| BANKATLANTIC BANCORP INC Item 1A Risk Factors BankAtlantic BankAtlantic’s primary risk factors are: changes in interest rates, success of BankAtlantic’s Florida Most Convenient Bank initiatives, loan portfolio credit risk, inadequate allowance for loan loss reserves and regulatory compliance |
| Changes in interest rates could adversely affect our net interest income and profitability |
| The majority of BankAtlantic’s assets and liabilities are monetary in nature |
| As a result, the earnings and growth of BankAtlantic are significantly affected by interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board |
| The nature and timing of any changes in such policies or general economic conditions and their effect on BankAtlantic cannot be controlled and are extremely difficult to predict |
| Changes in interest rates can impact BankAtlantic’s net interest income as well as the valuation of its assets and liabilities |
| Banking is an industry that depends to a large extent on its net interest income |
| Net interest income is the difference between: • interest income on interest-earning assets, such as loans; and • interest expense on interest-bearing liabilities, such as deposits |
| Changes in interest rates can have differing effects on BankAtlantic’s net interest income and the cost of purchasing residential mortgage loans in the secondary market |
| In particular, changes in market interest rates, changes in the relationships between short-term and long-term market interest rates, or the yield curve, or changes in the relationships between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities |
| This difference could result in an increase in interest expense relative to interest income and therefore reduce BankAtlantic’s net interest income |
| While BankAtlantic has attempted to structure its asset and liability management strategies to mitigate the impact on net interest income of changes in market interest rates, we cannot provide assurances that BankAtlantic will be successful in doing so |
| Loan prepayment decisions are also affected by interest rates |
| Prepayments in a declining interest rate environment reduce BankAtlantic’s net interest income and adversely affect its earnings because: • it amortizes premiums on acquired loans, and if loans are prepaid, the unamortized premium will be charged off; and • the yields it earns on the investment of funds that it receives from prepaid loans are generally less than the yields that it earned on the prepaid loans |
| Significant loan prepayments in BankAtlantic’s mortgage portfolio in the future could have an adverse effect on BankAtlantic’s earnings |
| Additionally, increased prepayments associated with purchased residential loans may result in increased amortization of premiums on acquired loans, which would reduce BankAtlantic’s interest income |
| In a rising interest rate environment loan prepayments generally decline resulting in loan yields that are less than the current market yields |
| In addition, the credit risks of loans with adjustable rate mortgages may worsen as interest rates rise and debt service obligations increase |
| BankAtlantic has developed a computer model using standard industry software to quantify its interest rate risk, referred to as an “ALCO model” in support of its Asset/Liability Committee |
| This model 19 _________________________________________________________________ [48]Table of Contents measures the potential impact of gradual and abrupt changes in interest rates on BankAtlantic’s net interest income |
| While management would attempt to respond to the projected impact on net interest income, there is no assurance that management’s efforts will be successful |
| BankAtlantic has disclosed issues regarding its compliance with the USA PATRIOT Act, anti-money laundering laws and the Bank Secrecy Act which may subject it to fines and regulatory actions, including restrictions on its ability to pay dividends |
| As previously disclosed BankAtlantic has identified deficiencies in its compliance with the USA PATRIOT Act, anti-money laundering laws and the Bank Secrecy Act (“AML-BSA”) and has been cooperating with regulators and other federal agencies concerning these deficiencies |
| The deficiencies may subject BankAtlantic to additional fines and regulatory actions, including restrictions on its ability to pay dividends |
| BankAtlantic has taken steps to correct identified deficiencies and has incurred substantial costs to improve its compliance systems and procedures, including costs associated with engaging attorneys and compliance consultants, acquiring new software and hiring additional compliance staff |
| Following the review and recommendations of our compliance consultants, BankAtlantic internally created a separate AML-BSA department which resulted in a staff increase of approximately 30 employees and significant improvements to our systems, processes, and training programs were put in place |
| The on-going financial impact of those changes and additions was to increase recurring expenses by approximately dlra3dtta5 million annually |
| Notwithstanding that we believe we are currently in compliance with applicable laws, many financial institutions have been the subject of proceedings based on past AML-BSA deficiencies which have resulted in substantial fines and penalties and have been required to enter into cease and desist orders with their primary regulators |
| Under these circumstances, we determined during the 2005 fourth quarter that it was appropriate to establish a dlra10 million reserve with respect to these matters, and we anticipate that BankAtlantic may be required to enter into a supervisory agreement with respect to the maintenance of satisfactory compliance status |
| BankAtlantic’s ability to obtain regulatory approvals necessary to proceed with certain aspects of its business plan, including its branch expansion and other acquisition plans, and its ability to pay dividends, could be adversely affected by a cease and desist order or any other actions taken by regulators or other federal agencies |
| There is no assurance that the dlra10 million reserve will be sufficient to cover the fines, penalties or additional expenses associated with these compliance matters, and additional fines, penalties or expenses will negatively impact our results |
| BankAtlantic’s “Florida’s Most Convenient Bank” initiative has created increased operating expenses, which may have an adverse impact on our earnings |
| BankAtlantic’s “Florida’s Most Convenient Bank” initiative and its associated expanded operations have required it to provide additional management resources, hire additional personnel, increase occupancy and marketing expenditures and take steps to enhance and expand its operational and management information systems |
| Employee compensation, occupancy and advertising expenses have significantly increased since the inception, during 2002, of the initiative from dlra78dtta9 million during 2001 to dlra141dtta9 million during 2004 and dlra182dtta0 million during 2005 |
| As a result of these growth initiatives, BankAtlantic has incurred and will continue to incur increased operating expenses |
| In the event that the “Florida’s Most Convenient Bank” initiative does not produce the results anticipated, BankAtlantic’s increased operating expenses will not be adequately offset by the benefits of the initiative and our earnings will be adversely impacted |
| BankAtlantic’s loan portfolio subjects it to high levels of credit risk |
| BankAtlantic is exposed to the risk that its borrowers or counter-parties may default on their 20 _________________________________________________________________ [49]Table of Contents obligations |
| Credit risk arises through the extension of loans, certain securities, letters of credit, financial guarantees and through counter-party exposure on trading and wholesale loan transactions |
| In an attempt to manage this risk, BankAtlantic establishes policies and procedures to manage both on and off-balance sheet (primarily loan commitments) credit risk |
| BankAtlantic attempts to manage credit exposure to individual borrowers and counter-parties on an aggregate basis including loans, securities, letters of credit, derivatives and unfunded commitments |
| Credit personnel analyze the creditworthiness of individual borrowers or counter-parties, and limits are established for the total credit exposure to any one borrower or counter-party |
| Credit limits are subject to varying levels of approval by senior line and credit risk managers |
| BankAtlantic also enters into participation agreements with other lenders to limit its credit risk |
| The majority of BankAtlantic’s loan portfolio consists of loans secured by real estate |
| BankAtlantic’s loan portfolio included dlra2dtta0 billion of loans secured by residential real estate and dlra2dtta4 billion of commercial real estate, construction and development loans at December 31, 2005 |
| At December 31, 2005, BankAtlantic’s commercial real estate, construction and development loans, which are concentrated mainly in South Florida, represented approximately 45dtta2prca of its loan portfolio |
| Accordingly, declines in real estate values, particularly in South Florida, could have a material adverse impact on the credit quality of BankAtlantic’s loan portfolio and on its results |
| Real estate values are affected by various factors, including changes in general and/or regional economic conditions, governmental rules and policies and natural disasters such as hurricanes |
| BankAtlantic’s commercial real estate loan portfolio includes large lending relationships, including relationships with unaffiliated borrowers involving lending commitments in each case in excess of dlra30 million |
| These relationships represented an aggregate outstanding balance of dlra633 million as of December 31, 2005 |
| Defaults by any of these borrowers could have a material adverse effect on BankAtlantic’s results |
| BankAtlantic may be impacted by a concentration in interest-only residential loans |
| Approximately 38prca of our residential loan portfolio consists of interest-only loans |
| These loans have reduced initial loan payments with the potential for monthly loan payments to increase significantly in subsequent periods, even if interest rates do not rise |
| Monthly loan payments will also increase as interest rates increase |
| This presents a potential repayment risk if the borrower is unable to meet the higher debt service obligations or refinance the loan |
| An inadequate allowance for loan losses would result in reduced earnings |
| As a lender, BankAtlantic is exposed to the risk that its customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment |
| BankAtlantic evaluates the collectibility of its loan portfolio and provides an allowance for loan losses that it believes is adequate based upon such factors as: • the risk characteristics of various classifications of loans; • previous loan loss experience; • specific loans that have loss potential; • delinquency trends; • estimated fair value of the collateral; • current economic conditions; • the views of its regulators; and 21 _________________________________________________________________ [50]Table of Contents • geographic and industry loan concentrations |
| If BankAtlantic’s evaluation is incorrect and borrower defaults cause losses exceeding the portion of the allowance for loan losses allocated to those loans, our earnings could be significantly and adversely affected |
| BankAtlantic may experience losses in its loan portfolios or perceive adverse trends that require it to significantly increase its allowance for loan losses in the future, which would reduce future earnings |
| In addition, BankAtlantic’s regulators may require it to increase or decrease its allowance for loan losses even if BankAtlantic thinks such change is unjustified |
| BankAtlantic Bancorp’s ability to service its debt and pay dividends depends on dividends from BankAtlantic, which are subject to regulatory limits |
| BankAtlantic Bancorp is a holding company and it depends upon dividends from BankAtlantic for a significant portion of its cash flow |
| BankAtlantic Bancorp uses dividends from BankAtlantic to service its debt obligations and to pay dividends on its capital stock |
| BankAtlantic Bancorp’s ability to service its debt and pay dividends is further subject to restrictions under its indentures and loan covenants |
| BankAtlantic’s ability to pay dividends or make other capital distributions to BankAtlantic Bancorp is subject to the regulatory authority of the OTS and the FDIC BankAtlantic’s ability to make capital distributions is subject to regulatory limitations |
| Generally, BankAtlantic may make a capital distribution without prior OTS approval in an amount equal to BankAtlantic’s net income for the current calendar year to date, plus retained net income for the previous two years, provided that BankAtlantic does not become under-capitalized as a result of the distribution |
| BankAtlantic’s ability to make such distributions depends on maintaining eligibility for “expedited treatment |
| ” BankAtlantic currently qualifies for expedited treatment, but there can be no assurance that it will maintain its current status |
| Additionally, although no prior OTS approval may be necessary, BankAtlantic is required to give the OTS thirty (30) days notice before making any capital distribution to BankAtlantic Bancorp |
| The OTS may object to any capital distribution if it believes the distribution will be unsafe and unsound |
| Additional capital distributions above the limit for an expedited treatment institution are possible but require the prior approval of the OTS The OTS is not likely to approve any distribution that would cause BankAtlantic to fail to meet is capital requirements on a pro forma basis after giving effect to the proposed distribution |
| The FDIC has backup authority to take enforcement action if it believes that a capital distribution by BankAtlantic constitutes an unsafe or unsound action or practice, even if the OTS has cleared the distribution |
| See also “Item 1A Risk Factors” — “BankAtlantic has disclosed issues regarding its compliance with the USA Patriot Act, anti-money laundering laws and the Bank Secrecy Act which may subject it to fines and regulatory actions, including restrictions on its ability to pay dividends |
| ” At December 31, 2005, BankAtlantic had approximately dlra263dtta3 million of indebtedness outstanding at the holding company level with maturities in 2032 and 2033 |
| The aggregate annual interest expense on this indebtedness is approximately dlra19dtta3 million |
| During 2005, BankAtlantic Bancorp received dlra20 million of dividends from BankAtlantic |
| BankAtlantic Bancorp’s financial condition and results would be adversely affected if the amounts needed to satisfy its debt obligations, including any additional indebtedness incurred in the future, exceeded the amount of dividends it receives from its subsidiaries |
| Adverse events in Florida, where our business is currently concentrated, could adversely impact our results and future growth |
| BankAtlantic’s business, the location of its branches and the real estate collateralizing its commercial real estate loans are concentrated in Florida |
| As a result, we are exposed to geographic risks, and any economic downturn in Florida or adverse changes in laws and regulations in Florida would have a negative impact on our revenues and business |
| Further, the State of Florida is subject to the risks of natural disasters such as tropical storms and hurricanes |
| The occurrence of an economic downturn in Florida, 22 _________________________________________________________________ [51]Table of Contents adverse changes in laws or regulations in Florida or natural disasters could impact the credit quality of BankAtlantic’s assets, the level of deposits our customers maintain with BankAtlantic, the success of BankAtlantic’s customers’ business activities, and the ability of BankAtlantic to expand its business |
| Regulatory Compliance |
| The banking industry is an industry subject to multiple layers of regulation |
| A risk of doing business in the banking industry is that a failure to comply with any of these regulations can result in substantial penalties, significant restrictions on business activities and growth plans and/or limitations on dividend payments, depending upon the type of violation and various other factors |
| For a description of the primary regulations applicable to BankAtlantic and BankAtlantic Bancorp see “Regulations and Supervision” |
| As a holding company, BankAtlantic Bancorp is also subject to significant regulation |
| Ryan Beck We engage in the securities business through Ryan Beck, which subjects us to the risks of its business |
| The securities business is, by its nature, subject to various risks, particularly in volatile or illiquid markets, including the risk of losses resulting from the underwriting or ownership of securities, customer fraud, employee errors and misconduct, failures in connection with the processing of securities transactions and litigation |
| Ryan Beck’s business and its profitability are affected by many factors including: • the volatility and price levels of the securities markets, • the volume, size and timing of securities transactions, • the demand for investment banking services, • the level and volatility of interest rates, • the availability of credit, • legislation affecting the business and financial communities, • the economy in general, • the volatility of equity and debt securities held in inventory, and • attraction and retention of key personnel |
| Markets characterized by low trading volumes and depressed prices generally result in reduced commissions and investment banking revenues as well as losses from declines in the market value of securities positions |
| Moreover, Ryan Beck is likely to be adversely affected by negative economic developments in the mid-Atlantic region or the financial services industry in general |
| Volatility in either the stock or fixed-income markets could have an adverse impact on Ryan Beck’s operations |
| A major portion of Ryan Beck’s assets and liabilities are securities owned or securities sold but not yet purchased |
| Securities owned and securities sold but not yet purchased are associated with trading activities conducted both as principal and as agent on behalf of individual and institutional investor clients of Ryan Beck and are accounted for at fair value in our financial statements |
| The fair value of these trading positions is generally based on listed market prices |
| If listed market prices are not available or if liquidating the positions would reasonably be expected to impact market prices, fair value is determined based on other relevant factors, including dealer price quotations, price quotations for similar instruments traded in different markets or management’s estimates of amounts to be realized on settlement |
| As a consequence, volatility in either the stock or fixed-income markets could result in adverse changes in our financial results |
| Trading transactions as principal involve making markets in securities, which are held in inventory to facilitate sales to and purchases from customers |
| As a result of this activity, Ryan Beck may be required to hold securities during declining markets |
| 23 _________________________________________________________________ [52]Table of Contents Parent Company We are controlled by BFC Corporation and its control position may adversely affect the market price of our Class A common stock |
| As of December 31, 2005, BFC Financial Corporation (“BFC”) owned all of the Company’s issued and outstanding Class B common stock and 8cmam329cmam236 shares, or approximately 15dtta0prca, of the Company’s issued and outstanding Class A common stock |
| BFC’s holdings represent approximately 54dtta9prca of the Company’s total voting power |
| Class A common stock and Class B common stock vote as a single group on most matters |
| BFC is in a position to control the Company and elect the Company’s Board of Directors |
| As a consequence, BFC has the voting power to significantly influence the outcome of any shareholder vote, except in those limited circumstances where Florida law mandates that the holders of our Class A common stock vote as a separate class |
| BFC’s control position may have an adverse effect on the market price of the Company’s Class A common stock |
| Our activities and our subsidiaries’ activities are subject to a wide range of bank regulatory requirements that could have a material adverse effect on our business |
| The Company is a “grandfathered” unitary savings and loan holding company and has broad authority to engage in various types of business activities |
| The OTS can prevent us from engaging in activities or limit those activities if it determines that there is reasonable cause to believe that the continuation of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of BankAtlantic |
| The OTS may also: • limit the payment of dividends by BankAtlantic to us; • limit transactions between us, BankAtlantic and the subsidiaries or affiliates of either; • limit our activities and the activities of BankAtlantic; or • impose capital requirements on us |
| Unlike bank holding companies, as a unitary savings and loan holding company we are not subject to capital requirements |
| However, the OTS has indicated that it may in the future impose capital requirements on savings and loan holding companies |
| The OTS may in the future adopt regulations that would affect our operations including our ability to pay dividends or to engage in certain transactions or activities |
| ” Our portfolio of equity securities subjects us to equity pricing risks |
| We maintain a portfolio of publicly traded and privately held equity securities that subject us to equity pricing risks arising in connection with changes in the relative values due to changing market and economic conditions |
| Volatility or a decline in the financial markets can negatively impact our net income as a result of devaluation of these investments |
| At December 31, 2005 we had equity securities with a book value of approximately dlra82dtta1 million |
| ” The repayment of our subordinated debentures is dependent on the ability of our subsidiaries to pay dividends to us |