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8.1.2023 / Gateway in the News

Top banks $2B-$10B: A Revamped Mortgage Lender's Outsize Returns

By Sabrina Lee: July 31, 2023, 2:21 PM EDT - 3 Min Read

A top bank isn't always the highest flier, but one that can survive the tough periods in a more turbulent economy.

That's the story of Gateway First in Jenks, Oklahoma, the No. 1 bank on the 2022 list of top-performing banks with $2 billion to $10 billion of assets compiled by the consulting firm Capital Performance Group. The list ranks the banks by their three-year average return on average equity. The $2.1 billion-asset Gateway's three-year average ROAE of 25.36% put it at the top of the list.

But compared to its top-performing peers that hovered in the 20% to 30% range in the last three years, Gateway First had a very different journey. Its ROAE was slashed in half from 2020 to 2021, going from 45.66% to 26.58%. This then plummeted down to 3.84% in 2022.

"I don't think there's any company I've seen that has been through more change in the last five years than we have," said Scott Gesell, CEO of Gateway First Bank. This included changes brought on by an acquisition and a change in strategy.

"But we've weathered the storm," Gesell added. "And it's because we got great people."

The bank, originally an independent mortgage company called Gateway Mortgage Group, acquired Farmers Exchange Bank and became Gateway First Bank in 2019. Gateway First's dominance in the mortgage market proved to be a boon during the pandemic when rates were cut in an attempt to spur economic activity. In 2020, the 30-year fixed-rate mortgage fell below 3% for the first time, and then hit an all-time low of 2.65% in January 2021.

Gesell noted that those were some of the "best years in the history of mortgage lending." The bank's mortgage loans peaked at $11.8 billion dollars in the middle of 2020, he added.

Then came the end of 2021, when the bank's mortgage loans fell to only $4 billion. "It was a transition year away from that and into kind of the worst year in mortgage banking, probably since 2008," he said.

Interest rates have spiked to more than 7% this year. Ninety-nine percent of borrowers had a mortgage rate lower than 6% or the current market rate, according to Goldman Sachs earlier this year. This has deterred refinancing, with the number of these loans dropping from 1.8 million in the first quarter of 2021 to just 9,700 in the fourth quarter of 2022. Gesell called it a "perfect storm in the mortgage industry today."

Gateway has made efforts to diversify its balance sheet by racking up more commercial loans while maintaining and monitoring its current mortgage portfolio. Gesell highlighted that mortgage banking is a more "fickle and volatile business" than other lines of business.

Steven Reider, president of the consulting firm Bancography, said that facing a dearth of refinancing and mortgage activity, it's good for a bank to look for other revenue streams.

"There's a benefit from diversification because all of our business lines and all our economic sectors don't tend to move in lockstep," he added. "But it takes time to build the product. It takes time to build the personnel."

The industries of Gateway's commercial loans are diverse, according to Gesell, ranging from hospitality to energy lending. Meanwhile, the bank has steered clear from lending on commercial office real estate given the uncertainty of that business right now. Remote work has persisted since the pandemic, and office vacancies have reached an all-time high at 16.1% in the first quarter.

Besides diversifying its loan portfolio, the company also cut operations and staffing since the mortgage boom ended. The company cut its number of mortgage centers from 170 to 125 and trimmed its headcount from 1,800 employees who work on mortgage originations to 1,100.

"It's a tough deal but people know that we aren't doing it lightly," added Gesell. "The nice thing is we had a couple good years that allowed us to buffer and soft-land the process of downsizing."

Gateway's near-future growth strategy will continue to focus on commercial lending, while fortifying its deposit base — the bank currently has one of the highest loan-to-deposit ratios in the top-performing banks ranking at around 140%. Gesell said that they will be able to do this through organic customer growth and acquisitions of banks heavier on deposits than loans. He is aiming to decrease Gateway's loan-to-deposit ratio to 90% by the end of 2024.

"That's sort of been the history of the organization. There has been a commitment to reinvesting in the organization on an ongoing basis because you want to maintain yourself in a position to continue to grow," said Gesell.

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