TD Bank Buys South Financial, U.S. Taxpayers Win

CHERRY HILL, N.J. (TheStreet) -- The deal reached by TD Bank Financial Group(TD) to purchase The South Financial Group (TSFG) with significant assistance from the Treasury points to a potentially big change in how large, troubled banks will be resolved.

The South Financial Group's main subsidiary is Carolina First Bank of Greenville, S.C. The bank was not included in the most recent version of TheStreet's Bank Watch List of undercapitalized institutions because its Tier 1 leverage ratio was 7.13% and its total risk-based capital ratio stood at 10.55% as of March 31, putting it above the 5% and 10% levels required for most banks to be considered well capitalized by regulators.

However, in a recent filing with the Securities and Exchange Commission, South Financial said the bank was "no longer deemed to be 'well capitalized'" because of an April 30 order from state regulators and the Federal Deposit Insurance Corp. requiring the bank to raise its capital ratios to 8% and 12% respectively within 120 days.

The South Financial Group posted a first-quarter net loss of $80.6 million on April 20 after losing $676.3 million in 2009, mainly from charge-offs of delinquent construction loans and commercial loans, and it had $12.4 billion in total assets at quarter's end, down from $13.3 billion at the same time a year earlier.

Late Monday, TD Bank agreed to pay about $61 million, or 28 cents a share, for South Financial's common stock, which closed at 30 cents yesterday. While TD Bank CEO Ed Clark touted the deal as "exactly the kind of unassisted transaction that we've said we're comfortable doing," he meant unassisted by the FDIC, which would have absorbed losses if the bank had failed.

Portraying this deal as "unassisted," however, was a stretch as there was significant assistance from the Treasury, which agreed to sell $347 million worth of South Financial preferred stock and warrants to TD for just $130.6 million. South Financial had issued the preferred shares to the Treasury in return for bailout money provided in December 2008 via the Troubled Assets Relief Program, or TARP. The compromise on the TARP monies looks like the trade-off for doing the deal before South Financial's situation deteriorated further.