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.