The termination of Toronto-Dominion Bank's planned acquisition of Memphis, Tenn.-based First Horizon Corp. is raising questions about potential regulatory issues for the buyer.
The companies announced the termination of the long-pending deal May 4, citing an unclear line of sight for regulatory approval. First Horizon Chairman, President and CEO D. Bryan Jordan said on a call following the announcement that TD could not provide assurance of approval in 2023 or 2024.
Industry experts believe a regulatory issue with TD may have sidelined the deal, leading regulators to hint that eventual approval would be unlikely. However, it is unclear what exactly the impediment was.
"Although we view TD's risk and operational management as strong, the closing delay, especially considering that other large deals were approved in this timeframe, raises questions of a potential U.S. regulatory issue at TD," DBRS Morningstar analysts wrote in a May 5 note.
Potential regulatory issue
First Horizon and TD first announced the deal in February 2022. With an announced deal value of $13.67 billion, it marks the largest US bank deal termination in history, according to S&P Global Market Intelligence data.
TD's failure to assure First Horizon that it could secure regulatory approval through 2024 raises questions about whether regulators have a specific concern with TD. First Horizon did not reply to a request for comment. TD declined to comment on the termination beyond the press release.
Keefe Bruyette & Woods analyst Mike Rizvanovic said the termination was surprising and suggested that "there's something going on in the background" to spur TD to "basically capitulate," he said in an interview.
Rizvanovic predicted that TD will provide more color at some point, probably during its second-quarter earnings call May 25, "but we're just going to be in the dark for the time being."
The delay in regulatory approval could be due to a number of factors such as "the current regulatory and political regime; TD's status as a global systemically important bank ... which triggers additional levels of regulatory scrutiny; the cross-border nature of the transaction; and idiosyncratic components of TD's business model," Christopher Olsen, managing partner at Olsen Palmer LLC, wrote in a report.
Separately, the deal also faced public opposition from community groups, which is increasingly common, and legislators over
Community pushback was unlikely to have been behind potential regulatory concerns about the deal, said Chip MacDonald, managing director of MacDonald & Partners LLP. MacDonald said he "would be surprised, especially in light of the size and positivity with which that community benefit plan" with the NCRC was received.
When asked if the company will still follow through on its community benefits agreement, TD spokesperson Elizabeth Goldenshtein said the bank will continue dialogue with the NCRC, but the plan was "contingent upon completion of the merger agreement."
Withdrawal over denial
If TD is facing regulatory issues, the termination may have been the result of regulators hinting that they would not approve the deal. Speaking broadly and not specifically about TD, Scott Coleman, partner at Ballard Spahr LLP, said it is more common for banks to withdraw a merger application than wait for regulators' denial.
"It's very rare for any of the prudential regulators to actually deny an application," Coleman said. "It is more frequently the case that they're withdrawn."
Christopher Marinac, director of research at Janney Montgomery Scott, believes that a private signal from the Federal Reserve is a possibility.
"Of course, these things we'll never know for sure, but it sure feels like the Fed had ruled [the day before the termination announcement] internally that there was no timetable to get approval. That was passed along to the advisers and to the companies, and therefore they had to make their decision," Marinac said. "Not knowing all the issues that TD has, it sure seems that there are enough that warrant the Fed feeling that they're not ready."
Effect from current environment
No matter the reason for the termination, it comes at an inopportune time for the industry following three regional bank failures and concerns about industry liquidity. The termination news "adds to the chaos," Marinac said.
The news of the termination sent First Horizon's stock price falling May 4, down 33% from the prior day's close.
The termination also "raises questions regarding the coordination and preparedness of the regulators themselves," the DBRS analysts wrote. "Given the now volatile operating environment, we would have thought the regulators would have prioritized this approval instead of placing First Horizon in a weaker position and providing additional negative headlines for the US banking sector."
However, some believe that the recent bank failures and other issues in the industry might have affected regulators' thinking.
"Issues that might have been manageable five weeks ago may look less manageable to the regulators today," Thomas Vartanian, a former general counsel of the Federal Savings and Loan Insurance Corp. and the Federal Home Loan Bank Board in the Reagan administration, said in an interview. "Frankly, what made sense two months ago may not necessarily make sense in today's financial environment."
The evolving environment and issues that have been at the center of the turmoil, such as the industry's liquidity challenges, may have complicated the situation.
"There could have been deficiencies that we would never know," Marinac said. "If you had a liquidity deficiency or a liquidity violation, as an examiner or a senior regulator at the Fed, that is hard for you to unsee because that is an ongoing concern, and obviously it has jumped the priority list in the last 60 days. ... Now it's the most important piece as we're fighting this unfortunate forest fire."
The tumultuous environment may have weighed on TD and First Horizon's appetite to continue the deal as well.
"While certainly not unexpected, we suspect the recent turmoil in the regional bank space since the failures of Silicon Valley Bank and Signature Bank in March and the failure of First Republic Bank on [May 1] was a notable factor in terminating the transaction in addition to a challenging regulatory backdrop (where more regulations are expected in the wake of the recent crisis)," Raymond James analyst Michael Rose wrote in a note.