TSFG sells to Toronto company

By Dick Hughes  

MAY 20, 2010 12:21 p.m. (0)

In 20 years, The South Financial Group shot like a rocket from a small Carolina First office in Greenville to one of the nation’s 50 largest banks and South Carolina’s largest.

In less than three, it flamed out, burdened by soured loans in the credit and real estate collapse.  The estimated $1 billion anticipated in losses still to come – TSFG already had absorbed more than $900 million in loss – is a legacy of those go-go years.

On Sunday, the company gave up trying to raise $700 million to $800 million in new money to stay independent and agreed to sell to TD Financial Group of Toronto, parent of Toronto-Dominion Bank and the sixth largest banking company in North America.

In the end, TD was the only life-line. Shareholders, taxpayers and Greenville pride took hits.

Under terms of the deal, TSFG’s operating banks, Carolina First and Mercantile Bank in Florida, will be merged into TD’s U.S. division and be renamed TD Bank, America’s Most Convenient Bank, a marketing slogan built into the name from another acquisition, a New Jersey one. The conversion is expected to take place next year.

In terms of what shareholders see, TSFG was sold for just $61 million or 28 cents a share. That’s about 60 percent less than what a share was worth Friday, and for long-time shareholders it is about 100 times less than what they saw in the months ahead of the beginning of the financial collapse in late 2007.

“28 cents is not what we wanted (but) 28 cents is better than zero,” C. Lynn Harton, TSFG president and chief executive officer, said in an interview with the Journal.

He was referring to the likelihood that TSFG would be shut down by the FDIC if it failed to raise sufficient capital as directed by the regulator.  In a closure, shareholders get nothing.

Based on TD’s estimate, Harton said, TSFG expects $1 billion in “additional loan losses” beyond those already written off or sold at a discount. If the deal goes through, that problem will be TD’s.

To stay solvent, he said, TSFG would have had to raise between $700 million and $800 million in new capital, “which is four or five times our current market capitalization. It would have been a very difficult proposition.”

Another problem TD inherits is the $90-million complex TSFG built along Interstate 85, decided not to occupy and put on the market.  To date, there are no takers.

TD also will have to deal with naming rights bought for the Carolina First expo hall and the Carolina First Arena in downtown Charleston.

Over the last six months, Harton said, TSFG approached “endless” potential investors and strategic partners without success until TD came along.

“We had done an exhaustive search and TD was the only viable option that we found.”

“At the end of the day, we are very happy that TD is the one that we are partnering with,” he said, citing the TD’s financial stability, opportunities for growth and the fact that there is no overlap of branches in the Carolinas and minimal overlap in Florida.

That bodes well for preserving jobs, even creating more as TD operates many branches seven days a week.

Harton, who will be hired by TD in a yet-to-be determined senior position and will remain in Greenville, also is optimistic that management of the holding company, Carolina First and Mercantile Bank “is going to do very well.”   Such details remain unresolved.

A loser in the transaction is the U.S. Treasury, which will take a $200-million-plus loss on the $347 million TARP bailout given to TSFG in late 2008.  Under the agreement, TD will buy back the preferred shares TSFG sold to the government, plus $9 million in deferred dividends, for $130.6 million.

Harton said Treasury officials “were involved in the negotiations and approved the terms of the transaction,” including the discount on the government investment.  FDIC regulators, who have the bank under a consent order, also were involved.

Another hitch for TSFG shareholders was TD’s insistence on assurance that the deal would not be rejected in a shareholder vote, which will be held at a date not yet scheduled.

To provide assurance, TSFG issued to TD preferred voting stock equal to 39.9 percent of outstanding common shares and invoked a waiver under NASDAQ, where TSFG is listed, to bypass a rule requiring shareholder approval to issue more than 20 percent.

TSFG said a delay caused by a vote on issuing the preferred shares “would seriously jeopardize the financial viability” of the bank.

Because TD will vote its shares in favor, as surely will management and the board, more than 40 percent of a shareholder vote already is committed to the deal, virtually guaranteeing approval.

“One of the critical things for TD entering this transaction was they wanted to make sure it would close,” Harton said.

While institutions are the biggest holders of TSFG common stock, people, such as Mack I. Whittle Jr., who founded the bank and was forced into retirement as president and CEO in October 2008, and board directors Jon Pritchett and William Hummers III are major holders who will take losses.

Whittle held 450,556 shares, Pritchett 253,312 and Hummers 157,415 as of the last reporting period Dec. 31.

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