Key Bank to buy First Niagara for $4.1B, $11.40/share (Updates)

Keycorp, a Cleveland-based banking company, says this morning it has agreed to pay $4.1 billion, or $11.40 in cash and stock, for Buffalo-based First Niagara Corp. and its nearly 400 branches in Eastern states, including 58 in eastern Pennsylvania.  Statement here.

It's bad news for Buffalo, where First Niagara is based: Not only are headquarters jobs typically stripped when one bank buys another; Key boss Beth Mooney told investors that 120 First Niagara branches are within 2 miles of a Key branch; many will close, a few might be "divested" to another bank. She hopes to chop $400 million in yearly spending, about 40% of First Niagara's budget.

The Philadelphia area will likely see less impact. Key doesn't have branches here -- Mooney called First Niagara's eastern Pennsylvania and Connecticut territories "attractive new markets" -- plus First Niagara has already stripped its operations here:
- First Niagara has 43 branches with $2.1 billion in deposits in the Phila metro area as of June 30
- Predecessor Harleysville National Bank had 62 branches with $3.2 billion in deposits in the Phila metro area in 2009, before it was acquired by First Niagara. First Niagara also took over (and has consolidated) Harleysville branches in the Reading, Lehigh Valley and Pocono areas.

Although First Niagara was well-known to be looking for a buyer, the move still surprised analysts like Matt Schultheis at Boenning & Scattergood, West Conshohocken, who told clients last week that the bank would have a tough time finding a new owner at a price it would likely accept. Schultheis also noted First Niagara had been upgrading its technology (the "Common Rails" initative) and boosting loan growth (he projected 7.5% annually) as if it planned to stay in business.

The stock had lately traded at a higher price than similarly low-profit peers, but a discount to the earning power of its assets ("tangible book value"), Schultheis wrote. (The takeout price is also below First Niagara's 2014 and pre-recession highs.) He added that the bank faced a "steady grind" if it were to boost profits and remain independent.

First Niagara, like other regional banks, has been squeezed between low interest rates, sluggish loan demand in its upstate New York and Pennsylvania markets, and impatient activist investors who would rather cash out now than gamble on growth after years of low bank profits.