One of the fundamental questions in valuing a business is whether the whole is worth more than the sum of its parts.
In striking a low-premium deal for Great Lakes Bancorp in Buffalo, John R. Koelmel, First Niagara Financial Group Inc.’s president and chief executive, made it clear that branches and deposits, and not the franchise, were his targets.
The $8 billion-asset First Niagara announced Monday that it would buy the $892 million-asset Great Lakes, the parent of Greater Buffalo Savings Bank, for $153 million in cash and stock. The acquisition would be First Niagara’s first since 2005, when it acquired two banks in the Albany, N.Y., area, and the Lockport company’s first in the Buffalo region since 2000.
Great Lakes has not been particularly profitable of late, and its efficiency ratio was above 100% last quarter. But 10 of Greater Buffalo Savings’ 16 branches are within a mile of a First Niagara branch and would be closed, Mr. Koelmel said in an interview on Monday. In fact, he said that First Niagara expects to trim about 70% of the expenses from Great Lakes.
“That’s what drives the cost saves up from what you would typically see,” he said. “We are processing this much more as a branch and deposit transaction than a whole-bank deal.”
Great Lakes’ performance is not much of a factor for First Niagara, Mr. Koelmel said. “Their historical operational pattern really wasn’t a driver for us.”
First Niagara is “very excited” about the $650 million of deposits it would gain, he said. The deposits would raise its share of the Buffalo market to just under 8% — a “meaningful” boost in an area dominated by M&T Bank Corp. and HSBC Holdings PLC.
Mr. Koelmel said the acquisition would solidify his company’s position as the No. 4 banking company by deposits among the 22 in the Buffalo region.
HSBC and M&T collectively have 68% of the deposits in the market, followed by KeyCorp, which has 8.52%, according to data from the Federal Deposit Insurance Corp. First Niagara has the fourth-largest share, 5%, and Greater Buffalo Savings has the eighth-largest, 2.33%.
“That will really ramp us up in terms of local market share,” Mr. Koelmel said. “It puts us in a much better position and accelerates what otherwise would be multiyear organic growth. And all that at what we believe is a relatively opportunistic price.”
Andrew W. Dorn Jr., the president and CEO of Great Lakes and Greater Buffalo Savings, said the sale came about because of the tough operating environment.
“We got stuck in this margin squeeze like everybody else did,” he said Monday.
Mr. Dorn had helped start Great Lakes in 1999 after selling his previous company, Jamestown Savings Bank, to Northwest Savings Bank in Warren, Pa., in 1998. He said he would not join First Niagara and is unsure what he would do next.
First Niagara said it would pay $14 for each of Great Lakes’ shares, or a 17% premium over their closing price Friday. Half of the price would be paid in cash, and the other half would be paid in First Niagara stock.
The price works out to 1.13 times book value and a 3.62% core deposit premium.
Great Lakes’ shares rose 9.2% in heavy trading Monday on news of the deal, to close at $13.10. First Niagara’s shares fell 3.7%, to close at $13.39.
Jared Shaw, an analyst at KBW Inc.’s Keefe, Bruyette & Woods Inc., said Great Lakes had been known for aggressive pricing on loans and deposits, so another benefit to the deal for First Niagara would be eliminating that pricing pressure.
“Greater Buffalo Savings is a relatively small company, but it was a disruptive force in the Buffalo market,” he said. “I think this will probably be seen positively by a bunch of their competitors, because it’ll help them with their own margins.”
Theodore Kovaleff, an analyst at Sky Capital LLC in New York, said a savings rate of 70% might be the best of any acquisition this year. Usually a buyer would consider 40% good, he said.
“Clearly, First Niagara played hardball in the negotiations, buying something for only a tad over their book,” he said.
Richard D. Weiss, an analyst at Janney Montgomery Scott LLC, called the price “reasonable,” given Great Lakes’ balance sheet.
Great Lakes has a securities-to-assets ratio of about 26%, Mr. Weiss said. “So much of their balance sheet was invested in securities,” and he expects First Niagara to sell much of them.
He also said he thinks the pricing is more evidence that sellers are looking at the operating challenges and deciding to get out. “I think there’s going to be more buying opportunities.”
That would be just fine with First Niagara, which Mr. Koelmel said is still in buying mode.
“This does not take us out of the market,” he said.
The acquisition would be immediately accretive to earnings and tangible book value per share.
It is expected to close in the first quarter.
