Description

This will be a quick idea. I'm already well paid up on my ideas for the year, so please feel free to hit it with the "2nd grade book report" tag if you're so inclined.... but given the timeliness of the idea, the interest in the sector from WAL / FRC boards, and the fact I'm not a financials expert so I'd love to know where I am wrong, I thought the community would be interested.

Anyway, the idea is to buy FHN equity (I know it says FHN pfd.... but FHN was written up in mid-March by limiteddownside as a merger arb play on their merger with TD. That idea did not prove to have limited downside (sorry, not knokcing the idea, but how can you resist that pun?), as yesterday TD and FHN broke the merger. Obviously the story has changed significantly, so again I hope writing it up within a few months is ok!).

Today, FHN is trading for <$11/share. PF for the break fee and TD converting some prefs they had purchased as part of the deal, FHN's book value is $11.70/share (per the merger break call). 

FHN is a good bank; ROTCE is consistently in the mid-teens. You'd generally expect a bank earning mid-teens to trade around 1.5-2x book; TD was willing to pay 2.1x "book at close."

That's all well and good, but what really interests me about FHN is their downside protection. That comes in three forms: capital, insured deposits, and HTM marks (or lack thereof).

Let's start with the last: HTM marks. This is top of mind for every investor on the heels of FRC and SIVB. FHN doesn't really have this issue; they haven't filed their 10-Q yet, but go to their 10-K and you can see fair value marks on the HTM securities plus their loans total <$600m, or ~$1/share. The merger break call gives more details on the book, as does their Q1 earnings deck, but basically this is not an issue for them.

The second thing worry with banks has been insured deposits. Basically, the thought here is insured deposits are safe, but uninsured deposits are prone to bank runs right now. FHN rates decently well here too: 55% of deposits are insured, and their top 15 uninsured deposits represent just 1% of deposits. They also held a call just yesterday noting no changes to depsoit outflows or client relationships since early March; perhaps that accelerates on the heels of the merger break, but that does give very up to date info on their deposit book and combine all of the information here togeter and it again seems fine.

The third worry with banks is with capital, and that's where I think FHN really shines. As part of the TD break, TD will convert ~$500m of prefs they purchased alongside the merger announcement into FHN at $25/share. In addition, TD makes a $200m payment to FHN plus $25m to cover merger fees. That's a good chunk of capital, and FHN is recieving it in an distressed environment. If they have a mini-deposit flight on the heels of the merger breaking, FHN can use that capital to cover the flight. If deposit trends hold steady, FHN can use that capital to play offense in this environment (making loans into a much tighter market).

There's probably a lot more to talk about with FHN; for example, their loan book looks generally good and is exposed to what I would tihnk are attractive growth market. But I am not a financials expert, and I wanted to get this idea up quickly given the timeliness of it. I'd love to engage in comments if you have any (or hear why I'm wrong from people who know more about banking than I do), but I do think the idea is simple and quite likely to work (again, you're buying a good bank for below tangible in a distressed environment where they just got a nice capital infusiion)

PS- FHN is hosting an investor day in June. I'd guess this could serve as a mini-catalyst for the stock as they give medium term guidance and (more importantly in this environment) confirm that deposits haven't fled like crazy!

PPS- Two directors bought stock as soon as the TD deal broke; most banks have directors buying stock there days, but a little added sign of confidence

PPPS- just to be explicit about it, FHN is probably not the best bank out there, nor is it the absolute cheapest. But what attracts me to FHN is I beleive it is a well above average bank trading for below tangible adjusted for HTM marks. Even in this environment, there aren't a ton of those, and FHN is trading for ~6x LTM earnings and those should go up significantly as they deploy this influx of capital

Catalyst

Environment normalizing

Investor day in June