KeyCorp to buy First Niagara to create 13th biggest US bank

Reuters: Cleveland-based KeyCorp has agreed to buy First Niagara Financial Group Inc of Buffalo for $ 4.1 billion in the biggest deal this year between two US regional banks.

The deal will create the 13th biggest US-based commercial bank and is the latest in a string of mergers among smaller US banks, spurred by years of near-zero interest rates and higher costs related to stricter regulations imposed since the financial crisis.

KeyCorp offered the equivalent of $ 11.40 per share for First Niagara – 0.68 of its own shares and $ 2.30 in cash, a premium of 9.8% to First Niagara’s closing price on Thursday.

“Expansion into similar, contiguous markets makes sense, but the size of the deal is surprising,” said Jefferies analyst Ken Usdin.

“It will take tight execution with a deal of this size and long time for it to be accretive to earnings.”

While many small banks have been acquired in the last few years, acquisitions of banks with more than $ 1 billion in assets were scarce until this year.

The KeyCorp-First Niagara deal follows New York Community Bancorp Inc’s announcement on Thursday that it would buy Astoria Financial Corp for about $ 2 billion. Both are New York-based banks.

In the biggest deal involving a regional bank this year, Royal Bank of Canada agreed to buy Los Angeles-based City National Corp for $ 5.4 billion.

By some measures, things are looking up for the smaller banks. Credit has improved, moderate loan growth has resumed and they have added to their capital cushions while taking less risk on their balance sheets.

Sustained low interest rates, however, have depressed earnings and banks have lost fee income for debit card transactions and overdraft protection due to new regulations.

KeyCorp said the combined company would have about $ 99.8 billion in deposits, $ 83.6 billion in loans and 1,366 branches across 15 states.

With about $ 135 billion in assets, the combined KeyCorp-First Niagara would be the 13th-largest US-based commercial bank, KeyCorp said.

First Niagara has binged on acquisitions that in retrospect look poorly timed.

The largest of these was in May 2012, when it bought 137 branches from HSBC in secondary and tertiary markets throughout New York State and Connecticut based on the assumption that interest rates would rise faster than they did.

Morgan Stanley and KeyBanc Capital Markets are financial advisers to KeyCorp. J.P. Morgan Securities advised First Niagara.