TORONTO — For the second time in a month, Toronto-Dominion Bank, Canada's second-largest bank by assets, scooped up a troubled U.S. bank, enabling it to expand its footprint in the U.S. southeast.
The bank said it agreed to buy Greenville, S.C.-based South Financial Group Inc. for $191.6 million in cash or stock. The transaction, six months in the making, allows TD to enter South Carolina and expand its recently acquired base in Florida.
Last month, TD bought three shuttered Florida banks — Riverside National Bank, First Federal Bank of North Florida and AmericanFirst Bank — for $3.8 billion from the Federal Deposit Insurance Corp. To outbid its competitors, TD was forced to accept less-than-favorable terms, agreeing to a 50-50 loss-sharing formula with the FDIC. The typical split is 80-20. This time, TD didn't wait for the FDIC to close the ailing three-state bank.
"This is a preemptive bid likely launched to ensure limited competition," says Brad Smith, an analyst at Stonecap Securities Inc. in Toronto.
The deal could also signal a return to traditional, that is, non-FDIC, merger-and-acquisition activity.
"I think it marks a turning point in the consolidation of the market. FDIC transactions aren't the only game in town any more," says Terry Moore, managing director of Accenture's North America banking practice. "With the economy showing some signs of strength, there's more confidence of getting into the game. There's a signficant number of diamonds in the rough that would fit nicely within the strategic aspirations of a set of stronger banks, that include both U.S. and foreign banks."
There are more than 700 U.S. banks, holding some $400 billion in assets, on the FDIC's troubled list. Foreign banks, including TD, Canadian rival Bank of Montreal and Spain's Banco Bilbao Vizcaya Argentaria SA, have all brokered deals with the FDIC.
"Foreign banks are licking their chops at the U.S. market," Moore says. "They didn't come here to buy one institution. I think it's conceivable that, over the next 12 months, we'll see a domino effect, where consolidation really picks up in the traditional market."
South Financial, the owner of Carolina First in the Carolinas and Mercantile Bank in Florida, sold $347 million in preferred stock to the U.S. Treasury through the Troubled Asset Relief Program, or TARP, to stay afloat after getting pummeled by its exposure to real estate in Florida. TD said it is paying the U.S. Treasury $130.6 million for the preferred stock. The government has agreed to discharge all accrued dividends.
Toronto-based TD is offering to pay 28 cents a share or 0.004 of a TD share for each South Financial stock for a total of $61 million. The per-share price is a 58% discount to Friday's closing price of 67 cents. The bank is also swapping 1,000 of its shares for South Financial voting preferred stock to pick up 39.9% voting power. TD needs to secure 51% approval from shareholders.
"There was a compromise on TARP and a price for the common shareholders," says TD Chief Executive Ed Clark. "The tipping-point positive was that we quite like the management team. We've acquired a solid set of lenders and a solid set of risk managers."
TD picks up 176 stores, including 66 in Florida that don't overlap with TD's other stores. It goes from having nine branches in Florida in 2007 to 170. "We've always viewed Florida as a critical state both for Canadian and northeastern customers going south, but we also liked Florida in its own right because it's an excellent souce of deposits," Clark says.
The bank, which is adding $9.8 billion in deposits, said it expects to take a $1 billion loan write-down, mostly from soured commercial loans.
The transaction is expected to be completed by the end of August. TD said the deal will be "slightly accretive" to fiscal 2011 earnings and reduce its Tier 1 capital by 40-50 basis points, even after it issues, in connection with this acquisition, C$250 million in stock.
Clark said TD will absorb South Financial before embarking on other deals. "You keep tilling the grounds to see where do you want to go next, but I think we pause here for the summer unless the FDIC surprises us and offers us something that we can't refuse," he says.