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Author: valueconvert One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 274  
Subject: Sizing up the investment opportunity Date: 11/18/2007 6:47 AM
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BB&T has only modest exposure to the credit quality problems in the mortgage market.
Sub-prime and Alt A mortgage exposure:
Through September 30,2007
Sub-prime Alt A
Total outstandings .5 bil 3.7 billion
% of loans .5% 4.1%
Average loan size $185,450 $331,130
% first mortgage 81.8% 100%
Average credit score 600 734
2007 loss ratio .48% .03%
No negative amortization loans or option arms
Minimal buyback risk
(source: BB&T Merrill Lynch presentation)

The company has had a headwind because of the flat yield curve. As the yield curve returns to a more normal shape (i.e. steeper), net interest margin should recover somewhat.

BB&T was not in the "originate and sell" business outside of Fannie and Freddie loans. Outside of fees related to mortgage origination, BB&T will not be losing major profit centers.

If BB&T can grow at 7% for the next 5 years and return to a 12x multiple, an investor requiring a 9% CAGR could pay up to $57. Buying today gives an investor a 40% margin of safety. In the meantime, you get a 5.4% yield that is rock solid and quite likely to rise.

BB&T has a strong franchise, with high market share in markets growing at above average rates. This makes them an attractive takeover target. While I don't believe there are more than a handful of US banks that are legitimate possibilities (with WFC and USB at the top of the list), the weak dollar may spur foreign banks to consider US acquisitions. Foreign banks should be in a position to pay a premium.

My dream situation is for BB&T to do a merger of equals with STI, moving the headquarters to Atlanta. This would create an awesome Southeastern franchise. They could run this for 5 year, optimizing and rationalizing the assets.

While STI is bigger, I don't think it is so much bigger as to preclude a merger of equals. Below are the facts, people can use their own judgment as to whether this is reasonable or not.

BB&T market cap =18.5 billion
STI market cap = 23.9 billion

BB&T total assets =127.5 billion
STI total assets = 176 billion

BB&T revenues = 6.4 billion
STI revenues =8.4 billion

Please remember, this is what I laid out as a "dream scenario." It is not a prediction. Putting together such a deal would be quite difficult. Further, the timing would matter a lot. We are in a decline in credit quality that I believe will get worse. Among BB&T's weakest markets currently are Metro DC, Florida and Atlanta. Well, Florida and Atlanta are a much bigger piece of the puzzle for STI. My guess is that this downturn will be tougher on STI than it is on BB&T.

Bottom line: there is a lot of fear out there. BB&T will make it through, possibly as a much stronger player in the industry. This seems like a "fat pitch" buying opportunity to me.
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