After Toronto-Dominion Bank agreed Monday to buy South Financial Group Inc. and bought three failed banks in Florida last month, the natural question is: What next?
Some observers expect more deals, but Bharat Masrani, head of Toronto-Dominion's U.S. banking operations, said that the $547 billion-asset company will not be on the prowl for a while. Canada's second-largest bank will have its hands full through 2011 integrating its new purchases, he said.
Toronto-Dominion, which had little U.S. presence just five years ago, would have more than 1,300 sites from Maine to Florida should the deal for Greenville, S.C.-based South Financial close as scheduled in the third quarter.
"We are very happy with our position now in Florida," Masrani said, referring to one key objective of the recent transactions. Any further deal would have to be "very compelling" for Toronto-Dominion to consider, though he said he would leave the door open for the right opportunity.
"Never say 'never,' " Masrani said.
Brad Smith, a senior financial services analyst at Stonecap Securities Inc. in Toronto, said such moves are inevitable. "I think they'll continue to do these" deals, he said. "They're making it very clear that they are an eastern seaboard-focused bank in the U.S."
Masrani said South Financial, which was primarily a commercial lender, would give Toronto-Dominion a chance to market its retail products at 176 new sites in Florida and the Carolinas. South Financial's business clients would also have access to new services like interest rate swaps and asset-based lending, he said.
Toronto-Dominion, which operates under the name TD Bank in the U.S., has been eager to break into Florida for more than a year after making a big push into the U.S. with its purchase of Commerce Bancorp, in 2008 and of Banknorth, in 2005. These units have been profitable through the downturn, though Toronto-Dominion has had to deal with some integration problems.
The Canadian bank is in position to make a deal now because — like most others in Canada — it has weathered the recession much better than its peers in the U.S. Florida is a natural destination because a lot of Canadians and people from the northeastern U.S. retire there.
Toronto-Dominion made a bid last year for the failed Bank United Financial, a Coral Gables lender, but lost out to a private-equity group. It got a toehold in Florida last month when it bought Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank from the Federal Deposit Insurance Corp. These deals gave Toronto-Dominion 69 sites in central Florida.
South Financial would deliver another 66 Florida branches, as well as 83 in South Carolina and 27 in North Carolina.
Toronto-Dominion estimated that South Financial has booked about $900 million in loan losses since 2008. It will write down the portfolio by another $1 billion when the deal closes, which the company said should mitigate future losses. The company assumed all $8 billion of South Financial's loans, much of them concentrated in commercial real estate, without a federal loss-sharing agreement.
Michael Goldberg, a managing director at Canaccord Genuity, said Toronto-Dominion can afford to take a risk because it is healthy and this is a relatively small transaction. Its growth plans in the U.S. hinge on whether short-term interest rates go up and the economy stabilizes. An interest rate hike would improve deposit margins, and an economic upturn would limit commercial real estate losses.
"If those two things happen, the U.S. strategy will look good," Goldberg said.