Confidential BankAtlantic exam unveiled
The lead plaintiffs’ attorney in the shareholder class action lawsuit against BankAtlantic Bancorp spent Wednesday morning grilling one of the bank’s 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 BankAtlantic’s 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 Tringali’s attorney.
Mindling said he didn’t 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 bank’s 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 isn’t about whether you made good loans or bad loans,” Stearns said. “It’s about what you told the public about the loans you were making.”
The lead plaintiffs’ attorney in the shareholder class action lawsuit against BankAtlantic Bancorp spent Wednesday morning grilling one of the bank’s 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 BankAtlantic’s 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 Tringali’s attorney.
Mindling said he didn’t 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 bank’s 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 isn’t about whether you made good loans or bad loans,” Stearns said. “It’s about what you told the public about the loans you were making.”
The defense attorney presented the jury with sections of the bank’s 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 bank’s 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. … It’s 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 Devco’s 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 didn’t 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 doesn’t 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 bank’s asset quality “strong” and its underwriting practices “prudent.”
Stearns stressed that the OTS examiners were satisfied with the bank’s 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 bank’s 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 bank’s public reports for the second quarter of 2007 didn’t 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 doesn’t 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 bank’s 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 won’t let BankAtlantic tell the jury about how other banks handle public financial reporting, most public banks don’t release data on their criticized assets. Should the plaintiffs win this case, some banks may need to rethink that
Read more: Confidential BankAtlantic exam unveiled - South Florida Business Journal
southflorida.bizjournals.com |
