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Merger boosts KeyBank

A year ago it added First Niagara in a $4.1B deal

Merger boosts KeyBank

A year ago it added First Niagara in a $4.1B deal

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A lot has changed since KeyCorp. closed on the $4.1 billion acquisition of First Niagara Financial Group Inc. on July 29, 2016.

KeyBank is not only bigger but a stronger bank in Rochester, said James Barger, president of KeyBank’s Rochester market.

Locally the firm employs 400 people and has 35 branches and 44 ATMs here. As of July 20, KeyBank had 18,344 employees companywide. The company said it did not have comparable information from prior to the merger.

“We had a very small market share in Rochester prior to the acquisition,” he said. “Now with the acquisition of First Niagara, we have a much greater market share so Rochester is now a much more significant market than it was before. It makes it easier for us to execute in our commitments to this community because of the resources that we receive.”

According to an October 2016 Federal Deposit Insurance Corp. snapshot of local market share taken before the merger, First Niagara ranked No. 5 with 8.7 percent of market share and deposits in this market of $1.46 billion—an increase from 8.4 percent in 2015 and $1.4 billion.

On the same list KeyBank ranked No. 6 and grew its local market share from 6.5 percent in 2015 to 6.8 percent last year. It also had $1.14 billion in deposits in 2016, compared with $1.1 billion in 2015, according to the report.

Anton Schutz is portfolio manager of Mendon Capital Advisors Corp.

“I think when they first announced the First Niagara deal, even though I think they’ve come pretty close to delivering on everything, the math on the deal wasn’t the best in terms of earn-back,” he said. “And (KeyBank was) reducing trapped capital given what the regulators were making them carry, and I think in today’s world the regulators are being a little more friendly; they’re letting banks give back capital through dividends and buybacks.”

A growth path

The growth has been substantial, Barger said.

“I think the impact has been wonderful,” he said. “I think it’s great for our business. Our business is growing and will continue to grow in this market. You don’t spend $4 billion dollars in the Upstate New York market and expect the status quo.”

Now that KeyBank has grown by adding clients of First Niagara, the focus of the bank has persisted: more growth. There are many opportunities in Rochester to do so, he said.

“Our focus is always to grow our business and have bigger impacts in our community,” he said. “It gives a special flavor to this year because of the acquisition. A lot of that growth is with legacy First Niagara clients and delivering to them the promises of the acquisition.

“Our commitment to Upstate New York is solid and will stay; we are committed for the long haul.”

The customer experience is a major consideration of any acquisition, Schutz said. Now KeyBank has more to offer clients.

“They’re bigger, they’ve got a greater suite of products and their ability to deliver it is a question I just don’t have the answer to—I’m not a customer—but clearly they’ve got more weapons in the arsenal,” Schutz said. “On top of that I think their practices are sounder—the underwriting side of it, putting loans on the books they should be putting on the books versus taking outsized risk.”

“I think as a bank they’re a better bank…has that reached the customer? I think that’s still a question mark,” he added.

After the acquisition, nine branches of KeyBank and First Niagara were consolidated in Rochester.

First Niagara needed a major systems overhaul. The bank waited too long to get up to speed, making the KeyBank merger an ideal option, Schutz said.

“KeyBank is an upgrade over legacy First Niagara,” he said. “I think this is a deeper, stronger organization that has the ability to fund the First Niagara legacy footprint both in operational stability as well as reasonable growth.

“It would have really been a painful upgrade for First Niagara to reinvest to provide a much more upgraded system. It was almost impossible for them to do it on their own.”

Given the consolidations across branches, KeyBank is attempting to sublease facilities to other financial institutions or let the leases naturally expire for those that are shorter term.

Not all smooth

Integration is still in progress, Barger said.

“(Change) doesn’t happen overnight,” he said. “2017 has really been focused on introducing everyone to the KeyBank platform, and I would say we’re probably at the point now where all of our bankers are familiar with that and comfortable with it and we’re now delivering our value proposition in the branches very effectively.”

The merger allowed some banks in the market to gain new clients. That shakeup largely is over, he said.  In all of the overlapped markets, where KeyBank and First Niagara existed, every one —including Rochester—saw deposits in the branches increase.

“Competition is strong; (there are) a lot of great banks here,” Barger said. “There’s a perception when one bank is bought by another bank that there’s disruption. Other banks target the clients of the new combined bank, so we were facing those competitive forces from the moment of the acquisition. I think we’ve gotten through that.

“The transition wasn’t perfect. There were some challenges. I think we aggressively addressed those and we did the best we could, and I think we are where we need to be now.”

All banks face a challenge in this region: growing loans, Schutz said.

“I think one of the challenges in general in the Northeast…is loan growth,” he said. “The economy is growing, but it’s not a torrid growth, so any growth you’re getting … you’re taking it from others.”

The community has responded to the deal in a positive way, Barger said.

“One of the things that surprised me was how much goodwill there was for the acquisition in the community,” Barger said.

PathStone Corp., a nonprofit that provides services to low-income families, has been a customer of KeyBank for over two decades. The acquisition was met with trepidation at first, said Stuart Mitchell, CEO and president of PathStone.

“When Key first went out to indicate they were going to do the buyout, we were concerned about what that would do to the competitiveness of the industry,” he said. “We were one of the organizations that raised questions about that. We were at the table negotiating the relationship that Key eventually came up with that was very satisfactory to what you might call the critics or the fair banking advocates.”

KeyBank also was transparent with PathStone about the deal before it happened, Mitchell said.

“I think that helped alleviate some of the anxiety,” he said. “They really stepped up to the plate with that (fair banking concerns) (and) we were aware of what was going on pretty much through that whole process.”

PathStone also has restarted a homebuyers program the organization had under First Niagara. KeyBank has been there to support the needs of the nonprofit.

“KeyBank has been very attentive to fill the gap,” Mitchell said. “KeyBank has also provided financial support for our first-time homebuyer program for many years. They’ve helped us look through options rather than sell us a particular singular solution.”

Getting First Niagara onto KeyBank systems was difficult. The first day of integration did not go as planned.

“We had a bit of a hiccup on Conversion Day One when we converted all of our customers onto KeyBank’s system,” Barger said. “A lot of people had to wait a long time to get support to get their password reset. It was not smooth and it could have been avoided if we thought about it a little bit better. We identified the problem (and) we fixed it, but to a certain extent the damage had already been done.”

KeyBank took the opportunity to respond. The bank deposited $100 in all customer accounts that were affected by the delays.

“With the $100 came an email from our CEO Beth (Mooney) saying we didn’t meet your expectations, we apologize, we hope to do better going forward. We hope this makes it better, and I was proud of that,” Barger said. “That’s a commitment. You’re facing up to things you didn’t do well and you’re trying to make it better.”

Barger sees growth ahead.

“Three to five years…we’ll be bigger,” he said.

That growth will depend on some factors such as tax cuts, higher short-term rates and a stimulus plan. That combination would help KeyBank, Schutz said.

“Key looks cheap compared to its peers as a stock,” he said. “I think they just have to continue to deliver and then you have to hope for those three things to happen. They have some upside if any of those things come.”

A year later, KeyBank remains dedicated to Rochester, Barger said.

“We are all-in in Rochester,” he said. “We want this community to thrive and we’re going to do everything we can,” he said. “KeyBank just made a $4 billion investment. You can’t get any more direct in your statement about how you feel about a market than that. Now we just have to execute.”

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