The Toronto-Dominion Bank (TSX: TD)(NYSE: TD) is on its way to becoming the sixth biggest bank in the United States. Already the ninth biggest in the U.S., it is completing the acquisition of First Horizon Corp (NYSE: FHN), a regional bank in the South East. After the deal closes, TD will be one of the true giants of U.S. banking. In this article I will explore the First Horizon deal, and what it means for TD Bank shareholders.
What is First Horizon?
First Horizon Corp is a bank holding company based in the South Eastern United States. It has US$79 billion worth of assets, 6,000 employees, and owns a number of different operations (retail banking, wealth management, insurance, and more). “First Horizon” can refer to either the company itself, or its retail bank subsidiary. TD is buying the whole package, including both the retail bank and the other miscellaneous financial services.
So, is First Horizon a good bank?
It depends on what timeframe you’re looking at. Its fourth-quarter results were pretty disappointing. They included negative year-over-year growth in both net income and revenue. It’s unusual for a bank to have seen revenue shrink in the fourth quarter, as most U.S. banks were benefiting from the COVID-19 economic recovery in that period. The bank cited lower mortgage banking and fixed income fees as reasons for the decline in revenue.
The bank’s long-term results, however, are quite strong.
Over the last five years, the bank grew its revenue at a 22% compound annual growth rate (CAGR), its net income at 34%, and its earnings per share (EPS) at 13.1%. These are pretty solid results for a bank–banking isn’t exactly most peoples’ idea of a high-growth sector. Granted, a lot of this growth is due to a merger. In 2020, First Horizon merged with Iberiabank, a merger that increased its loan portfolio considerably. The higher-than-average five-year CAGR growth is in no small part thanks to that merger. Still, we can see that First Horizon has done better over the long run than it did in its most recent quarter.
What TD aims to achieve with this acquisition
What TD aims to achieve with its First Horizon acquisition is three things:
- Increase its footprint in the U.S.
- Realize $610 million in pre-tax cost synergies
- Grow its commercial lending portfolio
Until recently, TD’s U.S. operations were mainly limited to retail banking and brokerage services. With the acquisition of First Horizon, it will now have a large commercial loan portfolio. That will diversify TD’s U.S. lending operation, which is already its biggest growth driver by far.
Foolish takeaway
TD Bank has taken a bold step forward by buying First Horizon. Soon to become the sixth biggest bank in the U.S., TD has expanded its footprint. No doubt, it will take some time for all the costs of this deal to be absorbed. But when they are, TD will have a powerful growth driver and a much bigger presence in U.S. commercial banking. Overall, this deal has a significant amount of potential.
