Colonial Bank Marks a New Low for Loans

By PETER EAVIS It is often said that an asset is only worth as much as someone is willing to pay for it. Judging by BB&T's purchase of Colonial Bank's assets, many real-estate-laden regional banks may be worth very little. Indeed, the deal, which has BB&T taking $21.8 billion of Colonial's assets after it was seized last week, goes to the heart of a long-running debate among bank-stock investors. One side says banks typically overvalue most of their assets, because they don't have to mark most of their loans to market. The other side says marking to market can price in undue pessimism, forcing unnecessary hits. What is more, this side argues, banks have reserves, cash flows from healthy loans and steady deposit funding that they can rely on to ride out periods when there are doubts about assets. The BB&T-Colonial deal shows how the second view can break down. Colonial faced loan losses that were too big to absorb. In doing the deal, BB&T is marking down Colonial loans and real-estate collateral by 37%, a number that reflects a large amount of estimated losses. The biggest mark is on construction loans; BB&T is cutting their value by 67%. Of course, few banks have the same level of toxic assets as Colonial. "When we looked at Colonial's portfolio versus ours, we saw a lot of borrowers we turned away," says Daryl Bible, BB&T's chief financial officer. Still, BB&T's marks are valuable market intelligence.Investors mightn't necessarily want to apply a full 67% hit to other banks' construction loans. But because it is part of a real and sizable transaction, it is a solid starting point for coming up with appropriate loss projections for other banks. Banks often don't like mark-to-market. But losses catch up with them eventually. Write to Peter Eavis at peter.eavis@wsj.com