Enlarge This ImageIt's an important deal for sure. But calling it a game-changer for bank M&A might be premature.
First Niagara Financial Group Inc.'s agreement to pay $1.5 billion for NewAlliance Bancshares Inc. is the largest regular bank acquisition in two years. It sets a precedent for other lenders eager to grow by buying good companies, not failures. That makes it a banner transaction.
But it isn't likely to unleash a wave of pent-up deal activity because it indicates the market is only gelling for buyers and sellers that meet some rather stringent criteria, experts said.
Those include: Be somewhat small, profitable and on good terms with regulators. Don't have too many loan problems. Don't owe the government any bailout money. Operate in the Northeast. Being a serial acquirer helps, too.
First Niagara, of Buffalo, fits the profile, experts said. The $20.5 billion-asset institution returned its federal aid last year and is already one of the rare banks to buy a nonfailed bank since the start of the financial crisis. For its part, so had NewAlliance of New Haven. It has stayed profitable through the downturn, and it was one of the few lenders to actually expand its loan book last quarter.
The transaction — should it close next year as expected — would be a turning point for First Niagara by transforming it into a regional powerhouse in one of the most affluent regions of the country. Its impact on the broader mergers and acquisitions market, though influential, is not yet clear.
There just aren't enough parties that have the financial heft to buy another bank right now, according to William Schwartz, senior vice president of the ratings agency DBRS Inc. High unemployment, a stagnant economy and still-elevated loan losses mean that there aren't a whole lot of good banks worth buying at the moment either, he said.
"I don't know that we're going to see an avalanche of transactions," Schwartz said.
There are other limiting factors. Most of the banks healthy enough to buy are in the Northeast — as that region hasn't suffered as badly as other parts of the country during the recession.
And regular mergers are mostly feasible for banks with assets of $20 billion or less, Schwartz said. Most of the big regional banks are either bogged down with loan problems or still holding their federal bailout money, two characteristics that aren't conducive to doing a deal. The four largest banking companies — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. Inc. — are off the deal market for a while as well. They're either committed to getting smaller or hold too many deposits, which restricts them from collecting any more through acquisitions.
The First Niagara deal is still a significant development in the stagnant bank M&A market, which has been modestly rebounding this year after coming to a virtual standstill two years ago. It's not he first sign of life, either. There's another New England banking company that's been on the prowl for deals lately: People's United Financial. of Bridgeport, Conn. In July People's United said it agreed to pay some $156 million for struggling banks on Long Island and in Massachusetts.
The First Niagara deal is more important than that one, though, experts said. First of all, it is much bigger. It also ramps up pressure on Northeastern banks to start looking for deals now that they have to worry about getting outflanked by two big, insurgent players. Furthermore, it establishes a market price for a bank with 88 branches and $8.7 billion of assets.
