KeyCorp (NYSE: KEY) has agreed to acquire First Niagara Financial Group Inc. (NASDAQ: FNFG) in a cash and stock transaction valued at about $4.1 billion.
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.
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KeyCorp expects the transaction to close in the third quarter of 2016, the banking company said in a news release issued Friday morning.
With about $135 billion in total assets, the combined bank will be the 13th largest commercial bank headquartered in the U.S., KeyCorp said in the release.
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,” KeyCorp said.
The banking company also expects some branch closures but didn’t mention layoffs in its release.
Shares of KeyCorp fell 96 cents, or more than 7 percent, to $12.42 per share on Friday. Shares of First Niagara Financial Group fell 3 cents, or 0.3 percent, to $10.35.
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 company “unanimously” approved the acquisition agreement, according to KeyCorp.
Rationale
The “compelling” financial rationale for the transaction provides “significant upside potential” for shareholders of both companies, KeyCorp said.
The acquisition diversifies KeyCorp’s loan portfolio; strengthens its core retail-deposit franchise; and provides “expanded scale.”
Upon completion of the transaction, the combined company will have about $99.8 billion in deposits, $83.6 billion in loans and 1,366 branches across 15 states.
The combined company will have about $135 billion of assets providing “increased operating leverage to deliver improved financial performance.”
Terms, reaction
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.”
“Key and First Niagara are a powerful combination, driven by a shared commitment to the clients and to the communities we serve,” Beth Mooney, chairman and CEO of KeyCorp, contended in the news release. “This transformational opportunity will bring compelling and complementary capabilities to our shared 3 million clients, while driving meaningful synergies and enhancing shareholder value. KeyBank and First Niagara both have values-based cultures and a long-term commitment to and experience with the region.”
