BankAtlantic, Downey Hit by Setbacks
Setbacks disclosed in regulatory filings this week raised questions about BankAtlantic Bancorp's chances to raise capital from the Treasury and Downey Financial's ability to survive to the weekend.
BankAtlantic Bancorp didn't specifically say it had applied to raise capital by issuing preferred shares to the Treasury through the Troubled Assets Relief Program, or TARP. But the Fort Lauderdale, Fla., thrift holding company's disclosure in a recent regulatory filing of a subpoena -- on top of a possibly problematic holding company structure -- could hurt its chances of having an application approved. Downey, in a third-quarter regulatory filing, expressed "substantial doubt" about its ability to survive the year, and the subsequent drubbing its shares took in the market could result in swift action by regulators.
BankAtlantic disclosed in its 10-Q filing Monday that it had received a subpoena and notice of investigation from the Miami Regional Office of the Securities and Exchange Commission. The SEC requested "a broad range of documents" relating to pending litigation, problem loans and insider purchases of the company's common stock.
The SEC is also looking at the holding company's asset workout subsidiary, which was formed in the first quarter. At that time, the holding company used proceeds from its sale of Stifel Financial shares provide $95 million to main subsidiary BankAtlantic in exchange for $101.5 million in nonperforming loans, which were placed, along with $6.4 million in specific reserves, in the new subsidiary. Thus the holding company used cash to remove bad assets from the thrift.
The SEC investigation may have been driven in part by a shareholder lawsuit against the holding company and executives, alleging that the company engaged in lending activities that "contravene the company's lending policies and applicable lending agency regulations," and that BankAtlantic Bancorp failed to "disclose and properly account for" its loan losses.
The holding company went on to say it had received a total of $180.7 million from the sale of securities during the first three quarters of 2008, and in addition to setting up the asset workout subsidiary, it provided $65 million in additional capital to BankAtlantic.
BankAtlantic Bancorp discussed the Treasury's Capital Purchase Program (CPP) in the 10-Q report, and pointed out that an application to participate in the program might have to come from BFC Financial Corp. , a separate company that "controls roughly 58% of the BBX vote, although it owns just 27% of the company's aggregate outstanding stock," according to a Sandler O'Neill report. TheStreet.com previously discussed the unusual holding company structure of BankAtlantic Bancorp and BFC Financial back in July, when BankAtlantic sued analyst Richard Bove. Alan Levan is chairman and CEO of BFC Financial, BankAtlantic Bancorp and BankAtlantic.
While the holding company didn't say whether it or BFC had applied to participate in the Capital Purchase Program, the deadline for applications is this Friday. Sandler O'Neill said in its report that the holding company structure could "complicate" participation in the CPP.
The holding company reported a net loss of $6.1 million for the third quarter, which compared to net losses of $19.4 in the second quarter and $29.6 million in the third quarter of 2007. The reduced loss primarily reflected lower provisions for loan losses, made possible by the transfer of loans from the thrift subsidiary to the asset workout subsidiary, along with expense reductions.
Although regulatory data is not available for thrift subsidiary BankAtlantic, the holding company provided capital ratios for the institution. The leverage ratio was 6.89% and the risk-based capital ratio was 11.75% as of Sept. 30, compared to 6.82% and 11.77% last quarter, and well above the 5% and 10% minimums for an institution to be well capitalized under regulatory guidelines.
In a recent investor presentation, the holding company said that BankAtlantic's ratio of nonperforming assets to loans and other assets was 2.36%. The ratio of loan loss reserves to total loans was 2.40%, keeping well ahead of the annualized ratio of net charge-offs to average loans, which was 1.34% for the third quarter.
Downey Financial, which holds Downey Savings and Loan of Newport Beach, Calif., also filed its 10-Q on Monday after the market close. The company expressed "substantial doubt concerning the ability of the Holding Company and the Bank to continue as going concerns for a reasonable period of time." This pushed the company's shares down 68%, to a closing price of 46 cents on Tuesday.
The holding company and the thrift entered into a consent order with the Office of Thrift Supervision on Sept. 5, agreeing to several requirements, including raising additional capital by the end of the year, along with submitting plans to reduce assets, including repossessed real estate and option-payment adjustable-rate mortgages.
Option-ARMs are the loans that feature several monthly payment options for borrowers, including the lowest option, where the borrower's monthly payment amounts to less than the previous month's accrued interest. When the lowest option payment is made, the unpaid interest is tacked onto the loan's principal balance (the same way a loan shark operates), while the bank books the unpaid interest as revenue. This increase in a loan balance is called "negative amortization."
These are the type of loans that brought down Washington Mutual and nearly caused Wachovia to fail, before it was ultimately sold to Wells Fargo .
JPMorgan Chase announced on Oct. 31 that it would modify mortgage terms for up to 400,000 borrowers, many of whom had option-ARMs the bank inherited when it purchased Washington Mutual's loans and deposits from the Federal Deposit Insurance Corp. Bank of America has a similar program in place.
As of Sept. 30, $5.7 billion, or 52% of Downey's one-to-four family residential mortgages were option-ARMs, with $4.9 billion having balances higher than the original loan amount. That is a frightening number when considering that home values have declined considerably in California, where 90% of Downey's one-four family mortgages are concentrated.
Downey's nonperforming assets (excluding performing restructured loans) comprised 12.46% of total assets as of Sept. 30, increasing from 11.16% in June and 2.26% in September 2007. Despite the tremendous exposure to option-ARMS and the company's pessimism, the annualized ratio of net charge-offs to average loans for the first three quarters of 2008 was a relatively low 2.52%. The ratio was 3.62% for the third quarter. In comparison, Downey's ratio of loan loss reserves to total loans was 6.62% as of Sept. 30, keeping ahead of the pace of charge-offs.
Downey's consent order also requires the thrift to maintain a Tier-1 core capital ratio of 7% and a risk-based capital ratio of 14%. These ratios normally need to be at least 6% and 10% for a bank or thrift to be considered well-capitalized under regulatory guidelines, but Downey Financial said in the filing that the thrift must be considered "adequately capitalized" because of the consent order. As of Sept. 30, Downey's capital ratios were in compliance with the order, since the thrift's core capital ratio was 7.48% and the risk-based capital ratio was 14.50%.
Although it had sufficient capital at the end of September to comply with the order, Downey made this ominous remark in the 10-Q: "Notwithstanding that portion of the bank consent order requiring the raising of new equity and a capital infusion by no later than Dec. 31, bank regulators could take enforcement action before that date, which could include placing the bank into receivership."
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