First Niagara's Sale Brings Tumultuous Tale to an End

What a long, strange trip it has been for First Niagara in Buffalo, N.Y.

The $39 billion-asset company's agreement to sell itself to KeyCorp in Cleveland for $4.1 billion ends a 12-year period that can fairly be described as a roller coaster.

First Niagara's narrative has run the gamut of issues, ranging from growing too fast and the trials of the financial crisis to a leader's suicide and suffering from the rising cost of technology. To be sure, First Niagara final years were anything but boring.

The drama began in August 2003 when, under the leadership of then-CEO Bill Swan, First Niagara agreed to buy the $1 billion-asset Troy Financial in a deal that was its biggest at the time. A few days later, Swan — who was also chaired the St. Bonaventure University board of trustees — took his life in the wake of a basketball scandal at his alma mater.

Paul Kolkmeyer succeeded Swan and, in January 2004, John Koelmel had become the company's chief financial officer. Koelmel's hiring was notable since he would eventually usher in a period of accelerated growth and subsequent upheaval.

Koelmel's ascension to CEO took place in December 2006, when Kolkmeyer was forced out. It didn't take long for Koelmel, once managing partner of KPMG's Buffalo office, to put his stamp on the company. After about nine months on the job, he agreed to buy Great Lakes Bancorp.

The deal was small, but it was the first of many increasingly aggressive deals for Koelmel.

In April 2009, First Niagara agreed to buy 57 National City branches around Pittsburgh, along with nearly $4 billion in deposits, that were being divested by PNC Financial Services Group. A few months later, First Niagara hammered out a deal to buy Harleysville National, which had a big presence in Philadelphia, for $237 million.

The buying spree initially received kudos from investors, and American Banker named Koelmel one of its community bankers of the year in 2009.

"I enjoy playing offense," Koelmel said in his interview for the honor. "I'm a shooter."

Koelmel kept looking to score baskets, all the while taking bigger shots. In August 2010, he agreed to pay $1.5 billion for the $8.7 billion-asset NewAlliance Bancshares in New Haven, Conn., in a deal that introduced First Niagara to New England.

As is often the case for serial acquirers, the last deal pushed First Niagara over the edge.

HSBC put 195 U.S. branches on the auction block in June 2011. First Niagara walked away with the deal after agreeing to shell out $1 billion for the locations. The deal also included the naming rights to the Buffalo Sabres' hockey arena.

The branch deal, combined with another round of domestic and global upheaval, would bring about Koelmel's demise.

First, the European debt crisis emerged in late 2011, not long after First Niagara announced the HSBC deal. Koelmel had planned to finance the deal by selling branches and issuing up to $1.2 billion of equity and debt. But the stock market tanked, taking First Niagara's shares down with it.

The Justice Department then ordered First Niagara to divest 26 of the acquired branches to address antitrust concerns. First Niagara eventually cut deals with three different banks — including Key — to sell those offices, plus dozens more.

The overall math didn't work in First Niagara's favor, given that the company, which bought the HSBC deposits for a 6.7% premium, ended up selling divested deposits to Key at a 4.6% premium. First Niagara would later report quarterly losses and halve its dividend; it eventually began to close branches and fire workers to save money.

Koelmel acknowledged that he was taking a beating.

"Have we been kicked around a little more by the Street? Yes," he told American Banker in a January 2012 interview.

Even First Niagara's fellow Buffalonians couldn't resist taking a shot at the bank's troubles.

Robert Wilmers, the longtime chairman and CEO of Buffalo's largest banking company, M&T Bank, wrote in his March 2013 shareholder letter that M&T bowed out of bidding for the HSBC branches because its offer "fell short of the eventual pricing … [and] some of the very concerns that led to our skittish approach towards the transaction have proven beneficial in the aftermath."

Only a few days after Wilmers' letter was released, Koelmel was forced out. Few analysts and investors were surprised.

"Our sense was that the company under Koelmel pursued growth for the sake of growth," Citigroup analyst Josh Levin wrote in a research note at the time.

Though it took them nine months to make a decision, the board replaced Koelmel in December 2013 with Gary Crosby, First Niagara's chief administrative and operations officer. It didn't take long before Crosby, rumored to be reluctant to take the CEO role permanently, would be embroiled in his own controversy.

Barely a month on the job, Crosby unveiled a plan to spend $200 million to $250 million to upgrade First Niagara's technology, with the ultimate goal of reducing long-term expenses.

Analysts openly wonder why First Niagara, which was still reeling from Koelmel's buying binge, would take on such an ambitious effort rather than look to spread out the cost over time.

"Nobody is undertaking a company-wide [overhaul] to their entire platform the way First Niagara is," Damon DelMonte, an analyst at Keefe, Bruyette & Woods, told American Banker in March 2014.

Crosby was likely left with no choice but to tackle the technology issue in one fell swoop, Matthew Schultheis, an analyst at Boenning & Scattergood, said in an interview Friday.

"It's obvious by the depth of what they were going through that they had not made the proper systems investments," Schultheis said. "It was preventing them from efficiently delivering product."

Still the surprises kept coming under Crosby, with perhaps the worst news tied to the HSBC branch deal. Last October, First Niagara said it would record an $800 million goodwill impairment charge to write down the value of the branches and to account for its own declining stock price.

Less than a month later, the company increased the size of the goodwill impairment charge to $1.1 billion, while also booking a $45 million reserve to correct a problem with a so-called "process issue" tied to customer deposit accounts. Though the size of the reserve was later cut to $22 million, First Niagara has never provided a full explanation of what happened.

The problems continued early this year. In February, First Niagara said that it had overstated its allowance for loan and lease losses from the middle of 2013 to the end of 2014; the overstatement was caused by the "misconduct of a mid-level employee," who was fired. First Niagara later revised the amount of its allowance, reducing it by $7 million.

First Niagara was ultimately done in by problems of its own making, Schultheis said. It appears that Crosby and the First Niagara board came to the conclusion that it would take too long to fix the myriad issues and that it was time to throw in the towel.

"This is a company that doesn't really have great return-on-assets metrics and it doesn't have a tremendous outlook for earnings growth," Schultheis said. "When that happens, you stop being able to justify your independence."