Regulatory environment clouds closing timeline for First Guaranty-Lone Star deal

Hammond, La.-based First Guaranty Bancshares Inc. hopes to close its acquisition of Lone Star Bank in the second quarter or third quarter but is unsure of the timeline because of the current regulatory environment, executives said.

In an unusual move, the bank did not provide an expected closing time frame when it announced the merger agreement in a press release on Jan. 9. In an interview with S&P Global Market Intelligence, the top executive of First Guaranty attributed the omission to uncertainty regarding the regulatory environment, but provided an estimate of the second or third quarter.

"Regulatory uncertainty — that's it," First Guaranty Bancshares Vice Chairman, President and CEO Alton Lewis Jr. said in an interview. "We would love to close tomorrow."

"If they approve it faster, we'll close faster," he added. "I can only look at our past experience."

First Guaranty's last bank deal — an acquisition of Marksville, La.-based Union Bancshares Inc. in 2019 — closed a little over three months after announcement. Prior to that, the company acquired McKinney, Texas-based Premier Bancshares Inc. in 2017, which took just under five months to close.

Jacob Thompson, managing director of the Financial Institutions Group at SAMCO Capital Markets Inc., said First Guaranty should not run into any regulatory delays for its latest transaction, even amid increased regulatory scrutiny of bank M&A, which is causing some deals to take longer to close. The second- or third-quarter close time frame seems reasonable and nothing "jumps off the page as something that might cause a regulatory delay," he said. Thompson did not advise on this transaction.

"Typically you wouldn't necessarily see that with smaller deals because they don't necessarily face the same type of scrutiny, but I think the regulatory approval process is certainly lengthened from what we've seen historically," Thompson said in an interview.

Underwater bond books a headwind to dealmaking

First Guaranty will move into the Houston metropolitan statistical area with the "solid, clean bank," Lewis said.

"It was a good way for us to get into the Houston market without selling our souls to do it," he said.

And the Louisiana-based company has an eye for more geographic expansion. The company just secured regulatory approval to open branches in Kentucky and West Virginia, and it is open to more growth in Texas, Louisiana and northwest Florida through M&A, Lewis told S&P Global Market Intelligence.

"We are actively talking to other M&A candidates," but underwater bond books are hindering "great opportunities," he said.

"There's several banks that we've talked to that are really good but who basically have said, 'With our investment portfolio valued down as far as it is right now, we would rather wait until it bounces back some before we did anything,'" Lewis said. "You have a lot of smaller banks that have big investment portfolios that they've survived off of for years. And they don't want to sell and take a 25% loss on it right now. They want to sell, but they would rather wait until this passes."

Attractive, low risk deal in the Lone Star state

The Texas market "has a lot of growth in it," said Kirk Hovde, managing principal and head of investment banking at the Hovde Group LLC. "It seems like a very simple deal that should be very easy for First Guaranty to manage and integrate and not a ton of risk."

Bank M&A activity has slowed drastically, partly as a result of economic uncertainty and fear of acquiring a loan book that could have problems down the line. However, this deal, "given its size, really isn't material in nature, so they're not taking a ton of additional credit risk," Hovde said. Hovde did not advise on this transaction.

With this deal, First Guaranty will now be in two major Texas MSAs — Dallas-Fort Worth and Houston.

"So if that's their strategy, to go in and find a target in those kind of metro markets and carefully evaluate what their opportunities are in those markets and then make an acquisition and grow from there, I think this makes a lot of sense for them," Thompson said.