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TD Bank picks up South Financial for US$191.6M as it grows further in U.S.

TORONTO - TD Bank Financial Group Inc. (TSX:TD) added another American bank to its growing basket of assets in the U.S. southeast on Monday with the announcement that it is picking up South Financial Group Inc. (Nasdaq:TSFG) for US$191.6 million.

TORONTO - TD Bank Financial Group Inc. (TSX:TD) added another American bank to its growing basket of assets in the U.S. southeast on Monday with the announcement that it is picking up South Financial Group Inc. (Nasdaq:TSFG) for US$191.6 million.

It's the second time in less than a month that TD has dipped its hands into the region, where the bank hopes to grow its presence amid a highly competitive Florida market, home to many Canadian snowbirds.

When the two deals close later this year, TD Bank will have about 1,300 branches in the United States, compared with about 1,100 in Canada.

TD president and chief executive Ed Clark said in an interview that the South Financial acquisition is particularly attractive because it comes with an experienced management team that he believes will help the Canadian bank navigate the local market.

"If you're going to go into the south you ought to have strong risk management and lending experience and that's what we're acquiring with South Financial," Clark said.

"Very definitely, you want to have people that know their way around the South."

South Financial is a casualty of the credit crunch in the U.S. that resulted in millions of foreclosures and helped spark a worldwide recession two years ago — it has incurred more than US$1.3 billion in losses since the beginning of 2008, primarily as a result of loan charges associated with real estate loans and mortgages.

The bank received a US$347-million investment under the U.S. Treasury's troubled asset relief program in 2008.

TD Bank said it will pay $61 million in cash or stock to South Financial shareholders, less than half the value of its shares before the announcement was made. Another $130.6 million will be paid to the U.S. Treasury Department.

The bank said the transaction would add 176 locations to its holdings in the region.

The move follows a separate arrangement TD made to buy the risky assets of three insolvent Florida banks with the help of U.S. Federal Deposit Insurance Corp. less than a month ago. Under the latest agreement TD secured a deal before the FDIC took over the bank.

The U.S. southeastern states are in an area that has been hit hard by the subprime mortgage crisis and collapse in the housing industry, squeezing the financial industry and producing large losses for banks and other mortgage lenders.

TD had already built a presence in U.S. retail banking before the latest round of acquisitions, starting primarily in New England and New York City area. It also owns about 40 per cent of TD Ameritrade (Nasdaq:AMTD), a discount brokerage based in the U.S. Midwest.

Clark said that together the Florida-area banks will provide a strong base for TD to expand further.

"We look at this and say we can, in a sense, now have a position... where we are a player in Florida and can grow from there organically," he said.

TD said that South's common shareholders will have the option to be paid either 28 cents in cash or 0.004 shares of TD's stock for each outstanding South Financial common share. A closing date is expected in the third quarter, pending approval from regulators and South Financial's shareholders.

Clark said this time around the Canadian bank did not want to wait for the FDIC to take over the assets of South Financial because executives believed it could destroy some value in the U.S. bank's assets.

"There's something about the process — it's harder to hold the management team in place, you lose some of your dynamic," he said.

"You frankly lose some clients and customers along the way."

However, he noted that if the FDIC revealed an acquisition too good to refuse, TD would likely make another move.

Otherwise, Clark said the bank will focus on integrating all of the assets it recently purchased, rather than scouring the market to bulk itself up even more.

"I think our preference would be just to pause, and get through the summer," he said.

South Financial has $8 billion in loans and $9.8 billion in deposits. Until it is merged with TD Bank, the bank will continue to operate under the Carolina First and Mercantile Bank brands in the Carolinas and Florida.

TD Bank also plans to issue $250 million of common shares before the agreement closes for "prudent capital management."

Barclays Capital analyst John Aiken said South Financial should offer synergies with the other Florida acquisitions, though he did see some other concerns.

"TD is taking on incremental credit exposure, in the U.S. Southeast, which has been one of the hardest hit regions, and this time without any loss sharing agreement with the government," Aiken wrote in a note.

"Almost 60 per cent of (South Financial's) $8 billion loan portfolio is related to commercial real estate."

TD Bank shares were down $1.25 to $72.14 in early trading Monday on the Toronto Stock Exchange.