TD Bank Financial Group Inc. (TSX:TD) is adding another piece to its American operations with the purchase of the South Financial Group, Inc. for US$191.6 million. Most of the money would go to the U.S. Treasury, with only US$61 million for shareholders of South Financial.

As of March 31, South Financial had a total of US$8 billion in loans and $9.8 billion in deposits (US$7.8 billion excluding brokered deposits), and 176 branches, including 66 in Florida, 83 in South Carolina, and 27 in North Carolina.

However, the firm has incurred more than US$1.3 billion in losses since the beginning of 2008, primarily as a result of loan charges associated with legacy residential, construction and development lending and commercial and residential mortgages in the Southeastern U.S., it said.

And, it recently entered into agreements with U.S. regulators (the FDIC, the South Carolina State Board of Financial Institutions, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond), which include a requirement to raise a substantial amount of capital within 120 days and reduce criticized assets. These agreements also limit South Financial’s access to brokered deposits and the rates it can pay on certain other customer deposits. As a result of these agreements, South Financial is no longer deemed to be “well capitalized” under applicable banking regulations.

TD president and CEO, Ed Clark, noted that the deal represents a relatively small acquisition and said it is “exactly the kind of unassisted transaction that we’ve said we’re comfortable doing. After undertaking extensive due diligence, we’re confident that this is an attractive opportunity that fits within our framework of only taking risks that we can clearly understand and manage. All in all, we think we’re getting a strong franchise that offers a solid financial return, along with a good management team who will bring their expertise to help with the combined company’s future growth plans.”

In connection with this transaction, TD intends to issue approximately C$250 million worth of common shares in Canada prior to closing for capital management. The transaction is expected to be slightly accretive to TD’s earnings in fiscal 2011 and to have an impact of 40 – 50 basis points on Tier 1 capital, after taking into account the capital issuance.

The transaction is expected to close in TD’s third fiscal quarter, following receipt of regulatory approvals and approval by South Financial’s shareholders. Shareholders of South Financial will have the right to elect to receive either 28¢ in cash, or .004 shares of TD common stock, for each outstanding South Financial common share.

In addition, immediately prior to completion of the transaction, the U.S. Treasury will sell to TD its US$347 million of South Financial preferred stock and the associated warrant acquired under the Treasury’s Capital Purchase Program and discharge all accrued but unpaid dividends on that stock for total cash consideration of approximately $130.6 million.

In connection with the transaction, TD’s wholly owned subsidiary TD Bank, and Carolina First Bank, which operates under the Carolina First brand in the Carolinas and the Mercantile Bank brand in Florida, are also expected to merge.

Upon completion of the transaction and conversion of the South Financial franchise to the TD Bank operating platform in 2011, TD Bank intends to introduce its brand, retail banking model across South Financial’s footprint. Until then, South Financial will continue to operate under the Carolina First and Mercantile Bank brands in the Carolinas and Florida, respectively.

“This transaction represents another key milestone as we continue to build out our U.S. franchise. With the acquisition of South Financial, we’re gaining established commercial banking assets and a solid network of stores in attractive and growing markets within our Maine-to-Florida footprint,” said Clark. “This acquisition will not only accelerate our growth, but it will also enable us to deepen our market share by offering an extensive suite of retail and commercial banking products to South Financial customers.”

IE