In a banking market that still is wary of mergers, KeyCorp is a natural buyer for First Niagara Financial Group.
Key’s $4.1 billion deal to buy First Niagara will make it a powerhouse in upstate New York banking, rivaled only by M&T Bank.
As banking markets go, upstate New York is steady, not sexy. And that’s a big part of what made First Niagara attractive to Key – that and the potential to wring $400 million in costs out of the combined bank’s operations.
“Key has operated in some of these markets for more than 100 years,” said Donald Kimble, Key’s chief financial officer, during a conference call Friday.
Slow-growth markets aren’t a big draw for banks looking to expand their footprints. They tend to seek out places growing faster than the rest of the country.
Banks like Key and M&T, which have a long history upstate, view these markets differently. They see upstate as a market where consumers are relatively conservative and where borrowers are a good bet to pay back their loans.
“I think it’s an attractive market,” said Edward Hutton, a Niagara University professor and a former Buffalo banker.
“You may not have the real fast growth as in some markets, but you don’t have the same competition either,” he said. “A lot of the faster-growing areas are hyper-competitive.”
Key’s own makeup reflects that. In addition to its franchise across the Northeast and Midwest, it also operates in five Western states and Alaska, markets that Key CEO Beth Mooney described as “high growth … with compelling demographics.”
The big deal also may have been helped along by the exit of other suitors.
When word leaked out earlier this month that First Niagara Group was looking for a buyer, one of the banks that analysts said might be interested in the Buffalo bank was New York Community Bank.
It turns out that New York Community executives had another bank on their minds.
New York Community Bancorp agreed Thursday to purchase Astoria Financial Corp. in a $2 billion deal that will expand its network in the New York City banking market.
Unlike a rumored First Niagara purchase, which would have pushed New York Community into new markets upstate, the Astoria merger combines two firms that focus on the New York City region and emphasize multifamily lending, said Joseph Ficalora, New York Community’s chief executive officer, in a statement.
Like First Niagara, Astoria was under pressure to find a buyer. Astoria, with 87 branches, has been under pressure from activist investor Basswood Capital Management LLC to boost its share price and had been working with an investment bank to find a buyer.
“We’ve been prepping for a large merger since the end of 2011 and, now that all the stars have aligned, I have to say: It certainly looks and feels right,” Ficalora said.
After a quiet 2014, takeovers of small banks have been picking up this year as bigger regional banks try to accelerate their growth while they grapple with low interest rates that make it hard to make money on loans. BB&T Corp. in August agreed to pay $1.8 billion for National Penn Bancshares. Royal Bank of Canada agreed to buy Los Angeles-based City National Corp. for $5.4 billion in the biggest bank deal so far this year.
The last time a Buffalo bank was involved in a big acquisition, it took more than three years and hundreds of millions of dollars in unexpected investment for M&T Bank to seal its deal to buy Hudson City Bancorp.
Mooney isn’t expecting M&T-style delays with the First Niagara deal. She told analysts during a conference call that Key executives have discussed the merger with regulators and she isn’t expecting it to be held up the way M&T’s acquisition was.
Key hopes to be able to complete its acquisition of First Niagara in less than a year, closing the transaction by the end of September 2016. If that happens, it hopes to complete most of its cost-cutting branch closings and other consolidations to merge administrative and back-office operations within a few months after that.
“We would expect most of the consolidation to occur in late 2016,” Kimble said.
First Niagara was under pressure because its stock has been hovering around $8 to $10 a share for most of the last four years. Its bid to grow through acquisitions under former CEO John Koelmel was derailed when it overpaid for HSBC USA’s branch network upstate. Under new CEO Gary Crosby, First Niagara swore off acquisitions in favor of boosting efficiency, but that’s a long process and the bank’s profits remained weak. Selling the bank to Key for $11.40 a share was a way to generate a quick return for shareholders.
CreditSuisse analyst Jill Shea described the price as “quite healthy” for First Niagara shareholders, given the “modest” 5 percent boost in earnings the deal is expected to yield for Key in 2018, once all the cost savings are in place.
“They really felt they had to do something,” Hutton said. “If they can’t do it from the inside, I don’t think it’s a surprise to anyone that they looked at a sale.”