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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number
333-72213
BFC FINANCIAL CORPORATION
(Exact name of registrant as specified in its Charter)
Florida 59-2022148
- --------------------------------------- ------------------------------------
(State of Organization) (IRS Employer Identification Number)
1750 E. Sunrise Boulevard
Ft. Lauderdale, Florida 33304
- --------------------------------------- ------------------------------------
(Address of Principal Executive Office) (Zip Code)
(954) 760-5200
------------------------------------------------------
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock $.01 par Value NASDAQ National Market
Class B Common Stock $.01 par Value None
- ------------------------------------ -----------------------------------------
(Title of Class) (Name of Exchange on Which Registered)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate, by check mark, if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
The aggregate market value of the voting common equity held by non-affiliates
was $35.8 million computed by reference to the closing price of the Registrant's
Class A Common Stock on June 30, 2003.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 23, 2004:
Class A Common Stock of $.01 par value, 13,916,052 shares outstanding.
Class B Common Stock of $.01 par value, 3,094,214 shares outstanding.
Documents Incorporated by Reference in Part IV of this Form 10-K:
Portions of Registrant's Definitive Proxy Statement relating to the 2004 Annual
Meeting of Shareholders is incorporated in Part III of this report.
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PART I
Except for historical information contained herein, the matters discussed in
this document contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that involve substantial risks and uncertainties. When used in this
document and in any documents incorporated by reference herein, the words
"anticipate," "believe," "estimate," "may," "intend," "expect" and similar
expressions identify certain of such forward-looking statements. Actual results,
performance, or achievements could differ materially from those contemplated,
expressed, or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of BFC
Financial Corporation ("the Company" or "BFC" which may be referred to as "we",
"us" or "our") and are subject to a number of risks and uncertainties that are
subject to change based on factors which are, in many instances, beyond the
Company's control. These include, but are not limited to, risks and
uncertainties associated with: the impact of economic, competitive and other
factors affecting the Company and its subsidiaries, and their operations,
markets, products and services; credit risks and loan losses, and the related
sufficiency of the allowance for loan losses; changes in interest rates and the
effects of, and changes in, trade, monetary and fiscal policies and laws;
adverse conditions in the stock market, the public debt market and other capital
markets and the impact of such conditions on our activities and the value of our
assets; BankAtlantic's seven-day banking initiative and other growth initiatives
not being successful or producing results which do not justify their costs; the
impact of periodic testing of goodwill and other intangible assets for
impairment; and achieving the benefits of the prepayment of the Federal Home
Loan Bank advances. This document contains forward-looking statements with
respect to Ryan Beck & Co., which are subject to a number of risks and
uncertainties including but not limited to the risks and uncertainties
associated with its operations, products and services, changes in economic or
regulatory policies, the volatility of the stock market and fixed income
markets, as well as its revenue mix, the success of new lines of business,
uncertainties associated with the Gruntal litigation, and additional risks and
uncertainties that are subject to change and may be outside of Ryan Beck's
control. Further, this document contains forward-looking statements with respect
to the operations of Levitt Corporation ("Levitt") and its real estate
subsidiaries, which are subject to risks and uncertainties including risks and
uncertainties relating to the market for real estate generally and in the areas
where Levitt has developments; the availability and price of land suitable for
development; the consummation of acquisitions of properties under contract;
increases in materials prices, labor costs and interest rates; and the impact of
environmental factors and governmental regulations. In addition to the risks and
factors identified above, reference is also made to other risks and factors
detailed in reports filed by the Company with the Securities and Exchange
Commission. The Company cautions that the foregoing factors are not exclusive.
ITEM 1. BUSINESS
THE COMPANY
We are a holding company with controlling interests in BankAtlantic Bancorp,
Inc. ("BankAtlantic Bancorp" or "Bancorp") and Levitt. As the controlling
shareholder of BankAtlantic Bancorp we are a unitary savings bank holding
company. The Company's primary activities currently relate to the operations of
BankAtlantic Bancorp and Levitt. The Company's website address is
WWW.BFCFINANCIAL.COM. The Company's annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those
reports are available free of charge through its website, as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC. The Company's Internet website and the information contained therein or
connected thereto are not incorporated into this Annual Report on Form 10-K.
Through December 31, 2003, Levitt was a wholly owned subsidiary of BankAtlantic
Bancorp. On December 2, 2003, the BankAtlantic Bancorp board of directors
authorized the spin-off of Levitt to the shareholders of BankAtlantic Bancorp by
declaring a stock dividend of all of BankAtlantic Bancorp's shares of Levitt.
BankAtlantic Bancorp's shareholders including the Company, each received one
share of Levitt Class A Common Stock for every four shares of BankAtlantic
Bancorp Class A Common Stock owned, and one share of Levitt Class B Common Stock
for every four shares of BankAtlantic Bancorp Class B Common Stock owned. The
shares were distributed on December 31, 2003 to shareholders of record on
December 18, 2003. As a consequence of the spin-off, our ownership position in
Levitt on December 31, 2003 was identical to our ownership position in
BankAtlantic Bancorp, including our control of more than 50% of the vote of
these companies. Accordingly, Levitt will continue to be consolidated in the
Company's financial statements.
We have controlled more than 50% of the vote of BankAtlantic Bancorp since 2000,
and BankAtlantic Bancorp has been consolidated in the Company's financial
statements instead of carried on the equity basis. In 2001, BankAtlantic Bancorp
amended its articles of incorporation to grant voting rights to holders of
BankAtlantic Bancorp Class A Common Stock, make BankAtlantic Bancorp Class B
Common Stock convertible into BankAtlantic Bancorp Class A Common Stock on a
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share for share basis, and equalize the cash dividends payable on BankAtlantic
Bancorp's Class A Common Stock and BankAtlantic Bancorp's Class B Common Stock.
As a consequence of the amendment, BankAtlantic Bancorp's Class A shareholders
are entitled to one vote per share, which in the aggregate represent 53% of the
combined voting power of BankAtlantic Bancorp's Class A Common Stock and
BankAtlantic Bancorp's Class B Common Stock. BankAtlantic Bancorp's Class B
Common Stock, all of which is owned by the Company, represents the remaining 47%
of the combined vote.
Our ownership in BankAtlantic Bancorp and Levitt is as follows:
Percent of Total Percent of
Class A Class B Outstanding Vote
------- ------- ---------------- ----------
BankAtlantic Bancorp 15.3% 100.0% 22.2% 55.1%
Levitt 15.3% 100.0% 22.2% 55.1%
BANKATLANTIC BANCORP, INC.
BankAtlantic Bancorp is a Florida-based financial services holding company that
owns BankAtlantic, a federal savings bank, and RB Holdings, Inc., the parent
company of Ryan Beck & Co ("Ryan Beck"). Through these subsidiaries,
BankAtlantic Bancorp provides a full line of products and services encompassing
consumer and commercial banking, brokerage services and investment banking.
BankAtlantic, a federally-chartered, federally-insured savings bank organized in
1952, is one of the largest financial institutions headquartered in Florida. It
provides traditional retail banking services and a wide range of commercial
banking products and related financial services through 73 branch offices
located primarily in Miami-Dade, Broward, Palm Beach and Hillsborough Counties,
in the State of Florida. BankAtlantic currently has over 225,000 customers and
500,000 accounts. BankAtlantic's primary activities include:
o attracting checking and savings deposits from individuals and business
customers,
o originating commercial real estate and business loans, and consumer
and small business loans,
o purchasing wholesale residential loans from third parties, and
o making other investments in mortgage-backed securities, tax
certificates and other securities.
BankAtlantic is a community-oriented bank which is engaged in commercial and
consumer banking. Its operations are focused primarily on retail deposit-taking,
commercial lending and commercial real estate lending. BankAtlantic's primary
source of revenue is interest income from its lending activities. It also
receives revenue from interest and dividends on its investment securities.
BankAtlantic's primary sources of funds are deposits, principal and interest
payments and principal prepayments on loans and investment securities, interest
and dividends from its investment securities and borrowings in the form of FHLB
Advances. BankAtlantic is regulated and examined by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC").
Ryan Beck, headquartered in Livingston, New Jersey, is a full-service broker
dealer engaged in underwriting, market making, and distribution and trading of
equity and fixed income securities. The firm also provides general securities
brokerage services, including financial planning for the individual investor and
consulting and financial advisory services to financial institutions and middle
market companies. Ryan Beck also provides equity research in the financial
institutions, healthcare, and consumer products sectors. Currently, Ryan Beck
has approximately 500 financial consultants located in 34 offices nationwide.
LEVITT CORPORATION
Levitt is a homebuilding and real estate development company with activities
throughout Florida. Levitt was organized in December 1982 under the laws of the
State of Florida. Until December 31, 2003, Levitt was a wholly owned subsidiary
of BankAtlantic Bancorp.
Levitt primarily develops single-family home and master-planned communities, but
also develops, on a limited basis, commercial and industrial properties and
multi-family complexes. Levitt's principal real estate activities are conducted
through: Levitt and Sons, LLC, a wholly owned homebuilding subsidiary ("Levitt
and Sons"); and Core Communities, LLC, a wholly owned master-planned community
development subsidiary ("Core Communities"). Levitt also engages in
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commercial real estate activities through Levitt Commercial, LLC, a wholly owned
commercial development subsidiary ("Levitt Commercial"), and invests with third
parties in joint ventures which develop rental and single-family residential
properties. In addition, Levitt owns approximately 38% of publicly traded
Bluegreen Corporation ("Bluegreen") (NYSE: BXG), which acquires, develops,
markets and sells vacation ownership interests in "drive-to" vacation resorts
and residential home sites around golf courses or other amenities.
Levitt and Sons is a real estate developer and residential homebuilder
specializing in single-family home communities and condominiums. Levitt and Sons
and its predecessors have built more than 200,000 homes since 1929. It has
strong brand awareness as America's oldest homebuilder and is recognized
nationally for having built the Levittown communities in New York, New Jersey
and Pennsylvania. Levitt acquired Levitt and Sons in December 1999.
Core Communities develops master-planned communities and has two existing
communities in South Florida. Core Communities' original and best-known
community, St. Lucie West, has been the fastest growing community on Florida's
Treasure Coast since it was acquired in October 1997 and was ranked by Robert
Charles Lesser & Co. as the 6th fastest selling master-planned community in the
United States for 2003. St. Lucie West is a 4,600-acre community with
approximately 5,000 built and occupied homes, numerous businesses, a university
campus and the New York Mets' spring training facility. Core Communities second
master-planned community, Tradition, is planned to include over 15,000
residences, a corporate park, a K-12 charter / lab school, commercial properties
and mixed-used parcels. Core Communities currently owns approximately 4,700
acres in Tradition and has options to acquire approximately 4,500 additional
acres, which would provide a total of approximately five miles of frontage along
Interstate-95, a major north/south interstate highway.
OTHER ACTIVITIES
During 1999 and 2000, the Company acquired interests in unaffiliated technology
entities. During 2000 and 2001, the Company's interests in the technology
entities were transferred at the Company's cost to specified asset limited
partnerships. Subsidiaries of the Company are the controlling general partners
of these venture partnerships, and therefore, they are consolidated in our
financial statements. We refer you to the discussion in "Related Party
Transactions" for a description of limited partnerships and transactions
relating to those partnerships. The general partners of these partnerships are
limited liability companies whose members are: BFC Financial Corporation -
57.5%; John E. Abdo - 13.75%; Alan B. Levan - 9.25%; Glen R. Gilbert - 2.0%; and
John E. Abdo, Jr. - 17.5%. Losses net of minority interests for the year ended
December 31, 2003 were $1.8 million. At December 31, 2003, the Company's net
investment in these partnerships was $626,000.
In addition to its other activities, the Company owns and manages real estate.
Prior to acquiring control of BankAtlantic Bancorp, the Company's primary
business was the organization, sale and management of real estate investment
programs. Subsidiaries of the Company serve as corporate general partners of a
number of private limited partnerships formed in prior years. The Company ceased
the organization and sale of real estate investment programs in 1987. The
Company continues to hold mortgage notes receivable of approximately $655,000
that were received in connection with the sale of properties previously owned by
the Company.
DESCRIPTION OF BUSINESS
Through our direct and indirect subsidiaries, we provide a broad spectrum of
products and services encompassing consumer and commercial banking, brokerage
and investment banking, homebuilding and real estate development. Management
reports results of operations through seven segments:
o Banking Operations, which are conducted solely by BankAtlantic Bancorp
and BankAtlantic, consist of :
o Commercial Banking,
o Community Banking and
o Bank Investments,
o Ryan Beck,
o BankAtlantic Bancorp Parent Company,
o Levitt and
o BFC Holding Company.
The presentation and allocation of the assets, liabilities and results of
operations may not reflect the actual economic costs of the segment as a
stand-alone business. If a different basis of allocation were utilized, the
relative contributions of the segment
5
might differ but in management's view, the relative trends in segments would not
likely be impacted. See also note 24, Segment Reporting to the Notes to
Consolidated Financial Statements.
BANKING OPERATIONS
BankAtlantic's business is primarily focused in southeast Florida and the Tampa
Bay area. Banking operations are concentrated in a network of 73 branches
located primarily in Miami-Dade, Broward, Palm Beach and Hillsborough Counties,
which include the cities of Miami, Ft. Lauderdale, West Palm Beach and Tampa,
respectively. These counties are the four most populous counties in Florida,
with a combined population of more than 6.0 million in 2000.
The Bank intends to focus on the following key areas:
CONTINUING THE "FLORIDA'S MOST CONVENIENT BANK" INITIATIVE.
BankAtlantic began its "Florida's Most Convenient Bank" initiative in
2002. This initiative, which includes offering free checking, seven-day
branch banking, extended lobby hours, a 24-hour customer service center
and new products and customer service initiatives is an integral part
of BankAtlantic's strategy to position itself as a customer-oriented
bank and increase its low cost deposit accounts. BankAtlantic has
instituted marketing programs in the branches which include sales
training programs, outbound telemarketing requirements and incentive
compensation programs enabling its branch banking personnel to earn
additional income for production of profitable business.
INCREASING LOW COST DEPOSITS. From December 31, 2001 to December 31,
2003, BankAtlantic's low cost deposits, comprised of demand deposit,
NOW checking accounts and savings accounts, increased 130% from
approximately $600 million to approximately $1.4 billion. These low
cost deposits represented 45% of BankAtlantic's total deposits at
December 31, 2003, compared to 26% of total deposits at December 31,
2001. BankAtlantic intends to continue to increase its low cost
deposits through strong sales and marketing efforts, new products,
commitment to customer service and the "Florida's Most Convenient Bank"
initiative.
GROWING BANKATLANTIC'S LOAN PORTFOLIO AND CONCENTRATING ON CORE
COMPETENCIES. BankAtlantic intends to grow its core commercial and
retail banking business with an emphasis on commercial real estate
loans, conforming one to four family residential loans, and small
business and consumer loans. BankAtlantic attributes its success in
these lending areas to several key factors, including disciplined
underwriting and significant expertise in its markets. Further,
BankAtlantic intends to limit activities in non-core lending areas,
such as credit card, international, syndication and indirect lending.
EXPANDING BANKATLANTIC'S BRANCH NETWORK. BankAtlantic intends to grow
its branch network both internally through de novo expansion and, to
the extent available, externally through acquisitions. BankAtlantic
intends to acquire branches through acquisition where attractive
opportunities are presented which are consistent with BankAtlantic's
growth strategy. BankAtlantic generally seeks to expand into relatively
faster growing and higher deposit level markets within the market area.
MAINTAINING BANKATLANTIC'S STRONG CREDIT CULTURE. Continued growth and
profitability will depend on maintaining a strong credit culture.
BankAtlantic has put in place stringent underwriting standards and has
developed and instituted credit training programs for its banking
officers which emphasize underwriting and credit analysis. It has also
developed systems and programs which it believes will enable it to
offer sophisticated products and services without exposing the Bank to
unnecessary credit risks. Non-performing assets, net of reserves,
declined to $12.8 million at December 31, 2003 from $28.6 million at
December 31, 2002, and the ratio of non-performing assets to total
loans, tax certificates and real estate owned improved from 0.79% at
December 31, 2002 to 0.33% at December 31, 2003.
COMMERCIAL BANKING
The Commercial Banking segment offers a wide range of commercial lending
products. These products include commercial real estate construction,
residential development and land acquisition loans and commercial business
loans. This segment also provides letters of credit and standby letters of
credit to corporate customers.
COMMERCIAL REAL ESTATE LENDING BankAtlantic provides commercial real estate
loans for the acquisition, development and construction of various property
types, as well as the refinancing and acquisition of existing income-producing
properties. These loans are generally secured by property primarily located
within Florida. Commercial real estate loans typically are based on a maximum of
80% of the collateral's appraised value and, for term loans, in most cases,
require the borrower to
6
maintain escrow accounts for real estate taxes and insurance. Prior to making a
loan, BankAtlantic considers the value of the collateral, the equity being
contributed, the quality of the loan, the credit worthiness of the borrowers and
guarantors, the location of the real estate, the projected income stream of the
property, the reputation and quality of management constructing or administering
the property and the interest rate and fees. Generally one or more of the
principals of the borrowing entity will be required to guarantee these loans.
Most of these loans have variable interest rates and are indexed to either the
prime or LIBOR rates.
Additionally, BankAtlantic purchases participations in commercial real estate
loans that are originated by another financial institution, typically known as a
"lead" bank. These transactions are underwritten as if BankAtlantic were
originating the loan, applying all normal underwriting standards. Typically, the
lead bank receives a servicing fee for administering the loan, which reduces the
prorated fee given to the participants. In most cases, the full rate on the loan
is passed through to the participants. The lead bank is responsible for the
administration of the loan; however, BankAtlantic receives periodic reports on
the progress of the project for which the loan was made. Major decisions
regarding the loan are made by the participants on either a majority or
unanimous basis. As a result, the lead bank cannot significantly modify the loan
without either the majority or unanimous consent of the participants.
BankAtlantic also often sells participations in loans that BankAtlantic
originates to other banks. This reduces BankAtlantic's exposure on the project
and may be required in order to stay within the regulatory "loans to one
borrower" limitations. BankAtlantic sells participations in the same manner as
participations are sold to BankAtlantic. Generally BankAtlantic retains the
servicing fee and is responsible for administration of the loan.
COMMERCIAL BUSINESS LENDING BankAtlantic makes commercial business loans
generally to medium size companies located throughout Florida, but primarily in
Miami-Dade, Broward, Palm Beach and Hillsborough Counties. BankAtlantic makes
both secured and unsecured loans, although the majority of these loans are
secured. Commercial business loans are typically secured by the accounts
receivable, inventory, equipment, real estate, and/or general corporate assets
of the borrowers. Commercial business loans generally have variable interest
rates that are prime or LIBOR-based. These loans typically are originated for
terms ranging from one to five years.
STANDBY LETTERS OF CREDIT AND COMMITMENTS Standby letters of credit are
conditional commitments issued by BankAtlantic to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is the same as extending loans to customers. BankAtlantic may hold certificates
of deposit, liens on corporate assets or liens on residential or commercial
property as collateral for letters of credit. BankAtlantic issues commitments
for commercial real estate and commercial business loans.
COMMUNITY BANKING
The Community Banking segment offers a diverse range of loan products for
individuals and small businesses.
These products include home equity lines of credit, automobile loans and
overdraft protection on deposit accounts. Additionally, business bankers and
branch market managers within the Community Banking segment originate small
business loans.
CONSUMER LENDING: Consumer loans are primarily loans to individuals originated
through BankAtlantic's branch network and sales force. The majority of these
originations are home equity lines of credit secured by a second mortgage on the
primary residence of the borrower. BankAtlantic does not currently use brokers
to originate loans. In the past, BankAtlantic originated automobile loans
through automobile dealers, but this activity was discontinued during the fourth
quarter of 1998. Home equity lines of credit have prime-based interest rates and
generally mature in 15 years. All other consumer loans generally have fixed
interest rates with terms ranging from one to five years.
SMALL BUSINESS LENDING: BankAtlantic makes small business loans to companies
located primarily in South Florida, along the Treasure Coast of East Florida and
in the Tampa Bay area. Small business loans are primarily originated on a
secured basis and do not exceed $1.0 million for non-real estate secured loans
and $1.5 million for real estate secured loans. These loans are originated with
maturities primarily ranging from one to three years or upon demand by
BankAtlantic; however, loans collateralized by real estate could have terms of
up to fifteen years. Lines of credit extended to small businesses are due upon
demand by BankAtlantic. Small business loans typically have either fixed or
variable prime-based interest rates.
Small business loans generally have a higher degree of risk than other loans in
BankAtlantic's portfolio because they are more likely to be adversely impacted
by unfavorable economic conditions. In addition, these loans typically are
highly dependent on the success of the business and the credit worthiness of the
principals.
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ATM NETWORK OPERATIONS: BankAtlantic's ATM network operations are located in
retail outlets, cruise ships, Native American reservation gaming facilities and
BankAtlantic branch locations.
RETAIL BROKERAGE SERVICES: During 2002, BA Financial Services, LLC, a wholly
owned subsidiary of BankAtlantic, began offering retail brokerage services to
customers through the BankAtlantic's branch network. These products and services
include mutual funds, bonds, stocks and variable annuities.
BANK INVESTMENTS
The Bank Investments segment includes the management of BankAtlantic's
securities portfolio and investments in tax certificates, as well as wholesale
and retail residential lending activities and wholesale borrowing activities.
RESIDENTIAL LOANS: Residential loans are purchased in the secondary markets, and
in 2003, BankAtlantic began a program in which BankAtlantic originates
residential loans to customers that are pre-sold to a correspondent. These loans
are secured by property located throughout the United States. For residential
loan purchases, BankAtlantic reviews the seller's underwriting policies and, for
certain individual loans, perform additional credit analysis. Residential loans
are typically purchased in bulk and are generally non-conforming loans due to
the size and characteristics of the individual loans. BankAtlantic sets
guidelines for loan purchases related to loan amount, type of property, state of
residence, loan-to-value ratios, and the borrower's sources of funds, appraisal,
and loan documentation. BankAtlantic also originates certain residential loans,
which are primarily made to "low to moderate income" borrowers in order to
comply with standards under the Community Reinvestment Act. The underwriting of
these loans generally follows government agency guidelines with independent
appraisers generally performing on-site inspections and valuations of the
collateral.
SECURITIES AVAILABLE FOR SALE: Securities available for sale consist principally
of investments in obligations of the U.S. government or its agencies. These
consist of mortgage-backed securities and real estate mortgage investment
conduits, or REMICs. The mortgage-backed securities and REMICs as of December
31, 2003 consisted of approximately $31 million of fixed rate securities and
approximately $308 million of adjustable rate securities. BankAtlantic's
securities portfolio serves as a source of liquidity while at the same time
providing a means to moderate the effects of interest rate changes. The decision
to purchase and sell securities is based upon a current assessment of the
economy, the interest rate environment and our liquidity requirements. The total
value of BankAtlantic's securities available for sale as of December 31, 2003
was approximately $359 million.
INVESTMENT SECURITIES AND TAX CERTIFICATES: Investment securities primarily
consisted of tax certificates at December 31, 2003. Tax certificates are
evidences of tax obligations that are sold through auctions or bulk sales by
various state taxing authorities on an annual basis. The tax obligation arises
when the property owner fails to timely pay the real estate taxes on the
property. Tax certificates represent a priority lien against the real property
for the delinquent real estate taxes. Interest accrues at the rate established
at the auction or by statute. The minimum repayment, in order to satisfy the
lien, is the certificate amount plus the interest accrued through the redemption
date and applicable penalties, fees and costs. Tax certificates have no payment
schedule or stated maturity. If the certificate holder does not file for the
deed within established time frames, the certificate may become null and void.
BankAtlantic's experience with this type of investment has been favorable as
rates earned are generally higher than many alternative investments and
substantial repayments generally occur over a two-year period.
8
The composition, yields and maturities of securities available for sale and
investment securities and tax certificates were as follows (dollars in
thousands):
U.S. Corporate
Treasury Mortgage- Bond Weighted
and Tax Backed and Average
Agencies Certificates Securities Other Total Yield
---------- ------------ ---------- --------- ------------- ---------
DECEMBER 31, 2003
MATURITY: (1)
One year or less $ -- $ 136,514 $ 18 $ 25 $ 136,557 9.34%
After one through five years -- 54,392 99 560 55,051 9.29
After five through ten years -- -- 557 -- 557 5.46
After ten years -- -- 338,077 -- 338,077 3.96
---------- ---------- ------------- ------------- ------------- -----
Fair values (2) $ -- $ 190,906 $ 338,751 $ 585 $ 530,242 5.90%
========== ========== ============= ============= ============= =====
Amortized cost (2) $ -- $ 190,906 $ 332,898 $ 585 $ 524,389 6.40%
========== ========== ============= ============= ============= =====
Weighted average yield based
on fair values --% 9.34% 3.96% 4.99% 5.90%
Weighted average maturity
(years) -- 2.0 27.43 2.94 18.14
---------- ---------- ------------- ------------- -------------
DECEMBER 31, 2002
Fair values (2) (3) $ -- $ 194,074 $ 706,050 $ 15,262 $ 915,386 6.26%
========== ========== ============= ============= ============= =====
Amortized cost (2) (3) $ -- $ 194,074 $ 684,085 $ 14,794 $ 892,953 6.34%
========== ========== ============= ============= ============= =====
DECEMBER 31, 2001
Fair values (2) $ 5,819 $ 144,077 $ 1,084,776 $ 262 $ 1,234,934 6.37%
========== ========== ============= ============= ============= =====
Amortized cost (2) $ 5,819 $ 144,077 $ 1,063,949 $ 250 $ 1,214,095 6.59%
========== ========== ============= ============= ============= =====
(1) Except for tax certificates, maturities are based upon contractual
maturities. Tax certificates do not have stated maturities, and estimates
in the above table are based upon historical repayment experience
(generally 1 to 2 years).
(2) Equity securities held by BankAtlantic Bancorp Parent Company and Ryan
Beck with a cost of $17.6 million, $4.8 million, $33.4 million and a fair
value of $20.9 million, $5.2 million, $43.4 million at December 31, 2003,
2002 and 2001, respectively, were excluded from the above table.
(3) Includes $14.8 million of collateralized mortgage obligations secured by
non-residential real estate associated with the commercial banking
segment at December 31, 2002.
A summary of BankAtlantic's amortized cost and gross unrealized appreciation or
depreciation of estimated fair value of tax certificates and held to maturity
and available for sale securities follows (in thousands):
December 31, 2003
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Appreciation Depreciation Fair Value
--------- ------------ ------------ ----------
Tax certificates and investment securities:
Cost equals market $192,706 $ -- $ -- $192,706
Investment securities available for sale:
Market over cost 16,360 3,400 -- 19,760
Mortgage-backed securities available for sale:
Market over cost 257,865 6,382 -- 264,247
Cost over market 75,033 -- 529 74,504
-------- -------- -------- --------
Total $541,964 $ 9,782 $ 529 $551,217
======== ======== ======== ========
UNDERWRITING AND CREDIT MANAGEMENT FOR BANK OPERATIONS SEGMENTS
BankAtlantic evaluates a borrower's ability to make principal and interest
payments and the value of any collateral securing the underlying loan.
Independent appraisers generally perform on-site inspections and valuations of
the collateral for commercial real estate loans. All non-residential loans or
leases of $1.0 million to $5.0 million require Officers' Loan Committee approval
and ratification by Major Loan Committee. Residential loans over $1.0 million
require approval by the Officers' Loan Committee and ratification by the Major
Loan Committee. Purchased residential loans in pools greater than $50 million
require Investment Committee approval. The Investment Committee includes
BankAtlantic's Chief Executive Officer, Chief Financial Officer, Chief
Investment Officer and Chief Credit Officer. All loans over $5.0 million require
the approval of the Major Loan Committee. In addition to Executive and Senior
officers of BankAtlantic, the Major Loan Committee consists of BankAtlantic's
Chief Executive Officer and the Vice-Chairman. The Officers' Loan Committee
includes members of BankAtlantic's executive management and senior officers.
9
For consumer and small business lending, credit-scoring systems are utilized to
assist in the assessment of the relative risks of new underwritings and to
provide standards for extensions of credit. Consumer and small business
portfolio credit risk is monitored by using statistical models and regular
reviews of actual payment experience in order to predict portfolio behavior.
An independent credit review group conducts ongoing reviews of credit activities
and portfolios, reexamining, on a regular basis, risk assessments for credit
exposure and overall compliance with policy. This group meets periodically with
the Credit Policy Committee to provide an update on the status of the various
loan portfolios.
A separate Senior Loan Committee meets monthly at BankAtlantic to discuss
problem or potentially problem credits, to consider the present or alternative
courses of action with respect to such credits and to upgrade or downgrade the
risk grades of specific loans. The Senior Loan Committee includes BankAtlantic's
Chief Credit Officer.
The Bank also has a Credit Policy Committee, which meets periodically to
consider possible lending opportunities and changes to the Bank's credit
policies. In addition, the Credit Policy Committee reviews trends in the various
lending portfolios and the adequacy of the Bank's allowance for loan losses. The
Credit Policy Committee includes BankAtlantic's Chief Credit Officer and
BankAtlantic's Executive Vice President of Commercial Lending.
BankAtlantic's loans and leases receivable portfolio totaled $3.7 billion, $3.4
billion, and $2.8 billion at December 31, 2003, 2002, and 2001, respectively.
Loans and leases receivable composition at the dates indicated was (in
thousands):
As of December 31,
-------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- ------------------ ----------------- ----------------- ------------------
Amount % Amount % Amount % Amount % Amount %
----------- ------ --------- ------ --------- ------ --------- ------ --------- ------
LOANS AND LEASES
RECEIVABLE:
REAL ESTATE LOANS:
Residential real estate $ 1,343,657 36.45% 1,378,041 40.85 1,111,775 40.07 1,316,062 46.14 1,188,092 44.39
Construction and
development 1,345,449 36.50 1,218,411 36.13 1,122,628 40.47 937,881 32.88 634,382 23.71
Commercial real estate 1,064,043 28.87 755,492 22.40 522,006 18.82 369,282 12.95 312,014 11.66
Small business - real
estate 110,745 3.00 98,494 2.92 43,196 1.56 28,285 0.99 22,241 0.83
Loans to Levitt 18,118 0.49 -- -- -- -- -- -- -- --
Other loans:
Loans to Levitt 43,500 1.18 -- -- -- -- -- -- -- --
Second mortgage - direct 333,655 9.05 261,579 7.75 166,531 6.00 124,859 4.38 85,936 3.21
Second mortgage -
indirect 1,105 0.03 1,713 0.05 2,159 0.08 4,020 0.14 5,325 0.20
Commercial business 91,491 2.48 82,174 2.44 76,146 2.74 86,194 3.02 188,040 7.03
Small business -
non-mortgage 58,574 1.59 62,599 1.86 59,041 2.13 69,325 2.43 93,442 3.49
Lease finance 14,442 0.39 31,279 0.93 54,969 1.98 75,918 2.66 43,436 1.62
Due from foreign banks -- -- -- -- 1,420 0.05 64,207 2.25 51,894 1.94
Consumer - other direct 21,928 0.60 24,881 0.74 25,811 0.93 33,036 1.16 35,508 1.33
Consumer - other
indirect 1,297 0.04 6,392 0.19 23,241 0.84 58,455 2.05 120,184 4.49
Loans held for sale:
Residential real estate 2,254 0.06 -- -- 4,757 0.17 -- -- 220,236 8.23
Syndication loans 9,114 0.25 14,499 0.43 40,774 1.47 80,016 2.80 -- --
----------- ------ --------- ------ --------- ------ --------- ------ ---------- ------
Total 4,459,372 120.98 3,935,554 116.69 3,254,454 117.31 3,247,540 113.85 3,000,730 112.13
----------- ------ --------- ------ --------- ------ --------- ------ ---------- ------
Adjustments:
Undisbursed portion of
loans in process 728,100 19.75 511,861 15.18 434,166 15.65 344,390 12.07 286,608 10.71
Unearned
discounts (premiums) (243) (0.01) 3,041 0.09 1,470 0.05 3,675 0.13 (6,420) (0.24)
Allowance for loan
losses 45,595 1.24 48,022 1.42 44,585 1.61 47,000 1.65 44,450 1.66
----------- ------ --------- ------ --------- ------ --------- ------ ---------- ------
Total loans receivable,
net $ 3,685,920 100.00% 3,372,630 100.00 2,774,233 100.00 2,852,475 100.00 2,676,092 100.00
=========== ====== ========= ====== ========= ====== ========= ====== ========== ======
Banker's acceptances $ 233 100.00 -- 100.00 5 100.00 1,329 100.00 13,616 100.00
=========== ====== ========= ====== ========= ====== ========= ====== ========== ======
INTEREST EXPENSE AND OVERHEAD ALLOCATIONS TO BANK OPERATION SEGMENTS
Interest expense and overhead for the bank operation segments represents
interest expense and certain revenue and expense items that are allocated to
each such segment based on its pro-rata average assets. Items included in
interest expense and overhead include (1) interest expense on all interest
bearing banking liabilities and (2) an allocation of BankAtlantic's back office
and corporate headquarters operating expenses, net of deposit account fee
income.
10
DEPOSITS. Deposits include commercial demand deposit accounts, retail demand
deposit accounts, savings accounts, money market accounts, certificates of
deposit, various NOW accounts, IRA and Keogh retirement accounts, brokered
certificates of deposit and public funds. Deposits are solicited in
BankAtlantic's market areas through advertising and relationship banking
activities primarily conducted through BankAtlantic's sales force and branch
network. During the year ended December 31, 2003, products such as Totally Free
Checking and Totally Free Savings were the lead programs of BankAtlantic's
marketing strategy to obtain new customers.
BankAtlantic has several relationships, including one with Ryan Beck, for the
placement of brokered certificates of deposit. These relationships are
considered an alternative source of funding.
FEDERAL HOME LOAN BANK ("FHLB") ADVANCES. BankAtlantic is a member of the FHLB
and can obtain secured advances from the FHLB of Atlanta. Advances are
collateralized by a security lien against BankAtlantic's residential loans,
certain commercial loans and securities. In addition, certain levels of FHLB
stock must be maintained for outstanding advances. BankAtlantic primarily use
FHLB advances to fund its purchased residential loan portfolio.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS.
Short-term borrowings consist of securities sold under agreements to repurchase
and federal funds borrowings. Securities sold under agreements to repurchase
include a sale of a portion of current investment portfolio (usually
mortgage-backed securities and REMICs) at a negotiated rate and an agreement to
repurchase the same assets on a specified future date. Repurchase agreements are
issued to institutions and BankAtlantic's customers. These transactions are
collateralized by securities in BankAtlantic's investment portfolio but are not
insured by the FDIC. Federal funds borrowings occur under established facilities
with various federally-insured banking institutions to purchase federal funds.
The facilities are used on an overnight basis to assist in managing
BankAtlantic's cash flow requirements. These federal fund lines are subject to
periodic review, may be terminated at any time by the issuer institution and are
unsecured. BankAtlantic also has a facility with the Federal Reserve Bank of
Atlanta for secured advances. These advances are collateralized by a security
lien against consumer loans.
BANKING INDUSTRY RISK
Banking is a business that depends on interest rate differentials. In general,
the net interest income, which is the difference between the interest paid by a
bank on its deposits and its other borrowings and the interest received by a
bank on its loan and securities holdings, constitutes a major portion of its
earnings.
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
changes in the relationships between different interest rate indices can affect
the interest rates received 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.
Loan prepayment decisions are also affected by interest rates. Loan prepayments
generally accelerate as interest rates fall. Prepayments in a declining interest
rate environment reduce BankAtlantic's net interest income and adversely affect
its earnings because:
o BankAtlantic often pays premiums to acquire loans and
mortgage-backed securities, which it amortizes over the life of
the asset. If loans or securities are prepaid, the unamortized
premium is charged off; and
o The yield BankAtlantic earns on the reinvestment of funds that it
receives on the prepayment of loans and securities is generally
less than the yield that it earned on the prepaid assets.
Thus, the earnings and growth of BankAtlantic are 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.
Additionally, BankAtlantic is exposed to the risk that borrowers or
counter-parties may default on their obligations. Credit risk arises through the
extension of loans and leases, 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, policies and procedures are
established to manage both on and off-balance sheet (primarily loan commitments)
credit risk and BankAtlantic monitors the application of these policies and
procedures. Further, the real estate collateralizing BankAtlantic's commercial
real estate and construction and development loans is concentrated in Broward,
Miami-Dade, Palm Beach and Hillsborough Counties in
11
Florida and, as such, the credit quality of these loans could be impacted by
declines in the economy generally or in the real estate markets in these areas.
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
credit worthiness 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 management.
The aftermath of the events of September 11, 2001, the war with Iraq, the United
States' continued war on terrorism and other factors may have an unpredictable
effect on economic conditions in general and in our primary market areas.
Depending upon the condition of the local and national economy, we could
experience a decline in credit quality that may result in loan losses and a
material adverse effect on our earnings.
RYAN BECK
Ryan Beck, founded in 1946 and acquired by BankAtlantic Bancorp in 1998, is a
full service broker-dealer headquartered in Livingston, New Jersey. Ryan Beck
operates on a nationwide basis through a network of 34 offices, with
approximately 500 financial consultants and over $17 billion of customer assets
gathered. Ryan Beck is primarily engaged in underwriting, merger advisory
assistance, market making, distribution and trading of equity and fixed income
securities, securities brokerage and equity research. Ryan Beck has primarily
focused its efforts on three industries: financial institutions, healthcare, and
consumer products. Unlike many of its peers, Ryan Beck does not offer any
proprietary fund or investment products, but instead recommends third parties'
products that are highly rated in their respective sectors, an approach which
Ryan Beck believes provides a more positive, less biased approach to investment
counseling.
Ryan Beck intends to focus on the following key areas:
o CONTINUING GROWTH AND DIVERSIFICATION. Ryan Beck's strategy has
been to diversify its operations through the addition of research
coverage and market-making in the technology, consumer products
and health care industries.
o INCREASING THE PRODUCTIVITY OF NEW EMPLOYEES. The Gruntal
transaction, in April, 2002 enabled Ryan Beck to significantly
increase its distribution capabilities by adding over 400
financial consultants to Ryan Beck's then existing 80 financial
consultants and by increasing the number of customer accounts
from 27,000 accounts with $4 billion of customer assets gathered
at December 31, 2001 to over 150,000 accounts with over $17
billion of customer assets gathered at December 31, 2003.
As a registered broker-dealer with the SEC, Ryan Beck operates on a
fully-disclosed basis through its clearing firm, Pershing LLC. Clients consist
primarily of:
o high net worth individuals,
o financial institutions,
o institutional clients (including mutual funds, pension funds,
trust companies, insurance companies, LBO funds, private equity
sponsors, merchant banks and other long-term investors) and
o to a lesser extent, insurance companies and specialty finance
companies.
Ryan Beck's Investment Banking Group operates in three markets: Financial
Institutions, Middle Market and Municipal Finance. Ryan Beck's Investment
Banking Group primarily focuses on financial institutions, managing underwritten
public offerings, serving as placement agent on institutional private financings
and as an advisor on merger and acquisitions.
Ryan Beck's operations also include trading, institutional sales and research.
The Trading Department makes markets in over 500 securities and is continuing to
gain expertise to support Ryan Beck's industry diversification. The Research
Department consists of 11 publishing analysts covering 138 companies in 4
industry sectors. Additionally, the Research Department employs a Chief Market
Strategist providing economic and global market commentary. The Institutional
Equity Sales Department brings investment ideas and proprietary investment
banking products to over 500 accounts across the United States.
Over the last several years, Ryan Beck has expanded significantly through both
acquisitions and internal growth. In April 2002, Ryan Beck acquired certain of
the assets and assumed certain of the liabilities of Gruntal & Co., LLC which
12
significantly increased the size of Ryan Beck. The long term success of this
transaction will depend upon Ryan Beck's ability to integrate the acquired
Gruntal operations and retain its new employees. Although Ryan Beck assumed a
$21 million deferred compensation plan obligation for participating financial
consultants, and put in place a length of service award and a retention award in
forgivable notes in the aggregate amounts of $900,000 and $11.0 million,
respectively, for certain financial consultants and key employees, the financial
consultants and other employees may choose not to remain with Ryan Beck.
While Ryan Beck has been named as a defendant in a number of arbitration claims
based on allegations that it is a "successor in interest" to Gruntal, Ryan Beck
has to date been successful in defending these actions. While no individual
action is material, an adverse result in a number of actions in the aggregate
could be material. In October 2002, Gruntal, which had agreed to indemnify Ryan
Beck against certain types of liabilities, filed for bankruptcy protection and
accordingly indemnification for these claims may not be available.
BROKERAGE INDUSTRY RISK
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:
o the volatility and price levels of the securities markets,
o the volume, size and timing of securities transactions,
o the demand for investment banking services,
o the level and volatility of interest rates,
o the availability of credit,
o legislation affecting the business and financial communities,
o the economy in general, and
o the volatility of equity and debt securities held in inventory.
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.
The majority 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.
13
BANKATLANTIC BANCORP PARENT COMPANY
BankAtlantic Bancorp Parent Company operations include the financing of the
capital needs of its subsidiaries. Funds are obtained from BankAtlantic
dividends and from issuances of equity and debt securities, as well as
borrowings from unrelated financial institutions. These funds are provided to
BankAtlantic Bancorp's subsidiaries for the financing of acquisitions and for
other general corporate purposes. BankAtlantic Bancorp's largest expense is
interest expense on debt, and depending on interest rates, this expense could
increase significantly as much of the debt is indexed to floating rates.
BankAtlantic Bancorp Parent Company also owns and manages a portfolio of equity
investments. As of December 31, 2003, BankAtlantic Bancorp owned publicly traded
equity securities and mutual funds with a fair value of $19.1 million and
privately held equity securities with a cost basis of $1.8 million. Volatility
or a decline in the financial markets can negatively impact the BankAtlantic
Bancorp's net income as a result of devaluation of these investments. Certain of
BankAtlantic Bancorp's affiliates, including certain of our executive officers
and directors, have independently made investments with their own funds in both
public and private entities in which both BankAtlantic Bancorp and the Company
hold investments.
As of December 31, 2003, BankAtlantic Bancorp had approximately $263.4 million
of indebtedness outstanding at the BankAtlantic Bancorp holding company level,
including $262.3 million of junior subordinated debentures with maturities
ranging from 2032 to 2033. The degree to which BankAtlantic Bancorp is leveraged
poses risks, including the risk that BankAtlantic Bancorp's cash flow will not
be sufficient to service its outstanding debt and that BankAtlantic Bancorp may
not be able to obtain additional financing or refinancing. If BankAtlantic
Bancorp is forced to utilize all or most of its cash flow for the purpose of
servicing debt, BankAtlantic Bancorp will not be able to use those funds for
other purposes including the payment of dividends to the Company. BankAtlantic
Bancorp's ability to meet its obligations is largely dependent on BankAtlantic's
ability to pay dividends. BankAtlantic's ability to pay dividends is limited and
is primarily determined based on BankAtlantic's net income. See "Regulations and
Supervision" and "Management's Discussion and Analysis - Liquidity and Capital
Resources".
LEVITT CORPORATION
Levitt intends to focus on the following key areas:
BUILDING AND SELLING HOMES PROFITABLY IN STRONG GROWTH MARKETS THROUGHOUT
FLORIDA. Levitt's markets are expected to remain strong due to favorable
demographic and economic trends, such as retiring "Baby Boomers" and continuing
new employment opportunities. As existing developments in these markets are
completed, Levitt plans to acquire new land that will not only replenish but
also increase Levitt's inventory.
CONTINUING TO ACQUIRE LAND AND DEVELOP MASTER-PLANNED COMMUNITIES IN DESIRABLE
MARKETS. Levitt intends to acquire land parcels in desirable markets that are
suited for developing large master-planned communities. Generally, land sale
revenues tend to be sporadic and fluctuate more than home sale revenues, but
land sale transactions result in higher margins, which typically exceed 40%.
Levitt's land development activities in its master-planned communities
complement its homebuilding activities by offering a potential source of land
for future homebuilding. At the same time, it's homebuilding activities
complement the master-planned community development activities since it is
believed that the strong merchandising and quality developments associated with
its homebuilding activities will support future land sales in its master-planned
communities.
EXPLORING JOINT VENTURES AND/OR ACQUISITIONS TO EXPAND ITS PENETRATION
THROUGHOUT THE UNITED STATES. Levitt believes that its brand and core competence
as a homebuilder and real estate developer can be extended to new markets both
inside and outside of Florida. Levitt also believes that its strength in
developing active adult communities and brand awareness, position it to pursue
joint venture opportunities in new markets.
MAINTAINING A CONSERVATIVE RISK PROFILE. Levitt attempts to apply a disciplined
risk management approach to its business activities. Other than its model homes,
substantially all of Levitt homes are pre-sold before construction begins.
Customer deposits of at least 5% to 10% of the base sales price of the homes are
required, and a higher percentage deposit is required for design customizations
and upgrades. As a result, Levitt believes it has strengthened its backlog and
lowered its cancellation rates. Levitt seeks to maintain land inventory for its
homebuilding activities at levels that can be absorbed within three years. While
Levitt's land inventory in Tradition, Levitt's newest master-planned community,
can support eight to ten years of development, Levitt believes it can mitigate
the risk associated with this investment by selling parcels to other developers
throughout the development period. Alternatively, early sales can provide funds
that will allow Levitt to
14
assemble substantially more acreage with less required additional capital
investment. Levitt can also utilize early sales to improve the attractiveness of
the development. For instance, 1,000 acres adjacent to Tradition were sold which
Levitt expects to be developed with one or more golf courses, thereby adding an
attractive amenity to the area near the development.
UTILIZING COMMUNITY DEVELOPMENT DISTRICTS TO FUND DEVELOPMENT COSTS. Levitt
establishes community development or improvement districts to access bond
financing to fund infrastructure and other projects. The ultimate owners of the
property within the district are responsible for amounts owed on these bonds as
part of an assessment on their tax bills. Generally, no payments under the bonds
are required from property owners during the first two years after issuance.
While Levitt is responsible for these amounts until the affected property is
sold, this strategy allows it to more effectively manage the cash required to
fund development of the project.
PURSUING OTHER STRATEGIC REAL ESTATE OPPORTUNITIES. Levitt owns approximately
38% of the outstanding common stock of Bluegreen. Bluegreen is an independently
operated company that primarily acquires, develops, markets and sells vacation
ownership interests in "drive-to" resorts and develops and sells residential
home sites around golf courses or other amenities. Levitt believes its
investment in Bluegreen will be beneficial over time since Bluegreen's current
customers are potential future homebuyers in Levitt's active adult communities
and because the investment diversifies Levitt's real estate activities. In the
future, Levitt may seek to pursue strategic investments in other real estate
related businesses.
Levitt reports its results of operations through Levitt and Sons, Core
Communities, Investment in Bluegreen and Other Operations.
LEVITT AND SONS
Levitt and Sons develops planned communities featuring homes with average
closing prices ranging from $167,000 to $273,000. While in prior years Levitt
and Sons focused on active adult communities, it recently expanded into
developing communities for the primary family-oriented market. At December 31,
2003, Levitt and Sons had 11 communities under development. Additionally,
through a joint venture, Levitt and Sons is constructing a 164-unit condominium
project. The communities currently under development or under contract and
relevant data as of December 31, 2003 are as follows:
Community Type of Sales Planned Closed Contracted Unsold
Currently in Development Location Community Commenced Units (A) Units Units Balance
------------------------ -------- --------- --------- --------- ----- ---------- -------
Cascades (b) St. Lucie West Active Adult 2000 1,158 660 400 98
Summit Greens Clermont Active Adult 2000 770 449 188 133
Bellaggio Boynton Beach Active Adult 2001 537 314 156 67
Cascades Estero Active Adult 2002 521 111 266 144
Cascades Sarasota Active Adult 2003 466 -- 76 390
------ ------ ------ -----
TOTAL ACTIVE ADULT 3,452 1,534 1,086 832
------ ------ ------ -----
Avalon Park Orlando Family 2002 806 84 274 448
Magnolia Lakes (b) St. Lucie West Family 2002 479 75 372 32
Regency Hills Clermont Family 2002 265 61 143 61
Summerport Windermere Family 2003 481 22 178 281
Riomar Sarasota Family 2004 154 -- -- 154
Hunter's Creek Orange County Family 2004 111 -- -- 111
------ ------ ------ -----
TOTAL FAMILY 2,296 242 967 1,087
------ ------ ------ -----
TOTAL CURRENTLY IN DEVELOPMENT 5,748 1,776 2,053 1,919
------ ------ ------ -----
PROPERTIES UNDER CONTRACT TO BE ACQUIRED (C)
Cascades Estero Active Adult 83 -- -- 83
Cascades Groveland Active Adult 999 -- -- 999
Cascades (b) Tradition Active Adult 1,200 -- -- 1,200
------ ------ ------ -----
TOTAL PROPERTIES UNDER CONTRACT 2,282 -- -- 2,282
------ ------ ------ -----
TOTAL PROPERTIES 8,030 1,776 2,053 4,201
====== ====== ====== =====
(a) Represents the number of residential units planned to be built on the
property. Actual number of units may vary from original plan due to
engineering and architectural changes.
(b) Acquired or to be acquired from Core Communities.
(c) There can be no assurance that current property contracts will be
consummated.
15
All of the above communities are located within the State of Florida.
The properties under contract listed above represent properties Levitt and Sons
has the right to acquire and currently intends to purchase for which due
diligence had been completed as of December 31, 2003 and represent an aggregate
purchase price of $32.7 million. While financing is not yet finalized for these
properties, all of these transactions are expected to close by the end of 2004.
At December 31, 2003 Levitt and Sons also had contracts to acquire three
additional properties for which due diligence had not yet been completed. These
additional properties, which are not included in the above table, would provide
a total of 1,674 homesites for an aggregate purchase price of approximately
$29.9 million.
Levitt and Sons is also participating in a joint venture that is constructing a
164-unit condominium project known as Boca Grand, in which it has a 47.5%
interest. At December 31, 2003, 18 units had been delivered, 104 units were in
the venture's backlog, and the remaining 42 units were available for sale.
At December 31, 2003, Levitt and Sons' backlog (excluding joint ventures) was
2,053 units, or $458.8 million. Backlog represents the number of units subject
to pending sales contracts. Homes included in the backlog include homes that
have been completed, but on which title has not been transferred, homes not yet
completed and homes on which construction has not begun. Information regarding
closed units and backlog units, excluding joint ventures, since Levitt's
acquisition of Levitt and Sons is as follows:
Closed Backlog
Units Units
------ -------
As of and for the year ended December 31, 2000 441 487
As of and for the year ended December 31, 2001 597 584
As of and for the year ended December 31, 2002 740 824
As of and for the year ended December 31, 2003 1,011 2,053
CORE COMMUNITIES
Core Communities was founded in May 1996 to develop the master-planned community
now known as St. Lucie West, and is currently developing the master-planned
community known as Tradition. As a master-planned community developer, Core
Communities engages in three primary activities:
(i) the acquisition of large tracts of raw land;
(ii) planning, entitlement and infrastructure development; and
(iii) the sale of entitled land and/or developed lots to homebuilders
(including Levitt and Sons) and commercial, industrial and
institutional end-users.
St. Lucie West is a 4,600 acre master-planned community located in St. Lucie
County, Florida. It is bordered by Interstate-95 to the west and Florida's
Turnpike to the east. St. Lucie West contains residential, commercial and
industrial developments. Within the community, residents are close to
recreational and entertainment facilities, houses of worship, retail businesses,
medical facilities and schools. PGA of America owns and operates a golf course
and a country club. The community's baseball stadium serves as the spring
training headquarters for the New York Mets. There are approximately 5,000 homes
in St. Lucie West housing nearly 8,000 residents. At December 31, 2003,
approximately 123 acres remained available for sale in this project.
Tradition is located approximately two miles south of St. Lucie West, and will
encompass 9,000 acres if all properties under contract are acquired, including
approximately five miles of frontage on Interstate 95. Tradition is being
developed as a master-planned community including a corporate park, a K-12
charter/lab school, commercial properties, residential homes and other uses in a
series of mixed-use parcels. Community Development District special assessment
bonds are being utilized to provide financing for certain infrastructure
developments.
At December 31, 2003, Core Communities owned 4,704 acres in Tradition. Core
Communities also has under contract additional parcels contiguous to the
existing land totaling approximately 4,456 acres. The contracts for these
parcels are expected to begin closing in May 2004. During June 2003, Core
Communities acquired a 1,706-acre parcel adjacent to Tradition and subsequently
sold 979 of those acres in a single transaction to a developer. This sale was
profitable as well as strategic, since Levitt anticipates that the land will be
used for the construction of one or more golf courses, which will be considered
attractive local amenities to new homeowners in Tradition.
16
First phase development is underway at the Tradition project and is expected to
continue through 2004. First phase development includes the construction of
primary access to Interstate-95 and of connector roadways from the interior of
Tradition out to the highway, construction of the storm water infrastructure,
commercial pod development, and traditional and neo-traditional residential lot
development. Through December 31, 2003, Core Communities has entered into
contracts with eight homebuilders for the sale of a total of 1,531 acres in the
first phase residential development. While there is no assurance that all of
these transactions will be consummated, 139 of the contracted acres had been
delivered as of December 31, 2003.
In September 2001, Core Communities acquired a 1,285-acre tract of land known as
Live Oak Preserve in Hillsborough County on the west coast of Florida for
approximately $17.0 million. During October 2002, Core Communities sold 1,267
acres of this property, representing all of the residential land, in a single
transaction for approximately $25.0 million. The remaining 18 acres of land
represented land zoned for commercial property and were sold in September 2003
for approximately $5.9 million.
Core Communities' land in development or under contract and relevant data as of
December 31, 2003 was as follows:
Project Location Type of Saleable Closed Contracted Unsold
------- -------- Project Acquired Acres (A) Acres Acres Balance
------- -------- --------- ------- ---------- -------
CURRENTLY IN DEVELOPMENT
St. Lucie West St. Lucie County Mixed Use 1997(b) 1,970 1,806 41 123
------ ------ ----- -----
TOTAL ST. LUCIE WEST 1,970 1,806 41 123
------ ------ ----- -----
Tradition St. Lucie County Mixed Use 1998 2,033 139 958 936
Tradition St. Lucie County Mixed Use 2002 1,826 -- 434 1,392
Tradition St. Lucie County Mixed Use 2003 984 -- -- 984
------ ------ ----- -----
TOTAL TRADITION 4,843 139 1,392 3,312
------ ------ ----- -----
TOTAL CURRENTLY IN DEVELOPMENT 6,813 1,945 1,433 3,435
------ ------ ----- -----
PROPERTIES UNDER CONTRACT TO BE ACQUIRED (C)
Tradition St. Lucie County Mixed Use 4,456 -- -- 4,456
------ ------ ----- -----
TOTAL PROPERTIES UNDER CONTRACT 4,456 -- -- 4,456
------ ------ ----- -----
TOTAL PROPERTIES 11,269 1,945 1,433 7,891
====== ====== ===== =====
(a) Actual saleable acres may vary from original plan due to changes in
zoning, project design, or other factors.
(b) Land inventory of St. Lucie West as of date of acquisition of by Core
Communities.
(c) There can be no assurance that current property contracts will be
consummated.
BLUEGREEN CORPORATION
Levitt also owns approximately 38% of the outstanding common stock of Bluegreen.
Bluegreen is a leading provider of vacation and residential lifestyle choices
through its vacation ownership and residential land businesses. Bluegreen is
organized into two divisions: Bluegreen Resorts and Bluegreen Communities.
Bluegreen Resorts acquires, develops and markets vacation ownership interests
in resorts generally located in popular, high-volume, "drive-to" vacation
destinations. Bluegreen sells vacation ownership interests in its Bluegreen
Vacation Club(R) product through sales offices at all of its owned resorts and
at four off-site sales offices. A vacation ownership interest in any of
Bluegreen's resorts entitles the buyer to an annual allotment of "points" in
perpetuity in the Bluegreen Vacation Club.(R) These points may be exchanged for
stays at any of Bluegreen's participating, fully-furnished vacation resorts or
for other vacation options, including cruises and stays at approximately 3,700
resorts offered by a worldwide vacation ownership exchange network. Bluegreen
currently develops, markets and sells vacation ownership interests in 16 resorts
located in the United States and one resort located in the Caribbean.
Bluegreen Communities acquires, develops and subdivides property and markets the
subdivided residential homesites to retail customers seeking to build a home in
a high quality residential setting. In some cases these properties feature a
golf course and/or other amenities. The strategy of this division is to locate
its projects (i) near major metropolitan centers (but outside the perimeter of
intense subdivision development) or (ii) in popular retirement areas. Bluegreen
has focused this division's activities in certain core markets in which
Bluegreen has developed substantial marketing expertise and has a track record
of success.
17
Bluegreen also generates significant interest income through its financing of
individual purchasers of vacation ownership interests.
OTHER OPERATIONS
Other operations consist of Levitt Commercial, investments in joint ventures
and other real estate interests and Levitt holding company operations.
LEVITT COMMERCIAL
Levitt Commercial was formed in 2001 to develop industrial and retail
properties. Levitt Commercial currently has four projects under development. The
first project, developed by a joint venture of which Levitt Commercial is an 82%
owner, is the High Ridge Commerce Center located in Boynton Beach, Florida. This
is a 70,000 square foot flex industrial building with 900 feet of frontage on
Interstate-95. The project is divided into 14 bays averaging 5,000 square feet.
The other three projects, which are wholly-owned by Levitt Commercial, include
Phase 2 and 3 of the High Ridge Commerce Center, the Boynton Commerce Center,
also located in Boynton Beach, and the Andrews Business Center, which is located
in Pompano Beach, Florida. The three newer projects will total 89 flex warehouse
bays, averaging 2,975 square feet each.
Levitt Commercial is also participating in a joint venture known as the Preserve
at Long Leaf, which is developing a 298-unit apartment complex in Melbourne,
Florida. Levitt Commercial owns a 50% interest in the land for the apartment
complex, which was acquired by the joint venture in October 2002, and a 20%
interest in costs related to the further development of the project. An
affiliate of our joint venture partner will be the general contractor and we
anticipate construction to commence during 2004.
Levitt Commercial's projects currently under development or under contract and
relevant data as of December 31, 2003 were as follows:
Project Type of Sales Total Closed Contracted Unsold
------- Location Project Commenced Units (A) Units Units Balance
-------- ------- --------- --------- ------ ---------- -------
CURRENTLY IN DEVELOPMENT
High Ridge Commerce Center Boynton Beach Flex 2002 14 13 -- 1
High Ridge Commerce Center
Phase 2 & 3 Boynton Beach Flex 2003 40 -- 15 25
Boynton Commerce Center Boynton Beach Flex 2003 21 -- -- 21
Andrews Business Center Pompano Beach Flex 2004 28 -- -- 28
--- --- ---- ---
TOTAL PROPERTIES 103 13 15 75
=== === ==== ===
(a) Actual number of units may vary from original project plan due to
engineering and architectural changes.
OTHER JOINT VENTURES
Levitt currently owns a 40% interest in Brittany Bay at Andros Isles, Ltd., a
Florida limited partnership formed to develop a single-family attached (duplex)
residential development consisting of 222 units located in West Palm Beach,
Florida. At December 31, 2003, the venture had closed on 203 units and had
entered into contracts to sell the remaining 19 units. Levitt owns a 39.9%
limited partnership interest in this venture and BankAtlantic Venture Partners
3, Inc., a subsidiary of Levitt, is a co-general partner with an unaffiliated
third party and owns a 0.1% general partnership interest. The remaining
partnership interests are held by unaffiliated third parties.
Additionally, Levitt owns a 45% interest in Fairways at Grand Harbor, Ltd., a
Florida limited partnership organized to develop 257 luxury rental apartments in
Vero Beach, Florida. Levitt owns a 44.5% limited partnership interest in this
venture and BankAtlantic Venture Partners 2, Inc., a subsidiary of Levitt and a
co-general partner, owns a 0.5% general partnership interest. The remaining
partnership interests are held by unaffiliated third parties. The rental
apartment property was sold to an unaffiliated third party in January 2004,
however the partnership continues to provide rental management services at
neighboring Grand Harbor.
LEVITT AND REAL ESTATE INDUSTRY RISKS
Levitt has a significant amount of debt. At December 31, 2003, Levitt's
consolidated debt was approximately $109 million, (excluding $18.1 million and
$43.5 million of borrowings due to BankAtlantic and BankAtlantic Bancorp,
respectively,
18
which amounts were eliminated in consolidation). The amount of debt could have
important consequences. For example, it could:
o limit the ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements or other requirements;
o require Levitt to dedicate a substantial portion of its cash
flow from operations to payment of or on its debt and reduce
Levitt's ability to use its cash flow for other purposes;
o impact Levitt's flexibility in planning for, or reacting to,
the changes in its business;
o place Levitt at a competitive disadvantage if Levitt has more
debt than its competitors; and
o make Levitt more vulnerable in the event of a downturn in its
business or in general economic conditions.
Levitt's ability to meet its debt service and other obligations, to refinance
its indebtedness and to fund planned capital expenditures will depend upon
future performance. Levitt is engaged in businesses that are substantially
affected by changes in economic cycles. Levitt's revenues and earnings vary with
the level of general economic activity in the markets it serves. Levitt's
businesses are also affected by financial, political, business and other
factors, many of which are beyond Levitt's control. The factors that affect
Levitt's ability to generate cash can also affect its ability to raise
additional funds for these purposes through the sale of equity securities, the
refinancing of debt, or the sale of assets. Changes in prevailing interest rates
may affect Levitt's ability to meet its debt service obligations, because
borrowings under a significant portion of Levitt's debt instruments bear
interest at floating rates.
Levitt's anticipated debt payment obligations for the 12 months beginning
December 31, 2003 total $20.2 million. Levitt's business may not generate
sufficient cash flow from operations, and future borrowings may not be available
under its existing credit facilities or any other financing sources in an amount
sufficient to enable Levitt to service its indebtedness or to fund its other
liquidity needs. Levitt may need to refinance all or a portion of its debt on or
before maturity, which it may not be able to do on favorable terms or at all.
The real estate industry is highly cyclical by nature and future market
conditions are uncertain. Factors which adversely affect the real estate and
homebuilding industries, many of which are beyond our control include:
o the availability and cost of financing,
o unfavorable interest rates and increases in inflation,
o overbuilding or decreases in demand,
o changes in the general availability of land and competition
for available land,
o construction defects and warranty claims arising in the
ordinary course of business, including mold related property
damage and bodily injury claims and homeowner and homeowner
association lawsuits,
o changes in national, regional and local economic conditions,
o cost overruns, inclement weather, and labor and material
shortages,
o the impact of present or future environmental legislation,
zoning laws and other regulations,
o availability, delays and costs associated with obtaining
permits, approvals or licenses necessary to develop property,
and
o increases in real estate taxes and other governmental fees.
In addition, Levitt currently develops and sells properties solely in Florida.
Florida is subject to the risks of natural disasters such as hurricanes and
tropical storms and subject to adverse changes in the economy in Florida.
BFC HOLDING COMPANY
The BFC Holding Company segment includes all of the operations and all of the
assets that are owned by BFC other than BankAtlantic Bancorp and its
subsidiaries and Levitt and its subsidiaries. BFC owns and manages real estate,
which includes the ownership of Burlington Manufacturers Outlet Center ("BMOC"),
a shopping center in North Carolina and the unsold land at Center Port, an
industrial office park developed in Florida. BFC also holds mortgage notes
receivable that were received in connection with the sale of properties
previously owned. The BFC Holding Company segment also includes overhead and
interest expense. The interest expense relates to debts and other borrowings,
primarily utilized for the acquisition of real estate and equity securities.
Equity investments primarily include equity securities in the technology sectors
and ownership interests in private limited partnerships. Subsidiaries of BFC are
the managing general partners of the private limited partnerships and the
partnerships' accounts are included in the consolidated financial statements of
the Company.
19
BFC HOLDING COMPANY RISKS
As of December 31, 2003, approximately $6 million of indebtedness was
outstanding at the BFC holding company level. The degree to which BFC is
leveraged poses risks to BFC's operations, including the risk that BFC's cash
flow will not be sufficient to service its outstanding debt, that BFC may not be
able to obtain additional financing or refinancing and that BFC may be required
to liquidate a portion of its assets. If BFC is forced to utilize all or most of
its cash flow for the purpose of servicing debt, it will not be able to use
those funds for other purposes. BFC's ability to meet its obligations is largely
dependent on BankAtlantic Bancorp's ability to pay dividends to BFC.
BankAtlantic Bancorp's ability to pay dividends is limited and is primarily
dependent on receiving dividends from BankAtlantic, which in turn is largely
determined based on BankAtlantic's net income and is subject to regulatory
restrictions.
Additionally, Alan B. Levan, our Chairman of the Board of Directors and Chief
Executive Officer and John E. Abdo, Vice Chairman of our Board of Directors
beneficially own approximately 45% and 13% of the Class A Common Stock and 43%
and 27% of the Class B Common Stock of BFC, respectively. As a consequence, Alan
B. Levan and John E. Abdo effectively have the voting power to control the
outcome of any shareholder vote of BFC. Alan Levan's and John Abdo's control
positions may have an adverse effect on the market price of our common stock.
EMPLOYEES
Management believes that its relations with its employees are satisfactory. The
Company currently maintains comprehensive employee benefit programs that are
considered by management to be generally competitive with programs provided by
other major employers in its markets.
The number of employees at the indicated dates was:
December 31, 2003 December 31, 2002
--------------------- ---------------------
Full- Part- Full- Part-
Time Time Time Time
----- ----- ----- -----
BFC 7 1 7 1
BankAtlantic 1,301 204 1,134 219
Ryan Beck 1,011 31 1,215 40
Levitt 353 34 221 28
----- --- ----- ---
Total 2,672 270 2,577 288
===== === ===== ===
COMPETITION
BankAtlantic is engaged in the banking and financial services industry, which is
very competitive. Legal and regulatory developments have made it easier for new
and sometimes unregulated entities to compete with BankAtlantic. Consolidation
among financial service providers has resulted in fewer very large national and
regional banking and financial institutions holding a large accumulation of
assets. These institutions may have significantly greater resources, a wider
geographic presence or greater accessibility. As consolidation continues among
large banks, BankAtlantic expects additional smaller institutions to try to
exploit our market. BankAtlantic faces substantial competition for both loans
and deposits. Competition for loans comes principally from other banks, savings
institutions and other lenders. This competition could decrease the number and
size of loans that BankAtlantic makes and the interest rates and fees that it is
receive on these loans.
BankAtlantic competes for deposits with banks, savings institutions and credit
unions, as well as institutions offering uninsured investment alternatives,
including money market funds and mutual funds. These competitors may offer
higher interest rates than BankAtlantic, which could decrease the deposits that
BankAtlantic attracts or require BankAtlantic to increase its rates to attract
new deposits. Increased competition for deposits could increase cost of funds
and adversely affect BankAtlantic's ability to generate the funds necessary for
its lending operations.
Ryan Beck is engaged in investment banking, securities brokerage and asset
management activities all of which are extremely competitive businesses.
Competitors include all of the member organizations of the New York Stock
Exchange and NASD, banks, insurance companies, investment companies and
financial consultants.
20
We are engaged in real estate activities both directly and through Levitt. The
business of developing and selling residential properties and planned
communities is highly competitive and fragmented. Levitt competes with numerous
large and small builders on the basis of a number of interrelated factors,
including location, reputation, amenities, design, quality and price. Some
competing builders have nationwide operations and substantially greater
financial resources. Levitt's products must also compete with sales of existing
homes and available rental housing. In connection with its leasing activities,
the Company competes with other shopping centers and outlet centers for tenants.
REGULATION AND SUPERVISION
HOLDING COMPANIES
BFC and BankAtlantic Bancorp are both unitary savings and loan holding companies
within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such,
both are registered with the OTS and are subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over BFC and BankAtlantic Bancorp, and our non-bank
subsidiary, Ryan Beck. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings bank.
HOLA prohibits a savings bank holding company, directly or indirectly, or
through one or more subsidiaries, from acquiring another savings institution or
holding company thereof without prior written approval of the OTS; acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating an application by a holding company to acquire a savings
institution, the OTS must consider the financial and managerial resources and
future prospects of the company and savings institution involved, the effect of
the acquisition on the risk to the insurance funds, the convenience and needs of
the community and competitive factors.
As a unitary savings and loan holding company, we generally are not restricted
under existing laws as to the types of business activities in which we may
engage, provided that the Bank continues to satisfy the Qualified Thrift Lending
("QTL") test. See "Regulation of Federal Savings Banks - QTL Test" for a
discussion of the QTL requirements. If we were to make a non-supervisory
acquisition of another savings institution that will be held as a separate
subsidiary, we would become a multiple savings bank holding company and would be
subject to limitations on the types of business activities in which we can
engage. HOLA limits the activities of a multiple savings institution holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company ("BHC") Act, subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation.
Transactions between the Bank, including any of the Bank's subsidiaries, and us
or any of the Bank's affiliates, are subject to various conditions and
limitations. See "Regulation of Federal Savings Banks - Transactions with
Related Parties." The Bank must file a notice with the OTS prior to any
declaration of the payment of dividends or other capital distributions to us.
See "Regulation of Federal Savings Banks - Limitation on Capital Distributions."
FEDERAL SECURITIES LAWS
BFC's Class A Common Stock and Class B Common Stock are registered with the SEC
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). We are subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
BANKATLANTIC
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by the
OTS, as its chartering agency, and the FDIC, as its deposit insurer. The Bank's
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF"), which are
administered by the FDIC. The Bank must file
21
reports with the OTS and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions or forming subsidiaries. The OTS and the FDIC conduct periodic
examinations to assess the Bank's safety and soundness and compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings bank can engage and is
intended primarily for the protection of the insurance fund and depositors.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on us, the Bank, and our operations.
The following discussion is intended to be a summary of the material statutes
and regulations applicable to savings banks, and it does not purport to be a
comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS BANKS
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from the
HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. These investment powers are subject to various limitations,
including (a) a prohibition against the acquisition of any corporate debt
security that is not rated in one of the four highest rating categories; (b) a
limit of 400% of capital on the aggregate amount of loans secured by
non-residential real estate property; (c) a limit of 20% of assets on commercial
loans, with the amount of commercial loans in excess of 10% of assets being
limited to small business loans; (d) a limit of 35% of assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on non-conforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or total
capital on certain construction loans made for the purpose of financing what is
or is expected to become residential property.
LOANS TO ONE BORROWER. Under HOLA, savings banks are generally subject to the
same limits on loans to one borrower as are imposed on national banks.
Generally, under these limits, a savings bank may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of the bank's
unimpaired capital and surplus. Additional loans or extensions of credit are
permitted of up to 10% of unimpaired capital and surplus if they are fully
secured by readily-marketable collateral. Such collateral includes certain debt
and equity securities and bullion, but generally does not include real estate.
At December 31, 2003, the Bank's limit on loans to one borrower was $71.1
million. At December 31, 2003, the Bank's largest aggregate amount of loans to
one borrower was $55.3 million and the second largest borrower had an aggregate
loan balance of $47.1 million.
QTL TEST. HOLA requires a savings bank to meet a QTL test by maintaining at
least 65% of its "portfolio assets" in certain "qualified thrift investments" in
at least nine months of the most recent twelve-month period. A savings bank that
fails the QTL test must either operate under certain restrictions on its
activities or convert to a bank charter. At December 31, 2003, the Bank
maintained 73.3% of its portfolio assets in qualified thrift investments. The
Bank had also satisfied the QTL test in each of the prior 12 months and,
therefore, was a qualified thrift lender.
CAPITAL REQUIREMENTS. The OTS regulations require savings banks to meet three
minimum capital standards: a tangible capital ratio requirement of 1.5% of total
assets as adjusted under the OTS regulations, a risk-based capital ratio
requirement of 8% of core and supplementary capital to total risk-based assets
and a core capital ratio (as defined under OTS regulations). For a depository
institution that has been assigned the highest composite rating of 1 under the
Uniform Financial Institutions Rating, the minimum core capital ratio is 3%, and
the minimum core capital ratio for any other depository institution is 4%,
unless a higher capital ratio is warranted by the particular circumstances or
risk profile of the depository institution. In determining the amount of
risk-weighted assets for purposes of the risk-based capital requirement, a
savings bank must compute its risk-based assets by multiplying its assets and
certain off-balance sheet items by risk-weights, which range from 0% for cash
and obligations issued by the U.S. Government or its agencies, to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations based
on the risks OTS believes are inherent in the type of asset. On May 10, 2002,
the OTS adopted amendments to its capital regulations which, among other
matters, eliminated the interest rate risk component of the risk-based capital
requirement. Pursuant to the amendment, the OTS will continue to monitor the
interest
22
rate risk management of individual institutions through the OTS requirements for
interest rate risk management, the ability of the OTS to impose an individual
minimum capital requirement on institutions that exhibit a high degree of
interest rate risk, and the requirements of Thrift Bulletin 13a, which provides
guidance regarding the management of interest rate risk and the responsibility
of boards of directors in that area.
The table below presents the Bank's regulatory capital as compared to the OTS
regulatory capital requirements at December 31, 2003 (dollars in thousands):
Minimum Capital Well
Actual Requirement Capitalized
----------------------- ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- ------
Tangible capital $379,505 8.52% $ 66,802 1.50% $ 66,802 1.50%
Core capital 379,505 8.52 178,138 4.00 222,673 5.00
Total tier 1 risk-based capital 379,505 10.22 148,604 4.00 222,906 6.00
Total risk-based capital 447,967 12.06 297,208 8.00 371,509 10.00
As unitary savings bank holding companies neither the Company nor BankAtlantic
Bancorp are currently subject to regulatory capital requirements, and it is not
anticipated that we or BankAtlantic Bancorp will be required to meet holding
company capital requirements in the foreseeable future.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon
capital distributions by the Bank, such as cash dividends, payments to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger, and other distributions charged against
capital.
As the subsidiary of a savings and loan holding company, the Bank is required to
file a notice with the OTS at least 30 days prior to each capital distribution.
However, if the total amount of all capital distributions (including each
proposed capital distribution) for the applicable calendar year exceeds net
income for that year plus the retained net income for the preceding two years,
then the Bank must file an application for OTS approval of a proposed capital
distribution. In addition, the OTS can prohibit a proposed capital distribution
otherwise permissible under the regulation, if it has determined that the
institution is in need of more than customary supervision or that a proposed
distribution by an institution would constitute an unsafe or unsound practice.
Furthermore, under the OTS Prompt Corrective Action Regulations, the Bank would
be prohibited from making any capital distribution if, after the distribution,
the Bank failed to satisfy its minimum capital requirements, as described above.
See "Regulation - Regulation of Federal Savings Institutions - Prompt Corrective
Regulatory Action".
LIQUIDITY. The Bank is required to maintain sufficient liquidity to ensure its
safe and sound operation. The Bank's liquidity ratio at December 31, 2003 was
10.77%.
ASSESSMENTS. Savings institutions are required by OTS regulation to pay
semi-annual assessments to the OTS to fund OTS operations. The regulations base
the assessment for individual savings institutions on three components: the size
of the institution on which the basic assessment is based; the institution's
supervisory condition; and the complexity of the institution's operations. The
Bank's assessment expense during the year ended December 31, 2003 was
approximately $791,000.
BRANCHING. Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings banks to establish branches in any state of the
United States.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA requires the OTS, in connection with its examination of a savings bank,
to assess the bank's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by such
bank. The CRA also requires all institutions to make public disclosure of their
CRA ratings. The Bank received a "satisfactory" CRA performance evaluation in
its most recent evaluation. Insured depository institutions also must publicly
disclose certain agreements that are in fulfillment of CRA. We have no such
agreements in place at this time.
23
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the
Bank is any company that controls the Bank or any other company that is
controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are non-bank insured depository institutions
and financial subsidiaries. The OTS regulations prohibit a savings bank (a) from
lending to any of its affiliates that are engaged in activities that are not
permissible for bank holding companies under Section 4(c) of the Bank Holding
Company Act ("BHC Act") and (b) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of the Bank and
also limits the aggregate amount of transactions with all affiliates to 20% of
the Bank's capital and surplus. Extensions of credit to affiliates are required
to be secured by collateral in an amount and of a type described in Section 23A,
and the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the Bank
as those prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards that in good
faith would be offered to or would apply to nonaffiliated companies. On October
1, 2001, the Bank made a special dividend to BankAtlantic Bancorp of all the
outstanding stock of Levitt, and Levitt thereupon became a subsidiary of
BankAtlantic Bancorp instead of the Bank. As an "affiliate" of the Bank by
virtue of BankAtlantic Bancorp's common ownership, transactions between the Bank
and Levitt became subject to the regulations and statutes described above. In
connection with the October 1, 2001 transaction, the OTS issued a "no action"
letter which effectively grandfathered all then-outstanding loans, commitments
and letters of credit from the Bank to Levitt ("Levitt Loans") and the Bank
agreed that it would not engage in any covered transactions with any affiliates
until the aggregate amount of all covered transactions, including the Levitt
Loans, fell below 20% of the Bank's capital stock and surplus. BankAtlantic
Bancorp spun-off Levitt to its stockholders on December 31, 2003; however,
Levitt remains an affiliate of the Bank by virtue of BFC's control of both
companies, and the Bank therefore continues to be subject to the above
restrictions.
Effective April 1, 2003, the Federal Reserve Board (the "FRB") replaced the
interpretations it has issued under Sections 23A and 23B of the FRA and replaced
these interpretations with Regulation W. In addition, Regulation W expands the
definition of what constitutes an affiliate subject to Sections 23A and 23B.
Under Regulation W, all transactions entered into on or before December 12,
2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which changed solely because of Regulation W, became subject to
Regulation W on July 1, 2003. All other covered affiliate transactions became
subject to Regulation W on April 1, 2003. The FRB expects each depository
institution that is subject to Sections 23A and 23B to implement policies and
procedures to ensure compliance with Regulation W. We do not expect that the
changes made by Regulation W will have a material adverse effect on our
business.
Section 402 of Sarbanes-Oxley prohibits the extension of personal loans to
directors and executive officers of issuers (as defined in Sarbanes-Oxley). The
prohibition, however, does not apply to mortgages advanced by an insured
depository institution, such as the Bank, which are subject to the insider
lending restrictions of Section 22(h) of the FRA.
The Bank's authority to extend credit to its directors, executive officers, and
10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as and follow credit underwriting procedures that are not
less stringent than those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the bank's
capital. In addition, extensions of credit in excess of certain limits must be
approved by the Bank's board of directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has
primary enforcement responsibility over savings banks and has the authority to
bring enforcement action against all "institution-affiliated parties," including
any controlling stockholder or any shareholder, attorney, appraiser and
accountant who knowingly or recklessly participates in any violation of
applicable law or regulation or breach of fiduciary duty or certain other
wrongful actions that cause or are likely to cause a more than a minimal loss or
other significant adverse effect on an insured savings bank. In addition, the
FDIC has back-up authority to take enforcement action for unsafe and unsound
practices.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the requirements of the FDI Act,
as amended by FDICIA and the Riegle Community Development and Regulatory
Improvement Act of 1994 ("Community Development Act"), the OTS, together
24
with the other federal bank regulatory agencies, have adopted a set of
guidelines prescribing safety and soundness standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, asset quality,
earnings and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify and
manage the risks and exposures specified in the guidelines.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking agencies
have adopted regulations prescribing standards for extensions of credit that (a)
are secured by real estate or (b) are made for the purpose of financing the
construction of improvements on real estate. The OTS regulations require each
savings bank to establish and maintain written internal real estate lending
standards that are consistent with OTS guidelines and with safe and sound
banking practices and which are appropriate to the size of the bank and the
nature and scope of its real estate lending activities.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS Prompt Corrective Action
Regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings institutions. For
this purpose, a savings institution would be placed in one of five categories
based on its capital. Generally, a savings institution is treated as "well
capitalized" if its ratio of total capital to risk-weighted assets is at least
10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%, its
ratio of core capital to total assets is at least 5.0%, and it is not subject to
any order or directive by the OTS to meet a specific capital level. The most
recent notification from the OTS categorized the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category. See "- Capital Requirements."
The severity of the action authorized or required to be taken under the Prompt
Corrective Action Regulations increases as a bank's capital deteriorates within
the three undercapitalized categories. All institutions are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the institution would be
undercapitalized. An undercapitalized institution is required to file a capital
restoration plan within 45 days of the date the institution receives notice that
it is within any of the three undercapitalized categories. The OTS is required
to monitor closely the condition of an undercapitalized institution and to
restrict the asset growth, acquisitions, branching, and new lines of business of
such an institution. If one or more grounds exist for appointing a conservator
or receiver for an institution, the OTS may require the institution to issue
additional debt or stock, sell assets, be acquired by a depository bank holding
company or combine with another depository bank. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depository bank. When appropriate, the OTS can require corrective
action by a savings bank holding company under the "Prompt Corrective Action"
provisions of FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. Savings banks are subject to a risk-based
assessment system for determining the deposit insurance assessments to be paid
by each bank. Under the risk-based assessment system, which began in 1993, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period. The supervisory
subgroup to which an institution is assigned is based upon a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Assessment rates currently range from 0.0% of
deposits for an institution in the highest category (i.e., well-capitalized and
financially sound, with no more than a few minor weaknesses) to 0.27% of
deposits for an institution in the lowest category (i.e., undercapitalized and
substantial supervisory concern). The FDIC is authorized to raise the assessment
rates as necessary to maintain the required reserve ratio of 1.25%. Both the BIF
and SAIF currently satisfy the reserve ratio requirement. If the FDIC determines
that assessment rates should be increased, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and could raise insurance assessment rates in the future. Increases in
deposit insurance premiums could have an adverse effect on the Company's
earnings.
The Deposit Insurance Funds Act of 1996 amended the FDIA Act to recapitalize the
SAIF and expand the assessment base for the payments of Financing Corporation
("FICO") bonds. FICO bonds were sold by the federal government in order to
finance the recapitalization of SAIF and BIF insurance funds. The
recapitalization of the SAIF and BIF insurance funds was necessitated following
payments made from these insurance funds to compensate depositors of
federally-insured depository institutions that experienced bankruptcy and
dissolution during the 1980's and 1990's. The quarterly adjusted rate of
assessment for FICO bonds is 0.0152% for both BIF- and SAIF-insured
institutions.
PRIVACY AND SECURITY PROTECTION. The OTS has adopted regulations implementing
the privacy protection provisions of the Gramm-Leach-Bliley Act ("Gramm-Leach").
The regulations, which require each financial institution to adopt procedures to
25
protect customers and customers' "non-public personal information," became
effective November 13, 2000. The Bank has a privacy protection policy, which we
believe complies with applicable regulations. In February 2001, the OTS and
other federal banking agencies finalized guidelines establishing standards for
safeguarding customer information to implement certain provisions of
Gramm-Leach. The guidelines describe the agencies' expectations for the
creation, implementation and maintenance of an information security program. The
regulation became effective on July 1, 2001. These regulations have not had a
material impact upon our operations.
INTERNET BANKING. Technological developments are dramatically altering the
methods by which most companies, including financial institutions, conduct their
business. The growth of the Internet is prompting banks to reconsider business
strategies and adopt alternative distribution and marketing systems. The federal
bank regulatory agencies have conducted seminars and published materials
targeted at various aspects of Internet Banking and have indicated their
intention to re-evaluate their regulations to ensure they encourage bank
efficiency and competitiveness consistent with safe and sound banking practices.
There is no assurance that federal bank regulatory agencies will not adopt new
regulations that will not materially affect or restrict the Bank's Internet
operations.
INSURANCE ACTIVITIES. As a federal savings bank, the Bank is generally permitted
to engage in certain insurance activities through subsidiaries. OTS regulations
promulgated pursuant to Gramm-Leach prohibit depository institutions from
conditioning the extension of credit to individuals upon either the purchase of
an insurance product or annuity or an agreement by the consumer not to purchase
an insurance product or annuity from an entity that is not affiliated with the
depository institution. The regulation also requires prior disclosure of this
prohibition to potential insurance product or annuity customers.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Atlanta,
which is one of the regional FHLB's composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares
of capital stock in the FHLB. The Bank was in compliance with this requirement
with an investment in FHLB stock at December 31, 2003 of $40.3 million. Any
advances from a FHLB must be secured by specified types of collateral, and all
long-term advances may be obtained only for the purpose of providing funds for
residential housing finance. The FHLB of Atlanta paid dividends on the capital
stock of $2.3 million during the year ended December 31, 2003. If dividends were
reduced or interest on future FHLB advances increased, the Bank's net interest
income would likely also be reduced.
FEDERAL RESERVE SYSTEM. The Bank is subject to provisions of the FRA and the
FRB's regulations, pursuant to which depository institutions may be required to
maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $42.8 million and 10% of amounts
over $42.8 million, subject to adjustment by the FRB. The FRB regulations
currently exempt $6.0 million of otherwise reservable balances from the reserve
requirements, which exemption is adjusted by the FRB at the end of each year.
The Bank is in compliance with the foregoing reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. FHLB System members are also authorized to
borrow from the Federal Reserve "discount window," but FRB regulations require
such institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
ANTI-TERRORISM REGULATION. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA
Patriot Act") was signed into law on October 26, 2001, providing the federal
government with new powers to address terrorist threats. By way of amendments to
the Bank Secrecy Act, Title III of the USA Patriot Act enacted measures intended
to encourage information-sharing among bank regulatory and law enforcement
agencies. In addition, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including the obligation
to establish anti-money laundering programs that include, at a minimum, (i)
internal policies, procedures and controls, (ii) a designated compliance
officer, and employee training program and an independent audit function to test
the program and (iii) implement procedures to verify customer identification
upon the opening of new accounts and (iv) undertake heightened due diligence
measures with respect to certain foreign accounts and relationships.
Implementation of the USA Patriot Act did not have a material impact upon the
financial condition or results of operations.
26
RYAN BECK
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Much of the regulation of
broker-dealers has been delegated to self-regulatory authorities, principally
the NASD and, in the case of broker-dealers that are members of a securities
exchange, the particular securities exchange. These self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC.
Securities firms are also subject to regulation by state securities commissions
in those states in which they do business. As of December 31, 2003, Ryan Beck
was registered as a broker-dealer in 50 states and the District of Columbia. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets, rather than protection of
creditors and stockholders of broker-dealers. The regulations to which
broker-dealers are subject cover all aspects of the securities business,
including sales methods, trading practices among broker-dealers, uses and
safekeeping of clients' funds and securities, capital structure of securities
firms, record-keeping and reporting, fee arrangements, disclosure to clients and
the conduct of directors, officers and employees.
Additionally, legislation, changes in rules promulgated by the SEC and
self-regulatory authorities or changes in the interpretation or enforcement of
existing laws and rules may directly affect the operations and profitability of
broker-dealers. The SEC, self-regulatory authorities and state securities
commissions may conduct administrative proceedings which can result in censure,
fine, suspension or expulsion of a broker-dealer, its officers or employees.
Such administrative proceedings, whether or not resulting in adverse findings,
can require substantial expenditures. The profitability of broker-dealers could
also be affected by rules and regulations that impact the business and financial
communities in general, including changes to the laws governing taxation,
antitrust regulation and electronic commerce.
Securities held in custody by Pershing for Ryan Beck's customer accounts are
protected to an unlimited amount. The Securities Investors Protection
Corporation (SIPC) provides $500,000 of coverage, including $100,000 for claims
for cash. Pershing provides the remaining coverage through a commercial insurer.
The account protection applies when a SIPC member firm fails financially and is
unable to meet obligations to securities customers, but it does not protect
against losses from the rise and fall in the market value of investments.
Ryan Beck is subject to the net capital provision of Rule 15c3-1 under the
Exchange Act. The net capital rule specifies minimum net capital requirements
that are intended to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NASD, certain punitive actions by the SEC and
other regulatory bodies, and ultimately may require a firm's liquidation. At
December 31, 2003, Ryan Beck was in compliance with all applicable capital
requirements.
Ryan Beck operates under the provisions of paragraph (k)(2)(ii) of Rule 15c3-3
of the SEC as a fully disclosed broker and, accordingly, customer accounts are
carried on the books of the clearing broker. However, Ryan Beck safe keeps and
redeems municipal bond coupons for the benefit of its customers. Accordingly,
Ryan Beck is subject to the provisions of SEC Rule 15c3-3 relating to possession
or control of customer securities and customer reserve requirements and was in
compliance with such provisions at December 31, 2003.
LEVITT
Levitt is subject to laws, ordinances and regulations of various federal, state
and local governmental entities and agencies concerning, among other things,
environmental matters; including the presence of hazardous or toxic substances;
wetland preservation; health and safety; zoning, land use and other
entitlements; building design; and density levels. In developing a project and
building homes or apartments, Levitt may be required to obtain the approval of
numerous governmental authorities regulating matters including installation of
utility services such as gas, electric, water and waste disposal; the dedication
of acreage for open space, parks and schools; permitted land uses; and the
construction design, methods and materials used. These laws or regulations
could, among other things, establish building moratoriums, limit the number of
homes, apartments or commercial properties that may be built; change building
codes and construction requirements affecting property under construction;
increase the cost of development and construction; delay development and
construction; and otherwise have a material adverse effect on the real estate
industry in general and on Levitt's business, financial condition and results of
operations, specifically. Several governmental authorities have also imposed
impact fees as a means of defraying the cost of providing certain governmental
services to developing areas, and many of these fees have increased
significantly during recent years.
27
Levitt may not at times be in compliance with all regulatory requirements. If
compliance with regulatory requirements are not met, Levitt may be subject to
penalties or may be forced to incur significant expenses to cure any
noncompliance.
Levitt considers the costs of compliance with environmental regulations to be
part of the ordinary course of business, and such compliance has not had any
material adverse effect on Levitt or the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"). On July 1, 2003, BankAtlantic Bancorp
implemented, except for Levitt and its subsidiaries, the interpretation
effective January 1, 2003. As a consequence of the implementation, BankAtlantic
Bancorp's wholly owned statutory business trusts formed to issue trust preferred
securities were deconsolidated and a real estate joint venture was consolidated.
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which replaced FIN
46. FIN 46R addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights. This
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The interpretation also requires
disclosures about variable interest entities that the Company is not required to
consolidate but in which it has a significant variable interest. The Company is
required to adopt FIN 46R by the end of the first reporting period ending after
March 15, 2004. The Company has completed its initial evaluation of FIN 46R, and
has concluded that other than to the extent that BankAtlantic Bancorp was
impacted by its prior implementation of FIN 46, the adoption of FIN 46R is not
expected to have a material impact on the results of operations or financial
condition.
In May 2003, the FASB issued Statement No. 150 ("Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity").
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The Statement requires that an issuer classify a financial instrument
that is within its scope as a liability. Many of those instruments were
previously classified as equity. This Statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. Upon adoption, this Statement did not have a significant impact on the
Company's financial statements. The Statement also required that mandatorily
redeemable minority interests in finite-lived entities be classified as
liabilities and reported at settlement value. The FASB deferred those
requirements related to mandatorily redeemable minority interests in
finite-lived entities indefinitely pending further FASB action. The Company's
minority interest in finite-lived entities is not significant.
In December 2003, the FASB issued Statement No. 132, revised ("Employers'
Disclosures about Pensions and Other Postretirement Benefits"). This revised
Statement requires additional disclosures about the assets, obligations, cash
flows and net periodic benefit cost of defined benefit pension and
postretirement plans, as well as the expense recorded for such plans. This
Statement is effective for financial statements with fiscal years ending after
December 15, 2003. The Company implemented the disclosure requirements of this
statement as of December 31, 2003.
In December 2003, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee ("AcSEC") issued Statement of
Position 03-3 ("SOP"). The SOP addresses accounting for loans and debt
securities acquired in purchase business combinations or purchased subsequent to
origination. The SOP prohibits the creation of valuation allowances in the
initial accounting of all loans acquired. The SOP does not apply to originated
loans. The SOP limits the yield that may be accreted to the excess of the
purchaser's estimate of undiscounted expected principal, interest and other cash
flows over the purchaser's initial investment. The SOP requires excess
contractual cash flows over cash flows expected to be collected to not be
recognized as an adjustment of yield, loss accrual or valuation allowance.
Subsequent increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan's yield over its
remaining life. Decreases in cash flows expected to be collected should be
recognized as impairments. The SOP is effective for loans and securities
acquired in fiscal years beginning after December 15, 2004 with early adoption
encouraged. BankAtlantic Bancorp's management is currently evaluating the
requirements of the SOP concerning future loan acquisitions that are within the
scope of the SOP.
28
ITEM 2. PROPERTIES
The principal and executive offices of the Company, BankAtlantic Bancorp,
BankAtlantic, and Levitt are located at 1750 East Sunrise Boulevard, Fort
Lauderdale, Florida, 33304. Levitt occupies these offices pursuant to an
agreement with BFC, which leases the property from BankAtlantic. BankAtlantic
has purchased another property to be used as its executive offices, and it is
expected that the Company and Levitt will also move to that building under a new
lease in the fall of 2004.
The Company owns a shopping center known as the Burlington Manufacturers Outlet
Center located in Burlington, North Carolina containing approximately 265,265
leaseable square feet. It is not utilized by the Company but is held by the
Company as an investment.
Levitt's subsidiaries occupy administrative space in various locations in
Florida under leases that expire at various dates through 2006.
In addition to its branches, BankAtlantic owns three buildings and leases four
locations, which house its back office operations. The following table sets
forth owned and leased branch offices at December 31, 2003:
Miami-Dade Broward Palm Beach Hillsborough
---------- --------- ---------- ------------
Owned full-service branches 4 10 26 3
Leased full-service branches 8 12 5 5
--------- --------- --------- ---------
Total full-service branches 12 22 31 8
========= ========= ========= =========
Lease expiration dates 2004-2012 2004-2009 2005-2009 2004-2008
========= ========= ========= =========
BankAtlantic also maintains two ground leases in Broward County one expiring in
2006 and the other expiring in 2072.
During 2002, BankAtlantic purchased a $14.3 million office facility to
consolidate its headquarters and back office operations into a centralized
facility. As of December 31, 2003, BankAtlantic had incurred approximately $3
million in renovation costs. The total estimated cost to renovate the facility
is approximately $24.5 million, and the facility is expected to be completed in
October 2004.
Ryan Beck's office space includes leased facilities in the following states with
year of lease expiration:
Lease Number of
Locations Expiration Offices
--------- ----------- ---------
California 2009 1
Connecticut 2004 - 2005 3
Florida 2004 - 2005 3
Georgia 2004 1
Illinois 2008 1
Maryland 2009 1
Massachusetts 2004 - 2006 3
Nevada 2004 1
New Jersey 2004 - 2012 5
New York 2004 - 2010 9
Ohio 2010 1
Pennsylvania 2004 - 2011 4
Virginia 2007 1
---
34
===
29
ITEM 3. LEGAL PROCEEDINGS
The following is a description of material lawsuits other than ordinary routine
litigation incidental to the business to which the Company or a subsidiary is a
party:
COMMERCE BANCORP, INC. V. BANKATLANTIC, CIVIL ACTION NO. 02CV 4774
(JBS)(D.N.J.)(CAMDEN). On October 3, 2002, Commerce Bancorp., Inc. ("Commerce")
filed a complaint against BankAtlantic in the United States District Court for
the District of New Jersey. The complaint, sought unspecified money damages and
injunctive relief, and asserted that BankAtlantic infringed certain trademark
rights allegedly owned by Commerce in the slogan "AMERICA'S MOST CONVENIENT
BANK" by virtue of BankAtlantic's use of the slogan "FLORIDA'S MOST CONVENIENT
BANK." Commerce also filed an amended complaint, which asserts additional claims
for trademark infringement. In order to amicably resolve the litigation the
parties entered into a Settlement Agreement dated January 20, 2004 settling the
case in its entirety. Pursuant to the settlement, the action was dismissed with
prejudice. No monetary payments were made by either party in connection with the
settlement.
SCOTT TEICH V. RYAN BECK & CO., INC., CASE NO. 03-80138-CIV-MIDDLEBROOKS/
JOHNSON, UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA, WEST
PALM BEACH, DIVISION. On January 30, 2003, a one-count purported class action
complaint was filed in the Circuit Court of the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida (Case No. CA-1114AF) by a former Gruntal
employee seeking a declaratory judgment that Ryan Beck is liable for all
pre-April 26, 2002 claims against Gruntal by former Gruntal retail customers and
retail brokers, whether pending or to be filed in the future, not expressly
assumed by Ryan Beck in its acquisition of certain of the assets of Gruntal. The
complaint does not specify the amount of such claims. The complaint seeks to
impose liability under the theory that either (1) Ryan Beck engaged in a DE
FACTO merger with Gruntal, (2) Ryan Beck's brokerage business is a mere
continuation of Gruntal's brokerage business, or (3) Ryan Beck is the
beneficiary of a fraudulent transfer. Ryan Beck removed the case to federal
court and subsequently filed a motion to dismiss the complaint on various
grounds. The court issued an order staying this action until the resolution of
the Gruntal bankruptcy proceedings.
OTHER GRUNTAL PROCEEDINGS. In April 2002, Ryan Beck acquired certain of the
assets and assumed certain of the liabilities of Gruntal. Ryan Beck has been
named as a defendant in a number of arbitration claims filed by former Gruntal
clients whose claims arose prior to the transaction date. In these actions Ryan
Beck is alleged to be "successor in interest" to Gruntal, which allegations Ryan
Beck denies. In some instances the former Gruntal brokers against whom the
claims relate are now employed by Ryan Beck and in other instances the brokers
are not employed by Ryan Beck. Ryan Beck did not assume any of the liabilities
associated with these actions in the Gruntal transaction. While Ryan Beck does
not consider any individual action to be material, an adverse result in a number
of these actions in the aggregate could adversely affect the Company's financial
statements. In October 2002, Gruntal filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Laws.
In the ordinary course of business, the Company and its subsidiaries are parties
to other lawsuits as plaintiff or defendant involving its bank operations,
lending, tax certificates, securities sales, brokerage and underwriting,
acquisitions and real estate development activities. Although the Company
believes it has meritorious defenses in all current legal actions, the outcome
of the various legal actions is uncertain.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
31
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock and the Class B Common Stock have substantially
identical terms except:
o Each share of Class A Common Stock is entitled to one vote for
each share held, with all holders of Class A Common Stock
possessing in the aggregate 22% of the total voting power.
Holders of Class B Common Stock have the remaining 78% of the
total voting power. When the number of shares of Class B
Common Stock outstanding decreases to 1,800,000 shares, the
Class A Common Stock aggregate voting power will increase to
40% and the Class B Common Stock will have the remaining 60%.
When the number of shares of Class B Common Stock outstanding
decreases to 1,400,000 shares, the Class A Common Stock
aggregate voting power will increase to 53% and the Class B
Common Stock will have the remaining 47%; and
o Each share of Class B Common Stock is convertible at the
option of the holder thereof into one share of Class A Common
Stock.
On May 5, 2003, BFC's Class A Common Stock began trading on the NASDAQ National
Market under the symbol "BFCF". The Company's Class B Common Stock continues to
trade on the OTC Bulletin Board under the symbol "BFCFB".
The following table sets forth, for the periods indicated, the high and low sale
prices of the Class A Common Stock as reported by the NASDAQ National Market,
and the Class B Common Stock, as reported on the OTC Bulletin Board. The
quotations for the Class B Common Stock reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions. All prices have been adjusted to reflect the stock splits effected
in the form of a 15%, 25% and 25% stock dividend, respectively, to holders of
record on June 3, 2003, November 17, 2003 and February 20, 2004, respectively,
payable in shares of the Company's Class A Common Stock for each share of the
outstanding Class A and Class B Common Stock. Where appropriate, amounts
throughout this report have been adjusted to reflect the stock splits.
Class a Common Stock Class B Common Stock
-------------------- --------------------
Year Quarter High Low High Low
- ---- ------- ---- --- ---- ---
2002
1st Quarter $ 4.73 $2.81 $ 4.84 $2.81
2nd Quatter $ 4.95 $3.98 $ 4.84 $4.03
3rd Quarter $ 4.03 $2.81 $ 4.17 $2.78
4th Quarter $ 3.34 $2.64 $ 3.34 $2.81
2003
1st Quarter $ 3.62 $2.78 $ 3.34 $2.84
2nd Quarter $ 6.34 $2.84 $ 6.08 $3.06
3rd Quarter $ 8.29 $5.13 $ 7.61 $5.37
4th Quarter $12.79 $7.55 $12.80 $7.61
On March 23, 2004, there were approximately 1,420 record holders of the Class A
Common Stock and 910 record holders of Class B Common Stock.
The last sale price during 2003 of the Company's Class A Common Stock as
reported by the Nasdaq National Market was $11.15 per share. The last sale price
during 2003 of the Company's Class B Common Stock as reported by the National
Quotation Bureau was $10.92 per share.
There are no restrictions on the payment of cash dividends by BFC. BFC has
never paid cash dividends.
As noted in Part I, Item I under "Business - Regulation and Supervision -
Regulation of Federal Savings Bank Limitation on Capital Distributions" there
are restrictions on the payment of dividends by BankAtlantic to BankAtlantic
Bancorp and in certain circumstances on the payment of dividends by BankAtlantic
Bancorp to its common shareholders, including BFC. The primary source of funds
for payment by BankAtlantic Bancorp of dividends to BFC is currently dividend
payments received by BankAtlantic Bancorp from BankAtlantic.
32
Levitt has indicated that it intends to evaluate the payment of cash dividends
on its common stock based upon its results of operations, financial condition,
cash requirements and prospects. There is no assurance that Levitt will declare
any cash dividends in the foreseeable future. Levitt's ability to pay dividends
is restricted by certain covenant restrictions contained in the indentures and
loan agreements that govern the terms of its debt.
The following table lists all securities authorized for issuance under the
Company's equity compensation plans.
Number of Securities
Remaining Available for
Future Issuance Under
Number of Securities to Weighted-average Equity Compensation Plans
be Issued Upon Exercise Exercise Price of (Excluding Outstanding
Plan Category of Outstanding Options Outstanding Options Options)
- ------------- ----------------------- ------------------- -------------------------
Equity compensation plans
approved by security holders 5,410,604 $ 2.41 525,534
Equity compensation plans
not approved by security
holders -- -- --
--------- ------- -------
Total 5,410,604 $ 2.41 525,534
========= ======= =======
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Data
(In thousands, except for per share, percentages and unit)
For the Years Ended December 31,
--------------------------------------------------------------------------
INCOME STATEMENT 2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Total interest income $ 261,874 $ 304,700 $ 326,001 $ 328,896 $ 1,529
Total interest expense 113,385 151,878 188,838 211,406 1,613
--------- --------- --------- --------- ---------
Net interest income (expense) 148,489 152,822 137,163 117,490 (84)
(Recovery from) provision for loan losses (547) 14,077 16,905 29,132 300
--------- --------- --------- --------- ---------
Net interest income after (recovery from)
provision for loan losses 149,036 138,745 120,258 88,358 (384)
Securities activities, net (1,110) 8,578 7,124 2,856 --
Gains on sales of real estate
developed for sale, net 79,269 48,133 35,040 23,584 1,391
Other non-interest income 288,290 172,497 79,124 100,045 13,004
Impairment of goodwill -- -- 6,624 -- --
Non-interest expense 414,347 317,652 186,947 179,580 2,292
--------- --------- --------- --------- ---------
Income before income taxes,
minority interest, discontinued
operations, extraordinary items and cumulative
effect of a change in accounting principle 101,138 50,301 47,975 35,263 11,719
Provision for income taxes 44,166 17,993 25,260 17,642 4,293
Minority interest in income of
consolidated subsidiaries 51,093 38,294 18,379 14,655 --
--------- --------- --------- --------- ---------
Income (loss) before discontinued operations,
extraordinary items and cumulative
effect of a change in accounting principle 5,879 (5,986) 4,336 2,966 7,426
Discontinued operations, net of taxes 1,143 2,536 -- 669 --
Extraordinary items, net of taxes -- 23,749 -- -- --
Cumulative effect of a change in accounting
principle, net of taxes -- (15,107) 1,138 -- --
--------- --------- --------- --------- ---------
Net income 7,022 5,192 5,474 3,635 7,426
Amortization of goodwill, net of tax -- -- 735 791 748
--------- --------- --------- --------- ---------
Net income adjusted to exclude goodwill
Amortization $ 7,022 $ 5,192 $ 6,209 $ 4,426 $ 8,174
========= ========= ========= ========= =========
(CONTINUED)
34
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Data
(In thousands, except for per share, percentages and unit)
For the Years Ended December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
COMMON SHARE DATA (D & E)
Basic earnings (loss) per share before
discontinued operations, extraordinary
items and cumulative effect of a change in
accounting principle $ 0.40 $ (0.42) $ 0.30 $ 0.21 $ 0.52
Discontinued operations 0.08 0.18 -- 0.05 --
Extraordinary items -- 1.65 -- -- --
Cumulative effect of a change in
accounting principle -- (1.05) 0.08 -- --
--------- --------- --------- --------- ---------
Basic earnings per share $ 0.48 $ 0.36 $ 0.38 $ 0.26 $ 0.52
--------- --------- --------- --------- ---------
Basic earnings per share from
amortization of goodwill -- -- 0.05 0.06 0.05
--------- --------- --------- --------- ---------
Basic earnings per share adjusted to exclude
goodwill amortization $ 0.48 $ 0.36 $ 0.43 $ 0.32 $ 0.57
========= ========= ========= ========= =========
Diluted earnings (loss) per share before
discontinued operations, extraordinary
items and cumulative effect of a change in
accounting principle $ 0.32 $ (0.43) $ 0.21 $ 0.16 $ 0.38
Discontinued operations 0.07 0.17 -- 0.04 --
Extraordinary items -- 1.62 -- -- --
Cumulative effect of a change in
accounting principle -- (1.03) 0.07 -- --
--------- --------- --------- --------- ---------
Diluted earnings per share 0.39 0.33 0.28 0.19 0.38
Diluted earnings per share from
amortization of goodwill -- -- 0.04 0.04 0.04
--------- --------- --------- --------- ---------
Diluted earnings per share adjusted to
exclude goodwill amortization $ 0.39 $ 0.33 $ 0.32 $ 0.23 $ 0.42
========= ========= ========= ========= =========
Basic weighted average of common
shares outstanding (e) 14,604 14,370 14,298 14,298 14,298
Diluted weighted average of common
shares outstanding (e) 16,660 14,370 15,764 15,312 15,845
Ratio of earnings to fixed charges (c) 0.15 (0.23) 0.95 (0.14) 2.34
Dollar deficiency of earnings to fixed
charges (c) 987 1,421 68 1,586 --
(CONTINUED)
35
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Data
(In thousands, except for per share, percentages and unit)
December 31,
------------------------------------------------------------------------
BALANCE SHEET (AT YEAR END) 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------
Loans and leases, net (f) $3,611,612 $3,377,870 $2,776,624 $2,855,015 $ 1,325
Securities 677,713 1,111,825 1,356,497 1,315,122 8,663
Total assets 5,135,444 5,415,933 4,665,359 4,654,954 96,745
Deposits 3,058,142 2,920,555 2,276,567 2,234,485 --
Securities sold under agreements to repurchase
and other short term borrowings 120,874 116,279 467,070 669,202 --
Other borrowings (g) 1,209,571 1,686,613 1,326,264 1,351,881 18,253
Shareholders' equity 85,675 77,411 74,172 72,615 58,965
Book value per share (e) 5.75 5.39 5.18 5.08 4.12
Return on average equity (a) 8.63% 6.85% 7.44% 5.77% 12.61%
ASSET QUALITY RATIOS:
Non-performing assets, net of reserves
as a percent of total loans,
tax certificates and real estate owned 0.33% 0.79% 1.11% 0.89% --
Loan loss allowance as a percent of
non-performing loans 490.46% 259.52% 122.60% 254.00% --
Loan loss allowance as a percent of total loans 1.28% 1.43% 1.62% 1.66% --
LEVITT DATA (B):
Consolidated margin on sales of real estate $ 73,627 $ 48,133 $ 31,455 $ 21,293 --
Consolidated margin percentage 26.0% 23.2% 22.0% 21.2% --
Homes delivered 1,011 740 597 441 --
Backlog of homes (units) 2,053 824 584 487 --
Backlog of homes (value) $ 58,771 $ 167,526 $ 125,041 $ 94,751 --
Core Communities acres sold 1,337 1,715 253 145
CAPITAL RATIOS FOR BANKATLANTIC:
Total risk based capital 12.06% 11.89% 12.90% 11.00% 13.30%
Tier I risk based capital 10.22% 10.01% 11.65% 9.74% 12.04%
Leverage 8.52% 7.26% 8.02% 6.66% 7.71%
(a) Computed using quarterly averages.
(b) Excludes joint ventures. Backlog includes all homes subject to sales
contracts.
(c) The operations of Bancorp have been eliminated since there is a
dividend restriction between BankAtlantic and Bancorp.
(d) While the Company has two classes of common stock outstanding, the
two-class method is not presented because the Company's capital
structure does not provide for different dividend rates or other
preferences, other than voting rights, between the two classes.
(e) I.R.E. Realty Advisory Group, Inc. ("RAG") owns 2,869,141 shares of
BFC's Class A Common Stock and 500,000 shares of BFC Class B Common
Stock. Because the Company owns 45.5% of the outstanding common stock
of RAG, 1,304,024 shares of Class A Common Stock and 227,250 shares of
Class B Common Stock are eliminated from the number of shares
outstanding for purposes of computing earnings per share and book value
per share.
(f) Includes $233,000, $0, $5,000 and $1.3 million of bankers acceptances
in 2003, 2002, 2001 and 2000, respectively.
(g) Other borrowings consists of FHLB advances, subordinated debentures,
notes and bonds payable and guaranteed preferred beneficial interests
in Bancorp's junior subordinated debentures.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
BFC is a holding company with controlling interests in BankAtlantic Bancorp and
Levitt. As the controlling shareholder of BankAtlantic Bancorp, BFC is a unitary
savings bank holding company regulated by the OTS. The Company's primary
activities currently relate to the operations of BankAtlantic Bancorp and
Levitt.
BFC ownership in BankAtlantic Bancorp and Levitt is as follows:
Percent of Percent
Total of
Class a Class B Outstanding Vote
------- ------- ----------- ----
BankAtlantic Bancorp 15.3% 100.0% 22.2% 55.1%
Levitt 15.3% 100.0% 22.2% 55.1%
Because BFC controls in excess of 50% of the vote of BankAtlantic Bancorp and
Levitt, BankAtlantic Bancorp and Levitt are consolidated in the Company's
financial statements. The percentage of votes controlled by the Company will
determine the Company's consolidation policy, whereas, the percentage of
ownership of total outstanding common stock will determine the amount of
BankAtlantic Bancorp's and Levitt's net income recognized by the Company
BankAtlantic Bancorp's principal assets include BankAtlantic and its
subsidiaries and Ryan Beck and its subsidiaries. Levitt engages in real estate
activities through Levitt and Sons, Core Communities, Levitt Commercial and two
investments in real estate projects in Florida. Levitt also owns approximately
38% equity investment in Bluegreen, a New York Stock Exchange-listed company
that acquires, develops, markets and sells vacation ownership interests in
"drive-to" resorts and develops and sells residential home sites around golf
courses or other amenities.
The following events have occurred during the past three years that have had a
significant impact on the Company and upon its past and future results of
operations:
o On December 2, 2003, BankAtlantic Bancorp's Board of Directors
authorized the spin-off of Levitt to the stockholders of
BankAtlantic Bancorp by declaring a dividend of all of
BankAtlantic Bancorp's shares of Levitt. Pursuant to the terms
of the spin-off, BankAtlantic Bancorp's stockholders each
received one share of Levitt Corporation Class A Common Stock
for every four shares of BankAtlantic Bancorp Class A Common
Stock owned, and one share of Levitt Corporation Class B
Common Stock for every four shares of BankAtlantic Bancorp
Class B Common Stock owned. The shares were distributed on
December 31, 2003 to stockholders of record on December 18,
2003. As a consequence of the spin-off, BFC now has ownership
positions in two New York Stock Exchange listed companies.
o In August 2003, Ryan Beck sold its entire membership interest
in The GMS Group, LLC ("GMS"). As a consequence of the GMS
sale, the results of operations of GMS are presented as
"Discontinued Operations" in the Consolidated Statements of
Operations for all periods presented.
o In April 2002, BankAtlantic embarked upon its "Florida's Most
Convenient Bank" initiative to attract retail customers. This
campaign includes seven-day branch banking and extended
weekday hours, along with a 24/7 live customer service center,
Totally Free Checking, free online banking, Totally Free
Change Exchange coin counters, and dozens of additional
product and service initiatives. While the initiatives have
resulted in increased expenses, BankAtlantic believes the
marketing campaign has contributed to significant new deposit
account openings and growth in low cost deposits at the Bank.
o In April 2002, Ryan Beck acquired certain of the assets and
assumed certain liabilities of the former broker-dealer known
as Gruntal & Co., LLC. Before this acquisition, Ryan Beck had
130 account executives located in 9 offices, principally in
the New Jersey/New York metropolitan area and southeast
Florida. This transaction added over 400 additional
consultants and 25 new offices to Ryan Beck's operations. Ryan
Beck currently has
37
approximately 500 financial consultants in 34 offices and now
has a substantial east coast presence, along with offices in
the mid-west and west coast.
o In April 2002, Levitt acquired 8.3 million shares of the
outstanding common stock of Bluegreen for approximately $53.8
million. BankAtlantic Bancorp previously had acquired
approximately 1.2 million shares of Bluegreen which Levitt
acquired from BankAtlantic Bancorp in connection with the
spin-off for $5.5 million evidenced by a promissory note and
additional shares of Levitt (which were distributed in the
spin-off). The investment in Bluegreen was recorded at cost
and the carrying amount of the investment is adjusted to
recognize Levitt's interest in the earnings or losses of
Bluegreen after the acquisition date. At December 31, 2003 and
2002, Levitt's investment in Bluegreen was approximately $70.9
million and $57.3 million, respectively. The 9.5 million
shares of Bluegreen common stock that Levitt owns comprises
approximately 38% of Bluegreen outstanding common stock as of
December 31, 2003.
o In March 2002, BankAtlantic acquired Community Savings
Bancshares, Inc., the parent company of Community Savings,
F.A. ("Community") and immediately merged Community into
BankAtlantic. Community had its headquarters and branches in
our South Florida market. Community had approximately $909
million in assets and $637 million in deposits on the date of
the acquisition.
CONSOLIDATED RESULTS OF OPERATIONS
Net income increased to $7.0 million in 2003 from $5.2 million in 2002 and $5.5
million in 2001. Included in these totals is income from discontinued operations
attributable to the GMS sale of $1.1 million and $2.5 million for the years 2003
and 2002, respectively. Additionally, in 2002, the Company realized an
extraordinary gain of $23.7 million associated with the Gruntal transaction
because the fair value of the assets acquired exceeded the purchase price. Also
in 2002, the Company realized a loss of $15.1 million due to BankAtlantic
Bancorp's initial implementation of FAS No. 142 concerning goodwill impairment.
BankAtlantic Bancorp performed the required goodwill impairment test and
determined that the goodwill assigned to the Ryan Beck subsidiary was impaired.
BankAtlantic Bancorp performed its annual goodwill impairment test again in 2003
and concluded that no further goodwill impairment existed. In 2001, the Company
realized a gain of $1.1 million due to the initial implementation of FAS No. 133
concerning BankAtlantic Bancorp's derivative instruments and hedging activities.
BankAtlantic Bancorp had interest rate swap contracts for which it recorded a
cumulative effect adjustment gain.
Income from continuing operations increased to $5.9 million in 2003 from a loss
of $6.0 million in 2002 and income of $4.3 million in 2001. A reconciliation of
the results of operations from each of the Company's primary business segments
follows (in thousands):
INCOME FROM CONTINUING OPERATIONS
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
BankAtlantic $ 42,129 $ 45,109 $ 44,629
Ryan Beck 9,645 (2,448) (1,317)
BankAtlantic Bancorp Parent Company (13,177) (23,511) (20,782)
Levitt 26,820 19,512 7,522
BFC Holding Company (9,601) (6,849) (8,307)
Eliminations and adjustments 1,156 495 970
-------- -------- --------
Total segment net income $ 56,972 $ 32,308 $ 22,715
Minority interest in income of
consolidated subsidiaries 51,093 38,294 18,379
-------- -------- --------
Income from continuing operations $ 5,879 $ (5,986) $ 4,336
======== ======== ========
A detailed discussion of the result of operations of each of these business
segments follows.
38
BANKATLANTIC RESULTS OF OPERATIONS
SUMMARY
Since the beginning of 2002, BankAtlantic has opened 244,000 new checking and
savings accounts, including over 34,000 in the fourth quarter of 2003. The
fourth quarter of 2003 marked the eighth consecutive quarter of double-digit
growth in new low cost checking and savings account openings. In 2003, new
checking (DDA/NOW) and savings account openings were approximately 145,000,
compared to 99,000 in 2002, an increase of 46%. Since January 1, 2002, total low
cost deposits have increased from approximately $600 million to approximately
$1.4 billion, an increase of 133%. Non-interest bearing demand deposits now
constitute 21% of deposit funding, up from 16% last year. BankAtlantic expects
these trends will continue as its advertising expenditures intensify, it creates
other marketing programs and maintains commitment to customer service.
Subject to changes in the interest rate environment, BankAtlantic expects its
net interest income to improve in 2004. During 2003, the net interest margin was
negatively impacted by lower interest rates, resulting in prepayments and rapid
premium amortization on mortgage-related assets. BankAtlantic was also impacted
by fixed rate FHLB advances that prevented its cost of funds from decreasing as
rapidly as its yield on assets. Late in 2003, BankAtlantic prepaid a portion of
these fixed rate FHLB advances and incurred a prepayment penalty. Although this
penalty decreased earnings in 2003, BankAtlantic prepaid these fixed rate
advances with the expectation that it will lower its funding costs and improve
net interest margin in future years.
BankAtlantic's credit quality has improved during the period. The ratio of
non-performing loans to total loans declined to 0.25% at year-end. Net
charge-offs for 2003 were only $1.1 million as compared to. $19.8 million for
2002, and the associated ratio of net charge-offs to average outstanding loans
declined to 0.03% as compared to 0.57% for these respective years. In addition
to lower loan charge-offs, in 2003, BankAtlantic was successful in recovering
and collecting upon past charge-offs in its syndication loan and leasing
portfolios. However, there is no assurance that BankAtlantic will have similar
success in future years. BankAtlantic expects to experience a higher net
charge-off ratio.
In addition, because of its emphasis on the origination and purchase of loans
collateralized by real estate, BankAtlantic believes it has lower losses
inherent in its loan portfolio; therefore, the ratio of the allowance for loan
losses to total loans outstanding at December 31, 2003 decreased to 1.22% from
1.40% at December 31, 2002. This, combined with low net charge-offs,
necessitated a negative provision for loan losses of $547,000 in 2003.
BankAtlantic believes that its credit ratios reflect the improving credit
quality of its loans. Although BankAtlantic does not foresee significant changes
in the quality of its loan portfolio, it cautions that change in the local or
national economy, or within certain industries, could have a dramatic impact on
the performance of its loans.
BankAtlantic's non-interest income improved substantially during 2003 due in
part to increased fees associated with the additional new deposit accounts
opened during the year and fee income generated on $637 million of deposits
acquired as part of the March 2002 acquisition of Community. BankAtlantic
believes that it will continue to experience an increase in non-interest income
during 2004 as BankAtlantic continues its FLORIDA'S MOST CONVENIENT BANK
initiatives and expansion and renovation of its branch network.
BankAtlantic's non-interest expenses increased significantly during 2003 due
primarily to the costs linked to its marketing initiatives, including the hiring
of new employees to service customers and advertising expenditures to promote
the campaign. BankAtlantic believes that these expenses will continue to
increase during 2004 as BankAtlantic continues to implement the Florida's Most
Convenient Bank initiatives. BankAtlantic believes that the potential future
contribution to its profitability from branch network expansion and deposit
strategies will justify these additional costs. Additionally, as discussed
earlier, non-interest expense increased because BankAtlantic incurred $10.9
million in expenses associated with the prepayment of FHLB advances.
39
The following table is a condensed income statement summarizing the Bank's
results of operations (in thousands):
For the Years Ended
December 31, Change Change
------------------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
--------- --------- --------- --------- ---------
Net interest income $ 154,100 $ 164,122 $ 153,722 $ (10,022) $ 10,400
Recovery from (provision for)
loan losses 547 (14,077) (16,905) 14,624 2,828
--------- --------- --------- --------- ---------
Net interest income after recovery
from (provision for) loan losses 154,647 150,045 136,817 4,602 13,228
Non-interest income 70,686 53,317 37,457 17,369 15,860
Non-interest expense (161,615) (134,408) (103,353) (27,207) (31,055)
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 63,718 68,954 70,921 (5,236) (1,967)
Income taxes (21,589) (23,845) (26,292) 2,256 2,447
--------- --------- --------- --------- ---------
Income from continuing operations $ 42,129 $ 45,109 $ 44,629 $ (2,980) $ 480
========= ========= ========= ========= =========
A discussion of each component of income and expense follows.
40
BANKATLANTIC'S NET INTEREST INCOME
The following table summarizes net interest income (dollars in thousands):
For the Years Ended
---------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------- ----------------------------- ------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
INTEREST EARNING ASSETS
Loans: (a)
Residential real estate $1,639,504 $ 78,535 4.79% $1,429,022 $ 88,808 6.21% $1,327,455 $ 94,199 7.10%
Commercial real estate 1,610,707 94,193 5.85 1,500,744 96,836 6.45 1,112,026 95,114 8.55
Consumer 316,113 14,177 4.48 253,044 14,165 5.60 211,939 17,296 8.16
Lease financing 21,930 2,490 11.35 43,496 5,307 12.20 70,113 8,835 12.60
Commercial business 107,371 6,126 5.71 99,852 5,935 5.94 187,131 14,482 7.74
Small business 161,245 11,973 7.43 146,468 11,565 7.90 98,405 9,811 9.97
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total loans 3,856,870 207,494 5.38 3,472,626 222,616 6.41 3,007,069 239,737 7.97
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Securities available
for sale(b) 559,562 27,265 4.87 727,347 42,406 5.83 858,145 52,813 6.15
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Investment securities (c) 229,889 16,476 7.17 452,753 32,013 7.07 389,197 32,161 8.26
Federal funds sold 16,499 166 1.01 3,929 57 1.45 564 21 3.72
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total investment securities 246,388 16,642 5.54 456,682 32,070 7.02 389,761 32,182 8.26
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest earning assets $4,662,820 $251,401 5.39% $4,656,655 $297,092 6.38% $4,254,975 $324,732 7.63%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
NON-INTEREST EARNING ASSETS
Total non-interest earning
assets 324,598 316,085 164,255
---------- ---------- ----------
Total assets $4,987,418 $4,972,740 $4,419,230
========== ========== ==========
INTEREST BEARING LIABILITIES
Deposits:
Savings $ 190,506 $ 856 0.45% $ 140,961 $ 1,362 0.97% 102,996 $ 1,451 1.41%
NOW, money funds
and checking 1,315,747 11,142 0.85 1,078,298 15,338 1.42 757,922 20,241 2.67
Certificate accounts 882,736 24,191 2.74 1,230,013 46,077 3.75 1,182,094 63,976 5.41
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest
bearing deposits 2,388,989 36,189 1.51 2,449,272 62,777 2.56 2,043,012 85,668 4.19
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Securities sold
under agreements to
repurchase and federal
funds Purchased 285,284 3,089 1.08 400,376 6,845 1.71 604,311 24,870 4.12
Advances from FHLB 1,195,653 57,299 4.79 1,198,463 62,412 5.21 1,077,876 60,472 5.61
Subordinated debentures
and notes payable 35,457 1,917 5.41 14,805 936 6.32 -- -- --
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest bearing
liabilities 3,905,383 98,494 2.52 4,062,916 132,970 3.27 3,725,199 171,010 4.59
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
NON-INTEREST BEARING
LIABILITIES
Demand deposit and
escrow accounts 551,866 405,599 285,760
Other liabilities 55,261 70,187 55,383
---------- ---------- ----------
Total non-interest
bearing liabilities 607,127 475,786 341,143
---------- ---------- ----------
Stockholders' equity 474,908 434,038 352,888
---------- ---------- ----------
Total liabilities
and stockholders' Equity $4,987,418 $4,972,740 $4,419,230
========== ========== ==========
Net interest income/net
interest spread 152,907 2.87% 164,122 3.11% 153,722 3.04%
==== ==== ====
Capitalized interest
from real estate
operations 1,193 -- --
-------- -------- --------
Net interest income $154,100 $164,122 $153,722
======== ======== ========
MARGIN
Interest income/interest
earning assets 5.39 6.38% 7.63%
==== ==== ====
Interest expense/interest
earning assets 2.11 2.86 4.02
==== ==== ====
Net interest margin 3.28% 3.52% 3.61%
==== ==== ====
(a) Includes non-accruing loans.
(b) Average balances were based on amortized cost.
(c) Includes securities purchased under agreements to resell, tax
certificates, mortgage-backed securities held to maturity and interest
bearing deposits and trading securities.
41
The following table summarizes the changes in net interest income (in
thousands):
Year Ended Year Ended
December 31, 2003 December 31, 2002
Compared to Year Ended Compared to Year Ended
December 31, 2002 December 31, 2001
-------------------------------------- --------------------------------------
Volume(a) Rate Total Volume(a) Rate Total
-------- -------- -------- -------- -------- --------
INCREASE (DECREASE) DUE TO:
Loans $ 20,672 $(35,793) $(15,121) $ 29,845 $(46,966) $(17,121)
Securities available for sale (8,175) (6,966) (15,141) (7,626) (2,781) (10,407)
Investment securities (b) (15,973) 436 (15,537) 4,494 (4,642) (148)
Federal funds sold 126 (17) 109 49 (13) 36
-------- -------- -------- -------- -------- --------
Total earning assets (3,350) (42,340) (45,690) 26,762 (54,402) (27,640)
-------- -------- -------- -------- -------- --------
Deposits:
Savings 223 (729) (506) 367 (456) (89)
NOW, money funds, and checking 2,011 (6,207) (4,196) 4,557 (9,460) (4,903)
Certificate accounts (9,517) (12,369) (21,886) 1,795 (19,694) (17,899)
-------- -------- -------- -------- -------- --------
Total deposits (7,283) (19,305) (26,588) 6,719 (29,610) (22,891)
-------- -------- -------- -------- -------- --------
Securities sold under agreements to (1,247) (2,508) (3,755) (3,487) (14,538) (18,025)
repurchase
Advances from FHLB (135) (4,978) (5,113) 6,280 (4,340) 1,940
Subordinated debentures 1,117 (136) 981 936 -- 936
-------- -------- -------- -------- -------- --------
(265) (7,622) (7,887) 3,729 (18,878) (15,149)
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities (7,548) (26,927) (34,475) 10,448 (48,488) (38,040)
-------- -------- -------- -------- -------- --------
Change in net interest income
before capitalized interest $ 4,198 $(15,413) $(11,215) $ 16,314 $ (5,914) $ 10,400
======== ======== ======== ======== ======== ========
(a) Changes attributable to rate/volume have been allocated to volume.
(b) Average balances were based on amortized cost.
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE SAME 2002 PERIOD
Net interest income decreased by $11.2 million, or 6%, from 2002. The decline
reflects a substantial decrease in yields on earning assets partially offset by
lower rates on interest bearing liabilities resulting in a 24 basis point
decline in net interest margin. The net interest margin was negatively impacted
by the historically low interest rates during 2003 and high rates associated
with advances from the FHLB. The yield on the 10-year Treasury bond declined
from approximately 5.5% in early 2002 to almost 3.0% in mid-2003. For most of
2002, the prime rate stood at 4.75%. The prime rate declined to 4.25% in
November 2002 and declined again to 4.00% in June 2003. Short-term Libor and
Treasury based indices also declined during this period, leading to less
interest income earned on adjustable rate loans and investments. Additionally,
this low interest rate environment resulted in accelerated prepayments of
mortgage loans and mortgage-backed securities as homeowners took advantage of
the refinancing opportunities. BankAtlantic experienced an accelerated
amortization of premiums associated with some of these assets, and was faced
with investing the proceeds from these repayments primarily in residential and
commercial loans at lower yields.
Interest income on average loans declined as the significant decline in average
loan yields was partially offset by an increase in average loan balances. The
growth in balances resulted from the purchase and origination of commercial real
estate, residential and home equity loans. During 2003, the Bank purchased $1.1
billion of residential loans and originated over $1.0 billion of commercial
loans and $317 million of home equity loans. The net loan growth was funded
primarily by the reduction in the average balances of BankAtlantic's securities
portfolios.
Interest income on investment securities, short-term investments and securities
available for sale declined primarily due to the accelerated repayment of high
yielding securities due to the historically low interest rate environment.
As a consequence of lower average yields on earning assets and a slight increase
in average earning asset balances, interest income decreased by $45.7 million.
Rates on interest bearing liabilities did not decline as rapidly as rates on
interest earning assets because 30% of average interest bearing liabilities
consist of long term advances from the FHLB that, either directly or indirectly
via interest rate swaps, bear fixed interest rates. These advances were
originated in order to fund the purchase of fixed rate residential loans.
However, in September 2003 BankAtlantic repaid $185 million of these advances
and in December 2003 BankAtlantic repaid an additional $140 million of these
advances. The advances repaid had an average rate of 5.57%. Expenses of $10.9
million were recognized in connection with these prepayments and a $1.9 million
loss was recognized on the termination of interest rate swap contracts.
42
The lower deposit rates reflect the historically low interest rate environment
during 2003 as well as a change in BankAtlantic's deposit mix from higher rate
certificate of deposit accounts to low cost deposits and insured money fund
accounts. Low cost deposits are comprised of checking and savings accounts. In
2003, new checking (DDA/NOW) and savings account openings were approximately
145,000, compared to 99,000 in 2002, an increase of 46%. Balances in low cost
deposits increased 35% for the year ended December 31, 2003, to $1.4 billion.
Non-interest bearing demand deposits now constitute 21% of deposit funding, up
from 16% last year. BankAtlantic believes that its growth in low cost deposits
was primarily the result of its Florida's Most Convenient Bank initiatives.
Interest expense on short-term borrowings was substantially lower during 2003
due to lower average balances and average rates.
Interest expense on FHLB advances declined resulting from maturities and
repayments of advances at higher rates than the advances outstanding.
Interest expense on long-term debt represents interest expense associated with
mortgage-backed bonds acquired in connection with the Community acquisition and
interest expense associated with $22 million of subordinated debentures issued
in October 2002.
Capitalized interest during 2003 represents interest capitalized on qualifying
assets associated with the Riverclub real estate joint venture. Upon the
implementation of FIN 46, the Riverclub joint venture was consolidated effective
January 1, 2003. During 2002, the Riverclub joint venture was accounted for on
the equity method of accounting.
In total, the Bank's interest expense declined by $34.5 million primarily due to
declining average rates and, secondarily, due to lower average balances on
interest bearing liabilities.
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE SAME 2001 PERIOD
Net interest income increased by $10.4 million, or 7%, from 2001. The
improvement reflects earning asset growth associated with the Community
acquisition and the origination and purchase of real estate loans partially
offset by a decline in the net interest margin. The net interest margin was
negatively impacted by a substantial increase in non-earning assets primarily
due to an increase in goodwill and branch-related assets as a result of the
Community acquisition. The unfavorable impact on net interest income of the
increase in non-earning assets was partially offset by a slight improvement in
the net interest spread as interest bearing liabilities re-priced downward more
rapidly than interest earning assets.
The growth in earning assets resulted from the addition of $709 million of
earning assets from the Community acquisition, and a significant increase in
fundings of commercial real estate, small business mortgage and home equity
consumer loans. The above increases in earning assets were partially offset by
lower average balances related to several discontinued or curtailed lines of
business, including the lease finance business, indirect consumer loans,
syndication commercial business loans, international loans to correspondent
banks and certain small business loans.
The decline in securities available for sale average balances primarily resulted
from accelerated repayments and the sale of mortgage-backed securities. The
increase in investment securities average balances reflects increased tax
certificate acquisitions during the period.
The increase in interest bearing deposits was primarily attributed to the
Community acquisition. The substantial growth in non-interest bearing demand
deposits primarily resulted from the Florida's Most Convenient Bank initiatives.
Average short-term borrowings were substantially lower during 2002. The decline
was linked to an increase in deposits, FHLB advances, and subordinated debenture
average balances. During October 2002, BankAtlantic issued $22 million of
subordinated debentures. The proceeds of the debentures were used for general
corporate purposes.
The net interest spread improved by 7 basis points from 2001, because the rates
on interest bearing liabilities declined faster than the yields on earning
assets. The significant decline in the yields on interest-earning assets and the
rate associated with interest bearing liabilities was a direct result of the
historically low interest rate environment during 2002. Contributing to the
decline in deposit rates was a change in the deposit mix from time deposits to
low cost savings, NOW, money funds and checking accounts. Contributing to the
decline in average yields on interest-bearing assets was the refinancing of
residential
43
loans and mortgage-backed securities and the subsequent purchases of replacement
assets at lower yields than the existing portfolio. Additionally, the rapid
decline in interest rates caused a downward adjustment of yields on floating
rate loans and securities.
As a consequence of the growth in average earning assets and interest bearing
liabilities, interest income increased by $26.8 million and interest expense
increased by $10.4 million. The lower rates paid on average interest bearing
liabilities decreased interest expense by $48.5 million while the lower yields
on interest-earning assets decreased interest income by $54.4 million.
BANKATLANTIC'S ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows (in thousands):
For the Year Ended December 31,
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
BALANCE, BEGINNING OF PERIOD $ 48,022 $ 44,585 $ 47,000 $ 44,450 $ 37,950
CHARGE-OFFS:
Syndication loans -- (8,013) (7,235) (3,659) --
Commercial business loans (2,394) -- -- (24) (87)
Commercial real estate loans -- (6,998) -- -- (211)
Small business (2,708) (3,655) (4,487) (14,114) (12,531)
Lease financing (3,700) (7,069) (10,340) (3,930) (1,217)
Consumer loans - direct (1,563) (1,006) (2,629) (2,233) (2,443)
Consumer loan - indirect (677) (1,095) (2,981) (7,546) (11,052)
Residential real estate loans (681) (827) (244) (715) (150)
-------- -------- -------- -------- --------
TOTAL CHARGE-OFFS (11,723) (28,663) (27,916) (32,221) (27,691)
-------- -------- -------- -------- --------
RECOVERIES:
Syndication loans 3,133 1,274 -- -- --
Commercial business loans 95 76 331 94 185
Commercial real estate loans 3 20 10 8 205
Small business 2,637 2,268 2,623 1,240 188
Lease financing 2,224 3,014 2,388 335 285
Consumer loans - direct 622 477 769 645 739
Consumer loans - indirect 1,137 1,419 2,252 3,211 1,931
Residential real estate loans 726 331 223 106 --
-------- -------- -------- -------- --------
TOTAL RECOVERIES 10,577 8,879 8,596 5,639 3,533
-------- -------- -------- -------- --------
NET CHARGE-OFFS (1,146) (19,784) (19,320) (26,582) (24,158)
Provision for loan losses (547) 14,077 16,905 29,132 30,658
Allowance for loan losses acquired (734) 9,144 -- -- --
-------- -------- -------- -------- --------
BALANCE, END OF PERIOD $ 45,595 $ 48,022 $ 44,585 $ 47,000 $ 44,450
======== ======== ======== ======== ========
The outstanding loan balances related to BankAtlantic's discontinued lines of
business and the amount of allowance for loan losses ("ALL") assigned to each
line of business was as follows (in thousands):
As of December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- -------------------------- ---------------------------
Allocation Allocation Allocation
Amount of ALL Amount of ALL Amount of ALL
-------- ---------- -------- ---------- -------- ----------
Lease finance $ 14,442 $ 3,425 $ 31,279 $ 7,396 $ 54,969 $ 8,639
Syndication loans 9,114 185 14,499 294 40,774 8,602
Small business (1) 9,569 873 17,297 2,143 32,123 4,105
Consumer - indirect 2,402 70 8,105 457 25,400 1,247
-------- -------- -------- -------- -------- --------
$ 35,527 $ 4,553 $ 71,180 $ 10,290 $153,266 $ 22,593
======== ======== ======== ======== ======== ========
(1) Small business loans originated before January 1, 2000.
During prior periods BankAtlantic discontinued the origination of syndication,
lease financings and indirect consumer loans and made major modifications to the
underwriting process for small business loans (collectively, "discontinued lines
of business"). The loans associated with the discontinued lines of business gave
rise to a significant portion of BankAtlantic's net charge-offs in prior
periods. As the portfolios of these discontinued lines of business declined,
BankAtlantic's provision for loan losses and the related allowance for loan
losses also declined.
44
The provision for loan losses declined in each of the years in the three-year
period ended December 31, 2003. During 1999 and 2000, BankAtlantic significantly
increased its allowance for loan losses and provision for loan losses to reflect
losses experienced in its indirect consumer and small business lending
activities. During 2001, BankAtlantic significantly increased the allowance and
provision associated with losses experienced in lease financing and syndication
lending activities. During 2002 and 2003, BankAtlantic's allowance and provision
were reduced due to a change in its underwriting and credit management polices
that began in 2000. BankAtlantic discontinued the origination of loans with high
historical loss experiences and focused its loan production on collateral based
loans that have historically had lower loss experiences than its discontinued
lines of business. Additionally, during 2003, BankAtlantic's loan loss provision
was favorably impacted by significant recoveries from its discontinued lines of
business. The majority of these recoveries were from bankruptcy settlements
associated with syndication loans charged-off in prior periods.
The Bank experienced a significant improvement in net charge-offs during 2003
compared to the net charge-offs experienced during 2002 and 2001. This
improvement resulted from lower discontinued lines of business net charge-offs
during 2003 compared to prior periods. Additionally, included in commercial real
estate charge-offs during 2002 was a $3.5 million partial charge-off of a
commercial real estate construction loan and a $3.4 million partial charge-off
of a commercial loan in the hospitality industry. The commercial real estate
construction loan was transferred to real estate owned during 2002 and was sold
in 2003. The commercial loan collateralized by real estate in the hospitality
industry was sold at book value to an unrelated third party. During 2003, there
were no commercial real estate loan charge-offs; however, the Bank recognized a
$2.4 million partial charge-off of a commercial business loan.
"Allowance for loan losses acquired" and "adjustments to the allowance for loan
losses acquired" represent the loan loss allowance acquired in connection with
the Community acquisition.
45
The table below presents the allocation of the allowance for loan losses by
various loan classifications ("ALL by category"), the percent of allowance to
each loan category ("ALL to gross loans in each category") and sets forth the
percentage of loans in each category to gross loans excluding banker's
acceptances ("Loans by category to gross loans"). The allowance shown in the
table should not be interpreted as an indication that charge-offs in future
periods will occur in these amounts or percentages or that the allowance
indicates future charge-off amounts or trends (dollars in thousands):
December 31, 2003 December 31, 2002 December 31, 2001
------------------------------ -------------------------------- ----------------------------------
ALL Loans ALL Loans ALL Loans
to Gross by to Gross by to Gross by
ALL Loans Category ALL Loans Category ALL Loans Category
by in Each to Gross by in Each to Gross by in Each to Gross
Category Category Loans Category Category Loans Category Category Loans
-------- -------- -------- -------- -------- -------- --------- -------- ----------
Commercial business $ 1,715 1.87% 2.08% $ 1,437 1.75% 2.09% $ 1,563 2.02% 2.38%
Syndications 185 2.03 0.21 294 2.03 0.37 8,602 21.10 1.25
Commercial real
estate 24,005 0.99 54.97 21,124 1.07 50.16 13,682 0.83 50.45
Small business 3,173 1.87 3.83 5,006 3.11 4.09 5,178 5.06 3.14
Lease financing 3,425 23.72 0.33 7,396 23.65 0.79 8,639 15.72 1.69
Residential real
estate 2,111 0.16 30.48 2,512 0.18 35.01 1,304 0.12 34.31
Consumer - direct 3,900 1.10 8.05 3,239 1.13 7.28 2,064 1.07 5.91
Consumer --
indirect 70 2.91 0.05 457 5.64 0.21 1,247 4.91 0.78
------- ------- -------
Total assigned 38,584 41,465 42,279
Unassigned 7,011 N/A N/A 6,557 N/A N/A 2,306 N/A N/A
------- ------ ------- ------ ------- ------
$45,595 1.03% 100.00% $48,022 1.22% 100.00% $44,585 1.37% 100.00%
======= ====== ======= ====== ======= ======
December 31, 2000 December 31, 1999
--------------------------------------------- ---------------------------------------------
ALL Loans ALL Loans
to Gross by to Gross by
ALL Loans Category ALL Loans Category
by in Each to Gross by in Each to Gross
Category Category Loans Category Category Loans
------- -------- -------- -------- -------- ----
Commercial business $ 1,502 1.00% 4.64% $ 2,004 1.85% 3.60%
Syndications 8,480 10.60 2.46 2,651 2.01 4.41
Commercial real
estate 10,072 0.77 40.25 8,118 0.86 31.44
Small business 10,750 11.01 3.01 13,278 11.48 3.84
Lease financing 2,879 3.79 2.34 2,131 4.91 1.45
Residential real
estate 1,540 0.12 40.52 1,912 0.14 47.00
Consumer - direct 2,989 1.89 4.86 2,294 1.89 4.05
Consumer -
indirect 5,388 8.62 1.92 7,758 6.18 4.21
------- -------
Total assigned 43,600 40,146
Unassigned 3,400 N/A N/A 4,304 N/A N/A
------- ------ ------- ------
$47,000 1.45% 100.00% $44,450 1.48 100.00%
======= ====== ======= ======
The assigned portion of the allowance for loan losses primarily related to
commercial real estate at December 31, 2003 and 2002 and from discontinued lines
of business in prior periods. The allowance for commercial real estate loans
increased from $8.1 million at December 31, 1999 to $24.0 million at December
31, 2003. This increase primarily reflects portfolio growth associated with high
balance loans and additional reserves associated with loans to the hospitality
industry. This industry component of BankAtlantic's loan portfolio was
significantly affected by the tourism decline in Florida during 2002 and 2003.
At December 31, 2003, BankAtlantic's commercial real estate portfolio included
large lending relationships, including 22 relationships with unaffiliated
borrowers involving individual lending commitments in excess of $30 million with
an aggregate outstanding balance of $555 million. The remaining change in the
assigned portion of BankAtlantic's allowance for loan losses during the five
year period ended December 31, 2003 resulted from the increase and subsequent
decreases in its discontinued lines of business reserves. The decline in
BankAtlantic's discontinued line of business reserves primarily reflects lower
portfolio balances.
46
The key factor in the calculation of the assigned portion of the allowance for
loan losses is BankAtlantic's historical loss experience obtained through
statistical analysis of charge-off trends and reserves assigned to loans
individually evaluated for impairment.
The unassigned portion of the allowance for loan losses addresses certain
individual industry conditions, general economic conditions and geographic
concentration. In periods prior to December 31, 2002, BankAtlantic established
an unassigned allowance based on its view of near term economic conditions and
their potential effect upon loan losses within select segments of the loan
portfolio. Since December 31, 2002, management has included the entire loan
portfolio in its analysis due to uncertainty surrounding economic conditions and
a higher concentration of lending in new geographical areas in Florida. The
uncertain economic conditions relate to the tourism industry and the luxury
residential housing market and the potential effect of both industries on the
entire loan portfolio. The tourism industry is the largest industry in Florida.
Additionally, BankAtlantic expanded the geographical area in which it originates
commercial real estate loans by hiring experienced lending personnel in these
markets and originating loans in central and northern Florida. The loans
originated outside the primary markets may have substantially different loss
experiences than BankAtlantic's loans secured by collateral in South Florida.
Loans originated in commercial lending branch offices outside of South Florida
amounted to $446 million at December 31, 2003.
47
NON-PERFORMING ASSETS AND POTENTIAL PROBLEM LOANS (dollars in thousands):
December 31,
------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
NONPERFORMING ASSETS
NON-ACCRUAL
Tax certificates $ 894 $ 1,419 $ 1,727 $ 2,491 $ 2,258
Residential 8,489 12,773 9,203 11,229 15,214
Syndication -- -- 10,700 -- --
Commercial real estate and business 52 1,474 13,066 1,705 6,097
Small business 155 239 905 2,532 4,427
Lease financing 25 3,900 2,585 1,515 1,201
Consumer 794 532 796 1,944 5,705
----------- ----------- ----------- ----------- -----------
10,409 20,337 38,982 21,416 34,902
REPOSSESSED (1)
Residential real estate owned 1,474 1,304 2,033 2,562 1,929
Commercial real estate owned 948 8,303 1,871 1,937 2,022
Consumer -- 4 17 95 867
Lease financing -- -- -- 1,647 386
----------- ----------- ----------- ----------- -----------
2,422 9,611 3,921 6,241 5,204
----------- ----------- ----------- ----------- -----------
TOTAL NON-PERFORMING ASSETS 12,831 29,948 42,903 27,657 40,106
Specific valuation allowances -- (1,386) (9,936) (819) (350)
----------- ----------- ----------- ----------- -----------
TOTAL NON-PERFORMING ASSETS, NET $ 12,831 $ 28,562 $ 32,967 $ 26,838 $ 39,756
=========== =========== =========== =========== ===========
Total nonperforming assets as a percentage of:
Total assets 0.27% 0.55% 0.92% 0.60% 0.96%
=========== =========== =========== =========== ===========
Loans, tax certificates and net real
estate owned 0.33% 0.83% 1.45% 0.91% 1.42%
=========== =========== =========== =========== ===========
TOTAL ASSETS $ 4,831,549 $ 5,421,011 $ 4,654,486 $ 4,617,300 $ 4,159,901
=========== =========== =========== =========== ===========
TOTAL LOANS, TAX CERTIFICATES AND NET
REAL ESTATE OWNED $ 3,927,946 $ 3,626,210 $ 2,968,341 $ 3,029,592 $ 2,831,189
=========== =========== =========== =========== ===========
Allowance for loan losses $ 45,595 $ 48,022 $ 44,585 $ 47,000 $ 44,450
=========== =========== =========== =========== ===========
Total tax certificates $ 193,776 $ 195,947 $ 145,598 $ 124,289 $ 93,080
=========== =========== =========== =========== ===========
Allowance for tax certificate losses $ 2,870 $ 1,873 $ 1,521 $ 1,937 $ 1,504
=========== =========== =========== =========== ===========
OTHER POTENTIAL PROBLEM LOANS
CONTRACTUALLY PAST DUE 90
DAYS OR MORE
Commercial real estate and business (2) $ 135 $ 100 $ -- $ 7,086 $ 410
----------- ----------- ----------- ----------- -----------
135 100 -- 7,086 410
PERFORMING IMPAIRED LOANS, NET OF
SPECIFIC ALLOWANCES
Performing impaired loans 180 -- -- 15,001 --
RESTRUCTURED LOANS
Commercial real estate and business 1,387 1,882 743 -- --
DELINQUENT RESIDENTIAL LOANS PURCHASED 1,288 1,464 1,705 5,389 10,447
----------- ----------- ----------- ----------- -----------
TOTAL POTENTIAL PROBLEM LOANS $ 2,990 $ 3,446 $ 2,448 $ 27,476 $ 10,857
=========== =========== =========== =========== ===========
(1) Amounts are net of specific allowances for real estate owned.
(2) The majority of these loans have matured and the borrower continues to
make payments under the matured loan agreement. The 2000 amount
represents one loan that was repaid during February 2001.
BankAtlantic's non-performing assets, net of reserves, decreased by $15.7
million to $12.8 million at December 31, 2003 compared to $28.6 million at
December 31, 2002. Non-accrual assets decreased by $9.95 million and repossessed
assets decreased by $7.2 million. The decrease in repossessed assets primarily
resulted from the $6.5 million sale of a commercial construction property which
was included in repossessed assets in 2002 at a value of $7.3 million. This
property was written down by $0.8 million during 2003. The decrease in
non-accrual assets resulted from lower non-performing leases in the
lease-financing portfolio as a result of a settlement of a significant
non-performing lease in the aviation industry and lower non-performing
residential loans.
Potential problem assets were $3.0 million at December 31, 2003 compared to $3.4
million at December 31, 2002.
48
BANKATLANTIC'S NON- INTEREST INCOME
The following table summarizes the changes in non-interest income (in
thousands):
For the Years Ended December 31, Change Change
--------------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
-------- -------- -------- -------- --------
Other service charges and fees $ 19,318 $ 14,087 $ 14,731 $ 5,231 $ (644)
Service charges on deposits 40,569 26,479 16,372 14,090 10,107
Income from real estate operations 5,642 1,293 -- 4,349 1,293
Gains on sales of loans, net 122 1,840 60 (1,718) 1,780
Securities activities, net (1,957) 4,741 468 (6,698) 4,273
Other 6,992 4,877 5,826 2,115 (949)
-------- -------- -------- -------- --------
Non-interest income $ 70,686 $ 53,317 $ 37,457 $ 17,369 $ 15,860
======== ======== ======== ======== ========
Other service charges and fees increased 37% during 2003 compared to 2002. The
additional fee income reflects the opening of 244,000 new deposit accounts since
January 2002 that is directly associated with the Florida's Most Convenient Bank
campaign and higher loan fees. New ATM and check cards are linked to the new
checking and savings accounts and result in increases in interchange fees,
annual fees and foreign transaction fees. Also in 2003, check card income was
favorably impacted by card conversion fees received from MasterCard in
consideration for converting customer check cards from Visa.
The increased loan fee income in 2003 primarily resulted from higher prepayment
penalties associated with commercial loans. During 2003, BankAtlantic
experienced a significant increase in prepayment penalties assessed on borrowers
refinancing commercial loans in response to historically low interest rates
In 2002, compared to 2001, the decline in other service charges and fees
resulted from an 18% decrease in ATM fee income and a decline in late fee
income. The decline in ATM fee income resulted from the removal of ATM machines
from retail outlets, gas stations and convenience stores. The decline in late
fee income was attributed to lower collections of late fees assessed in
BankAtlantic's consumer and leasing portfolios in proportion to declines in
outstanding balances resulting from discontinued product lines. The above
declines in fee income were partially offset by higher fees earned on check
cards which were linked to the significant increase in transaction accounts
since commencing the Florida's Most Convenient Bank initiative.
Revenues from service charges on deposits increased by 53% in 2003 and by 62% in
2002. The increase in service charge revenues primarily resulted from a higher
volume of overdrafts, which increased 74% in 2003 and 116% in 2002. This
substantial increase in overdraft fee income primarily resulted from an increase
in the number of checking accounts attributed to high performance checking
products and the Florida's Most Convenient Bank initiatives. The above increase
in service charge income was partially offset by a 3% decline in monthly
checking account fee income in 2003 as BankAtlantic discontinued the promotion
of fee-based checking products. In 2002, monthly checking account fee income
declined 17%.
Income from real estate operations in 2003 represents revenues from the
Riverclub joint venture. This is a 50% owned real estate joint venture acquired
in connection with the Bank's purchase of Community in March 2002. This
development of single-family homes, condominium units and duplexes is located on
117 acres of land in Florida. During the year, the Riverclub joint venture
closed on the sale of 26 units. Prior to 2003, this joint venture was accounted
for as an unconsolidated subsidiary, and the income from real estate operations
represented the Bank's equity in the undistributed earnings of Riverclub. During
2002, there were 11 closings on the sale of units.
During 2002, the Bank had a gain on the sale of a commercial loan of $2.1
million. The gain was partially offset by losses on the sale of CRA loans. In
2003, the Bank had a small gain on the sale of residential loans.
Losses on securities in 2003 are primarily due to the termination of interest
rate swaps. The swaps had a total notional amount of $75 million and were
settled at a loss of $1.9 million as part of a strategy to prepay FHLB advances
with a view to improving the net interest margin in future periods. In 2002,
gains on securities activities resulted from the sale of $152 million of
mortgage-backed securities and $9.4 million of corporate bonds for gains. The
securities were sold to reposition the portfolio in response to the significant
decline in interest rates.
Other income during 2003 was favorably impacted by the expansion of
BankAtlantic's branch brokerage business unit which earned $1.4 million in
commissions versus $342,000 in commissions in 2002. Other income was also
favorably impacted by higher miscellaneous customer fees such as wire fees,
research charges and cash management services associated with the substantial
increase in the number of customer accounts.
49
The decline in other income during 2002, compared to 2001, was primarily due to
a $1.6 million gain realized on the sale of in-store branches during 2001,
compared to a $384,000 gain during 2002. The exiting of in-store branches was
part of a bank-wide program to review all lines of business with a view towards
improving overall earnings. BankAtlantic also sold or disposed of branch
facilities and equipment for a $328,000 loss during 2002 compared to a $386,000
gain during 2001. Additionally in 2002, a $264,000 loss was recognized from the
sale of residential loan servicing acquired in connection with the Community
acquisition.
BANKATLANTIC'S NON- INTEREST EXPENSE
The following table summarizes the changes in non-interest expense (in
thousands):
For the Years Ended December 31, Change Change
-------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
-------- -------- -------- -------- --------
Employee compensation and benefits $ 79,492 $ 65,130 $ 49,231 $ 14,362 $ 15,899
Occupancy and equipment 27,329 29,852 25,852 (2,523) 4,000
Advertising and promotion 9,434 7,470 3,771 1,964 3,699
Restructuring charges and impairment write-downs 257 1,007 331 (750) 676
Amortization of intangible assets 1,772 1,360 -- 412 1,360
Acquisition related charges -- 864 -- (864) 864
Professional fees 4,390 2,723 4,916 1,667 (2,193)
Cost associated with debt redemption 10,895 -- -- 10,895 --
Other 28,046 26,002 19,252 2,044 6,750
-------- -------- -------- -------- --------
Non-interest expense $161,615 $134,408 $103,353 $ 27,207 $ 31,055
======== ======== ======== ======== ========
Compensation and benefit expenses increased 22% in 2003. In addition to standard
annual employee salary increases, the growth in this expense category primarily
resulted from:
o AN INCREASE IN THE NUMBER OF EMPLOYEES RESULTING FROM
FLORIDA'S MOST CONVENIENT BANK INITIATIVES. The number of full
time equivalent Bank employees increased to 1,403 at year-end
2003 versus 1,244 at year-end 2002 and 873 at year-end 2001.
In 2002, 172 employees were added as a result of the Community
acquisition. The remaining personnel growth during the past
two years was primarily related to the additional personnel
required to implement the Bank's commitment to provide high
service levels to the increased number of Bank customers
resulting from the Florida's Most Convenient Bank campaign.
o THE HIGHER COST OF EMPLOYEE BENEFITS. In addition to the
increase in the number of employees in 2003, the cost of the
regular benefit programs also increased. In addition,
BankAtlantic experienced higher health insurance costs and
higher pension expenses associated with BankAtlantic's defined
benefit plan.
o THE IMPLEMENTATION OF AN EMPLOYEE PROFIT SHARING PLAN IN 2003.
Approximately $3.6 million in bonuses were paid in 2003 to
employees of the Bank for exceeding targeted performance
goals.
In 2003, occupancy and equipment expenses decreased 8%. This decline primarily
resulted from lower data processing costs and depreciation expense. Lower data
processing expenses resulted from the renewal of a vendor contract by
BankAtlantic at significantly lower rates than experienced during the prior
period. The decrease in depreciation expense reflects $1.9 million of
accelerated depreciation expense during 2002, most of which was associated with
a reduction in the estimated life of BankAtlantic's on-line banking platform as
BankAtlantic upgraded the technology.
The increase in occupancy and equipment expenses during 2002 compared to 2001
reflects the accelerated depreciation expense. The remaining increase reflects
upgrades in the data processing infrastructure and increases in occupancy costs
due to building maintenance, repairs, real estate taxes and security guard
services associated with an expanded branch network resulting from the Community
acquisition and longer branch business hours due to the Florida's Most
Convenient Bank campaign.
50
Advertising expenses during 2003 and 2002 reflect marketing initiatives to
promote BankAtlantic's new "high performance" account products and the Florida's
Most Convenient Bank initiatives. These promotions included an expanded direct
mail campaign; a check card rewards program and periodic customer gifts and
events associated with seven-day banking.
The 2003 impairment write-down resulted from the Bank's relocation of a branch,
transferring the real estate associated with the closed branch to real estate
held for sale and recognizing a $257,000 impairment loss. Restructuring charges
and impairment write-downs during 2002 were the result of a plan to discontinue
certain ATM relationships. These relationships were primarily with convenience
stores and gas stations, which did not meet BankAtlantic's performance
expectations and were unlikely to meet future profitability goals. As a
consequence, the Bank realized an $801,000 restructuring charge and a $206,000
impairment write-down. The remaining ATM machines are primarily located in
BankAtlantic's branch network, cruise ships, Native American reservation gaming
facilities and other retail outlets.
Amortization of intangible assets consisted of the amortization of core deposit
intangible assets acquired in connection with the Community acquisition. The
core deposit intangible assets are being amortized over an estimated life of
eight years.
Acquisition related charges and impairments during 2002 include various data
conversion and system integration expenses as well as facilities impairment
write-downs associated with the Community acquisition. As a consequence of the
acquisition, BankAtlantic closed two of its branches that competed directly with
two of the former Community branches.
The higher expenses for professional fees in 2003 compared to 2002 were
primarily associated with legal fees incurred in connection with a lawsuit filed
against BankAtlantic in October 2002 relating to our Florida's Most Convenient
Bank initiative which has been settled without payments to either party. (See
Item 3. Legal Proceedings for a description of this lawsuit.)
Costs associated with debt redemption resulted from the prepayment penalties
associated with the repayment of $325 million of FHLB advances. These high rate
advances were prepaid with the expectation that it will improve BankAtlantic's
net interest margin in future periods.
The increase in other expenses in 2003 primarily resulted from higher ATM
interchange expenses, check loss charges, and higher general operating expenses.
These increases in other expenses relate to a substantial increase in the number
of deposit accounts and the related increase in transaction volume associated
with Florida's Most Convenient Bank initiative. Expenses of the Riverclub joint
venture as well as costs related to converting check cards from Visa to
MasterCard are also reflected in 2003 results and contributed to higher other
expenses.
The increase in other expenses during 2002, compared to 2001, related to several
factors. During 2002, real estate owned ("REO") properties were written down by
$1.5 million compared to $120,000 during 2001. The majority of the 2002 REO
write down related to a residential construction loan that was transferred to
real estate owned. Additionally, REO expenses increased by $700,000 during 2002
due to the operating costs associated with this REO property. Also, during 2002,
only $120,000 of gains was recognized on the sales of REO property compared to
net gains of $1.2 million during 2001. The remaining increase in other expenses
resulted from increased check losses and higher operating expenses in connection
with BankAtlantic's increased size.
RYAN BECK RESULTS OF OPERATIONS
SUMMARY
The integration of the assets that were acquired from Gruntal significantly
increased Ryan Beck's distribution capabilities and revenues during the latter
half of 2003. The increase to approximately 500 financial consultants has
enabled the investment banking and trading lines of business to distribute their
products to an increased client base of over 110,000 active clients. Continued
improvement is expected as a result of improvements in the economy, further
advancement in the equity markets, and renewed interest in both equity and fixed
income products. However, there is no assurance that Ryan Beck will be
successful in managing the expanded operations resulting from Ryan Beck's growth
or that clients will remain with Ryan Beck.
51
The following table is a condensed income statement summarizing Ryan Beck's
results of operations (in thousands):
For the Years Ended December 31, Change Change
------------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
--------- --------- --------- --------- ---------
NET INTEREST INCOME:
Interest on trading securities $ 10,437 $ 7,512 $ 1,978 $ 2,925 $ 5,534
Interest expense (1,283) (1,444) (517) 161 (927)
--------- --------- --------- --------- ---------
NET INTEREST INCOME 9,154 6,068 1,461 3,086 4,607
--------- --------- --------- --------- ---------
NON-INTEREST INCOME:
Principal transactions 95,519 49,106 18,930 46,413 30,176
Investment banking 27,728 19,119 12,014 8,609 7,105
Commissions 85,176 62,924 12,761 22,252 50,163
Other 2,516 2,696 978 (180) 1,718
--------- --------- --------- --------- ---------
Non-interest income 210,939 133,845 44,683 77,094 89,162
--------- --------- --------- --------- ---------
NON-INTEREST EXPENSE:
Employee compensation and benefits 147,358 100,909 33,440 46,449 67,469
Occupancy and equipment 12,707 9,344 3,287 3,363 6,057
Advertising and promotion 3,291 2,977 1,515 314 1,462
Professional Fees 10,467 3,994 1,627 6,473 2,367
Communications 13,783 10,152 3,291 3,631 6,861
Floor broker and clearing fees 9,227 8,192 2,796 1,035 5,396
Amortization of goodwill -- -- 440 -- (440)
Acquisition related charges and impairments -- 4,061 -- (4,061) 4,061
Other 6,691 4,865 1,774 1,826 3,091
--------- --------- --------- --------- ---------
Non-interest expense 203,524 144,494 48,170 59,030 96,324
--------- --------- --------- --------- ---------
Income (loss) before income taxes 16,569 (4,581) (2,026) 21,150 (2,555)
Income taxes (benefit) 6,924 (2,133) (709) 9,057 (1,424)
--------- --------- --------- --------- ---------
Income from continuing operations $ 9,645 $ (2,448) $ (1,317) $ 12,093 $ (1,131)
========= ========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE SAME 2002 PERIOD
The improvement in income from continuing operations was primarily the result of
the full year impact of increased revenue from Ryan Beck's additional financial
consultants, as well as an improvement in investment banking revenue.
Investment banking revenue increased 45% from 2002. The improvement was largely
attributable to the increased distribution capabilities discussed above along
with an increase in the merger and acquisition and advisory business in 2003.
Net interest income increased 51% from 2002. The improvement in net interest
income primarily resulted from the expansion of municipal bond trading and the
associated spread between the interest on the municipal bonds and the financing
costs incurred. Also included in interest income was Ryan Beck's participation
in interest income associated with approximately $259 million of customer margin
debit balances and fees earned in connection with approximately $1.3 billion in
customer money market account balances. This improvement in net interest income
was partially offset by the interest expense associated with a $5.0 million
subordinated borrowing from BankAtlantic Bancorp, which was repaid in full on
September 3, 2003, as well as an increased level of borrowings from Ryan Beck's
clearing agent as a result of a higher volume of trading activity.
Principal transactions revenue increased 95% from 2002. The improvement in
principal transactions revenue was primarily the result of additional financial
consultants and trading personnel hired in connection with the Gruntal
transaction in April 2002. The operating environment of the U.S. securities
industry also improved during the second half of fiscal 2003.
Commission revenue increased 35% in 2003. The improvement was largely due to the
additional financial consultants, as well as the improvement in equity and fixed
income markets.
The increase in employee compensation and benefits of 46% from 2002 was
primarily due to the additional personnel. It also correlates to an increase in
compensation paid in the form of commission expense and discretionary bonuses
based on Ryan Beck's increased revenues.
Occupancy and rent expenses have increased 36% from 2002. This increase was
primarily due to the additional offices operated as a result of the Gruntal
transaction.
52
Professional fees increased by 162% in 2003. The increase was primarily due to
additional legal expense associated with the ongoing successor liability issues
relating to the Gruntal transaction, as well as an NASD ruling against Ryan Beck
in the amount of $2.7 million which resulted in a $1.7 million increase in
professional fees. Additionally, broker registration fees were higher as a
result of the additional financial consultants added as a result of the Gruntal
transaction.
Acquisition-related charges during 2002 included branch closures, professional
fees, and regulatory costs incurred in connection with the Gruntal transaction.
The increase in communications, floor broker and clearing fees and other
expenses from 2002 related primarily to increased commission revenue and
principal transactions revenue associated with the additional financial
consultants.
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE SAME 2001 PERIOD
The increased losses primarily resulted from the Gruntal transaction. Included
in the 2002 loss was $4.1 million of acquisition-related charges and impairments
associated with the Gruntal transaction. The transaction resulted in significant
differences between 2002 and 2001 revenue and expense line items. In addition,
the transaction resulted in the addition of 32 branch offices, 125,000 customer
accounts and $14.4 billion in customer assets.
Net interest income increased 315% from 2001. The improvement resulted from Ryan
Beck's participation in interest income associated with approximately $255
million of customer margin debit balances and fees earned in connection with
approximately $1.5 billion in customer money market account balances. This
improvement in net interest income was partially offset by the interest expense
associated with a $5.0 million subordinated borrowing from BankAtlantic Bancorp,
as well as an increased level of borrowings from Ryan Beck's clearing agent as a
result of a higher volume of trading activity.
Principal transaction revenue increased 159% from 2001. The improvement in
principal transaction revenue was primarily the result of additional financial
consultants and trading personnel. This increase was offset by losses on the
sale of mutual fund securities as well as mark to market losses on those funds,
which were associated with a deferred compensation plan acquired in connection
with the Gruntal transaction.
Investment banking revenue increased 59% from 2001. The improvement was largely
attributable to the increased distribution capabilities discussed above which
allowed for an increased participation in underwritings and initial public
offerings.
Commission revenue increased 393% from 2001. The improvement was largely due to
the additional financial consultants.
The increase in employee compensation and benefits of 202% from 2001 was
primarily due to the additional personnel.
Occupancy and rent expenses increased 184% from 2001. This increase was
primarily due to the additional offices.
Advertising and promotion expenses increased 97% from 2001. This increase
related to marketing to a larger geographic region as a result of the additional
offices discussed above.
Acquisition-related charges during 2002 included branch closures, professional
fees, and regulatory costs incurred in connection with the Gruntal transaction.
Professional fess increased from 2001, primarily as a result of the ongoing
successor liability issues associated with the Gruntal transaction.
The increase in communications, floor broker and clearing fees and other
expenses from 2001 related primarily to increased commission revenue and
principal transactions revenue associated with the additional financial
consultants.
53
BANKATLANTIC BANCORP PARENT COMPANY RESULTS OF OPERATIONS
The following table is a condensed income statement summarizing the BankAtlantic
Bancorp parent company's results of operations (in thousands):
For the Years
Ended December 31, Change Change
---------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
-------- -------- -------- -------- --------
NET INTEREST INCOME:
Interest and fees on loans $ 1,488 $ 1,416 $ 21 $ 72 $ 1,395
Interest on short term investments 234 329 208 (95) 121
Interest expense on junior subordinated debentures (16,344) (17,439) (18,297) 1,095 858
-------- -------- -------- -------- --------
NET INTEREST INCOME (14,622) (15,694) (18,068) 1,072 2,374
-------- -------- -------- -------- --------
NON-INTEREST INCOME:
Income from unconsolidated subsidiaries 425 -- -- 425 --
Gains on securities activities 404 3,837 6,656 (3,433) (2,819)
Impairment of securities -- (18,801) (3,527) 18,801 (15,274)
Other (635) (359) -- (276) (359)
-------- -------- -------- -------- --------
Non-interest income 194 (15,323) 3,129 15,517 (18,452)
-------- -------- -------- -------- --------
NON-INTEREST EXPENSE:
Employee compensation and benefits 90 940 2,049 (850) (1,109)
Professional fees 1,500 810 186 690 624
Cost associated with debt redemption 1,648 3,125 389 (1,477) 2,736
Impairment of goodwill -- -- 6,624 -- (6,624)
Amortization of goodwill -- -- 3,633 -- (3,633)
Other 600 280 585 320 (305)
-------- -------- -------- -------- --------
Non-interest expense 3,838 5,155 13,466 (1,317) (8,311)
-------- -------- -------- -------- --------
Loss before income taxes (18,266) (36,172) (28,405) 17,906 (7,767)
Income taxes benefit 5,089 12,661 7,623 (7,572) 5,038
-------- -------- -------- -------- --------
Loss from continuing operations $(13,177) $(23,511) $(20,782) $ 10,334 $ (2,729)
======== ======== ======== ======== ========
Interest and fees on loans for each of the years in the two year period ended
December 31, 2003 represent interest income associated with a $5 million loan to
Ryan Beck and a $30 million loan to Levitt. The $30 million loan to Levitt was
originated in April 2002. The $5 million Ryan Beck loan was fully repaid in
September 2003.
The decrease in interest expense during 2003, compared to 2002, resulted from
lower rates on borrowings partially offset by higher average balances. During
2002 and 2003, BankAtlantic Bancorp redeemed higher rate trust preferred
securities and subordinated debentures with the proceeds associated with the
issuance of lower rate trust preferred securities. During the years ended
December 31, 2003 and 2002, BankAtlantic Bancorp issued $77.3 million and $186.0
million, respectively, of junior subordinated debentures, all of which were
issued in connection with the issuance of trust preferred securities. The
average rate of these debentures was 5.94%. A portion of the proceeds from the
issuance of those debentures were used to retire $74.8 million of 9.50% fixed
rate trust preferred securities and $21.0 million of 9.00% subordinated
debentures.
The decrease in interest expense on debentures and notes payable for 2002
compared to 2001 resulted from a substantial decrease in average rates. In part
because of the lower interest rate environment in 2002, BankAtlantic Bancorp
issued $186 million of junior subordinated debentures and used the proceeds to
redeem higher cost trust preferred securities and subordinated debentures. As a
result of the above debt restructuring and the significant decline in interest
rates, BankAtlantic Bancorp's average rate on borrowings declined from 8.55%
during 2001 to 7.83% during 2002. The decline in interest expense was partially
offset by an increase in average balances. BankAtlantic Bancorp Parent Company's
average borrowings increased from $214.1 million during 2001 to $222.7 million
during 2002.
In 2003, income from unconsolidated subsidiaries represents the equity earnings
from trusts formed to issue trust-preferred securities. In prior periods, the
trusts were consolidated for financial reporting. This change in accounting
methodology was required due to a change in the accounting rules.
Gains on securities activities during 2003 represent a gain realized on a
liquidating dividend from an equity security. Securities activities during 2002
and 2001 include the sale of equity securities.
During 2002, BankAtlantic Bancorp recognized a $15 million impairment charge
associated with its investment in a privately held technology company. Both Alan
B. Levan and John E. Abdo became directors of the technology company in
54
connection with BankAtlantic Bancorp's investment and individually invested in
the technology company. Additionally, during 2002 and 2001, BankAtlantic Bancorp
recognized impairment charges of $3.8 million and $3.5 million, respectively, on
publicly traded equity securities resulting from significant declines in value
that were other than temporary. As a result of these losses, BankAtlantic
Bancorp revised its policy for holding equity investments so that future equity
investments will generally be more liquid and subject to concentration
restrictions. BankAtlantic Bancorp did not recognize impairments on securities
during 2003.
Compensation expense during 2003 primarily related to the Ryan Beck retention
pool established upon the acquisition of Ryan Beck in June 1998. During 2002 and
2001, BankAtlantic Bancorp accrued $1.0 million and $2.0 million, respectively,
of compensation expense related to the Ryan Beck retention pool. The
participants' accounts in the Ryan Beck retention pool vested on June 28, 2002,
and no further expenses will be incurred in connection with this retention pool.
The increase in professional fees during 2003 consisted of higher fees
associated with litigation relating to BankAtlantic Bancorp's investments in the
privately held technology company and legal, accounting and tax advice
associated with the Levitt spin-off. For a more detailed discussion of the
technology company litigation see "Related Party Transactions".
Loss on debt redemption during 2003 resulted from BankAtlantic Bancorp redeeming
its 5.625% convertible debentures at a redemption price of 102% of the principal
amount. The loss on the redemption reflects a $732,000 write-off of deferred
offering costs and a $916,000 call premium. During 2002, BankAtlantic Bancorp
used the proceeds from the issuance of junior subordinated debentures to retire
$21 million of 9% subordinated debentures and $74.8 million of 9.5% trust
preferred securities. A $3.1 million loss was recognized associated with these
redemptions. During 2001, BankAtlantic Bancorp redeemed its subordinated
investment notes and recognized a $389,000 loss.
The impairment of goodwill in 2001 related to BankAtlantic Bancorp's 1998
acquisition of Leasing Technology, Inc. ("LTI") During the third quarter of
2001, BankAtlantic Bancorp concluded that LTI would not meet performance
expectations. As a consequence, BankAtlantic Bancorp closed the offices of LTI
and ceased the origination of leases.
Goodwill amortization during 2001 represented the amortization of goodwill
associated with all acquisitions. Upon the implementation of FAS No. 142 on
January 1, 2002, the amortization of goodwill was discontinued. Goodwill is
evaluated for impairment in accordance with FAS No. 142.
LEVITT RESULTS OF OPERATIONS
SUMMARY
At December 31, 2003, Levitt and Sons had a delivery backlog of 2,053 homes
representing $458.8 million of future sales. The number of homes in backlog is
at a five-year high and is higher than the number of units delivered in 2001 and
2002 combined. The number of homes in backlog is 149% higher than at year-end
2002, and the average sales price of the homes under contract is approximately
10% higher than the year-end 2002 backlog. While the strong backlog is
encouraging for Levitt's 2004 results, potential economic trends and
developments could impact Levitt and Sons' home sales operations. In recent
months, the costs of lumber, steel, concrete and other building materials have
risen significantly. While Levitt and Sons may be able to increase their selling
prices to absorb these increased costs in future sales, the sales prices of
homes in backlog are set. Accordingly, Levitt expects that the margins on the
delivery of homes in backlog may be adversely affected by this trend.
Operations at Core Communities also remained strong in 2003. Development
activity in St. Lucie West entered its final stages in 2003, with only 164 acres
of acreage inventory available at December 31, 2003. Home sales remain strong in
St. Lucie West, as homebuilders within that community sold almost 1,600 homes
during 2003. Building on the success of St. Lucie West, land development has
commenced in Tradition, Core Communities' newest master-planned community
project in St. Lucie County, Florida. Currently, Tradition includes more than
4,800 acres, 1,531 of which had already been contracted to homebuilders as of
December 31, 2003. Additionally, Core Communities has contracts to acquire
approximately 4,500 additional acres adjacent to Tradition. Notwithstanding the
sustained interest and activity at both St. Lucie West and Tradition, we expect
that any reduction of demand in the residential real estate market could
negatively impact Core Communities' operations.
Levitt currently owns approximately 38% of the outstanding common stock of
Bluegreen. Under equity method accounting, Levitt recognizes its pro-rata share
of Bluegreen's net income or loss (net of purchase accounting adjustments) as
pre-tax earnings. Bluegreen has not paid dividends to its shareholders, and
Levitt's earnings therefore represent only its claim on the future distributions
of Bluegreen's earnings. Should Bluegreen's financial performance deteriorate,
Levitt's earnings in
55
Bluegreen would deteriorate concurrently and its results of operations would be
adversely affected. Furthermore, a significant reduction in Bluegreen's
financial position might require that Levitt test its investment in Bluegreen
for impairment, which could result in significant charges against Levitt's
results of operations or the write-off of its entire investment in Bluegreen.
The following table is a condensed income statement summarizing Levitt's results
of operations (in thousands):
For the Years Ended December 31, Change Change
---------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
-------- -------- -------- -------- --------
NET INTEREST INCOME:
Interest on loans and investments $ 863 $ 1,259 $ 1,989 $ (396) $ (730)
Interest on notes and bonds payable (7,924) (8,057) (6,226) 133 (1,831)
Capitalized interest 7,691 7,668 6,046 23 1,622
-------- -------- -------- -------- --------
NET INTEREST INCOME 630 870 1,809 (240) (939)
-------- -------- -------- -------- --------
NON-INTEREST INCOME:
Gains on sales of real estate developed for
sale, net 73,627 48,133 31,299 25,494 16,834
Income from unconsolidated
real estate subsidiaries 7,916 5,419 2,888 2,497 2,531
Other 3,159 1,892 1,775 1,267 117
-------- -------- -------- -------- --------
Non-interest income 84,702 55,444 35,962 29,258 19,482
-------- -------- -------- -------- --------
NON-INTEREST EXPENSE:
Employee compensation and benefits 19,845 13,983 9,730 5,862 4,253
Advertising and promotion 4,144 3,156 2,611 988 545
Selling, general and administrative 16,504 12,007 12,437 4,497 (430)
Professional fees 1,301 920 961 381 (41)
Other 318 482 392 (164) 90
-------- -------- -------- -------- --------
Non-interest expense 42,112 30,548 26,131 11,564 4,417
-------- -------- -------- -------- --------
Income before income taxes 43,220 25,766 11,640 17,454 14,126
Income taxes 16,400 6,254 4,118 10,146 2,136
-------- -------- -------- -------- --------
Income from continuing operations $ 26,820 $ 19,512 $ 7,522 $ 7,308 $ 11,990
======== ======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE SAME 2002 PERIOD
Consolidated net income increased $7.3 million, or 37%, to $26.8 million for the
year ended December 31, 2003 from $19.5 million for the same 2002 period. The
increase in net income resulted primarily from an increase in gains on sales of
real estate by Levitt and Sons, Core Communities, and Levitt Commercial, as well
as from increased earnings from Bluegreen. These increases in income were
partially offset by a decrease in earnings in joint ventures, an increase in
selling, general and administrative expenses, an increase in employee
compensation and benefits, and an increase in the provision for income taxes.
The 53% increase in gains on sales of real estate in 2003 was driven primarily
by increases in real estate sales activity over 2002. Revenues from sales of
real estate increased $75.3 million, or 36%, to $283.1 million for the year
ended December 31, 2003 from $207.8 million for the same 2002 period. Cost of
sales from real estate increased $49.8 million, or 31%, to $209.5 million for
the year ended December 31, 2003 from $159.7 million for the same 2002 period.
Levitt and Sons' home deliveries in 2003 increased 37% to 1,011 homes from 740
homes delivered in 2002. This increase in deliveries resulted in a $59.9 million
increase in revenues from sales of real estate at Levitt and Sons over the
corresponding periods. Core Communities' revenues from land sales in 2003
increased to $55.0 million from $53.9 million in 2002. Core Communities 2002
revenues include sales to Levitt and Sons of $8.5 million. These inter-company
transactions were eliminated in consolidation. Consolidated cost of sales in
2003 was reduced by $1.0 million as previously deferred margins on inter-company
transactions were recognized at the time of homes were delivered to third
parties. Levitt Commercial commenced deliveries of its flex warehouse units in
2003, and revenues from sales of these units in 2003 totaled $5.8 million.
Income from unconsolidated real estate subsidiaries includes Levitt's equity
earnings from Bluegreen, as well as Levitt's joint ventures equity earnings or
losses. Earnings from Bluegreen for the year ended December 31, 2003 were $7.4
million,
56
as compared with $4.6 million for the period of Levitt's ownership in 2002.
Bluegreen's net income for 2003 was $25.8 million, as compared to $9.8 million
for the period of Levitt's ownership ended December 31, 2002. Earnings from
joint ventures decreased $370,000 in 2003 as compared to 2002. The decrease in
earnings from joint ventures resulted primarily from completion of a joint
venture project during 2002.
The increase in selling, general and administrative expenses, employee
compensation and benefits expense, and advertising expenses for the year ended
December 31, 2003 as compared to 2002 related primarily to Levitt's new
development projects in central and southeast Florida and to the increase in
home deliveries by Levitt and Sons. As a result of these new projects and the
higher number of home deliveries, Levitt's full-time employees increased to 353
at December 31, 2003 from 221 at December 31, 2002, and the number of part-time
employees increased to 34 at December 31, 2003 from 28 at December 31, 2002.
Professional fees increased primarily due to expenses relating to Levitt's
public offering of investment notes in 2003.
Interest incurred totaled $7.9 million and $8.1 million for 2003 and 2002,
respectively. The decrease in interest incurred was primarily due to a decline
in average interest rates from 6.0% for 2002 to 4.8% for 2003. These decreases
were partially offset by increases in borrowings associated with several new
development projects, as well as interest accruing on Levitt's $30.0 million
note payable to BankAtlantic Bancorp for the full year in 2003, as compared to
only nine months in 2002. Interest capitalized totaled $7.7 million for both
2003 and 2002. Cost of sales of real estate for the years ended December 31,
2003 and 2002 included previously capitalized interest of approximately $6.4
million and $6.2 million, respectively.
The provision for income taxes increased $10.1 million, or 62%, to $16.4 million
for 2003, due to increased earnings before taxes, and an increase in the
effective tax rate from 24.2% in 2002 to 37.9% in 2003. The provision for income
taxes for the years ended December 31, 2003 and 2002 was net of a reduction in
the deferred tax asset valuation allowance of approximately $418,000 and $2.6
million, respectively. Reductions in the deferred tax asset valuation allowance
reduce the provision for income taxes for the year, thereby reducing the
effective tax rate.
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE SAME 2001 PERIOD
Income from continuing operations increased 159%, to $19.5 million for the year
ended December 31, 2002, from $7.5 million for the same 2001 period. This
increase primarily resulted from higher revenues from the sales of real estate
and joint venture activities of $16.8 million and the equity in earnings from
Bluegreen of $4.6 million included in income from unconsolidated real estate
subsidiaries. These increases in income were partially offset by a decrease in
net interest income of $939,000 and an increase in non-interest expense of $4.4
million.
The decline in net interest income of $939,000 was primarily associated with a
decrease in interest income on loans and investments resulting from lower
average balances and yields. Interest on notes and bonds payable totaled $8.1
million and $6.2 million for the years ended December 31, 2002 and 2001,
respectively. The increase in interest expense was primarily due to increases in
borrowings resulting from several new development projects. This increase in
interest expense was partially offset by a decline in average interest rates
from 7.5% for 2001 to 6.0% for 2002. Capitalized interest totaled $7.7 million
and $6.0 million for 2002 and 2001, respectively. Interest is capitalized at the
effective interest rates paid on borrowings for interest costs incurred on real
estate inventory during the pre-construction and planning stage and the periods
that projects are under development. Capitalization of interest is discontinued
if development ceases at a project. Throughout 2002 and 2001, a larger portion
of total interest incurred was capitalized to real estate inventory. At the time
of home closings and land sales, the capitalized interest is charged to cost of
sales. Gains from sales of real estate, for the years ended December 31, 2002
and 2001 includes previously capitalized interest of approximately $6.2 million
and $4.8 million, respectively.
During the year ended December 31, 2002, Core Communities' net gains on land
sales were $18.7 million as compared to $11.0 million in 2001. The increases in
sales revenue and gross profit are primarily attributable to an increase in
commercial land sales and residential lot sales in 2002. This was primarily a
result of growth in the residential home sales market. During the year ended
December 31, 2002, net gains from home sales of Levitt and Sons were $31.1
million as compared to $22.1 million during the same 2001 period. Net gains from
home sales increased due to increased deliveries of homes, as well as an
increase in the average selling price of homes. The increase in deliveries and
average selling price was the result of communities nearing completion and the
introduction of new projects and product lines. During 2002, 740 homes closed as
compared to 597 homes in 2001. The average selling price of homes during 2002
was approximately $219,000, increasing 12% from $195,000 in 2001. Also included
in gains on sales of real estate during 2002 and 2001 is Levitt's holding
company amortization of interest previously capitalized of $1.6 million and $2.3
million, respectively. In 2001, Levitt sold a marine rental property for a
$680,000 gain.
57
During the years 2002 and 2001, equity in earnings from real estate joint
ventures was $849,000 and $2.9 million, respectively. The decrease in equity in
earnings from joint ventures primarily resulted from declines in home deliveries
from 282 in 2001 to 140 in 2002 because the joint venture project was nearing
sell-out.
In April 2002, Levitt acquired 35% of Bluegreen's common stock. In 2002,
BankAtlantic Bancorp separately owned approximately 5% of Bluegreen's common
stock. Levitt's income from Bluegreen for the year ended December 31, 2002 was
$4.6 million. The earnings from Bluegreen included approximately $353,000 of
amortization associated with purchase accounting adjustments. Bluegreen's income
before the cumulative effect of a change in accounting principle for the period
of ownership in 2002 was $15.4 million.
The increase in non-interest expense during 2002 as compared to 2001 resulted
from an increase in employee compensation and benefits and advertising. This
increase in non-interest expense was partially offset by a decrease in selling,
general and administrative expense. The increase in employee compensation and
benefits was primarily associated with increases in incentive accruals and
personnel resulting from the addition of several new development projects in
central and southeast Florida. These new projects and an increase in home
deliveries resulted in an increase in selling and general and administrative
expenses, excluding the $2.6 million accrual in 2001 reflecting an adverse
verdict in a jury trial against a partnership in which a subsidiary of Levitt is
a 50% partner.
BFC HOLDING COMPANY OPERATIONS
SUMMARY
Since BFC Holding Company controls in excess of 50% of the vote of BankAtlantic
Bancorp, but does not own more than 80% of the outstanding stock of BankAtlantic
Bancorp, the results of BankAtlantic Bancorp are consolidated in the financial
statements of the Company, but are not consolidated for tax purposes. For
segment reporting purposes, the BFC Holding company segment results do not
reflect the Company's equity from earnings in BankAtlantic Bancorp, but include
a provision for income tax relating to the tax effect of the Company's earnings
from unconsolidated subsidiaries.
In connection with the spin-off of Levitt to BankAtlantic Bancorp's
stockholders, BFC received an ownership position in Levitt identical to its
ownership position in BankAtlantic Bancorp, including its control of more than
50% of the vote. Accordingly, Levitt will continue to be consolidated in the
Company's financial statements.
The following table is a condensed income statement summarizing BFC Holding
Company's results of operations (in thousands):
For the Years Ended December 31, Change Change
----------------------------------------- 2003 vs. 2002 vs.
2003 2002 2001 2002 2001
------- ------- ------- ------- -------
NET INTEREST EXPENSE:
Interest on loans $ 363 $ 303 $ 239 $ 60 $ 64
Interest on short term investments 27 51 144 (24) (93)
Interest on notes payable (1,163) (1,153) (1,239) (10) 86
------- ------- ------- ------- -------
NET INTEREST EXPENSE (773) (799) (856) 26 57
------- ------- ------- ------- -------
NON-INTEREST INCOME:
Gains on sales of real estate developed for
sale, net -- -- 1,345 -- (1,345)
Impairment of securities (3,071) (1,583) (4,379) (1,488) 2,796
Securities activities, net 444 -- -- 444 --
Other 1,088 1,161 1,129 (73) 32
------- ------- ------- ------- -------
Non-interest loss (1,539) (422) (1,905) (1,117) 1,483
------- ------- ------- ------- -------
NON-INTEREST EXPENSE:
Employee compensation and benefits 2,553 2,332 1,902 221 430
Occupancy and equipment 73 77 85 (4) (8)
Professional fees 234 152 104 82 48
Other 715 647 795 68 (148)
------- ------- ------- ------- -------
Non-interest expense 3,575 3,208 2,886 367 322
------- ------- ------- ------- -------
Loss before income taxes (5,887) (4,429) (5,647) (1,458) 1,218
Income taxes 3,714 2,420 2,660 1,294 (240)
------- ------- ------- ------- -------
Income from continuing operations $(9,601) $(6,849) $(8,307) $(2,752) $ 1,458
======= ======= ======= ======= =======
Securities activities, net during the 2003 primarily represents a gain realized
on liquidating dividends from an equity security.
58
During 2003, 2002 and 2001 limited partnerships in which the Company has a 12%
to 57% controlling interests recognized impairment charges of approximately $3.1
million, $1.1 million and $3.5 million, respectively, associated with
investments in privately held technology companies. Also, during 2002 and 2001,
BFC Holding Company recognized impairment charges of $499,000 and $920,000,
respectively, on publicly traded equity securities resulting from significant
declines in value that were considered other than temporary.
The increase in employee compensation and benefits was due to an increase in
salaries, bonuses and related benefits.
FINANCIAL CONDITION
Our total assets at December 31, 2003 were $5.1 billion compared to $5.4 billion
at December 31, 2002. The decrease in total assets primarily resulted from:
o Accelerated loan and mortgage-backed securities repayments due
to the historically low interest rate environment;
o A decline in securities owned associated with the sale by Ryan
Beck of its subsidiary, GMS; o A lower accrued interest
receivable resulting from a substantial decline in interest
rates and lower investment and securities available for sale
balances;
o Decreased investments in and advances to unconsolidated
subsidiaries of approximately $23.6 million primarily
associated with the consolidation of a joint venture as a
consequence of implementation FIN 46 effective January 1,
2003;
o Declines in cash and due from depository institutions
resulting from lower cash letter and Federal Reserve balances;
and
o Declines in investment in FHLB stock related to repayments of
FHLB advances.
The above decreases in total assets were partially offset by:
o The purchase of approximately $1.1 billion of hybrid
adjustable rate residential loans;
o The origination of and participation in commercial real estate
loans;
o The origination of home equity loans;
o Increases in real estate held for development and sale
primarily related to higher levels of real estate inventory at
Levitt and the consolidation of the Riverclub joint venture;
and
o Increases in investments in and advances to unconsolidated
subsidiaries as a result of deconsolidation of $7.9 million of
trusts formed to issue trust preferred securities and an
increase in Levitt's investment in Bluegreen of approximately
$10.2 million primarily associated with Levitt's equity in
earnings of Bluegreen.
The Company's total liabilities at December 31, 2003 were $4.6 billion compared
to $5.0 billion at December 31, 2002. The decreases in total liabilities
primarily resulted from:
o The prepayment and maturity of over $500 million of FHLB
advances;
o Redemption of BankAtlantic Bancorp's 5.625% convertible
subordinated debentures;
o Lower certificate of deposit account balances associated with
marketing initiatives focusing on the origination of low cost
deposits; and
o Lower clearing agent balances due to the sale of Ryan Beck's
subsidiary, GMS.
The above decreases in total liabilities were partially offset by:
o The issuance in the aggregate of $77.3 million of junior
subordinated debentures;
o Higher transaction and savings account balances resulting from
BankAtlantic's Florida's Most Convenient Bank and totally free
checking account initiatives;
o Increases in Levitt's notes and mortgage notes payable to fund
real estate purchases and development costs; and
o Higher short-term borrowings to fund certificate account
outflows, loan originations and loan purchases.
59
At December 31, 2003 and 2002, minority interest was approximately $420 million
and $365.5 million, respectively. The following table summarizes the minority
interest in our subsidiaries (in thousands):
December 31,
----------------------------
2003 2002
-------- --------
BankAtlantic Bancorp $321,583 $363,317
Levitt 97,567 --
Joint Venture Partnerships 808 2,184
-------- --------
$419,958 $365,501
======== ========
The decrease in minority interest in BankAtlantic Bancorp primarily related to a
decrease in BankAtlantic Bancorp's stockholders' equity related to the spin-off
of Levitt, the payment of dividends on its common stock and reductions in the
minority interest associated with BankAtlantic Bancorp's activity in other
comprehensive income. This decrease was partially offset by earnings of $52.5
million in BankAtlantic Bancorp and the issuance of additional shares of
BankAtlantic Bancorp's common stock upon the exercise of stock options,
conversion of BankAtlantic Bancorp subordinated debentures and the issuance of
restricted Class A Common Stock. The minority interest in Levitt resulted from
BankAtlantic Bancorp's spin-off of Levitt to its stockholders. In connection
with the spin-off, BFC received an interest in Levitt representing 22.2% of
Levitt's outstanding equity, which was identical to its ownership position in
BankAtlantic Bancorp, including its control of more than 50% of the vote.
Levitt's equity prior to December 31, 2003 was included within BankAtlantic
Bancorp. The decrease in minority interest associated with joint venture
partnerships was primarily the result of losses from the joint venture
partnerships.
Shareholders' equity at December 31, 2003 was $85.7 million compared to $77.4
million at December 31, 2002. The increase was due to earnings of $7.0 million,
the issuance of the Company's Class A and Class B Common Stock upon the exercise
of stock options of $282,000, the tax effect relating to the exercise of stock
options of $550,000 and $662,000 associated with activities in other
comprehensive income. Offsetting the above increases was $252,000 reduction of
additional paid-in capital relating to the net effect of BankAtlantic Bancorp's
capital transactions, net of income taxes.
The components of other comprehensive income relate to the Company's net
unrealized gains or losses on securities available for sale, net of income taxes
and the Company's proportionate share of non-wholly owned subsidiaries'
activities in other comprehensive income. Included in the change in other
comprehensive income was a $862,000 decline in unrealized gains on securities
available for sale, a $1.0 million increase in BankAtlantic Bancorp's minimum
pension liability, a $385,000 unrealized gain on BankAtlantic Bancorp's interest
rate swap activity and a $121,000 unrealized gain associated with an investment
in an unconsolidated real estate subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
BFC HOLDING COMPANY LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds to BFC (without consideration of BankAtlantic
Bancorp's or Levitt's liquidity and capital resources, which except as noted,
are not available to BFC) were dividends from BankAtlantic Bancorp, revenues
from property operations, principal and interest payments on loans receivable,
liquidating dividends received from investment securities and proceeds from the
exercise of stock options. BFC may also in the future obtain funds through the
issuance of equity and debt securities. On May 5, 2003, the Company's Class A
Common Stock began trading on the Nasdaq National Market under the symbol BFCF.
Funds were primarily utilized by BFC to reduce mortgage payables and other
borrowings, to fund operating expenses, and general and administrative expenses.
In addition, BFC has an $8.0 million revolving line of credit that can be
utilized for working capital as needed. The facility bears interest at the prime
rate plus 1% and at December 31, 2003, approximately $6.0 million was
outstanding. Shares of BankAtlantic Bancorp's Class A Common Stock owned by BFC
are pledged as collateral for the facility.
The payment of dividends by BankAtlantic Bancorp is subject to declaration by
BankAtlantic Bancorp's Board of Directors and applicable indenture restrictions
and loan covenants and will also depend upon, among other things, the results of
operations, financial condition and cash requirements of BankAtlantic Bancorp
and, as discussed below, the ability of BankAtlantic to pay dividends or
otherwise advance funds to BankAtlantic Bancorp, which in turn is subject to OTS
regulation and is based upon BankAtlantic's regulatory capital levels and net
income. While there is no assurance that BankAtlantic Bancorp will pay dividends
in the future, BankAtlantic Bancorp has paid a regular quarterly dividend to its
common stockholders since August 1993 and management of BankAtlantic Bancorp has
indicated that it will seek to declare regular quarterly cash dividends on the
BankAtlantic Bancorp Common Stock in the future. BankAtlantic Bancorp currently
60
pays a quarterly dividend of $.033 per share on its Class A and Class B Common
Stock. Based on its current level of ownership and BankAtlantic Bancorp's
current dividend rate, BFC currently receives approximately $435,000 per quarter
in dividends from BankAtlantic Bancorp.
On July 16, 2002, John Abdo borrowed $3.5 million from the Company on a recourse
basis and paid off his existing $500,000 loan due to BFC. The $3.5 million loan
bears interest at the prime rate plus 1%, requires monthly interest payments, is
due on demand and is secured by 2,127,470 shares of BFC Class A Common Stock and
370,750 shares of BFC Class B Common Stock.
At December 31, 2003 and 2002, approximately $8.4 million and $8.5 million,
respectively, of the Company's mortgage payables relate to mortgages on real
estate with an interest rate of 9.2% and maturity date in May 2007. At December
31, 2003 and 2002, approximately $625,000 and $702,000, respectively, of the
mortgage payables relate to mortgage receivables in connection with the sale of
properties previously owned by the Company, bearing interest at 6% per annum and
maturity dates ranging from 2009 through 2010.
We expect to meet our short-term liquidity requirements generally through net
cash provided by operations, dividends from BankAtlantic Bancorp, and existing
cash balances. We expect to meet our long-term liquidity requirements through
the foregoing, as well, as long term secured and unsecured indebtedness, and
future issuances of equity or debt securities.
BANKATLANTIC BANCORP, INC. LIQUIDITY AND CAPITAL RESOURCES
BankAtlantic Bancorp's principal source of liquidity is dividends from
BankAtlantic. BankAtlantic Bancorp also obtains funds through the issuance of
equity and debt securities, borrowings from financial institutions, repayment of
subsidiary loans and liquidation of equity securities it holds. BankAtlantic
Bancorp uses these funds to contribute capital to its subsidiaries, pay debt
service, repay borrowings, purchase equity securities and for administrative
expenses. BankAtlantic Bancorp's annual debt service associated with its junior
subordinated debentures and financial institution borrowings is approximately
$15.6 million. BankAtlantic Bancorp's estimated current annual dividends to
common shareholders are approximately $7.8 million. The declaration and payment
of dividends and the ability of BankAtlantic Bancorp to meet its debt service
obligations will depend upon the results of operations, financial condition and
cash requirements of BankAtlantic Bancorp as well as indenture restrictions and
loan covenants and on the ability of BankAtlantic to pay dividends to
BankAtlantic Bancorp. These payments are subject to regulations and OTS approval
and are based upon BankAtlantic's regulatory capital levels and net income.
During 2003, BankAtlantic Bancorp received $20.0 million of dividends from
BankAtlantic.
BankAtlantic Bancorp management believes that the Levitt spin-off transaction
will not have a significant effect on BankAtlantic Bancorp's liquidity due to
the fact that i) in prior periods, Levitt did not declare any cash dividends,
ii) BankAtlantic Bancorp invested in Levitt to expand its operations, and iii)
BankAtlantic Bancorp will receive cash payments from Levitt in subsequent
periods from interest and principal payments associated with the Levitt notes
payable held by BankAtlantic Bancorp discussed below in Levitt's Liquidity and
Capital Resources.
During 2003, BankAtlantic Bancorp participated in three pooled trust preferred
securities offerings in which an aggregate of $77.3 million of junior
subordinated debentures were issued. The junior subordinated debentures pay
interest quarterly at a fixed rates ranging from 6.40% to 6.65% per annum until
2008, and thereafter at a floating rate equal to 3-month LIBOR plus 315-325
basis points. The debentures are callable in five years and mature in 2033. The
net proceeds to BankAtlantic Bancorp from the issuance of junior subordinated
debentures, after BankAtlantic Bancorp's investment in the related trust,
placement fees and expenses, were approximately $74 million.
BankAtlantic Bancorp used the net proceeds from the above trust preferred
securities offerings to redeem $45.8 million of 5.625% convertible subordinated
debentures due 2007, repay $16 million of outstanding borrowings under a credit
facility from an unrelated financial institution, repay $3.7 million of Ryan
Beck retention pool notes payable and for general corporate purposes.
BankAtlantic Bancorp maintains a revolving credit facility of $30 million with
an independent financial institution. The credit facility contains customary
covenants, including financial covenants relating to BankAtlantic's regulatory
capital and maintenance of certain loan loss reserves and is secured by the
common stock of BankAtlantic. BankAtlantic Bancorp has used this credit facility
to temporarily fund acquisitions and asset purchases as well as for general
corporate purposes. The credit facility had an outstanding balance of $100,000
at December 31, 2003, and BankAtlantic Bancorp was in compliance with all loan
covenants. Amounts outstanding accrue interest at the prime rate minus 50 basis
points, and the facility matures in March 2005.
61
To date, Ryan Beck has not paid dividends to BankAtlantic Bancorp, although,
subject to regulatory and capital requirements, it may do so in the future.
BANKATLANTIC LIQUIDITY AND CAPITAL RESOURCES
BankAtlantic's liquidity will depend on its ability to generate sufficient cash
to support loan demand, to meet deposit withdrawals, and to pay operating
expenses. BankAtlantic's securities portfolio provides an internal source of
liquidity through its short-term investments as well as scheduled maturities and
interest payments. Loan repayments and sales also provide an internal source of
liquidity.
BankAtlantic's primary sources of funds were deposits, principal repayments of
loans and tax certificates and securities available for sale, proceeds from the
sale of loans and securities available for sale, proceeds from securities sold
under agreements to repurchase, advances from FHLB, and operations. These funds
were primarily utilized to fund loan disbursements and purchases, deposit
outflows, repayments of securities sold under agreements to repurchase,
repayments of advances from FHLB, purchases of tax certificates, payments of
maturing certificates of deposit, to pay operating expenses and to pay dividends
to BankAtlantic Bancorp. The FHLB has granted BankAtlantic a $1.4 billion line
of credit subject to available collateral, with a maximum term of ten years.
BankAtlantic borrowed $782.2 million of FHLB advances and the FHLB issued a $92
million letter of credit to secure public deposits under this line at December
31, 2003. The line of credit is secured by a blanket lien on BankAtlantic's
residential mortgage loans and certain commercial real estate loans.
BankAtlantic's available borrowings under this line of credit were approximately
$525.8 million at December 31, 2003. BankAtlantic has established lines of
credit for up to $245 million with other banks to purchase federal funds and has
established a $10.0 million potential advance with the Federal Reserve Bank of
Atlanta. BankAtlantic has various relationships to acquire brokered deposits.
These relationships may be utilized as an alternative source of borrowings.
BankAtlantic's commitments to originate and purchase loans at December 31, 2003
were $428.1 million and $43.7 million, respectively, compared to $397.3 million
and $300.6 million, respectively, at December 31, 2002. Additionally,
BankAtlantic had commitments to purchase mortgage-backed securities of $8.6
million and $39.1 million at December 31, 2003 and 2002, respectively. At
December 31, 2003, total loan commitments represented approximately 11.6% of net
loans receivable.
At year-end 2003, BankAtlantic had approximately $144.9 million in investments
and mortgage-backed securities pledged against securities sold under agreements
to repurchase.
During 2002, BankAtlantic purchased a $14.3 million office facility to
consolidate its headquarters and back office operations into a centralized
facility. As of December 31, 2003, BankAtlantic had incurred approximately $3
million in renovation costs. The total estimated cost to renovate is
approximately $24.5 million, and the facility is expected to be completed in
October 2004. The estimated cost to renovate the building will be funded through
cash flow from operations.
A significant source of BankAtlantic's liquidity is repayments and maturities of
loans and securities. The table below presents the contractual principal
repayments and maturity dates of BankAtlantic's loan portfolio and securities
available for sale at December 31, 2003. The total amount of principal
repayments on loans and securities contractually due after December 31, 2004 was
$3.6 billion, of which $791.7 million have fixed interest rates and $2.8 billion
have floating or adjustable interest rates. Actual principal repayments may
differ from the information shown below (in thousands):
Outstanding
on For the Period Ending December 31, (1)
December 31, -------------------------------------------------------------------------------------
2003 2004 2005-2006 2007-2011 2012-2016 2017-2021 >2022
----------------- ---------- ---------- ---------- ---------- ---------- ----------
Commercial real estate $2,568,355 $1,065,233 $ 998,191 $ 353,972 $ 80,105 $ 65,858 $ 4,996
Residential real estate 1,345,911 13,979 16,157 22,774 114,547 115,179 1,063,275
Consumer (2) 357,985 4,012 5,328 11,341 117,907 219,397 --
Commercial business (4) 187,354 105,278 35,443 41,885 4,748 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL LOANS (4) $4,459,605 $1,188,502 $1,055,119 $ 429,972 $ 317,307 $ 400,434 $1,068,271
========== ========== ========== ========== ========== ========== ==========
TOTAL SECURITIES
AVAILABLE FOR SALE (3) $ 358,485 $ 19,192 $ 352 $ 841 $ 1,659 $ 20,922 $ 315,519
========== ========== ========== ========== ========== ========== ==========
(1) Does not include deductions for the undisbursed portion of loans in
process, deferred loan fees, unearned discounts and allowances for loan
losses. Includes second mortgage
(2) loans. Includes in 2003 marketable equity securities available for sale
(3) of $1.4 million.
(4) Includes lease financing.
62
Loan maturities and sensitivity of loans to changes in interest rates for
commercial business and real estate construction loans at December 31, 2003 were
(in thousands):
Commercial Real Estate
Business Construction Total
---------- ------------ ----------
One year or less $ 163,590 $ 658,066 $ 821,656
Over one year, but less than five years 6,910 698,383 705,293
Over five years 3,354 7,118 10,472
---------- ---------- ----------
$ 173,854 $1,363,567 $1,537,421
========== ========== ==========
DUE AFTER ONE YEAR:
Pre-determined interest rate $ 10,264 $ 120,157 $ 130,421
Floating or adjustable interest rate -- 585,344 585,344
---------- ---------- ----------
$ 10,264 $ 705,501 $ 715,765
========== ========== ==========
BankAtlantic's geographic loan concentration at December 31, 2003 was:
Florida 65%
California 9%
Northeast 7%
Other 19%
---
Total 100%
===
The loan concentration for BankAtlantic's originated portfolio is primarily in
Florida. The concentration in California, the Northeast, and other locations
primarily relates to purchased wholesale residential real estate loans.
At December 31, 2003, BankAtlantic met all applicable liquidity and regulatory
capital requirements. At the indicated dates, BankAtlantic's capital amounts and
ratios were (dollars in thousands):
Minimum Ratios
--------------------------
Actual Adequately Well
--------------------------- Capitalized Capitalized
Amount Ratio Ratio Ratio
-------- ------ ----------- -----------
AT DECEMBER 31, 2003:
Total risk-based capital $447,967 12.06% 8.00% 10.00%
Tier 1 risk-based
capital $379,505 10.22% 4.00% 6.00%
Tangible capital $379,505 8.52% 1.50% 1.50%
Core capital $379,505 8.52% 4.00% 5.00%
AT DECEMBER 31, 2002:
Total risk-based capital $413,469 11.89% 8.00% 10.00%
Tier 1 risk-based capital $347,927 10.01% 4.00% 6.00%
Tangible capital $347,927 7.26% 1.50% 1.50%
Core capital $347,927 7.26% 4.00% 5.00%
Savings institutions are also subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). Regulations
implementing the prompt corrective action provisions of FDICIA define specific
capital categories based on FDICIA's defined capital ratios, as discussed more
fully in Part I under "Regulations of Federal Savings Banks".
RYAN BECK LIQUIDITY AND CAPITAL RESOURCES
Ryan Beck's primary sources of funds during the year ended December 31, 2003
were clearing broker borrowings, proceeds from the sale of securities owned,
proceeds from securities sold but not yet purchased, and fees from customers.
These funds were primarily utilized to pay operating expenses and fund capital
expenditures. As part of the Gruntal transaction, Ryan Beck acquired all of the
membership interests in GMS. During 2003, Ryan Beck sold GMS for $22.6 million,
receiving cash proceeds of $9.0 million and a $13.6 million promissory note. The
note is secured by the membership interests in GMS and requires GMS to maintain
certain capital and financial ratios. During 2003, the buyer made a $1.6 million
repayment of principal of the promissory note which reduced the balance to $12.0
million.
63
In the ordinary course of business, Ryan Beck borrows, under an agreement with
its clearing broker, by pledging securities owned as collateral primarily to
finance its trading inventories. The amount and terms of the borrowings are
subject to the lending policies of the clearing broker and can be changed at the
clearing broker's discretion. Additionally, the amount which may be borrowed is
impacted by the market value of the securities owned.
Also as part of the Gruntal transaction, Ryan Beck assumed responsibility for
repayment of a $3.4 million note payable secured by leasehold improvements and
equipment. At December 31, 2003, the total outstanding amount was $0.8 million
and the note matures on May 1, 2004. At December 31, 2003, Ryan Beck had a line
of credit facility with an unrelated financial institution in the amount of $10
million with an interest rate of LIBOR plus 1.50%. The line expires on April 1,
2004, and it is secured by certificates of deposit which Ryan Beck holds in
inventory in its certificate of deposit wholesale business. There were no
amounts outstanding under this facility at December 31, 2003.
Ryan Beck is subject to the net capital provision of Rule 15c3-1 under the
Exchange Act, which requires the maintenance of minimum net capital and requires
the ratio of aggregate indebtedness to net capital, both as defined, not to
exceed 15 to 1. Additionally, Ryan Beck, as a market maker, is subject to
supplemental requirements of Rule 15c3-1(a) 4, which provides for the
computation of net capital to be based on the number of and price of issues in
which markets are made by Ryan Beck, not to exceed $1.0 million. Ryan Beck's
regulatory net capital was $26.2 million, which was $25.2 million in excess of
its required net capital of $1.0 million.
Ryan Beck operates under the provisions of paragraph (k)(2)(ii) of Rule 15c3-3
of the SEC as a fully disclosed introducing broker and, accordingly, customer
accounts are carried on the books of the clearing broker. However, Ryan Beck
safe keeps and redeems municipal bond coupons for the benefit of its customers.
Accordingly, Ryan Beck is subject to the provisions of SEC Rule 15c3-3 relating
to possession or control and customer reserve requirements and was in compliance
with such provisions at December 31, 2003.
LEVITT LIQUIDITY AND CAPITAL RESOURCES
Levitt's primary sources of funds for each of the years in the three year period
ended December 31, 2003 were proceeds from the sale of real estate inventory,
distributions from real estate joint ventures, borrowings, proceeds from
development bonds payable and, in 2002, capital contributions from BankAtlantic
Bancorp. These funds were primarily utilized for development, construction and
acquisition of real estate, to repay borrowings, to pay general and
administrative expenses, to invest in real estate joint ventures, and, in 2002,
to invest in Bluegreen.
Levitt expects to meet its short-term liquidity requirements generally through
net cash provided by operations and existing cash balances. Levitt expects to
meet its long-term liquidity requirements, such as acquisitions and debt service
obligations, primarily with net cash provided by operations, long-term secured
and unsecured indebtedness and future issuances of equity and debt securities,
including the proposed equity offering described below.
As a result of the spin-off, Levitt will not receive any future capital
contributions from BankAtlantic Bancorp. Levitt's management believes that the
other available sources identified above will be adequate for current needs,
however additional sources of funding will be required to fund desired growth.
These may take the form of equity offerings (such as the proposed offering
described below) or the issuance of secured indebtedness or subordinated debt.
As of December 31, 2003, 2002 and 2001, Levitt had cash and cash equivalents of
$36.0 million, $16.0 million and $23.6 million, respectively.
On February 23, 2004, Levitt filed a registration statement on Form S-3 for a
proposed underwritten public offering of up to 5,750,000 shares of Levitt Class
A Common Stock. Copies of the prospectus relating to this offering may be
obtained by contacting: Corporate Communications, Levitt Corporation, P.O. Box
5403, Fort Lauderdale, Florida 33310. The net proceeds of the offering, if
completed, will be used to repay approximately $13.9 million of indebtedness, to
fund Levitt's growth, both internally and through acquisitions, and for general
corporate purposes. Levitt's management believes that this offering will improve
Levitt's capital structure by increasing its common equity capitalization
relative to its current indebtedness.
At December 31, 2003, Levitt's consolidated debt was approximately $174.1
million, including $43.5 million of indebtedness due to BankAtlantic Bancorp and
$18.1 million due to BankAtlantic.
Levitt's anticipated debt payment obligations for the 12 months beginning
December 31, 2003 total $20.2 million. Levitt's ability to meet its debt service
and other obligations, to refinance its indebtedness and to fund planned capital
expenditures
64
will depend upon Levitt's future performance. Levitt's business may not generate
sufficient cash flow from operations, and future borrowings may not be available
under its existing credit facilities or any other financing sources in an amount
sufficient to enable Levitt to service its indebtedness or to fund other
liquidity needs. Levitt may need to refinance all or a portion of its debt on or
before maturity, which Levitt may not be able to do on favorable terms or at
all.
Levitt has entered into various loan agreements that provide financing for
acquisition and site improvements and construction of residential units. As of
December 31, 2003, these loan agreements provided in the aggregate for advances,
subject to available collateral, on a revolving basis up to a maximum of $204.5
million, of which $120.0 million was outstanding. The loans are secured by
mortgages on properties, including improvements. Principal payments are required
as sales of the collateral are consummated. Certain notes and mortgage notes
provide that events of default include a change in ownership, management or
executive management.
Levitt borrowed $15 million from an unaffiliated financial institution to
finance the purchase of Levitt and Sons. The obligation is secured by Levitt's
membership interest in Levitt and Sons. At December 31, 2003, $8.4 million was
outstanding under this loan, and Levitt intends to repay this loan with the
proceeds, if any, of the proposed equity offering described above. At December
31, 2003, Levitt and Sons had a credit agreement with an unaffiliated financial
institution to provide a working capital line of credit of $10.0 million. Levitt
has guaranteed amounts outstanding under the line of credit, but the guarantee
is limited to a security interest evidenced by a second priority lien on
Levitt's membership interest in Levitt and Sons. At December 31, 2003, $1.0
million was outstanding under this line of credit. The credit facility matures
in September 2005.
On September 30, 2003, the SEC declared effective Levitt's Registration
Statement on Form S-1 for the public offering of up to $100 million of unsecured
subordinated investment notes. The investment notes are unsecured obligations of
Levitt and are subordinated to substantially all of Levitt's other liabilities.
The investment notes are not guaranteed by any of Levitt's subsidiaries or any
other entity. At December 31, 2003, Levitt had $52.8 million of debt and other
liabilities ranking senior in right of payment to the investment notes. On a
consolidated basis, Levitt had $266.0 million of senior indebtedness at December
31, 2003. Approximately $1.3 million of investment notes were outstanding as of
December 31, 2003. In late 2003, Levitt ceased advertising the offering of the
investment notes, and in March 2004, the unsold notes under the registration
statement were deregistered. However, Levitt currently anticipates that during
the next 12 months it may issue up to $100 million of debt securities that may
consist of investment notes, subordinated debt, senior debt or other similar
securities.
In April 2002, Levitt received an $18.6 million capital contribution and
borrowed $30.0 million from BankAtlantic Bancorp. These funds were utilized,
together with $5.2 million of working capital, to purchase a 34% interest in
Bluegreen's common stock. The $30.0 million loan was due on demand and bore
interest, payable monthly at the prime rate minus 25 basis points, but this note
was modified in connection with the spin-off as described below.
In connection with BankAtlantic Bancorp's spin-off of Levitt, BankAtlantic
Bancorp converted the $30.0 million demand note described above to a five year
term note with interest only payable monthly initially at the prime rate and
thereafter at the prime rate plus increments of an additional 0.25% every six
months beginning in June 2004. BankAtlantic Bancorp also transferred its 4.9%
ownership interest in Bluegreen to Levitt in exchange for a $5.5 million note
and additional shares of Levitt's common stock (which additional shares were
distributed in the spin-off). This note is due in one year, with interest and
principal payable monthly and bearing interest at the prime rate. Levitt intends
to repay this loan with proceeds, if any, of the proposed equity offering
described above. Additionally, prior to the spin-off, Levitt declared an $8.0
million dividend to BankAtlantic Bancorp payable in the form of a note with the
same payment terms as the $30.0 million note described above. The restructuring
of the $30.0 million demand note and the incurrence of the additional
indebtedness in connection with the spin-off will result in an additional annual
interest expense of almost $600,000 based on interest rates at December 31,
2003. All of the spin-off related transactions are eliminated in BFC's
statements of financial condition and results of operations. Additionally, it is
anticipated that Levitt's general and administrative expenses will increase due
to expenses associated with being a public company.
At December 31, 2003, 2002 and 2001, Levitt's total borrowings from
BankAtlantic, excluding joint ventures, were approximately $18.1 million, $27.5
million and $27.9 million, respectively. These loans and loans due to
BankAtlantic Bancorp described above were eliminated in BFC's consolidated
statements of financial position. As an "affiliate" of BankAtlantic, the amounts
that BankAtlantic is permitted to lend to Levitt are now restricted by
applicable OTS regulations, and accordingly, financing may only be available
from unaffiliated third party lenders.
65
Some of Levitt's borrowings contain covenants that, among other things, require
Levitt to maintain certain financial ratios and a minimum net worth. These
covenants may have the effect of limiting the amount of debt that Levitt can
incur in the future and restricting the payment of dividends by Levitt and it's
subsidiaries. At December 31, 2003, Levitt was in compliance with all loan
agreement financial covenants. Levitt's financial covenants currently include:
o a requirement of a minimum tangible net worth of $55.6 million
of Levitt on a consolidated basis and $32.0 million at Levitt
and Sons and $5.0 million at Levitt Commercial;
o unrestricted liquidity of Levitt of not less than $3.0
million; and
o a maximum debt to unaffiliated entities to tangible net worth
ratio, as defined, of 1.5 to 1 for Levitt and 3.0 to 1.0 for
Levitt and Sons.
Levitt has provided guarantees on indebtedness of joint ventures accounted for
under the equity method of accounting. The guarantees were required for both
Levitt and Levitt's joint venture partners to obtain financing for the joint
ventures. Levitt and its joint venture partners would be required to perform on
its guarantees if the joint ventures default on the various loan agreements. At
December 31, 2003 and December 31, 2002, Levitt had guarantees on $22.4 million
and $22.7 million, respectively, of joint venture debt. Levitt's management
believes that, based on the loans' collateral, no payments will be required
under the guarantees.
In connection with the development of certain of Levitt's communities, community
development or improvement districts have been established. These districts may
utilize bond financing to fund construction or acquisition of certain on-site
and off-site infrastructure improvements that may be performed by Levitt near or
at these communities. The obligation to pay principal and interest on the bonds
issued by the districts is assigned to each parcel within the district and a
priority assessment lien may be placed on benefited parcels to provide security
for the debt service. The bonds, including interest and redemption premiums, if
any, and the associated priority lien on the property typically are payable,
secured and satisfied by revenues, fees, or assessments levied on the benefited
property. Levitt pays a portion of the revenues, fees, and assessments levied by
the districts on the properties Levitt still owns that are benefited by the
improvements and may also agree to pay down a specified portion of the bonds at
the time of each unit or parcel closing.
In accordance with Emerging Issues Task Force Issue 91-10 ("EITF 91-10"),
Accounting for Special Assessments and Tax Increment Financing, Levitt records a
liability, net of cash held by the districts available to offset the particular
bond obligation, for the estimated developer obligations that are fixed and
determinable and user fees that are required to be paid or transferred at the
time the parcel or unit is sold to an end user. Levitt reduces this liability by
the corresponding assessment assumed by property purchasers and the amounts paid
by Levitt at the time of closing and transfer of the property. Interest is
calculated and paid based upon the gross bond obligation.
During the fourth quarter of 2003, a development district for the Tradition
master-planned community issued $62.8 million of long-term assessment bonds to
refinance $28.9 million of previously issued and outstanding bond anticipation
notes and to provide financing for infrastructure development. The development
district assesses property owners to fund debt service and the ultimate
repayment of the bonds. Levitt is assessed based on our pro-rata ownership of
the property in the district. At December 31, 2003, Levitt owned approximately
95% of the property in the district. Levitt's pro-rata share of the assessment
transfers to third party purchasers upon property sales. The assessments are
projected to be levied beginning in 2005. In accordance with EITF 91-10, an
expense will be recognized for the pro rata portion of assessments, based upon
Levitt's ownership of benefited property.
At December 31, 2003, Levitt had commitments to purchase properties for
development of $146.7 million, of which approximately $114.0 million is subject
to due diligence and satisfaction of certain requirements and conditions, as
well as the obtaining of financing.
66
CONSOLIDATED CASH FLOWS
A summary of our consolidated cash flows follows (in thousands):
For the Years Ended December 31,
-------------------------------------------------
2003 2002 2001
--------- --------- ---------
Net cash provided (used) by:
Operating activities $ 95,988 $ (3,317) $ 80,641
Investing activities
150,781 279,444 (7,023)
Financing activities
(355,804) (148,089) (37,688)
--------- --------- ---------
(Decrease) increase in cash and cash
equivalents $(109,035) $ 128,038 $ 35,930
========= ========= =========
Cash flows from operating activities increased during 2003 compared to 2002 due
primarily to increases in other liabilities and amounts due to clearing agent.
The above increases in cash flows were partially offset by a substantial
decrease in securities owned activities.
Cash flows from operating activities decreased during 2002 compared to 2001 due
to increases in real estate inventory and loans held for sale along with
decreases in other liabilities and amounts due to clearing agent. These declines
in operating cash flows were partially offset by a decline in securities owned
as well as a significant increase in impairments and write-downs.
Cash flows from investing activities decreased during 2003 compared to 2002
resulting primarily from greater purchases and originations of loans, net of
repayments, and lower proceeds from the sale and maturity of securities. These
decreases in cash flows from investing activities were partially offset by lower
investments in unconsolidated subsidiaries and reduced purchases of investments.
Cash flows provided by investing activities increased during 2002 compared to
2001 primarily due to increased proceeds from sales and maturities of securities
available for sale and investment securities.
Cash flows from financing activities declined during 2003 compared to 2002
primarily as a result of increases in FHLB maturities and repayments. The
decreases were partially offset by a net increase in deposits and a net increase
in securities sold under agreements to repurchase.
Cash flows from financing activities declined during 2002 compared to 2001
primarily as a result of a decline in FHLB advances and short-term borrowings,
the retirement of certain trust preferred securities and debentures and a
decline in the increase in deposits. The above cash outflows were partially
offset by the issuance of trust preferred securities and additional borrowings.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS
The table below summarizes the Company's commercial commitments at December 31,
2003 (in thousands):
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------------------
Total
Amounts Less Than After 5
Commercial Commitments Committed 1 Year 1-3 Years 4-5 Years Years
- ---------------------- --------- --------- --------- ------------- --------
Lines of credit $468,991 $152,669 $ 9,954 $ -- $306,368
Standby letters of credit 32,292 32,292 -- -- --
Other commercial commitments 428,084 428,084 -- -- --
Other commitments 8,611 -- 8,611 -- --
-------- -------- -------- ------------- --------
Total commercial commitments $937,978 $613,045 $ 18,565 $ -- $306,368
-------- -------- -------- ------------- --------
Lines of credit are primarily revolving lines to home equity loan and business
loan customers. The business lines of credit usually expire in less than one
year and the home equity lines generally expire in 15 years.
Standby letters of credit are conditional commitments issued by BankAtlantic to
guarantee the performance of a customer to a third party. BankAtlantic standby
letters of credit are generally issued to customers in the construction industry
guaranteeing
67
project performance. These types of standby letters of credit had a maximum
exposure of $26.1 million at December 31, 2003. BankAtlantic also issues standby
letters of credit to commercial lending customers guaranteeing the payment of
goods and services. These types of standby letters of credit had a maximum
exposure of $5.6 million at December 31, 2003. Those guarantees are primarily
issued to support public and private borrowing arrangements and have maturities
of one year or less. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
BankAtlantic may hold certificates of deposit and residential and commercial
liens as collateral for such commitments which are collateralized similar to
other types of borrowings.
Other commercial commitments are agreements to lend funds to a customer as long
as there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. BankAtlantic evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral required by
BankAtlantic in connection with an extension of credit is based on management's
credit evaluation of the counter-party.
Other commitments consists of a 5-year forward commitment to purchase the
underlying collateral from a government agency pool in March 2005.
Ryan Beck, in its capacity as a market-maker and dealer in corporate and
municipal fixed-income and equity securities, may enter into transactions in a
variety of cash and derivative financial instruments in order to facilitate
customer order flow and to hedge market risk exposures. Accordingly, these
transactions result in off-balance-sheet risk as Ryan Beck's ultimate obligation
may exceed the amount recognized in the Consolidated Statement of Financial
Condition.
As a securities broker and dealer, Ryan Beck is engaged in various securities
trading and brokerage activities servicing a diverse group of domestic
corporations, governments, institutional, and individual investors. Ryan Beck
has exposure to risk associated with the nonperformance of these counter-parties
in fulfilling their contractual obligations.
In connection with the development of certain of Levitt communities, Levitt has
established community development districts to access bond financing for the
funding of infrastructure development and other projects within the community.
No liability is recorded for the repayment of principal and interest on the
bonds until a district levies assessments on the properties Levitt owns within
the district. As of December 31, 2003, a development district in Tradition had
$62.8 million of community development district bonds outstanding for which no
assessments had been levied. As of December 31, 2003, Levitt owned approximately
95% of the property in the district. See "Levitt Liquidity and Capital
Resources"
Levitt has provided guarantees on $22.4 million of indebtedness for certain of
its joint ventures. Based on the loans' collateral Levitt believes that it is
not reasonably likely that any payments will be required under these guarantees.
See "Levitt Liquidity and Capital Resources"
At December 31, 2003, the Company did not have any other off balance sheet
arrangements that would have a material effect on the Company's consolidated
financial statements.
68
The table below summarizes the Company's contractual obligations at December 31,
2003 (in thousands).
Payments Due by Period
----------------------------------------------------------------------------------
Less Than After 5
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years Years
- ----------------------- ---------- ---------- ---------- ---------- ----------
Time deposits $ 802,462 $ 474,063 $ 292,497 $ 35,489 $ 413
Long-term debt 299,861 2,785 856 -- 296,220
Notes, mortgage notes payable
and development bonds payable 127,505 13,926 51,992 59,626 1,961
Advances from FHLB (1) 782,205 56,250 61,250 542,000 122,705
Operating lease obligations 55,479 13,223 20,291 11,603 10,362
Pension obligation 11,536 -- 2,595 1,918 7,023
Purchase obligations 146,652 146,652 -- -- --
Other obligations 7,229 7,229 -- -- --
Securities sold but not yet purchased 37,813 37,813 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $2,270,742 $ 751,941 $ 429,481 $ 650,636 $ 438,684
---------- ---------- ---------- ---------- ----------
(1) Payments due by period are based on contractual maturities.
Long-term debt primarily consists of the junior subordinated debentures issued
by BankAtlantic Bancorp, as well as BankAtlantic's subordinated debentures and
mortgage backed bonds. Notes, mortgage notes payable and development bonds
related to Levitt's borrowings, primarily to its real estate acquisition and
development loans, as well as BFC's Holding Company borrowings of approximately
$15 million. Operating lease obligations represent minimum future lease payments
under real estate, equipment leases, and rent commitments.
Securities sold but not yet purchased represent obligations of Ryan Beck to
deliver specified financial instruments at contracted prices, thereby creating a
liability to purchase the financial instrument in the market at prevailing
prices.
The pension obligation represents the accumulated benefit obligation of
BankAtlantic Bancorp's defined benefit plan at December 31, 2003. The amount
represents the estimated benefit payments through 2013, the majority of which
will be funded through plan assets. The table does not include estimated benefit
payments after 2013. The actuarial present value of projected accumulated
benefit obligation was $23.1 million at December 31, 2003.
Purchase obligations consist of contracts to acquire real estate properties for
development and sale; however, Levitt's liability for not completing the
purchase of any such property is generally limited to the deposit Levitt makes
under the relevant contract, none of which exceeds $500,000 individually. See
"Levitt Liquidity and Capital Resources". Other obligations are legally binding
agreements with vendors for the purchase of services and materials associated
with the construction of BankAtlantic's corporate headquarters. The facility is
expected to be completed in October 2004.
RELATED PARTY TRANSACTIONS
Alan B. Levan, President and Chairman of the Board of the Company also serves as
Chairman of the Board and Chief Executive Officer of BankAtlantic Bancorp and
BankAtlantic. Alan B. Levan is also Chairman of the Board of Bluegreen and
Levitt. John E. Abdo, Vice Chairman of the Board of the Company also serves as
Vice Chairman of the Board of Directors of BankAtlantic Bancorp, BankAtlantic,
Levitt and Bluegreen, and is President of Levitt. Glen R. Gilbert, Executive
Vice President of the Company also serves as Executive Vice President of Levitt.
These executive officers separately receive compensation from our affiliates for
services rendered for such affiliates.
The Company's management fees from related parties for the years ended December
31, 2003, 2002 and 2001 consisted of (in thousands):
For the Years Ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Levitt $213 170 80
==== ==== ====
Other affiliates $ 10 41 44
==== ==== ====
69
In connection with the Levitt spin-off, BankAtlantic Bancorp entered into a
transitional services agreement with Levitt whereby BankAtlantic Bancorp will
provide human resources, risk management and investor and public relation
services and receive compensation for such services in an amount not in excess
of the amount which would be charged by a third party. Additionally,
BankAtlantic Bancorp entered into an employment matters agreement providing for
the allocation of responsibility and liability between BankAtlantic Bancorp and
Levitt with respect to the welfare and benefit plans for Levitt employees after
the spin-off.
Also in connection with the spin-off of Levitt, BankAtlantic Bancorp converted a
currently outstanding $30.0 million demand note owed by Levitt to BankAtlantic
Bancorp to a five year term note with interest only payable monthly initially at
a prime rate and thereafter at the prime rate plus increments of an additional
0.25% every six months. Prior to the spin-off, BankAtlantic Bancorp transferred
its 1.2 million shares in Bluegreen to Levitt in exchange for $5.5 million note
and additional shares of Levitt common stock (which additional shares were
distributed as part of the spin-off transaction.) This note is due in one year,
with principal and interest payable monthly. Additionally, prior to the
spin-off, Levitt declared an $8.0 million dividend to BankAtlantic Bancorp
payable in the form of a five-year note with the same payment terms as the $30.0
million note described above. The above transactions were eliminated in the
Company's consolidated financial statements.
The Company paid BankAtlantic approximately $67,000 during 2003 for office space
used by the Company in BankAtlantic's headquarters and for miscellaneous
administrative and other related expenses. BankAtlantic provided certain
administrative services to Bluegreen in 2003 without receipt of payment for such
services.
During the year ended December 31, 2003, BankAtlantic paid a subsidiary of
Levitt a $540,000 management fee to operate and sell a residential construction
property acquired by BankAtlantic through foreclosure. The property was sold to
an unrelated developer during the fourth quarter of 2003.
In 1994, the Company agreed to participate in certain real estate opportunities
with John E. Abdo and certain of his affiliates (the "Abdo Group"). Under the
arrangement, the Company and the Abdo Group share equally in profits after
interest earned by the Company on advances made by the Company. The Company
bears any risk of loss under the arrangement with the Abdo Group. Pursuant to
this arrangement, in December 1994, an entity controlled by the Company acquired
from an unaffiliated seller approximately 70 acres of unimproved land known as
the "Center Port" property in Pompano Beach, Florida. Through December 31, 2001,
all of the project except for land under two pylon signs, a cell tower site and
the lake had been sold to unaffiliated third parties for approximately $21.4
million and the Company recognized net gains from the sales of real estate of
approximately $4.8 million. The Abdo Group received approximately $2.6 million
in 2000 from the Company for their real estate sales profit participation.
During 1999 and 2000, the Company (without consideration of BankAtlantic
Bancorp) acquired interests in unaffiliated technology entities. During 2000 and
2001, the Company's interests in the technology entities were transferred at the
Company's cost to specified asset limited partnerships. Subsidiaries of the
Company are the controlling general partners of these venture partnerships, and
therefore, they are consolidated in the Company's financial statements.
Interests in such partnerships were sold in 2000 and 2001 to accredited
investors in private offerings. During 2000, approximately $5.1 million of
capital was raised by these partnerships from unaffiliated third parties, as
well as officers, directors and affiliates of the Company who invested
approximately $4.4 million in the partnerships. The Company and the general
partners retained ownership interests of approximately $1.8 million.
Additionally, during 2001, approximately $895,000 of capital was raised from
unaffiliated third parties by one of these partnerships and officers, directors
and affiliates of the Company invested approximately $1.3 million in the
partnership. The Company and the general partners retained ownership interests
of approximately $3.8 million increasing the Company's total investment in these
partnerships to an aggregate of $5.6 million. Of the $1.3 million invested by
officers, directors and affiliates, Alan Levan and John Abdo each borrowed
$500,000 from the Company on a recourse basis and Glen Gilbert, Executive Vice
President, and Earl Pertnoy, a director of the Company each borrowed $50,000 on
a non-recourse basis to make their investments. Such amounts were still
outstanding at the end of the year (except for John Abdo's $500,000 loan which
is discussed below), bear interest at the prime rate plus 1% and are payable
interest only annually with the entire balance due in February 2006. After the
limited partners receive a specified return from the partnerships, the general
partners are entitled to receive 20% of all cash distributions from the
partnerships. The general partners are limited liability companies of which the
members are: BFC Financial Corporation - 57.5%, John E. Abdo - 13.75%; Alan B.
Levan - 9.25%; Glen R. Gilbert - 2.0% and John E. Abdo, Jr. - 17.5%. Losses net
of minority interests for the year ended December 31, 2003 were $1.8 million. At
December 31, 2003, the Company's net investment in these partnerships was
$626,000
70
On July 16, 2002, John Abdo borrowed $3.5 million from the Company on a recourse
basis and paid off the previously described $500,000 loan due to the Company.
The $3.5 million loan bears interest at the prime rate plus 1%, requires monthly
interest payments, is due on demand and is secured by 2,127,470 shares of BFC
Class A Common Stock and 370,750 shares of BFC Class B Common Stock.
An affiliated limited partnership, BankAtlantic Bancorp and affiliates of the
Company are investors in a privately held technology company located in Boca
Raton, Florida. The affiliated limited partnership invested $2 million in
219,300 shares in the technology company's common stock, which shares were
acquired in October 2000 at a price per share of $9.12. At December 31, 2001,
the carrying value of this investment by the limited partnership had been
written down to $4.95 per share and in 2002, based on its performance, the
technology company was written off entirely by the Company and Bancorp.
BankAtlantic Bancorp invested $15 million in 3,033,386 shares of the technology
company's common stock in cash and by issuance to the technology company of
748,000 shares of BankAtlantic Bancorp Class A Common Stock. BankAtlantic
Bancorp's shares in the technology company were acquired in October 1999 at an
average price per share of $4.95. Both Alan B. Levan and John E. Abdo became
directors of the technology company in connection with the investment. Alan B.
Levan owns or controls direct and indirect interests in an aggregate of 286,709
shares of the technology company common stock, purchased at an average price per
share of $8.14 and Mr. John E. Abdo owns or controls direct and indirect
interests in an aggregate of 368,408 shares of the technology company common
stock purchased at an average price per share of $7.69. Jarett Levan, a director
of BankAtlantic Bancorp and Executive Vice President of BankAtlantic, and Bruno
DiGiulian, a director of BankAtlantic Bancorp have a 0.15% and 0.7% ownership
interest, respectively, in the limited partnership. BFC and its affiliates
collectively owned approximately 7% of the technology company's outstanding
common stock at December 31, 2003. During 2001, Mr. Levan and Mr. Abdo resigned
from the Board of Directors of the technology company and initiated a lawsuit on
behalf of the Company and others against the founder of the technology company,
personally, regarding his role. In early 2003, the technology company initiated
a lawsuit against BankAtlantic Bancorp seeking to have a restrictive legend on
its BankAtlantic Bancorp's Class A Common Stock removed. On March 24, 2004, the
parties settled the pending litigation. Pursuant to the terms of the settlement,
the affiliated limited partnership, BankAtlantic Bancorp and the other
affiliates of the Company were given the opportunity to sell their respective
investments in the technology company to a third party investor group for the
amount of their initial investment. The investor group and the technology
company also agreed to pay an additional amount equal to the legal expenses
incurred and damages. The amounts paid by the technology company were paid by
delivery of shares of BankAtlantic Bancorp Class A Common Stock owned by the
technology company. BankAtlantic Bancorp sold its shares in the technology
company for $15 million in cash, its original cost, and received compensation
for legal expenses and damages consisting of $1.7 million in cash and return of
378,000 shares of BankAtlantic Bancorp Class A Common Stock. The affiliated
limited partnership and other affiliates of the Company chose not to sell their
shares in the technology company but recovered legal fees and damages. The
affiliated limited partnership received $309,845 in cash and 50,422 shares of
BankAtlantic Bancorp Class A Common Stock in connection with the settlement and
the Company's other affiliates, without regard to their interests in the
affiliated partnership, received in the aggregate $132,747 in cash and 29,413
shares of BankAtlantic Bancorp Class A Common Stock. The parties also exchanged
releases and the pending litigation between the parties will be dismissed in
connection with the settlement.
BankAtlantic Bancorp and its subsidiaries utilized certain services of Ruden,
McClosky, Smith, Schuster & Russell, P.A. ("Ruden, McClosky"), a law firm to
which Bruno DiGiulian is of counsel. Fees aggregating approximately $110,000
were paid by BankAtlantic and $30,000 were paid by Ryan Beck to Ruden, McClosky
in 2003. In addition, fees aggregating $1.1 million were paid to Ruden, McClosky
by Levitt and Bluegreen in 2003. In 2002 and 2001, fees aggregating
approximately $1.0 million and $793,000, respectively, were paid to the law firm
by BankAtlantic and Levitt Corporation. Ruden, McClosky also represents Alan B.
Levan and John E. Abdo with respect to certain other business interests.
Since 2002, Levitt has utilized certain services of Conrad & Scherer, a law firm
in which William R. Scherer, a member of Levitt's Board of Directors, is a
member. Levitt paid fees aggregating $79,000 and $364,000 to this firm during
the years ended December 31, 2003 and 2002, respectively.
Alan B. Levan, Jarett Levan and John E. Abdo have investments or are partners in
real estate joint ventures with developers, in connection with other ventures,
have outstanding loans from BankAtlantic or are joint venture partners with
Levitt.
Certain of the Company's affiliates, including its executive officers, have
independently made investments with their own funds in both public and private
entities in which the Company holds investments.
The Company has a 49.5% interest and affiliates and third parties have a 50.5%
interest in a limited partnership formed in 1979, for which the Company's
Chairman serves as the individual General Partner. The partnership's primary
asset is real estate subject to net lease agreements. The Company's cost for
this investment, approximately $441,000, was written off in
71
1990 due to the bankruptcy of the entity leasing the real estate. During each of
the years 2003 and 2002, the Company received distributions of approximately
$25,000 from the partnership.
Florida Partners Corporation owns 133,314 shares of the Company's Class B Common
Stock and 764,999 shares of the Company's Class A Common Stock. Alan B. Levan
may be deemed to beneficially be the principal shareholder and is a member of
the Board of Florida Partners Corporation. Glen R. Gilbert, Executive Vice
President and Secretary of the Company holds similar positions at Florida
Partners Corporation.
The BankAtlantic Foundation is a non-profit foundation established by
BankAtlantic. During 2003, the Foundation made donations aggregating $364,530,
including $25,000 to the Broward Community College Foundation (as the first
installment of a 4-year commitment of $100,000 to the Will and Jo Holcombe
Institute for Teaching and Learning), $15,000 to the Florida Grand Opera, $7,500
to the Leadership Broward Foundation, $7,500 to Nova Southeastern University
(including $5,000 as the first installment of a 5-year, $25,000 commitment to
the Wayne Huizenga School of Business and $2,500 to Nova Southeastern University
Libraries); $4,250 to ArtServe, $3,000 to the Broward Performing Arts Foundation
and $2,000 to the Museum of Art of Ft. Lauderdale. In addition to the
contributions made by the BankAtlantic Foundation, BankAtlantic made certain
direct contributions. In 2003 BankAtlantic made donations of $11,500 to the
Broward Community College Foundation, $10,963 to the Urban League of Broward
County, $6,000 to ArtServe, $1,160 to United Way of Broward County and $900 to
the Leadership Broward Foundation. Alan B. Levan sits on the Boards of the
Broward Community College Foundation, the Florida Grand Opera and Nova
Southeastern University, Jarett Levan sits on the Boards of the Leadership
Broward Foundation and ArtServe and the Board of Governors of the Museum of Art
of Ft. Lauderdale, John E. Abdo is President of the Broward Performing Arts
Foundation, Dr. Willis Holcombe sits on the Boards of the Broward Community
College Foundation and the Urban League of Broward County. In addition both D.
Keith Cobb and Lloyd DeVaux sit on the Board of the United Way of Broward County
which may further provide funds to these entities.
During fiscal 2003, Jarett Levan, a director and son of director, president and
CEO Alan B. Levan, was employed by BankAtlantic as Chief Marketing Officer and
was paid approximately $211,000 for his services. Alan B. Levan's daughter,
Rachelle Levan Margolis, served as executive director of the BankAtlantic
Foundation and received approximately $43,000 for the year. For the years ended
December 31, 2002 and 2001, Jarett Levan received approximately $170,000 and
$145,000, respectively, while Rachelle Levan Margolis received approximately
$102,000 and $88,000, respectively.
Included in BFC's other assets at December 31, 2003 and 2002 were approximately
$138,000 and $391,000, respectively due from affiliates.
CRITICAL ACCOUNTING POLICIES
Management views critical accounting policies as accounting policies that are
important to the understanding of our financial statements and also involve
estimates and judgments about inherently uncertain matters. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated statements
of financial condition and assumptions that affect the recognition of income and
expenses on the statement of operations for the periods presented. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in subsequent periods relate
to the determination of the allowance for loan losses, evaluation of goodwill
for impairment, the valuation of real estate acquired in connection with
foreclosure or in satisfaction of loans, the valuation of the fair value of
assets and liabilities in the application of the purchase method of accounting,
the amount of the deferred tax asset valuation allowance, the valuation of real
estate held for development and equity method investments and accounting for
contingencies. The seven accounting policies that we have identified as critical
accounting policies are: (i) allowance for loan losses; (ii) valuation of
securities; (iii) impairment of goodwill and other intangible assets; (iv)
impairment of long-lived assets; (v) real estate held for development and sale
and equity method investments, (vi) accounting for business combinations and
(vii) accounting for contingencies. We have discussed the critical accounting
estimates outlined below with our audit committee of our board of directors, and
the audit committee has reviewed our disclosure. See note 1, Summary of
Significant Accounting Policies to the Notes to Consolidated Financial
Statements, for a detailed discussion of our significant accounting policies.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of three components. The first component
requires the identification of impaired loans based on management's
classification and, if necessary, assign a valuation allowance to the impaired
loans. A loan is deemed impaired when collection of principal and interest based
on the contractual terms of the loan is not likely to occur. Most loans do not
have an observable market price and an estimate of the collection of contractual
cash flows is based on the
72
judgment of management. Valuation allowances are established on loans that are
collateral-dependent based on management's estimated fair value of the
collateral less the cost to dispose of the collateral. Valuation allowances are
established on unsecured loans based on the present value of expected future
cash flows, discounted at the note's effective rate. These valuations are based
on available information and require estimates and subjective judgments about
fair values of the collateral or expected future cash flows. It is likely that
materially different results would be obtained if different assumptions or
conditions were to prevail. This would include updated information that came to
management's attention about the loans or a change in the current economic
environment. As a consequence of the estimates and assumptions required to
calculate the first component of the allowance for loan losses, a change in
these highly uncertain estimates could have a materially favorable or
unfavorable impact on our financial position and results of operations.
The second component of the allowance requires the grouping of loans and leases
that have similar credit risk characteristics so as to form a basis for
predicting losses based on historical data and delinquency trends as it relates
to the group. Management assigns an allowance to these groups of loans by
utilizing observable data such as historical loss experiences, trends in the
industry, static pool analysis, delinquency trends and credit scores. These loss
experiences assigned to loan groups are primarily based on historical data and
current delinquency trends. As a consequence, there may be a lag in the
adjustment to historical loss experiences when there is a significant change in
observable data in subsequent periods. A subsequent change in observable data
trends may result in material changes in this component of the allowance from
period to period.
The third component of the allowance is the unassigned portion of the allowance.
This component addresses certain industry and geographic concentrations, the
view of regulators, and changes in the composition of the loan portfolio. This
component requires substantial management judgment in adjusting the allowance
for the changes in the current economic climate compared to the economic
environment that existed historically. Due to the subjectivity involved in the
determination of the unassigned portion of the allowance, the relationship of
the unassigned component to the total allowance may fluctuate substantially from
period to period.
Management believes that the allowance for loan losses reflects management's
best estimate of incurred credit losses as of the balance sheet date. As of
December 31, 2003, the allowance for loan losses was $46.7 million. See
"Provision for Loan Losses" for a discussion on the amounts of the allowance
assigned to each loan product and the amount of the unassigned allowance. The
estimated allowance derived from the above methodology may be significantly
different from actual realized losses. Actual losses incurred in the future are
highly dependent upon future events, including the economies of geographic areas
where loans are located. These uncertainties are beyond management's control. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require additions to the allowance based on their judgments and information
available to them at the time of their examination.
On an on-going basis, the loan portfolio is monitored based on the loan mix,
credit quality, historical trends and economic conditions. As a consequence, the
allowance for loan losses estimates will change from period to period. A measure
of this change is the ratio of the allowance for loan losses to total loans.
This ratio has declined from 1.66% at December 31, 2000 to 1.28% at December 31,
2003. If the historical loss experience in the assigned portion of the allowance
for loan losses was increased or decreased by 25 basis points at December 31,
2003, pre-tax earnings before minority interest are estimated to increase or
decrease by approximately $9 million.
VALUATION OF SECURITIES AND TRADING ACTIVITIES
We record securities available for sale, securities owned and derivative
instruments in our statement of financial condition at fair value. The following
three methods are used for valuation: obtaining market price quotes, using a
price matrix, and applying a management valuation model.
73
The following table provides the sources of fair value for securities available
for sale, securities owned and derivative instruments at December 31, 2003 (in
thousands):
National
Market Price Price Valuation
Quotes Matrix Model Total
------------ --------- --------- ---------
SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities $ -- $ 338,751 $ -- $ 338,751
Other securities -- -- 1,335 1,335
Equity securities 20,356 -- -- 20,356
--------- --------- --------- ---------
Total securities available for sale 20,356 338,751 1,335 360,442
--------- --------- --------- ---------
BROKERAGE INDUSTRY SECURITIES
Securities owned 124,565 -- -- 124,565
Securities sold not yet purchased (37,813) -- -- (37,813)
--------- --------- --------- ---------
TOTAL BROKERAGE INDUSTRY SECURITIES 86,752 -- -- 86,752
--------- --------- --------- ---------
Interest rate swap contracts -- -- 13 13
--------- --------- --------- ---------
TOTAL $ 107,108 $ 338,751 $ 1,348 $ 447,207
========= ========= ========= =========
Equity securities available for sale trade daily on various stock exchanges and
are primarily exchange-traded mutual funds. The fair value of these securities
in our statement of financial condition was based on the closing price
quotations at period end. The closing quotation represents inter-dealer
quotations without retail markups, markdowns or commissions and do not
necessarily represent actual transactions. Equity securities available for sale
are adjusted to fair value monthly with a corresponding increase or decrease,
net of income taxes, to other comprehensive income. Declines in the fair value
of individual securities available for sale below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value.
A third-party service provides a price matrix fair value of debt securities
available for sale. The pricing matrix computes a fair value of debt securities
based on inputting the securities' coupon rate, maturity date and estimates of
future prepayment rates. The valuations obtained from the pricing matrix are not
actual transactions and will not be the actual amount realized upon sale. It is
likely that results would vary materially if different interest rate and
prepayment assumptions were used in the valuation. Debt securities available for
sale are adjusted to fair value monthly with a corresponding increase or
decrease, net of income taxes, to other comprehensive income.
Securities and future contracts to purchase residential loans that are not
listed on an exchange, and broker quotes that cannot be obtained are valued
based on a valuation model. Management estimates the valuation of these
securities and contracts based on market information available, principally
reviewing the issuer's financial statements and obtaining recent trades of
similar securities. This evaluation requires a significant amount of judgment in
assessing the estimated fair value. These estimates would be significantly
different if the assumptions concerning credit quality and projected cash flows
were changed.
At December 31, 2003, the fair value and net unrealized gain associated with
securities available for sale was $360.4 million and $10.3 million,
respectively. If interest rates were to decline by 200 basis points, the fair
value of the securities available for sale portfolio is estimated to increase by
$8 million. In contrast, if interest rates were to increase by 200 basis points,
the fair value of securities is estimated to decline by $9.1 million. The above
changes in value are based on various assumptions concerning prepayment rates
and shifts in the interest rate yield curve. Significantly different results are
likely if these assumptions were changed. At December 31, 2002 and 2001,
securities available for sale had a fair value of $713.1 million and $857.9
million, respectively, and unrealized gains were $22.9 million and $30.4
million, respectively.
Securities owned and securities sold but not yet purchased are accounted for at
fair value with changes in fair value included in earnings. The fair value of
these securities is determined by obtaining security values from various
sources, including dealer price quotations and price quotations for similar
instruments traded and management estimates. The majority of the securities
owned are listed on national markets or market quotes can be obtained from
brokers. The fair values of securities owned and securities sold but not yet
purchased are highly volatile and are largely driven by general market
conditions and changes in the market environment. The most significant factors
affecting the valuation of securities owned and securities sold but not yet
purchased is the lack of liquidity and credit quality of the issuer. Lack of
liquidity results when trading in a position or a market sector has slowed
significantly or ceased and quotes may not be available.
74
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are tested for impairment annually. The
test consists of determining the fair value of the reporting units and compares
the reporting units' fair value to its carrying value. The fair values of the
reporting units are estimated using discounted cash flow present value
techniques and management valuation models. While management believes the
sources utilized to arrive at the fair value estimates are reliable, different
sources or methods would yield different fair value estimates. These fair value
estimates require a significant amount of judgment. Changes in management's
valuation of its reporting units may affect future earnings through the
recognition of a goodwill impairment charge. At September 30, 2003 (the goodwill
impairment testing date) the fair value of the reporting units was greater than
their carrying value; therefore, goodwill was not impaired. If the fair value of
the reporting units declines below the carrying amount, the second step of the
impairment test would be performed. This step requires us to fair value all
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation. This allocation would include core deposit intangible
assets that are currently not recognized on our financial statements. These
unrecognized assets might result in a significant impairment of goodwill. At
December 31, 2003, total goodwill and other intangible assets were $88.7
million. The fair value of our reportable segments assigned goodwill exceeds the
carrying value by $261 million, $69 million, $36 million and $8.4 million for
commercial banking, bank investments, community banking, and Ryan Beck,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When testing a long-lived asset for recoverability, it may be
necessary to review estimated lives and adjust the depreciation period. Changes
in circumstances and the estimates of future cash flows as well as evaluating
estimated lives of long-lived assets are subjective and involve a significant
amount of judgment. A change in the estimated life of a long-lived asset may
substantially increase depreciation expense in subsequent periods. For purposes
of recognition and measurement of an impairment loss, we are required to group
long-lived assets at the lowest level for which identifiable cash flows are
independent of other assets. These cash flows are based on projections from
management reports which are based on subjective interdepartmental allocations.
Fair values are not available for many of our long-lived assets, and estimates
must be based on available information, including prices of similar assets and
present value valuation techniques. At December 31, 2003, total property and
equipment was $93.7 million.
Near the end of 2004, BankAtlantic expects to relocate its new corporate
headquarters. It is the intention of BankAtlantic's management to sell the land
and building that comprise its current headquarters, and the facility is
considered "held and used" with a book value of $3.9 million at December 31,
2003. Based upon property values indicated by the property's latest tax
assessments, management believes the carrying value of the facility is
recoverable.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE AND EQUITY METHOD INVESTMENTS
Real estate held for development and sale consists of the combined activities of
Levitt and its subsidiaries as well as the activities of a 50% owned real estate
joint venture in which BankAtlantic Bancorp is the primary beneficiary as
defined by FIN 46. As a consequence of the implementation of FIN 46 on July 1,
2003, the Company consolidated Riverclub in its financial statements effective
January 1, 2003. In periods prior to 2003, Riverclub was accounted for on the
equity method. Also included in real estate held for development and sale is the
Company's real estate, which includes Burlington Manufacturers Outlet Center, a
shopping center in North Carolina and the unsold land at the commercial
development, known as Center Port in Pompano Beach, Florida. At December 31,
2003 and 2002, real estate held for development and sale was $283.3 million and
$204.5 million, respectively.
Real estate held for development and sale includes land acquisition costs, land
development costs, interest and other construction costs, all of which are
accounted for in our financial statements at accumulated cost or when
circumstances indicate that the inventory is impaired at estimated fair value.
Estimated fair value is based on disposition of real estate in the normal course
of business under existing and anticipated market conditions. The evaluation
takes into consideration the current status of the property, various
restrictions, carrying costs, costs of disposition and any other circumstances
that may affect fair value, including management's plans for the property. Due
to the large acreage of land holdings, disposition in the normal course of
business is expected to extend over a number of years. Uncertainties associated
with the economy, interest rates and the real estate market in general may
significantly change the valuation of our real estate investments.
Land and indirect land development costs are accumulated and allocated to
various parcels or housing units using specific identification and allocation
based upon the relative sales value, unit or area methods. Direct construction
costs are assigned to housing units based on specific identification. Other
capitalized costs consist of capitalized interest, real estate taxes,
75
tangible selling costs, local government fees and field overhead incurred during
the development and construction period. Start-up costs and selling expenses are
expensed as incurred. Interest is capitalized as a component of inventory at the
effective rates paid on borrowings during the pre-construction and planning
stage and the periods that projects are under development. Capitalization of
interest is discontinued if development ceases at a project. Interest is
amortized to cost of sale as related homes, land and units are sold.
Revenue and all related costs and expenses from home and land sales are
recognized at the time that closing has occurred, when title and possession of
the property and the risks and rewards of ownership transfer to the buyer, and
when other sale and profit recognition criteria are satisfied as required under
accounting principles generally accepted in the United States of America for
real estate transactions. In order to properly match revenues with expenses, we
estimate construction and land development costs incurred but not paid at the
time of closing. Estimated costs to complete are determined for each closed home
and land sale based upon historical data with respect to similar product types
and geographical areas. The accuracy of estimates are monitored by comparing
actual costs incurred subsequent to closing to the estimate made at the time of
closing and making modifications to the estimates based on these comparisons. We
do not expect the estimation process to change in the future nor do we expect
actual results to materially differ from such estimates.
We account for joint ventures in which we have a 50% or less ownership interest
or a less than controlling interest using the equity method of accounting. Under
the equity method, the initial investment in a joint venture is recorded at cost
and is subsequently adjusted to recognize the Company's share of the joint
venture's earnings or losses. Joint venture investments and Levitt's investment
in Bluegreen are evaluated annually for other than temporary declines in value.
Evidence of other than temporary declines in value includes the inability of
the investee venture to sustain an earnings capacity that would justify the
carrying amount of the investment and consistent joint venture operating losses.
The evaluation is based on available information including condition of the
property and current and anticipated real estate market conditions. At December
31, 2003 and 2002, investments and advances to unconsolidated subsidiaries was
$106 million and $112.6 million, respectively. At December 31, 2003, investments
and advances to unconsolidated subsidiaries includes Levitt's investment in
Bluegreen of $70.9 million and $23.2 million in loans due to BankAtlantic from
Levitt's joint ventures.
ACCOUNTING FOR BUSINESS COMBINATIONS
The Company accounts for business combinations, such as the Community
acquisition, the Bluegreen equity investment and the Gruntal transaction, based
on the purchase method of accounting. The purchase method of accounting requires
to fair value the tangible net assets and identifiable intangible assets
acquired. The fair values are based on available information and current
economic conditions at the date of acquisition. The fair values may be obtained
from independent appraisers, discounted cash flow present value techniques,
management valuation models, quoted prices on national markets or quoted market
prices from brokers. These fair values estimates will affect future earnings
through the disposition or amortization of the underlying assets and
liabilities. While management believes the sources utilized to arrive at the
fair value estimates are reliable, different sources or methods could have
yielded different fair value estimates. Such different fair value estimates
could affect future earnings through different values being utilized for the
disposition or amortization of the underlying assets and liabilities acquired.
In connection with the acquisition of Community and shares of Bluegreen, net
fair value adjustments excluding goodwill and other intangible assets were
recorded of $21.9 million and $2.1 million, respectively. This amount will
affect future earnings through the disposition and amortization of the
underlying assets and liabilities.
CONTINGENT LIABILITIES
Contingent liabilities consist of Ryan Beck arbitration proceedings, litigation
and tax reserves and other claims arising from the conduct of our business
activities. The Company is also subject to the customary obligations associated
with entering into contracts for the purchase, development and sale of real
estate in the routine conduct of its business. We have established reserves for
legal and other claims when it becomes probable that we will incur a loss and
the loss is reasonably estimated. We have attorneys, consultants and other
professionals assessing the probability of the estimated amounts. Changes in
these assessments can lead to changes in the recorded reserves and the actual
costs of resolving the claims may be substantially higher or lower than the
amounts reserved for the claim. The reserving for contingencies is based on
management's judgment on uncertain events in which changes in circumstances
could significantly affect the amounts recorded in the Company's financial
statements. At December 31, 2003, total reserves for contingent liabilities
included in other liabilities were $6.7 million.
76
DIVIDENDS
The Company has not paid cash dividends since its inception. As stated above, a
source of the Company's liquidity is dividends from BankAtlantic Bancorp. While
there is no assurance that BankAtlantic Bancorp will pay dividends in the
future, BankAtlantic Bancorp management has stated that it intends to pay
regular quarterly cash dividends on its common stock. BankAtlantic Bancorp's
payment of dividends may be limited by the terms of applicable indentures and
the availability of funds for dividend payments. The availability of funds
depends upon BankAtlantic's ability to pay dividends to BankAtlantic Bancorp.
Current regulations applicable to the payment of cash dividends by savings
institutions impose limits on capital distributions based on an institution's
regulatory capital levels, retained net income and net income. See "Regulation
and Supervision - Limitation on Capital Distributions."
Levitt has never paid regular cash dividends on its common stock. From time to
time, Levitt has indicated that it intends to evaluate the payment of regular
cash dividends on its common stock in the future based upon its results of
operations, financial condition, cash requirements and prospects. There is no
assurance that Levitt will declare any cash dividends in the foreseeable future.
Levitt's ability to pay dividends is restricted by certain covenant restrictions
contained in the indentures and loan agreements that govern the terms of its
debt.
IMPACT OF INFLATION
The financial statements and related financial data and notes presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, the majority of our assets and liabilities are
monetary in nature, as it relates to our subsidiary, BankAtlantic Bancorp. As a
result, interest rates have a more significant impact on our performance than
the effects of general price levels. Although interest rates generally move in
the same direction as inflation, the magnitude of such changes varies. The
possible effect of fluctuating interest rates is discussed more fully under the
section entitled "Consolidated Interest Rate Risk" In Item 7A below.
As it relates to our real estate, inflation can have a long-term impact on us
because increasing costs of land, materials and labor result in a need to
increase the sales prices of homes. In addition, inflation is often accompanied
by higher interest rates, which can have a negative impact on housing demand and
the costs of financing land development activities and housing construction.
Rising interest rates, as well as increased materials and labor costs may reduce
gross margins. In recent years, the increases in these costs have followed the
general rate of inflation and hence have not had a significant adverse impact on
us. In addition, deflation can impact the value of real estate and make it
difficult for us to recover our land costs. Therefore, either inflation or
deflation could adversely impact our future results of operations.
77
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONSOLIDATED MARKET RISK
Market risk is defined as the risk of loss arising from adverse changes in
market valuations which arise from interest rate risk, foreign currency exchange
rate risk, commodity price risk and equity price risk. Our primary market risk
is interest rate risk and our secondary market risk is equity price risk.
CONSOLIDATED INTEREST RATE RISK
The majority of BankAtlantic Bancorp assets and liabilities are monetary in
nature subjecting BankAtlantic Bancorp to significant interest rate risk which
would arise if the relative values of each of its assets and liabilities change
in conjunction with a general rise or decline in interest rates. BankAtlantic
Bancorp has developed a model using standard industry software to quantify its
interest rate risk. A sensitivity analysis was performed measuring its potential
gains and losses in net portfolio fair values of interest rate sensitive
instruments at December 31, 2003 resulting from a change in interest rates.
Interest rate sensitive instruments included in the model are:
o Loans,
o Debt securities available for sale,
o Investment securities,
o FHLB stock,
o Federal funds sold,
o Deposits,
o Advances from FHLB,
o Securities sold under agreements to repurchase,
o Federal funds purchased,
o Subordinated debentures,
o Notes and bonds payable,
o Interest rate swaps,
o Forward contracts,
o Junior subordinated debentures, and
o Off-balance sheet loan commitments.
The model calculates the net potential gains and losses in net portfolio fair
value by:
i. discounting anticipated cash flows from existing assets, liabilities
and off-balance sheet contracts and derivatives at market rates to
determine fair values at December 31, 2003,
ii. discounting the above expected cash flows based on instantaneous and
parallel shifts in the yield curve to determine fair values; and
iii. calculating the difference between the fair value calculated in (i) and
(ii).
Management of BankAtlantic Bancorp has made estimates of fair value discount
rates that it believes to be reasonable. However, because there is no quoted
market for many of these financial instruments, management has no basis to
determine whether the fair value presented would be indicative of the value
negotiated in an actual sale. BankAtlantic Bancorp's fair value estimates do not
consider the tax effect that would be associated with the disposition of the
assets or liabilities at their fair value estimates.
Subordinated debentures, notes and bonds payable and junior subordinated
debentures were valued for this purpose based on their contractual maturities or
redemption date. BankAtlantic Bancorp's interest rate risk policy has been
approved by the Board of Directors and establishes guidelines for tolerance
levels for net portfolio value changes based on interest rate volatility.
Management of BankAtlantic Bancorp has maintained the portfolio within these
established tolerances.
78
Certain assumptions by BankAtlantic Bancorp in assessing the interest rate risk
were utilized in preparing the following table. These assumptions related to:
o Interest rates,
o Loan prepayment rates,
o Deposit decay rates,
o Market values of certain assets under various interest rate
scenarios, and
o Re-pricing of certain borrowings.
The prepayment assumptions used in the model are:
o Fixed rate mortgages 60%
o Fixed rate securities 35%
o Tax certificates 10%
o Adjustable rate mortgages 62%
o Adjustable rate securities 65%
Deposit runoff assumptions used in the model are as follows:
Within 1-3 3-5 Over 5
1 Year Years Years Years
------ ----- ----- -------
Money fund savings accounts decay rates 17% 17% 16% 14%
NOW and savings accounts decay rates 37% 32% 17% 17%
The tables below measure changes in net portfolio value for instantaneous and
parallel shifts in the yield curve in 100 basis point increments up or down. It
was also assumed that delinquency rates would not change as a result of changes
in interest rates, although there is no assurance that this would be the case.
Even if interest rates change in the designated increments, there can be no
assurance that BankAtlantic Bancorp assets and liabilities would perform as
indicated in the tables. In addition, a change in U.S. Treasury rates in the
designated amounts accompanied by a change in the shape of the yield curve could
cause significantly different changes to the fair values than indicated.
Furthermore, the results of the calculations in the tables are subject to
significant deviations based upon actual future events, including anticipatory
and reactive measures which may be taken in the future.
Presented below is an analysis of the impact of changes in interest rates on
BankAtlantic Bancorp's net portfolio value at December 31, 2003 (dollars in
thousands):
Net Portfolio
Changes Value Dollar
in Rate Amount Change
------- -------------- --------
+200 bp $470,869 $ 17,666
+100 bp $482,543 $ 29,340
0 $453,203 $ --
-100 bp $408,921 $(44,282)
-200 bp $391,156 $(62,047)
Presented below is an analysis of the impact of changes in interest rates on
BankAtlantic Bancorp's net portfolio value at December 31, 2002 (dollars in
thousands):
Net Portfolio
Changes Value Dollar
in Rate Amount Change
------- ------------- ----------
+200 bp $531,932 $ 66,530
+100 bp $512,530 $ 47,128
0 $465,402 $ --
-100 bp $404,404 $ (60,998)
-200 bp $341,066 $(124,336)
79
Levitt is also subject to interest rate risk on its long-term debt. At December
31, 2003, Levitt had $109 million in borrowings (excluding $18.1 million and
$43.5 million of borrowings due to BankAtlantic and BankAtlantic Bancorp,
respectively, which amounts were eliminated in consolidation) with adjustable
rates tied to the prime rate and/or the London Interbank Offered Rate and $3.5
million in borrowings with fixed rates. Consequently, for debt tied to an
indexed rate, changes in interest rates may affect earnings and cash flows, but
generally would not impact the fair value of such debt. For fixed rate debt,
changes in interest rates generally affect the fair market value of the debt,
but not earnings or cash flow. Based upon the amount of variable rate debt
outstanding at December 31, 2003 and holding the variable rate debt balance
constant, each one percentage point increase in interest rates would increase
interest incurred by approximately $1.1 million per year.
INTEREST RATE SENSITIVITY
Changes in interest rates can impact net interest income as well as the
valuation of our assets and liabilities, as the relative spreads between assets
and liabilities can widen or narrow due to changes in the overall levels of and
changes in market interest rates.
BankAtlantic Bancorp's profitability is dependent to a large extent on 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 and borrowings. Changes in market
interest rates, changes in the relationships between short-term and long-term
market interest rates, 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. While BankAtlantic Bancorp attempted to structure asset and
liability management strategies to mitigate the impact on net interest income of
changes in market interest rates, such strategy may not be successful.
Generally, as interest rates fall, loan prepayments accelerate. Prepayments in a
declining interest rate environment reduce net interest income and adversely
impact earnings due to accelerated amortization of loan premiums and the
reinvestment of proceeds from these loan payoffs at lower rates. Significant
loan prepayments in BankAtlantic Bancorp's purchased residential loan portfolio
in the future could have an adverse effect on future earnings.
EQUITY PRICE RISK
The portfolio of equity securities and exchange traded mutual funds held by the
Company and its consolidated subsidiaries are subject to equity pricing risks
which would arise as the relative values of the equity investments change in
conjunction with market or economic conditions. The change in fair values of
equity investments represents instantaneous changes in all equity prices. The
following are hypothetical changes in the fair value of available for sale
securities at December 31, 2003 based on percentage changes in fair value.
Actual future price appreciation or depreciation may be different from the
changes identified in the table below (dollars in thousands).
Available
Percent for Sale
Change in Securities Dollar
Fair Value Fair Value Change
---------- ---------- -------
20% $24,427 $ 4,071
10% $22,392 $ 2,036
0% $20,356 $ --
-10% $18,320 $(2,036)
-20% $16,285 $(4,071)
Excluded from the above table is $1.8 million and $750,000 of investments in
private companies held by BankAtlantic Bancorp and BFC, respectively, for which
no current market exists. The ability to realize on or liquidate these
investments will depend on future market conditions and is subject to
significant risk.
80
RYAN BECK'S MARKET RISK
BankAtlantic Bancorp, through its broker/dealer subsidiary Ryan Beck, is exposed
to market risk arising from trading and market making activities. Ryan Beck's
market risk is the potential change in value of financial instruments caused by
fluctuations in interest rates, equity prices, credit spreads or other market
forces.
Ryan Beck's management attempts to monitor risk in its trading activities by
establishing limits and reviewing daily trading results, inventory aging,
pricing, concentration and securities ratings. Ryan Beck uses a variety of
tools, including aggregate and statistical methods. Value at Risk, ("VaR") is
the principal statistical method utilized. This method measures the potential
loss in the fair value of a portfolio due to adverse movements in underlying
risk factors. Ryan Beck began using VaR on January 31, 2003. Substantially all
of Ryan Beck's trading inventory is subject to measurement using VaR.
Ryan Beck uses an historical simulation approach to measuring VaR using a 99%
confidence level, a one-day holding period and the most recent three months
average volatility. The 99% VaR means that, on average, one would not expect to
exceed such loss amount more than one time every one hundred trading days if the
portfolio were held constant for a one-day period.
Modeling and statistical methods rely on approximations and assumptions that
could be significant under certain circumstances. As such, the risk management
process also utilizes other methods such as analysis of interest rate
sensitivity and stress testing.
The following table sets forth the high, low and average VaR for Ryan Beck
during the period January 31, 2003 to December 31, 2003, and adjusted for
discontinued operations (in thousands).
High Low Average
------- ------- -------
VaR $ 1,285 $ 16 $ 531
Aggregate Long Value $68,995 $42,364 $66,809
Aggregate Short Value $19,570 $60,602 $36,495
81
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82
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants of PricewaterhouseCoopers LLP
Independent Auditors' Report of KPMG LLP
Financial Statements:
Consolidated Statements of Financial Condition as of December 31, 2003
and 2002
Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 2003
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for each of the years in the three year period ended December
31, 2003
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 2003
Notes to Consolidated Financial Statements
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows presents fairly, in all material respects,
the financial position of BFC Financial Corporation and its subsidiaries at
December 31, 2003, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 30, 2004
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
BFC Financial Corporation:
We have audited the accompanying consolidated statement of financial condition
of BFC Financial Corporation and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the two-year period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BFC Financial
Corporation and subsidiaries at December 31, 2002, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets in 2002 and
for derivative instruments and hedging activities in 2001.
KPMG LLP
Fort Lauderdale, Florida
February 3, 2003
F-3
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2003 and 2002
(In thousands, except share data)
2003 2002
---------- ----------
ASSETS
Cash and due from depository institutions $ 143,542 $ 202,432
Federal funds sold and securities purchased under resell agreements -- 50,145
Securities owned (at fair value) 124,565 186,454
Securities available for sale (at fair value) 360,442 713,131
Investment securities and tax certificates (approximate fair value:
$192,706 and $(212,698) 192,706 212,240
Federal Home Loan Bank stock, at cost which approximates fair value 40,325 64,943
Loans receivable, net of allowance for loan losses of
$46,667 and $49,094 3,611,612 3,377,870
Accrued interest receivable 27,912 34,050
Real estate held for development and sale 283,272 204,497
Investments in and advances to unconsolidated subsidiaries 106,048 112,599
Office properties and equipment, net 93,654 92,784
Deferred tax asset, net -- 12,119
Goodwill 76,674 78,612
Core deposit intangible asset 11,985 13,757
Other assets 62,707 60,300
---------- ----------
Total assets $5,135,444 $5,415,933
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $2,413,106 $2,457,837
Non-interest bearing deposits 645,036 462,718
---------- ----------
Total deposits 3,058,142 2,920,555
Advances from FHLB 782,205 1,297,170
Securities sold under agreements to repurchase 120,874 116,279
Subordinated debentures, notes and bonds payable 164,100 209,068
Guaranteed preferred beneficial interests in BankAtlantic Bancorp's
Junior Subordinated Debentures -- 180,375
Junior subordinated debentures 263,266 --
Securities sold not yet purchased 37,813 38,003
Due to clearing agent 8,583 78,791
Deferred tax liabilities, net 2,895 --
Other liabilities 191,933 132,780
---------- ----------
Total liabilities 4,629,811 4,973,021
---------- ----------
Minority interest 419,958 365,501
Shareholders' equity:
Preferred stock of $.01 par value; authorized
10,000,000 shares; none issued -- --
Class A common stock of $.01 par value, authorized 20,000,000 shares;
issued and outstanding 13,884,470 in 2003 and 6,474,994 in 2002 126 58
Class B common stock of $.01 par value, authorized 20,000,000 shares;
issued and outstanding 2,534,426 in 2003 and 2,362,157 in 2002 23 21
Additional paid-in capital 24,654 24,077
Retained earnings 59,342 52,387
---------- ----------
Total shareholders' equity before
accumulated other comprehensive income 84,145 76,543
Accumulated other comprehensive income 1,530 868
---------- ----------
Total shareholders' equity 85,675 77,411
---------- ----------
Total liabilities and shareholders' equity $5,135,444 $5,415,933
========== ==========
See accompanying notes to consolidated financial statements.
F-4
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For each of the years in the three year period ended December 31, 2003
(In thousands, except per share data)
2003 2002 2001
--------- --------- ---------
INTEREST INCOME:
Interest and fees on loans and leases $ 207,212 $ 222,170 $ 237,304
Interest and dividends on securities available for sale 24,572 42,457 52,956
Interest and dividends on other investment securities 19,653 32,562 32,171
Interest and dividends on other investments and securities owned 10,437 7,511 3,570
--------- --------- ---------
Total interest income 261,874 304,700 326,001
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 36,189 62,777 85,668
Interest on advances from FHLB 57,299 62,412 60,472
Interest on securities sold under agreements to repurchase and federal
funds purchased 2,914 6,546 24,270
Interest on subordinated debentures, notes and bonds payable
and guaranteed beneficial interests in BankAtlantic Bancorp's junior
subordinated debentures 25,867 26,140 24,177
Capitalized interest on real estate developments and joint ventures (8,884) (5,997) (5,749)
--------- --------- ---------
Total interest expense 113,385 151,878 188,838
--------- --------- ---------
NET INTEREST INCOME 148,489 152,822 137,163
(Recovery from) provision for loan losses (547) 14,077 16,905
--------- --------- ---------
NET INTEREST INCOME AFTER (RECOVERY FROM) PROVISION FOR LOAN LOSSES 149,036 138,745 120,258
--------- --------- ---------
NON-INTEREST INCOME:
Investment banking income 207,788 130,738 43,436
Service charges on deposits 40,569 26,479 16,372
Other service charges and fees 19,318 14,087 14,731
Gains on sales of real estate developed for sale, net 79,269 48,133 35,040
Income from unconsolidated real estate subsidiaries 10,126 9,327 2,888
Securities activities, net (1,110) 8,578 7,124
Impairment of securities (3,071) (20,384) (7,905)
Gains on sales of loans, net 122 1,840 60
Other 13,438 10,410 9,542
--------- --------- ---------
Total non-interest income 366,449 229,208 121,288
--------- --------- ---------
NON-INTEREST EXPENSE:
Employee compensation and benefits 249,338 183,294 96,352
Occupancy and equipment 40,109 39,272 29,224
Advertising and promotion 16,868 13,603 7,897
Selling, general and administrative expenses 16,504 12,008 12,437
Amortization of goodwill and other intangible assets 1,772 1,360 4,073
Impairment of goodwill -- -- 6,624
Restructuring charge and impairment write-downs 257 1,007 331
Cost associated with debt redemption 12,543 3,125 389
Acquisition related charges and impairments -- 4,925 --
Professional fees 17,846 8,599 7,794
Communications 13,783 10,152 3,291
Floor broker and clearing fees 9,227 8,192 2,796
Other 36,100 32,115 22,363
--------- --------- ---------
Total non-interest expense 414,347 317,652 193,571
--------- --------- ---------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST,
DISCONTINUED OPERATIONS, EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 101,138 50,301 47,975
Provision for income taxes 44,166 17,993 25,260
Minority interest in income of consolidated subsidiaries 51,093 38,294 18,379
--------- --------- ---------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS, EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 5,879 (5,986) 4,336
Discontinued operations,
less income tax (benefit) provision of $(517) in 2003
and $303 in 2002 1,143 2,536 --
Extraordinary items, less income taxes of $2,771 -- 23,749 --
Cumulative effect of a change in accounting principle, less
income tax (benefit) provision of $(1,246) in 2002
and $683 in 2001 -- (15,107) 1,138
--------- --------- ---------
NET INCOME 7,022 5,192 5,474
Amortization of goodwill, net of tax and minority interest -- -- 735
--------- --------- ---------
NET INCOME ADJUSTED TO EXCLUDE GOODWILL AMORTIZATION $ 7,022 $ 5,192 $ 6,209
========= ========= =========
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-5
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For each of the years in the three year period ended December 31, 2003
(In thousands, except per share data)
2003 2002 2001
--------- --------- ---------
Earnings per share:
Basic earnings (loss) per share before discontinued operations,
extraordinary items and cumulative effect of
a change in accounting principle $ 0.40 $ (0.42) $ 0.30
Basic earnings per share from discontinued operations 0.08 0.18 --
Basic earnings per share from extraordinary items -- 1.65 --
Basic (loss) earnings per share from cumulative effect
of a change in accounting principle -- (1.05) 0.08
--------- --------- ---------
Basic earnings per share 0.48 0.36 0.38
Basic earnings per share from amortization of goodwill -- -- 0.05
--------- --------- ---------
Basic earnings per share adjusted to exclude goodwill amortization $ 0.48 $ 0.36 $ 0.43
========= ========= =========
Diluted earnings (loss) per share before discontinued operations,
extraordinary items and cumulative effect of
a change in accounting principle $ 0.32 $ (0.43) $ 0.21
Diluted earnings per share from discontinued operations 0.07 0.17 --
Diluted earnings per share from extraordinary items -- 1.62 --
Diluted (loss) earnings per share from cumulative effect
of a change in accounting principle -- (1.03) 0.07
--------- --------- ---------
Diluted earnings per share 0.39 0.33 0.28
Diluted earnings per share from amortization of goodwill -- -- 0.04
--------- --------- ---------
Diluted earnings per share adjusted to exclude goodwill amortization $ 0.39 $ 0.33 $ 0.32
========= ========= =========
Basic weighted average number of common shares outstanding 14,604 14,370 14,298
Diluted weighted average number of common and common
equivalent shares outstanding 16,660 14,370 15,764
See accompanying notes to consolidated financial statements.
F-6
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For each of the years in the three year period ended December 31, 2003
(In thousands)
Accumulated
Other
Compre-
Compre- Class A Class B Additional hensive
hensive Common Common Paid-in Retained Income
Income Stock Stock Capital Earnings (Loss) Total
------- ------- ------- ----------- ---------- ------ -------
BALANCE, DECEMBER 31, 2000 $ 58 21 25,788 41,721 5,027 72,615
Net income $ 5,474 -- -- -- 5,474 -- 5,474
Other comprehensive income,
net of tax:
Unrealized loss on securities
available for sale, net of tax of $987 (1,570)
Accumulated losses associated with
cash flow hedges, net of tax of $200 (319)
Reclassification adjustment
for cash flow hedges , net of tax 129
Reclassification adjustment
for net gain included in
net income, net of tax of $360 (575)
-------
Other comprehensive loss (2,335) -- -- -- -- (2,335) (2,335)
-------
Comprehensive income $ 3,139
=======
Net effect of Bancorp capital
transactions, net of income taxes -- -- (1,636) -- -- (1,636)
Issuance of common stock -- -- 23 -- -- 23
Tax effect relating to the exercise
of stock options -- -- 31 -- -- 31
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 2001 $ 58 21 24,206 47,195 2,692 74,172
Net income $ 5,192 -- -- -- 5,192 -- 5,192
Other comprehensive income,
net of tax:
Unrealized gains on securities
available for sale, net of tax of $153 244
Increase in minimum pension liability,
net of tax of $650 (1,035)
Unrealized losses associated
with investment in unconsolidated
real estate subsidiary, net of tax of $39 (62)
Accumulated loss associated with
cash flow hedges, net of tax of $80 (127)
Reclassification adjustment
for cash flow hedges, net of tax (74)
Reclassification adjustment for net gain
included in net income, net of tax of (770)
-------
Other comprehensive loss (1,824) -- -- -- -- (1,824) (1,824)
-------
Comprehensive income $ 3,368
=======
Net effect of Bancorp capital
transactions, net of income taxes -- -- (15) -- -- (15)
Retirement of Class B common stock -- (1) (318) -- -- (319)
Issuance of Class B common stock -- 1 144 -- -- 145
Tax effect relating to the exercise
of stock options -- -- 60 -- -- 60
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 2002 $ 58 21 24,077 52,387 868 77,411
======= ======= ======= ======= ======= =======
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-7
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For each of the years in the three year period ended December 31, 2003
(in thousands)
Accumulated
Other
Compre-
Compre- Class A Class B Additional hensive
hensive Common Common Paid-in Retained Income
Income Stock Stock Capital Earnings (Loss) Total
------- ------- ------- ----------- ---------- ------ -------
BALANCE, DECEMBER 31, 2002 $ 58 21 24,077 52,387 868 77,411
Net income $ 7,022 -- -- -- 7,022 -- 7,022
Other comprehensive income,
net of tax:
Unrealized loss on securities
available for sale, net of tax of $620 (988)
Decrease in minimum pension liability,
net of tax of $639 1,018
Unrealized gain associated
with investment in unconsolidated
real estate subsidiary, net of tax of $79 121
Accumulated gain associated with
cash flow hedges, net of tax of $198 315
Reclassification adjustment
for cash flow hedges, net of tax 70
Reclassification adjustment
for net losses included
in net income, net of tax of $85 126
-------
Other comprehensive income 662 -- -- -- -- 662 662
-------
Comprehensive income $ 7,684
=======
Net effect of subsidiaries capital
transactions, net
of income taxes -- -- (252) -- -- (252)
Common stock splits 67 -- -- (67) -- --
Issuance of common stock 1 2 279 -- -- 282
Tax effect relating to the exercise
of stock options -- -- 550 -- -- 550
------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 2003 $ 126 23 24,654 59,342 1,530 85,675
======= ======= ======= ======= ====== =======
See accompanying notes to consolidated financial statements.
F-8
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2003
(In thousands)
2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES:
Income from continuing operations $ 5,879 $ (5,986) $ 4,336
Income from discontinued operations, net of tax 1,143 2,536 --
Income from extraordinary item, net of tax -- 23,749 --
Cumulative effect of a change in accounting principle, net of tax -- (15,107) 1,138
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Minority interest in income of consolidated subsidiaries 51,093 38,294 18,379
Provision for loan losses, real estate owned and tax certificates 1,465 17,019 18,222
Change in real estate inventory (55,206) (57,131) (28,789)
Loans held for sale activity, net (32,305) (24,091) 14,068
Losses (gains) from securities activities, net 1,110 (8,578) (7,124)
Gains on sale of REO (1,984) (117) (1,053)
Loss on debt redemption 12,543 3,125 389
Depreciation, amortization and accretion, net 20,939 11,128 1,111
Restructuring charges and impairment write-downs, net 257 4,852 331
Gain on Gruntal transaction -- (26,520) --
Impairment of goodwill -- 16,353 6,624
Impairment of securities 3,071 20,384 7,905
Provision (benefit) for deferred income taxes 13,073 (1,954) 3,257
Proceeds from sales of loans 44,617 41,602 24,017
Securities owned activities, net (43,194) 33,751 (24,739)
Decrease in accrued interest receivable 6,124 2,557 10,259
Amortization of intangible assets -- 1,360 4,073
Issuance of forgivable notes receivable to Ryan Beck employees (16,270) (17,140) --
Decrease (increase) in other assets 2,209 5,828 (3,665)
Increase (decrease) in other liabilities 77,606 (25,399) 9,123
Increase (decrease) in due to clearing agent 10,353 (32,876) (739)
Increase (decrease) in securities sold but not yet purchased 3,591 (1,629) 26,406
Equity in earnings from unconsolidated subsidiaries (10,126) (9,327) (2,888)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 95,988 $ (3,317) $ 80,641
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of investment securities and tax certificates (205,209) (238,700) (267,025)
Proceeds from redemption and maturity of investment securities
and tax certificates 205,677 239,176 221,434
Purchase of securities available for sale (279,127) (356,795) (485,862)
Proceeds from sales and maturities of securities available for sale 631,350 772,339 509,833
Purchases and net (originations) repayments of loans and leases (235,735) (23,776) 24,039
Proceeds from sales of real estate owned 10,807 6,015 6,913
Net additions to office properties and equipment (12,599) (23,676) (13,404)
Proceeds from sales of properties and equipment -- 1,986 529
Proceeds from sales of real estate held for sale -- 6,012 --
(Investments) and repayments from joint ventures, net 1,044 3,478 1,348
Increase in investment in unconsolidated real estate subsidiary -- (53,380) --
Purchases of FHLB stock net of redemptions 24,618 (452) (4,488)
Net cash proceeds from the sale of Ryan Beck's subsidaries 9,955 -- --
Acquisitions, net of cash acquired -- (52,783) (340)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 150,781 $ 279,444 $ (7,023)
--------- --------- ---------
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-9
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 2003
(In thousands)
2003 2002 2001
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits $ 137,587 $ 47,858 $ 125,252
Reduction in deposits from sale of in-store branches, net -- (42,597) (81,593)
Proceeds from FHLB advances 275,000 227,499 365,000
Repayments of FHLB advances (799,991) (172,736) (297,771)
Net increase (decrease) in federal funds purchased -- (61,000) 51,300
Proceeds from notes and bonds payable 134,016 158,831 66,651
Issuance of trust preferred securities -- 180,375 --
Issuance of junior subordinated debentures 77,320 -- --
Repayment of notes and bonds payable (112,563) (95,772) (72,285)
Retirement of subordinated notes and debentures (70,855) (21,716) (35,042)
Retirement of trust preferred securities -- (74,750) --
Net increase (decrease) in securities sold under agreements to repurchase 4,767 (289,791) (253,432)
Change in minority interest -- (61) 2,397
Issuance of BFC common stock upon exercise of stock options 282 205 54
Retirement of BFC common stock -- (319) --
Issuance of BankAtlantic Bancorp common stock 4,472 1,296 95,595
BankAtlantic Bancorp common stock dividends paid to non-BFC shareholders (5,839) (5,411) (3,814)
--------- --------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (355,804) (148,089) (37,688)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (109,035) 128,038 35,930
Cash and cash equivalents at the beginning of period 252,577 124,539 88,609
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 143,542 $ 252,577 $ 124,539
========= ========= =========
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Interest paid on borrowings and deposits $ 121,384 $ 160,069 $ 201,681
Income taxes paid 31,115 36,790 17,884
Note receivable issued in connection with the GMS sale 13,681 -- --
Adjustment to goodwill related to the allowance for loan losses 734 -- --
Loans transferred to REO 2,450 13,067 4,328
Transfer of commercial mortgage-backed securities to available for sale 14,505 -- --
Tranfer of fixed assets to real estate held for sale 1,000 -- --
Increase in investments in unconsolidated subsidiaries related to
deconsolidation of trusts formed to issue trust preferred securities 7,910 -- --
Increase in junior subordinated debentures related to trust deconsolidation 7,910 -- --
Transfer of guaranteed preferred beneficial interest in BankAtlantic Bancorp's
junior subordinated debentures to junior subordinated debentures 180,375 -- --
Change in minority interest resulting from issuance of BankAtlantic Bancorp
Class A common stock upon conversion of subordinated debentures 211 25 49,935
Issuance of notes payable under the Ryan Beck deferred compensation plan -- 3,675 --
Change in minority interest resulting from issuance of
BankAtlantic Bancorp's Class A common stock upon acquisitions -- -- 335
Change in minority interest resulting from issuance
of BankAtlantic Bancorp's Class A restricted common stock, net -- -- 1,209
Decrease in minority interest resulting from the distribution of
securities investment -- (8,655) --
Increase in loans receivable from real estate closings -- -- 1,247
Increase in development bonds payable from real estate closings -- -- 1,247
Change in shareholders' equity resulting from net change
in other comprehensive income (loss), net of taxes 662 (1,824) (2,335)
Net loss effect of BankAtlantic Bancorp capital transactions, net of income taxes (252) (15) (1,636)
Increase in stockholders' equity for the tax effect related to the
exercise of employee stock options 550 60 31
See accompanying notes to consolidated financial statements.
F-10
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION - BFC Financial Corporation ("BFC" or
the "Company") is a holding company with controlling interests in BankAtlantic
Bancorp, Inc. ("BankAtlantic Bancorp" or "Bancorp") and Levitt Corporation
("Levitt"). As the controlling stockholder of BankAtlantic Bancorp we are a
unitary savings bank holding company. The Company's primary activities currently
relate to the operations of BankAtlantic Bancorp and Levitt. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. ("GAAP").
Through December 31, 2003, Levitt was a wholly owned subsidiary of BankAtlantic
Bancorp. On December 2, 2003, BankAtlantic Bancorp's board of directors
authorized the spin-off of Levitt to the stockholders of BankAtlantic Bancorp by
declaring a dividend of all of BankAtlantic Bancorp's shares of Levitt.
BankAtlantic Bancorp stockholders including the Company, each received one share
of Levitt Class A Common Stock for every four shares of BankAtlantic Bancorp
Class A Common Stock owned, and one share of Levitt Class B Common Stock for
every four shares of BankAtlantic Bancorp Class B Common Stock owned. The shares
were distributed on December 31, 2003 to shareholders of record on December 18,
2003. As a consequence of the spin-off, BFC's ownership position in Levitt was
identical to its ownership position in BankAtlantic Bancorp, including its
control of more than 50% of the vote. Accordingly, Levitt will continue to be
consolidated in the Company's financial statements.
BFC's ownership in BankAtlantic Bancorp and Levitt is as follows:
Percentage of
Total Percentage of
Class A Class B Outstanding Vote
------- ------- ----------- -------------
BankAtlantic Bancorp 15.3% 100.0% 22.2% 55.1%
Levitt 15.3% 100.0% 22.2% 55.1%
Because BFC controls more than 50% of the vote of BankAtlantic Bancorp and
Levitt, BankAtlantic Bancorp and Levitt are consolidated in the Company's
financial statements. The percentage of votes controlled by the Company will
determine the Company's consolidation policy, whereas, the percentage of
ownership of total outstanding common stock will determine the amount of
BankAtlantic Bancorp's and Levitt's net income recognized by the Company.
BankAtlantic Bancorp trades on the New York Stock Exchange under the symbol
"BBX", BankAtlantic Bancorp principal assets include BankAtlantic and its
subsidiaries and RB Holdings, Inc. the parent company of Ryan Beck and its
subsidiaries.
BankAtlantic was founded in 1952 and is a federally chartered, federally insured
savings bank headquartered in Fort Lauderdale, Florida. BankAtlantic currently
operates through a network of 73 branches located in Florida. BankAtlantic is a
community-oriented bank which provides traditional retail banking services and a
wide range of commercial banking products and related financial services.
Ryan Beck & Co. was founded in 1946 and acquired by BankAtlantic Bancorp in
1998, is a full service broker dealer headquartered in Livingston, New Jersey.
RB Holdings, Inc. was formed in July 2003 as a holding company for Ryan Beck.
Ryan Beck provides financial advice to individuals, institutions and corporate
clients through 34 offices in 13 states. Ryan Beck is an investment banking firm
engaged in the underwriting, distribution and trading of tax-exempt, equity and
debt securities. Ryan Beck also offers a full service, general securities
brokerage business with investment and insurance products for retail and
institutional clients and provides investment and wealth management advisory
services for its customers. In August 2003, Ryan Beck sold its entire membership
interest in The GMS Group, LLC ("GMS"). As a consequence of the GMS sale, the
results of operations of GMS are presented as "Discontinued Operations" in the
Consolidated Statements of Operations for all periods presented.
Levitt engages in real estate activities through Levitt and Sons, LLC ("Levitt
and Sons") and its subsidiaries, Core Communities, LLC ("Core Communities") and
its subsidiaries, Levitt Commercial, LLC ("Levitt Commercial") and its
subsidiaries and several investments in real estate projects in Florida. Levitt
also owns an approximately 38% equity investment in Bluegreen Corporation
("Bluegreen"), a New York Stock Exchange-listed company engaged in acquisition,
development, marketing and sale of primarily "drive-to" vacation resorts, golf
communities and residential land. In April 2002, Levitt acquired approximately
8.3 million shares of Bluegreen common stock (approximately 34%) as an equity
investment, and in December 2003, BankAtlantic Bancorp transferred its 1.2
million shares in Bluegreen to Levitt. Levitt and
F-11
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sons is a developer of single-family home communities and condominium and rental
apartment complexes primarily in Florida. Core Communities owns the unsold land
and other entitlements of the master-planned communities commonly known as St.
Lucie West and Tradition, both of which are located in St. Lucie County,
Florida. Levitt Commercial specializes in development, redevelopment, and joint
venture opportunities in industrial and retail properties, including flex
warehouse projects located in Boynton Beach and Pompano Beach, Florida, and an
apartment rental property in Melbourne, Florida. The majority of Levitt's assets
and activities are located in Florida. Changes in the economic conditions in
Florida would have an impact on the operations of Levitt and the Company.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statements of financial condition and operations for the periods
presented. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the next year relate to the determination of the allowance for loan losses,
evaluation of goodwill for impairment, the valuation of real estate acquired in
connection with foreclosure or in satisfaction of loans, the valuation of the
fair value of assets and liabilities in the application of purchase method
accounting, the amount of deferred tax asset valuation allowance, the valuation
of equity securities that are not publicly traded, accounting for contingencies,
the valuation of real estate held for development, real estate joint venture
investments and the cost to complete development work on real estate projects.
In connection with the determination of the allowances for loan losses, real
estate owned, real estate held for development and real estate joint venture
investments, management obtains independent appraisals for significant
properties when it is deemed prudent.
Certain amounts for prior years have been reclassified to conform with revised
statement presentation for 2003.
CONSOLIDATION POLICY -- The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, majority-controlled
subsidiaries, including BankAtlantic Bancorp and Levitt, majority-owned joint
ventures and variable interest entities in which the Company's subsidiaries are
the primary beneficiary as defined by Financial Accounting Standards
Board("FASB") Interpretation No. 46 ("FIN 46"). On July 1, 2003, BankAtlantic
Bancorp and its subsidiaries, except for Levitt and its subsidiaries,
implemented FIN 46 effective January 1, 2003. As a consequence of the
implementation of FIN 46, BankAtlantic Bancorp consolidated a 50% owned joint
venture and deconsolidated its wholly owned statutory business trusts formed to
issue trust preferred securities. The joint venture was acquired in connection
with the acquisition of Community Savings Bancshare, Inc., the parent company of
Community Savings, F.A. ("Community") and recorded at fair value on the
acquisition date, resulting in no impact to our financial statements upon
adoption of FIN 46. In periods ending prior to January 1, 2003, the statutory
business trusts were included in the Company's and BankAtlantic Bancorp's
consolidated financial statements and the 50% owned joint venture was accounted
for under the equity method of accounting. Prior to the implementation of FIN
46, the Company consolidated all entities in which it owned a majority of the
voting securities. Less than majority-owned joint ventures in which the Company
did not have a controlling interest were accounted for under the equity method
of accounting. Levitt's non-consolidated ownership interest in joint ventures
range from 40% to 50%.
CASH EQUIVALENTS -- Cash and due from depository institutions include demand
deposits at other financial institutions. Federal funds sold are generally sold
for one-day periods, and securities purchased under resell agreements are
settled in less than 30 days.
DEBT AND EQUITY SECURITIES -- Debt securities are classified based on
management's intention on the date of purchase. Debt securities that management
has both the positive intent and ability to hold to maturity are classified as
securities held-to-maturity and are carried at amortized cost. Trading account
securities consist of securities that are bought and held principally for the
purpose of selling them in the near term and are carried at fair value with
changes in the fair value included in earnings. All other debt securities are
classified as available-for-sale and carried at fair value with the net
unrealized gains and losses included in shareholders' equity on an after-tax
basis as other comprehensive income. The fair value of securities available for
sale was estimated by obtaining prices actively quoted on national markets,
using a price matrix or applying management valuation models. Declines in the
fair value of individual held-to-maturity and available-for-sale securities
below their cost that are other than temporary result in write-downs through
charges to earnings of the individual securities to their fair value.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on securities
using the interest method over the lives of the securities, adjusted for actual
prepayments. Gains and losses on the sale of securities are recorded on the
trade date and are calculated using the specific identification method.
F-12
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marketable equity securities and mutual funds which are included in securities
available for sale are carried at fair value with the net unrealized gains and
losses included in shareholders' equity on an after-tax basis as other
comprehensive income. Declines in the fair value of individual equity securities
and mutual funds below their cost that are other than temporary result in
write-downs through charges to earnings of the individual securities to their
fair value. The fair value of marketable equity securities and mutual funds was
estimated by obtaining prices actively quoted on national markets. Equity
securities that do not have readily determinable fair values are classified as
investment securities and carried at historical cost. These securities are
evaluated for other than temporary declines in value, and, if impaired, the
historical cost of the securities is written down through charges to earnings to
estimated fair value.
The specific identification method was used in determining cost in computing
realized gains and losses in connection with sales of securities available for
sale.
TAX CERTIFICATES -- Tax certificates represent a priority lien against real
property for which assessed real estate taxes are delinquent. Tax certificates
are classified as investment securities and are carried at cost, net of an
allowance for probable losses, which approximates fair value.
ALLOWANCE FOR TAX CERTIFICATE LOSSES - The allowance represents management's
estimate of incurred losses in the portfolio that are probable and subject to
reasonable estimation. In establishing its allowance for tax certificate losses,
management considers past loss experience, present indicators, such as the
length of time the certificate has been outstanding, economic conditions and
collateral values. Tax certificates and resulting deeds are classified as
non-accrual when a tax certificate is 24 to 60 months delinquent, depending on
the municipality, from the acquisition date. At that time, interest ceases to be
accrued. The provision to record the allowance is included in other expenses.
LOANS AND LEASES - Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal balances net of any unearned income, unamortized deferred
fees or costs, premiums or discounts and an allowance for loan losses. Interest
income on loans, including the recognition of unearned income, discounts and
loan fees, is accrued based on the outstanding principal amount of loans using
the interest method. Equipment leases are carried at the aggregate of lease
payments receivable plus estimated residual value of the leased property, less
unearned income. Unearned income on equipment leases is amortized over the lease
terms by the interest method.
LOANS HELD FOR SALE - Such loans are reported at the lower of aggregate cost or
estimated fair value based on current market prices for similar loans. Loan
origination fees and related direct loan origination costs on originated loans
held for sale and premiums and discounts on purchased loans held for sale are
deferred until the related loan is sold.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan and lease losses reflects
management's estimate of probable incurred credit losses in the loan portfolios.
Loans are charged off against the allowance when management believes the
uncollectibility of the loan balance is confirmed. Recoveries are credited to
the allowance.
The allowance consists of three components. The first component of the allowance
is for high-balance "non-homogenous" loans that are individually evaluated for
impairment. A loan is impaired when collection of principal and interest based
on the contractual terms of the loan is not probable. The process for
identifying loans to be evaluated individually for impairment is based on
management's identification of classified loans. Once an individual loan is
found to be impaired, a valuation allowance is assigned to the loan based on one
of the following three methods: (1) present value of expected future cash flows,
(2) fair value of collateral less costs to sell, or (3) observable market price.
Non-homogenous loans that are not impaired are assigned an allowance based on
historical data by product. The second component of the allowance is for
"homogenous loans" in which groups of loans with common characteristics are
evaluated to estimate the inherent losses in the portfolio. Homogenous loans
have certain characteristics that are common to the entire portfolio so as to
form a basis for predicting losses on historical data and delinquency trends as
it relates to the group. Management segregates homogenous loans into groups such
as residential real estate, small business mortgage, small business
non-mortgage, lease financing, and various types of consumer loans. The
methodology utilized in establishing the allowance for homogenous loans includes
consideration of trends in industries, analysis of historical losses, static
pool analysis, delinquency trends, and credit scores. The third component of the
allowance is determined separately from the procedures outlined above. This
component addresses certain industry and geographic concentrations, the view of
regulators and changes in composition of the loan portfolio.
Management believes the allowance for loan and lease losses is adequate and that
it has a sound basis for estimating the adequacy of the allowance for loan and
lease losses. Actual losses incurred in the future are highly dependent upon
future events, including the economies of the geographic areas in which
BankAtlantic holds loans.
F-13
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NON-PERFORMING LOANS - A loan or lease is generally placed on non-accrual status
at the earlier of (i) the loan becoming past due 90 days as to either principal
or interest or (ii) when the borrower has entered bankruptcy proceedings and the
loan is delinquent. Exceptions to placing 90-day past due loans on non-accrual
may be made if there exists an abundance of collateral and the loan is in the
process of collection. Loans are placed on non-accrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful. When
a loan is placed on non-accrual status, interest accrued but not received is
reversed against interest income. A non-accrual loan may be restored to accrual
status when delinquent loan payments are collected and the loan is expected to
perform in the future according to its contractual terms. Interest income on
impaired loans is recognized on a cash basis.
Consumer non-mortgage loans and lease financing contracts that are 120 days past
due are charged off. Real estate secured consumer and residential loans that are
120 days past due are charged down to fair value less cost to sell.
REAL ESTATE OWNED ("REO") - REO is recorded at the lower of cost or estimated
fair value, less estimated selling costs when acquired, establishing a new cost
basis. Write-downs required at the time of acquisition are charged to the
allowance for loan losses. Expenditures for capital improvements made thereafter
are generally capitalized. Real estate acquired in settlement of loans is
anticipated to be sold and valuation allowance adjustments are made to reflect
any subsequent changes in fair values from the initially recorded amount. The
costs of holding REO are charged to operations as incurred. Provisions and
reversals in the REO valuation allowance are reflected in operations. Management
obtains independent appraisals for significant properties. The construction and
development activities of Levitt are not accounted for as REO.
INVESTMENT BANKING ACTIVITIES - Investment banking revenues include gains,
losses, and fees, net of syndicate expenses, arising from securities offerings
in which Ryan Beck acts as an underwriter or agent. Investment banking revenues
also include fees earned from providing merger and acquisition and financial
restructuring advisory services. Investment banking management fees are recorded
on the offering date, sales concessions on settlement date, and underwriting
fees at the time the underwriting is completed and the income is reasonably
determined.
SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED - Securities owned
and securities sold, but not yet purchased are associated with proprietary
transactions entered into by Ryan Beck and are accounted for at fair value with
changes in the fair value included in earnings. 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, management's estimates of amounts to be
realized on settlement or management valuation model associated with securities
that are not readily marketable. Profit and losses arising from transactions is
recorded on a trade-date basis.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE - This includes land, land development
costs, interest and other construction costs associated with Levitt's real
estate inventory, BankAtlantic Bancorp's investment in a real estate variable
interest entity and BFC's real estate property, an outlet center in North
Carolina. Real estate inventory is stated at the accumulated cost or when
circumstances indicate that the inventory is impaired at estimated fair value.
The estimated fair value of real estate is evaluated based on disposition of
real estate in the normal course of business under existing and anticipated
market conditions. The evaluation takes into consideration the current status of
property, various restrictions, carrying costs, debt service requirements, costs
of disposition and any other circumstances which may affect fair value,
including management's plans for the property. Due to the large acreage of
certain land holdings, disposition in the normal course of business is expected
to extend over a number of years.
Inventory costs include direct acquisition, development and construction costs,
interest and other indirect construction costs. Land and indirect land
development costs are accumulated by specific area and allocated to various
parcels or housing units using specific identification and allocation based upon
the relative sales value, unit or area methods. Direct construction costs are
assigned to housing units based on specific identification. Construction costs
primarily include direct construction costs and capitalized field overhead.
Other costs are comprised of tangible selling costs, prepaid local government
fees and capitalized real estate taxes. Tangible selling costs are capitalized
by communities and represent costs incurred that are used directly throughout
the selling period to aid in the sale of housing units, such as model
furnishings and decorations, sales office furnishings and facilities, exhibits,
displays and signage. These tangible selling costs are capitalized and amortized
over benefited home sales. Direct construction costs are assigned to housing
units based on specific identification. Start-up costs and selling expenses are
expensed as incurred.
F-14
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest is capitalized at the effective rates paid on borrowings incurred for
real estate inventory during the preconstruction and planning stage and the
periods that projects are under development. Capitalization of interest is
discontinued if development ceases at a project. Interest is amortized to cost
of sale as related homes, land and units are sold.
Revenue and all related costs and expenses from home and land sales are
recognized at the time that closing has occurred, when title and possession of
the property and the risks and rewards of ownership transfer to the buyer, and
when other sale and profit recognition criteria are satisfied as required under
GAAP for real estate transactions. In order to properly match revenues with
expenses, an estimation is made as to certain construction and land development
costs incurred but not yet paid at the time of closing. Estimated costs to
complete are determined for each closed home and land sale based upon historical
data with respect to similar product types and geographical areas. The accuracy
of estimates are monitored by comparing actual costs incurred subsequent to
closing to the estimate made at the time of closing and modifications are made
to the estimates based on these comparisons. We do not expect the estimation
process to change in the future nor do we expect actual results to materially
differ from such estimates.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES - The Company follows the equity
method of accounting to record its interests in subsidiaries in which it does
not own a majority of the voting stock. Effective January 1, 2003, BankAtlantic
Bancorp, implemented FIN 46, which requires the use of the equity method to
account for investments in variable interest entities in which it is not the
primary beneficiary. As a result of the adoption of FIN 46 in 2003, BankAtlantic
Bancorp began accounting for its interest in statutory business trusts (utilized
in the issuance of trust preferred securities) under the equity method. Under
this method, the initial investment is recorded at cost and is subsequently
adjusted to recognize its share of earnings or losses. Distributions received
reduce the carrying amount of the investment.
Interest is capitalized on real estate joint ventures while the venture has
activities in progress necessary to commence its planned principal operations
based on the average balance outstanding of investment and advances to joint
ventures. Interest income on loans from BankAtlantic to joint ventures is
eliminated in consolidation based on the Company's ownership percentage until
realized by the sale of real estate by the joint venture.
GOODWILL AND OTHER INTANGIBLE ASSETS - The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," on January 1, 2002. As of the adoption date, the Company no longer
amortizes goodwill over its useful life. Instead, goodwill is tested for
impairment annually at the reporting unit level, by comparing the fair value of
the reporting unit to its carrying amount. The Company will recognize a goodwill
impairment charge if the carrying amount of the goodwill assigned to the
reporting unit is greater than the implied fair value of the goodwill.
At the date of adoption, the fair values of all reporting units, except for the
Ryan Beck reportable segment, exceeded their respective carrying amounts at the
adoption date. Based on an independent valuation, a $15.1 million impairment
loss (net of a $1.2 million tax benefit) related to Ryan Beck was recorded
effective as of January 1, 2002 as the cumulative effect of a change in
accounting principle.
Other intangible assets consist of core deposit intangible assets, which were
initially measured at fair value and are amortized over their useful life of
eight years.
Prior to the adoption of SFAS No. 142, goodwill was being amortized on a
straight-line basis over estimated useful lives, ranging from 7 to 25 years. The
Company periodically reviewed its goodwill for events or changes in
circumstances that indicated that the carrying amount was not recoverable, in
which cases an impairment charge was recorded.
OFFICE PROPERTIES AND EQUIPMENT - Land is carried at cost. Office properties,
equipment and computer software are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which generally range up to 40 years for
buildings and 3-10 years for equipment and software. The cost of leasehold
improvements is being amortized using the straight-line method over the terms of
the related leases.
Expenditures for new properties and equipment and major renewals and betterments
are capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred, and gains or losses on disposal of assets are reflected in current
operations.
IMPAIRMENT OF LONG LIVED ASSETS - Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for impairment, the
Company compares the expected future cash flows (undiscounted and without
interest charges) to the carrying amount of the asset and records an impairment
loss if the carrying amount exceeds the expected future cash flows.
F-15
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived assets to be abandoned, exchanged for a similar productive asset, or
distributed to owners in a spin-off are considered held and used until disposed.
The depreciable life of a long-lived asset to be abandoned is revised and the
asset is depreciated over its shortened depreciable life when an entity commits
to a plan to abandon the asset before the end of its previously estimated useful
life. An impairment loss is recognized at the date a long-lived asset is
exchanged for a similar productive asset or distributed to owners in a spin-off
if the carrying amount of the asset exceeds its fair value. Under the accounting
model long-lived assets classified as held for sale are reported at the lower of
their carrying amount or fair value less cost to sell and depreciation
(amortization) is ceased.
ADVERTISING -- Advertising expenditures are expensed as incurred.
INCOME TAXES - BFC and its wholly owned subsidiaries file a consolidated U.S.
federal income tax return. Subsidiaries in which the Company owns less than 80%
of the outstanding common stock, including BankAtlantic Bancorp and Levitt, are
not included in the Company's consolidated U.S. federal income tax return. The
Company and its subsidiaries file separate state income tax returns for each
state jurisdiction.
The provision for income taxes is based on income before taxes reported for
financial statement purposes after adjustment for permanent differences.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in the period
that includes the statutory enactment date. A deferred tax asset valuation
allowance is recorded when it is more likely than not that deferred tax assets
will not be realized.
DERIVATIVE INSTRUMENTS -- All derivatives are recognized on the statement of
financial condition at their fair value. On the date the derivative contract is
entered, the Company evaluates the derivative in order to determine if it
qualifies for hedge accounting. The hedging instrument must be highly effective
in achieving offsetting changes in the hedge instrument and hedged item
attributable to the risk being hedged. Any ineffectiveness which arises during
the hedging relationship is recognized in earnings in the Company's statements
of operations. When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk are recorded in earnings. Changes in the
fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in other comprehensive income until
earnings are affected by the variability in cash flows of the designated hedged
item. Changes in the fair value of undesignated derivative instruments are
reported in current-period earnings.
Commitments to sell residential mortgage loans are accounted for as derivatives
at fair value.
At January 1, 2001, BankAtlantic Bancorp had outstanding interest rate swap
contracts utilized in BankAtlantic Bancorp's interest rate risk management
strategy. In conjunction with the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities, on January 1, 2001, BankAtlantic
Bancorp accounted for the interest rate swap contracts in accordance with the
transition provisions of SFAS No. 133 and recorded a cumulative effect
adjustment gain of approximately $1.1 million, net of tax.
MINORITY INTEREST- Minority interest reflects third parties' ownership interest
in BankAtlantic Bancorp, Levitt and venture partnerships that the Company
controls.
EARNINGS PER COMMON SHARE - While the Company has two classes of common stock
outstanding, the two-class method is not presented because the Company's capital
structure does not provide for different dividend rates or other preferences,
other than voting rights, between the two classes. Basic earnings per share
excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options to issue common
shares were exercised. Common stock options, if dilutive, are considered in the
weighted average number of dilutive common shares outstanding. The options are
included in the weighted average number of dilutive common shares outstanding
based on the treasury stock method. The diluted earnings per share
F-16
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
computations take into consideration the potential dilution from securities
issued by subsidiaries that enable their holders to obtain the subsidiary's
common stock. The resulting net income amount is divided by the weighted average
number of dilutive common shares outstanding, when dilutive. For all periods,
the shares of the Company issued in connection with a 1984 acquisition are
considered outstanding after elimination of the Company's percentage ownership
of the entity that received the shares issued in that acquisition.
STOCK-BASED COMPENSATION PLANS - The Company, BankAtlantic Bancorp and Levitt
each separately maintain both qualifying and non-qualifying stock-based
compensation plans for their employees and directors. All of the entities have
elected to account for their employee stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25 and related interpretations.
As such, no compensation is recognized in connection with option grants that had
an exercise price equal to or greater than the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
For the Years Ended December 31,
-------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
--------- --------- ---------
PRO FORMA NET INCOME
Net income, as reported $ 7,022 $ 5,192 $ 5,474
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects and minority interest 52 55 79
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related income tax
effects and minority interest (639) (477) (367)
--------- --------- ---------
Pro forma net income $ 6,435 $ 4,770 $ 5,186
========= ========= =========
EARNINGS PER SHARE:
Basic as reported $ 0.48 $ 0.36 $ 0.38
========= ========= =========
Basic pro forma $ 0.44 $ 0.33 $ 0.36
========= ========= =========
Diluted as reported $ 0.39 $ 0.33 $ 0.28
========= ========= =========
Diluted pro forma $ 0.35 $ 0.30 $ 0.26
========= ========= =========
NEW ACCOUNTING PRONOUNCEMENTS - In January 2003, the FASB issued Interpretation
("FIN 46"). On July 1, 2003, BankAtlantic Bancorp implemented the interpretation
effective January 1, 2003. As a consequence of the implementation, BankAtlantic
Bancorp's wholly owned statutory business trusts formed to issue trust preferred
securities were deconsolidated and a real estate joint venture was consolidated.
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"), which replaces FIN
46. FIN 46R addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights. This
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The interpretation also requires
disclosures about variable interest entities that the Company is not required to
consolidate but in which it has a significant variable interest. The Company is
required to adopt FIN 46R by the end of the first reporting period ending after
March 15, 2004. The Company has completed its initial evaluation of FIN 46R, and
has concluded that other than to the extent BankAtlantic Bancorp was impacted by
its prior implementation of FIN 46, the adoption of FIN 46R is not expected to
have a material impact on the results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability. Many of those instruments were previously classified
as equity. SFAS No. 150 was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective at the beginning of the
first interim period beginning after June 15, 2003. Upon adoption, SFAS No. 150
did not have a significant impact on the Company's financial statements. SFAS
No. 150 also required that mandatorily redeemable minority interests in
finite-lived entities be classified as liabilities and reported at settlement
value. The FASB deferred those requirements related to mandatorily redeemable
minority interests in finite-lived entities indefinitely pending further FASB
action. The Company's minority interest in finite-lived entities is not
significant.
F-17
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, the FASB issued SFAS No. 132, revised "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This revised statement
requires additional disclosures about the assets, obligations, cash flows and
net periodic benefit cost of defined benefit pension and postretirement plans,
as well as the expense recorded for such plans. SFAS No. 132 is effective for
financial statements with fiscal years ending after December 15, 2003. The
Company has implemented the disclosure requirements of SFAS No. 132 as of
December 31, 2003.
In December 2003, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee ("AcSEC") issued Statement of
Position 03-3 ("SOP"). The SOP addresses accounting for loans and debt
securities acquired in purchase business combinations or purchased subsequent to
origination. The SOP prohibits the creation of valuation allowances in the
initial accounting of all loans acquired. The SOP does not apply to originated
loans. The SOP limits the yield that may be accreted to the excess of the
purchaser's estimate of undiscounted expected principal, interest and other cash
flows over the purchaser's initial investment. The SOP requires excess
contractual cash flows over cash flows expected to be collected to not be
recognized as an adjustment of yield, loss accrual or valuation allowance.
Subsequent increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan's yield over its
remaining life. Decreases in cash flows expected to be collected should be
recognized as impairments. The SOP is effective for loans and securities
acquired in fiscal years beginning after December 15, 2004 with early adoption
encouraged. BankAtlantic Bancorp's management is currently evaluating the
requirements of the SOP concerning future loan acquisitions that are within the
scope of the SOP.
2. DISCONTINUED OPERATIONS AND ACQUISITIONS
DISCONTINUED OPERATIONS
During the year ended December 31, 2003, Ryan Beck sold two of its subsidiaries,
GMS and Cumberland Advisors, Inc. ("Cumberland"). The above transactions are
presented as discontinued operations in the Company's statements of operations
for the years ended December 31, 2003 and 2002.
As part of Ryan Beck's acquisition of certain of the assets and assumption of
certain of the liabilities of Gruntal & Co, LLC, ("Gruntal") in April 2002, Ryan
Beck acquired all of the membership interests in GMS. Since its acquisition, GMS
was operated as an independent business unit. After a receipt of an offer by
GMS's management to purchase GMS from Ryan Beck, Ryan Beck sold its entire
membership interest in GMS to GMS Group Holdings Corp. ("Buyer") in August 2003
for $22.6 million. The Buyer was formed by the management of GMS along with
other investors. Ryan Beck received cash proceeds from the sale of $9.0 million
and a $13.6 million secured promissory note issued by the Buyer with recourse to
the management of GMS. The note is secured by the membership interest in GMS and
contains covenants that require GMS to maintain certain capital and financial
ratios. Ryan Beck did not recognize any gain or loss associated with the
transaction. During 2003, Buyer made a $1.6 million prepayment of principal of
the promissory note, which reduced the outstanding balance to $12.0 million.
During the second quarter of 2003, Ryan Beck sold its entire interest in
Cumberland for $1.5 million and recognized a $228,000 loss.
F-18
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of earnings from discontinued operations were as follows (in
thousands):
For the Years Ended December 31,
--------------------------------
2003 2002
-------- --------
NET INTEREST INCOME $ 5,240 $ 4,187
NON-INTEREST INCOME:
Investment banking income 17,782 20,418
Other 1,375 1,706
-------- --------
Total non-interest income 19,157 22,124
-------- --------
NON-INTEREST EXPENSES:
Employee compensation and benefits 17,377 17,986
Occupancy and equipment 744 763
Advertising and promotion 402 230
Professional fees 1,762 1,362
Communications 1,148 1,162
Floor broker and clearing fees 683 668
Other 1,655 1,301
-------- --------
Total non-interest expenses 23,771 23,472
-------- --------
INCOME FROM DISCONTINUED OPERATIONS BEFORE
INCOME TAXES 626 2,839
(Benefit) provision for income taxes (517) 303
-------- --------
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX $ 1,143 $ 2,536
======== ========
The assets and liabilities associated with discontinued operations included in
the Company's statement of financial condition as of December 31, 2002 consisted
of the following (in thousands):
ASSETS
Cash $ 455
Securities owned 114,823
Goodwill 1,204
Other assets 5,546
--------
TOTAL ASSETS $122,028
========
LIABILITIES
Securities sold but not yet purchased $ 2,797
Due to clearing agent 92,035
Other liabilities 4,619
--------
TOTAL LIABILITIES $ 99,451
========
The following table summarizes the assets and liabilities included in the sale
of Cumberland and GMS and the consideration received (in thousands).
Cash $ 814
Securities owned 105,083
Property and equipment 559
Goodwill 1,204
Other assets 5,479
Securities sold but not yet purchased (3,781)
Due to clearing agent (80,561)
Other liabilities (4,347)
---------
Net assets sold 24,451
Notes receivable - GMS Holdings, Inc. (13,681)
Cash sold (815)
---------
Net cash proceeds received $ 9,955
=========
F-19
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITIONS
On April 26, 2002, Ryan Beck acquired certain of the assets and assumed certain
of the liabilities of Gruntal and acquired all of the membership interests in
GMS the ("Gruntal transaction"). The assets acquired from Gruntal include all of
Gruntal's customer accounts, furniture, leasehold improvements and equipment
owned by Gruntal at the offices where Gruntal's financial consultants were
located, assets related to Gruntal's deferred compensation plan and forgivable
notes. The consideration provided by Ryan Beck for this transaction was the
assumption of a note payable related to furniture and equipment in the Gruntal
offices, assumption of non-cancelable leases associated with the Gruntal offices
acquired, obligations owed to financial consultants participating in Gruntal's
deferred compensation plan that accepted employment with Ryan Beck, and the
payment of $6.0 million in cash.
The Gruntal transaction was accounted for by the purchase method of accounting.
Under this method the acquired assets and assumed liabilities of Gruntal were
recorded at their estimated fair value, and the amount of estimated fair value
of net assets in excess of the purchase price was used to write down
non-financial assets. The remaining balance was recorded as an extraordinary
income item. The Company's financial statements reflect the Gruntal transaction
since April 26, 2002.
On March 22, 2002, BankAtlantic acquired Community, for $170.3 million in cash
and immediately merged Community into BankAtlantic. At the acquisition date,
BankAtlantic Bancorp made a $78.5 million capital contribution to BankAtlantic.
BankAtlantic funded the acquisition of Community using such capital contribution
received from BankAtlantic Bancorp and funds obtained from the liquidation of
investments. Community's results of operations have been included in the
Company's consolidated financial statements since March 22, 2002. Community was
a federally chartered savings and loan association founded in 1955 and
headquartered in North Palm Beach, Florida. At March 22, 2002, Community had
assets of $909 million, deposits of $637 million and 21 branches.
The following table summarizes the fair value of assets acquired and liabilities
assumed in connection with the acquisition of Community and the Gruntal
transaction effective March 22, 2002 and April 26, 2002, respectively (in
thousands):
Community Gruntal Total
----------- ----------- -----------
Cash and interest earning deposits $ 124,977 $ 886 $ 125,863
Securities available for sale 79,768 -- 79,768
Securities owned -- 151,909 151,909
Loans receivable, net 623,469 -- 623,469
FHLB stock 8,063 -- 8,063
Investments and advances in unconsolidated
subsidiaries 16,122 -- 16,122
Goodwill 55,068 -- 55,068
Core deposit intangible asset 15,117 -- 15,117
Other assets 46,620 12,597 59,217
----------- ----------- -----------
Fair value of assets acquired 969,204 165,392 1,134,596
----------- ----------- -----------
Deposits 639,111 -- 639,111
FHLB advances 138,981 -- 138,981
Other borrowings 14,291 3,427 17,718
Securities sold, but not yet purchased -- 1,201 1,201
Due to clearing agent -- 101,705 101,705
Other liabilities 6,022 27,463(1) 33,485
----------- ----------- -----------
Fair value of liabilities assumed 798,405 133,796 932,201
Fair value of net assets acquired over cost -- (23,749)(2) (23,749)
----------- ----------- -----------
Purchase price 170,799 7,847 178,646
Cash acquired (124,977) (886) (125,863)
----------- ----------- -----------
Purchase price net of cash acquired $ 45,822 $ 6,961 $ 52,783
=========== =========== ===========
(1) Included in Gruntal's other liabilities were a $21 million deferred
compensation plan obligation, of which $18.3 million was vested. Also
included in other liabilities was $675,000 of termination costs for
contract obligations related to leased equipment and $654,000 of contract
termination obligations associated with closing certain Gruntal branches.
(2) The Company recognized an extraordinary gain of $23.7 million, net of
income taxes of $2.8 million, and reduced the carrying amount of
non-financial assets by $11.2 million as a result of the fair value of the
assets acquired exceeding the
F-20
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost of the Gruntal transaction. BankAtlantic Bancorp did not establish a
deferred tax liability for the extraordinary gain associated with the GMS
membership interest acquired because BankAtlantic Bancorp acquired the GMS
membership interest rather than the net assets.
The purchase price of Community consisted of $170.3 million in cash and $500,000
of acquisition professional fees. The cost of the Gruntal transaction consisted
of a $6.0 million cash payment, $750,000 of acquisition professional fees and an
estimated $1.05 million of contingent consideration payable to Gruntal. The
$1.05 million contingent consideration to Gruntal relates to possible deferred
compensation plan participant forfeitures and represents the maximum amount of
additional consideration. Pursuant to the terms of the acquisition agreement,
during each of the three years beginning October 27, 2002, Ryan Beck is
obligated to pay Gruntal up to $350,000 of forfeitures each year under the
Amended and Restated Gruntal & Co. LLC Deferred Compensation Plan for each of
the years in the three year period ended October 26, 2005. During the year ended
December 31, 2003, Ryan Beck paid Gruntal $350,000 reducing the liability to
$700,000.
The following pro forma information for the year ended December 31, 2002 is
presented as if the Gruntal and Community transactions had been consummated on
January 1, 2002. The pro forma information is not necessarily indicative of the
combined results of operations which would have been realized had the
transactions been consummated during the period or as of the date for which the
pro forma financial information is presented.
2002
------------------------------
(In thousands, except per share data) Historical Pro Forma
---------- ---------
Interest income $ 304,700 $ 320,654
Interest expense 151,878 158,598
Provision for loan losses 14,077 16,121
--------- ---------
Net interest income after provision for loan losses $ 138,745 $ 145,935
--------- ---------
Loss from continuing operations $ (5,986) $ (6,498)
========= =========
Basic loss per share from continuing operations $ (0.42) $ (0.45)
========= =========
Diluted loss per share from continuing operations $ (0.43) $ (0.47)
========= =========
During April 2002, the Company's ownership in Bluegreen increased from
approximately 5% to 40%. Bluegreen is a New York Stock Exchange-listed company
engaged in the acquisition, development, marketing and sale of primarily
drive-to vacation interval resorts, golf communities and residential land. The
interest in Bluegreen was acquired for an aggregate purchase price of
approximately $56 million. BankAtlantic Bancorp acquired approximately 5% of
Bluegreen common stock during the first quarter of 2001, and Levitt acquired
approximately 35% of Bluegreen common stock in April 2002. The acquisition of
Bluegreen at various acquisition dates was accounted for as a step acquisition
under the purchase method of accounting. In a step acquisition, the purchase
price allocation is performed at each acquisition date and goodwill is
recognized with each step. As a consequence, the net assets of Bluegreen were
recognized at estimated fair value to the extent of BankAtlantic Bancorp's
ownership percentage at each acquisition date. The purchase price was, in the
aggregate, $2.1 million lower than the ownership percentage in the underlying
equity in the net assets of Bluegreen. The $2.1 million was allocated to
property and equipment at the date of the latest step purchase. Prior period
financial statements were not restated to reflect the results of applying the
equity method to the initial acquisition, due to lack of significance. Under the
equity method, the investment in Bluegreen was recorded at cost and the carrying
amount of the investment is adjusted to recognize the Company's interest in the
earnings or loss of Bluegreen after the acquisition date.
F-21
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed in connection with the Bluegreen investment to the
extent of Levitt's and BankAtlantic Bancorp's ownership interest in the
aggregate of 40% (in thousands).
Fair
Value
--------
Cash and cash equivalents $ 19,077
Contracts receivable, net 8,544
Notes receivable, net 22,449
Prepaid expenses 4,556
Inventory, net 75,260
Retained interests in notes receivable sold 15,101
Property and equipment, net 16,156
Other assets 2,247
--------
Fair value of assets acquired 163,390
--------
Accounts payable, accrued liabilities and other liabilities 20,196
Deferred income taxes 9,505
Line-of-credit notes payable and receivable -
backed notes payable 21,496
10.50% senior secured notes payable 43,508
8.00% convertible subordinated debentures to related parties 2,350
8.25% convertible subordinated debentures 9,826
--------
Fair value of liabilities assumed 106,881
--------
Purchase price of Bluegreen Corporation $ 56,509
========
In June 2001, pursuant to the February 1998 acquisition agreement under which
Ryan Beck acquired Cumberland, BankAtlantic Bancorp issued 43,991 shares of its
Class A Common Stock and made a cash payment of $340,000 to the former
Cumberland partners. Such additional consideration was paid under earn-out
provisions in accordance with the acquisition agreement and was recorded as an
adjustment to the purchase price of Cumberland.
Effective March 1, 1998, BankAtlantic Bancorp acquired Leasing Technology Inc.
("LTI"), a company engaged in the equipment leasing and finance business, in
exchange for 826,175 shares of BankAtlantic Bancorp's Class A Common Stock and
$300,000 in cash. This merger was accounted for under the purchase method of
accounting. BankAtlantic Bancorp was amortizing $7.9 million of goodwill from
the transaction over 25 years on a straight-line basis. During the third quarter
of 2001, after an extensive review by BankAtlantic Bancorp of LTI's operations,
management concluded that LTI would not be able to meet performance
expectations, and its products did not complement BankAtlantic Bancorp's product
mix. As a consequence, the offices of LTI were closed and new lease originations
were ceased. BankAtlantic Bancorp determined that the goodwill associated with
the LTI acquisition was impaired, resulting in the write-off of the remaining
unamortized LTI goodwill of $6.6 million.
F-22
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AND SHORT-TERM INVESTMENTS
The following tables summarize available-for-sale securities, investment
securities and tax certificates(in thousands) :
Available for Sale
---------------------------------------------------------------
December 31, 2003
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Appreciation Depreciation Fair Value
--------- ------------ ------------ ----------
MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities $315,520 $ 6,262 $ 529 $321,253
Real estate mortgage investment
conduits 17,378 120 -- 17,498
-------- -------- -------- --------
Total mortgage-backed
securities 332,898 6,382 529 338,751
-------- -------- -------- --------
INVESTMENT SECURITIES:
Other bonds 585 -- -- 585
Equity securities 16,635 4,471 -- 21,106
-------- -------- -------- --------
Total investment securities 17,220 4,471 -- 21,691
-------- -------- -------- --------
Total $350,118 $ 10,853 $ 529 $360,442
======== ======== ======== ========
Available for Sale
---------------------------------------------------------------
December 31, 2002
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Appreciation Depreciation Fair Value
--------- ------------ ------------ ----------
MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities $581,893 $ 20,696 $ -- $602,589
Real estate mortgage investment
conduits 102,192 1,299 30 103,461
-------- -------- -------- --------
Total mortgage-backed
securities 684,085 21,995 30 706,050
-------- -------- -------- --------
INVESTMENT SECURITIES:
Other bonds 411 10 -- 421
Equity securities 5,703 957 -- 6,660
-------- -------- -------- --------
Total investment securities 6,114 967 -- 7,081
-------- -------- -------- --------
Total $690,199 $ 22,962 $ 30 $713,131
======== ======== ======== ========
Unrealized losses on mortgage-backed securities at December 31, 2003 have not
been recognized into income as the securities are issued by government agencies
and are of high credit quality. The decline in fair value is primarily due to
increased market interest rates from the securities' acquisition dates. The fair
value is expected to recover as the securities approach their maturity date or
as market rates decline. At December 31, 2003, there are no mortgage-backed
securities with unrealized losses greater than one year.
F-23
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Securities and Tax Certificates
------------------------------------------------------------------
December 31, 2003(1)
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
--------- ------------ ------------ ----------
Tax certificates --
Net of allowance of
$2,870 $ 190,906 $ -- $ -- $ 190,906
Equity investment(2) 1,800 -- -- 1,800
--------- --------- --------- ---------
$ 192,706 $ -- $ -- $ 192,706
========= ========= ========= =========
Investment Securities and Tax Certificates
------------------------------------------------------------------
December 31, 2002(1)
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
--------- ------------ ------------ ----------
Tax certificates --
Net of allowance of
$1,873 $ 194,074 $ -- $ -- $ 194,074
Mortgage-backed securities(3) 14,383 458 -- 14,841
Equity investment(2) 3,783 -- -- 3,783
--------- --------- --------- ---------
$ 212,240 $ 458 $ -- $ 212,698
========= ========= ========= =========
(1) BankAtlantic Bancorp's management considers estimated fair value
equivalent to book value for tax certificates and equity investment
securities since these securities have no readily traded market and are
deemed to approximate fair value.
(2) Investment securities consist of equity instruments purchased through
private placements and are accounted for at historical cost adjusted for
other-than-temporary declines in value.
(3) Mortgage-backed securities at December 31, 2002 represented beneficial
interests in a real estate mortgage investment trust secured by
commercial real estate. During the year ended December 31, 2002,
BankAtlantic Bancorp transferred all of its residential mortgage-backed
securities held to maturity ($198.7 million) to securities available for
sale. The securities were transferred in order to respond to the
significant decline in interest rates during the period. The securities
transferred were not sold during the year ended December 31, 2002. The
remaining mortgage-backed securities held to maturity during 2002 were
collateralized by commercial real estate and were transferred to
securities available for sale and sold during the year ended December
31, 2003. The securities were transferred and sold upon non-compliance
with debt covenants by the issuer.
The scheduled maturities of debt securities and tax certificates were (in
thousands):
Debt Securities
Available for Sale Tax Certificates
---------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
December 31, 2003 (1)(2) Cost Value Cost Value
--------- --------- --------- ---------
Due within one year $ 43 $ 43 $136,514 $136,514
Due after one year, but within five years 655 659 54,392 54,392
Due after five years, but within ten years 528 557 -- --
Due after ten years 332,257 338,077 -- --
-------- -------- -------- --------
Total $333,483 $339,336 $190,906 $190,906
======== ======== ======== ========
(1) Scheduled maturities in the above table may vary significantly from
actual maturities due to prepayments.
(2) Except for tax certificates, maturities are based upon contractual
maturities. Tax certificates do not have stated maturities, and
estimates in the above table are based upon historical repayment
experience (generally 1 to 2 years).
F-24
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for tax certificate losses was (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Balance, beginning of period $ 1,873 $ 1,521 $ 1,937
------- ------- -------
Charge-offs (869) (1,783) (2,162)
Recoveries 666 660 546
------- ------- -------
Net charge-offs (203) (1,123) (1,616)
Provision charged to operations 1,200 1,475 1,200
------- ------- -------
Balance, end of period $ 2,870 $ 1,873 $ 1,521
======= ======= =======
The components of gains and losses on sales of securities were (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Gross realized gains on securities activities $ 900 $ 8,711 $ 7,130
Gross realized losses on securities activities (1,961) (67) --
Unrealized loss on futures contract (49) (66) (6)
------- ------- -------
Securities activities, net $(1,110) $ 8,578 $ 7,124
======= ======= =======
Proceeds from sales of securities available for sale were $41.2 million, $197.6
million, and $194.2 million during the years ended December 31, 2003, 2002 and
2001, respectively. Included in gross losses on securities activities, net
during the year ended December 31, 2003 was $1.9 million of realized losses
related to the settlement of interest rate swap contracts. The interest rate
swaps were accounted for as a cash flow hedge and the unrealized losses were
recorded in other comprehensive income during the years ended December 31, 2002
and 2001. Included in gains on securities activities, net during the year ended
December 31, 2001 was $1.4 million of realized gains related to the settlement
of interest rate swap contracts and unrealized losses of $1.5 million related to
interest rate swap contracts that were subsequently designated as cash flow
hedges.
Securities owned consisted of the following (in thousands):
December 31,
--------------------------
2003 2002
-------- --------
Debt obligations:
States and municipalities (1) $ 9,903 $119,417
Corporations 5,159 5,344
U.S. Government and agencies 62,229 26,004
Corporate equity 15,072 19,280
Mutual funds 24,639 16,409
Certificates of deposits 7,563 --
-------- --------
Total $124,565 $186,454
======== ========
(1) Includes $108.3 million of securities owned by GMS at December 31,
2002, of which approximately $86 million are non-rated securities and
$9.7 million of those securities are not accruing interest.
All the securities owned at December 31, 2003 and 2002 were associated with
trading activities conducted both as principal and as agent on behalf of
individual and institutional investor clients of Ryan Beck. Transactions as
principal involve making markets in securities which are held in inventory to
facilitate sales to and purchases from customers. Ryan Beck realized income from
principal transactions of $95.5 million, $50.4 million and $18.9 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
F-25
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the ordinary course of business, Ryan Beck borrows under an agreement with
its clearing broker by pledging securities owned as collateral primarily to
finance trading inventories. As of December 31, 2003, the balance due to the
clearing broker was $8.6 million.
Securities sold, but not yet purchased consists of the following (in thousands):
December 31,
------------------------
2003 2002
------- -------
Corporate equity $ 3,544 $ 3,691
Corporate bonds 1,963 1,159
State and municipalities 67 9,566
U.S. Government agencies 32,231 23,587
Certificates of deposits 8 --
------- -------
$37,813 $38,003
======= =======
Securities sold, but not yet purchased are a part of Ryan Beck's normal
activities as a broker and dealer in securities and are subject to
off-balance-sheet risk should Ryan Beck be unable to acquire the securities for
delivery to the purchaser at prices equal to or less than the current recorded
amounts.
The following table provides information on securities purchased under resell
agreements (dollars in thousands):
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Ending balance $ -- $ 30,145 $ 156
Maximum outstanding at any month end within period $160,000 $ 30,145 $ 3,651
Average amount invested during period $ 31,589 $ 4,558 $ 1,152
Average yield during period 0.60% 0.73% 2.80%
The underlying securities associated with the securities purchased under resell
agreements during the years ended December 31, 2003, 2002 and 2001 were held by
BankAtlantic Bancorp.
The following table provides information on Federal Funds sold (dollars in
thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Ending balance $ -- $20,000 $ --
Maximum outstanding at any month end within period $83,000 $20,000 $16,500
Average amount invested during period $16,499 $ 3,928 $ 564
Average yield during period 1.01% 1.45% 3.73%
The estimated fair value of securities and short-term investments pledged for
the following obligations were (in thousands):
December 31,
--------------------------
2003 2002
-------- --------
FHLB advances $ -- $542,228
Treasury tax and loan 1,724 935
Repurchase agreements 144,984 124,364
Public funds -- 139,358
Interest rate swap and forward contracts 174 7,192
-------- --------
$146,882 $814,077
======== ========
F-26
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in net unrealized holding gains or losses on available for sale
securities, included as a separate component of shareholder's equity, was as
follows (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Net change in other comprehensive income on securities available for sale $(1,397) $ (851) $(3,492)
Change in deferred tax benefits on net unrealized depreciation
on securities available for sale (535) (325) (1,347)
------- ------- -------
Change in other comprehensive income component of shareholders' equity
from net unrealized depreciation on securities available for sale $ (862) $ (526) $(2,145)
======= ======= =======
The components of accumulated other comprehensive income included in
shareholders' equity were as follows (in thousands):
December 31,
------------------------
2003 2002
------- -------
Unrealized gains on securities available for sale $ 1,471 $ 2,356
Unrealized gains (losses) associated with investment --
in unconsolidated subsidiaries 59 (62)
Accumulated losses associated with cash flow hedges -- (391)
Minimum pension liability -- (1,035)
------- -------
Accumulated other comprehensive income $ 1,530 $ 868
======= =======
4. LOANS RECEIVABLE
The loan portfolio consisted of the following components (in thousands):
December 31,
---------------------------------
2003 2002
----------- -----------
Real estate loans:
Residential $ 1,343,657 $ 1,378,041
Construction and development 1,322,268 1,218,411
Commercial 1,071,787 758,261
Small business 110,745 98,494
Other loans:
Second mortgages - direct 333,655 261,579
Second mortgages - indirect 1,105 1,713
Commercial business 91,724 82,174
Lease financing 14,442 31,279
Small business - non-mortgage 58,574 62,599
Deposit overdrafts 4,036 2,487
Consumer loans - other direct 17,892 22,394
Consumer loans - other indirect 1,297 6,392
Other 4,175 4,175
Loans held for sale:
Residential 2,254 --
Commercial syndication 9,114 14,499
----------- -----------
Total gross loans 4,386,725 3,942,498
----------- -----------
Adjustments:
Undisbursed portion of loans in process (728,100) (511,861)
Net premiums related to purchased loans 6,898 2,159
Deferred fees (6,655) (5,200)
Deferred profit on commercial real estate loans (589) (632)
Allowance for loan losses (46,667) (49,094)
----------- -----------
Loans receivable- net $ 3,611,612 $ 3,377,870
=========== ===========
F-27
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BankAtlantic's loan portfolio had the following geographic concentration at
December 31, 2003:
Florida 65%
California 9%
Northeast 7%
Other 19%
---
100%
===
Unsecured loans receivable due from Levitt to BankAtlantic Bancorp in the amount
of $43.5 million and construction loans secured by land and improvements due
from Levitt to BankAtlantic in the amount of $18.1 million were eliminated in
the consolidated financial statements at December 31, 2003.
In February 2001, BFC originated several loans to officers and directors
totaling approximately $1.1 million, $100,000 of which are non-recourse loans
secured by investments in BankAtlantic Financial Ventures II, Ltd. These loans
bear interest payable annually at the prime rate plus 1% and are due in February
2006. On July 16, 2002, John Abdo borrowed from the Company $3.5 million on a
recourse basis and paid off his existing loan due to the Company of $500,000.
The $3.5 million loan bears interest at the prime rate plus 1%, requires monthly
interest payments, is due on demand and is secured by 2,127,470 shares of BFC
Class A Common Stock and 370,750 shares of BFC Class B Common Stock.
DISCONTINUED AND RESTRUCTURED LENDING ACTIVITY:
BankAtlantic continuously evaluates its business units for profitability, growth
and overall efficiency. As a consequence of these evaluations BankAtlantic
closed the offices of its leasing subsidiary, LTI, and ceased new lease
originations during the third quarter of 2001.
During 2003, BankAtlantic began originating residential loans that are pre-sold
to correspondents. During 2002, BankAtlantic discontinued the origination of
residential loans, except for loans that qualified under the Community
Reinvestment Act ("CRA"), which were originated for resale through September
2002. During September 2002, BankAtlantic discontinued its practice of selling
CRA loans, transferred $7.3 million of CRA loans from loans held for sale to
loans held for investment and realized a $151,000 loss at the transfer date.
BankAtlantic now originates CRA loans designated as held for investment and also
originates CRA loans that are pre-sold to correspondents. BankAtlantic continues
to purchase residential loans for its portfolio.
ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS):
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Balance, beginning of period $ 49,094 $ 45,657 $ 48,072
-------- -------- --------
Loans charged-off (11,723) (28,663) (27,916)
Recoveries of loans previously charged-off 10,577 8,879 8,596
-------- -------- --------
Net charge-offs (1,146) (19,784) (19,320)
Allowance for loan losses, acquired (734) 9,144 --
Net provision (credited) charged to operations (547) 14,077 16,905
-------- -------- --------
Balance, end of period $ 46,667 $ 49,094 $ 45,657
======== ======== ========
F-28
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes impaired loans (in thousands):
December 31, 2003 December 31, 2002
-------------------------- ---------------------------
Gross Gross
Recorded Specific Recorded Specific
Investment Allowances Investment Allowances
---------- ---------- ---------- ----------
Impaired loans with specific valuation allowances $ 361 $ 181 $ 4,886 $ 1,386
Impaired loans without specific valuation allowances 12,325 -- 17,478 --
------- ------- ------- -------
Total $12,686 $ 181 $22,364 $ 1,386
======= ======= ======= =======
The average gross recorded investment in impaired loans was $16.3 million, $39.3
million and $54.2 million during the years ended December 31, 2003, 2002 and
2001, respectively.
Interest income, which would have been recorded under the contractual terms of
impaired loans, and the interest income actually recognized was (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Contracted interest income $ 666 $ 1,575 $ 2,815
Interest income recognized (396) (768) (941)
------- ------- -------
Foregone interest income $ 270 $ 807 $ 1,874
======= ======= =======
Non-performing assets consist of non-accrual loans, non-accrual tax
certificates, REO and repossessed assets. Non-accrual loans are loans on which
interest recognition has been suspended because of doubts as to the borrower's
ability to repay principal or interest. Non-accrual tax certificates are tax
deeds or certificates in which interest recognition has been suspended due to
the aging of the certificate or deed.
NON-PERFORMING ASSETS (IN THOUSANDS):
At December 31,
---------------------------------------------
2003 2002 2001
-------- -------- --------
Non-accrual -- tax certificates $ 894 $ 1,419 $ 1,727
Non-accrual -- loans
Residential 8,489 12,773 9,203
Syndication -- -- 10,700
Commercial real estate and business 52 1,474 13,066
Small business 155 239 905
Lease financing 25 3,900 2,585
Consumer 794 532 796
Real estate owned 2,422 9,607 3,904
Other repossessed assets -- 4 17
-------- -------- --------
Total non-performing assets 12,831 29,948 42,903
Specific valuation allowance -- (1,386) (9,936)
-------- -------- --------
Total non-performing assets, net $ 12,831 $ 28,562 $ 32,967
======== ======== ========
Other potential problem loans consist of the following (in thousands)
At December 31,
--------------------------------------
2003 2002 2001
------ ------ ------
Loans contractually past due 90 days or more
and still accruing $ 135 $ 100 $ --
Performing impaired loans, net of specific allowances 180 -- --
Restructured loans 1,387 1,882 743
Delinquent residential loans purchased 1,288 1,464 1,705
------ ------ ------
Total potential problem loans $2,990 $3,446 $2,448
====== ====== ======
Loans contractually past due 90 days or more represent loans that have matured
and the borrower continues to make the
F-29
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments under the matured loan agreement. BankAtlantic is in the process of
renewing or extending these matured loans. Restructured loans are loans in which
the original terms were modified granting the borrower loan concessions due to
financial difficulties. Performing impaired loans are still accruing impaired
loans, and delinquent purchased loans were non-performing residential loans
purchased at a discount. There were no commitments to lend additional funds on
non-performing loans or potential problem loans at December 31, 2003.
Foreclosed asset activity in non-interest expense includes the following (in
thousands):
For the Years Ended December 31,
------------------------------------------
2003 2002 2001
------- ------- -------
Real estate acquired in settlement of loans
and tax certificates:
Operating expenses, net $ 1,122 $ 872 $ 160
Provisions for losses on REO 812 1,467 117
Net gains on sales (1,984) (117) (1,053)
------- ------- -------
Total (income) loss $ (50) $ 2,222 $ (776)
======= ======= =======
Activity in the allowance for real estate owned consisted of (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Balance, beginning of period $ -- $ -- $ 310
Net charge-offs:
Commercial real estate (750) (1,500) (220)
Residential real estate (62) 33 (207)
------- ------- -------
Total net charge-offs (812) (1,467) (427)
Provision for losses on REO 812 1,467 117
------- ------- -------
Balance, end of period $ -- $ -- $ --
======= ======= =======
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of (in thousands):
December 31,
-----------------------
2003 2002
------- ------
Loans receivable $15,746 $17,621
Investment securities and tax certificates 10,269 11,390
Interest rate swaps -- 789
Securities available for sale 1,897 4,250
------- -------
$27,912 $34,050
======= =======
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment was comprised of (in thousands):
December 31,
--------------------------
2003 2002
-------- --------
Land $ 22,422 $ 22,668
Buildings and improvements 70,446 68,291
Furniture and equipment 50,132 45,115
-------- --------
Total 143,000 136,074
Less accumulated depreciation 49,346 43,290
-------- --------
Office properties and equipment -- net $ 93,654 $ 92,784
======== ========
F-30
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2002, BankAtlantic Bancorp purchased a $14.3 million office facility to
consolidate BankAtlantic Bancorp's headquarters and back office operations into
a centralized facility. As of December 31, 2003, BankAtlantic Bancorp had
incurred approximately $3 million in renovation costs.
During 2002, BankAtlantic discontinued certain ATM relationships, resulting in
an $801,000 restructuring charge and a $206,000 impairment write-down.
During 2001, BankAtlantic finalized a plan to exit its in-store branches
resulting in a $550,000 impairment charge on leasehold improvements. The Company
also sold 14 in-store branches to unrelated financial institutions and recorded
gains of $384,000 and $1.6 million during the years ended December 31, 2002 and
2001, respectively.
7. DEPOSITS
The weighted average nominal interest rate payable on deposit accounts at
December 31, 2003 and 2002 was 0.94% and 1.79%, respectively. The stated rates
and balances on deposits were (dollars in thousands):
December 31,
-----------------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
Interest free checking $ 645,036 21.09% $ 462,718 15.84%
Insured money fund savings
0.83% at December 31, 2003,
1.20% at December 31, 2002, 865,590 28.31 775,175 26.54
NOW accounts
0.30% at December 31, 2003,
0.50% at December 31, 2002, 533,888 17.46 399,985 13.70
Savings accounts
0.28% at December 31, 2003,
0.56% at December 31, 2002, 208,966 6.83 163,641 5.60
----------- --------- ----------- ---------
Total non-certificate accounts 2,253,480 73.69 1,801,519 61.68
----------- --------- ----------- ---------
Certificate accounts:
Less than 2.00% 455,709 14.90 259,328 8.88
2.01% to 3.00% 147,446 4.82 222,475 7.62
3.01% to 4.00% 45,546 1.49 65,972 2.26
4.01% to 5.00% 51,379 1.68 284,611 9.75
5.01% and greater 102,382 3.35 280,193 9.59
----------- --------- ----------- ---------
Total certificate accounts 802,462 26.24 1,112,579 38.10
----------- --------- ----------- ---------
Total deposit accounts 3,055,942 99.93 2,914,098 99.78
----------- --------- ----------- ---------
Fair value adjustment related to hedged deposits -- -- 843 0.03
Premium on brokered deposits (798) (0.03) -- --
Fair value adjustment related to acquisitions 472 0.02 929 0.03
Interest earned not credited to deposit accounts 2,526 0.08 4,685 0.16
----------- --------- ----------- ---------
Total $ 3,058,142 100.00% $ 2,920,555 100.00%
=========== ========= =========== =========
Interest expense by deposit category was (in thousands):
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Money fund savings and NOW accounts $ 11,142 $ 15,338 $ 20,241
Savings accounts 856 1,362 1,451
Certificate accounts -- below $100,000 10,914 24,177 30,324
Certificate accounts - $100,000 and above 13,457 22,140 33,960
Less early withdrawal penalty (180) (240) (308)
-------- -------- --------
Total $ 36,189 $ 62,777 $ 85,668
======== ======== ========
F-31
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003, the amounts of scheduled maturities of certificate
accounts were (in thousands):
For the Years Ended December 31,
Nominal ---------------------------------------------------------------------------------------------------
Interest Rate 2004 2005 2006 2007 2008 Thereafter
------------- -------- -------- -------- -------- --------- ----------
Less than 2.00% $341,975 $104,606 $ 8,603 $ 159 $ 354 $ 12
2.01% to 3.00% 19,929 51,992 70,235 1,583 3,707 --
3.01% to 4.00% 7,885 12,491 1,571 5,799 17,399 401
4.01% to 5.00% 36,667 2,924 7,755 4,032 1 --
5.01% and greater 67,607 29,263 3,057 2,166 289 --
-------- -------- -------- -------- -------- --------
Total $474,063 $201,276 $ 91,221 $ 13,739 $ 21,750 $ 413
======== ======== ======== ======== ======== ========
Time deposits of $100,000 and over had the following maturities (in thousands):
December 31,
2003
------------
3 months or less $ 94,378
4 to 6 months 45,885
7 to 12 months 75,049
More than 12 months 227,798
--------
Total $443,110
========
Included in certificate accounts at December 31 was (in thousands):
2003 2002
-------- --------
Brokered deposits $145,559 $ 37,857
Public deposits 180,241 286,908
-------- --------
Total institutional deposits $325,800 $324,765
======== ========
Ryan Beck acted as principal dealer in obtaining $20.7 million and $22.9 million
of the brokered deposits outstanding as of December 31, 2003 and 2002,
respectively. BankAtlantic has various relationships for obtaining brokered
deposits. These relationships are considered as an alternative source of
borrowings, when and if needed. At December 31, 2002, $33 million of 10 and 15
year callable fixed rate time deposits with an average interest rate of 5.89%
were included with brokered deposits. Callable interest rate swap contracts were
written to swap the 5.89% average fixed interest rate to a three-month LIBOR
interest rate. BankAtlantic elected to account for the interest rate swaps as
fair value hedges (see Note 19). During 2003, BankAtlantic called the deposits
and terminated the interest rate swap contracts.
F-32
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ADVANCES FROM FEDERAL HOME LOAN BANK AND FEDERAL FUNDS PURCHASED
ADVANCES FROM FEDERAL HOME LOAN BANK ("FHLB") (DOLLARS IN THOUSANDS):
December 31,
Payable During the Year Year ---------------------------
Ending December 31, Callable Interest Rate 2003 2002
- ------------------------------------------------------ ---------- ----------------- ---------- -----------
2003 5.39% to 7.25% $ -- $ 145,611
2004 2.80% to 5.68% 6,250 128,750
2005 6.09% to 6.15% -- 75,000
2005 1.86% 17,500 --
2006 1.89% 18,750 --
2007 5.68% 25,000 25,000
2008 5.32% to 5.67% 492,000 --
2010 5.84% to 6.34% 32,000 32,000
--------- -----------
TOTAL FIXED RATE ADVANCES 591,500 406,361
--------- -----------
2007 2003 1.69% to 1.93% -- 122,500
2008 2003 5.32% to 5.67% -- 492,000
2008 2004 1.31% 25,000 --
2011 2004 4.50% to 4.90% 50,000 50,000
2011 2005 5.05 30,000 30,000
--------- -----------
TOTAL CALLABLE FIXED RATE ADVANCES - EUROPEAN 105,000 694,500
--------- -----------
2004 2004 5.47% -- 10,000
2009 2004 5.06% 10,000 10,000
2010 2003 5.52% -- 30,000
--------- -----------
TOTAL CALLABLE FIXED RATE ADVANCES - BERMUDA 10,000 50,000
--------- -----------
ADJUSTABLE RATE ADVANCES
2003 4.15% to 4.90% -- 68,000
2004 1.17% to 1.40% 50,000 50,000
2006 1.18% to 5.46% 25,000 25,000
--------- -----------
TOTAL ADJUSTABLE RATE ADVANCES 75,000 143,000
--------- -----------
PURCHASE ACCOUNTING FAIR VALUE ADJUSTMENTS 705 3,309
--------- -----------
TOTAL FHLB ADVANCES $ 782,205 $ 1,297,170
========= ============
AVERAGE COST DURING PERIOD 4.79% 5.21%
--------- ----------
AVERAGE COST END OF PERIOD 4.67% 4.83%
========= ==========
European callable advances give the FHLB the option to reprice the advance at a
specific future date. Bermuda callable advances give the FHLB the option to
reprice the advance anytime from the call date until the payable date. Once the
FHLB exercises its call option, BankAtlantic has the option to convert to a
three-month LIBOR-based floating rate advance, pay off the advance or convert to
another fixed rate advance.
At December 31, 2003, $1.4 billion of 1-4 family residential loans, $252.1
million of commercial real estate loans and $328.5 million of consumer loans
were pledged against FHLB advances and an FHLB letter of credit securing public
deposits. In addition, FHLB stock is pledged as collateral for outstanding FHLB
advances.
BankAtlantic's line of credit with the FHLB is limited to 30% of assets, subject
to available collateral, with a maximum term of 10 years.
On December 31, 2003, BankAtlantic pledged $12.4 million of consumer loans to
the Federal Reserve Bank of Atlanta ("FRB") as collateral for potential advances
of $10.0 million. The FRB line of credit has not yet been utilized.
During the year ended December 31, 2003, BankAtlantic repaid $325 million of
fixed rate FHLB advances that would have matured within 24 months and incurred a
prepayment penalty of $10.9 million. The weighted average rate of FHLB advances
repaid was 5.57%.
F-33
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEDERAL FUNDS PURCHASED:
BankAtlantic established $245.0 million of lines of credit with other banking
institutions for the purchase of federal funds. The following table provides
information on federal funds purchased at December 31, (dollars in thousands):
2003 2002 2001
-------- -------- --------
Ending balance $ -- $ -- $ 61,000
Maximum outstanding at any month end
within period $180,000 $ 85,000 $107,000
Average amount outstanding during period $ 60,179 $ 47,704 $ 54,167
Average cost during period 1.29% 1.85% 3.86%
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase represent transactions whereby
BankAtlantic Bancorp sells a portion of its current investment portfolio
(usually MBS's and REMIC's) at a negotiated rate and agrees to repurchase the
same assets on a specified future date. BankAtlantic issues repurchase
agreements to institutions and its customers. These transactions are
collateralized by investment securities. Customer repurchase agreements are not
insured by the Federal Deposit Insurance Corporation (the "FDIC"). At December
31, 2003 and 2002, the outstanding balances of customer repurchase agreements
were $138.8 million and $116.3 million, respectively. There were no repurchase
agreements outstanding to institutions at December 31, 2003 and 2002.
The following table provides information on the agreements to repurchase
(dollars in thousands):
For the Years Ended December 31,
-------------------------------------------------
2003 2002 2001
----------- ----------- ------------
Maximum borrowing at any month-end within the period $ 365,042 $ 540,880 $ 714,121
Average borrowing during the period $ 193,068 $ 327,001 $ 542,296
Average interest cost during the period 1.11% 1.73% 4.09%
Average interest cost at end of the period 0.73% 1.08% 1.52%
The following table lists the amortized cost and estimated fair value of
securities sold under repurchase agreements, and the repurchase liability
associated with such transactions (dollars in thousands):
Weighted
Estimated Average
Amortized Fair Repurchase Interest
Cost Value Balance Rate
--------- --------- ---------- --------
DECEMBER 31, 2003 (1)
Mortgage-backed securities $ 124,759 $ 128,118 $106,813 0.73%
REMIC 16,846 16,866 14,061 0.73
--------- --------- -------- ----
Total $ 141,605 $ 144,984 $120,874 0.73%
========= ========= ======= ====
DECEMBER 31, 2002 (1)
Mortgage-backed securities $ 113,494 $ 117,317 $109,690 1.08%
REMIC 7,024 7,047 6,589 1.08
--------- --------- -------- ----
Total $ 120,518 $ 124,364 $116,279 1.08%
========= ========= ======== ====
(1) At December 31, 2003 and 2002, all securities were classified as
available for sale and were recorded at fair value in the consolidated
statements of financial condition.
All repurchase agreements existing at December 31, 2003 matured and were repaid
in January 2004. These securities were held by unrelated broker/dealers.
F-34
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBORDINATED DEBENTURES, OTHER DEBT AND TRUST PREFERRED SECURITIES
The Company had the following subordinated debentures, notes and bonds payable
outstanding at December 31, 2003 and 2002 (dollars in thousands):
December 31,
Issue ------------------------------ Interest Maturity
Date 2003 2002 Rate Date
---------- -------- -------- ------------ ----------
BANKATLANTIC BANCORP BORROWINGS
5 5/8% convertible debentures (1) 11/25/1997 $ -- $ 46,042 5.63% 12/1/2007
Bank line of credit 8/24/2000 100 16,100 Prime -.50% 9/1/2004
Notes payable - retention plan 6/28/2002 -- 3,675 5.75% 6/28/2003
-------- --------
TOTAL BANKATLANTIC BANCORP BORROWINGS 100 65,817
-------- --------
BANKATLANTIC BORROWINGS
Subordinated debentures (2) 10/29/2002 22,000 22,000 LIBOR + 3.45% 11/7/2012
Development notes Various 2,739 - Various% Various
Mortgage-backed bond 3/22/2002 10,954 13,755 (3) 9/30/2013
-------- --------
TOTAL BANKATLANTIC BORROWINGS 35,693 35,755
-------- --------
LEVITT BORROWINGS
Acquisition note 9/15/2000 8,400 10,500 Prime +1/2% 9/1/2005
Working capital line of credit Various 1,000 3,612 Prime +1% 9/15/2005
Development bonds Various 850 4,581 Various Various
Acquisition and development notes Various 100,575 70,802 Various Various
Subordinated investment notes Various 1,309 - Various Various
Other loans Various 341 445 Various Various
-------- --------
TOTAL LEVITT BORROWINGS 112,475 89,940
-------- --------
RB HOLDINGS, INC. BORROWINGS
Notes payable 4/26/2002 802 2,304 LIBOR + 2.65% 5/1/2004
-------- --------
BFC BORROWINGS
Working capital Various 6,015 6,015 Prime +1 5/3/2004
Mortgage payables Various 9,015 9,237 Various 2004 - 2010
-------- --------
TOTAL BFC BORROWINGS 15,030 15,252
-------- --------
TOTAL $164,100 $209,068
======== ========
(1) Convertible at the option of the holder into shares of BankAtlantic
Bancorp Class A Common Stock at a conversion price of $11.25 per share.
(2) LIBOR interest rates are indexed to three-month LIBOR and adjust
quarterly.
(3) The bonds adjust semi-annually to the 10-year treasury constant
maturity rate minus 23 basis points.
F-35
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BankAtlantic Bancorp had the following junior subordinated debentures
outstanding at December 31, 2003 (dollars in thousands):
Beginning
Optional
Issue Outstanding Interest Maturity Redemption
Junior Subordinated Debentures Date Amount Rate Date Date
- ------------------------------------ ----------- ------------- --------------- ------------ -------------
Subordinated Debentures Trust II 3/5/2002 $ 57,088 8.50% 3/31/2032 3/31/2007
Subordinated Debentures Trust III 6/26/2002 25,774 LIBOR + 3.45% 6/26/2032 6/26/2007
Subordinated Debentures Trust IV 9/26/2002 25,774 LIBOR + 3.40% 9/26/2032 9/26/2007
Subordinated Debentures Trust V 9/27/2002 10,310 LIBOR + 3.40% 9/27/2032 9/27/2007
Subordinated Debentures Trust VI 12/10/2002 15,450 LIBOR + 3.35% 12/10/2032 12/10/2007
Subordinated Debentures Trust VII 12/19/2002 25,774 LIBOR + 3.25% 12/19/2032 12/19/2007
Subordinated Debentures Trust VIII 12/19/2002 15,464 LIBOR + 3.35% 12/19/2032 12/19/2007
Subordinated Debentures Trust IX 12/19/2002 10,310 LIBOR + 3.35% 12/19/2032 12/19/2007
Subordinated Debentures Trust X 3/26/2003 51,548 6.40(2)% 3/26/2033 3/26/2008
Subordinated Debentures Trust XI 4/10/2003 10,310 6.45(2)% 4/24/2033 4/24/2008
Subordinated Debentures Trust XII 3/27/2003 15,464 6.65(2)% 4/07/2033 4/07/2008
----------
Total Subordinated Debentures (1) $ 263,266
==========
(1) LIBOR interest rates are indexed to 3-month LIBOR and adjust quarterly.
(2) Adjusts to floating LIBOR rate five years from the issue date.
BankAtlantic Bancorp had the following trust preferred securities outstanding at
December 31, 2002 (dollars in thousands):
Beginning
Optional
Issue Outstanding Interest Maturity Redemption
Date Amount Rate Date Date
------------ ------------- --------------- ------------ --------------
BBC Capital Trust II 3/5/2002 $ 55,375 8.50% 3/31/2032 3/31/2007
BBC Capital Trust III 6/26/2002 25,000 LIBOR + 3.45% 6/26/2032 6/26/2007
BBC Capital Trust IV 9/26/2002 25,000 LIBOR + 3.40% 9/26/2032 9/26/2007
BBC Capital Trust V 9/27/2002 10,000 LIBOR + 3.40% 9/27/2032 9/27/2007
BBC Capital Trust VI 12/10/2002 15,000 LIBOR + 3.35% 12/10/2032 12/10/2007
BBC Capital Trust VII 12/19/2002 25,000 LIBOR + 3.25% 12/19/2032 12/19/2007
BBC Capital Trust VIII 12/19/2002 15,000 LIBOR + 3.35% 12/19/2032 12/19/2007
BBC Capital Trust IX 12/19/2002 10,000 LIBOR + 3.35% 12/19/2032 12/19/2007
---------
Total Trust Preferred Securities(1) $ 180,375
=========
(1) LIBOR interest rates are indexed to 3-month LIBOR and adjust quarterly.
Annual Maturities of junior subordinated debentures and other debt outstanding
at December 31, 2003 are as follows (in thousands):
Year Ending
December 31, Amount
------------ --------
2004 $ 16,711
2005 41,713
2006 11,135
2007 57,514
2008 2,112
Thereafter 298,181
--------
$427,366
========
F-36
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003 and 2002, $7.6 million and $7.3 million, respectively, of
unamortized underwriting discounts and costs associated with the issuance of
subordinated debentures, trust preferred securities and other debt were included
in other assets in the Company's statements of financial condition.
JUNIOR SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES:
BankAtlantic Bancorp has formed eleven statutory business trusts ("Trusts") for
the purpose of issuing Trust Preferred Securities ("trust preferred securities")
and investing the proceeds thereof in junior subordinated debentures of
BankAtlantic Bancorp. The trust preferred securities are fully and
unconditionally guaranteed by BankAtlantic Bancorp. The Trusts used the proceeds
from issuing trust preferred securities and the issuance of its common
securities to BankAtlantic Bancorp to purchase junior subordinated debentures
from BankAtlantic Bancorp. Interest on the junior subordinated debentures and
distributions on the trust preferred securities are payable quarterly in
arrears. Distributions on the trust preferred securities are cumulative and are
based upon the liquidation value of the trust preferred security. BankAtlantic
Bancorp has the right, at any time, as long as there are no continuing events of
default, to defer payments of interest on the junior subordinated debentures for
a period not exceeding 20 consecutive quarters; but not beyond the stated
maturity of the junior subordinated debentures. To date no interest has been
deferred. The trust preferred securities are subject to mandatory redemption, in
whole or in part, upon repayment of the junior subordinated debentures at
maturity or their earlier redemption. BankAtlantic Bancorp has the right to
redeem the junior subordinated debentures five years from the issue date and
also has the right to redeem the junior subordinated debentures in whole (but
not in part) within 180 days following certain events, as defined, whether
occurring before or after the redemption date and therefore cause a mandatory
redemption of the trust preferred securities. The exercise of such right is
subject to BankAtlantic Bancorp having received regulatory approval, if required
under applicable capital guidelines or regulatory policies. In addition,
BankAtlantic Bancorp has the right, at any time, to shorten the maturity of the
junior subordinated debentures to a date not earlier than the redemption date.
Exercise of this right is also subject to receipt of regulatory approval, if
required under applicable capital guidelines or regulatory policies.
Prior to January 1, 2003, the Trusts were consolidated in the Company's and
BankAtlantic Bancorp's financial statements, with the trust preferred securities
issued by the Trusts reported as guaranteed preferred beneficial interests in
BankAtlantic Bancorp's junior subordinated debentures and the junior
subordinated debentures were eliminated in consolidation. Upon the
implementation of FIN 46, as revised in December 2003, the Trusts are no longer
consolidated in the Company's and BankAtlantic Bancorp's financial statements.
As a consequence the Company and BankAtlantic Bancorp report their junior
subordinated debentures issued to the Trusts as liabilities and reports its
investment in the Trusts as investment in unconsolidated subsidiaries. The
effect of the implementation of FIN 46 on the Company's consolidated statement
of financial condition was to increase investment in unconsolidated subsidiaries
by $5.5 million, decrease guaranteed preferred beneficial interest in Company's
Junior Subordinated Debentures by $180.4 million and increase junior
subordinated debentures by $185.9 million. The effect of the implementation on
the Company's statement of operations was to increase income from unconsolidated
subsidiaries by $425,000 and increase interest expense by $425,000.
During the year ended December 31, 2003, BankAtlantic Bancorp participated in
three pooled trust preferred securities offerings in which an aggregate of $77.3
million of junior subordinated debentures were issued. The subordinated
debentures pay interest quarterly at fixed rates ranging from 6.40% to 6.65% per
annum until 2008, and thereafter at a floating rate equal to three-month LIBOR
plus 315-325 basis points. The net proceeds to BankAtlantic Bancorp from the
subordinated debentures offerings after BankAtlantic Bancorp's investment in the
related Trusts, placement fees and expenses were approximately $74 million.
A portion of the net proceeds from the above junior subordinated debenture
issuance was used to redeem $45.8 million of BankAtlantic Bancorp's 5.625%
Convertible Subordinated Debentures and pay down $16 million of borrowings under
BankAtlantic Bancorp's credit facility with an unrelated financial institution.
BankAtlantic Bancorp wrote off $732,000 of deferred offering costs and incurred
a $916,000 call premium upon retirement of the debentures.
During the year ended December 31, 2002, BankAtlantic Bancorp participated in
seven pooled trust preferred securities offerings in which an aggregate of $125
million of trust preferred securities were issued. The trust preferred
securities pay interest quarterly at a floating rate equal to three-month LIBOR
plus a spread and are redeemable five years from the issue date. The net
proceeds to BankAtlantic Bancorp from the trust preferred securities offerings
after placement fees and expenses were approximately $121.1 million.
Additionally, in March 2002, BankAtlantic Bancorp completed an
F-37
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
underwritten public offering in which BankAtlantic Bancorp's wholly owned
statutory trust ("BBC Capital II") issued $55.4 million of trust preferred
securities. These trust preferred securities pay distributions quarterly at an
8.50% fixed rate. The net proceeds to BankAtlantic Bancorp from the publicly
offered trust preferred securities after underwriting discounts and expenses was
approximately $53.3 million.
BankAtlantic Bancorp used the proceeds from the above trust preferred securities
offerings to retire $74.8 million of 9.5% trust preferred securities and $21
million of 9% subordinated debentures; to fund a portion of BankAtlantic's
purchase of Community, Levitt's investment in Bluegreen and Ryan Beck's
acquisition of certain assets and the assumption of certain liabilities of
Gruntal, and for general corporate purposes. BankAtlantic Bancorp wrote off $2.4
million of deferred offering costs associated with the retirement of the
debentures and trust preferred securities and incurred a $716,000 call premium
associated with the retirement of the debentures.
In August 2001, BankAtlantic Bancorp called for redemption approximately $51
million in principal amount of its outstanding 6 3/4% convertible subordinated
debentures due 2006. At September 19, 2001, the redemption date, all but
approximately $251,000 of the 6 3/4% convertible debentures were converted by
holders into an aggregate of 8,919,649 shares of BankAtlantic Bancorp Class A
Common Stock. The debentures were convertible into BankAtlantic Bancorp Class A
Common Stock at a conversion price of $5.70.
BANKATLANTIC BANCORP:
REVOLVING CREDIT FACILITY:
On August 24, 2000, BankAtlantic Bancorp entered into a revolving credit
facility of $20 million from an independent financial institution. The credit
facility contains customary financial covenants relating to regulatory capital
and maintenance of certain loan loss reserves and is secured by the common stock
of BankAtlantic. On September 17, 2001, the maturity date of the credit facility
was extended to September 2004, and the maximum outstanding balance of the
credit facility was increased from $20 million to $30 million. In January 2004,
the maturity date of the note was extended to March 2005. BankAtlantic Bancorp
was in compliance with all loan covenants at December 31, 2003.
NOTES PAYABLE RETENTION PLAN:
On June 28, 2002, the participants in the BankAtlantic Bancorp, Inc. Deferred
Compensation Plan relating to the acquisition of Ryan Beck vested in their
compensation awards and BankAtlantic Bancorp elected to issue notes for 50% of
the award. BankAtlantic Bancorp repaid the notes in May 2003.
BANKATLANTIC:
In connection with the acquisition of Community, BankAtlantic assumed a $15.9
million mortgage-backed bond, valued at $14.3 million at the acquisition date.
The bond had a $11.0 million outstanding balance at December 31, 2003.
BankAtlantic pledged $20.4 million of residential loans as collateral for this
bond at December 31, 2003.
In October 2002, BankAtlantic issued $22 million of floating rate subordinated
debentures due 2012. The Subordinated Debentures pay interest quarterly at a
floating rate equal to three-month LIBOR plus 345 basis points and are
redeemable after October 2007 at a price based upon then prevailing market
interest rates. The net proceeds were used by BankAtlantic for general corporate
purposes. The subordinated debentures were issued by BankAtlantic in a private
transaction as part of a larger pooled securities offering. The subordinated
debentures currently qualify for inclusion in BankAtlantic's total risk based
capital.
The development notes are the obligation of a real estate joint venture that was
acquired in connection with the acquisition of Community. The notes are secured
by construction of specific homes. The notes are with unrelated financial
institutions with interest rates ranging from prime plus .75% to prime plus 1%
with interest rate floors ranging from 5.00% to 5.75%. These notes have maturity
dates ranging from 2004 to 2006. BankAtlantic's wholly owned subsidiary has a
50% interest in the real estate joint venture and effective January 1, 2003, the
joint venture was included in the Company's consolidated financial statements
upon the implementation of FIN 46.
RYAN BECK:
At December 31, 2003, Ryan Beck had a line of credit facility with an unrelated
financial institution in the amount of $10
F-38
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million with an interest rate of LIBOR plus 1.50%. The line expires on April 1,
2004, and is secured by certificates of deposit ("CDs") from Ryan Beck's
certificate of deposit wholesale business. There were no amounts outstanding
under this facility at December 31, 2003.
During the year ended December 31, 2002, Ryan Beck borrowed $5.0 million from
BankAtlantic Bancorp for general corporate purposes and repaid the loan in
September 2003. This inter-company loan was eliminated in consolidation.
As part of the Gruntal transaction, Ryan Beck assumed a $3.4 million note
payable secured by leasehold improvements and equipment in nine branch
locations. The note bears interest at three-month LIBOR plus 265 basis points
and matures on May 1, 2004. The outstanding balance of this note at December 31,
2003 and 2002 was $802,000 and $2.3 million, respectively.
INDENTURES
The Indentures relating to all of the Debentures (including those related to the
junior subordinated debentures) contain certain customary covenants found in
Indentures under the Trust Indenture Act, including covenants with respect to
the payment of principal and interest, maintenance of an office or agency for
administering the Debentures, holding of funds for payments on the Debentures in
trust, payment by BankAtlantic Bancorp of taxes and other claims, maintenance by
BankAtlantic Bancorp of its properties and its corporate existence and delivery
of annual certifications to the Trustee.
LEVITT:
Levitt acquisition and development loan obligations at December 31, 2003 are
secured by land acquisitions, construction and development of various
communities located in Florida. These notes are with unrelated financial
institutions and a total of $99.6 million are indexed to the prime rate or LIBOR
rate of interest. Interest rates range from prime less 0.25% to prime plus 0.75%
and LIBOR plus 2.10% to LIBOR plus 3.00%, with interest rates floors ranging
from 4.75% to 5.50% and maturity dates ranging from August 2005 to March 2008.
The fixed rate loan was $988,000 and has a current interest rate of 5.10%,
adjustable every three years based on 325 basis points over US Treasuries, and a
maturity date of February 2024.
On September 30, 2003, the Securities and Exchange Commission (the "SEC")
declared effective a Levitt Registration Statement on Form S-1 for the public
offering of up to $100 million of unsecured subordinated investment notes. The
investment notes are unsecured obligations of Levitt and are subordinated to
substantially all of Levitt's other liabilities. The investment notes are not
guaranteed by any of Levitt's subsidiaries or any other entity. At December 31,
2003, approximately $1.3 million of investment notes were outstanding. In late
2003, Levitt ceased advertising the offering of the investment notes, and in
March 2004, Levitt deregistered the unsold balance of investment notes remaining
under the registration statement.
Levitt borrowed $15 million from an unaffiliated financial institution to
finance the purchase of Levitt and Sons. The obligation is secured by Levitt's
membership interest in Levitt and Sons. At December 31, 2003, $8.4 million was
outstanding under this loan, and Levitt intends to repay this loan with the
proceeds of the proposed equity offering described in Note 26 - Subsequent
Event.
Levitt and Sons has a credit agreement with a non-affiliated financial
institution to provide a working capital line of credit of $10 million. At
December 31, 2003, Levitt and Sons had available credit of approximately $9
million and had a balance outstanding of $1 million. The credit facility matures
in September 2005. On or before June 30th of each calendar year (other than the
year of the maturity date, as may be extended) the financial institution may in
its sole discretion offer the option to extend the term of the loan for a
one-year period.
In connection with the development of certain of Levitt's communities, community
development or improvement districts have been established. These districts may
utilize bond financing to fund construction or acquisition of certain on-site
and off-site infrastructure improvements that may be performed by Levitt near or
at these communities. The obligation to pay principal and interest on the bonds
issued by the districts is assigned to each parcel within the district and a
priority assessment lien may be placed on benefited parcels to provide security
for the debt service. The bonds, including interest and redemption premiums, if
any, and the associated priority lien on the property are typically payable,
secured and satisfied by revenues, fees, or assessments levied on the property
benefited. Levitt pays a portion of the revenues, fees, and assessments levied
by the districts on the properties Levitt still owns that are benefited by the
improvements and may also agree to pay down a specified portion of the bonds at
the time of each unit or parcel closing. At December 31, 2003, the outstanding
balances of these development bonds were $850,000 with a fixed interest rate of
5.875% and a maturity date in May 2009.
F-39
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with Emerging Issues Task Force Issue 91-10 ("EITF 91-10"),
Accounting for Special Assessments and Tax Increment Financing, Levitt records a
liability, net of cash held by the districts available to offset the particular
bond obligation, for the estimated developer obligations that are fixed and
determinable and user fees that are required to be paid or transferred at the
time the parcel or unit is sold to an end user. Levitt reduces this liability by
the corresponding assessment assumed by property purchasers and the amounts paid
by Levitt at the time of closing and transfer of the property. Interest is
calculated and paid based upon the gross bond obligation.
During the fourth quarter of 2003, a development district for the Tradition
master planned community issued $62.8 million of long term assessment bonds to
refinance $28.9 million of previously issued and outstanding bond anticipation
notes and to provide financing for infrastructure development. The development
district assesses property owners to fund debt service and the ultimate
repayment of the bonds. Levitt is assessed based on our pro-rata ownership of
the property in the district. At December 31, 2003, Levitt owned approximately
95% of the property in the district. Levitt's pro-rata share of the assessment
transfers to third party purchasers upon property sales. The assessments are
projected to be levied beginning in 2005. In accordance with EITF 91-10, an
expense will be recognized for the pro-rata portion of assessments, based upon
Levitt's ownership of benefited property.
Inter-company loans to Levitt from BankAtlantic were $18.1 million and $27.5
million at December 31, 2003 and 2002, respectively. Inter-company loans to
Levitt from BankAtlantic Bancorp were $43.5 million and $30.0 million at
December 31, 2003 and 2002, respectively. The above inter-company loans were
eliminated in consolidation.
Some of Levitt's borrowings contain covenants that, among other things, require
it to maintain financial ratios and a minimum net worth. These covenants may
have the effect of limiting the amount of debt that Levitt can incur in the
future and restricting the payment of dividends to Levitt from its subsidiaries.
At December 31, 2003, Levitt was in compliance with all loan agreement financial
covenants.
BFC
All mortgage payables and other borrowings are from unaffiliated parties. At
December 31, 2003, the Company had a line of credit in the amount of $8.0
million requiring only interest payments at prime plus 1%. The line of credit
matures in May 2004. The outstanding balance at December 31, 2003 and 2002 was
$6.0 million. Shares of BankAtlantic Bancorp's Class A Common Stock owned by BFC
are pledged as collateral.
At December 31, 2003 and 2002, approximately $8.4 million and $8.5 million,
respectively, of the mortgage payables related to real estate with an interest
rate of 9.2% and maturity date in May 2007. At December 31, 2003 and 2002,
approximately $625,000 and $702,000, respectively, of the mortgage payables
related to mortgage receivables in connection with the sale of properties
previously owned by the Company, with interest rates at 6% and maturity dates
ranging from 2009 through 2010.
Included in other liabilities at December 31, 2003 and 2002 is approximately
$4.9 million representing amounts due in connection with the settlement of a
class action litigation that arose in connection with exchange transactions that
the Company entered into in 1989 and 1991.
11. INVESTMENT IN BANKATLANTIC BANCORP AND LEVITT, AND EQUITY TRANSACTIONS FROM
BANKATLANTIC BANCORP AND LEVITT
INVESTMENT IN BANKATLANTIC BANCORP
The following table reflects BFC's percentage ownership in BankAtlantic Bancorp:
Class a Class B Percent Percent
Common Common of Total of
Stock Stock Outstanding Vote
-------- ------- ----------- -------
December 31, 2003 15.3% 100% 22.2% 55.1%
December 31, 2002 15.5% 100% 22.6% 55.2%
December 31, 2001 15.6% 100% 22.7% 55.3%
At December 31, 2003, the Company owned 8,296,978 shares of BankAtlantic Bancorp
Class A Common Stock and 4,876,124 shares of BankAtlantic Bancorp Class B Common
Stock representing 22.2% of all outstanding BankAtlantic Bancorp Common Stock.
On May 24, 2001, BankAtlantic Bancorp amended its articles of incorporation to
grant voting
F-40
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rights to holders of BankAtlantic Bancorp Class A Common Stock, make
BankAtlantic Bancorp Class B Common Stock convertible into BankAtlantic Bancorp
Class A Common Stock on a share for share basis, and equalize the cash dividends
payable on BankAtlantic Bancorp's Class A Common Stock and BankAtlantic
Bancorp's Class B Common Stock. As a consequence of the amendment, BankAtlantic
Bancorp's Class A shareholders are entitled to one vote per share, which in the
aggregate represent 53% of the combined voting power of BankAtlantic Bancorp's
Class A Common Stock and BankAtlantic Bancorp's Class B Common Stock.
BankAtlantic Bancorp's Class B Common Stock represents the remaining 47% of the
combined vote. The fixed voting percentages will be eliminated, and shares of
BankAtlantic Bancorp's Class B Common Stock will be entitled to only one vote
per share, from and after the date that BFC or its affiliates no longer own in
the aggregate at least 2,438,062 shares of Class B Common Stock.
The payment of dividends by BankAtlantic Bancorp is subject to declaration by
BankAtlantic Bancorp's Board of Directors and compliance with applicable
indenture covenants and will depend upon, among other things, the results of
operations, financial condition and cash requirements of BankAtlantic Bancorp
and the ability of BankAtlantic to pay dividends or otherwise advance funds to
BankAtlantic Bancorp, which in turn is subject to OTS regulation and is based
upon BankAtlantic's regulatory capital levels and net income. Currently,
BankAtlantic Bancorp pays a quarterly dividend of $0.033 per share for Class A
and Class B Common Stock.
BankAtlantic Bancorp is consolidated in the Company's financial statements,
since BFC controls greater than 50% of the vote of BankAtlantic Bancorp. The
percentage of votes controlled by the Company determines the Company's
consolidation policy, whereas, the percentage of ownership of total outstanding
common stock determines the amount of BankAtlantic Bancorp's net income,
recognized by the Company.
BANKATLANTIC BANCORP EQUITY TRANSACTIONS
The following are additional equity transactions of BankAtlantic Bancorp that
impact or could impact the Company's ownership percentage of BankAtlantic
Bancorp and minority interest.
ISSUANCE OF BANKATLANTIC BANCORP CLASS A COMMON STOCK
In April 2003, BankAtlantic Bancorp called for redemption approximately $45.8
million of 5.625% Convertible Subordinated Debentures due 2007. The Convertible
Subordinated Debentures were redeemed at a redemption price of 102% of the
principal amount plus accrued and unpaid interest through the redemption date.
During the period between the mailing of the notice of redemption and the
redemption, approximately $211,000 of Convertible Subordinated Debentures were
converted by holders into an aggregate of 18,754 shares of BankAtlantic Bancorp
Class A Common Stock.
During December 2001, BankAtlantic Bancorp sold 6.9 million shares of its Class
A Common Stock in an underwritten public offering at a price of $8.25 per share.
The net proceeds after underwriting discounts and expenses were approximately
$53.5 million. BankAtlantic Bancorp used the proceeds to fund a portion of the
purchase price to acquire Community.
On August 15, 2001, BankAtlantic Bancorp called for redemption approximately $51
million in principal amount of its outstanding 6-3/4% Convertible Subordinated
Debentures due 2006. The 6 3/4% Convertible Subordinated Debentures were
convertible into Class A Common Stock at $5.70 per share. At September 19, 2001,
the redemption date, all but approximately $251,000 of the 6 3/4% Convertible
Debentures were converted by holders into an aggregate of 8,919,649 shares of
BankAtlantic Bancorp Class A Common Stock.
During July 2001, BankAtlantic Bancorp sold 5.1 million shares of its Class A
Common Stock in an underwritten public offering at a price of $8.50 per share.
The net proceeds after underwriting discounts and expenses were approximately
$40.3 million and were used to redeem approximately $34.8 million of
BankAtlantic Bancorp's subordinated investment notes and for general corporate
purposes.
During the years ended December 31, 2003, 2002 and 2001, BankAtlantic Bancorp
received net proceeds of $4.5 million, $1.2 million and $1.6 million,
respectively, from the exercise of stock options.
BANKATLANTIC BANCORP RESTRICTED STOCK
During the years ended December 31, 2003, 2002 and 2001, BankAtlantic Bancorp
issued 12,500, 1,500 and 196,500 shares, respectively, of BankAtlantic Bancorp
restricted Class A Common Stock to certain key employees of BankAtlantic. The
restricted stock vests over designated periods and had a fair market value of
$148,000, $17,000 and $1.4 million on the issue
F-41
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dates, respectively. During the years ended December 31, 2003, 2002 and 2001,
21,000, 21,000 and zero shares, respectively, of restricted stock vested and
183,287 shares of restricted stock remain outstanding.
In December 1998, BankAtlantic Bancorp adopted a Restricted Stock Incentive Plan
(the "Restricted Stock Plan") to provide additional incentives to officers and
key employees of its subsidiary, Ryan Beck. The Restricted Stock Plan provided
up to 862,500 shares of BankAtlantic Bancorp restricted Class A Common Stock, of
which not more than 287,500 shares may be granted to any one person. The
Restricted Stock Plan allows BankAtlantic Bancorp's Board of Directors to impose
an annual cap on awards. BankAtlantic Bancorp's Board granted 16,287 shares of
restricted BankAtlantic Bancorp Class A Common Stock under the Restricted Stock
Plan to key employees of Ryan Beck in 2001. The fair value of the award at the
grant date is recorded as compensation expense over the vesting period. The
restricted stock vests over designated period. The shares granted in 2001 had a
fair market value of $100,000 at the grant date. During the year ended December
31, 2003, 33,760 of the restricted stock vested and none vested in 2002 and
2001.
BANKATLANTIC BANCORP RETENTION POOL:
In connection with the acquisition of Ryan Beck in June 1998, BankAtlantic
Bancorp established a retention pool covering certain key officers of Ryan Beck,
under which 785,866 shares of BankAtlantic Bancorp restricted Class A common
stock (valued at $8.1 million at the acquisition date) were issued to key
employees. The shares vested four years from the date of acquisition and are
treated as compensation expense. In January 2000, each participant in the
retention pool was provided the opportunity to exchange the restricted shares
that were allocated to such participant for a cash-based deferred compensation
award in an amount equal to the aggregate value at the date of the Ryan Beck
acquisition. The deferred compensation awards were granted under the
BankAtlantic Bancorp, Inc. Deferred Compensation Plan (the "Plan"). On March 1,
2000, 749,533 shares of restricted BankAtlantic Bancorp Class A Common Stock out
of the 755,474 shares of BankAtlantic Bancorp restricted common stock
outstanding were retired in exchange for the establishment of interests in the
Plan in the aggregate amount of $7.8 million. All participant accounts under the
Plan vested on June 28, 2002, and the remaining participants received, in the
aggregate, 5,941 shares of BankAtlantic Bancorp Class A Common Stock, and $3.8
million in cash and notes payable for an aggregate principal amount of $3.7
million. The notes payable had a 5.75% interest rate and were paid in full in
May 2003. Included in the Company's statement of operations during 2002 and 2001
was $1.0 million and $2.0 million, respectively, of compensation expense
associated with the Plan.
BANKATLANTIC BANCORP STOCK OPTION PLANS:
Stock Option Plans
-------------------------------------------------------------------------
Maximum Term Shares Class of Vesting Type of Options
(3) Authorized(6) Stock Requirements (5)
------------- ------------- -------- ------------- --------------
1996 Stock Option Plan 10 years 2,246,094 A 5 Years (1) ISO, NQ
1998 Ryan Beck Option Plan 10 years 362,417 A (4) ISO, NQ
1998 Stock Option Plan 10 years 920,000 A 5 Years (1) ISO, NQ
1999 Non-qualifying Stock Option Plan 10 years 862,500 A (2) NQ
1999 Stock Option Plan 10 years 862,500 A (2) ISO, NQ
2000 Non-qualifying Stock Option Plan 10 years 1,704,148 A Immediately NQ
2001 Amended and Restated Stock
Option Plan 10 years 3,000,000 A 5 Years (1) ISO, NQ
- -------------
(1) Vesting is established by BankAtlantic Bancorp Compensation Committee
in connection with each grant of options. All BankAtlantic Bancorp
directors' stock options vest immediately.
(2) Options vest at the discretion of BankAtlantic Bancorp Compensation
Committee.
(3) All BankAtlantic Bancorp outstanding options must be exercised no later
than 10 years after their grant date.
(4) Upon acquisition of Ryan Beck, BankAtlantic Bancorp assumed all options
outstanding under Ryan Beck's existing stock option plans at various
exercise prices based upon the exercise prices of the assumed option.
No new options will be issued under the 1998 Ryan Beck option plan and
the plan will terminate when the outstanding options are exercised or
expire. The options vest ratably over four years.
(5) ISO - Incentive Stock Option NQ - Non-qualifying Stock Option
(6) During 2001, BankAtlantic Bancorp shares underlying options available
for grant under all stock options plans except the 2001 stock option
plan were canceled. BankAtlantic Bancorp's shareholders increased the
number of shares authorized under the 2001 stock option plan to
3,000,000 at the BankAtlantic Bancorp 2002 Annual Meeting.
In January 2004, in connection with the Levitt spin-off and in accordance with
the terms of all the option plans, BankAtlantic
F-42
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bancorp adjusted the exercise price and number of options granted for all
options then outstanding in order to restore the option holder's intrinsic
value. In addition, the shares authorized under BankAtlantic Bancorp 2001
Amended and Restated Stock Option Plan were adjusted by the same ratio applied
to each participant increasing such Plan's authorized shares to 3,918,891. The
number of BankAtlantic Bancorp shares authorized under all other plans was
increased in the amount necessary to provide for the increased number of options
outstanding under such plans following the above-referenced adjustment.
RYAN BECK STOCK OPTION PLAN:
Ryan Beck's Board of Directors adopted the Ryan Beck & Co., Inc. Option Plan
(the "Ryan Beck Plan") effective March 29, 2002. The Ryan Beck Plan provides for
the grant of not more than an aggregate 510,000 options to acquire Ryan Beck
common stock. As of December 31, 2003, 8,125,000 shares of Ryan Beck common
stock were outstanding, all of which are owned by BankAtlantic Bancorp.
In March 2002, Ryan Beck's Board of Directors granted to certain executives,
pursuant to the Plan, options to acquire an aggregate of 385,000 shares of Ryan
Beck common stock at an exercise price below fair value at the date of grant
($4.80), all of which vested immediately. BankAtlantic Bancorp recorded $92,000
of compensation expense associated with the issuance of these options in 2002.
Additionally, in June 2002, 107,500 Ryan Beck options were granted with an
exercise price equal to the fair value at the date of grant ($5.04), all of
which vest four years from the grant date. During 2003, 25,000 Ryan Beck options
were granted with an exercise price equal to the fair value at the date of grant
($10.09), all of which vest four years from the grant date. During 2003, 7,500
Ryan Beck options issued during 2003 were forfeited.
Upon exercise of the options, BankAtlantic Bancorp or Ryan Beck has the right
under certain defined circumstances, starting six months plus one day after the
exercise date, to repurchase the common stock at fair value as determined by an
independent appraiser. BankAtlantic Bancorp and Ryan Beck also have the right of
first refusal on any sale of Ryan Beck common stock issued as a result of the
exercise of an option, and BankAtlantic Bancorp has the right to require any
common stockholder to sell its shares in the event that BankAtlantic Bancorp
sells its interest in Ryan Beck.
A summary of BankAtlantic Bancorp's Class A Common Stock option activity was:
Class A
Outstanding
Options
-----------
Outstanding at December 31, 2000 5,490,386
Exercised (361,085)
Forfeited (227,097)
Issued 553,875
---------
Outstanding at December 31, 2001 5,456,079
Exercised (269,428)
Forfeited (243,606)
Issued 759,600
---------
Outstanding at December 31, 2002 5,702,645
Exercised (996,305)
Forfeited (172,075)
Issued 777,100
---------
Outstanding at December 31, 2003 5,311,365
=========
Available for grant at December 31, 2003 1,007,282
=========
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
-------- --------- --------
Weighted average exercise price of options outstanding at period end $ 6.04 $ 5.44 $ 4.70
Weighted average exercise price of options exercised $ 5.36 $ 4.98 $ 4.32
Weighted average price of options forfeited $ 6.71 $ 8.83 $ 6.06
In January 2004, BankAtlantic Bancorp Compensation Committee adjusted all
outstanding options to acquire BankAtlantic Bancorp Class A Common Stock that
were outstanding prior to the Levitt spin-off to reflect the change in intrinsic
value of BankAtlantic Bancorp's Class A Common Stock that resulted from the
spin-off. The options were adjusted in accordance
F-43
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with FASB Interpretation No. 44 whereby the aggregate intrinsic value of the
options immediately after the Levitt spin-off was adjusted to equal the
aggregate intrinsic value of the options immediately before the Levitt spin-off
and options were also adjusted so that the ratio of the exercise price per share
to the market value per share remained unchanged. The option adjustment was
accounted for as if the outstanding options prior to the Levitt spin-off were
cancelled and new options were issued at the adjusted exercise price and number
of shares. As a consequence of the above adjustments the outstanding options
increased from 5,311,365 to 6,938,247 and the weighted average exercise price
was reduced from $6.04 to $4.63 on January 6, 2004.
The method used to calculate the fair value of the options granted was the
Black-Scholes model with the following grant date fair values and assumptions:
Weighted Average
--------------------------------------------------------------------------------
Number of Risk Free Expected
Year of Options Grant Date Exercise Interest Expected Dividend
Grant Granted Fair Value Price Rate Volatility Yield
-------- --------- ---------- -------- --------- ---------- --------
2001 553,875 $ 1.69 $ 3.94 5.04% 50.00% 3.00%
2002 759,600 $ 5.55 $ 11.18 4.65% 47.00% 1.04%
2003 777,100 $ 4.78 $ 9.73 3.34% 50.00% 1.27%
The employee turnover factor was 6.00% for officer incentive and non-qualifying
stock options during the year ended December 31, 2003. The employee turnover
factor was 1.00% for incentive and non-qualifying stock options during the year
ended December 31, 2002. The employee turnover factor was 13.00% for incentive
stock options and 1.50% for non-qualifying stock options during the year ended
December 31, 2001. The expected life for options issued during 2003 and 2002 was
7.0 years, and the expected life for options issued during 2001 was 7.5 years.
The following table summarizes information about fixed stock options outstanding
at December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Class of Range of Average Average Average
Common Exercise Number Remaining Exercise Number Exercise
Stock Prices Outstanding Contractual Life Price Exercisable Price
-------- -------------- ----------- ---------------- -------- ----------- ---------
A $2.26 to 2.50 1,281,013 .9 years $ 2.29 1,281,013 $ 2.29
A $2.51 to 500 1,197,158 5.3 years $ 4.17 368,829 $ 4.83
A $5.01 to 8.75 1,341,835 4.5 years $ 6.39 725,370 $ 6.54
A $8.76 to 12.23 1,491,359 8.7 years $ 10.44 82,995 $ 10.95
--------- --------- -------- --------- --------
5,311,365 5.0 years $ 6.04 2,458,207 $ 4.22
========= ========= ======== ========= ========
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Class of Range of Average Average Average
Common Exercise Number Remaining Exercise Number Exercise
Stock Prices Outstanding Contractual Life Price Exercisable Price
-------- -------------- ----------- ---------------- -------- ----------- ---------
A $2.26 to 2.50 1,519,647 1.8 years $ 2.29 1,519,647 $ 2.29
A $2.51 to 5.00 1,339,540 6.1 years $ 4.21 473,164 $ 4.84
A $5.01 to 8.75 2,035,836 5.5 years $ 6.37 754,075 $ 6.36
A $8.76 to 12.23 807,622 8.5 years $ 11.07 92,017 $ 10.44
--------- --------- -------- --------- --------
5,702,645 5.1 years $ 5.44 2,838,903 $ 4.06
========= ========= ======== ========= ========
F-44
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Class of Range of Average Average Average
Common Exercise Number Remaining Exercise Number Exercise
Stock Prices Outstanding Contractual Life Price Exercisable Price
-------- ---------------- ----------- ---------------- -------- ----------- ---------
A $2.26 to 4.44 2,474,742 5.0 years $ 2.89 1,597,866 $ 2.34
A $4.45 to 7.83 2,684,066 6.0 years $ 5.93 851,406 $ 5.24
A $7.84 to 12.23 297,271 5.3 years $ 8.71 105,459 $ 9.35
--------- --------- -------- --------- --------
5,456,079 5.5 years $ 4.70 2,554,731 $ 3.60
========= ========= ======== ========= ========
INVESTMENT IN LEVITT
On December 2, 2003, BankAtlantic Bancorp's board of directors authorized the
spin-off of Levitt to the stockholders of BankAtlantic Bancorp by declaring a
stock dividend of all of Bancorp's shares of Levitt. BankAtlantic Bancorp
stockholders each received one share of Levitt Class A Common Stock for every
four shares of BankAtlantic Bancorp Class A Common Stock owned, and one share of
Levitt Class B Common Stock for every four shares of BankAtlantic Bancorp Class
B Common Stock owned. The shares were distributed on December 31, 2003 to
shareholders of record on December 18, 2003. As a consequence of the spin-off,
BFC's ownership position in Levitt is identical to its ownership position in
BankAtlantic Bancorp, including its control of more than 50% of the vote of
these companies.
At December 31, 2003, the Company owned 2,074,244 shares of Levitt Class A
Common Stock and 1,219,031 shares of Levitt Class B Common Stock. The following
table reflects BFC's percentage ownership in Levitt.
Class A Class B Percent of Percent
Common Common Total of
Stock Stock Outstanding Vote
-------- ------- ----------- -------
December 31, 2003 15.3% 100% 22.2% 55.1%
Levitt is consolidated in the Company's financial statements, since BFC controls
greater than 50% of the vote of Levitt. The percentage of votes controlled by
the Company determines the Company's consolidation policy, whereas the
percentage ownership of total outstanding common stock determines the amount of
Levitt net income recognized by the Company.
LEVITT EQUITY TRANSACTIONS
The following are additional equity transactions of Levitt that impact or could
impact the Company's ownership percentage of Levitt and minority interest.
LEVITT STOCK INCENTIVE PLAN
On December 15, 2003, Levitt's Board of Directors approved the 2003 Levitt Stock
Incentive Plan (the "Levitt Plan"); in connection therewith, the Board of
Directors reserved 1,500,000 shares of Levitt's Class A Common Stock for
issuance under the Levitt Plan and directed the officers of Levitt to file on
registration statement Form S-8 among other interests, the shares of Levitt's
Class A Common Stock issuable under the Levitt Plan. On December 18, 2003,
BankAtlantic Bancorp, Levitt's sole shareholder at such time, approved the terms
and conditions of the Levitt Plan. Under the terms of the Levitt Plan, the
compensation committee of the board of directors is authorized to grant
incentive stock options or restricted stock to officers, directors and persons
employed by or otherwise providing services to Levitt or any parent or
subsidiary of Levitt. On January 2, 2004, the compensation committee of Levitt
granted options for the issuance of 674,250 shares of Levitt's Class A Common
Stock at an exercise price of $20.15, the closing price reported by the New York
Stock Exchange at that time.
F-45
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
The provision for income taxes consisted of (in thousands):
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
-------- -------- --------
Continuing operations $ 44,166 $ 17,993 $ 25,260
Discontinued operations (517) 303 --
Extraordinary items -- 2,771 --
Cumulative effect of a change in
accounting principle -- (1,246) 683
-------- -------- --------
Total provision for income taxes $ 43,649 $ 19,821 $ 25,943
======== ======== ========
CONTINUING OPERATIONS:
CURRENT:
Federal $ 27,200 $ 18,934 $ 21,525
State 4,287 633 478
-------- -------- --------
31,487 19,567 22,003
-------- -------- --------
DEFERRED:
Federal 12,679 (878) 1,410
State -- (696) 1,847
-------- -------- --------
12,679 (1,574) 3,257
-------- -------- --------
PROVISION FOR INCOME TAXES $ 44,166 $ 17,993 $ 25,260
======== ======== ========
The Company's actual provision for income taxes from continuing operations
differ from the Federal expected income tax provision as follows (dollars in
thousands):
For the Years Ended December 31,
-----------------------------------------------------------------------------
2003 (1) 2002 (1) 2001 (1)
-------------------- --------------------- -----------------------
Income tax provision at expected
federal income tax rate of $ 35,398 35.00% $ 17,605 35.00% $ 16,791 35.00%
Increase (decrease) resulting from:
Taxes related to subsidiaries not
consolidated for income tax purposes 5,818 5.75% 4,214 8.38% 4,823 10.05%
Tax-exempt interest income (267) (0.26%) (275) (0.55%) (165) (0.34%)
Provision (benefit) for state taxes,
net of federal effect 3,991 3.94% (370) (0.74%) 486 1.01%
Change in valuation allowance for
deferred tax assets (1,586) (1.57%) (2,408) (4.79%) 351 0.73%
Levitt spin-off nondeductible 1,275 1.26% -- -- -- --
Low income housing tax credits (555) (0.55%) (416) (0.83%) -- --
Impairment and amortization of goodwill -- -- -- -- 3,590 7.48%
Other - net 92 0.09% (357) (0.71%) (616) (1.28%)
-------- ----- -------- ----- -------- -----
Provision for income taxes $ 44,166 43.66% $ 17,993 35.76% $ 25,260 52.65%
======== ===== ======== ===== ======== =====
(1) Expected tax is computed based upon income (loss) before minority
interest, discontinued operations, extraordinary items and cumulative
effect of a change in accounting principle.
F-46
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and tax liabilities were (in thousands):
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
DEFERRED TAX ASSETS:
Provision for restructuring charges and write-downs $ 294 $ 191 $ 404
Allowance for loans, REO, tax certificate losses and other reserves, for
financial statement purposes 27,539 29,884 20,536
Federal and state net operating loss carryforward 9,277 10,498 8,252
Compensation expensed for books and deferred for tax purposes 3,754 3,915 3,147
Goodwill impairment for books in excess of tax amortization -- 1,086 --
Real estate held for development and sale capitalized costs for tax purposes -- --
in excess of amounts capitalized for financial statement purposes 6,891 7,554 10,669
Other 4,896 4,642 2,314
-------- -------- --------
Total gross deferred tax assets 52,651 57,770 45,322
Less valuation allowance 2,470 4,369 7,682
-------- -------- --------
Total deferred tax assets 50,181 53,401 37,640
-------- -------- --------
DEFERRED TAX LIABILITIES:
Subsidiaries not consolidated for income tax purposes 36,006 30,541 26,853
Investment in Bluegreen 5,533 -- --
Tax bad debt reserve in excess of base year reserve -- 293 546
Deferred loan income 885 918 688
Change in investment of unconsolidated real estate subsidiary -- 1,762 --
Purchase accounting adjustments for bank acquisitions 2,229 1,356 --
Accumulated other comprehensive income 3,887 2,596 10,018
Prepaid pension expense 2,607 -- 2,618
Other 1,929 3,816 833
-------- -------- --------
Total gross deferred tax liabilities 53,076 41,282 41,556
-------- -------- --------
Net deferred tax (liability) asset (2,895) 12,119 (3,916)
Net deferred tax (asset) liability at beginning of period (12,119) 3,916 (4,345)
Acquired net deferred tax asset, net of valuation allowance -- (8,175) --
Decrease in deferred tax liability from Bancorp other capital transactions (158) (9) (1,026)
Increase in deferred tax liability from Levitt's other capital transactions 934 -- --
Increase (decrease) in accumulated other comprehensive income 416 (1,145) (1,467)
Decrease in deferred tax liability from BFC's tax effect relating to
exercise stock option (550) -- --
Increase in Levitt's accumulated other comprehensive income 361 -- --
Increase (decrease) in Bancorp's accumulated other comprehensive income 1,019 (6,277) 7,497
-------- -------- --------
(Provision) benefit for deferred income taxes (12,993) 429 (3,257)
Benefit for deferred income taxes - discontinued operations -- (380) --
Reduction in deferred tax asset associated with GMS sale 314 -- --
Provision for deferred income taxes - extraordinary item -- 2,771 --
Benefit for deferred income taxes - cumulative effect of an accounting change -- (1,246) --
-------- -------- --------
(Provision) benefit for deferred income taxes - continuing operations $(12,679) $ 1,574 $ (3,257)
======== ======== ========
F-47
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the deferred tax valuation allowance was (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Balance, beginning of period $ 4,369 $ 7,682 $ 7,331
Utilization of acquired tax benefits (418) (2,638) (1,163)
Increase (reduction) in state deferred tax valuation allowance (1,168) 230 1,637
Other decreases and reclassifications (313) (905) (123)
------- ------- -------
Balance, end of period $ 2,470 $ 4,369 $ 7,682
======= ======= =======
Except as discussed below, BankAtlantic Bancorp's management believes that it
will have sufficient taxable income of the appropriate character in future years
to realize the net deferred income tax asset. In evaluating the expectation of
sufficient future taxable income, management considered the future reversal of
temporary differences and available tax planning strategies that could be
implemented, if required. A valuation allowance was required at December 31,
2003, 2002 and 2001 as it was management's assessment that, based on available
information, it is more likely than not that a portion of the deferred tax asset
will not be realized. A change in the valuation allowance occurs if there is a
change in management's assessment of the amount of the net deferred income tax
asset that is expected to be realized.
At December 31, 2003, BankAtlantic Bancorp had State net operating loss
carryforwards ("NOLs") and Federal NOL's of $50 million and $352,000,
respectively. The NOL's expire through the year 2017. Utilization of the state
NOL carryforward is restricted by state jurisdiction and BankAtlantic Bancorp's
management believes that it is more likely than not that the State NOL will not
be realized.
Prior to December 31, 1996, BankAtlantic was permitted to deduct from taxable
income an allowance for bad debts, which was in excess of the provision for such
losses charged to income. Accordingly, at December 31, 2003, BankAtlantic
Bancorp had $21.5 million of excess allowance for bad debts. Included in this
amount was $11.4 million of excess allowance acquired in connection with the
Community acquisition. If, in the future, this portion of retained earnings is
distributed, or BankAtlantic no longer qualifies as a bank for tax purposes,
federal income tax of approximately $7.5 million would be imposed.
BankAtlantic Bancorp is not included in the Company's consolidated tax return.
At December 31, 2003, the Company (excluding BankAtlantic Bancorp and Levitt,
which is included in BankAtlantic Bancorp's 2003 consolidated tax return) had
estimated state and federal net operating loss carry forwards as follows (in
thousands):
Expiration
Year State Federal
---------- ------- -------
2006 $ 429 $ --
2007 4,235 4,558
2008 2,332 3,322
2011 1,662 1,831
2012 669 984
2021 806 1,422
2022 824 1,528
2023 1,907 3,506
------- -------
$12,864 $17,151
======= =======
F-48
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFITS PLAN
BFC'S STOCK OPTION PLAN
BFC's Stock Option Plan provides for the grant of stock options to purchase
shares of the Company's Class B Common Stock. The plan provides for the grant of
both incentive stock options and non-qualifying options. The exercise price of a
stock option will not be less than the fair market value of the Common Stock on
the date of the grant and the maximum term of the option is ten years. The
following table sets forth information on all outstanding options:
Class B
Outstanding
Options Price Per Share
----------------- ------------------
Outstanding at December 31, 2000 5,573,771 $0.63 to $5.75
Issued --
Exercised (33,693) $0.67 to $0.67
---------
Outstanding at December 31, 2001 5,540,078 $0.63 to $5.75
Issued -
Exercised (88,049) $0.63 to $2.27
Forfeited (8,985) $3.34 to $3.34
---------
Outstanding at December 31, 2002 5,443,044 $0.67 to $5.75
Issued 354,901 $2.87 to $2.87
Exercised (387,341) $0.67 to $0.74
---------
Outstanding at December 31, 2003 5,410,604 $0.69 to $5.75
=========
Exercisable at December 31, 2003 4,763,705 $0.69 to $5.75
=========
Available for grant at December 31, 2003 525,534
=========
The weighted average exercise price of options outstanding at December 31, 2003,
2002 and 2001 was $2.41, $2.26 and $2.25, respectively. The weighted average
price of options exercised was $0.73 during 2003, $1.64 during 2002 and $0.67
during 2001.
The adoption of FAS 123 under the fair value based method would have increased
compensation expense by approximately $355,000, $177,000 and $182,000 for the
years ended December 31, 2003, 2002 and 2001, respectively. The option model
used to calculate the FAS 123 compensation adjustment was the Black-Scholes
model with the following grant date fair values and assumptions:
Number of Risk Free Expected Expected
Date of Options Grant Date Type of Exercise Interest Life Expected Dividend
Grant Granted Fair Value Grant Price Rate (Years) Volatility Yield
- ------------ ------------ ------------- ---------- ----------- ----------- ----------- ----------- -----------
7/1/1997 88,365 $ 0.90 ISO $ 2.27 5.80% 6.0 27.40% 0%
7/1/1997 214,865 $ 0.90 NQ $ 2.27 5.80% 6.0 27.40% 0%
7/1/1997 1,347,658 $ 0.82 NQ $ 2.48 5.80% 6.0 27.40% 0%
1/13/1998 956,845 $ 3.27 * $ 5.75 5.53% 7.5 44.46% 0%
4/6/1999 327,938 $ 2.78 * $ 3.34 5.28% 7.5 92.21% 0%
2/7/2003 354,901 $ 2.02 * $ 2.87 4.50% 7.5 72.36% 0%
* Both non-qualified and incentive stock options were granted.
The employee turnover was considered to be none.
F-49
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted-
Average Weioghted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
$0.67 to $1.20 2,198,649 0.7 years $0.71 2,198,649 $0.71
$1.20 to $2.40 233,598 3.5 years $2.27 233,598 $2.27
$2.40 to $3.60 2,021,512 4.8 years $2.69 1,374,613 $2.49
$3.60 to $6.00 956,845 3.9 years $5.75 956,845 $5.75
--------- --------- ----- --------- -----
5,410,604 2.9 years $2.41 4,763,705 $2.31
========= ========= ===== ========= ======
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted-
Average Weioghted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
$0.63 to $1.20 2,585,990 1.6 years $0.71 2,585,990 $0.71
$1.20 to $2.40 233,598 4.5 years $2.27 233,598 $2.27
$2.40 to $3.60 1,666,611 4.8 years $2.65 1,347,658 $2.49
$3.60 to $6.00 956,845 4.9 years $5.75 956,845 $5.75
--------- --------- ----- --------- -----
5,443,044 3.3 years $2.26 5,124,091 $2.19
========= ========= ===== ========= ======
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted-
Average Weioghted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
$0.63 to $1.20 2,619,681 2.6 years $0.71 2,619,681 $0.71
$1.20 to $2.40 287,956 4.8 years $2.27 287,956 $2.27
$2.40 to $3.60 1,675,596 5.8 years $2.65 1,347,658 $2.49
$3.60 to $6.00 956,845 5.9 years $5.75 956,845 $5.75
--------- --------- ----- --------- -----
5,540,078 4.3 years $2.25 5,212,140 $2.19
========= ========= ===== ========= ======
BFC PROFIT SHARING PLAN
The Company has an employee's profit sharing plan which provides for
contributions to a fund of a defined amount, but not to exceed the amount
permitted under the Internal Revenue Code as deductible expense. The provision
charged to operations was approximately $50,000, $50,000 and $35,000 for the
years ended December 31, 2003, 2002 and 2001, respectively. Contributions are
funded on a current basis.
BANKATLANTIC BANCORP'S PENSION PLAN
At December 31, 1998, BankAtlantic Bancorp froze its defined benefit pension
plan (the "Pension Plan"). All participants in the Pension Plan ceased accruing
service benefits beyond that date and became vested. BankAtlantic Bancorp is
subject to future pension expense or income based on future actual plan returns
and actuarial values of the Pension Plan obligations to employees.
F-50
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the Pension Plan's funded status and the minimum
pension liability or prepaid pension cost included in the consolidated
statements of financial condition at (in thousands):
December 31,
---------------------------
2003 2002
-------- --------
Projected benefit obligation at the beginning of the year $ 22,276 $ 21,088
Interest cost 1,485 1,424
Actuarial loss 148 563
Benefits paid (815) (799)
-------- --------
Projected benefit obligation at end of year $ 23,094 $ 22,276
======== ========
December 31,
---------------------------
2003 2002
-------- --------
Fair value of Pension Plan assets at the beginning of year $ 17,860 $ 24,566
Actual return on Pension Plan assets 6,132 (5,907)
Employer contribution 750 --
Benefits paid (815) (799)
-------- --------
Fair value of Pension Plan assets as of actuarial date $ 23,927 $ 17,860
======== ========
December 31,
---------------------------
2003 2002
-------- --------
Actuarial present value of projected benefit obligation for
service rendered to date $(23,094) $(22,276)
Pension Plan assets at fair value as of the actuarial date 23,927 17,860
-------- --------
Funded (unfunded) accumulated benefit obligation (1) 833 (4,416)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 5,924 11,650
-------- --------
Prepaid pension cost(2) $ 6,757 $ 7,234
======== ========
(1) The measurement date for the accumulated benefit obligation was
December 31, 2003 and 2002. The December 31, 2002 unfunded accumulated
benefit obligation was recorded in other liabilities in the Company's
consolidated statement of financial condition.
(2) The December 31, 2003 prepaid pension cost was recorded in other assets
in the Company's consolidated statement of financial condition.
For the year ended December 31, 2002, BankAtlantic Bancorp recorded a minimum
pension liability in other comprehensive income associated with the unfunded
accumulated benefit obligation as follows (in thousands):
Amount
---------
Change in prepaid pension cost in other assets $ (7,234)
Minimum pension liability in other liabilities (4,416)
Change in deferred tax assets 4,194
---------
Decrease in other comprehensive income $ (7,456)
=========
F-51
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net pension expense (benefit) includes the following components (in thousands):
For the Years Ended December 31,
-------------------------------------------
2003 2002 2001
------- ------- -------
Service cost benefits earned during the period $ -- $ -- $ --
Interest cost on projected benefit obligation 1,485 1,424 1,429
Expected return on plan assets (1,470) (1,989) (2,381)
Amortization of unrecognized net losses 1,212 314 --
------- ------- -------
Net periodic pension expense (benefit) (1) $ 1,227 $ (251) $ (952)
======= ======= =======
(1) Periodic pension expense (benefit) is included as an increase/decrease
in compensation expense.
The actuarial assumptions used in accounting for the Pension Plan were:
For the Years Ended
December 31,
--------------------------------------------
2003 2002 2001
----- ----- -----
Weighted average discount rate 6.75% 6.75% 7.25%
Rate of increase in future compensation levels N/A N/A N/A
Expected long-term rate of return 8.50% 9.00% 9.00%
Actuarial estimates and assumptions are based on various market factors and are
evaluated on an annual basis, and changes in such assumptions may impact future
pension costs. Current participant data was used for the actuarial assumptions
for each of the three years ended December 31, 2003. BankAtlantic Bancorp
contributed $750,000 to the Pension Plan during the year ended December 31,
2003. BankAtlantic Bancorp did not make any contributions to the Pension Plan
during the years ended December 31, 2002 and 2001. BankAtlantic Bancorp will not
be required to contribute to the Pension Plan for the year ending December 31,
2004.
BankAtlantic Bancorp's pension plan weighted-average asset allocations at
December 31, 2003 and 2002 by asset category are as follows:
Plan Assets
At December 31,
-------------------
2003 2002
------ ------
Equity securities 57.45% 71.16%
Debt securities 38.13 27.70
Cash 4.42 1.14
------ ------
Total 100.00% 100.00%
====== ======
The Pension Plan's investment policies and strategies are to invest in mutual
funds that are rated with at least a three-star rating awarded by Morningstar at
the initial purchase. If a fund's Morningstar rating falls below a three-star
rating after an initial purchase, it is closely monitored to ensure that the
under performance can be attributed to market conditions rather than management
deficiencies. BankAtlantic Bancorp's management changes or changes in fund
objectives could be cause for replacement of any mutual fund. The Pension Plan
also maintains an aggressive growth investment category which includes
investments in equity securities and mutual funds. Both public and private
securities are eligible for this category of investment, but no more than 5% of
total Plan assets at the time of the initial investment may be invested in any
one company. Beyond the initial cost limitation (5% at time of purchase), there
will be no limitation as to the percentage that any one investment can represent
if it is achieved through growth. As a means to reduce negative market
volatility, and to invoke a sell discipline for concentrated positions, the
Pension Plan has a strategy of selling call options against certain stock
positions within the portfolio when considered timely. At December 31, 2003, 16%
of the Pension Plan's assets were invested in the aggressive growth category.
F-52
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Pension Plan's targeted asset allocation is 72% equity securities, 25% debt
securities and 3% cash during the year ended December 31, 2004. A rebalancing of
the portfolio takes place on a quarterly basis when there has been a 5% or
greater change from the prevailing benchmark allocation.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2004 $ 830
2005 $ 856
2006 $ 909
2007 $ 941
2008 $ 977
Years 2009-2013 $7,023
There are large increases in annual benefit payouts expected in 2009 and 2010
when four key employees of BankAtlantic Bancorp reach normal retirement age.
BANKATLANTIC BANCORP 401(K) PLAN:
The table below outlines the terms of BankAtlantic Bancorp's Security Plus
401(k) Plan and the associated employer costs (dollars in thousands):
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
---------- --------- ----------
Employee Salary Contribution Limit (1) $ 12.0 $ 11.0 $ 10.5
Percentage of Salary Limitation (2) 75% 75% 20%
Employer Match Contribution (3) $ 1,558 $ 1,800 1,500
Vesting of Employer Match Immediate Immediate 5 years (4)
(1) For the 2003 and 2002 plan year, employees over the age of 50 were
entitled to contribute $14,000 and $12,000, respectively.
(2) Highly compensated employees were limited to a maximum contribution of
7% of salary during the 2001 plan year.
(3) During the 2003 and 2002 plan year, the employer matched 100% of the
first 3% of employee contributions and 50% of the next 2% of employee
contributions. During the 2001 plan year, the employer matched 100% of
the first 4% of employee contributions.
(4) The vesting period is pro-rata over 5 years from the date of hire.
BANKATLANTIC PROFIT SHARING PLAN
At January 1, 2003, BankAtlantic established the BankAtlantic Profit Sharing
Stretch Plan (the "Plan") for all employees of BankAtlantic and its
subsidiaries. The profit sharing awards are paid in cash quarterly and are based
on achieving specific profitability and loan and deposit growth goals. Included
in compensation expense during the year ended December 31, 2003 was $3.6 million
of expenses associated with the BankAtlantic Profit Sharing Plan.
RYAN BECK PLANS:
As of December 31, 2003, Ryan Beck maintains one retirement plan for eligible
employees, the 401(k) Savings Plan. In 2002 and 2001 Ryan Beck maintained two
retirement plans for eligible employees, the 401(k) Savings Plan and the Money
Purchase Pension Plan.
Ryan Beck maintained a nonvoluntary Money Purchase Pension Plan to which Ryan
Beck contributed 5% of an employee's eligible earnings, subject to certain
limitations in 2002. Contributions to the Ryan Beck Money Purchase Pension Plan
totaled $729,000 and $1.4 million during the years ended December 31, 2002 and
2001, respectively. Ryan Beck contributed 8% of an employee's eligible earnings,
subject to certain limitations during the year ended December 31, 2001. The Ryan
Beck Money Purchase Pension Plan was liquidated into the Ryan Beck 401(k) Saving
Plan during 2003.
F-53
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ryan Beck's employees may contribute up to 12% of their eligible earnings,
subject to certain limitations, to the 401(k) Savings Plan. For the period from
January 2001 to March 2001, Ryan Beck matched dollar-for-dollar the first 4% of
contributions for salaried employees and the first 2.5% for financial
consultants. Effective April 1, 2001, Ryan Beck suspended the matching
contributions to its 401(k) Savings Plan. In 2003, Ryan Beck matched 50% on the
first 6% of contributions for salaried employees. Additionally, Ryan Beck
awarded an additional 1% of contributions for salaried employees as a
discretionary match during 2003. Included in employee compensation and benefits
on the consolidated statement of operations was $332,420, $0, and $224,000 of
expenses and employer contributions related to the 401(k) Savings Plan during
the years ended December 31, 2003, 2002 and 2001, respectively.
During the year ended December 31, 2002, Ryan Beck instituted the Ryan Beck &
Co., Inc. Voluntary Deferred Compensation Plan for certain employees whereby the
employee can elect to defer a portion of his or her compensation for a minimum
of 3 years or until retirement. These contributions are fully vested. The
obligations under the terms of this plan are not required to be funded. The
obligations are unsecured general obligations to pay, in the future, the value
of the deferred compensation, adjusted to reflect the performance of selected
measurement options chosen by each participant. In 2003, the former Gruntal
Deferred Compensation Plan was merged into this plan. At December 31, 2003 and
2002, the deferred compensation obligation payable under this plan totaled $13.8
million and $9.7 million, respectively.
During 2002, Ryan Beck amended the Ryan Beck & Co., Inc. Supplemental Bonus Plan
in which a bonus account was established for $1.5 million. The bonus account
will amortize into compensation expense pro-rata over a four-year period. The
bonus account vests and is payable 25% per year on the first business day in
January 2004 through 2007.
In connection with the Gruntal transaction, a nonqualified deferred compensation
plan was assumed by Ryan Beck covering select employees of Gruntal. Gruntal
provided an annual matching contribution and, in some cases, special
allocations, both of which would vest if the employee remained employed for ten
years from the plan year for which contributions were made. The obligations were
not required to be funded and were unsecured general obligations to pay, in the
future, the value of the deferred compensation, adjusted to reflect the
performance of selected investment measurement options chosen by each
participant during the deferral period. On April 26, 2002, Ryan Beck froze the
plan, and participants could no longer continue to make contributions and
related matches ceased. In August 2002, Ryan Beck allowed the participants in
the plan to elect to withdraw their vested benefits upon forfeiting their
unvested benefits. During September 2002, $15.9 million of Ryan Beck's mutual
fund investments assigned to the plan were withdrawn, resulting in a $2.5
million realized loss included in income from investment banking activity in the
statement of operations. All unvested amounts will vest no later than 2011.
During the year ended December 31, 2003, Ryan Beck realized compensation expense
of $3.0 million associated with the increase in the nonqualified deferred
compensation plan obligation. During the year ended December 31, 2002, Ryan Beck
realized a $1.5 million reduction in compensation expense associated with the
decrease in the plan obligation.
In July 2002, Ryan Beck established a retention plan for certain Gruntal
financial consultants, key employees and others. Pursuant to the retention plan,
the participants were granted a length of service award and a retention award in
forgivable notes in the aggregate amounts of $900,000 and $11.0 million,
respectively. The participants received forgivable notes of $5.7 million, $2.9
million and $2.4 million in July 2002, February 2003 and January 2004,
respectively. Each forgivable note will have a term of five years. A pro-rata
portion of the principal amount of the note is forgiven each month over the five
year term. If a participant terminates employment with Ryan Beck prior to the
end of the term of the Note, the outstanding balance becomes immediately due to
Ryan Beck.
Included in other assets at December 31, 2003 and 2002 were $15.1 million and
$14.8 million, respectively, of forgivable notes receivable to certain employees
of Ryan Beck. These notes receivable are forgivable loans and are amortized over
a five-year period from the date of the notes. Included in compensation expense
for each of the years ended December 31, 2003 and 2002 was $4.9 million and $3.7
million, respectively, of forgivable note receivable amortization.
LEVITT 401(K) PLAN
Through December 31, 2003, employees of Levitt participated in BankAtlantic's
defined contribution plan, pursuant to Section 401(k) of the Internal Revenue
Code for all employees who have completed three months of service and have
reached the age of 18. Levitt's contributions to the plan were at the discretion
of BankAtlantic's Board of Directors. Included in the Company's consolidated
statements of operations for each of the years ended December 31, 2003, 2002 and
2001 was approximately $475,000, $344,000, and $198,000, respectively, of
expenses relating to the employer 401(k) contribution under the plan.
F-54
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES
The Company is a lessee under various operating leases for real estate and
equipment extending to the year 2072. The approximate minimum future rentals
under such leases, at December 31, 2003, for the periods shown were (in
thousands):
Year Ending December 31, Amount
- ------------------------ -------
2004 $13,223
2005 11,161
2006 9,130
2007 6,758
2008 4,845
Thereafter 10,362
-------
Total $55,479
=======
For the Years Ended December 31,
----------------------------------------
(In thousands) 2003 2002 2001
------- ------- -------
BFC rental expense $ 31 $ 31 $ 31
======= ======= =======
Bancorp rental expense for premises and equipment $17,697 $16,327 $10,315
======= ======= =======
Levitt rental expense $ 875 $ 435 $ 367
======= ======= =======
At December 31, 2003, BankAtlantic leased 85 ATMs located in BankAtlantic branch
locations, cruise ships and various retail outlets.
In the normal course of its business, BankAtlantic a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit and to issue standby and documentary letters of
credit. Those instruments involve, to varying degrees, elements of credit risk.
BankAtlantic's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
those instruments. BankAtlantic uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial instruments with off-balance sheet risk were (in thousands):
December 31,
------------------------------
2003 2002
---------- ----------
Commitments to sell fixed rate residential loans $ 12,962 $ 88
Commitments to sell variable rate residential loans 3,740 --
Forward contract to purchase mortgage-backed securities 8,611 39,128
Commitments to purchase other investment securities -- 200
Commitments to purchase fixed rate residential loans 40,242 --
Commitments to purchase variable rate residential loans 3,500 300,643
Commitments to extend credit, including the undisbursed
portion of loans in process 1,418,809 1,126,384
Standby letters of credit 31,722 35,927
Commercial lines of credit 162,623 209,708
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. BankAtlantic has $16.8 million of
commitments to extend credit at a fixed interest rate and $1.4 billion of
commitments to extend credit at a variable rate. BankAtlantic evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
required by BankAtlantic in connection with an extension of credit is based on
management's credit evaluation of the counter-party.
F-55
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby letters of credit are conditional commitments issued by BankAtlantic to
guarantee the performance of a customer to a third party. BankAtlantic standby
letters of credit are generally issued to customers in the construction industry
guaranteeing project performance. These types of standby letters of credit had a
maximum exposure of $26.1 million at December 31, 2003. BankAtlantic also issues
standby letters of credit to commercial lending customers guaranteeing the
payment of goods and services. These types of standby letters of credit had a
maximum exposure of $5.6 million at December 31, 2003. Those guarantees are
primarily issued to support public and private borrowing arrangements and have
maturities of one year or less. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. BankAtlantic may hold certificates of deposit and residential and
commercial liens as collateral for such commitments that are collateralized
similar to other types of borrowings. Included in other liabilities at December
31, 2003 was $110,000 of unearned guarantee fees.
BankAtlantic is required to maintain reserve balances with the Federal Reserve
Bank. Such reserves consisted of cash and amounts due from banks of $50.1
million and $60.2 million at December 31, 2003 and 2002, respectively.
As a member of the FHLB system, BankAtlantic is required to purchase and hold
stock in the FHLB of Atlanta. As of December 31, 2003 BankAtlantic was in
compliance with this requirement, with an investment of approximately $40.3
million in stock of the FHLB of Atlanta.
BankAtlantic Bancorp, through its ownership of Ryan Beck, is subject to the
risks of investment banking. Ryan Beck's customers' securities transactions are
introduced on a fully disclosed basis to its clearing broker. The clearing
broker carries all of the accounts of the customers of Ryan Beck and is
responsible for execution, collection and payment of funds, and receipt and
delivery of securities relative to customer transactions. Customers' securities
activities are transacted on a cash and margin basis. These transactions may
expose Ryan Beck to off-balance-sheet risk, wherein the clearing broker may
charge Ryan Beck for any losses it incurs in the event that customers may be
unable to fulfill their contractual commitments and margin requirements are not
sufficient to fully cover losses. Ryan Beck seeks to minimize this risk through
procedures designed to monitor the creditworthiness of its customers and ensure
that customer transactions are executed properly by the clearing broker.
Ryan Beck, in its capacity as a market-maker and dealer in corporate and
municipal fixed-income and equity securities, may enter into transactions in a
variety of cash and derivative financial instruments in order to facilitate
customer order flow and hedge market risk exposures. These financial instruments
include securities sold, but not yet purchased and future contracts. Securities
sold, but not yet purchased represent obligations of BankAtlantic Bancorp to
deliver specified financial instruments at contracted prices, thereby creating a
liability to purchase the financial instrument in the market at prevailing
prices. Accordingly, these transactions result in off-balance-sheet risk as
BankAtlantic Bancorp's ultimate obligation may exceed the amount recognized in
the Consolidated Statement of Financial Condition.
Levitt is subject to obligations associated with entering into contracts for the
purchase, development and sale of real estate in the routine conduct of its
business. Levitt is obligated to fund homeowner association operating deficits
incurred by its communities under development. This obligation ends upon
turnover of the association to the residents of the community.
At December 31, 2003, Levitt had commitments to purchase properties for
development of $147.6 million, of which approximately $114.9 million is subject
to due diligence and satisfaction of certain requirements and conditions, as
well as the obtaining of financing. At December 31, 2003, cash deposits of
approximately $3.5 million secured Levitt's commitments under these contracts.
15. REGULATORY MATTERS
The Company is a unitary savings bank holding company that owns approximately
15% and 100%, respectively of the outstanding BankAtlantic Bancorp Class A and
Class B Common Stock, in the aggregate representing approximately 22% of all the
outstanding BankAtlantic Bancorp Common Stock. BankAtlantic Bancorp is the
holding company for BankAtlantic Bank by virtue of its ownership of 100% of the
outstanding BankAtlantic common stock. BFC is subject to regulatory oversight
and examination by the OTS as discussed herein with respect to BankAtlantic
Bancorp. BankAtlantic Bancorp is a unitary savings bank holding company subject
to regulatory oversight and examination by the OTS, including normal supervision
and reporting requirements. The Company is subject to the reporting and other
requirements of the Securities Exchange Act of 1934 (the "Exchange Act").
BankAtlantic Bancorp is also subject to the reporting and other requirements of
the Exchange Act.
F-56
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BankAtlantic's deposits are insured by the FDIC for up to $100,000 for each
insured account holder, the maximum amount currently permitted by law.
BankAtlantic is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can cause regulators to initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on BankAtlantic's financial statements. At December 31, 2003,
BankAtlantic met all capital adequacy requirements to which it is subject and
was considered a well capitalized institution.
The OTS imposes limits applicable to the payment of cash dividends by
BankAtlantic to the BankAtlantic Bancorp which are based on an institution's
regulatory capital levels. BankAtlantic is permitted to pay capital
distributions during a calendar year that do not exceed its net income for the
year plus its retained net income for the prior two years, without notice to, or
the approval of, the OTS. At December 31, 2003, this capital distribution
limitation was $67.5 million.
Bank Atlantic's actual capital amounts and ratios are presented in the table
(dollars in thousands):
For Capital To Be Considered
Actual Adequacy Purposes Well Capitalized
--------------------- ------------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------ -------- ------
AS OF DECEMBER 31, 2003:
Total risk-based capital $447,967 12.06% $297,208 8.00% $371,509 10.00%
Tier I risk-based capital $379,505 10.22% $148,604 4.00% $222,906 6.00%
Tangible capital $379,505 8.52% $ 66,802 1.50% $ 66,802 1.50%
Core capital $379,505 8.52% $178,138 4.00% $222,673 5.00%
AS OF DECEMBER 31, 2002:
Total risk-based capital $413,469 11.89% $278,176 8.00% $347,720 10.00%
Tier I risk-based capital $347,927 10.01% $139,088 4.00% $208,632 6.00%
Tangible capital $347,927 7.26% $ 71,873 1.50% $ 71,873 1.50%
Core capital $347,927 7.26% $191,661 4.00% $239,576 5.00%
Ryan Beck has not paid dividends to BankAtlantic Bancorp, although, subject to
regulatory and capital requirements, it may do so in the future.
BankAtlantic Bancorp's wholly owned subsidiary, Ryan Beck is subject to the net
capital provision of Rule 15c3-1 promulgated under the Exchange Act, which
requires the maintenance of minimum net capital and requires the ratio of
aggregate indebtedness to net capital, both as defined, not to exceed 15 to 1.
Additionally, Ryan Beck, as a market-maker, is subject to supplemental
requirements of Rule 15c3-1(a)4, which provides for the computation of net
capital to be based on the number of and price of issues in which markets are
made by Ryan Beck, not to exceed $1.0 million. Ryan Beck's regulatory net
capital was approximately $26.2 million, which was $25.2 million in excess of
its required net capital of $1.0 million at December 31, 2003.
Ryan Beck operates under the provisions of paragraph (k)(2)(ii) of Rule 15c3-3
of the SEC as a fully disclosed introducing broker and, accordingly, customer
accounts are carried on the books of the clearing broker. However, Ryan Beck
safekeeps and redeems municipal bond coupons for the benefit of its customers.
Accordingly, Ryan Beck is subject to the provisions of SEC Rule 15c3-3 relating
to possession or control and customer reserve requirements and was in compliance
with such provisions at December 31, 2003.
16. LEGAL PROCEEDINGS
On October 3, 2002, Commerce Bancorp., Inc. ("Commerce") filed a complaint
against BankAtlantic in the United States District Court for the District of New
Jersey. The complaint, which sought unspecified money damages and injunctive
relief, asserted that BankAtlantic infringed certain trademark rights allegedly
owned by Commerce in the slogan "AMERICA'S MOST CONVENIENT BANK" by virtue of
BankAtlantic's use of the slogan "FLORIDA'S MOST CONVENIENT BANK." Commerce also
filed an amended complaint, which asserts additional claims for trademark
infringement. In order to amicably resolve the litigation the parties entered
into a Settlement Agreement dated January 20, 2004 settling the case in its
entirety. Pursuant to the settlement, the action was dismissed with prejudice.
No monetary payments were made by either party in connection with the
settlement.
F-57
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 30, 2003, a one-count purported class action complaint was filed in
the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach
County, Florida by a former employee of Gruntal seeking a declaratory judgment
that Ryan Beck is liable for all pre-April 26, 2002 claims against Gruntal by
former Gruntal retail customers and retail brokers, whether pending or to be
filed in the future, not expressly assumed by Ryan Beck in its acquisition of
certain of the assets of Gruntal. The complaint does not specify the amount of
such claims. The complaint seeks to impose liability under the theory that
either (1) Ryan Beck engaged in a DE FACTO merger with Gruntal, (2) Ryan Beck's
brokerage business is a mere continuation of Gruntal's brokerage business, or
(3) Ryan Beck is the beneficiary of a fraudulent transfer. Ryan Beck removed the
case to federal court and subsequently filed a motion to dismiss the complaint
on various grounds. The court issued an order staying this action until the
resolution of the Gruntal bankruptcy proceedings.
In April 2002, Ryan Beck acquired certain of the assets and assumed certain of
the liabilities of Gruntal. Ryan Beck has been named as a defendant in a number
of arbitration claims filed by former Gruntal clients whose claims arose prior
to the transaction date. In these actions Ryan Beck is alleged to be "successor
in interest" to Gruntal, which allegations Ryan Beck denies. In some instances
the former Gruntal brokers against whom the claims relate are now employed by
Ryan Beck and in other instances the brokers are not employed by Ryan Beck. Ryan
Beck did not assume any of the liabilities associated with these actions in the
Gruntal transaction. While Ryan Beck does not consider any individual action to
be material, an adverse result in a number of these actions in the aggregate
could adversely affect the Company's financial statements. In October 2002,
Gruntal filed for bankruptcy protection under Chapter 11 of the Federal
Bankruptcy Laws.
On December 29, 2000, Smith & Company, Inc. ("Smith") filed an action against
Levitt-Ansca Towne Partnership (the "Partnership"), Bellaggio By Levitt Homes,
Inc. ("BLHI"), Bellaggio By Ansca, Inc. a/k/a Bellaggio By Ansca Homes, Inc.,
and Liberty Mutual Insurance Company (collectively, "Defendants") based on an
August 21, 2000 contract entered into with the Partnership. BLHI is a 50%
partner of the Partnership and a wholly owned subsidiary of Levitt and Sons. The
complaint alleged, among other things, wrongful termination, breach and failure
to pay for extra work performed outside the scope of the contract. The
Partnership denied the claims, asserted defenses and asserted a number of
counterclaims. This case was tried before a jury, and on March 7, 2002, the jury
returned a verdict against the Partnership. The final judgment entered against
the Defendants is $3.68 million. Under the final judgment, Smith and its surety
company may be entitled to recover legal fees and other costs. Since BLHI is a
50% partner of the Partnership, its share of the potential liability is
estimated at $2.6 million. The Partnership appealed the verdict. At December 31,
2003 and 2002, the Company's financial statements included an accrual in other
liabilities associated with this matter of $2.5 million and $2.4 million,
respectively.
In the ordinary course of business, the Company and its subsidiaries are parties
to other lawsuits as plaintiff or defendant involving its bank operations
lending, tax certificates, securities sales, brokerage and underwriting,
acquisitions and real estate development activities. Although the Company
believes it has meritorious defenses in all current legal actions, the outcome
of the various legal actions is uncertain. Management, based on discussions with
legal counsel, believes results of operations or financial position will not be
significantly impacted by the resolution of these matters.
F-58
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. PARENT COMPANY FINANCIAL INFORMATION
BFC's Condensed Statements of Financial Condition at December 31, 2003 and 2002,
Condensed Statements of Operations and Condensed Statements of Cash Flows for
each of the years in the three-year period ended December 31, 2003 are shown
below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS EXCEPT SHARE DATA)
December 31,
--------------------------
ASSETS 2003 2002
-------- --------
Cash and cash equivalents $ 1,536 $ 797
Securities available for sale, at market value 1,218 1,269
Investment in venture partnerships 626 2,782
Investment in BankAtlantic Bancorp 91,869 106,017
Investment in Levitt 27,885 --
Investment in other subsidiaries 13,680 13,620
Loans receivable 4,175 4,175
Other assets 484 768
-------- --------
Total assets $141,473 $129,428
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages payable and other borrowings $ 6,015 $ 6,015
Other liabilities 23,234 22,805
Deferred income taxes 26,549 23,197
-------- --------
Total liabilities 55,798 52,017
-------- --------
Shareholders' equity:
Preferred stock of $.01 par value; authorized
10,000,000 shares; none issued -- --
Class A common stock of $.01 par value, authorized 20,000,000 shares;
issued and outstanding 13,884,470 in 2003 and 6,474,994 in 2002 126 58
Class B common stock, of $.01 par value, authorized 20,000,000
shares; issued and outstanding 2,534,426 in 2003 and 2,362,157 in 2002 23 21
Additional paid-in capital 24,654 24,077
Retained earnings 59,342 52,387
-------- --------
Total shareholders' equity before
accumulated other comprehensive income 84,145 76,543
Accumulated other comprehensive income 1,530 868
-------- --------
Total shareholders' equity 85,675 77,411
-------- --------
Total liabilities and shareholders' equity $141,473 $129,428
======== ========
F-59
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 2003
(IN THOUSANDS)
2003 2002 2001
-------- -------- --------
Revenue - interest and other $ 1,051 $ 763 $ 1,010
Expenses - interest and other 3,954 3,898 4,022
-------- -------- --------
(Loss) before undistributed earnings from
subsidiaries (2,903) (3,135) (3,012)
Equity from earnings in BankAtlantic Bancorp 15,222 11,380 10,551
Equity from (loss) earnings in other subsidiaries (1,583) (633) 595
-------- -------- --------
Income before income taxes 10,736 7,612 8,134
Provision for income taxes 3,714 2,420 2,660
-------- -------- --------
Net income $ 7,022 $ 5,192 $ 5,474
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 2003
(IN THOUSANDS)
2003 2002 2001
-------- -------- --------
Operating Activities:
Income (loss) from continuing operations $ 5,879 $ (5,986) $ 4,336
Income from discontinued operations, net of tax 1,143 2,536 --
Income from extraordinary item, net of tax -- 23,749 --
Cumulative effect of a change in accounting principle,
net of tax -- (15,107) 1,138
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Equity from earnings in BankAtlantic Bancorp (15,222) (11,380) (10,551)
Equity from loss (earnings) in other subsidiaries 1,583 633 (595)
Depreciation 10 24 25
Provision for deferred income taxes 3,646 2,556 2,660
Loss on investment securities -- 499 920
Gain from securities activities, net (270) -- --
Advances from other subsidiaries 444 503 1,538
Increase in loans receivable -- (2,991) (1,184)
Decrease in other assets 274 49 1,671
Increase in other liabilities 155 213 719
-------- -------- --------
Net cash (used in) provided by operating activities (2,358) (4,702) 677
-------- -------- --------
Investing Activities:
Common stock dividends received from Bancorp 1,686 1,581 1,468
Distributions from venture partnerships 344 -- --
Decrease (increase) in securities available for sale 785 (173) (100)
-------- -------- --------
Net cash provided by investing activities 2,815 1,408 1,368
-------- -------- --------
Financing Activities:
Borrowings -- 1,500 4,515
Repayment of borrowings -- -- (4,080)
Retirement of common stock -- (319) --
Issuance of common stock upon exercise of stock options 282 204 54
-------- -------- --------
Net cash provided by financing activities 282 1,385 489
-------- -------- --------
Increase (decrease) in cash and cash equivalents 739 (1,909) 2,534
Cash and cash equivalents at beginning of period 797 2,706 172
-------- -------- --------
Cash and cash equivalents at end of period $ 1,536 $ 797 $ 2,706
======== ======== ========
F-60
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002 2001
-------- -------- --------
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Interest paid on borrowings 333 302 349
Increase in securities available for sale
resulting from venture partnerships
distribution of its securities investment -- 506 --
Change in shareholders' equity resulting from net
change in other comprehensive income, net of taxes 662 (1,824) (2,335)
Net loss effect of Bancorp capital transactions,
net of income taxes (252) (15) (1,636)
Increase in shareholders' equity for the tax effect related
to the exercise of stock options 550 60 31
Levitt investment resulting from the spin-off transaction
27,885 -- --
18. SELECTED QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the quarterly results of operations for the years
ended December 31, 2003 and 2002 (in thousands except for per share data):
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
Interest income $ 69,291 $ 69,503 $ 63,090 $ 59,990 $ 261,874
Interest expense 31,872 31,306 27,879 22,328 113,385
--------- --------- --------- --------- ---------
Net interest income 37,419 38,197 35,211 37,662 148,489
Provision for (recovery from) loan losses 850 1,490 (1,076) (1,811) (547)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 36,569 36,707 36,287 39,473 149,036
--------- --------- --------- --------- ---------
Income before income taxes, minority interest
and discontinued operations 22,192 25,022 28,302 25,622 101,138
Provision for income taxes 9,190 10,588 11,995 12,393 44,166
Minority interest in income of consolidated
subsidiaries 11,185 13,318 14,352 12,238 51,093
--------- --------- --------- --------- ---------
Income from continuing operations 1,817 1,116 1,955 991 5,879
Discontinued operations, net of taxes 83 754 306 -- 1,143
--------- --------- --------- --------- ---------
Net income $ 1,900 $ 1,870 $ 2,261 $ 991 $ 7,022
========= ========= ========= ========= =========
Basic earnings per share from continuing
operations $ 0.13 $ 0.08 $ 0.13 $ 0.07 $ 0.40
Basic earnings per share from discontinued
operations 0.01 0.05 0.02 -- 0.08
--------- --------- --------- --------- ---------
Basic earnings per share $ 0.14 $ 0.13 $ 0.15 $ 0.07 $ 0.48
========= ========= ========= ========= =========
Diluted earnings per share from continuing
operations $ 0.11 $ 0.06 $ 0.11 $ 0.05 $ 0.32
Diluted earnings per share from discontinued
operations 0.01 0.05 0.02 -- 0.07
--------- --------- --------- --------- ---------
Diluted earnings per share $ 0.12 $ 0.11 $ 0.13 $ 0.05 $ 0.39
========= ========= ========= ========= =========
Basic weighted average number of common
shares outstanding 14,348 14,619 14,559 14,735 14,604
========= ========= ========= ========= =========
Diluted weighted average number of common
shares outstanding 15,793 16,441 16,396 17,292 16,660
========= ========= ========= ========= =========
The third and fourth quarter earnings were impacted by BankAtlantic Bancorp
prepaying $185 million of FHLB advances in the third quarter and $140 million of
FHLB advances in the fourth quarter incurring prepayment penalties of $2.0
million and $8.9 million, respectively. The discontinued operations reflect the
operations of GMS. (See Note 2.)
F-61
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total
--------- --------- --------- -------- ---------
Interest income $ 67,914 $ 81,799 $ 81,762 $ 73,225 $ 304,700
Interest expense 35,301 40,097 39,698 36,782 151,878
--------- --------- --------- --------- ---------
Net interest income 32,613 41,702 42,064 36,443 152,822
Provision for loan losses 2,565 6,139 2,082 3,291 14,077
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 30,048 35,563 39,982 33,152 138,745
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority interest,
discontinued operations, extraordinary items and
cumulative effect of a change in accounting
principle 18,551 (10,444) 19,088 23,106 50,301
Provision (benefit) for income taxes 6,138 (3,022) 6,946 7,931 17,993
Minority interest in income of consolidated
subsidiaries (2,042) 15,218 11,181 13,937 38,294
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 14,455 (22,640) 961 1,238 (5,986)
Discontinued operations, net of taxes -- 689 860 987 2,536
Extraordinary items, net of taxes -- 23,810 (61) -- 23,749
Cumulative effect of a change in accounting
principle, net of tax (15,107) -- -- -- (15,107)
--------- --------- --------- --------- ---------
Net income (loss) $ (652) $ 1,859 $ 1,760 $ 2,225 $ 5,192
========= ========= ========= ========= =========
Basic earnings (loss) per share from continuing
operations $ 1.01 $ (1.57) $ 0.07 $ 0.09 $ (0.42)
Basic earnings per share from discontinued operations -- 0.05 0.06 0.07 0.18
Basic earnings per share from extraordinary items -- 1.65 -- -- 1.65
Basic loss per share from cumulative effect of a
change in accounting principle (1.05) -- -- -- (1.05)
--------- --------- --------- --------- ---------
Basic earnings (loss) per share $ (0.04) $ 0.13 $ 0.12 $ 0.16 $ 0.36
========= ========= ========= ========= =========
Diluted earnings (loss) per share from continuing
operations $ 0.88 $ (1.58) $ 0.05 $ 0.07 $ (0.43)
Diluted earnings per share from discontinued
operations -- 0.05 0.05 0.06 0.17
Diluted earnings per share from extraordinary items -- 1.65 -- -- 1.62
Diluted loss per share from cumulative effect of a
change in accounting principle (0.92) -- -- -- (1.03)
--------- --------- --------- --------- ---------
Diluted earnings (loss) per share $ (0.04) $ 0.12 $ 0.10 $ 0.13 $ 0.33
========= ========= ========= ========= =========
Basic weighted average number of common
shares outstanding 14,382 14,395 14,353 14,348 14,370
========= ========= ========= ========= =========
Diluted weighted average number of common
shares outstanding 16,062 14,395 15,879 15,742 14,370
========= ========= ========= ========= =========
During the first quarter, the cumulative effect of a change in accounting
principle resulted from the implementation of FASB Statement No. 142. Based on
the accounting principles of the new statement, the goodwill associated with the
Ryan Beck reportable segment was deemed impaired, resulting in the $15.1 million
charge, net of tax. The second quarter loss from continuing operations resulted
from a $19.7 million impairment of equity investments, a $1.0 million
restructuring charge associated with the discontinuation of ATM relationships
and $3.9 million of acquisition related expenses. The extraordinary gain during
the second quarter resulted from the Gruntal transaction as the fair value of
net assets acquired exceeded the cost. During the fourth quarter, BankAtlantic
increased its unassigned component of its allowance for loan losses by $4.9
million and an amendment to a supplemental bonus plan resulted in a $1.4 million
reduction in compensation expense.
19. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated fair value
of the Company's financial instruments presented in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("FAS 107").
Management has made estimates of fair value that it believes to be reasonable.
However, because there is no market for many of these financial instruments,
management has no basis to determine whether the fair value presented would be
indicative of the value negotiated in an actual sale. The Company's fair value
estimates do not consider the tax effect that would be associated with the
disposition of the assets or liabilities at their fair value estimates.
F-62
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair values are estimated for loan portfolios with similar financial
characteristics. Loans are segregated by category, and each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and non-performing categories.
The fair value of performing loans, except residential mortgage and adjustable
rate loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. The estimate of average maturity is
based on BankAtlantic's historical experience with prepayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows, which are adjusted for
national historical prepayment estimates. The discount rate is based on
secondary market sources and is adjusted to reflect differences in servicing and
credit costs.
Fair values of non-performing loans are based on the assumption that the loans
are on a non-accrual status, discounted at market rates during a 24 month
workout period. Assumptions regarding credit risk are determined using available
market information and specific borrower information.
The book value of tax certificates approximates market value. The fair value of
mortgage-backed and investment securities are estimated based upon a price
matrix obtained from a third party.
Under FAS 107, the fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings and NOW accounts, and money market
and checking accounts, is considered the same as book value. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using current rates offered by
BankAtlantic for similar remaining maturities.
The book value of securities sold under agreements to repurchase approximates
fair value.
The fair value of FHLB advances is based on discounted cash flows using rates
offered for debt with comparable terms to maturity and issuer credit standing.
The fair value of convertible subordinated debentures was based on quoted market
prices on NASDAQ. The fair values of other subordinated debentures, junior
subordinated debentures, trust preferred securities and notes payable were based
on discounted value of contractual cash flows at a market discount rate.
The following table presents information for the Company's financial instruments
at December 31, 2003 and 2002 (in thousands):
December 31, 2003 December 31, 2002
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- -----------
Financial assets:
Cash and cash equivalents $ 143,542 $ 143,542 $ 252,577 $ 252,577
Securities available for sale 360,442 360,442 713,131 713,131
Securities owned 124,565 124,565 186,454 186,454
Investment securities 192,706 192,706 212,240 212,698
Loans receivable including loans held for sale, net 3,611,612 3,620,487 3,377,870 3,429,711
Financial liabilities:
Deposits $3,048,142 $3,062,565 $2,920,555 $2,940,848
Securities sold under agreements to repurchase 120,874 120,874 116,279 116,279
Advances from FHLB 782,205 830,939 1,297,170 1,386,648
Subordinated debentures, notes and bonds payable 164,100 163,827 209,068 210,665
Guaranteed preferred beneficial interests in Bancorp's
junior subordinated debentures -- -- 180,375 180,479
Junior subordinated debentures 263,266 257,647 -- --
F-63
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount and fair values of BankAtlantic's commitments to extend
credit, standby letters of credit, financial guarantees and forward FHLB
commitments are not significant. (See Note 14 for the contractual amounts of
BankAtlantic's financial instrument commitments).
DERIVATIVES
During the year ended December 31, 2000, BankAtlantic Bancorp entered into a
forward contract to purchase the underlying collateral from a government agency
pool of securities in May 2005. The underlying collateral is $8.6 million of
five-year hybrid adjustable rate mortgage loans that will adjust annually after
May 2005. The forward contract was held for trading purposes and recorded at
fair value of $13,000.
During the year ended December 31, 2002, BankAtlantic Bancorp utilized interest
rate swaps to manage its interest rate risk. BankAtlantic Bancorp entered into
callable time deposits with its customers and entered into callable interest
rate swaps. During the year ended December 31, 2003, interest rate swap
contracts with a notional amount of $33 million were called by the
counter-party, resulting in BankAtlantic Bancorp redeeming $33 million of fixed
rate time deposits. There were no interest rate swaps outstanding at December
31, 2003.
BankAtlantic Bancorp also created cash flow hedges by entering into interest
rate swap contracts to hedge the variable cash flows relating to forecasted
interest payments on certain variable rate FHLB advances. The changes in fair
value of the interest rate swap contracts designated as cash flow hedges were
recorded in other comprehensive income and the receivables and payables from the
swap contracts were recorded as an adjustment to interest expense on FHLB
advances in the Company's statement of operations for the years ended December
31, 2002 and 2001. BankAtlantic Bancorp terminated the above mentioned interest
rate swap contracts with a notional amount of $75 million during the year ended
December 31, 2003 and recognized a $1.9 million loss included in securities
activities, net in the Company's statement of operations.
20. EARNINGS (LOSS) PER SHARE
The Board of Directors of the Company declared stock splits effected in the form
of a 15%, 25% and 25% stock dividend, respectively, to holders of record on June
3, 2003, November 17, 2003 and February 20, 2004, respectively, payable in
shares of the Company's Class A Common Stock for each share of the outstanding
Class A and Class B Common Stock. Where appropriate, amounts throughout this
report have been adjusted to reflect the stock splits.
The Company has two classes of common stock outstanding. The two-class method is
not presented because the Company's capital structure does not provide for
different dividend rates or other preferences, other than voting rights, between
the two classes. The number of options considered outstanding shares for diluted
earnings per share is based upon application of the treasury stock method to the
options outstanding as of the end of the period. I.R.E. Realty Advisory Group,
Inc. ("RAG") owns 2,869,141 of BFC Financial Corporation's Class A Common Stock
and 500,000 shares of BFC Financial Corporation Class B Common Stock. Because
the Company owns 45.5% of the outstanding common stock of RAG, 1,304,024 shares
of Class A Common Stock and 227,250 shares of Class B Common Stock are
eliminated from the number of shares outstanding for purposes of computing
earnings per share.
The following reconciles the numerators and denominators of the basic and
diluted earnings per share computation for the years ended December 31, 2003,
2002 and 2001.
F-64
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31,
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
-------- -------- --------
BASIC EARNINGS PER SHARE
NUMERATOR:
Income (loss) from continuing operations $ 5,879 $ (5,986) $ 4,336
Discontinued operations, net of taxes 1,143 2,536 --
Extraordinary item, net of taxes -- 23,749 --
Cumulative effect of a change in accounting principle, net of taxes -- (15,107) 1,138
-------- -------- --------
NET INCOME $ 7,022 $ 5,192 $ 5,474
Amortization of goodwill, net of tax -- -- 735
-------- -------- --------
NET INCOME ADJUSTED TO EXCLUDE GOODWILL AMORTIZATION $ 7,022 $ 5,192 $ 6,209
======== ======== ========
DENOMINATOR:
Weighted average number of common shares outstanding 16,135 15,901 15,829
Eliminate RAG weighted average number of common shares (1,531) (1,531) (1,531)
-------- -------- --------
Basic weighted average number of common shares outstanding 14,604 14,370 14,298
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share from continuing operations $ 0.40 $ (0.42) $ 0.30
Earnings per share from discontinued operations 0.08 0.18 --
Earnings per share from extraordinary items -- 1.65 --
(Loss) earnings per share from cumulative effect of a change in
accounting principle -- (1.05) 0.08
-------- -------- --------
BASIC EARNINGS PER SHARE $ 0.48 $ 0.36 $ 0.38
Basic earnings per share from amortization of goodwill -- -- 0.05
-------- -------- --------
BASIC EARNINGS PER SHARE ADJUSTED TO EXCLUDE GOODWILL AMORTIZATION $ 0.48 $ 0.36 $ 0.43
======== ======== ========
DILUTED EARNINGS PER SHARE
NUMERATOR
Income (loss) from continuing operations $ 5,879 $ (5,986) $ 4,336
Effect of securities issuable by a subsidiary (505) (206) (1,033)
-------- -------- --------
Income (loss) available after assumed dilution $ 5,374 $ (6,192 $ 3,303
-------- -------- --------
Discontinued operations, net of taxes $ 1,143 $ 2,536 $ --
Effect of securities issuable by a subsidiary (17) (56) --
-------- -------- --------
Discontinued operations, net of taxes after assumed dilution $ 1,126 $ 2,480 $ --
-------- -------- --------
Extraordinary items, net of taxes $ -- $ 23,749 $ --
Effect of securities issuable by a subsidiary -- (511) --
-------- -------- --------
Extraordinary items, net of taxes after assumed dilution $ -- $ 23,238 $ --
-------- -------- --------
Cumulative effect of a change in accounting principle, net of taxes $ -- $(15,107) $ 1,138
Effect of securities issuable by a subsidiary -- 325 (97)
-------- -------- --------
Cumulative effect of a change in accounting principle, net of taxes
after assumed dilution $ -- $(14,782) $ 1,041
-------- -------- --------
NET INCOME AVAILABLE AFTER ASSUMED DILUTION $ 6,500 $ 4,744 $ 4,344
Amortization of goodwill, net of tax -- -- 641
-------- -------- --------
NET INCOME AVAILABLE AFTER ASSUMED DILUTION ADJUSTED TO
EXCLUDE GOODWILL AMORTIZATION
$ 6,500 $ 4,744 $ 4,985
======== ======== ========
DENOMINATOR
Weighted average number of common shares outstanding 16,135 15,901 15,829
Eliminate RAG weighted average number of common shares (1,531) (1,531) (1,531)
Common stock equivalents resulting from stock-based compensation 2,056 -- 1,466
-------- -------- --------
Diluted weighted average shares outstanding 16,660 14,370 15,764
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE
Earnings (loss) per share from continuing operations $ 0.32 $ (0.43) $ 0.21
Earnings per share from discontinued operations 0.07 0.17 --
Earnings per share from extraordinary items -- 1.62 --
(Loss) earnings per share from cumulative effect of
a change in accounting principle -- (1.03) 0.07
-------- -------- --------
DILUTED EARNINGS PER SHARE $ 0.39 $ 0.33 $ 0.28
Diluted earnings per share from amortization of goodwill -- -- 0.04
-------- -------- --------
DILUTED EARNINGS PER SHARE ADJUSTED TO EXCLUDE GOODWILL AMORTIZATION $ 0.39 $ 0.33 $ 0.32
======== ======== ========
F-65
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. REAL ESTATE HELD FOR DEVELOPMENT AND SALE
Real estate held for development and sale consist of the following (in
thousands):
December 31,
------------------------
2003 2002
-------- --------
Land and land development costs $183,847 $161,826
Construction costs 75,087 23,412
Other capitalized costs 17,378 12,888
Other real estate 6,960 6,371
-------- --------
Total $283,272 $204,497
======== ========
Real estate held for development and sale consisted of the combined activities
of Levitt and its subsidiaries as well as the activities of a 50% owned real
estate joint venture ("Riverclub") in which BankAtlantic Bancorp is the primary
beneficiary as defined by FIN 46. Riverclub was acquired in connection with the
acquisition of Community in March 2002. As a consequence of the implementation
of FIN 46 on July 1, 2003, BankAtlantic Bancorp consolidated Riverclub in its
financial statements effective January 1, 2003. In periods prior to 2003,
Riverclub was accounted for on the equity method. The purpose of the Riverclub
joint venture is to develop 199 single-family homes, condominium units and
duplexes that are located in Indian River County, Florida. Also included in
other real estate held for development and sale is BFC's real estate, Burlington
Manufacturers Outlet Center ("BMOC"), a shopping center in North Carolina and
the unsold land at the commercial development known as Center Port in Pompano
Beach, Florida. Also included in real estate held for development and sale at
December 31, 2003 and 2002 is $3.1 million and $2.1 million, respectively,
associated with branch banking facilities.
Gains on sales of real estate developed for sale were as follows (in thousands):
2003 2002 2001
-------- -------- --------
Sales of real estate $302,908 $207,808 $144,677
Cost of sales on real estate 223,639 159,675 109,637
-------- -------- --------
$ 79,269 $ 48,133 $ 35,040
======== ======== ========
22. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
Investments in and advances to unconsolidated subsidiaries consisted of Levitt's
investment in Bluegreen, Levitt's investment in real estate joint ventures,
BankAtlantic Bancorp's investment in 11 statutory business trusts that were
formed to issue trust preferred securities, and in 2002, Riverclub. Prior to
January 1, 2003, BankAtlantic Bancorp's statutory business trusts were
consolidated in the Company's financial statements.
At December 31, 2003, Levitt and its subsidiaries owned equity investments
associated with real estate joint ventures at various stages of development,
ranging from 40% to 50% profit sharing interests. At December 31, 2003 and 2002,
Levitt's investment in real estate joint ventures included BankAtlantic's loans
of approximately $23.2 million and $24.9 million, respectively.
Levitt has provided guarantees on indebtedness to joint ventures accounted for
under the equity method of accounting. The guarantees arose in order to obtain
joint venture financing. Levitt and its joint venture partners would have to
perform on their guarantees if the joint ventures were to default on the main
loan agreements. At December 31, 2003, Levitt had guarantees on $22.4 million of
joint venture debt. Included in these guarantees were $21.1 million of loans
from BankAtlantic. All guarantees were entered into prior to December 31, 2002.
Levitt's management believes that based on the value of the collateral pledged
to support the loans, no payments will be required under the guarantees. The
other joint venture partners are also guarantors to the joint venture debt and
any payments associated with the guarantees in excess of Levitt's ratable
obligation may be recovered from these third parties.
BankAtlantic's loans to joint ventures have resulted in deferral of the
recognition of interest income on the financing activity and/or the deferral of
profit recognition from the joint venture. The less than 50% owned joint
ventures are accounted for under the equity method of accounting and primarily
develop residential and multifamily properties.
F-66
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The condensed combined statements of financial condition and condensed combined
statements of operations for investment and advances to unconsolidated
subsidiaries are as follows (in thousands):
December 31,
--------------------------
2003 2002
-------- --------
STATEMENT OF FINANCIAL CONDITION
Investment in Bluegreen $ 70,852 $ 60,695
Investments in and loans to real estate joint ventures 27,286 51,904
Investment in statutory business trusts 7,910 --
-------- --------
$106,048 $112,599
======== ========
For the Years Ended
December 31,
------------------------
STATEMENT OF OPERATIONS 2003 2002
------- -------
Equity in Bluegreen earnings $ 9,085 $ 5,349
Equity in joint ventures earnings 616 3,978
Earnings from statutory trusts 425 --
------- -------
$10,126 $ 9,327
======= =======
The Condensed Combined Statements of Financial Condition and Condensed Combined
Statements of Operation for unconsolidated subsidiaries, excluding Bluegreen,
are as follows for 2003 and 2002 (unaudited):
Condensed Combined Balance Sheets
(In thousands)
December 31,
--------------------------
2003 2002
-------- --------
Real estate assets $ 57,402 $ 70,367
Junior subordinated debentures 263,266 --
Other assets 6,568 6,846
-------- --------
Total Assets $327,236 $ 77,213
======== ========
Notes payable - BankAtlantic
$ 22,726 $ 58,341
Trust preferred securities 255,375 --
Other notes payable 25,628 11,041
Other liabilities 7,497 6,923
-------- --------
Total Liabilities 311,226 76,305
-------- --------
Partners' capital 8,100 908
Common securities 7,910 --
-------- --------
Total Liabilities and Equity $327,236 $ 77,213
======== ========
F-67
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Combined Statement of Operations
(In thousands)
For the Years Ended December 31,
---------------------------------
2003 2002
-------- --------
Revenues $ 18,893 $ 51,866
Cost and expenses (18,332) (48,738)
Interest income from subordinated debentures 14,534 --
Interest expense (14,109) --
-------- --------
Net income $ 986 $ 3,128
======== ========
The condensed consolidated balance sheet and condensed consolidated statement of
income of Bluegreen are as follows:
Condensed Consolidated Balance Sheet
(In thousands)
December 31,
--------------------------
2003 2002
-------- --------
Total assets $570,406 $433,992
======== ========
Total liabilities 378,878 272,459
Minority interest 4,648 3,250
Total shareholders' equity 186,880 158,283
-------- --------
Total liabilities and shareholders'
equity $570,406 $433,992
======== ========
Condensed Consolidated Statement of Income
(In thousands)
Year Nine Months Year
Ended Ended Ended
December 31, December 31, March 31,
2003 2002 2002
------------ ------------ ---------
Revenues $ 438,454 $ 271,973 $ 287,825
Cost and expenses 393,129 247,302 268,343
Provision for income taxes 16,168 8,479 7,345
Minority interest 3,330 816 405
--------- --------- ---------
Income before cumulative effect of a change in
accounting principle 25,827 15,376 11,732
Cumulative effect of a change in accounting
principle, net of income taxes and minority interest -- (5,579) --
--------- --------- ---------
Net income $ 25,827 $ 9,797 $ 11,732
========= ========= =========
F-68
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Alan B. Levan, President and Chairman of the Board of the Company also serves as
Chairman of the Board and Chief Executive Officer of BankAtlantic Bancorp and
BankAtlantic. Alan B. Levan is also Chairman of the Board of Bluegreen and
Levitt. John E. Abdo, Vice Chairman of the Board of the Company also serves as
Vice Chairman of the Board of Directors of BankAtlantic Bancorp, BankAtlantic,
Levitt and Bluegreen and is President of Levitt. Glen R. Gilbert, Executive Vice
President of the Company also serves as Executive Vice President of Levitt.
These executive officers separately receive compensation from our affiliates for
services rendered for such affiliates.
The Company's management fees from related parties for the years ended December
31, 2003, 2002 and 2001 consisted of (in thousands):
For the Years Ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Levitt $213 170 80
==== ==== ====
Other affiliates $ 10 41 44
==== ==== ====
In connection with the Levitt spin-off, BankAtlantic Bancorp entered into a
transitional services agreement with Levitt whereby BankAtlantic Bancorp will
provide human resources, risk management and investor and public relation
services and receive compensation for such services on a percentage of cost
basis. Additionally, BankAtlantic Bancorp entered into an employment matters
agreement providing for the allocation of responsibility and liability between
BankAtlantic Bancorp and Levitt with respect to the welfare and benefit plans
for Levitt employees after the spin-off.
Also in connection with the spin-off of Levitt, BankAtlantic Bancorp converted a
currently outstanding $30.0 million demand note owed by Levitt to BankAtlantic
Bancorp to a five year term note with interest only payable monthly initially at
a prime rate and there after at a prime rate plus increments of an additional
0.25% every six months. Prior to the spin-off, BankAtlantic Bancorp transferred
its 1.2 million shares in Bluegreen to Levitt in exchange for $5.5 million
note and additional shares of Levitt common stock (which additional shares were
distributed as part of the spin-off transaction.) This note is due in one year,
with principal and interest payable monthly. Additionally, prior to the
spin-off, Levitt declared an $8.0 million dividend to BankAtlantic Bancorp
payable in the form of a five year note with the same payment terms as the $30.0
million note described above. The above transactions were eliminated in the
Company's consolidated financial statements.
The Company paid BankAtlantic approximately $67,000 during 2003 for office space
used by the Company in BankAtlantic's headquarters and for miscellaneous
administrative and other related expenses. BankAtlantic provided certain
administrative services to Bluegreen in 2003 without receipt of payment for such
services.
During the year ended December 31, 2003, BankAtlantic paid a subsidiary of
Levitt a $540,000 management fee to operate and sell a residential construction
property acquired by BankAtlantic through foreclosure. The property was sold to
an unrelated developer during the fourth quarter of 2003.
In 1994, the Company agreed to participate in certain real estate opportunities
with John E. Abdo and certain of his affiliates (the "Abdo Group"). Under the
arrangement, the Company and the Abdo Group share equally in profits after
interest earned by the Company on advances made by the Company. The Company
bears any risk of loss under the arrangement with the Abdo Group. Pursuant to
this arrangement with the Abdo Group, in December 1994, an entity controlled by
the Company acquired from an unaffiliated seller approximately 70 acres of
unimproved land known as the "Center Port" property in Pompano Beach, Florida.
Through December 31, 2001, all of the project except for land under two pylon
signs, a cell tower site and the lake had been sold to unaffiliated third
parties for approximately $21.4 million and the Company recognized net gains
from the sales of real estate of approximately $4.8 million. The Abdo Group
received approximately $2.6 million in 2000 from the Company for their real
estate sales profit participation.
During 1999 and 2000, the Company (without consideration of BankAtlantic
Bancorp) acquired interests in unaffiliated technology entities. During 2000 and
2001, the Company's interests in the technology entities were transferred at the
Company's cost to specified asset limited partnerships. Subsidiaries of the
Company are the controlling general partners of
F-69
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these venture partnerships, and therefore, they are consolidated in the
Company's financial statements. Interests in such partnerships were sold in 2000
and 2001 to accredited investors in private offerings. During 2000,
approximately $5.1 million of capital was raised by these partnerships from
unaffiliated third parties, as well as officers, directors and affiliates of the
Company who invested approximately $4.4 million in the partnerships. The Company
and the general partners retained ownership interests of approximately $1.8
million. Additionally, during 2001, approximately $895,000 of capital was raised
from unaffiliated third parties by one of these partnerships and officers,
directors and affiliates of the Company invested approximately $1.3 million in
the partnership. The Company and the general partners retained ownership
interests of approximately $3.8 million increasing the Company's total
investment in these partnerships to an aggregate of $5.6 million. Of the $1.3
million, invested by officers, directors and affiliates, Alan Levan and John
Abdo each borrowed $500,000 from the Company on a recourse basis and Glen
Gilbert, Executive Vice President, and Earl Pertnoy, a director of the Company
each borrowed $50,000 on a non-recourse basis to make their investments. Such
amounts were still outstanding at the end of the year (except for John Abdo's
$500,000 loan which is discussed below), bear interest at the prime rate plus 1%
and are payable interest only annually with the entire balance due in February
2006. After the limited partners receive a specified return from the
partnerships, the general partners are entitled to receive 20% of all cash
distributions from the partnerships. The general partners are limited liability
companies of which the members are: BFC Financial Corporation - 57.5%, John E.
Abdo - 13.75%; Alan B. Levan - 9.25%; Glen R. Gilbert - 2.0% and John E. Abdo,
Jr. - 17.5%. Losses net of minority interests for the year ended December 31,
2003 were $1.8 million. At December 31, 2003, the Company's net investment in
these partnerships was $626,000
On July 16, 2002, John Abdo borrowed $3.5 million from the Company on a recourse
basis and paid off his existing $500,000 loan due to the Company. The $3.5
million loan bears interest at the prime rate plus 1%, requires monthly interest
payments, is due on demand and is secured by 2,127,470 shares of BFC Class A
Common Stock and 370,750 shares of BFC Class B Common Stock.
An affiliated limited partnership, BankAtlantic Bancorp and affiliates of the
Company are investors in a privately held technology company located in Boca
Raton, Florida. The affiliated limited partnership invested $2 million in
219,300 shares in the technology company's common stock, which shares were
acquired in October 2000 at a price per share of $9.12. At December 31, 2001,
the carrying value of this investment by the limited partnership had been
written down to $4.95 per share and in 2002, based on its performance, the
technology company was written off entirely by the Company and Bancorp.
BankAtlantic Bancorp invested $15 million in 3,033,386 shares of the technology
company's common stock in cash and by issuance to the technology company of
748,000 shares of BankAtlantic Bancorp Class A Common Stock. BankAtlantic
Bancorp's shares in the technology company were acquired in October 1999 at an
average price per share of $4.95. Both Alan B. Levan and John E. Abdo became
directors of the technology company in connection with the investment. Alan B.
Levan owns or controls direct and indirect interests in an aggregate of 286,709
shares of the technology company common stock, purchased at an average price per
share of $8.14 and Mr. John E. Abdo owns or controls direct and indirect
interests in an aggregate of 368,408 shares of the technology company common
stock purchased at an average price per share of $7.69. Jarett Levan, a director
of BankAtlantic Bancorp and Executive Vice President of BankAtlantic, and Bruno
DiGiulian, a director of BankAtlantic Bancorp have a 0.15% and 0.7% ownership
interest, respectively, in the limited partnership. BFC and its affiliates
collectively owned approximately 7% of the technology company's outstanding
common stock at December 31, 2003. During 2001, Mr. Levan and Mr. Abdo resigned
from the Board of Directors of the technology company and initiated a lawsuit on
behalf of the Company and others against the founder of the technology company,
personally, regarding his role. In early 2003, the technology company initiated
a lawsuit against BankAtlantic Bancorp seeking to have a restrictive legend on
its BankAtlantic Bancorp's Class A Common Stock removed. On March 24, 2004, the
parties settled the pending litigation. Pursuant to the terms of the settlement,
the affiliated limited partnership, BankAtlantic Bancorp and the other
affiliates of the Company were given the opportunity to sell their respective
investments in the technology company to a third party investor group for the
amount of their initial investment. The investor group and the technology
company also agreed to pay an additional amount equal to the legal expenses
incurred and damages. The amounts paid by the technology company were paid by
delivery of shares of BankAtlantic Bancorp Class A Common Stock owned by the
technology company. BankAtlantic Bancorp sold its shares in the technology
company for $15 million in cash, its original cost, and received compensation
for legal expenses and damages consisting of $1.7 million in cash and return of
378,000 shares of BankAtlantic Bancorp Class A Common Stock. The affiliated
limited partnership and other affiliates of the Company chose not to sell their
shares in the technology company but recovered legal fees and damages. The
affiliated limited partnership received $309,845 in cash and 50,422 shares of
BankAtlantic Bancorp Class A Common Stock in connection with the settlement and
the Company's other affiliates, without regard to their interests in the
affiliated partnership, received in the aggregate $132,747 in cash and 29,413
shares of BankAtlantic Bancorp Class A Common Stock. The parties also exchanged
releases and the pending litigation between the parties will be dismissed in
connection with the settlement.
F-70
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BankAtlantic Bancorp and its subsidiaries utilized certain services of Ruden,
McClosky, Smith, Schuster & Russell, P.A. ("Ruden, McClosky"), a law firm to
which Bruno DiGiulian is of counsel. Fees aggregating $110,000 were paid by
BankAtlantic and $30,000 were paid by Ryan Beck to Ruden, McClosky in 2003. In
addition, fees aggregating approximately $1.1 million were paid to Ruden,
McClosky by Levitt and Bluegreen in 2003 prior to the spin off of Levitt from
BankAtlantic Bancorp. In 2002 and 2001, fees aggregating $1.0 million and
$793,000, respectively, were paid to the law firm by BankAtlantic and Levitt.
Ruden, McClosky also represents Alan B. Levan and John E. Abdo with respect to
certain other business interests.
Since 2002, Levitt has utilized certain services of Conrad & Scherer, a law firm
in which William R. Scherer, a member of the Levitt's Board of Directors, is a
member. Levitt paid fees aggregating $79,000 and $364,000 to this firm during
the years ended December 31, 2003 and 2002, respectively.
Alan B. Levan, Jarett Levan and John E. Abdo have investments or are partners in
real estate joint ventures with developers, which developers, in connection with
other ventures, have loans from BankAtlantic or are joint venture partners with
Levitt.
Certain of the Company's affiliates, including its executive officers, have
independently made investments with their own funds in both public and private
entities in which the Company holds investments.
The Company has a 49.5% interest and affiliates and third parties have a 50.5%
interest in a limited partnership formed in 1979, for which the Company's
Chairman serves as the individual General Partner. The partnership's primary
asset is real estate subject to net lease agreements. The Company's cost for
this investment, approximately $441,000, was written off in 1990 due to the
bankruptcy of the entity leasing the real estate. During each of the years 2003
and 2002, the Company received distributions of approximately $25,000 from the
partnership.
Florida Partners Corporation owns 133,314 shares of the Company's Class B Common
Stock and 764,999 shares of the Company's Class A Common Stock. Alan B. Levan
may be deemed to beneficially be the principal shareholder and is a member of
the Board of Florida Partners Corporation. Glen R. Gilbert, Executive Vice
President and Secretary of the Company holds similar positions at Florida
Partners Corporation.
The BankAtlantic Foundation is a non-profit foundation established by
BankAtlantic. During 2003, the Foundation made donations aggregating $364,530,
including $25,000 to the Broward Community College Foundation (as the first
installment of a 4-year commitment of $100,000 to the Will and Jo Holcombe
Institute for Teaching and Learning), $15,000 to the Florida Grand Opera, $7,500
to the Leadership Broward Foundation, $7,500 to Nova Southeastern University
(including $5,000 as the first installment of a 5-year, $25,000 commitment to
the Wayne Huizenga School of Business and $2,500 to Nova Southeastern University
Libraries); $4,250 to ArtServe, $3,000 to the Broward Performing Arts Foundation
and $2,000 to the Museum of Art of Ft. Lauderdale. In addition to the
contributions made by the BankAtlantic Foundation, BankAtlantic made certain
direct contributions. In 2003 BankAtlantic made donations of $11,500 to the
Broward Community College Foundation, $10,963 to the Urban League of Broward
County, $6,000 to ArtServe, $1,160 to United Way of Broward County and $900 to
the Leadership Broward Foundation. Alan B. Levan sits on the Boards of the
Broward Community College Foundation, the Florida Grand Opera and Nova
Southeastern University, Jarett Levan sits on the Boards of the Leadership
Broward Foundation and ArtServe and the Board of Governors of the Museum of Art
of Ft. Lauderdale, John E. Abdo is President of the Broward Performing Arts
Foundation, Dr. Willis Holcombe sits on the Boards of the Broward Community
College Foundation and the Urban League of Broward County. In addition both D.
Keith Cobb and Lloyd DeVaux sit on the Board of the United Way of Broward County
which may further provide funds to these entities.
During fiscal 2003, Jarett Levan, a director and son of director, president and
Chief Executive Officer Alan B. Levan, was employed by BankAtlantic as Chief
Marketing Officer and was paid annual compensation of approximately $211,000 for
his services. Alan B. Levan's daughter, Rachelle Levan Margolis, served as
executive director of the BankAtlantic Foundation and received approximately
$43,000 for the year. For the years ended December 31, 2002 and 2001, Jarett
Levan received approximately $170,000 and $145,000, respectively, while Rachelle
Levan Margolis received approximately $102,000 and $88,000, respectively.
Included in BFC's other assets at December 31, 2003 and 2002 were approximately
$138,000 and $391,000, respectively, due from affiliates.
24. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is regularly reviewed by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
F-71
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reportable segments consist of one or more operating segments with similar
economic characteristics, products and services, production processes, type of
customer, distribution system and regulatory environment. The information
provided for Segment Reporting is based on internal reports utilized by
management. Results of operations are reported through seven reportable
segments. Bank Investments, Commercial Banking, and Community Banking are our
Bank Operation segments, which are conducted through BankAtlantic. The remaining
reportable segments consist of the activities of Ryan Beck and its subsidiaries,
Levitt and its subsidiaries, BankAtlantic Bancorp parent company and BFC holding
company. Interest expense and certain revenue and expense items are allocated to
the three Bank Operation reportable segments as interest expense and overhead.
The presentation and allocation of interest expense and overhead and the net
contribution for the operating segments may not reflect the actual economic
costs, contribution or results of operations of the unit as a stand alone
business. If a different basis of allocation was utilized, the relative
contributions of the segments might differ but the relative trends in segments
would, in management's view, likely not be impacted.
The following summarizes the aggregation of the Company's operating segments
into reportable segments:
Reportable Segment Operating Segments Aggregated
------------------ -----------------------------
Bank Investments Investments, tax certificates, residential loans purchased, CRA
lending and real estate capital services
Commercial Banking Commercial lending, syndications, international, lease
finance, trade finance and a real estate joint venture development
Community Banking Indirect and direct consumer lending, small business lending
and ATM operations
Ryan Beck Investment banking and brokerage operations
BankAtlantic Bancorp Parent Company BankAtlantic Bancorp's operations, costs of acquisitions,
financing of acquisitions, and equity investments
Levitt Levitt real estate and joint venture activities, which includes
Levitt and Sons, Core Communities, Levitt Commercial, equity
investment in Bluegreen and real estate joint ventures
BFC Holding Company BFC's real estate owned which includes BMOC and Center Port.
Loans receivable that relate to previously owned properties,
other securities and investments and BFC's overhead and
interest expense. Provision for income taxes includes the tax
effect from BFC's equity from earnings in BankAtlantic Bancorp.
BFC's investment in BankAtlantic Bancorp and Levitt and BFC's
equity earnings from BankAtlantic Bancorp and Levitt are not
presented within this segment. BankAtlantic Bancorp and Levitt
are consolidated in our financial statements.
The accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies. Intersegment
transactions consist of borrowings by Levitt and investment banking operations
which are recorded based upon the terms of the underlying loan agreements and
are eliminated. The elimination entries consist of the intercompany loan
interest income and interest expense, management fees, consulting fees, and
brokerage commission.
Depreciation and amortization consist of: depreciation on property and
equipment, amortization of premiums and discounts on loans and investments,
amortization of goodwill and core deposit intangible assets, and amortization of
the retention pool.
F-72
BFC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates segment performance based on net segment income before
minority interest. The table below is segment information for income from
continuing operations for the three years ended December 31, 2003:
ADJUSTING
BANCORP BFC AND
BANK PARENT HOLDING ELIMINATION SEGMENT
2003 OPERATIONS RYAN BECK COMPANY LEVITT COMPANY ENTRIES TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest income $ 251,402 $ 10,437 $ 1,722 $ 863 $ 390 $ (2,940) 261,874
Interest expense (97,302) (1,283) (16,344) (233) (1,163) 2,940 (113,385)
Recovery from loan losses 547 -- -- -- -- -- 547
Non-interest income 70,686 210,939 194 84,702 (1,539) 1,467 366,449
Non-interest expense (161,615) (203,524) (3,838) (42,112) (3,575) 317 (414,347)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment profits and
losses before taxes 63,718 16,569 (18,266) 43,220 (5,887) 1,784 101,138
(Provision) benefit
for income taxes (21,589) (6,924) 5,089 (16,400) (3,714) (628) (44,166)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment net income
(loss) $ 42,129 $ 9,645 $ (13,177) $ 26,820 $ (9,601) $ 1,156 $ 56,972
=========== =========== =========== =========== =========== =========== ===========
Segment average assets $ 4,706,746 $ 200,760 $ 98,840 $ 392,714 $ 17,240 $ 155,550 $ 5,571,850
=========== =========== =========== =========== =========== =========== ===========
Equity method investments
included in total assets $ -- $ -- $ 7,910 $ 74,958 $ -- $ -- $ 82,868
=========== =========== =========== =========== =========== =========== ===========
Expenditures for segment
assets $ 704 $ 1,310 $ -- $ -- $ -- $ -- $ 2,014
=========== =========== =========== =========== =========== =========== ===========
Depreciation and
amortization $ (7,877) $ (1,711) $ -- $ (323) $ (526) $ -- $ (10,437)
=========== =========== =========== =========== =========== =========== ===========
ADJUSTING
BANCORP BFC AND
BANK PARENT HOLDING ELIMINATION SEGMENT
2002 OPERATIONS RYAN BECK COMPANY LEVITT COMPANY ENTRIES TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest income $ 297,092 $ 7,512 $ 1,745 $ 1,259 $ 354 $ (3,262) $ 304,700
Interest expense (132,970) (1,444) (17,439) (389) (1,153) 1,517 (151,878)
Provision for loan losses (14,077) -- -- -- -- -- (14,077)
Non-interest income 53,317 133,845 (15,323) 55,444 (422) 2,347 229,208
Non-interest expense (134,408) (144,494) (5,155) (30,548) (3,208) 161 (317,652)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment profits and
losses before taxes 68,954 (4,581) (36,172) 25,766 (4,429) 763 50,301
(Provision) benefit
for income taxes (23,845) 2,133 12,661 (6,254) (2,420) (268) (17,993)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment net income
(loss) $ 45,109 $ (2,448) $ (23,511) $ 19,512 $ (6,849) $ 495 $ 32,308
=========== =========== =========== =========== =========== =========== ===========
Segment average assets $ 4,699,579 $ 189,523 $ 100,296 $ 264,559 $ 20,569 $ 156,073 $ 5,430,599
=========== =========== =========== =========== =========== =========== ===========
Equity method investments
included in total assets $ 23,602 $ -- $ 1,934 $ 61,583 $ -- $ -- $ 87,119
=========== =========== =========== =========== =========== =========== ===========
Expenditures for segment
assets $ 299 $ 2,285 $ -- $ -- $ -- $ -- $ 2,584
=========== =========== =========== =========== =========== =========== ===========
Depreciation and
amortization $ (5,113) $ (1,225) $ (690) $ (131) $ (490) $ -- $ (7,649)
=========== =========== =========== =========== =========== =========== ===========
F-73
ADJUSTING
BANCORP BFC AND
BANK PARENT HOLDING ELIMINATION SEGMENT
2001 OPERATIONS RYAN BECK COMPANY LEVITT COMPANY ENTRIES TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest income $ 324,732 $ 1,978 $ 229 $ 1,989 $ 383 $ (3,310) $ 326,001
Interest expense (171,010) (517) (18,297) (180) (1,239) 2,405 (188,838)
Provision for loan losses (16,905) -- -- -- -- -- (16,905)
Non-interest income 37,457 44,683 3,129 35,962 (1,905) 1,962 121,288
Non-interest expense (103,353) (48,170) (13,466) (26,131) (2,886) 435 (193,571)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment profits and
losses before taxes 70,921 (2,026) (28,405) 11,640 (5,647) 1,492 47,975
(Provision) benefit
for income taxes (26,292) 709 7,623 (4,118) (2,660) (522) (25,260)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Segment net income
(loss) $ 44,629 $ (1,317) $ (20,782) $ 7,522 $ (8,307) 970 $ 22,715
=========== =========== =========== =========== =========== =========== ===========
Segment average assets $ 4,263,526 $ 74,108 $ 99,220 $ 173,437 $ 28,751 $ 85,036 $ 4,724,078
=========== =========== =========== =========== =========== =========== ===========
Equity method investments
included in total assets $ -- $ -- $ 1,107 $ 7,127 $ -- $ -- $ 8,234
=========== =========== =========== =========== =========== =========== ===========
Expenditures for segment
assets $ 297 $ 1,003 $ -- $ -- $ -- $ -- $ 1,300
=========== =========== =========== =========== =========== =========== ===========
Depreciation and
amortization $ (3,612) $ (1,580) $ (7,749) $ (96) $ (570) $ -- $ (13,607)
=========== =========== =========== =========== =========== =========== ===========
The changes in the carrying amount of goodwill for the year ended December 31,
2003 was as follows (in thousands):
BANCORP
BANK PARENT
OPERATIONS RYAN BECK COMPANY TOTAL
-------- -------- -------- --------
Balance as of December 31, 2002 $ 71,224 $ 1,658 $ 5,730 $ 78,612
Loan losses acquired (734) -- -- (734)
Sale of Cumberland -- (1,204) -- (1,204)
-------- -------- -------- --------
Balance as of December 31, 2003 $ 70,490 $ 454 $ 5,730 $ 76,674
======== ======== ======== ========
F-74
Bank Operations consists of three reportable segments. The table below is
segment information for income from continuing operations for the three years
ended December 31, 2003 (in thousands):
BANK OPERATIONS
-----------------------------------------------------------------
BANK COMMERCIAL COMMUNITY
2003 INVESTMENTS BANKING BANKING TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest income $ 122,005 $ 103,206 $ 26,191 $ 251,402
Interest expense and overhead (90,239) (49,321) (13,634) (153,194)
Recovery (provision) for loan
losses 442 (782) 887 547
Direct non-interest income 431 3,683 10,401 14,515
=========== =========== =========== ===========
Segment profits and losses
before taxes 20,886 37,744 5,088 63,718
Provision for income taxes (7,077) (12,788) (1,724) (21,589)
----------- ----------- ----------- -----------
Segment net income $ 13,809 $ 24,956 $ 3,364 $ 42,129
=========== =========== =========== ===========
Segment average assets $ 2,440,500 $ 1,775,770 $ 490,476 $ 4,706,746
=========== =========== =========== ===========
Equity method investments
included in total assets $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Expenditures for segment
Assets $ 27 $ 48 $ 629 $ 704
=========== =========== =========== ===========
Depreciation and amortization
$ (7,720) $ 6 $ (163) $ (7,877)
=========== =========== =========== ===========
2002
(IN THOUSANDS)
Interest income $ 164,625 $ 106,746 $ 25,721 $ 297,092
Interest expense and overhead (113,908) (61,032) (15,142) (190,082)
Provision for loan losses (305) (12,533) (1,239) (14,077)
Direct non-interest income 5,136 5,748 9,616 20,500
=========== =========== =========== ===========
Segment profits and losses
before taxes 44,337 25,694 (1,077) 68,954
Provision for income taxes (15,332) (8,885) 372 (23,845)
----------- ----------- ----------- -----------
Segment net income (loss) $ 29,005 $ 16,809 $ (705) $ 45,109
=========== =========== =========== ===========
Segment average assets $ 2,639,070 $ 1,653,148 $ 407,361 $ 4,699,579
=========== =========== =========== ===========
Equity method investments
included in total assets $ -- $ 23,602 $ -- $ 23,602
=========== =========== =========== ===========
Expenditures for segment
assets $ -- $ 10 $ 289 $ 299
=========== =========== =========== ===========
Depreciation and amortization $ (4,715) $ (15) $ (383) $ (5,113)
=========== =========== =========== ===========
F-75
BANK OPERATIONS
-----------------------------------------------------------------
BANK COMMERCIAL COMMUNITY
2001 INVESTMENTS BANKING BANKING TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
Interest income $ 179,151 $ 118,430 $ 27,151 $ 324,732
Interest expense and overhead (135,160) (68,864) (16,325) (220,349)
Provision for loan losses 215 (21,096) 3,976 (16,905)
Direct non-interest income 919 3,074 11,073 15,066
=========== =========== =========== ===========
Segment profits and losses
before taxes 39,383 25,413 6,125 70,921
Provision for income taxes (14,598) (9,420) (2,274) (26,292)
----------- ----------- ----------- -----------
Segment net income $ 24,785 $ 15,993 $ 3,851 $ 44,629
=========== =========== =========== ===========
Segment average assets $ 2,571,246 $ 1,368,850 $ 323,430 $ 4,263,526
=========== =========== =========== ===========
Equity method investments
included in total assets $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Expenditures for segment
assets $ 137 $ 3 $ 157 $ 297
=========== =========== =========== ===========
Depreciation and amortization $ (2,534) $ (319) $ (759) $ (3,612)
=========== =========== =========== ===========
The changes in the carrying amount of goodwill for the year ended December 31,
2003 were as follows (in thousands):
BANK OPERATIONS
-----------------------------------------------------
BANK COMMERCIAL COMMUNITY BANK OPS
INVESTMENTS BANKING BANKING TOTAL
----------- ---------- ---------- --------
Balance as of December 31, 2002 $ 34,322 $ 35,977 $ 925 $ 71,224
Loan losses acquired adjustment -- (734) -- (734)
-------- -------- -------- --------
Balance as of December 31, 2003 $ 34,322 $ 35,243 $ 925 $ 70,490
======== ======== ======== ========
The reconciliation of consolidated segment income (loss) to consolidated income
(loss) before discontinued operations, extraordinary item and cumulative effect
of a change in accounting principle is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
------- ------- -------
Total segment profits $56,972 32,308 22,715
Minority interest in income of consolidated subsidiaries 51,093 38,294 18,379
------- ------- -------
Income (loss) before discontinued operations, extraordinary
items and cumulative effect of a change in accounting principle $ 5,879 (5,986) 4,336
======= ======= =======
25. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $.01 par value preferred stock. The Board of Directors has
the authority to divide the authorized preferred stock into series or classes
having the relative rights, preferences and limitations as may be determined by
the Board of Directors without the prior approval of shareholders. The Board of
Directors has the power to issue this preferred stock on terms that would create
a preference over the Company's Common Stock with respect to dividends,
liquidation and voting rights. No further vote of security holders would be
required prior to the issuance of the shares.
The Company's Articles of Incorporation authorize the Company to issue both a
Class A Common Stock, par value $.01 per share, and a Class B Common Stock, par
value $.01 per share. On May 22, 2002, the Company's Articles of Incorporation
were amended to, among other things, grant holders of the Company's Class A
Common Stock one vote for each share held, which previously had no voting rights
except under limited circumstances provided by Florida law, with all holders of
Class A Common Stock possessing in the aggregate 22% of the total voting power.
Holders of Class B Common Stock have the remaining 78% of the total voting
power. When the number of shares of Class B Common Stock outstanding decreases
to
F-76
1,800,000 shares, the Class A Common Stock aggregate voting power will
increase to 40% and the Class B Common Stock will have the remaining 60%. When
the number of shares of Class B Common Stock outstanding decreases to 1,400,000
shares, the Class A Common Stock aggregate voting power will increase to 53% and
the Class B Common Stock will have the remaining 47%. Also, each share of Class
B Common Stock is convertible at the option of the holder thereof into one share
of Class A Common Stock.
On January 10, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan. As part of the Rights Plan, the Company declared a dividend
distribution of one preferred stock purchase right (the "Right") for each
outstanding share of BFC's Class B Common Stock to shareholders of record on
January 21, 1997. Each Right will become exercisable only upon the occurrence of
certain events, including the acquisition of 20% or more of BFC's Class B Common
Stock by persons other than the existing control shareholders (as specified in
the Rights Plan), and will entitle the holder to purchase either BFC stock or
shares in the acquiring entity at half the market price of such shares. The
Rights may be redeemed by the Board of Directors at $.01 per Right until the
tenth day following the acquisition of 20% or more of BFC's Class B Common Stock
by persons other than the existing controlling shareholders. The Board may also,
in its discretion, extend the period for redemption. The Rights will expire on
January 10, 2007.
26. SUBSEQUENT EVENT
On February 23, 2004, Levitt filed a registration statement on Form S-3 for a
proposed underwritten public offering of up to 5,750,000 shares of Levitt Class
A Common Stock.
F-77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 7, 2003, the Company dismissed KPMG LLP as its independent public
accountants effective upon completion of the audit of the fiscal year ended
December 31, 2002. The reports of KPMG LLP on the financial statements for the
years ended December 31, 2002 and 2001 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except that in 2002, the Company changed
its method of accounting for goodwill and intangible assets and in 2001 the
Company changed its method of accounting for derivative instruments and hedging
activities.
The decision to change accountants was approved by the Audit Committee of the
board of directors of the Company. In connection with its audits for the fiscal
years ended December 31, 2002 and 2001, and through January 7, 2003, there have
been no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure, auditing scope or procedure, which
disagreements if not resolved to the satisfaction of KPMG LLP would have caused
them to make reference thereto in their report on the financial statements for
such years.
The Company's Audit Committee engaged PricewaterhouseCoopers LLP as its
independent certified public accountant effective as of January 1, 2003. During
the two years in the period ended December 31, 2002, and through January 7,
2003, the Company has not consulted with PricewaterhouseCoopers LLP regarding
either (i) the application of accounting principles to a specific transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on the Company's financial statements; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item 304
(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item (a)(1)(v)
of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports.
CHANGES IN INTERNAL CONTROLS
In addition, we reviewed our internal controls over financial reporting, and
there have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect those controls
during the last fiscal quarter.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and procedures
and internal controls over financial reporting will prevent all errors and all
improper conduct. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of improper conduct, if any, within the Company
have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control.
Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
F-78
CEO AND CFO CERTIFICATIONS
Appearing as Exhibits 31.1 and 31.2 to this annual report are Certifications of
the principal executive officer and the principal financial officer. The
Certifications are required in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002. This Item of this report, which you are currently reading, is the
information concerning the evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART III
Items 10 through 14 will be provided by incorporating the information required
under such items by reference to the registrant's definitive proxy statement to
be filed with the Securities and Exchange Commission, no later than 120 days
after the end of the year covered by this Form 10-K, or, alternatively, by
amendment to this Form 10-K under cover of 10-K/A no later than the end of such
120 day period.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements of BFC Financial
Corporation and its subsidiaries are included herein under Part II,
Item 8 of this Report.
Independent Certified Public Accountants' Report of
PricewaterhouseCoopers LLP dated March 30, 2004
Independent Auditors' Report of KPMG LLP dated February 3,
2003
Consolidated Statements of Financial Condition as of December
31, 2003 and 2002.
Consolidated Statements of Operations for each of the years in
the three year period ended December 31, 2003.
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for each of the years in the three year
period ended December 31, 2003.
Consolidated Statements of Cash Flows for each of the years in
the three year period ended December 31, 2003.
Notes to Consolidated Financial Statements for each of the
years in the three year period ended December 31, 2003.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted as the required information is either not
applicable or presented in the financial statements or related
notes.
F-79
(3) EXHIBITS
The following exhibits are either filed as a part of this Report or
are incorporated herein by reference to documents previously filed
as indicated below:
EXHIBIT
NUMBER DESCRIPTION REFERENCE
------- ----------- ---------
3.1 Articles of Incorporation, as amended and restated Exhibit 3.1 of Registrant's Registration
Statement on Form 8-A filed October 16, 1997
3.2 Amendment to Articles of Incorporation, as amended Exhibit 4 of Registrant's Registration Statement
and restated on Form 8-K filed June 18, 2002
3.3 By-laws Exhibit 3.2 of Registrant's Registration
Statement on Form 8-A filed October 16, 1997
10.1 BFC Financial Corporation Stock Option Plan Exhibit A to Registrant's Definitive Proxy
Statement filed September 24, 1997
12.1 Statement re computation of ratios - Ratio of Filed with this Report.
earnings to fixed charges
21.1 Subsidiaries of the registrant Filed with this Report
23.1 Consent of PricewaterhouseCoopers LLP Filed with this Report
23.2 Consent of KPMG LLP Filed with this Report
31.1 Certification pursuant to Regulation S-X Section 302 Filed with this Report
31.2 Certification pursuant to Regulation S-X Section 302 Filed with this Report
32.1 Certification pursuant to 18 U.S.C. Section 1350, as Filed with this Report
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as Filed with this Report
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
Form 8-K filed on November 10, 2003, to disclose that the Company's
Board of Directors declared a 5 for 4 common stock split effected in
the form of a 25% stock dividend payable in Class A Common Stock to BFC
Financial Corporation Class A and Class B common stockholders of record
at the close of trading on November 17, 2003.
(c) Exhibits - See Item 15(a) (3) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BFC FINANCIAL CORPORATION
March 30, 2004 By: /s/ ALAN B. LEVAN
------------------------------------
Alan B. Levan, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Alan B. Levan Chairman of the Board, President and March 30, 2004
- --------------------------------------- Chief Executive
Alan B. Levan Officer
/s/ Glen R. Gilbert Executive Vice President And Chief March 30, 2004
- --------------------------------------- Financial Officer
Glen R. Gilbert
/s/ John E. Abdo Vice Chairman of the Board March 30, 2004
- ---------------------------------------
John E. Abdo
/s/ Earl Pertnoy Director March 30, 2004
- ---------------------------------------
Earl Pertnoy
/s/ Oscar J. Holzmann Director March 30, 2004
- ---------------------------------------
Oscar J. Holzmann
/s/ Neil A. Sterling Director March 30, 2004
- ---------------------------------------
Neil A. Sterling
F-81