TSB is preparing to beef up its challenge to Britain's big four banks after agreeing to a £1.7 billion (€2.35 billion) takeover offer from Spain's Banco de Sabadell.
The deal will see tens of thousands of small investors each pocket a typical £800 profit after the British lender's short-lived return to the stock market last June.
TSB said it was one of the largest cross-border banking deals since the financial crisis.
It will boost Spain's hold on UK banking after Santander's acquisition of Abbey, Alliance & Leicester and parts of Bradford & Bingley.
Chief executive Paul Pester said the takeover would add to its "firepower" in the banking sector where it styles itself as a challenger to the likes of Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays.
Mr Pester, who will continue in his role, said: "Today's offer by Sabadell to acquire TSB is a real vote of confidence in TSB, our 8,700 employees and the straightforward, transparent approach we're bringing to banking in the UK."
The deal is conditional upon clearance by the Bank of England's Prudential Regulation Authority (PRA) but Mr Pester said: "We certainly don't see any red flags or any issues at this stage."
He indicated the likelihood was that such a deal might be expected to take "three to four months to progress". TSB is expected to retain its name.
The Spanish bank's chairman, Josep Oliu Creus, said it could "add more value" to TSB's aim to bring more competition to the UK banking sector and help to speed up its expansion.
Sabadell signalled the possibility of further growth, saying: "The challenger bank market is relatively unconsolidated in the UK and Sabadell believes that this will create opportunities to further develop TSB's market position over time."
The deal will see investors receive 340p per share, a 31% premium for those who bought the stock at 260p nine months ago.
British state-backed Lloyds will sell Sabadell its 50% share in the bank ahead of a year-end deadline for it to dispose of the stake.
Today's announcement comes a week after TSB first disclosed details of the takeover proposal from Barcelona-based Sabadell and said it was minded to accept. The board will now recommend that shareholders do so.
It comes after around 60,000 retail investors snapped up about 10% of TSB in June, buying an average of just over £2,000 worth of shares.
Those who held on to the stock will see a rise in value of around £670. Many had been lured in by a promise to small investors of 5% worth of free shares if they still held the investment after a year.
Lloyds has promised to compensate them for the value of those free shares at Sabadell's offer price, adding about £140 to the typical investor's windfall and taking the total profit for sitting on the stock to just over £800.
Sabadell said it was attracted by a UK banking market with "a well-defined and stable regulatory framework, consistent profitability and good future growth prospects".
It said it was picking up a "straight-forward retail and small business bank" with a 6% share of UK branches, which attracted 8.4% of new and switching personal bank accounts in 2014.
Mr Oliu Creus said: "TSB is a well-established brand which shares our culture of focusing on our customers and local communities.
"We believe that our experience of growing SME lending, our resilient and tested IT platform and our commitment to innovation will speed up TSB's expansion so that it fulfils its potential as a strong and effective challenger to the traditional UK banks, without any of their legacy issues."
Sabadell said it saw opportunities to continue growth in the current account market, and accelerate growth in lending and expansion in the small business sector.
It said potential savings of £160m a year could be made through a switch over of IT systems from those currently provided by Lloyds to Sabadell's own platform.
Lloyds will provide £450m to support the transition.
Sabadell also announced a €1.6 billion rights issue to shore up its balance sheet after splashing out on the British bank. The bank, founded in 1881, has expanded rapidly, doubling in size in the last five years.
It is now Spain's fifth largest bank and also has a presence in the US.
TSB operates 631 branches and serves 4.5m customers. It recently reported annual profits of £170m.
Lloyds - 23% owned by the British taxpayer after a bailout in 2008 - was forced to offload the TSB business under European rules on state aid. It had been obliged to dispose of its remaining stake by the end of this year.
Last year's TSB flotation was more than 10 times oversubscribed and raised £455m, resulting in its return to the market for the first time since 1995 when it merged with Lloyds.
Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said: "In all, the news looks good for both UK consumers and businesses, with the new TSB adding competitive vigour to the UK market place."
