TD Bank's Purchase Of South Financial Is A Boon For The FDIC

The sale of a small troubled bank in South Carolina means big things in the government's efforts to close the nation's most troubled lenders.

The Canadian lender Toronto-Dominion Bank (TD, TD.T) on Monday agreed to buy the teetering South Financial Group (TSFG) for 28 cents a share, or less than half the 67 cents apiece South Financial's shares were fetching before the weekend.

More striking than TD Bank's discount, however, is the conspicuous absence of the Federal Deposit Insurance Corp.

The government regulator has closed more than 200 banks since the beginning of last year, soaking up losses as it worked to find buyers for the banks, or at least some of their pieces. Now, its benefiting from stronger lenders' growing interest in buying banks before, not after, they fail.

"Institutions are becoming more interested in making acquisitions, including open bank acquisitions," said FDIC spokesman Andrew Gray. "Obviously, that's our preferred outcome, because it saves the deposit fund money."

The trend also means bank regulators could see a smaller and smaller role in cleaning up the most troubled banks. During the real estate boom, hundreds of smaller U.S. banks rushed headlong into financing commercial real estate projects; when the bubble popped, many of those loans turned into hefty losses.

During the worst days of the financial crisis, some of the biggest U.S. banks bought loss-riddled competitors for next to nothing by waiting for the FDIC to first seize the struggling lenders, and wipe out current shareholders. J.P. Morgan Chase & Co. (JPM) expanded coast-to-coast when it purchased failed Washington Mutual Inc., for example, and PNC Financial Services Group Inc. (PNC) bought Ohio rival National City Corp.

Back then, very few banks were willing to assume the risk of taking on a distressed bank, so willing buyers could name ultra-friendly terms. Now, with the U.S. economy improving, bankers are rushing to make sure they don't miss a chance to pick up competitors--and also their loans and deposits--for cheap.

In fact, there are now so many bidders for failed banks that the most eager banks could follow TD Bank's model and start cutting deals with troubled banks that haven't yet failed. The prices for distressed banks, in other words, are fast becoming less distressed.

"FDIC deals have become overheated very quickly," said Chris Marinac, managing principal at FIG Partners. "And regular-way mergers at low prices may be the new ticket."

TD Bank's outright purchase of a teetering lender in the Southeast--a crisis zone of the banking crisis--is the latest sign prices for troubled banks are rising.

Late last month, the FDIC seized three troubled banks in Puerto Rico and sold them off to stronger banks. Bidding was so strong that the FDIC said the seizures cost $500 million less than its forecasts. In mid-April, TD Bank itself outbid competitors for three failed Florida banks, and agreed to soak up a larger share of the failed banks' future loan losses than the FDIC initially offered.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

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