KeyCorp, First Niagara CEOs discuss Key’s pending $4B acquisition

SYRACUSE — It’s a deal that helps KeyBank grow in upstate New York and helps First Niagara become the “digitally progressive, full-fledged commercial bank” that it wants to be.

 

Those are the views of Beth Mooney, chairman and CEO of KeyCorp, and Gary Crosby, president and CEO of First Niagara Financial Group.

 

KeyCorp (NYSE: KEY) on Oct. 30 agreed to acquire First Niagara Financial Group Inc. (NASDAQ: FNFG) in a cash and stock transaction valued at about $4.1 billion.

 

Both CEOs spoke with CNYBJ on Nov. 3 at the Sheraton Syracuse University Hotel & Conference Center. The banking-company leaders were addressing employee town hall meetings in the facility following the announced acquisition. 

 

Cleveland, Ohio–based KeyCorp is the parent company of KeyBank, while Buffalo–based First Niagara Financial Group is the parent company of First Niagara Bank. 

Each bank is ranked in the top 5 in deposit market share in the 16-county Central New York area.

 

The acquisition is subject to customary closing conditions, including regulatory approvals and approval by KeyCorp and First Niagara shareholders.

 

KeyCorp expects the transaction to close in the third quarter of 2016, the banking company said in a news release issued Oct. 30.

 

CEOs discuss deal

The board of directors at First Niagara Financial Group determined that selling the bank would be the best course of action in the current “interest-rate environment,” says Crosby. 

 

He noted that First Niagara in January 2014 had chartered a course to become a “digitally progressive, full-fledged commercial bank” but also acknowledged “all the things that we still have left to do” to reach that goal.

 

“If First Niagara had been more of a full- fledged commercial bank than it is right now, it might have been able to weather this storm, but it appears that this storm is going to go on for a long time to come in terms of a difficult interest-rate environment … and Key is that digitally progressive, full-fledged commercial bank that we aspired to be,” says Crosby, who will leave the company once the acquisition closes.

 

Crosby explained the impact of interest rates this way, “It is a very difficult time for banks because banks make a lot of their revenue on spread, the difference between the short-term and the long-term rates and that’s been compressing … that spread’s been getting smaller and smaller and it’s impossible to make it up on volume.” 

 

As a bank that already has a big presence in upstate New York, Mooney sees the acquisition as an investment to help KeyCorp “grow faster.”

 

“We’re already a strong bank. We’ve got strong teams here. And what we get is more branches, more customers, more employees. We get larger in upstate New York. We’ve got brand recognition … We have complementary business models,” says Mooney.

 

Consolidation

When asked about branch closings, Mooney said she would call it a “consolidation.”

 

“Odds are we will be looking at areas where we overlap and figure out which branch is the best of the breed and that we can consolidate a handful of customers into. That is part of it,” says Mooney.

 

Any plans for branch closings will happen “later in the process,” she added.

 

The KeyCorp CEO also notes that banks normally see “high turnover” in their branch networks. 

 

“What we’ve found as a practical matter, because of branch networks and how they work, we typically have been able to make room for everybody,” says Mooney.

In its Oct. 30 news release, KeyCorp notes the acquisition diversifies Key’s loan portfolio, strengthens its core retail-deposit franchise, and provides “expanded scale.”

 

Upon completion of the transaction, the combined banking company will have about $99.8 billion in deposits, $83.6 billion in loans, and 1,366 branches across 15 states.

 

 It will have about $135 billion of total assets providing “increased operating leverage to deliver improved financial performance.” The combined bank will be the 13th largest commercial bank headquartered in the U.S.

 

Regional bank

The acquisition will create a “leading” regional bank to serve 3 million clients across the Northeast, Mid-Atlantic, Midwest, and Pacific Northwest, KeyCorp contended.

 

 It will make KeyCorp a leading bank in upstate New York, with a “strong” market presence in Syracuse, Buffalo, Albany, and Rochester, the company boasted.

KeyCorp had total assets of more than $95 billion as of Sept. 30, according to its news release.

 

First Niagara says it is a multi-state, community-oriented bank with about 394 branches, $39 billion in assets, $29 billion in deposits, and about 5,400 employees across New York, Pennsylvania, Connecticut, and Massachusetts.

 

KeyCorp will also expand its operations to markets throughout Pennsylvania, Massachusetts, and Connecticut, the company said.

 

The boards of directors of both banking companies “unanimously” approved the acquisition agreement, according to Key.

 

KeyCorp expects the acquisition to add to its earnings per share in 2017, excluding one-time charges, and anticipates the transaction to deliver an “attractive” internal rate of return of about 15 percent, according to its release.

 

Shareholders of both companies will benefit from annual cost savings in excess of $400 million from “maximizing efficiencies of technology infrastructure, [and] procurement savings across the combined organization,” Key said.

 

Under the terms of the agreement, First Niagara shareholders will receive 0.68 KeyCorp shares and $2.30 in cash for each First Niagara common share. 

 

The per-share consideration is valued at $11.40 per share based on the closing price of KeyCorp common stock on Oct. 29.

 

In conjunction with the closing of the transaction, KeyCorp expects three members of the First Niagara board of directors to join the KeyCorp board, “which will be expanded accordingly.”

 

If it terminates the merger agreement, First Niagara has to pay KeyCorp a termination fee of $137.5 million, under certain circumstances, according to the Form 8-K that First Niagara filed with the U.S. Securities & Exchange Commission.