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Suntrust Acquisition of National

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SunTrust Acquisition of National

1. What is the rationale behind the merger between SunTrust and National Commerce? Does it make sense for SunTrust?

The merger makes sense for SunTrust. SunTrust would gain nearly 500 retail locations in the high-growth markets of the Carolinas, while solidifying its positions in Virginia and Tennessee. This growth would give them the opportunity to have a comparable footprint to Wachovia in the southeast. The combined companies would be projected to gain 14 basis points in yield on the loan portfolio with an increase of only 7 bps in funding cost.

2. What is the role of capital for a bank and what levers can use to arrive at an “optimal” capital ratio? What trade-offs in terms of the level of capital (high vs. low) are faced by SunTrust as it pursues this acquisition?

Capital provides banks with a cushion against risk, promotes public confidence, and funds growth. It is also used as a regulatory tool to limit the amount of risk a bank is exposed to. If SunTrust’s acquisition were funded with 100% stock and zero cash it would increase the tangible capital ratio by approximately 16bps, from the current level of 7.13% to 7.29%. However, SunTrust will be faced with a trade off between dilution of anticipated earnings and its capital ratio. The percentage between cash and stock used in the acquisition will affect the trade off. The greater the amount of cash that is used in the acquisition, the lower the capital ratio and the dilution of earnings.

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