Law Suits & Courts

First witness called in BankAtlantic trial

Posted on Thursday, October 21, 2010

1The attorney representing shareholders suing BankAtlantic Bancorp told jurors Tuesday he would prove executives lied to investors about a deteriorating loan portfolio.
As the shareholder class action suit opened in U.S. District Court in Miami, plaintiffs' attorney Mark Arisohn pointed to internal e-mails from bank officials and the bank's "internal watch list" of problem loans. Arisohn said they contradicted the bank's public statements to investors during the investor class period, which was Nov. 9, 2005, through Oct. 25, 2007. As a result, shareholders overpaid for the stock, he said.
Later in the day, BankAtlantic's defense attorney, Eugene Stearns, countered that the bank was open about the risks its loans faced and investors should have been well-aware that its stock would suffer if Florida real estate values declined, as they did severely.
What you have here is a company that encourages full disclosure, Stearns told the jury.
The trial comes at a crucial time for BankAtlantic (NYSE: BBX), which is seeking to raise up to $125 million as its shares trade at 95 cents. The bank is considered well capitalized by regulators, but a recent Fitch Ratings report said the company does not have enough capital to deal with problem loans and operating losses that have totaled $461 million in the past 10 quarters.
It is unclear how much in damages the bank might face if the plaintiffs are successful.
Problem loans to undeveloped properties held by developers or by borrowers that planned to sell to developers are one of the focal points of the trial, which has the State-Boston Retirement System as the lead plaintiff.
Developers, such as Miami-based Lennar Homes and the since-defunct TOUSA, backed out of tentative deals to buy home lots from BankAtlantic borrowers, according to internal bank documents presented at the trial. On Sept. 20, 2006, Lennar alone had plans to buy properties secured by $55.5 million in BankAtlantic loans.
The national builder exited a preliminary deal with Priority Entrada (near Cape Coral) and Hernando Oaks (near Brooksville), ultimately leading the borrower to defaults on loans of $12.6 million and $20 million, the documents indicated.
As an example of alleged misstatements, Arisohn pointed to comments BankAtlantic President Jarrett Levan made at an investor conference in New York: "We see no trends to make us nervous; we are very comfortable with our borrowers."
That statement was picked up by newswires.1. When Levan shared it with his father, BankAtlantic Chairman and CEO Alan Levan, the elder Levan responded back by e-mail: "I also wouldn't be so bold on the credit front. I think that Marcia [Snyder] is going to have problems with her land portfolio."
Snyder, the former chief of land lending at BankAtlantic, is scheduled to testify in the trial.
Arisohn said the e-mail exchange showed the bank's statements to the public were misleading.
"Despite the fact that the head of the bank told his son that this was too bold, there was no retraction," Arisohn said.
During his opening statement, Arisohn sought to characterize BankAtlantic's land loan practices as reckless and unsafe.
The attorney started his criticism by running through the bank's builder land bank (BLB) loans, where the source of repayment is the borrower selling property to a major homebuilder. He pointed to four loans totaling $86.6 million in Florida.
By October 2006, it was clear that builders, such as Lennar Corp. and D.R. Horton, weren't likely to purchase the properties, Arisohn said.
One of the largest loans was the $27 million Steeplechase loan on a sod farm about 25 miles east of Sarasota, which was the subject of a Dec. 12, 2006, South Florida Business Journal article. Arisohn said the owner flipped the property before the BankAtlantic loan, and the guarantor had a net worth of $275,000.
Of Steeplechase, Stearns said the bank screwed up," but it quickly disclosed that to investors.
Arisohn used Steeplechase as an example of why he believes it was false for Alan Levan to say in a February 2007 conference call: "We believe we are conservative in our underwriting and our portfolio is high quality."
Stearns said Levan relied on the opinion of federal banking regulators in making that statement. He presented an Office of Thrift Supervision examination of BankAtlantic released in May 2006 when many of the land loans were in place as calling the banks asset quality strong and its underwriting practices prudent.
The company was describing its loans in the same way the banks examiners were describing its loans, Stearns said. But the recession caused property values to fall. So now you have a bank that made a prudent loan at the beginning and found that the property is now worth less than the loan.
Although BankAtlantic started disclosing problems in its BLB portfolio in the first quarter of 2007, Arisohn said it took much longer for bank officials to come clean with investors about problems with non-BLB loans, which are land loans held by borrowers who plan to do the development themselves.
For both types of land loans, BankAtlantic maintained an internal watch list that had category 10 as a special mention and category 11 as substandard.
The loans in the two categories increased to $67.3 million on April 26, 2007, from $7.4 million on March 31, 2007, Arisohn said.
Arisohn said most of those were non-BLB loans.
The plaintiffs attorney sought to contradict an April 26, 2007, statement by Alan Levan at a conference call when the banker said: "The portfolios that our borrowers who are buying land for their own development are proceeding in the normal course."
Arisohn said the watch list showed the portfolio was performing anything but normally.
Stearns cited examples from BankAtlantic Bancorps public filings that he believes made it clear that a decline in the Florida home buying market would hurt the company. He also noted that non-BLB loans caused $9.3 million of the reserve expenses in the third quarter of 2007 when the banks earnings announcement was followed by a 40 percent decline in its stock. By comparison, the larger sources of that quarterly loss came from the $22.2 million expense from BLB loans and the $15 million expense to reserve for a general decline because of the troubled economy.
So even if the bank wasnt honest about its non-BLB loans, which Stearns insists that it was, the impact on its earnings wasnt great enough to merit damages, he said.
After the jury left the courtroom, Stearns, of Miami-based Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., told Judge Ursula Ungaro that he wasn't happy with the plaintiffs' attorney making it sound like the bank should have made its watch list data public. Stearns noted that this isn't an SEC requirement, and most other banks don't do that.
However, before the trial, the judge barred BankAtlantic from using the disclosure records of other banks as evidence.
Ungaro held firm in her position as the trial began, and said that the plaintiffs argument refers to the banks public statements not reflecting the data in the watch list.
The plaintiffs attorneys goal is to get the jury to rule that BankAtlantic's stock was inflated during the class period, meaning investors who bought during that time should collect damages.
Arisohn said his expert witness would testify that, based on the alleged misleading statements by the bank, its stock was inflated by 37 cents a share from Oct.19, 2006, to April 25, 2007, and then by $3.15 from April 26, 2007, to Oct. 25, 2007.
"The plaintiffs will prove to you, through the bank's own documents and the bank's own employees, that the bank broke the golden rule, 'Don't lie to your investors and the public,'" Arisohn said.
The plaintiffs plan to use testimony from Candace L. Preston, principal of Princeton, N.J.-based Financial Markets Analysis, to show the amount of damages caused to shareholders.
Stearns disputed Prestons conclusion in advance. He said it was wrong to compare the performance of BankAtlantic Bancorp stock in an index of national U.S. banks because BankAtlantic was adversely impacted by the troubled Florida real estate market. He showed jurors a chart comparing BankAtlantic Bancorp stock to other Florida-based savings and loan institutions on the market. They plummeted in value in the third quarter of 2007.
Back then, BankUnited FSB was the largest bank in Florida and its stock was spiraling downward. The Coral Gables-based bank failed in 2009.
In addition, Stearns said that BankAtlantic was buying shares of its own stock during the class period, a practice that wouldnt make sense if the bank was intentionally inflating the value of its shares.
Now thats a great way to pump up your stock, get in front of the investing public and say, Lets keep our fingers crossed, Stearns said, referring to a comment by Alan Levan at an April 2007 investor conference call.
Before the trial started, former SEC attorney James Sallah, who is now an attorney in Boca Raton, said the plaintiffs have a tough standard of proof in this case, especially in showing that the allegedly false statements made by bank officials directly caused losses in share value, as opposed to losses from other economic factors.
The first witness to take the stand was the point-man on the banks loan portfolio, BankAtlantic Chief Credit Officer Jeffrey Mindling.
Arisohn walked him through the banks commercial real estate lending policy, which included recommended loan amount limits based on property values and development costs. Then the plaintiffs' attorney showed him land loans that exceeded those limits.
Using an internal bank report from October 2007, Arisohn pointed out five land loans where the mortgages made up more than 91 percent of the development costs in one case 100 percent. That left the borrowers with little of their cash in the deals and increased the risks to the bank, the attorney said.
Mindling said that having a high loan-to-development cost ratio was more risky, but exceptions to the banks loan policies can be made based on mitigating factors."
Arisohn presented an internal bank memo that showed $413 million in commercial real estate loans with policy exceptions were granted in the third quarter of 2006 alone. Of those, 10 percent had loan-to-value ratios that exceeded recommended limits and 11 percent had no or limited personal guarantees from the borrowers.
Mindling said that some of the exceptions granted werent all that significant. Some were missing or late documentation.
All loans above $5 million were approved by the banks major loan committee, which includes both Levans and other executives who are named as defendants in the case along with the bank. Mindling is also on that committee, but hes not a defendant.
Arisohn is trying to undermine the banks public statements that its underwriting was conservative. Mindling testified that the bank realized Florida real estate wasnt such a good investment around the same time everybody else did.
We started to have concerns about BLB loans near the end of 2006, Mindling said. We started to hear talk there was potential that the market could slow. I dont believe it was until 2007 that we realized that was happening.
Mindlings testimony will continue on Wednesday.
2. Confidential BankAtlantic exam unveiled
Published: October 13, 2010
The lead plaintiffs attorney in the shareholder class action lawsuit against BankAtlantic Bancorp spent Wednesday morning grilling one of the banks top lending officials about land development lending practices.
Later on in the day, plaintiffs' attorney Mark Arisohn presented a previously confidential regulatory exam from 2007 where federal examiners were critical of BankAtlantics loan portfolio.
Arisohn is trying to prove in U.S. District Court in Miami that executives at Fort Lauderdale-based BankAtlantic (NYSE: BBX) were aware of land loan problems well before they disclosed it to the investing public.
In quizzing BankAtlantic Chief Credit Officer Jeffrey Mindling, Arisohn zeroed in on a problematic land loan that was made in 2005 during the height of the real estate boom. Sarasota-based Steeplechase Properties borrowed $27 million and planned to build about 180 luxury homes with an equestrian theme on a 1,143-acre site about 20 miles east of Sarasota.
The loan was foreclosed upon and the borrower was charged with deceiving the bank. At the time the loan was made, the bank classified it as a good risk.
On Tuesday, BankAtlantic's attorney, Eugene Stearns of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., said the bank was open about the risks its loans faced, and investors should have been well aware that its stock would suffer if Florida real estate values declined, as they did severely.
What you have here is a company that encourages full disclosure, Stearns told the jury.
On Wednesday, Mindling noted that the Steeplechase developer had contracts with five homebuilders to buy lots in the development, and the builders were supposed to deposit $2 million in an escrow account with BankAtlantic as collateral.
However, Mindling said, the $2 million deposit was not held with BankAtlantic, but with borrower Michael Tringalis attorney.
Mindling said he didnt discover that until problems with the loan cropped up.
At issue is whether Tringali, who had a net worth of just $275,000, according to loan approval documents, should have been considered a good risk.
Two of his companies that also served as guarantors had some assets, but the banks staff noted that the recordkeeping of those companies was poor.
The approval document, which bank executives, including Chairman and CEO Alan Levan, signed off on, said the loan-to-value ratio was 70 percent based on the appraisal.
The outside appraiser based that value, in part, on the $34 million contract by Steeplechase to buy the land.
The appraisal also factored in a previous land deal, a verbal land agreement and a piece of land listed for sale.
Arisohn questioned why the bank would accept an appraisal based on the contract purchase price on that site, especially when the bank knew the property had recently been flipped from one buyer to the developer.
Mindling said that flipping property during a real estate boom often caused property values to rise.
Mindling said the Steeplechase loan was properly underwritten, but that the bank was the victim of fraud.
Stearns said that BankAtlantic was timely in its disclosures to the public about its problems with the Steeplechase loan.
This whole case isnt about whether you made good loans or bad loans, Stearns said. Its about what you told the public about the loans you were making.
The defense attorney presented the jury with sections of the banks public filings and earnings press releases from 2006 and 2007 where it said that the Florida housing market was deteriorating and that could cause a negative impact in the banks loan portfolio. That included statements from Levan expressing concern over land development loans.
We were very up front with what we were discussing, Mindling testified.
Mindling said that Levan and BankAtlantic Vice Chairman John Abdo recognized as early as 2005 that it should exit condo lending because the market was overbuilt, especially in South Florida.
However, the bank put more emphasis on residential land loans, particularly in North Florida and West Florida. BankAtlantic ordered an analysis on the Florida real estate market by noted economist Hank Fishkind. He predicted that 2006 and 2007 would be soft years, but 2008 would foster in a recovery and 2009 would be a strong year for housing demand.
In actuality, the slowdown was followed by a recession that lasted well into 2009 and whether 2010 is a year of recovery or not is debatable.
While condo lending has caused significant problems for banks, so have land loans. In fact, construction and development loans have the highest delinquency ratio among South Florida banks.
By early 2007, land loan problems were becoming a big concern for Levan.
Arisohn presented as evidence an e-mail from Levan to his top lending executives, dated March 14, 2007, that said: There seems to be a parade of land loans coming in for extensions recently. Its pretty obvious the music has stopped . I believe we are in for a long, sustained problem in this sector.
Arisohn then presented Mindling with the minutes from seven major loan committee meetings from January 2007 through March 2007, during which nine land development loans were granted extensions or modifications.
Levan and Abdo signed off on each of the deals. Some of the extended loans have since wound up in foreclosure lawsuits, including Home Devcos Tivoli Lakes in Boynton Beach.
As the Business Journal reported in February, BankAtlantic filed a foreclosure lawsuit targeting 11 unsold home sites in the Tivoli Lakes community. It concerns a mortgage last modified at $14.3 million in 2006.
According to bank documents complied by the defense, these 12 extended loans resulted in $4.25 million in losses through the third quarter of 2007 the financial reporting period that the class action covers through. Stearns noted that, by comparison, the larger sources of that quarterly loss came from the $22.2 million expense from builder land bank loans and the $15 million expense to reserve for a general decline because of the troubled economy.
Mindling said the bank was attempting to work with its borrowers to get repaid, but he didnt recall denying any application for a land loan renewal during this period.
Arisohn pointed out that each of these extensions was for a loan for property to be developed by the borrower, as opposed to a builder land bank loan (BLB), which is for property that's expected to be sold to a builder by a borrower.
During his opening statement Tuesday, Arisohn said Levan spoke falsely in April 2007 when he said the portfolios that our borrowers that are buying land for their own development, those are proceeding in the normal course.
During his cross-examination of Mindling, Stearns asked about the difference between a bad loan and a good loan that turned bad.
A bad loan at the outset never should have been made because it doesnt meet safety and soundness standards, Mindling said. A good loan at the outset can be affected negatively in many different ways, including the downturn in the housing market.
Stearns said Levan relied on the opinion of federal banking regulators in making that statement. He presented an Office of Thrift Supervision examination of BankAtlantic released in May 2006 which includes the period when the Steeplechase loan was made as calling the banks asset quality strong and its underwriting practices prudent.
Stearns stressed that the OTS examiners were satisfied with the banks land lending process.
However, regulators came to a different conclusion about BankAtlantic a year later. The OTS examination released on Oct. 12, 2007 based on the banks condition as of June 30 of that year included the following statements:
The board needs to continue to pay close attention to the deteriorating credit quality of the land acquisition, development and construction (ADC) loan portfolio.
Asset quality deteriorated most significantly during the first half of 2007. At June 30, 2007, classified assets (loans that are impaired, with repayment questionable) totaled $148 million, which represented 29 percent of capital and 2.4 percent of total assets. Criticized assets (substandard loans where a loss is conceivable or loans are in special monitoring because of a potential problem) were $261 million, or 51 percent of capital. The less than satisfactory credit quality is due to a downturn in the Florida housing market, which had a material adverse impact on the quality of ADC loans. Criticized ADC loans account for most of the credit quality problems.
This level of criticized assets causes regulatory concern since asset quality in the near term is uncertain as the housing market remains weak and development in many home projects may be slow.
Loss exposure in many substandard assets has not been fully determined because collateral value needs to be updated.
Arisohn asked Mindling why the banks public reports for the second quarter of 2007 didnt mention the $261 million in criticized assets that the OTS cited. In addition to noncurrent loans, which the OTS lumped in with classified assets, BankAtlantic said it had $7.8 million in potential problem loans.
Mindling said that the Securities and Exchange Commission doesnt require banks to list their criticized assets and make public information from its OTS examination. He said that the potential problem loans definition used in the banks public filings is a different accounting standard than criticized assets.
During his opening statement, Arisohn said that BankAtlantic understated its loan problems in its public filings.
Is it misleading to say that credit quality is good but not report increases in substandard loans, Arisohn asked Mindling.
No, not necessarily, Mindling responded.
While the judge wont let BankAtlantic tell the jury about how other banks handle public financial reporting, most public banks dont release data on their criticized assets. Should the plaintiffs win this case, some banks may need to rethink that.

3. Confidential BankAtlantic exam unveiled
Published: October 13, 2010
The lead plaintiffs attorney in the shareholder class action lawsuit against BankAtlantic Bancorp spent Wednesday morning grilling one of the banks top lending officials about land development lending practices.
Later on in the day, plaintiffs' attorney Mark Arisohn presented a previously confidential regulatory exam from 2007 where federal examiners were critical of BankAtlantics loan portfolio.
Arisohn is trying to prove in U.S. District Court in Miami that executives at Fort Lauderdale-based BankAtlantic (NYSE: BBX) were aware of land loan problems well before they disclosed it to the investing public.
In quizzing BankAtlantic Chief Credit Officer Jeffrey Mindling, Arisohn zeroed in on a problematic land loan that was made in 2005 during the height of the real estate boom. Sarasota-based Steeplechase Properties borrowed $27 million and planned to build about 180 luxury homes with an equestrian theme on a 1,143-acre site about 20 miles east of Sarasota.
The loan was foreclosed upon and the borrower was charged with deceiving the bank. At the time the loan was made, the bank classified it as a good risk.
On Tuesday, BankAtlantic's attorney, Eugene Stearns of Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., said the bank was open about the risks its loans faced, and investors should have been well aware that its stock would suffer if Florida real estate values declined, as they did severely.
What you have here is a company that encourages full disclosure, Stearns told the jury.
On Wednesday, Mindling noted that the Steeplechase developer had contracts with five homebuilders to buy lots in the development, and the builders were supposed to deposit $2 million in an escrow account with BankAtlantic as collateral.
However, Mindling said, the $2 million deposit was not held with BankAtlantic, but with borrower Michael Tringalis attorney.
Mindling said he didnt discover that until problems with the loan cropped up.
At issue is whether Tringali, who had a net worth of just $275,000, according to loan approval documents, should have been considered a good risk.
Two of his companies that also served as guarantors had some assets, but the banks staff noted that the recordkeeping of those companies was poor.
The approval document, which bank executives, including Chairman and CEO Alan Levan, signed off on, said the loan-to-value ratio was 70 percent based on the appraisal.
The outside appraiser based that value, in part, on the $34 million contract by Steeplechase to buy the land.
The appraisal also factored in a previous land deal, a verbal land agreement and a piece of land listed for sale.
Arisohn questioned why the bank would accept an appraisal based on the contract purchase price on that site, especially when the bank knew the property had recently been flipped from one buyer to the developer.
Mindling said that flipping property during a real estate boom often caused property values to rise.
Mindling said the Steeplechase loan was properly underwritten, but that the bank was the victim of fraud.
Stearns said that BankAtlantic was timely in its disclosures to the public about its problems with the Steeplechase loan.
This whole case isnt about whether you made good loans or bad loans, Stearns said. Its about what you told the public about the loans you were making.
The defense attorney presented the jury with sections of the banks public filings and earnings press releases from 2006 and 2007 where it said that the Florida housing market was deteriorating and that could cause a negative impact in the banks loan portfolio. That included statements from Levan expressing concern over land development loans.
We were very up front with what we were discussing, Mindling testified.
Mindling said that Levan and BankAtlantic Vice Chairman John Abdo recognized as early as 2005 that it should exit condo lending because the market was overbuilt, especially in South Florida.
However, the bank put more emphasis on residential land loans, particularly in North Florida and West Florida. BankAtlantic ordered an analysis on the Florida real estate market by noted economist Hank Fishkind. He predicted that 2006 and 2007 would be soft years, but 2008 would foster in a recovery and 2009 would be a strong year for housing demand.
In actuality, the slowdown was followed by a recession that lasted well into 2009 and whether 2010 is a year of recovery or not is debatable.
While condo lending has caused significant problems for banks, so have land loans. In fact, construction and development loans have the highest delinquency ratio among South Florida banks.
By early 2007, land loan problems were becoming a big concern for Levan.
Arisohn presented as evidence an e-mail from Levan to his top lending executives, dated March 14, 2007, that said: There seems to be a parade of land loans coming in for extensions recently. Its pretty obvious the music has stopped . I believe we are in for a long, sustained problem in this sector.
Arisohn then presented Mindling with the minutes from seven major loan committee meetings from January 2007 through March 2007, during which nine land development loans were granted extensions or modifications.
Levan and Abdo signed off on each of the deals. Some of the extended loans have since wound up in foreclosure lawsuits, including Home Devcos Tivoli Lakes in Boynton Beach.
As the Business Journal reported in February, BankAtlantic filed a foreclosure lawsuit targeting 11 unsold home sites in the Tivoli Lakes community. It concerns a mortgage last modified at $14.3 million in 2006.
According to bank documents complied by the defense, these 12 extended loans resulted in $4.25 million in losses through the third quarter of 2007 the financial reporting period that the class action covers through. Stearns noted that, by comparison, the larger sources of that quarterly loss came from the $22.2 million expense from builder land bank loans and the $15 million expense to reserve for a general decline because of the troubled economy.
Mindling said the bank was attempting to work with its borrowers to get repaid, but he didnt recall denying any application for a land loan renewal during this period.
Arisohn pointed out that each of these extensions was for a loan for property to be developed by the borrower, as opposed to a builder land bank loan (BLB), which is for property that's expected to be sold to a builder by a borrower.
During his opening statement Tuesday, Arisohn said Levan spoke falsely in April 2007 when he said the portfolios that our borrowers that are buying land for their own development, those are proceeding in the normal course.
During his cross-examination of Mindling, Stearns asked about the difference between a bad loan and a good loan that turned bad.
A bad loan at the outset never should have been made because it doesnt meet safety and soundness standards, Mindling said. A good loan at the outset can be affected negatively in many different ways, including the downturn in the housing market.
Stearns said Levan relied on the opinion of federal banking regulators in making that statement. He presented an Office of Thrift Supervision examination of BankAtlantic released in May 2006 which includes the period when the Steeplechase loan was made as calling the banks asset quality strong and its underwriting practices prudent.
Stearns stressed that the OTS examiners were satisfied with the banks land lending process.
However, regulators came to a different conclusion about BankAtlantic a year later. The OTS examination released on Oct. 12, 2007 based on the banks condition as of June 30 of that year included the following statements:
The board needs to continue to pay close attention to the deteriorating credit quality of the land acquisition, development and construction (ADC) loan portfolio.
Asset quality deteriorated most significantly during the first half of 2007. At June 30, 2007, classified assets (loans that are impaired, with repayment questionable) totaled $148 million, which represented 29 percent of capital and 2.4 percent of total assets. Criticized assets (substandard loans where a loss is conceivable or loans are in special monitoring because of a potential problem) were $261 million, or 51 percent of capital. The less than satisfactory credit quality is due to a downturn in the Florida housing market, which had a material adverse impact on the quality of ADC loans. Criticized ADC loans account for most of the credit quality problems.
This level of criticized assets causes regulatory concern since asset quality in the near term is uncertain as the housing market remains weak and development in many home projects may be slow.
Loss exposure in many substandard assets has not been fully determined because collateral value needs to be updated.
Arisohn asked Mindling why the banks public reports for the second quarter of 2007 didnt mention the $261 million in criticized assets that the OTS cited. In addition to noncurrent loans, which the OTS lumped in with classified assets, BankAtlantic said it had $7.8 million in potential problem loans.
Mindling said that the Securities and Exchange Commission doesnt require banks to list their criticized assets and make public information from its OTS examination. He said that the potential problem loans definition used in the banks public filings is a different accounting standard than criticized assets.
During his opening statement, Arisohn said that BankAtlantic understated its loan problems in its public filings.
Is it misleading to say that credit quality is good but not report increases in substandard loans, Arisohn asked Mindling.
No, not necessarily, Mindling responded.
While the judge wont let BankAtlantic tell the jury about how other banks handle public financial reporting, most public banks dont release data on their criticized assets. Should the plaintiffs win this case, some banks may need to rethink that.1. BankAtlantic land loans questioned
Published: October 19, 2010
The executive who oversaw the buildup of BankAtlantics land loan portfolio testified Tuesday in a shareholder class action trial that the loans appeared like good bets when they were made.
Even when the Florida home market slowed down in late 2006 and early 2007, no one at the bank foresaw the long-term crash starting in the third quarter of 2007, said Marcia Snyder, former senior VP of commercial lending at BankAtlantic Bancorp (NYSE: BBX).
Synder led that department from 1987 through most of 2008. She now works at Boca Raton-based Legacy Bank of Florida.
The banks losses from the third quarter of 2007, and the resulting decline in its share price, prompted several shareholder groups to sue BankAtlantic and its key executives, claiming that they failed to disclose the problems in the banks land loan portfolio. The lawsuit comes as the bank is seeking to raise up to $125 million and received a delisting warning from the New York Stock Exchange.
Snyder is not a defendant, but is represented by BankAtlantics attorneys.
The trial started Oct. 12.
When BankAtlantic attorney Eugene Stearns asked Snyder whether she would have made those loans if she knew then what she knows now, she said: Hindsight is 20/20. If I had a crystal ball, we wouldnt have made any of those loans but we didnt have a crystal ball.
Plaintiffs' attorney Mark Arisohn pointed to land development loans made in more rural parts of Florida near Brooksville, Frostproof, Sebring and Destin to guarantors with fairly low net worth. That included a $2.7 million loan to Frostproof Acres LLC for 300 acres near a town with a population of 3,000. The four guarantors had a combined adjusted net worth of $140,000. The appraisal showed the land had gopher tortoises, which are endangered species and could make building difficult.
While the bank was considering the loan, Vice Chairman John E. Abdo sent Snyder a e-mail that read: Way out land, with land speculators, that gives me the willies especially when they have limited ability to carry it after the [interest] reserves. He continued: I dont know who would want to live in Frostproof and everything I have read says that secondary markets are getting killed.
Abdo concluded in the November 2006 e-mail: I think it is very, very risky.
BankAtlantic took a $500,000 loan lost reserve expense on Frostproof Acres in the third quarter of 2007.
Snyder said she supported Frostproof Acres because it had a low loan-to-value ratio of only $6,000 an acre and had interest from national homebuilders.
The plaintiffs' attorneys continued their criticism of the bank over the Steeplechase loan. In 2005, BankAtlantic granted a $27 million mortgage to Sarasota-based Steeplechase Properties, which planned to build 180 luxury homes with an equestrian theme on a 1,143-acre site 20 miles east of Sarasota. That loan was foreclosed upon and the borrower was charged with deceiving the bank.
Steeplechase wasnt risky at the time we made it, Snyder said.
She said developer Michael Tringali put $15 million in hard equity into the land, but never identified the investors group that presumably provided the money.
Bank officials knew there was a problem with the loan after reading April 2006 news articles about Tringali flipping properties, including Steeplechase but the loan didnt go bad until September 2006. Thats when they found problems in the closing procedure, including the developer not depositing $2 million in homebuilder escrows with BankAtlantic.
Stearns noted that the problems with Steeplechase were publicly disclosed in the third quarter of 2006 and resulted in a $7 million charge off the following quarter.
BankAtlantics exposure to Steeplechase was originally $20 million, but that was increased by $7 million to buy out lending participant Columbus Bank and Trust at full value.
Snyder said Columbus Bank and Trust could have held BankAtlantic liable as the lead bank for not ensuring all conditions were met.
As he tried to poke holes in the banks public disclosures, Arisohn pointed to the banks internal tracking of loans revealing problems not included in SEC filings. He noted more than $175 million in land loans in a May 2007 internal report that had interest reserves depleted to zero.
Snyder said in an accompanying e-mail that she was concerned because that is the first indicator of early problems.
On the stand Tuesday, Snyder said many of the borrowers paid those loans out of pocket. BankAtlantic was hoping to work with borrowers and get through the downturn, but had no idea things would become so bad.
Stearns noted that only a minority of those loans with depleted interest reserves resulted in losses at the bank through the third quarter of 2007, the end of the class action period.SFBJ


DBR


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