Eighteen months ago Troy Financial Corp. brushed off a tentative acquisition inquiry from First Niagara Financial Group Inc. and a hostile bid from a third upstate New York company, Trustco Bank Corp. N.Y.
But times change: On Monday the $1.2 billion-asset thrift announced that it had agreed to sell itself to First Niagara for $356.6 million in cash and stock.
For the $3.6 billion-asset First Niagara, the rationale for its biggest deal ever is clear. Buying Troy Financial, which is named for the city, would give the Lockport company a branch network stretching from Buffalo to Albany and put to work more than $160 million of the $390 million it raised through its second-step conversion in January.
"Since January, Paul Kolkmeyer and I have been very busy, out looking for merger-and-acquisition transactions," William E. Swan, First Niagara's chairman, president, and chief executive officer, said in a conference call Monday. "We had an 'A' list and a 'B' list and Troy was on our 'A' list." (Mr. Kolkmeyer is First Niagara's executive vice president and chief financial officer.)
Troy Financial, the parent of the state's oldest thrift, Troy Savings Bank, has struggled to generate profits in the slow-growing region. Daniel J. Hogarty Jr., its chairman, president, and CEO, did not say what led to the change of heart regarding First Niagara, but Federal Deposit Insurance Corp. statistics show that his company's return on equity is well below that of other thrifts with assets of $1 billion to $5 billion.
But while Troy Financial's results lag the national average, they are typical of many upstate New York banks and thrifts. According to analysts, the economies in large parts of the region - communities such as Binghamton and Utica - are essentially stagnant, making organic growth difficult for banks there.
"I would expect to see more consolidation in upstate New York, just like we're seeing in New England," said Laurie Hunsicker, an analyst at Friedman, Billings Ramsey & Co. in Arlington, Va. "The same players who are driving the merger-and-acquisition market there are looking in New York."
Kevin T. Timmons, an analyst for C.L. King & Associates in Albany, said that the "general tenor of merger activity is picking up."
First Niagara may well be involved in further pairings. Even after accounting for its $33 million January purchase of Finger Lakes Bancorp Inc. of Geneva and the Troy Financial deal, which would use about $166 million in cash, First Niagara still has more than $190 million remaining from its second-step conversion.
"That's plenty of capital to do more deals, continue buying back stock and raise our dividends," Mr. Swan said.
Completion of the First Niagara-Troy deal, which is expected to happen in mid-January, would leave potential buyers few community banks of any size to choose from in the Albany-Schenectady-Troy metropolitan statistical area, also known as New York's capital region. Glenville's Trustco, with assets of $2.7 billion, and the $2.5 billion-asset Hudson River Bancorp in Hudson are in that area but both are more apt to buy than sell, Mr. Timmons said.
He said he had forecast about 10% earnings-per-share growth for Troy Financial over the next year, but he added that much of that growth was being generated by the company's aggressive share-repurchase program.
"The rate environment we've had here has not been conducive to comfort in terms of future earnings," Mr. Timmons said.
That could be why Troy Financial's investment banker, Keefe, Bruyette & Woods Inc., contacted First Niagara last month to gauge its interest in a possible combination, and Mr. Swan said he was quick to respond.
"We made contact and said that we in fact were interested," Mr. Swan said. "After that, we submitted a nonbinding letter of intent … which Troy's board received favorably."
Said Mr. Hogarty, "There is no better partner and no better combination" for Troy Financial.
Each Troy Financial shareholder is to receive 1.3 shares of First Niagara stock and $15.27 in cash. The aggregate deal price of $356.6 million is 2.12 times the seller's book value and represents a 23% premium over its closing stock price on Aug. 8, the day the two sides consummated their agreement.
"I'm very comfortable with the transaction pricing," Mr. Swan said. "It's in line with the market and it provides Troy Financial's shareholders with a fair and equitable return."
The combined company would have assets of $4.9 billion, deposits of $3.3 billion, and a $3 billion loan portfolio.
"It has the potential to be the leading community bank in upstate New York," Mr. Hogarty said.
News of the deal sent Troy Financial's share price soaring. It closed at $35.40, up 23% from Friday's closing price. First Niagara shares were down 2.17%, to $15.30.
The deal would also unite two of the oldest institutions in the state: Troy Savings Bank was founded in 1823 and First Niagara Bank in 1870.
First Niagara plans to merge Troy Savings Bank into First Niagara Bank. Troy Commercial Bank, which Troy Financial founded in 2000 to accept state and municipal deposits, would be renamed First Niagara Commercial Bank.
