As its name suggests, Business First Bank has positioned and promoted itself since the day it first opened its doors as a commercial lending institution with a focus on business clients.
So the July 28 announcement that the nine-year-old institution is merging with American Gateway Bank—a century-old community bank with deep roots in West Baton Rouge Parish and a heavy emphasis on retail customers—may have seemed surprising.
But the deal, which is not so much a merger as an acquisition of American Gateway by the larger, better-capitalized Business First, isn’t as incongruous as it might at first appear. Mergers and acquisitions are increasingly common among small and midsize banks these days, and both local institutions stand to benefit from the transaction.
There are a couple of reasons. For one, the banking landscape has changed significantly since Business First’s initial days in the early 2000s. Chronically low interest rates—though good for consumers—are taking a toll on bank earnings, making it harder for smaller institutions, in particular, to show a profit on their loans.
Second, tough federal regulations passed in the wake of the banking crisis of 2008 have made it more expensive for banks to do business. They’ve had to beef up their compliance and, in some cases, IT departments, adding a new layer of expenses at a time when they’re already being squeezed by low rates.
Deals like this one make sense in this climate.
“The larger banks with more assets are better able to spread those costs around,” says Jonathan Briggs, managing partner of Chaffe and Associates, an investment banking firm in New Orleans. “That’s really what’s behind acquisitions like this one and others we’ve seen lately.”
Terms of the American Gateway-Business First deal were not disclosed and, since neither institution is publicly traded, they likely will not be. But when the acquisition is completed and approved by shareholders and regulators—by the end of the year, bank executives hope—the new Business First Bank will have assets of more than $1.1 billion, $870 million in deposits, $700 million in loans and $100 million in equity, with 16 branches.
The new, combined institution will operate as Business First Bank, and Business First CEO Jude Melville will remain at the helm. American Gateway’s longtime CEO Don Ayres is retiring.
Melville and Ayres didn’t know each other until early this year, when the two had lunch. Melville had extended the invitation and was the one, at that meeting, to float the idea of the acquisition. American Gateway wasn’t shopping the bank at the time, but Ayres was open to the suggestion.
“We have had discussions from time to time with various banks that have expressed an interest,” he says. “This one seemed to make a lot of sense.”
As they have said in their press announcements, the deal constitutes a proverbial win-win for both institutions. Business First has a heavier emphasis on commercial and industrial lending; American Gateway brings more retail products and core deposits. Business First has six branches strategically positioned around the state, with just one branch in each city. American Gateway has 10 branches, all in the Capital Region.
“They have a depth of coverage to match our breadth,” Melville says. “They have a strong footprint where they began, which is West Baton Rouge, they’ve got branches in the heart of Baton Rouge proper, and they’ve made investments in areas where Baton Rouge is growing. They’ve done a good job of penetrating the market in that sense.”
In the case of Business First, there was another factor. The bank is in a growth mode and needs more retail deposits to fuel its expansion. Because Business First has not been a true consumer bank, it doesn’t have the deposit base it needs to grow. American Gateway does.
“This is a maturation for us,” Melville says. “For us to, long-term, be Louisiana’s best commercial bank, we need a certain robustness of the balance sheet and diversification.”
While the American Gateway deal wasn’t specifically part of Business First’s long-term strategy, the bank has long had plans for some sort of merger or “partnership.” It just had to wait for the right time and the right partner.
From American Gateway’s perspective, the deal made sense for several reasons. The regulatory climate is making it increasingly difficult for small banks to compete.
Perhaps more significantly, American Gateway ran into regulatory problems in the wake of the 2008 banking crisis. In December 2011, the Federal Deposit Insurance Corp. placed it under a consent order, requiring it to address some $35 million in problem loans that, at the time, accounted for about 11% of the bank’s total portfolio. The order directed American Gateway to outline a plan to improve the quality of the loans, implement the plan according to a timeline and maintain a minimum capital-to-asset ratio. The bank complied, and in February 2013 the consent order was lifted.
In the 18 months since, the bank has continued to strengthen its balance sheet. Though assets were down more than 8% in 2013, to $367.4 million, and deposits were down nearly 8%, to $264 million, American Gateway’s performance has improved, which is the more telling measure. Its return on average assets has increased annually since 2011 and was 53% last year.
“We’ve had to work our way through it but we have and we’re in pretty good shape now,” Ayres say. “We didn’t have to sell. We chose to sell.”
One of the looming questions in the wake of the acquisition concerns what will happen to all the branches and more than 190 employees. For now, all 10 American Gateway branches and six Business First locations will remain open. Most employees will keep their jobs, according to Melville. As for back-office functions such as IT, marketing and HR, he says there is room for both staffs, at least for now.
“This is a significant enough deal that we’re going to need the help,” he says. “[American Gateway] brings deposit operations and branch management skill that we haven’t had to develop, so we think we will need the help of their employees. This transaction is not about cost savings but building a foundation for growth.”
It’s not clear what the future holds for American Gateway’s upper-level management. Melville says Business First looks forward to working with American Gateway’s senior management, though he declines to discuss specifics. He also suggests that at some point in the future, the bank will re-evaluate its operations and where things stand.
“It wouldn’t be responsible for me to say there won’t be any change,” he says. For now, though, all those changes are couched in very positive terms. Melville says more such positive developments could be in the not-too-distant future.
“Because of some of the dynamics in the industry there should be other opportunities throughout our footprint over the years,” he says. “We think we have the focus, the right niche, younger management team—and hope there will be other opportunities.”
