Is First Horizon Bank in Trouble After TD Deal Collapse?

First Horizon Bank has been making headlines after a major deal with TD Bank fell through. The collapse of the deal, which was set to merge the two banks, has left investors and customers wondering if First Horizon is in trouble.

The deal's collapse was reportedly due to regulatory issues, with the Federal Reserve and Office of the Comptroller of the Currency (OCC) expressing concerns about the bank's ability to manage risk. This has led to a significant drop in First Horizon's stock price.

First Horizon's financial health has been a concern for some time, with the bank facing challenges in its mortgage business and struggling to grow its loan portfolio.

First Horizon Bank has faced significant financial issues, including a $2.2 billion loss in 2020 due to a large loan portfolio that was not performing well.

The bank has also struggled with regulatory issues, including a $500 million fine from the Office of the Comptroller of the Currency (OCC) for failing to maintain adequate risk management practices.

First Horizon's credit quality took a hit due to the collapse of Silicon Valley Bank, which heightened deal stress for the TD-First Horizon deal.

The bank's stock dropped from $25 to $14, causing depositors to worry. First Horizon's stock is now 38% below the TD bid, leading many to worry that the acquisition won't occur.

First Horizon's business is more diversified than Silicon Valley Bank's, but it still suffered a decline in deposits, with an outflow of $65 billion in the fourth quarter of 2022.

The bank's revenues and profits fell slightly in the first quarter of 2023, with deposits declining 4% to $62.2 billion and revenue falling 3% to $859 million.

First Horizon's credit quality is also affected by the unrealized losses on its securities, which are not reflected in its profits or capital adequacy measures. A 25 bp increase in rates for a 10-year security causes approximately 2 points in losses, which is a significant hit to the bank's credit quality.

First Horizon's credit quality is not the only concern, as the bank's stock is also suffering from comparisons to other banks that seem to be in more trouble.

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The breach at First Horizon Bank was a result of a combination of factors, including a brute force attack and vulnerabilities in their internal network system. Experts believe that an unauthorized party obtained login credentials from an unknown source.

The attack exploited a vulnerability in third-party security software, allowing the unauthorized party to gain access to under 200 online customer bank accounts. This vulnerability has since been repaired.

The breach was not a result of a sophisticated attack, but rather a straightforward exploitation of a known vulnerability. First Horizon Bank has taken steps to prevent such an attack in the future.

The unauthorized party was able to obtain personal information from the affected accounts and fraudulently obtained an aggregate of less than $1 million.

The collapse of Silicon Valley Bank heightened deal stress, making it less likely for the TD-First Horizon deal to reach its finish line. This was partly due to the similar bank failure pattern seen in 2023.

First Horizon's stock traded 40% below TD's offer in March, suggesting the market had concluded TD would cancel or renegotiate the deal. This was likely due to the market's concerns about the deal's timing, given the Fed's interest rate hikes starting in March 2022.

First Horizon suffered a decline in deposits, with a 4% outflow in the first quarter of 2023. This was less severe than Silicon Valley Bank's $42 billion deposit outflow, but still a significant decline.

The deal's failure was officially announced in May, with TD terminating the merger due to uncertainty regarding regulatory approval. TD paid First Horizon $225 million, which included a termination fee and a fee reimbursement.

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TD decided to terminate its deal to acquire First Horizon due to uncertainty regarding the timing of the deal's approval by U.S. regulators.

TD will pay First Horizon $225 million, with 89% of it being a termination fee and 11% a fee reimbursement.

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The termination fee is a significant sum, especially considering First Horizon's stock plunged 43% in pre-market trading on May 4, wiping some $3.5 billion off of its stock market capitalization.

First Horizon's stock had already taken a hit, trading 40% below TD's offer in March, suggesting the market had concluded TD would cancel or renegotiate the deal.

TD's decision to terminate the deal is likely a result of the uncertainty surrounding the regulatory approval process, which was further complicated by the collapse of Silicon Valley Bank (SVB) in March.

First Horizon's business is more diversified than SVB's, with less than half of its deposits uninsured as of the end of December, compared to more than 90% of SVB's deposits.

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The collapse of Silicon Valley Bank (SVB) had a significant impact on the TD-First Horizon deal. The deal's chances of being completed dropped after SVB's collapse, which followed a similar pattern to other bank failures in 2023.

First Horizon's stock traded 40% below TD's offer in March, suggesting the market thought TD would cancel or renegotiate the deal. This was likely due to the fact that First Horizon's business is more diversified than SVB's, which focused on venture-backed startups and wealthy individuals.

First Horizon's deposits were also less uninsured than SVB's, with less than half of its deposits uninsured as of December. In contrast, SVB had over 90% of its deposits uninsured.

The deal's trouble surfaced on March 1, when First Horizon indicated that regulators would not approve the merger by May 27, 2023. The bank was negotiating with TD to extend the closing date.

First Horizon suffered a decline in deposits, with an outflow of 5% in the fourth quarter of 2022, compared to SVB's $42 billion deposit outflow the day before the FDIC took it over.

Here's a comparison of the deposit outflows of First Horizon and SVB:

In the first quarter of 2023, First Horizon's deposit outflow continued, with its deposits declining 4% to $62.2 billion. The bank's revenues and profits also fell slightly, with a 3% decline in revenue and a 6% decline in net income.

First Horizon's stock has been suffering due to comparisons to other banks that seem to be in more trouble than SVB and First Republic were before they collapsed.