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BankAtlantic Bancorp. Q3 2009 Earnings Call Transcript 2 comments

October 22, 2009 | about: BBX

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BankAtlantic Bancorp. (BBX)

Q3 2009 Earnings Call

October 22, 2009; 11:00 am ET

Executives

Alan Levan - Chief Executive Officer

Valerie Toalson - Executive Vice President & Chief Financial Officer

Jarett Levan - BankAtlantic President & Chief Executive Officer

Leo Hinkley - Senior Vice President & Investor Relations Officer

Analysts

Paul Miller - FBR Capital Markets & Co

Catherine Miller - Bank of America

Matthew Elise - Homecomings Financial

Wilson Yeagley - Unidentified Company

Operator

Good morning. My name is Molly, and I will be your conference facilitator today. At this time I would like to welcome everyone to the BankAtlantic Bancorp, third quarter 2009 earnings call. All lines have been placed on mute to prevent any background noise (Operator Instructions).

I would now like to introduce Mr. Leo Hinkley, Senior Vice President of Investor Relations, Mr. Hinkley; you may begin your conference.

Leo Hinkley

Thank you Molly, good morning everyone, and thank you for joining us at the BankAtlantic Bancorp teleconference call and webcast, discussing our financial results for the third quarter of 2009.

The speakers today will include BankAtlantic Bancorp’s Chairman and Chief Executive Officer, Mr. Alan B. Levan; and Valerie C. Toalson, BankAtlantic Bancorp’s Chief Financial Officer as well as BankAtlantic’s President and Chief Executive Officer, Jarett S. Levan,. We’ll begin our call with a discussion from Alan, Valerie and Jarett. At the conclusion of the discussion and time permitting, we will then conduct a question and answer period.

Copies of the press release issued this morning on Thursday, October 22, 2009 are available on the press room section of our website, www.bankatlanticbancorp.com. Also detailed financial tables are also available on the investor relations section of the BankAtlantic Bancorp website, by clicking the quarterly and/or supplemental financial navigation links. In addition individual copies may be obtained by contacting our investor relations department at 954-940-5300 or by e-mail at investorrelations@bankatlanticbancorp.com.

Now, before beginning our discussion, I’d like to remind everyone that certain statements made today may constitute forward-looking statements with respect to plans, projections and/or the future performance of the company. Forward-looking statements are based largely on the expectations of BankAtlantic Bancorp and involve a number of risks and uncertainties that are subject to change, based on factors which are in many instances beyond the company’s control.

Actual results, performance or achievements could differ materially from those expressed or implied by these statements, and the company cautions that the foregoing factors are not exclusive. In addition to the risks and factors identified, reference is also made to our other risks and factors detailed in the press release issued this morning, October 22, 2009, as well as reports filed by the company with the Securities and Exchange Commission.

Now it’s my great pleasure to introduce Mr. Alan B. Levan. Alan.

Alan Levan

Thank you, Leo. Good morning everybody. Welcome to the BankAtlantic conference call. As we’ve reported over the last several quarters, team has been working very diligently to prove our core operating statistics because at some point, we wall recognize that we will see beyond this economy and then we’ll be looking at the core operations company.

What I am going to do this morning is just give you a short high level summary of some performance print line and then turn it over to Jarrett and Valerie to give you details and then of course to go to Q&A. My presentation really is broken down to these performance bullet points, I’ve got 11 of them, first one is negative and the next 10 are positive. So let me start with the negative number. It relates to the economy of course, it’s something that we have no control over, which is why we are focusing so much on core earnings.

Our long lost provision was up for the quarter primarily a result of key appraisals on loans that were already non-performing to start with requiring us again to write down these assets, further than we had previously written down and we take those number from the appraisers, we would like to get to a final number, but unfortunately the Florida economy still has been, they have gotten to stabilization and we are just going to have to, we are just going to have to deal with that, until it reaches stabilization. Number two is our total non accrual loans actually defined, which is positive.

Our allowance for loans losses is at the highest level in BankAtlantic’s history. Number four are our BankAtlantic’s regulatory capital ratios increased to record level, number five, our core deposits reached record levels, number six, our borrowing at BankAtlantic continues to reduce significantly and were at the lowest levels in two decades.

Number seven, our core earnings, the BankAtlantic’ core earnings increased over the quarter. Number eight, our net interest margin improved from last quarter. Number nine, our non-interest income was up, number ten, hardcore expenses were down and number 11, as you know, we conducted a rights offering in the quarter raising approximately $76 million.

Karen Rosario spent more time than I just did talking about all these positive trends and the details related with the positive trends, but let me just spend a moment before I have Tom here to talk about this, this one negative issue which of course is the economy.

The Florida real estate markets by all reports continue to suffer and the real estate values continue to be devalued according to the appraisers that do this research. While, well we are pleased that we didn’t increase our total non-performing loans for the quarter, these many of these write-downs or increases in provisions related to the legacy loans that were non-performing that we reported in prior quarters and it’s unfortunate that, that we have to continue to write these down.

Under accounting rules, some cases, you know we argued to write it down further, but under the rules we are subject to - for the metrics to get us to the various levels of each quarter. Of course that phenomenon won’t turn around until the Florida economy improves and this value stabilizes.

So, at this point let me turn it over to Jarrett who will give you more detail on some of the bullet points we are going to cover.

Jarett Levan

Thank you Alan and good morning, as we reported in the press release that the bank we reported a $35 million loss for the quarter, now obviously it is a loss, but I’m going to echo Alan’s sentiments that there are many, many things that the bank could be proud of, in many positive trends, I wont go through the list, again like Alan did, but I think Valerie will go into it more detailed, but a lot of very, very positive trends.

The non-performing loans, as we mentioned were relatively stable, there one maybe two additional non-performing loans in the commercial real estate portfolio and nothing of significance during this quarter. Mostly the charge-offs or half the charge-offs were from the existing non-performing loans.

Valerie is going to go into more detail on that as well as on the loan loss provision, but the question is as we look at this market and we look forward, we’ve truly taken an opportunity to strengthen the balance sheet by reducing the borrowings by repositioning our assets, by increasing the core earnings and by improving the margin and as we emerge from this market, you will see the effects of those opportunities.

Our three main priorities remain as they have for the full year managing credit, maintaining capital and improving the core earnings, as reflected in the release, very strong capital in the quarter continues to be well in excess of regulatory requirements and that’s a result of well in success of the rights offering to the continued improvement or strength for earnings and previous reports from Bancorp for the quarter.

In terms of the core earnings we were up 25% over the second quarter to $24 million and are also up from the third quarter of 2008. We continue to believe that eventually the quarter economies over cover and these core earnings will be the best parameter for how BankAtlantic will perform after the recession has passed.

As I mentioned earlier, great quarter in terms of core deposit growth up to $2.5 billion in core deposits which is a new record for BankAtlantic and also $320 million in year-to-date growth in core deposits, in fact throughout the quarter several weeks we were hitting records week over week in core deposits.

Usually the second and third quarters are very challenging for us, because of seasonality in the quarter markets, but this year we bucked that trend, we were very focused on the second and third quarters and were able to sustain this growth traditionally would be a down period for us and we would hope that those trends would continue into the fourth quarter.

Part of our success is that, we’ve - we are delivering old fashioned banking or talking to the customer, we are listening to their needs, we are delivering the products that they want and, we call it wrong service, we call it old fashioned banking, but the training and the products that we reengineered in 2008, appear to be pain off for us in 2009.

Our deposit franchise just to remind you as a $4 billion, a deposit franchise, 72% of which is non-CD which is up 70% in the second quarter, at an average cost of 37 basis points for our core deposits and 92 basis points for our total deposits which we believe represents one of the strongest franchises in the state of Florida.

Our broker deposit levels also came down to less than 3% of total assets, because of the organic growth in deposits, our borrowings also came down to less than 10%. Now I mentioned that they probably, at all time low for us, at least in the past two decades and those borrowings are down over a billion dollars from a year ago.

Our revenue was flat up slightly quarter over quarter and of course our revenue suffers from the impact of the non-performing loans, it also suffers from the impact of the reduction in assets over the last year. Despite that, our core non-interest income and net interest income was up over the second quarter and has held pretty stable throughout the year.

The expense side, we’ve been focused on reducing expenses and improving the efficiency ratio, since the beginning of 2007 and our core expenses came down again in the third quarter and a 15% reduction over the same period last year and is down below pre-2005 levels and you followed our company for the last several years, you know, that from 2005 through 2007, we opened 30 new locations, our expenses are down despite the growth of those new stores.

Despite the reductions in expenses I just want to mention it again our core deposits also we are doing more with less, more efficient operation. Our folks are focused on the customer and you would think that with reduction in expenses service levels would decline that I would submit that it’s actually the opposite, I think our service levels have actually gotten better despite the reduction in expenses.

We know we still have a lot of work to do, we are very proud of the progress we have made this year, and especially in the third quarter, and I’m happy to answer any questions as we get to the Q-&-A. Valerie.

Valerie Toalson

Thank you Jarett, the supplemental financials on the website detail the financial results of the consolidated company, BankAtlantic and the parent company, and I will speak to BankAtlantic first. As Alan and Jarett mentioned, while we continue to incur losses on loan provisioning, we are certainly pleased with foundational progress on several fronts.

First is the increase in BankAtlantic’s capital ratios during the quarter, our total risk based capital ratio at September 30 was 13.5%, tier one at 11.6% and our tier one common at 11.5%. Additionally, tangible equity to tangible assets ratio at BankAtlantic of 8.37% and that increase in the capital ratios was driven by the $75 million capital contribution from the parent company as a result of their rights offering completed in the third quarter. As well as then continued shrinkage of the balance sheet and the focus on the core operating earnings

BankAtlantic’s third quarter 2009 net loss was $35.3 million, and that is made up of core operating earnings, earnings before year loan loss provisions and other non core expenses of approximately $24 million, that’s offset by $7 million in non core expense that I will detail for you in a moment.

Net charge-offs at $43 million, and then additional loan provisioning in excess of those net charge-off at about $9 million. Before I speak to the earnings, I will speak to some of the balance sheet dynamics in the quarter is this is certainly been an important component of our capital management strategy.

During the third quarter, our assets reduced by a little over $300 million or close to 6% and the basis for that has really been the same as in the prior quarter’s continued run of through routine payment of our purchase mortgage loan portfolio, half certificate redemptions, and then in the third quarter we did have a net sale of approximately $45 million in mortgage backed securities.

Compared to a year ago, our balance sheet is down by about 20% or about $1.2 billion, and at the same time, well we have the continued improvement in our quarter deposits that Jarett spoke to. Our total deposits were down about $95 million as a result of declines in the broker deposits in the quarter as well as some other non core deposits.

This mix in shift of deposits as well as discipline of pricing in a quarter resulted in our total cost of deposits actually improving 21 basis points in the third quarter. As a result of these balance sheet dynamics, we brought down our total borrowings by $250 million in the quarter to $416 million compared to same time last year those total borrowings have been brought down by over 74% or about $1.2 billion.

As a result our ratio of our borrowings to the total of our deposits and borrowing was under 10% at September 30, ‘09 and that’s compared to close to 30% a year ago. Additionally, our loan to deposit ratio has improved to a 100% at the end of the current quarter compared to a 115% a year ago.

Moving on to core earnings, Jarett spoke to those the improvement in our core operating earning for the third consecutive quarter to close to $24 million, and up 27% or $5 million from the prior quarter.

Total revenue of $77 million compared to the prior quarter was up $4.1 million or to exclude securities gains were a little bit more normalized likely was, still up $1.4 million. If you break it into its components, the third quarter ‘09 net interest income of $41.5 million was up $1.4 from the prior quarter.

Our net interest margin of 3.59% was actually a 35 basis points from the second quarter of 2009, and our spread improved by 41 basis points here in that same period, and this improvement was really due to lower average rates on the borrowings due to the pay downs and then the lower cost of deposit that I spoke to earlier, offset however, by the impact of the decline in the average earning assets.

Non interest income of $35.5 million was up $2.7 million from the prior quarter primarily as a result of securities gains from the mortgage backed security sales. Excluding those securities, non interest income was about 30.7, essentially flat form the prior quarter.

As Jarrett mentioned, we remain disciplined with expense management year-to-date our core expenses were down over $32 million over the same 2008 period or over 16%, and for the third quarter 2009 our four non interest expense of $53.1 million was down just shy of a $1 million.

Total non interest expense for the third quarter of $60 million was down also approximately a $1 million from the prior quarter, and included in that was $7 million of other non-core expenses, breaking that down it includes $5.4 million in debt redemption costs related again to those pay-downs of borrowings as well as a $1.7 million related to impairments of properties held for sale and lease exit cost.

Moving on to credit, during the third quarter of 2009, as Alan mentioned our non-accrual loans decreased slightly on a net basis to $295 million. Included in that was an increase in residential non-accruals which increased $11 million. Commercial business increased $2 million and then commercial real estate actually decreased close to $14.5 million quarter to quarter due primarily a charge off in that portfolio.

The net charge off at the bank were 43 million reflecting an increase from the second quarter primarily due to a commercial real estate portfolio with a net charge off, they were up to $21.5 million as well as lesser increases in the residential and consumer portfolios of charges, with charge-offs of $7 million and $12 million respectively there.

Delinquencies excluding non-accrual loans at the end of September 09 were stable in total at 1.51% of total loan versus 1.5% at June 30^th, well flat and total we actually saw increases in all the major portfolios, delinquency rates except for commercial real estate which we actually saw some reduction in those delinquencies including non-accrual loans.

The allowance for loan losses in the third quarter was increased by just shy of 6%, a little over 9 million during the fourth quarter and now represent 4.18% of total loans and that was really driven by the increase in the residential non-accrual loans, the increases then are continued, elevated delinquencies across the portfolios and then the increase net charge offs particularly in the commercial real estate portfolio.

Our third question 09 loan loss provision $52 million related approximately 58% to the commercial real estate portfolio, 22% to consumer and 16% to residential. So to summarize, BankAtlantic’s financial results, our net loss for the quarter at $35.3 million was comprised of pre-tax, core operating earnings of approximately 24 million reduced by the loan provision of $52 million in other non-core expenses of $7 million, and again because we took the full deferred evaluation allowance in the fourth quarter of 2008, there has been no tax benefit since then.

Couple of comments on the parent company for the third quarter of 2009, as previously noted the parent company did contribute $75 million of the $76 million rights offering proceeds to BankAtlantic during the third quarter. The parent continues to hold cash of approximately $16 million and its workout sub for the loans in RIO of $63 million or $44.5 million net of reserves.

During the third quarter of 2009, the workout sub incurred a loan provision of $11.3 million and that again is reflecting updated collateral evaluations in the quarter.

So, in summary, the consolidated Bancorp net loss from continuing operations of $52.2 million is comprised of BankAtlantic’s net loss of $35.3 million. The parent company net loss of $16.8 million, which is made up of the workout sub loan provision of $11.3 million and then another parent operating costs, and again because of the DTA evaluation allowance, no tax benefits for the quarter.

Jarett Levan

Operator, I will hold my comments for summary at the end of the Q-&-A period. So why don’t you open the line for the questions at this point.

Question- and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Paul Miller - FBR Capital Markets.

Paul Miller - FBR Capital Markets

Over the quarter you guys did that rights offering in which you raised $70 million and by most investors calculations, given the amount of losses in your portfolio we think you probably be a little bit more capital. Are there any plans to raise more capital or to do something to bring more capital into the institution?

Jarett Levan

Paul we’ve made it clear from the beginning of this recession that maintaining good capital is one of our goals and to stay ahead of that curve. So I cant answer that question today in terms of what our needs maybe, and what may hold in the future in terms of capital raises , but at this point our capital is pretty strong and we’ll just have to look at it quarter-by-quarter.

Paul Miller - FBR Capital Markets & Co

The loans that you moved up to the [Inaudible] which that charge off almost doubled in the quarter. Is that peeking because you haven’t added anything new to that I think over the last couple of quarters. So we should be looking at those charge offs sort of decline going forward or that still has their ways to work through that portfolio?

Jarett Levan

Well, if you take the comments that I made at the beginning, there is a phenomenon going on that if you don’t add a lot of new non-performing loans, clearly that would be the case if they work out, we haven’t added any new home loans, every time you appraise it the appraisals write it down. At some point in time you have say a level of diminishing return

At some point you’ve kind of cleaned the barrel out and so I can’t tell you what next quarter’s write downs will be, if any. That’s we just follow the rules in terms of doing evaluations and getting the appraisal, but it's clearly, it depends on what new non accruals are coming in the system and how you have to write these down.

We seen this before as we’ve discussed several times, we saw this in the 70s and we saw this in the late 80s, and that is the Florida economy is really good when the market is good and it's really bad when the market is bad. And at some point in time, this market will stabilize, and Florida is still a very attractive place for people and businesses to be, and when the all clear sign goes out and things tend to accelerate and get a lot better a lot faster in other parts in the country. The key point is when does that flag go up and unfortunately we don’t have that.

Paul Miller - FBR Capital Markets & Co

Are you seeing any regions at all in Florida because it's such a big state it has a very diverse economy, you got the Miami area which lot of people are saying that can detract a lot of foreign money to stabilize a lot quicker then you got the Fort Meyer, the West Coast area then you got up in the Tampa area and then the Panhandle as any of this, have you seen any difference in performance in this regions?

Alan Levan

Some of those markets are performing better than others, because that you have take into account valuation in the Fort Meyers area for example, and there was huge, huge discounting from a valuation standpoint, and because the bargains were still great in Fort Meyers it was a acceleration of buying there, so they did go through a fair amount of absorption.

I don’t think they are at the level that you could say everything is great there, but unfortunately in the Florida markets there still are a huge number of residential foreclosures going on. I think the latest stats were somewhere likely one in every four, I maybe a little off on that, of residential mortgages in the state are in some form of either foreclosure or modification. The court system here is so slow because of all of these cases that some of them may take many quarters ultimately to resolve, it all goes to inventory of lots of things not just greater than housing.

So I wouldn’t go out and shouting about any part of Florida but there is some parts that perhaps to reach the bottom based on a fact that prices has declined so much.

Paul Miller - FBR Capital Markets & Co

And in the commercial real estate mortgage portfolio I think is where most of the jump and the charge off this quarter was, if I’m incorrect please correct me. But is that any one particular segment, we are hearing that the residential and financial sectors in that categories probably suffering the most, are you experiencing the same?

Alan Levan

Well of course as you know we had a significant emphasis over the last several years on financing, residential builders throughout the state. So many of our early non performing loans were those either land bankers or sites that were spoken for by national or regional home builders who walked away from their options or defaulted on their contracts.

We see some increase in instability in sectors other than that, within our portfolio but nowhere near to the extent that we experienced and continue to experience in the home building side. So, I mean there are some apartments, some commercials that are issues and are just a function of again going back to the economy, but not to the extend that we saw in the residential area.

Paul Miller - FBR Capital Markets & Co

Thank you very much

Operator

Your next question comes from the line Catherine Miller – Bank of America.

Alan Levan

Catherine before you ask a question.

Jarett Levan

I just wanted to just make a follow up to a question that Paul asked which is the difference in the market. We tracked the housing data the starts and the sales and in terms of some of the information that we are seeing from the Florida Association of Realtors. If some of the metropolitan markets, south Florida and Tampa we are seeing over the last three or four months stabilization and medium sales prices and even some increases in the home sales over the last three or four months, so that’s a positive trend hopefully that’s the bottoming in some of these markets. Sorry Catherine go ahead

Catherine Miller – Bank of America

Wanted to ask you about trouble debt restructuring, but I think it’s been increasing for you all pretty substantially over the past few quarters, I think it was about $138 million last quarter. Do you have the number updated for third quarter and can you talk a little bit about your strategy there and trends you are seeing in these loans?

Alan Levan

Valerie why don’t you talk about the trends and I will talk about the strategy.

Valerie Toalson

Okay, Catherine you are right, the trends are up, we are stilling finalizing the numbers and clearly, we’ll have those in our queue here in a couple of weeks, but certainly on the accruing side, we are seeing an increasing trend in our numbers in the trouble debt restructuring particularly on the commercial side.

Alan Levan

Let me deal with the strategy on this trouble debt restructured classification of course has wide implications. In many cases, customers have loans that have due dates, because we traditionally have been a short-term lender.

So many of our commercial loans have one year, two year, three year maturities in our commercial area we don’t have very many that go out more than five years the most, and clearly we haven’t virtually none, I wont say absolutely none, but virtually none that go out more than five years up to ten years, and so the issues that many customers are having is they just cannot pay off these loans at maturity date.

In the past they paid them off either because they would have build what they intended to build and have got or it would have gone to the securitization markets and taken us out or they would have gone to another bank or either a refinancing or additional financing for example, we might have financed a parcel for the acquisition, but now they needed a larger loan to actually build the structure they intended to build. So, because of the markets the way it is, any of these loans come to maturity and the customers are not in a position to pay them off they are still viable borrowers and the project is viable but not necessarily at this moment in time.

Also if they have multiple parcels or multiple loans particularly, if they are not income producing, everybody is focused on liquidity, and so they may come to us and ask us for some relief to reduce the rate. And generally as we evaluate these loans, not in all cases but in some cases, where you give extensions, where you reduce rates, where you provide some assistance to a borrower it changes the category to troubled debt restructure, and not in all cases, but again it’s on a case by case basis.

So, our objective here is to where we’ve had good borrowers as we want to work with those borrowers, and not create a liquidity event or a negative liquidity event through that borrower if it’s not necessary to create a negative liquidity events. It depends on what the appraisal is and what we think the borrower’s interest is in continuing with the property and whether we think this is a straight up borrower or not at this particular time.

All the borrowers at the beginning, but a year or two or three into the cycle, a lot of the blemishes that starts to come to the surface that they’ve got multiple projects that are stalled and very difficult for these borrower though, and so that’s kind of where we are with these trouble debt restructure and we look at each loan and we classify them appropriately, either negatively or affirmatively. In some cases we put them on trouble debt, in some cases we take them off trouble debt it really depends on the circumstances or the way that works in our system.

Catherine Miller – Bank of America

And they don’t have the number finalized for this quarter as of last quarter what percentage of that balance was commercial versus residential?

Valerie Toalson

We had I think a total of about $100 million last quarter, a troubled debt including non-accruals and accruals, and of that about $75 million to $77 million or so of that was commercial, so fairly that is a predominant component of our TDR does fall into the commercial portfolio.

Alan Levan

Thank you, and even though when you look at the residential, if you all remember we have talked for quite some time, that our residential portfolio had a pretty good credit scores, appropriate loan-to-values, no (Inaudible) no what we would call sub-prime I will say negative and this would just claim for another residential loans, which performs extremely well even during the first half of the recessions, but when you got some markets 8% to 10% or 11% of the population unemployed and they are not going to be able to make the mortgage payment.

I know I am not telling anything you don’t know, because every bank in the country is suffering from these same issues, but this is our residential portfolio, what we would view as a pretty clean portfolio and yet we are having default in that portfolio, and of course in light of the market and the issues related to debt divorce and health issues which have always been issues on many portfolio if people could sell their houses or refinance them at some point, and that market is just dead in the water which is a result of delinquencies, and are non performing to increases.

Operator

(Operator Instruction). Your next question comes from the line of [Matthew Elise - Homecomings Financial.]

Matthew Elise - Homecomings Financial

Hi Jarett, hi Valerie I just wanted to comment you lot of people are asking you questions but I do want to comment you for running what is obviously a very tough business and a tough balance in the economy that we are right now.

Also you spoke to something to the effect of law of the nation return a bell curve, and I do agree 100% that’s exactly what it is, you will have these loans they will get flushed out of the system, and just on a positive note that our people that have been coming to Florida for many years, and that is nevertheless that beautiful state, and even though there are difference in each counties that might have for loan losses, and obviously a lot of people are calling in as far as for investment, and this dock has only been in there kind of below 10 year downfall, at least a six year one based up on bad loans starting to unravel 2005.

I will say on a real positive note, thanks to obviously all your good work that this stock has reached a technical bottom where it couldn’t even go any lower, and I think that you have all done a wonderful job and I was just wondering to tell you that, also being open seven days a week that is wonderful.

Operator

Your final question comes from the line of Wilson Yeagley – Unidentified Company.