KeyCorp’s deal for First Niagara Financial Group cleared its last big hurdle Thursday as the U.S. Justice Department announced a plan for Key to sell 18 of First Niagara’s branches to Northwest Bancshares in Erie and Niagara counties for $78.2 million.
While the Key-First Niagara deal, now valued at about $3.5 billion, still needs the Federal Reserve’s approval, the branch-sale agreement removes a significant obstacle. The banks needed to satisfy the Justice Department’s concerns about the impact that their combination would have on local banking competition, and the branch sale agreement resolved that issue.
The branch sales are also a big step forward for Pennsylvania-based Northwest, which projects it will leap from No. 7 in deposit market share in the Buffalo Niagara region, to the No. 4 spot. The purchase price was based on a 4.5 percent premium on the $1.7 billion in deposits associated with the 18 branches.
The Justice Department said that it will advise the Federal Reserve Board that it will not challenge the Key-First Niagara deal, provided that Key and First Niagara stick tho the agreement.
“Americans value the convenience of retail bank branches,” said Renata B. Hesse, principal deputy assistant attorney general for criminal and civil operations in the Justice Department’s Antitrust Division. “Today’s agreement will ensure that customers in Buffalo and other New York markets will continue to enjoy the benefits of competition among banks with retail branch networks.”
Beth E. Mooney, chairwoman and CEO of Key, said the deal is expected to close before the end of September.
“Today’s announcement is another important milestone for the KeyCorp and First Niagara merger, which remains on track to close in the third quarter of this year,” Mooney said in a statement. “We will be working closely with Northwest in the coming months to deliver a seamless transition for clients and communities.”
The Justice Department agreement moves Key closer to the finish line, said Jeff K. Davis, managing director of Mercer Capital’s Financial Institutions Group. “I think it’s highly likely this deal gets completed.”
Thirteen of the branches are in Erie County, and five are in Niagara County. The Justice Department said the divested assets will include the commercial loans associated with the branches.
One of the branches to be sold, at 55 East Ave. in Lockport, has deep historical roots. It was the former headquarters of Lockport Savings Bank, before the bank – since rebranded First Niagara – moved its headquarters to the Town of Pendleton, and then to Larkinville in Buffalo.
“It’s certainly sad to see the presence of First Niagara leave East Avenue, which is where Lockport Savings Bank started,” said Lockport Mayor Anne E. McCaffrey.
Northwest, based in Warren, Pa., has 150 full-service offices and seven drive-up facilities operating under the Northwest Bank name in New York, Pennsylvania, Ohio and Maryland.
Northwest ranked No. 7 in deposit market share in the Buffalo Niagara region, with only about 0.63 percent, according to the most recent data from the Federal Deposit Insurance Corp. The bank has eight branches in the region, and is adding a brand-new location in Orchard Park – an uncommon step at a time when many banks are trimming their branch networks.
William J. Wagner, Northwest’s chairman, president and CEO, said Northwest would keep all 18 branches open – it doesn’t plan to resell any of them to another bank – and maintain their 180 employees.
“It’s just a good market for a community bank such as Northwest, which is what spurred our initial interest,” Wagner said.
Wagner said that some of the branches being acquired are close to existing Northwest locations, “but they’re great branches with pretty substantial transaction volumes, so we don’t see that we’ll be closing any of the offices. We think that the combined network is just terrific for us.”
Northwest will step up its presence in a region where M&T is the market leader, followed by a stronger Key at No. 2 if the takeover of First Niagara is approved. “I think the unique feature of that is we fill a niche between those large banks – M&T and Key and Bank of America – and then the smaller banks that operate in the market,” Wagner said. “I think there’s just a great niche for us to fill there as a large community bank to offer things that the larger banks are not focused on and that the smaller banks possibly don’t offer.”
First Niagara ranks No. 2 in the region in deposit market share, and Key ranks No. 3. They would have a combined market share of 35 percent – before accounting for the branch sales – behind market leader M&T Bank Corp.’s 51 percent, according to FDIC data. The deal will make Key the 13th-largest bank in the country, with about $135 billion in assets, nearly $100 billion in deposits, and more than 1,000 branches in 15 states.
The Federal Reserve does not publicly discuss its approval process, so it is not known when its decision might be announced. Key’s Mooney recently said she was not aware of any issues that could delay the deal.
As for the branches, the sale will put 18 locations into the hands of a competitor to help maintain customer choice.
“Economists certainly believe that the more competitors you have, the better it is for consumers,” said John Wilcox, a professor in SUNY Buffalo State’s economics and finance department. “What the Justice Department is attempting to do is keep a certain number of competitors” in the market.
The Justice Department agreement calls for the two banks to sell or lease any branches closed within two years of the deal in New York State to other financial institutions. Wilcox said that was another measure meant to safeguard competition after the deal closes.
Key and First Niagara have worked steadily toward completing their deal since announcing it last October.
Shareholders for both companies approved the deal in separate votes in March. That same month, Key rolled out a five-year community benefits plan that included $5.8 billion in loans and investment directed to markets where a combined Key-First Niagara would operate, addressing community groups’ concerns.
Davis, of Mercer Capital, said that was an example of how banks these days are more “proactive” about involving community groups in the process, rather than waiting for objections to arise and trying to respond.
Wilcox said Key seems to have handled the acquisition process well as it seeks all the necessary approvals. “It looks like this acquisition will get done within a year” of when it was announced, he said.
Key has not yet announced how many jobs it will cut in the merger, but it has pledged to keep at least some jobs, such as in First Niagara’s mortgage operations, in Buffalo.
Once Key completes the deal, Wilcox said, the bank will face higher expectations for civic and community involvement in the region. “They are going to be a very strong second” in deposit market share, he said.
First Niagara will release its first-quarter results Friday. Key will hold its annual shareholders meeting May 19 in Cleveland.