBT's and Alliance's shareholders.

Valuation

NBT Bancorp ended its second quarter of 2012 with total assets of $6.0 billion. The bank had $4.2 billion in loans outstanding and attracted $4.7 billion in deposits. The company has a equity-to-assets ratio of 9.5%, and a book value of $16.79 per share.

For the first six months of 2012, NBT net earned $26.9 million, or $0.80 per diluted share. At this rate, the company is on track to earn $1.60 per share for the full year of 2012. NBT is currently valued at $725 million. This values the firm at 13 times annual earnings and 1.3 times its book value.

Currently, NBT Bancorp pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 3.7%.

Investment Thesis

Year to date, shares of NBT Bancorp have fallen some 3%. Shares quickly rallied to $24 in January and gradually fell to $19 in the beginning of the summer. Shares recovered throughout the summer, now exchanging hands at $21.50 per share.

Over the past five years, shares have fallen some 10%. Besides a little spike to $34 in 2008, shares traded between $20-$25 for most of the time. Between 2008 and 2012, the company steadily increased its total asset base from $5.3 billion to $6.0 billion at the moment.

NBT's deal with Alliance Financial is rather important to NBT. The bank will add $1.4 billion in total assets, boosting NBT's total assets by a quarter to $7.5 billion. The total loan portfolio will grow to $5.1 billion, while the deposit base increases to $5.8 billion. Annual net profits will rise to some $67 million, excluding synergies which have not been specified.

Investors in NBT have their concerns about the acquisition given the high multiples NBT pays 18 times annual earnings for Alliance Financials, after shares have risen some 50% already in 2012. The valuation is rather steep given, that NBT itself trades at just 13 times earnings. NBT did provide some level of comfort for shareholders, by indicating that annual synergies could reach $15 million per annum.

Investors in NBT approach the deal with caution, as the acquisition is relatively large. Investors should take comfort in annual synergies estimates of $15 million, but be wary of integration risks. The deal will be accretive to future earnings of NBT can make good on its synergy estimate, and its estimated timeline. Investors with a long term horizon, and confidence in management's ability to successfully integrate the business, could hold on to their shares.

Source: NBT Bancorp - Acquisition Of Alliance Financial Is Accretive To Earnings In The Long Haul