CHERRY HILL, N.J. (
) -- The deal reached by
TD Bank Financial Group
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
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
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.
The deal furthers the expansion strategy of TD Bank on the East Coast, bringing in 176 more branches, including 66 in Florida, and comes comes a month after TD Bank acquired 69 branches as a result of three
TD's largest acquisition on April 16 was Riverside National Bank of Fort Pierce, Fla., which had 58 branches and $3.42 billion in total assets. TD Bank won the bid for Riverside over a bid by Seacoast Banking Corp.
of Stuart, Fla., in part because TD was willing to accept a 50-50 loss-sharing deal with the FDIC, while most similar deals up to that point in the banking crisis had featured 80% loss sharing by the FDIC.
Since Carolina First's prospects of raising capital it required were bleak, the TD deal looks like a winner for all parties. While the Treasury is losing roughly $216 million, it would have lost all of its TARP investment if Carolina First Bank had failed, and the FDIC's insurance fund would have probably taken a much larger hit.
Written by Philip van Doorn in Jupiter, Fla.
Undercapitalized Banks 2010 Bank Watch List
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.