BB&T Corp.'s credit-quality issues are no longer flying under the radar.

Before last week's announcement that it plans to buy Colonial Bank, analysts had been waiting for a shoe to drop concerning the quality of BB&T's loan book. They might have found it. BB&T's aggressive markdown of Colonial credits, very much akin geographically to the Winston-Salem, N.C., company's own, is raising analysts' eyebrows.

"The aggressive marks … show just how pressured these markets are," David Hendler, an analyst at CreditSights Inc, wrote in a Monday note to clients. "We cannot rule out higher-than-expected loss developments in BB&T's legacy loan book." He added that the quality of BB&T's own portfolio should be carefully followed by investors through early next year.

Analysts have generally praised BB&T's loss-sharing agreement with the Federal Deposit Insurance Corp. as part of its acquisition of $22 billion of assets that belonged to Colonial, which failed last week.

Yet in a conference call with analysts, BB&T executives said the company would take a cumulative 37% markdown on the $14 billion in assets it agreed to take on. The markdown ranged from 18% for residential mortgages to 67% for loans in Colonial's construction portfolio. BB&T touted the writedowns as the most aggressive of any major bank bailout in the past 12 months, and noted that the most it could lose on the Colonial book is $500 million.

Analysts said BB&T and Colonial were both lending in Florida and Georgia and had significant dealings with residential developers and home builders.

Kevin Fitzsimmons, an analyst for Sandler O'Neill & Partners LP, agreed. Though BB&T had taken the right tack in securing solid backing from the FDIC, the markdowns "raise the question of whether they are being too optimistic about their own credit quality," he added.

Credit was a focal point of BB&T's second-quarter earnings, which were off 52% from a year earlier, at $208 million, and were a penny shy of analysts' expectations. The loan-loss provisions more than doubled from a year earlier, to $701 million; nonperforming assets rose 156% over the same period, to $3.34 billion.

BB&T runs the risk of deflated property valuations, including the collateral for loans it holds, if it attempts to unload Colonial assets at the written down levels, analysts said. It is more likely that BB&T will opt to hold Colonial's assets for an undetermined time, they said.

A chart showing capital ratios in BBT's presentation also created some disagreement on Monday. BB&T calculated its tangible common equity ratio using Tier 1 common equity, deviating from how most banks handle the numbers, analysts said. The difference was a 6.1% ratio by BB&T rather than a 5.6% otherwise.

Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., noted the discrepancy, adding that regardless of methodology, the estimated capital levels "came out a little lower" than expected.

"I thought they wouldn't have to raise money" to maintain capital levels, he added.

A BB&T spokesman said he could not comment until the company prices the stock offering. BB&T executives hosted two conference calls with analysts Monday morning to discuss the acquisition.

Kelly King, BB&T's CEO, when asked about the necessity of the capital raise, said that while there are signs of an improving economy, "we're still not through the storm," according to participants of the call. Otherwise, he said the extra capital would let BB&T take advantage of other opportunities when the economy begins to recover.

BB&T, in recent quarters, has attempted to soothe nerves over its loan exposure as it continues to produce profits, while other Southeast peers have spilled red ink.

King best detailed that position during BB&T's Feb. 11 investor day, telling attendees that the company only deals with local home builders rather than speculative developers. "We underwrite tough," he said. "We have a lot of equity requirements, and we have a lot of guaranteed support. So what that means is that if the project gets in trouble, we've got more staying power."

BB&T received good FDIC coverage on Colonial's assets, analysts said. The exposure is limited to $1.47 billion of the assets it took on. Executives said during one of the calls that the markdowns address two thirds of the exposure, according to participants on the call.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.