When MidSouth Bank announced at the end of April it was merging into Hancock Whitney in a stock-for-stock transaction, few in Baton Rouge’s banking community were surprised.
The deal, expected to close late in the third quarter, is effectively an acquisition of the smaller, Lafayette-based MidSouth by the larger Hancock Whitney, which will walk out with an additional $1.7 billion in assets, $900 million in loans, and $1.4 billion in deposits. By fetching MidSouth’s 42 branches between Louisiana and Texas, the move also allows Hancock Whitney to increase its footprint.
At a broader glance, the deal marks the latest in a flurry of mergers and acquisitions in Baton Rouge over the past few decades, and the second so far this year. While two major national banks—Chase and Capital One—still collectively hold more than 50% of the local market share, both are shifting their power and resources out of tertiary markets like Baton Rouge and into bigger urban hubs. That, in turn, has given the Hancock Whitneys and other mid-sized, regionally focused banks the opportunity to expand.
Though some institutions’ aggressive expansion efforts open up the gates for the acquisition of smaller community banks with less resources, local community bankers say deals like the Hancock Whitney-MidSouth merger ultimately make the market a healthier place.
“It’s all positive, from my perspective,” says Gary Littlefield, market president at Gulf Coast Bank and Trust, and chairman of the board of directors for the Louisiana Bankers Association. “We want to see a healthy banking environment, so that’s what we’re dealing with here now.”
The deal is part of a larger, nationally-triggered consolidation wave Baton Rouge’s market has ridden for over 30 years. Some consider it a cyclical phase, with banks merging together and then splintering off into smaller, independent banks every few decades. But the past 10 years have differed in several aspects; namely, which factors have perpetuated the trend toward consolidation.
In 1984, there were 302 commercial banks in Louisiana, carrying some $35 billion in total assets; today, it’s down to 107, and total assets have more than doubled, reaching $72 billion. In the early ’80s, more than 40 banks were headquartered in Baton Rouge; today, just three are.
Much of the consolidation wave can be traced back to a landmark law passed in 1985 that allowed banks to cross both parish and state lines, ushering in an area of increased competition which ultimately resulted in the takeover or closure of many local institutions. Exacerbating the issue was a mid-’80s dive in the state’s economy, when oil prices plummeted to $14 per barrel and banks lost business to energy companies that folded. The nation’s savings and loans industry collapsed in the early ’90s, removing more local lenders.
So why is consolidation still happening today? Many smaller banks are still dealing with the lingering effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, an Obama-era piece of legislation targeting the sectors of the financial system that were believed to have caused the 2008 financial crisis, including banks, mortgage lenders and credit rating agencies. Particularly, the act’s regulatory compliance requirements place a heavy cost burden on community banks and smaller financial institutions, says Littlefield—despite the fact that they played no role in causing the financial crisis.
“Some banks might’ve had two compliance people in their whole bank up until Dodd Frank got passed; by 2013, they’ve got five to seven people working in compliance,” Littlefield says. “For a small community bank, that’s anywhere between $250,000 and $500,000 or above in per-year costs.”
In 2018, Congress passed a new law that rolled back some of Dodd-Frank’s regulations, but Littlefield says the road had already been paved for community banks to latch to the scaleability, technology and other resources larger banks had to offer them.
Moreover, banking, as a whole, is an aging profession. When looking for exit strategies, bank presidents, CEOs and board chairmen often view cashing out as a viable option, given the industry’s dwindling talent pool, fueled largely by previous cuts to institutional training programs.
Others argue the consolidation period is driven not by mergers and acquisitions activity, but by the fewer number of bank charters being granted throughout the state within the past decade.
“The pace of consolidation hasn’t picked up; it’s been pretty constant,” notes Jude Melville, CEO and president of Business First Bank. “But since the financial crisis, new charters haven’t been put into motion, meaning replenishment is the bigger issue.”
In other words, as costly as it is to operate a bank today, it’s even more of an obstacle to start one from scratch. Today’s de novos need more startup capital than those of the ’80s, especially considering all the in-house cybersecurity software now necessary for problems that didn’t exist decades ago.
These considerations push the 13-year-old Business First to be strategic about where it expands, Melville says. The bank’s target growth areas include those along Interstates 10, 12 and 20. Over the past four years, it’s acquired three banks in Baton Rouge, Minden and the greater Monroe area, while also opening branches in New Orleans and Dallas.
The other two existing Baton Rouge-based banks are making moves of their own. Investar Bank is growing its presence along the Interstate 10 corridor—most recently expanding to Lake Charles—in an effort to bridge its presence to the greater Houston market, which it entered in March by acquiring Mainland Bank. Meanwhile, First National Bankers Bank announced last year it was opening a new capital markets office in Memphis.
Doing business in Baton Rouge has proven beneficial, says John Everett, the new Baton Rouge market president of IberiaBank, who pegs “a stable and diversified market” as what attracted the Lafayette-headquartered bank to Louisiana’s capital city.
IberiaBank has grown from a small community bank to the largest bank headquartered in Louisiana, and Baton Rouge’s fifth-largest bank in terms of market share last year. But IberiaBank hasn’t shied away from shrinking its retail footprint; the bank closed or consolidated seven of its Louisiana branches in 2018—including one in Baton Rouge, on Sherwood Forest Boulevard—as part of a long-term strategy to improve efficiency as it focuses on digital banking.
The physical consolidation of banks extends to larger national banks, such as Capital One Bank, which announced it would close its downtown Baton Rouge branch, among others, for the same reason in early 2018.
“Now, you can take a photo of your check and make a deposit on your phone,” Everett says. “Those things have become just as important, if not more so, than brick and mortar.”
Regional banking hasn’t been hit by the same wave of consolidation as community banking, says Regions Bank South Louisiana Area President Danny Montelaro.
Regions right-sized its branch network about five years ago, Montelaro says, and has no plans to build more brick-and-mortar branches in Baton Rouge in the near future. Instead of growth, the bank is focusing on its petrochemical segment—where it’s seen the most growth over the past few years—as well as building its multi-channel portfolio for clients, having recently invested $625 million in technology.
Looking ahead, recent federal actions allow for even more consolidation. In 2017, the Federal Reserve made it easier for banks to merge by lifting the combined size threshold that would trigger a much deeper regulatory probe, from $25 billion in assets to $100 billion.
Even if the consolidation wave is merely cyclical, it would take several critical steps, say bankers, for the industry to return to a period of deconsolidation. These include: a greater investment in institutional education programs, the loosening of tight regulations imposed by Dodd-Frank, and increased assistance to de novo banks, and new charters.
“It will take a greater recognition of the value community banks provide to the country,” says Melville, of Business First. “Community banking is important to who we are as a country.”