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How Key brought First Niagara deal to the finish line

KeyCorp took a bold step last fall when it announced a deal to buy First Niagara Financial Group.

Nine months later, the Cleveland-based bank has successfully pulled off the feat, with the deal set to take effect Monday.

The bank won over shareholders, regulators, community groups and elected officials. And, guided by CEO Beth Mooney, the bank stuck to the timetable it set last October.

“We were thoughtful about our plans, realistic about our milestones, deployed the right people to do the right work, and, as in all things, it’s your relentless execution and attention to detail that gets you to the other side,” Mooney told The Buffalo News.

Key, already with a sizable presence in the Buffalo area, now becomes a much larger player in the region’s financial services sector.

And it has sought to reinforce that in different ways.

Perhaps the most striking example: It declared Larkinville as Key’s Northeast regional headquarters, emphasizing the value the bank placed on Buffalo Niagara operations.

Key also pledged $20 million to the First Niagara Foundation to maintain the foundation’s philanthropic efforts. And the KeyBank Foundation announced $1.7 million in grants for 12 area groups.

Look for another sign – literally – this fall, when First Niagara Center, the downtown arena, changes its name to KeyBank Center.

Mooney called getting the $3.6 billion deal across the finish line just a starting point.

Politicians

When news of Key’s plan to buy First Niagara broke, some elected leaders were critical, if not outright opposed, to the idea. They feared devastating job cuts and branch closings that would jeopardize what First Niagara had built up through a series of acquisitions, including the 2,200 jobs it had in Western New York.

Sen. Charles E. Schumer, a member of the Senate Banking Committee, raised issues early. He first met with Mooney and First Niagara CEO Gary Crosby in Crosby’s Larkinville office, where Schumer shared his concerns about the deal’s potential effect on jobs and local operations.

“His focus sharpened our focus,” Mooney said.

Rep. Brian Higgins, D-Buffalo, said thyat as the talks between Key and elected officials progressed, the deal “increasingly got better relative to job growth in Buffalo and Western New York.”

“We worked really hard. We used the leverage we had,” Schumer said of the work he did with Higgins.

Key unveiled a plan that called for closing 106 First Niagara and Key branches in four states, including 23 in Western New York, but offering new jobs to all affected branch employees. Key also said it would cut no more than 250 other jobs statewide, and add at least 500 to 600 jobs in upstate New York through 2018. More jobs could be added in 2019 and 2020.

“I don’t think they would commit to anything they weren’t prepared to honor,” Higgins said of the outcome.

Key said it welcomed the chance to build on business lines like commercial insurance, auto lending and mortgage banking that First Niagara already had here. Their presence worked in Buffalo’s favor.

Community groups

On a frigid day last January, community groups gathered outside First Niagara’s headquarters to call attention to how the Key-First Niagara deal could hurt neighborhoods and low-income residents.

They said the city was already “grossly underserved” by banks, and they worried the deal would exacerbate the problem. They called for protecting branch services for low-income people, and for products and services that would help those residents build wealth.

Some of those same community groups ended up helping shape Key’s $16.5 billion loan and investment program, called a National Community Benefits Plan, that will touch every market Key will serve in 15 states. Of that, $5.8 billion will go toward markets served by both Key and First Niagara. The five-year program is set to kick off in January.

On a much more pleasant day in March, two Key officials – Bruce Murphy, head of corporate responsibility, and Norm Bliss, director of community development – traveled to Buffalo from Cleveland, vowing to follow through on the plan. Key officials also said they would gather input on opening a new East Side branch, and create a local advisory council to track the community benefits plan’s progress.

“We’ve made some significant commitments which, by the way, we’re not afraid of,” Murphy said during his visit.

The National Community Reinvestment Coalition, which signed the agreement with Key, said the bank raised its commitment from $12 billion to the $16.5 billion final amount over the course of their talks. The Federal Reserve’s order approving the Key-First Niagara deal noted that Key would keep open four branches in low- and moderate-income neighborhoods that were at risk of being closed.

Shareholders

Without shareholder approval, no deal was possible. At separate meetings on the same day in March, the banks announced shareholders had overwhelmingly backed the purchase. After First Niagara’s meeting in Buffalo, some individual shareholders said they had voted against the deal; others felt Key’s offer was the best First Niagara could get. But in both banks’ cases, institutional shareholders, who controlled an overwhelming majority of shares, had a decisive say in the outcome. Based on Key’s share price on Friday, the deal was valued at about $3.6 billion, down from $4.1 billion when it was announced last fall.

Behind the scenes

While Key and First Niagara continued to operate as separate companies, the two banks formed integration teams, with employees from both banks, to explore how to bring their operations together. Key put Christopher Gorman, the head of its Corporate Bank, in charge of that work. Mooney said taking Gorman out of such a “critical role” at Key to lead the integration was a sign of the importance Key placed on that task.

Crosby, who will join Key’s board of directors, said he was impressed with how the integration process unfolded.

“When I see our teams working together, it’s really hard to tell them apart because they are working so closely and so collaboratively together,” he said.

Regulators

Probably the biggest wild card in any acquisition is what federal regulators think. M&T Bank Corp.’s deal for Hudson City Bancorp was held up for years, after regulators identified shortcomings in M&T’s anti-money-laundering systems that M&T had to fix.

Key didn’t encounter any similar roadblocks en route to acquiring First Niagara. But it still had to persuade the Justice Department that its deal wouldn’t harm competition. That was a real issue in the Buffalo Niagara region, where First Niagara and Key ranked No. 2 and 3, respectively, in deposit market share. Put the two banks together, and they would control about 35 percent, in a market where M&T already had 51 percent, according to Federal Deposit Insurance Corp. data from last year.

The remedy: sell some First Niagara branches to reduce the amount of market share they would jointly control. Northwest Bancshares stepped forward and agreed to buy 18 First Niagara branches in Erie and Niagara counties, ramping up its own presence here.

Mooney said another essential step for Key came when the Federal Reserve found no objections to the bank’s capital plan. Regulators use that process to ensure banks are financially healthy enough to withstand an economic downturn.

The true impact of the acquisition won’t be known until Key absorbs First Niagara’s operations and shows whether it can meet its expectations for cost savings and growth. Some analysts are skeptical, and Key’s share price is down about 12 percent from when the acquisition was announced.

email: mglynn@buffnews.com

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