At issue, according to the report, is a more than two-year old Justice Department probe into First Niagara's (NASDAQ:FNFG) minority lending practices.
Those regulators who must sign off on KeyCorp's (NYSE:KEY) purchase have questions, but it's not yet known if the scrutiny is holding up the deal which was announced in October, but still a long way from the expected closing date.
It's been nearly a decade since D.C. released a public report on First Niagara's community lending practices, but a 2007 study showed the bank's share of loans in poorer areas was slightly below the industry norm, though it was deemed "adequate."
Sizable bank mergers were supposed to be no-brainers as lenders - weighed down by a sluggish lending environment, overlapping branch networks, and high regulatory costs - sought operating synergies. Unfortunately, regulators since the financial crisis have had different ideas about what banks should be doing with their capital (namely, storing it for a rainy day).
The M&T/Hudson City merger finally getting approval (after a three-year delay), along with quick green lights for a couple of BB&T purchases began to give investors hope, and this week they got KeyCorp (NYSE:KEY) agreeing to buy First Niagara (NASDAQ:FNFG), and New York Community Bancorp's (NYSE:NYCB) deal for Astoria Financial (NYSE:AF).
The reaction: KeyCorp is lower by more than 10% since the news was announced, and First Niagara by more than 6%; NYCB is off nearly 14%, and Astoria 11%.
"This level of selloff is not typical," says Sterne Agee's Peter Winter. "Early reactions to bank transactions often are bumpy," says KeyCorp CEO Beth Mooney.
CLSA's Mike Mayo calls Key's purchase "strategically good," but isn't a fan of the bank's plan to fund a major portion of the deal with stock. NYCB is also funding much of its buy with stock, and the deal includes a cut in the dividend - maybe not the greatest move considering the income-oriented lean of the bank's investor base, says Winter.
Speaking on a post-deal conference call, KeyCorp (KEY -6.9%) CEO Beth Mooney says the purchase of First Niagara (FNFG +0.2%) has been discussed with regulators, and she's not expecting it to get held up the way M&T Bancorp's acquisition of Hudson City was.
The combined bank will be tops in market share in the Buffalo region and other areas in Upstate New York (M&T is currently #1 in Western NY). It also establishes Key in areas like Pittsburgh, Philadelphia, Hartford, and New Haven.
Expect jobs cuts/branch closures, mostly in the Buffalo area as cost savings are hoped to be $400M annually, helping to boost ROTCE by 200 basis points and improve the cash efficiency ratio by 300 bps.
First Niagara (NASDAQ:FNFG) owners will receive 0.68 shares of KeyCorp (NYSE:KEY) and $2.30 in cash for each share of FNFG they hold. Based on KeyCorp's close of $13.39 yesterday, it works out to $11.40 per share for First Niagara vs. its close last night of $10.38, and $9 in September when the bank put itself on the block.
The combined bank will have about $135B in assets, making it the 13th biggest in the U.S.
Annual cost savings are expected to be north of $400M. KeyCorp sees the deal as being accretive to EPS in 2017 and providing IRR of roughly 15%.
Needless to say, regulators must first give their approval, but the deal is hoped to close in Q3 of 2016.
The deal could value First Niagara Financial (FNFG -2.2%) at modest premium to its current market cap of just under $4B, reports the WSJ, which says we could see an official announcement as soon as tomorrow.
Before First Niagara owners are too disappointed, they should be reminded the stock is higher by about 18% since reports of the bank being on the block first hit one month ago.
"First Niagara (FNFG +0.9%) clearly bit off more than they could chew, trying to do four large acquisitions over a three-year period of time," says analyst Robert Wagner. Now it's paying the price, writes Patty Tascarella, in terms of lagging profits and pressure on the management team to turn things around.
If no turnaround, who might be a buyer? It would have to be a sizable player, given FNFG's $38B balance sheet.
Two Ohio-based banks which already have retail presences in Pittsburgh - where Fifth Third operates 59 branches - could make sense, particularly Fifth Third Bank (NASDAQ:FITB), and maybe Huntington Bancshares (NASDAQ:HBAN).
BB&T (NYSE:BBT) is in the process of buying eastern-PA's Susquehanna Bancshares, and might want to extend its footprint further west, but it could be another few years before BB&T is ready for another major deal.
Then there's Cleveland-based KeyCorp (NYSE:KEY) which may want to move into a contiguous market, and New York Community Bancorp (NYSE:NYCB) which is based in the same state as First Niagara.