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Cashing in: Multiple banks reaping benefits of HSBC branch sale

Just over a year ago, HSBC Bank USA completed a deal that shook the upstate banking landscape.

HSBC finished selling 195 branches in New York and Southwest Connecticut to First Niagara Financial Group for $900 million. The blockbuster deal marked HSBC’s exit from retail banking in the region, as well as an audacious expansion by First Niagara.

The upheaval didn’t stop there. First Niagara subsequently sold off 64 branches – a combination of HSBC’s and its own locations – to other banks, and closed 35 others that overlapped. Into the mix came KeyBank, Community Bank and Five Star, each of which acquired branches that beefed up their upstate presence.

Bankers say HSBC’s sale of its upstate retail network created a rare large-scale opportunity for rivals to compete for customers. Even some banks that did not acquire branches say they gained customers who chose to shop around amid the shakeup. As M&T President Mark J. Czarnecki said, “When you make people think about banking, they’re going to think about it.”

Much has been reported about how the two banks directly involved in the deal are faring a year later. HSBC, minus its upstate retail bank network, remains a major local employer. And First Niagara is choosing a new CEO, following John R. Koelmel’s departure from the job in March, in part, because of the drag the acquisition put on the bank.

Apart from those two players, the branch network sale’s greatest impact in sheer numbers was on KeyBank, which acquired 37 HSBC branches from First Niagara. The deal included all 26 HSBC locations in Erie, Niagara and Orleans counties that the Justice Department had required First Niagara to divest in order to satisfy antitrust concerns.

KeyBank, a subsidiary of Cleveland-based KeyCorp, was already well established in Western New York, but the deal for the HSBC branches ramped up its regional presence. “We didn’t buy them to close them,” said Gary Quenneville, the regional sales executive for KeyBank’s Western New York region and president for its Buffalo market, “We were very interested in expanding the franchise in both markets, Buffalo and Rochester.” The 37 branches it acquired in July 2012, which also included 11 in the Rochester area, represented $2.1 billion in deposits.

Quenneville said employee, customer and deposit retention levels exceeded its expectations. KeyBank had about 8 percent in deposit market share in the Buffalo area last year, according to most recently available statistics; Quenneville said he is hopeful that share will rise to 13 to 15 percent this year.

Reaching that level of market share means a bank can bring all of its products and services to bear in a market in a bigger way, he said, in areas such as investment products and cash management services. “It really opens up a lot of new avenues to you.”

Smaller banks gained

For Community and Five Star, their respective deals with First Niagara were opportunities to enter new markets or bolster their businesses in places where they were already operating.

DeWitt-based Community Bank System acquired 19 branches, a mix of HSBC and First Niagara locations, mostly in central New York and the North Country. Only three were in Western New York. One of them was an HSBC branch on North Buffalo Street in Springville that dated to the 1960s, when predecessor Marine Midland Bank operated it.

The branch is tucked into a village street in a pedestrian-friendly neighborhood. Customers and employees mix personal conversations with transactions at the counter. “It’s a hometown bank,” said Brooke M. Baker, vice president and branch manager. “What we’re here for is the customer service.”

When the changeover happened last July, customers wondered if the branch would stay open, since Community Bank had another location less than two miles away, on Cascade Drive.

But Baker said having two branches actually serves the community well, with one in the village and the other on a high-traffic retail corridor. Community Bank uses a similar strategy in Dunkirk and Wellsville, he said. “You can get more business out of a community with two locations. It’s more convenient.”

Something else also reassured the North Buffalo Street customers: “We just had this entire office remodeled, which I think gave customers a big sense of relief that we were staying,” Baker said. The makeover came with new carpeting, signs and offices, removing the cubicles that were part of the HSBC layout.

Baker came to the branch last September from a Community Bank location in Gowanda, to help apply Community Bank’s approach to the branch. Nearly all of the other employees are the same as when HSBC was running it.

Jane Engels, a customer going back to the Marine Midland days, said the conversion was handled well. “It’s nice,” she said. “It was pretty easy. They all know me.”

Kristen Woodarek, the retail services officer at the branch, recalls customers had lots of questions about how the changeover would affect their accounts, but she said the transition has gone smoothly. And she has seen lots of customers stick with the branch: she said they have relationships with the employees that have endured through the change in affiliation.

“I think there’s a lot of loyal customers,” Woodarek said. “I think it’s more about the people than the brand.”

Employees such as Woodarek brought experience and continuity to the conversion. But Baker said the switch to Community Bank from HSBC did mean some business changes. For instance, Baker said, HSBC focused on wealth management; while Community Bank also provides those services, loans and mortgages are a primary feature of its business. And since decisions about loans are made in-house, instead of being made at a centralized location, employees who know the customers make the evaluations, he said.

When the North Buffalo Street location was still an HSBC branch in June 2012, it had deposits of $49.6 million, representing 2 percent of all HSBC deposits in Erie County, according to Federal Deposit Insurance Corp. figures. (Branch-specific data for 2013 are not yet available.) At the same time, Community Bank’s Cascade Drive location had deposits of $11.9 million.

Five Star, whose parent company Financial Institutions is based in Warsaw, acquired four First Niagara and four HSBC branches – more than half of them outside Western New York, including three in the Elmira area, one in Seneca County and one in the Rochester suburb of Brockport. It also gained one in Batavia. Five Star faced a different sort of challenge in Orleans County, where it went from having no branches, to two of them.

Five Star held community events at the branches to help build name recognition, bringing in bank executives and board members to mingle with employees and customers, said Charles Guarino, director of marketing. And the bank retained employees from the HSBC and First Niagara branches, so the faces inside the branches were still familiar.

As a result of its deal, Five Star added 12,000 new customers, $287 million in deposits, more than $75 million in loans, and bolstered its employment by more than 10 percent.

Gaining by losing

While the branch transition takes hold, First Niagara estimates that since the acquisition closed, customer retention at the locations it added was 95 percent, in line with its projections when it was pricing the deal, said Jodi Johnston, a First Niagara spokeswoman.

The “transformational” deal brought other benefits, such as greater branch density and heightened brand awareness that have helped the bank attract and retain customers and employees, she said. It also has made gains in the credit card business, and has increased its number of mobile banking users faster than projected.

Even some banks that did not acquire branches say they benefited. M&T Bank Corp. was outbid by First Niagara for the HSBC branches in 2011. In his annual letter to shareholders earlier this year, M&T’s chief executive officer, Robert G. Wilmers, elaborated on the outcome.

“The market disruption caused by the exit of a large competitor, whose branch system was divided among four other banks, has resulted in some of the customers migrating to M&T, assisted by a well-trained sales force that has covered these markets for generations,” Wilmers wrote. “We have acquired customers, made loans and received new deposits at a pace unseen in upstate New York for a very long time.”