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BBX > SEC Filings for BBX > Form 10-Q on 15-Nov-2012All Recent SEC Filings

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Form 10-Q for BBX CAPITAL CORP


15-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The objective of the following discussion is to provide an understanding of the financial condition and results of operations of BBX Capital Corporation (formerly BankAtlantic Bancorp, Inc.) (the "Parent Company" or "BBX") and subsidiaries (BBX, together with its subsidiaries, the "Company", which may also be referred to as "we," "us," or "our") for the three and nine months ended September 30, 2012. On July 31, 2012 BBX completed the sale to BB&T Corporation ("BB&T") of all of the shares of BankAtlantic (the sale and related transactions, the "Transaction"). As a result of the completion of the Transaction and the entry into the definitive agreement governing the terms of the Transaction, BBX's financial statements reflect BankAtlantic's Community Banking, Investments, Tax Certificates and Capital Services reporting units as discontinued operations for the three and nine months ended September 30, 2012 and 2011, respectively. The Company expects to continue commercial lending activities subsequent to the Transaction resulting in the inclusion of BankAtlantic's Commercial Lending reporting unit in continuing operations for the three and nine months ended September 30, 2012 and 2011. See Note 1 - "Basis of Financial Statement Presentation" to the Notes to the Company's Consolidated Financial Statements for a further discussion of the presentation of the Company's results of operations, including the impact of the Transaction on such presentation.

This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. All opinions, forecasts, projections, future plans or other statements, other than statements of historical fact, are forward-looking statements and include words or phrases such as "plans," "believes," "will," "expects," "anticipates," "intends," "estimates," "our view," "we see," "would" and words and phrases of similar import. The forward looking statements in this document are also 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"), and involve substantial risks and uncertainties. We can give no assurance that such expectations will prove to have been correct. Future results could differ materially as a result of a variety of risks and uncertainties, many of which are outside of the control of management. These risks and uncertainties include, but are not limited to the impact of economic, competitive and other factors affecting the Company and its markets, products and services, including the impact of the changing regulatory environment, decreases in real estate values, and increased unemployment or sustained high unemployment rates on our business generally, the ability of our borrowers to service their obligations and the value of collateral securing our loans; credit risks and loan losses, and the related sufficiency of the allowance for loan losses, including the impact of the economy and real estate market values on our assets and the credit quality of our loans; the risk that loan losses will continue and the risks of additional charge-offs, impairments and required increases in our allowance for loan losses; the impact of and expenses associated with litigation including but not limited to litigation brought by the SEC; adverse conditions in the stock market, the public debt market and other financial and credit markets and the impact of such conditions on our activities and the risks associated with the impact of periodic valuation of our assets for impairment. Past performance and perceived trends may not be indicative of future results. In addition, this document contains forward looking statements relating to BBX's future business plans that may not be realized as anticipated, if at all; that the Company's Class A Common Stock may not meet the requirements for continued listing on the NYSE; and that the assets retained by BBX directly or through subsidiaries may not be monetized at the values currently ascribed to them. 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, including the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and June 30, 2012. The Company cautions that the foregoing factors are not exclusive.

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 Consolidated Statements 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 assets for impairment, including the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans and the measuring of loans for impairment, the amount of the deferred tax asset valuation allowance, and accounting for contingencies. The two accounting policies that we have identified as critical accounting policies are allowance for loan losses and impairment of long-lived assets. For a more detailed discussion of these critical accounting


BBX Capital Corporation

policies see "Critical Accounting Policies" appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Consolidated Results of Operations

CLRU consists of the results of operations of our Commercial Lending reporting unit. The CLRU results include the interest income and impairments associated with $297.3 million of commercial loans transferred to BB&T upon the consummation of the Transaction on July 31, 2012 and BankAtlantic's general corporate overhead for the one and seven month period ended July 31, 2012, but not for the two month period ended September 30, 2012. The CLRU also includes the results of operations of $120 million in assets of the disposed reporting units that were retained by the Company.

Loss from continuing operations from each of the Company's reportable segments was as follows (in thousands):

                                    For the Three Months Ended September 30,
                                        2012           2011         Change
CLRU                             $        (3,303)       (19,341)       16,038
Parent Company                            (7,601)        (3,721)       (3,880)
Loss from continuing operations
 before benefit for income taxes         (10,904)       (23,062)       12,158
Benefit for income taxes                  (4,206)        (4,422)          216
Loss from continuing operations  $        (6,698)       (18,640)       11,942

For the Three Months Ended September 30, 2012 Compared to the Same 2011 Period:

The improvement in CLRU's loss from continuing operations during the 2012 quarter compared to the 2011 quarter was primarily the result of lower operating expenses and a decrease in the provision for loan losses partially offset by a decline in net interest income.

The decrease in operating expenses reflects a $3.2 million reduction in professional fees, $1.6 million decrease in real estate owned impairments as well as a $4.2 million decline in compensation and occupancy expenses. The significant decline in professional fees during the three months ended September 30, 2012 compared to the same period during 2011 primarily resulted from lower commercial loan foreclosure legal costs and declines in supervisory and audit fees relating to the consummation of the Transaction as of July 31, 2012. The decrease in impairments on real estate owned reflect lower valuation adjustments during the 2012 quarter compared to the same 2011 period based on updated property valuations. The decline in employee compensation resulted primarily from the transfer of substantially all of the Company's employees to BB&T upon consummation of the Transaction and an arrangement under the transition services agreement which provided for the Company to receive specified services from certain former employees at no cost as well as workforce reductions and the corresponding reduction in payroll taxes and employee benefits. See Note 9 to the "Notes to Consolidated Financial Statements - Unaudited" for a description of the terms of the transition services agreement with BB&T. The lower occupancy expense reflects the consolidation of back-office facilities during prior periods, the consummation of the Transaction and the terms of the BB&T transition services agreement.

The $13.5 million decrease in the provision for loan losses primarily reflects a significant reduction in charge-offs during the 2012 quarter compared to the same 2011 quarter and the slowing in the amount of loans migrating to a delinquency or non-accrual status compared to prior periods. This reduction in loans migrating to delinquency or loss status primarily reflects lower balances in the loan portfolio, the transfer of loans to BB&T and what management believes is a stabilization of real estate values.

The $6.0 million of lower net interest income resulted primarily from a significant reduction in loan average balances associated with the consummation of the Transaction and the recognition of $1.1 million of interest expense related to BB&T's priority return distributed by FAR. There was no interest expense recognized in the CLRU during the three months ended September 30, 2011.


BBX Capital Corporation

The increase in the Parent Company's loss for the 2012 quarter compared to the same 2011 quarter resulted from a $3.7 million increase in compensation expense and $2.2 million of higher professional fees partially offset by a $2.6 million reduction in junior subordinated debenture interest expense.

The compensation expense increase resulted primarily from the accrual of $3.6 million of executive management bonuses in September 2012. The increase in professional fees during the 2012 quarter was associated primarily with the previously settled TruPS related litigation in Delaware as well as a $0.9 million litigation settlement gain recognized during the 2011 quarter. The junior subordinated debenture interest expense reduction reflects BB&T's assumption of the Parent Company's obligations under the junior subordinated debentures as of July 31, 2012 in connection with the consummation of the Transaction.

For the Nine Months Ended September 30, 2012 compared to the Same 2011 Period:

                                    For the Nine Months Ended September 30,
                                        2012           2011         Change
CLRU                             $        (8,933)       (37,158)      28,225
Parent Company                           (23,502)       (17,803)      (5,699)
Loss from continuing operations
 before benefit for income taxes $       (32,435)       (54,961)      22,526
Benefit for income taxes                 (12,512)       (16,925)       4,413
Loss from continuing operations          (19,923)       (38,036)      18,113

The improvement in CLRU's loss from continuing operations during the nine months ended September 30, 2012 compared to the same 2011 period resulted primarily from the items discussed above for the three months ended September 30, 2012 compared to the same 2011 period.

The increase in the Parent Company's loss for the nine months ended September 30, 2012 resulted primarily from the items discussed above for the three months ended September 30, 2012 compared to the same 2011 period.

Results of Discontinued Operations

      Income from the Company's discontinued operations was as follows (in
thousands):


                                   For the Three Months         For the Nine Months
                                   Ended September 30,          Ended September 30,
                                  2012     2011    Change      2012     2011    Change
Net interest income           $   5,235   21,023  (15,788)    37,384   65,849  (28,465)
Provision for loan losses        (1,865)  (4,010)   2,145    (18,383) (31,391)  13,008
Gain on the sale of
BankAtlantic                    290,642         - 290,642    290,642         - 290,642
Non-interest income               4,978   24,982  (20,004)    37,234  107,121  (69,887)
Non-interest expense             (8,763) (30,849)  22,086    (61,634) (98,020)  36,386
Income from discontinued
operations
 before provision for income
taxes                           290,227   11,146  279,081    285,243   43,559  241,684
Provision for income taxes       (6,467)  (4,300)  (2,167)   (14,773) (16,803)   2,030
Net income from discontinued
operations                    $ 283,760    6,846  276,914    270,470   26,756  243,714

The significant increase in income from discontinued operations during the three and nine months ended September 30, 2012 compared to the same 2011 period resulted primarily from the gain recognized on the sale of BankAtlantic to BB&T. As a consequence of the sale, the income from discontinued operations for the three months ended September 30,


BBX Capital Corporation

2012 includes one month of activity while the 2011 period includes three months of activity. Likewise, income (loss) from discontinued operations for the nine months ended September 30, 2012 reflects seven months of activity while the income from discontinued operations for the nine months ended September 30, 2012 reflects nine months of activity.

Included in income from discontinued operations during the nine months ended September 30, 2011 was the sale of 19 Tampa branches and related facilities to an unrelated financial institution on June 3, 2011 for a net gain of $38.7 million. The decline in net interest income and non-interest income during the 2012 nine month period compared to the same 2011 period resulted primarily from a significant reduction in earning assets and an increasing proportion of investments in low yielding cash balances, at the Federal Reserve Bank. The decline in non-interest income resulted primarily from lower deposit fee income mainly due to fewer deposit accounts as a result of the sale of the Tampa branches and lower overdraft fees. The above reductions in net interest income and non-interest income during the nine months ended September 30, 2012 compared to the same 2011 period were partially offset by lower operating expenses. The decrease in operating expenses reflects lower compensation and occupancy expenses associated with the consolidation of back-office facilities, workforce reductions, normal attrition and elimination of expenses associated with BankAtlantic's Tampa operations as a result of the completion of the Tampa branch sale.

Provision (benefit) for income taxes

Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as discontinued operations or accumulated other comprehensive loss. However, an exception to the general rule exists when there is a pre-tax loss from continuing operations and pre-tax income from other categories. In such instances, income from other categories is used to offset the current loss from continuing operations resulting in such offset being reflected in continuing operations. The offset is limited to the lower of income from other categories or the loss from continuing operations. As a consequence, the Company recognized a continuing operation benefit for income taxes for the three and nine months ended September 30, 2012 in the amount of $4.2 million and $12.5 million, respectively, calculated based on the Company's effective income tax rate of 38.6% and the pre-tax loss from continuing operations. The discontinued operations provision for income taxes represents the $4.2 million and $12.5 million benefit in continuing operations for the three and nine months ended September 30, 2012 plus $2.3 million of additional provision for income taxes included in other comprehensive income that was transferred to discontinued operations upon the sale of BankAtlantic.

The Company recognized a continuing operations benefit for income taxes for the three and nine months ended September 30, 2011 in the amount of $4.4 million and $16.9 million, representing an effective tax rate of 19.2% and 30.8%, respectively. The continuing operations benefit for income taxes was limited by the pre-tax income from discontinued operations. Also included in continuing operations benefit for income taxes during the three and nine months ended September 30, 2011 was the recognition of $206,000 of tax benefits upon the resolution of a tax contingency partially offset by an $84,000 tax payment associated with the recapture of low income tax credits.


BBX Capital Corporation



CLRU Results of Operations



The following table is a condensed income statement summarizing the results of
operations of the Commercial Lending Reporting Unit ("CLRU") (in thousands):


                                   For the Three Months        For the Nine Months
                                   Ended September 30,         Ended September 30,
                                  2012     2011   Change      2012     2011    Change
Net Interest income            $  3,096    9,109  (6,013)    18,497   31,971  (13,474)
(Provision for) recovery
 from loan losses                  (257) (13,745) 13,488      1,129  (24,391)  25,520
Net interest income after
 provision for loan losses        2,839   (4,636)  7,475     19,626    7,580   12,046
Non-interest income                 133         -    133        203       13      190
Non-interest expense             (6,275) (14,705)  8,430    (28,762) (44,751)  15,989
CLRU loss before income taxes    (3,303) (19,341) 16,038     (8,933) (37,158)  28,225
Provision for income taxes       (1,274)  (3,709)  2,435     (3,446) (11,442)   7,996
CLRU net loss                  $ (2,029) (15,632) 13,603     (5,487) (25,716)  20,229

Net Interest Income

The reduction in net interest income during the three and nine months ended September 30, 2012 compared to the same 2011 period resulted primarily from the decline in average balances associated with the transfer of $297 million of commercial loans to BB&T on July 31, 2012 and secondarily from $1.1 million of interest expense associated with BB&T's priority return in FAR. The average balance declines for the three and nine months ended were also impacted by loan repayments, migration of loans to real estate owned and loan sales as well as a substantial decline in loan originations.

Asset Quality

The loans and real estate owned and related data presented below as of September 30, 2012 and for the three and nine months ended September 30, 2012 excludes loans and real estate owned transferred to BB&T as of July 31, 2012 upon consummation of the Transaction.


BBX Capital Corporation

The table below presents the allocation of the allowance for loan losses ("ALL") by various loan classifications, the percent of allowance to each loan category ("ALL to gross loans percent") and the percentage of loans in each category to total loans ("Loans to gross loans percent"). 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 accurately reflects future charge-off amounts or trends (dollars in thousands):

                            September 30, 2012               December 31, 2011
                                  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 non-real
estate               $   1,929    16.44  %    3.56  % $  16,408    13.89  %     4.6  %
Commercial real
estate                   3,516     1.48      72.25       66,269     9.84      26.23
Small business                -    0.00           -       7,168     2.52      11.09
Residential real
estate                     791     1.31      18.39       16,704     1.79      36.34
Consumer                   359     1.88       5.80       22,554     4.04      21.74
Total allowance for
loan losses          $   6,595     2.00  %  100.00  % $ 129,103     5.03  %     100  %

Included in the allowance for loan losses as of September 30, 2012 and December 31, 2011 were specific valuation allowances by loan type as follows (in thousands):

                                          September 30,   December 31,
                                              2012            2011
             Commercial non-real estate $        1,490         15,408
             Commercial real estate              1,586         51,798
             Small business                           -           861
             Consumer                                 -         1,454
             Residential                              -         6,942
             Total                      $        3,076         76,463

The decrease in the allowance for loan losses at September 30, 2012 compared to December 31, 2011 resulted primarily from the charge-off of specific valuation allowances on collateral dependent loans as well as from the transfer of $1.8 billion of loans and $46.3 million of allowance for loan losses to BB&T in connection with the sale of BankAtlantic. The reduction in allowance for loan losses to gross loans in each category also reflects the charge-off of $65.7 million of the specific valuation allowances discussed in the following paragraph and the fact that a higher percent of the loans which were not transferred to BB&T in the Transaction are non-performing and/or collateral dependent. An allowance for loan losses was not established for those collateral dependent loans as these loans were instead charged-down to the fair value of the collateral less cost to sell. The specific valuation allowance as of September 30, 2012 reflects impaired loans measured based on the present value of expected cash flows discounted at the loan's effective interest rate or appraisal adjustments on collateral dependent impaired loans.

As part of the transition of the regulation of OTS savings associations such as BankAtlantic to the OCC, the OCC provided guidance to thrifts related to their transition to OCC regulatory reporting, which was to be implemented no later than March 31, 2012, including guidance surrounding specific valuation allowances on collateral dependent loans. Under OCC guidance, where the appraised value of collateral on a collateral dependent loan is less than the recorded investment of the loan, a charge-off of the amount of the deficiency rather than a specific valuation allowance is generally required.


BBX Capital Corporation

Management considered the appraisals on its impaired collateral dependent loans, including appraised values and appraisal dates and, during the first quarter of 2012, the Company charged down the recorded investment of loans by $66.5 million to the fair value of the collateral less cost to sell. This charge down consisted entirely of the charging-off of existing specific valuation allowances. As a specific valuation allowance was previously established for these loans, the charge-offs did not impact the provision for loan losses or the net loss during the three months ended March 31, 2012, but did reduce the Company's allowance for loan losses and recorded investment in the loans. Further, these charge-offs of specific valuation allowances did not impact the estimation of the allowance for loan losses as the change in the specific valuation allowances was always a factor in the overall estimation of BankAtlantic's allowance for loan losses.

The activity in CLRU's allowance for loan losses was as follows (in thousands):

                                For the Three Months      For the Nine Months
                                 Ended September 30,      Ended September 30,
Allowance for Loan Losses:       2012          2011        2012         2011
Balance, beginning of period $    5,183        79,071      82,676      93,816
Charge-offs :
Commercial real estate             (558)       (6,422)    (53,059)    (32,636)
Commercial non-real estate       (1,376)       (7,563)    (15,990)     (8,151)
Small business                   (1,619)             -     (1,619)           -
Consumer                           (615)             -       (615)           -
Residential                      (1,091)             -     (1,091)           -
Total Charge-offs                (5,259)      (13,985)    (72,374)    (40,787)
Recoveries of loans
previously charged-off            4,308             2       6,383       1,413
Net (charge-offs)                  (951)      (13,983)    (65,991)    (39,374)
(Recovery from) provision
for loan losses                     257        13,745      (1,135)     24,391
Retained loan allowance           2,106              -      2,106            -
Transfer to assets
 held for sale                         -             -    (11,061)           -
Balance, end of period       $    6,595        78,833       6,595      78,833

Certain small business, consumer and residential loans associated with the disposed Capital Services and Community Banking reporting units were retained and the allowance for loan losses reflects the activity of these retained loans for the two months ended September 30, 2012.

Commercial real estate charge-offs during the three months ended September 30, 2012 primarily represent declines in the collateral values of two collateral dependent non-accrual commercial-other loans based on updated property valuations. The commercial real estate charge-offs during the three months ended September 30, 2011 were primarily related to $3.4 million and $1.6 million of commercial residential loans and commercial other loan charge-offs, respectively. Management also believes that the significant decline in commercial real estate charge-offs during the 2012 quarter compared to the 2011 quarter reflects the stabilization of commercial property values resulting in lower loss severity impairments associated with updated valuations and a decline in non-performing loans due to the sale of BankAtlantic. . . .

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