DBRS Comments on TD’s Acquisition of The South Financial Group, Inc. – Ratings Unchanged

DBRS believes the acquisition of the The South Financial Group, Inc. (TSFG) by The Toronto-Dominion Bank (TD or the Bank) will not have a material impact on the Bank’s earnings and the impact on its capital will be modest. The credit risk profile for TD remains solid, notwithstanding the credit risk concerns at TSFG given its exposure to commercial real estate (CRE). As such, there are no rating implications for TD at this time.

DBRS believes this transaction is consistent with TD’s desire to bolster its presence in Florida, as well as helping implement a Maine-to-Florida U.S. footprint. TD is achieving some scale in its targeted market of Florida as this acquisition adds 66 branches, predominately in Orlando, Tampa Bay, Gainesville, Jacksonville and South Florida, which are geographically complementary to TD’s existing Florida banking franchise, for a total of approximately 169 locations. Following the acquisition, TD will have the seventh largest branch network and the tenth largest deposit market share in the state. Additionally, TD will gain the fourth deposit market share position in South Carolina with TSFG’s 83 branches and its more modest footprint of 27 branches in North Carolina. Given the focus on commercial lending at TSFG, there are opportunities for TD to expand and leverage its retail banking model in these geographies.

This transaction is expected to have some credit risk concerns given TSFG’s CRE concentration, but DBRS believes the credit risk will be manageable. The Bank believes it has conservatively valued the loan portfolio given its due diligence. Even with the addition of TSFG’s loan portfolio, CRE remains a small portion of TD’s overall loan mix. Additionally, the transaction would have only a very modest impact on capital. Including the C$250 million of common share issuance, the Tier 1 ratio would decline between 40 and 50 basis points.

With the transaction, TD will acquire $12.4 billion in assets, including $8.0 billion in loans, and $9.8 billion in deposits. DBRS notes that TSFG operates in Florida under Mercantile Bank and in the Carolinas through its banking subsidiary Carolina First Bank. The transaction is expected to close in Q3 2010 and the systems conversion to follow in 2011.

DBRS believes one of the challenges facing TD is the number of bank conversions over the next 12 to 18 months, two from the current acquisition (Mercantile Bank and Carolina First Bank) and three from the previous acquisition (Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank). Mitigating this concern is the Bank’s breadth of integration experience and proven track record.

Based in Toronto, The Toronto-Dominion Bank has a full-service banking operation in retail and wholesale banking and wealth management in Canada, U.S. retail banking and global discount brokerage. In Canada, TD has one of the largest personal banking operations, with ten million customers.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations, which can be found on our website under Methodologies

This is a Corporate (Financial Institutions) rating.