SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission File Number
0-9811
BFC FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Florida 59-2022148
(State of Organization) (I.R.S. 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
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 the number of shares outstanding for each of the Registrant's classes
of common stock, as of the latest practicable date:
Class A Common Stock of $.01 par value, 6,454,494 shares outstanding.
Class B Common Stock of $.01 par value, 2,354,907 shares outstanding.
<PAGE>
BFC Financial Corporation and Subsidiaries
Index to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of September
30, 1999 and December 31, 1998 - Unaudited
Consolidated Statements of Operations for the nine and three
month periods ended September 30, 1999 and 1998 - Unaudited
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the nine months ended September 30,
1999 and 1998 - Unaudited
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 - Unaudited
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
September 30, 1999 and December 31, 1998
(in thousands, except share data)
(Unaudited)
Assets
1999 1998
---- ----
Cash and cash equivalents $ 884 2,523
Securities available for sale 8,047 450
Investment in BankAtlantic Bancorp, Inc. ("BBC") 75,850 74,565
Mortgage notes and related receivables, net 1,434 1,740
Investment real estate, net 5,899 6,172
Real estate held for development and sale 2,894 1,811
Other assets 4,185 3,996
-------- --------
Total assets $ 99,193 91,257
======== ========
Liabilities and Stockholders' Equity
Subordinated debentures, net -- 1,452
Deferred interest on the subordinated debentures -- 2,217
Mortgage payables and other borrowings 18,318 10,784
Other liabilities 6,008 5,967
Deferred income taxes 14,621 13,206
-------- --------
Total liabilities 38,947 33,626
Stockholders' 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
6,454,494 in 1999 and 6,453,994 in 1998 58 58
Class B common stock, of $.01 par value; authorized
20,000,000 shares; issued and outstanding
2,354,907 in 1999 and 2,355,407 in 1998 21 21
Additional paid-in capital 26,043 26,095
Retained earnings 37,431 30,660
-------- --------
Total stockholders' equity before
accumulated other comprehensive income 63,553 56,834
Accumulated other comprehensive (loss) income -
net unrealized (depreciation) appreciation
on securities available for sale, net of
deferred income taxes (3,307) 797
-------- --------
Total stockholders' equity 60,246 57,631
-------- --------
Total liabilities and stockholders' equity $ 99,193 91,257
======== ========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Operations
For the nine and three month periods ended September 30, 1999 and 1998
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Interest on mortgage notes and
related receivables $ 1,165 159 992 53
Interest and dividends on securities
available for sale and escrow accounts 173 178 66 49
Earnings on real estate rental operations, net 848 683 261 277
Sale of real estate 1,897 8,134 825 4,417
Earnings from real estate limited partnerships 847 -- -- --
Equity in earnings (losses) of BBC 9,113 1,607 3,187 (2,852)
Other income 192 23 24 9
-------- -------- -------- --------
Total revenues 14,235 10,784 5,355 1,953
-------- -------- -------- --------
Costs and expenses:
Interest on subordinated debentures 353 373 106 115
Interest on mortgages payable
and other borrowings 780 1,161 301 303
Cost of sale of real estate 807 5,521 59 3,141
Allowance for loss on mortgage notes 225 -- 75 --
Write-down of investment -- 184 -- --
(Income) expenses related to real estate held
for development and sale, net (47) 107 (35) 36
Employee compensation and benefits 887 865 298 299
Occupancy and equipment 43 32 13 11
General and administrative, net 524 598 129 162
-------- -------- -------- --------
Total cost and expenses 3,572 8,841 946 4,067
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items 10,663 1,943 4,409 (2,114)
Provision (benefit) for income taxes 4,005 395 1,614 (918)
-------- -------- -------- --------
Income (loss) before extraordinary items 6,658 1,548 2,795 (1,196)
Extraordinary items:
Gain on settlements of litigation, net of
income taxes of $183,000 in 1999 292 -- 292 --
(Loss) gain from extinguishment of debt,
net of income taxes (benefits) of ($112,000)
in 1999 and $39,000 and $29,000 for the nine
and three month periods ended
September 30, 1998 (179) 61 (179) 44
-------- -------- -------- --------
Net income (loss) $ 6,771 1,609 2,908 (1,152)
======== ======== ======== ========
Basic earnings (loss) per share
Before extraordinary items 0.84 0.19 0.35 (0.15)
Extraordinary items 0.01 0.01 0.01 0.01
-------- -------- -------- --------
Net income (loss) $ 0.85 0.20 0.36 (0.14)
======== ======== ======== ========
Diluted earnings (loss) per share
Before extraordinary items 0.75 0.17 0.32 (0.13)
Extraordinary items 0.01 0.01 0.01 --
-------- -------- -------- --------
Net income (loss) $ 0.76 0.18 0.33 (0.13)
======== ======== ======== ========
Basic weighted average shares outstanding 7,957 7,953 7,957 7,957
======== ======== ======== ========
Diluted weighted average shares outstanding 8,858 9,156 8,780 9,049
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the nine months ended
September 30, 1999 and 1998 (in thousands) (Unaudited)
<TABLE>
<CAPTION>
Net
unrealized
appreciation
Addi- (depreciation)
Compre- Class A Class B tional on securities
hensive Common Common Paid-in Retained available
income Stock Stock Capital Earnings for sale Total
------ ----- ----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 $ 58 21 23,525 30,280 258 54,142
Comprehensive income
Net income $ 1,609 -- -- -- 1,609 -- 1,609
Other comprehensive income
(loss), net of tax:
Unrealized gains on securities
available for sale (400) -- -- -- -- -- --
Reclassification adjustment
for net losses included
in net income 222 -- -- -- -- -- --
-------
Other comprehensive loss (178) -- -- -- -- -- --
-------
Comprehensive income $ 1,431 -- -- -- -- -- --
=======
Net effect of BBC
capital transactions, net of
deferred income taxes -- -- 2,529 -- -- 2,529
Change in BBC net unrealized
depreciation on securities
available for sale-net of
deferred income taxes -- -- -- -- (178) (178)
Exercise of stock options -- -- 60 -- -- 60
------- ------- ------- ------- ------- -------
Balance, September 30, 1998 $ 58 21 26,114 31,889 80 58,162
======= ======= ======= ======= ======= =======
Balance,
December 31, 1998 $ 58 21 26,095 30,660 797 57,631
Comprehensive income
Net income $ 6,771 -- -- -- 6,771 -- 6,771
Other comprehensive income
(loss), net of tax:
Unrealized losses on securities
available for sale (3,807) -- -- -- -- -- --
Reclassification adjustment
for net gains included
in net income (297) -- -- -- -- -- --
-------
Other comprehensive loss (4,104) -- -- -- -- -- --
-------
Comprehensive income $ 2,667 -- -- -- -- -- --
=======
Net effect of BBC capital
transactions, net of
deferred income taxes -- -- (52) -- -- (52)
Change in BBC net unrealized
depreciation on securities
available for sale-net of
deferred income taxes -- -- -- -- (4,199) (4,199)
BFC's net unrealized appreciation
on securities available for sale-net
of deferred income taxes -- -- -- -- 95 95
------- ------- ------- ------- ------- -------
Balance, September 30, 1999 $ 58 21 26,043 37,431 (3,307) 60,246
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
BFC Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
(In thousands)
(Unaudited)
September 30,
-------------
1999 1998
---- ----
Operating activities:
Net income before extraordinary items $ 6,658 1,548
Adjustments to reconcile net income
to net cash used in operating activities:
Equity in earnings of BBC (9,113) (1,607)
Depreciation 384 449
(Income) expenses related to real estate held for
development and sale, net (47) 107
Earnings from real estate limited partnership (847) --
Provision for income taxes 4,005 395
Allowance for loss on mortgage notes 225 --
Amortization on subordinated debentures 5 8
Accretion of discount on loans receivable (26) (31)
Increase in real estate development
and construction costs (1,826) (1,455)
Gain on sale of real estate, net (1,090) (2,613)
Proceeds from escrow for called debenture liability -- 2,161
Increase in deferred interest on the
subordinated debentures 348 366
Accrued interest income on escrow accounts (94) (96)
Increase (decrease) in other liabilities 15 (53)
(Increase) decrease in other assets (374) 213
------- -------
Net cash used in operating activities (1,777) (608)
------- -------
Investing activities:
Distributions from real estate
limited partnerships 847 --
Proceeds from the sale of real estate 816 --
Common stock dividends received from BBC 914 884
Purchase of securities available for sale (7,450) (6,716)
Proceeds from redemption and maturities
of securities available for sale 8 7,275
Principal reduction on mortgage notes and
related receivables, net 107 124
Decrease in real estate
held for development and sale 1,065 7,584
Improvements to investment real estate (94) (83)
Other 40 --
------- -------
Net cash (used in) provided by investing activities (3,747) 9,068
------- -------
Financing activities:
Issuance of common stock -- 35
Borrowings 8,079 --
Repayments of borrowings (4,194) (7,942)
------- -------
Net cash provided by (used in) financing activities 3,885 (7,907)
------- -------
(Decrease) increase in cash and cash equivalents (1,639) 553
Cash and cash equivalents at beginning of period 2,523 604
------- -------
Cash and cash equivalents at end of period $ 884 1,157
======= =======
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
BFC Financial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
1. PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
by BFC Financial Corporation (the "Company" or "BFC") in accordance with the
accounting policies described in its 1998 Annual Report and should be read in
conjunction with the notes to the consolidated financial statements which appear
in that report.
In the opinion of management, the accompanying financial statements contain such
adjustments as are necessary to present fairly the Company's unaudited
consolidated statements of financial condition at September 30, 1999 and
December 31, 1998, the unaudited consolidated statements of operations for the
nine and three month periods ended September 30, 1999 and 1998, the unaudited
consolidated statements of stockholders' equity and comprehensive income for the
nine months ended September 30, 1999 and 1998 and the unaudited consolidated
statements of cash flows for the nine months ended September 30, 1999 and 1998.
Such adjustments consisted only of normal recurring items. The unaudited
consolidated financial statements and related notes are presented as permitted
by Form 10-Q and should be read in conjunction with the notes to consolidated
financial statements appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. Certain prior year balances have been
reclassified to conform with the 1999 presentation.
2. INVESTMENT IN BANKATLANTIC BANCORP, INC.
A reconciliation of the carrying value in BankAtlantic Bancorp, Inc. ("BBC") to
BBC stockholders' equity at September 30, 1999 and December 31, 1998 is as
follows (dollars in thousands):
September 30, December 31,
1999 1998
---- ----
BBC stockholders' equity $ 236,967 240,440
Ownership percentage 32.1% 31.3%
--------- ---------
76,100 75,340
Purchase accounting adjustments (250) (775)
--------- ---------
Investment in BBC $ 75,850 74,565
========= =========
At September 30, 1999, the Company owned 8,296,891 shares of BBC Class A Common
Stock and 4,876,124 shares of BBC Class B Common Stock representing 32.1% of all
outstanding BBC Common Stock. At September 30, 1999, the Company's ownership of
BBC Class A and Class B Common Stock was approximately 27% and 47%,
respectively. The aggregate market value of the Company's investment in BBC at
September 30, 1999 was approximately $77.1 million or approximately $1.2 million
in excess of the carrying value in the financial statements.
On July 21, 1999 BBC's Board of Directors approved a 15% common stock dividend,
payable in Class A common stock to both Class A and Class B common shareholders
of record at the close of business on August 16, 1999. The distribution date of
this common stock dividend was August 26, 1999. Where appropriate, amounts
throughout this report of all BBC share and per share amounts have been adjusted
to reflect the 15% common stock dividend.
In June 1998, BBC acquired Ryan, Beck & Co., Inc. ("RBCO"), an investment
banking firm that is principally engaged in the underwriting, distribution and
trading of tax-exempt obligations and bank and thrift equity and debt securities
and in June 1999, RBCO acquired the assets of Southeast Research Partners, Inc.
In connection with these acquisitions, an incentive and retention pool was
established under which shares of BBC's Class A Common Stock were allocated to
key employees. The retention pool consists of restricted shares of Class A
Common Stock, which will vest in June 2002 to employees who remain through that
date. BFC's ownership percentage of BBC, as of September 30, 1999, assumes that
the 740,533 shares of restricted Class A Common Stock are not outstanding.
On July 14, 1999, BBC's Board of Directors approved the repurchase on the open
market of up to 3.5 million shares of BBC's common stock. BBC's Board authorized
the repurchase of common stock on a "time-to-time" basis, depending upon market
conditions and subject to compliance with applicable securities laws. Pursuant
to the above repurchase plan BBC paid $1.6 million to repurchase and retire
221,345 shares of Class B common stock during the nine months ended September
30, 1999. Pursuant to a previously announced plan to repurchase shares of common
stock, BBC paid $8.4 million to repurchase and retire 1,149,655 shares of Class
A common stock during the nine months ended September 30, 1999. During the nine
months ended September 30, 1998, BBC paid $10.6 million to repurchase and retire
849,275 share of Class B common stock.
3. SECURITIES AVAILABLE FOR SALE
The composition of securities available for sale at September 30, 1999 and
December 31, 1998 was as follows (in
thousands):
September 30, December 31,
1999 1998
---- ----
Venture capital investments 7,793 343
Other marketable securities 254 107
------ ------
$8,047 450
====== ======
At September 30, 1999 and December 31, 1998, the Company had provided venture
capital to six and one companies in the early stages of their development. Two
of these companies are in the retail sector and the other four companies are in
the internet technology industry. The Company's venture investments are not
public companies and therefore there is not a quoted market value for these
investments. They are carried at the Company's cost therein, which should
approximate their market value. At September 30, 1999 and December 31, 1998, the
market value of other marketable securities available for sale approximated book
value.
4. CONSOLIDATED STATEMENTS OF CASH FLOWS
Other non-cash financing and investing activities and other supplemental cash
flow items for the nine months ended September 30, 1999 and 1998 were as follows
(in thousands):
September 30,
-------------
1999 1998
---- ----
Change in stockholders' equity resulting
from the Company's proportionate share
of BBC's net unrealized depreciation on
securities available for sale, net of
deferred income taxes (4,199) (178)
====== ======
Net effect of BBC capital transactions,
net of income taxes (52) 2,529
====== ======
Change in stockholders' equity resulting
from the Company's net unrealized
appreciation on securities available for sale,
net of deferred income taxes 95 --
====== ======
Transfers from escrow accounts to reflect
payments on other liabilities 223 248
====== ======
Allowance for loss on mortgage notes 225 --
====== ======
BBC's dividends on common stock
declared and received in subsequent period 308 303
====== ======
Increase in equity for the tax effect related to
the exercise of stock options -- 25
====== ======
Deferred profit recognized -- 316
====== ======
Net (loss) gain from extinguishments of debt,
net of income taxes (179) 61
====== ======
Net gain on settlements of litigation,
net of income taxes 292 --
====== ======
Interest paid on borrowings 783 1,182
====== ======
Interest paid on redemption of subordinated
debentures 2,216 --
====== ======
Income taxes paid -- 30
====== ======
5. OTHER ASSETS AND OTHER LIABILITIES
Included in other liabilities at September 30, 1999 and December 31, 1998 was
approximately $5.3 million of amounts associated with settlements of litigation.
Such amounts do not bear interest. Included in other assets at September 30,
1999 and December 31, 1998 was approximately $2.7 million held in escrow
accounts relating to payments associated with a portion of the settlement.
Payments are made when a claimant presents a subordinated debenture that was
cancelled upon settlements of the litigation. In January 2000, any amounts
remaining in escrow will be released to the Company and after that date any
payments would be paid directly by the Company.
6. BORROWINGS
At September 30, 1999, the Company had a revolving line of credit in the amount
of $8.08 million requiring only interest payments at prime plus 1% and a
maturity date of February 2000. The outstanding balance at September 30, 1999
was $8.08 million.
7. SUBORDINATED DEBENTURES
The Company elected to redeem all of its outstanding Subordinated Debentures due
July 1, 2011 and July 1, 2009 on November 15, 1999 (the "Redemption Date") at a
price of 100% of the principal amount plus accrued interest through the
Redemption Date. In September 1999, the Company funded approximately $3.6
million to U.S. Bank Trust National Association, the Trustee for the Debentures
who is also acting as the Paying Agent. The $3.6 million payment to the Trustee
included the Subordinated Debentures principal balance of approximately $1.4
million and the payment of accrued interest through November 15, 1999 in the
amount of $2.2 million. The Company recognized an extraordinary loss from
extinguishments of debt, net of income taxes of approximately $179,000, due to
the write-off of the subordinated debentures valuation discount and other
related costs.
8. SEGMENT REPORTING
The Company has three reportable segments:
o Investment in BBC
o Real estate operations
o Other
Investment in BBC consists of the Company's ownership interest in the common
stock of BBC. The Company's ownership position is carried on the equity method
and as of September 30, 1999 and 1998 the Company's ownership in BBC was
approximately 32.1% and 31.5%, respectively, of all of the outstanding BBC
Common Stock. In addition to its investment in BBC, the Company owns and manages
real estate, included in the Consolidated Statements of Financial Condition as
investment real estate, net and real estate held for development and sale.
Investment real estate, net includes the BMOC property and a 50% interest in the
Delray property. The real estate held for development and sale is the Center
Port property, part of which is being developed and the remainder of which is
being held for sale. Real estate operations also include mortgage notes
receivables that relate to the sale of properties previously owned by the
Company. Other includes securities available for sale, repurchase agreements and
escrow accounts related to a portion of debentures that were cancelled in
connection with the settlement of litigation.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies described in its 1998 Annual Report.
The Company evaluates segment performance based on its operating profit before
tax and overhead allocations. The tables below provide segment information for
the nine and three month periods ended September 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999
Real
Investment Estate
in BBC Operations Other Eliminations Consolidated
------ ---------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 9,113 4,755 268 99 14,235
======== ======== ======== ======== ========
Operating profit $ 9,113 3,074 206 99 12,492
======== ======== ======== ========
General non-allocable expenses:
Interest on subordinated debentures (353)
Interest on mortgages payable
and other borrowings (22)
Employee compensation and benefits (887)
Occupancy and equipment (43)
General and administrative, net (524)
--------
Income before income taxes $ 10,663
========
Identifiable assets at September 30, 1999 $ 75,850 10,934 11,350 -- 98,134
Corporate assets 1,059
--------
Total assets at September 30, 1999 $ 99,193
========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998
Real
Investment Estate
in BBC Operations Other Eliminations Consolidated
------ ---------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 1,607 8,886 186 105 10,784
======== ======== ======== ======== ========
Operating profit $ 1,607 2,046 186 105 3,944
======== ======== ======== ========
General non-allocable expenses:
Interest on subordinated debentures (373)
Interest on mortgages payable
and other borrowings (133)
Employee compensation and benefits (865)
Occupancy and equipment (32)
General and administrative, net (598)
--------
Income before income taxes $ 1,943
========
Identifiable assets at September 30, 1998 $ 76,844 12,093 3,890 -- 92,827
Corporate assets 924
--------
Total assets at September 30, 1998 $ 93,751
========
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30, 1999
Real
Investment Estate
in BBC Operations Other Eliminations Consolidated
------ ---------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 3,187 2,049 85 34 5,355
======== ======== ======== ======== ========
Operating profit $ 3,187 1,718 23 34 4,962
======== ======== ======== ========
General non-allocable expenses:
Interest on subordinated debentures (106)
Interest on mortgages payable
and other borrowings (7)
Employee compensation and benefits (298)
Occupancy and equipment (13)
General and administrative, net (129)
--------
Income before income taxes $ 4,409
========
Identifiable assets at September 30, 1999 $ 75,850 10,934 11,350 -- 98,134
Corporate assets 1,059
--------
Total assets at September 30, 1999 $ 99,193
========
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30, 1998
Real
Investment Estate
in BBC Operations Other Eliminations Consolidated
------ ---------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ (2,852) 4,727 43 35 1,953
======== ======== ======== ======== ========
Operating profit (loss) $ (2,852) 1,292 43 35 (1,482)
======== ======== ======== ========
General non-allocable expenses:
Interest on subordinated debentures (115)
Interest on mortgages payable
and other borrowings (45)
Employee compensation and benefits (299)
Occupancy and equipment (11)
General and administrative, net (162)
--------
Income before income taxes $ (2,114)
========
Identifiable assets at September 30, 1998 $ 76,844 12,093 3,890 -- 92,827
Corporate assets 924
--------
Total assets at September 30, 1998 $ 93,751
========
</TABLE>
9. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic and
diluted earnings (loss) per share computations for the nine and three month
periods ended September 30, 1999 and 1998 (in thousands, except per share data):
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Basic Numerator:
Net income (loss) available
to common shareholders $6,771 1,609 2,908 (1,152)
====== ====== ====== ======
Basic Denominator
Weighted average shares
outstanding 7,957 7,953 7,957 7,957
====== ====== ====== ======
Basic earnings (loss) per share $ .85 .20 .36 (.14)
====== ====== ====== ======
Diluted Numerator:
Net income (loss) available
to common shareholders $6,771 1,609 2,908 (1,152)
====== ====== ====== ======
Diluted Denominator
Basic weighted average shares
outstanding 7,957 7,953 7,957 7,957
Options 901 1,203 823 1,092
------ ------ ------ ------
Diluted weighted average shares
outstanding 8,858 9,156 8,780 9,049
====== ====== ====== ======
Diluted earnings (loss) per share $ .76 .18 .33 (.13)
====== ====== ====== ======
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.
<PAGE>
BFC Financial Corporation and Subsidiaries
Management's Discussion and Analysis of Results
of Operations and Financial Condition
General
BFC Financial Corporation (the "Company" or "BFC") is a savings bank holding
company which owns in the aggregate approximately 32.1% of the outstanding
BankAtlantic Bancorp, Inc. ("BBC") common stock. BBC is the holding company for
BankAtlantic, A Federal Savings Bank ("BankAtlantic") by virtue of its ownership
of 100% of the outstanding BankAtlantic common stock.
Except for historical information contained herein, the matters discussed in
this report contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that involve substantial risks and
uncertainties. When used in this report, the words "anticipate", "believe",
"estimate", "may", "intend", "expect" and similar expressions identify certain
of such forward-looking statements. Actual results could differ materially from
these forward-looking statements. These forward-looking statements are based
largely on the Company's expectations and are subject to a number of risks and
uncertainties, including but not limited to, economic factors (both generally
and particularly in areas where the Company or its subsidiaries operate or hold
assets), year 2000 considerations, the Company's limited sources of funds,
regulatory limitations on the ability of BBC and BankAtlantic to pay dividends,
interest rate risks, credit risks, competitive and other factors affecting the
operations, markets, products and services, and expansion strategies of the
Company and its subsidiaries including BBC and BankAtlantic, the speculative
nature of the Company's real estate development activities, the speculative
nature of the Company's investments described in "Securities Available for Sale"
and the other factors discussed elsewhere in this report and in the documents
filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control.
Results of Operations
The Company's basic and diluted earnings per share were $0.36 and $0.33 for the
quarter ended September 30, 1999, compared to basic and diluted loss per share
of $0.14 and $0.13 for the comparable period in 1998. The 1999 period included
an extraordinary gain of $.01 in basic and diluted earnings per share. The 1998
period included an extraordinary gain of $.01 in basic earnings per share.
The Company's basic and diluted earnings per share were $0.85 and $0.76 for the
nine months ended September 30, 1999, compared to $0.20 and $0.18 for the
comparable period in 1998. The 1999 period included an extraordinary gain of
$.01 in basic and diluted earnings per share. The 1998 period included an
extraordinary gain of $.01 in basic and diluted earnings per share.
For the three months ended September 30, 1999, the Company reported net income
of approximately $2.9 million as compared to net loss of approximately $1.2
million for the comparable period in 1998. Operations for the quarter ended
September 30, 1999 included an extraordinary gain on settlements of litigation,
net of income taxes of approximately $292,000 and an extraordinary loss from
extinguishment of debt, net of income taxes of approximately $179,000.
Operations for the quarter ended September 30, 1998 included an extraordinary
gain from extinguishment of debt, net of income taxes of approximately $44,000.
For the nine months ended September 30, 1999, the Company reported net income of
approximately $6.8 million as compared to net income of approximately $1.6
million for the comparable period in 1998. Operations for the nine months ended
September 30, 1999 included an extraordinary gain on settlements of litigation,
net of income taxes of approximately $292,000 and an extraordinary loss from
extinguishment of debt, net of income taxes of approximately $179,000.
Operations for the quarter ended September 30, 1998 included an extraordinary
gain from extinguishment of debt, net of income taxes of approximately $61,000.
Increases (decreases) in revenues for the nine and three month periods ended
September 30, 1999, as compared to the comparable periods in 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
------------- -------------
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Interest on mortgage notes and
related receivables $ 1,165 159 1,006 992 53 939
Interest and dividends on securities
available for sale and escrow accounts 173 178 (5) 66 49 17
Earnings on real estate rental operations, net 848 683 165 261 277
(16)
Sale of real estate 1,897 8,134 (6,237) 825 4,417 (3,592)
Earnings from real estate limited partnership 847 -- 847 -- -- --
Equity in earnings (losses) of BBC 9,113 1,607 7,506 3,187 (2,852) 6,039
Other income, net 192 23 169 24 9 15
------- ------- ------- ------- ------- -------
$14,235 10,784 3,451 5,355 1,953 3,402
======= ======= ======= ======= ======= =======
</TABLE>
Interest on mortgage notes and related receivables increased for the nine and
three month periods ended September 30, 1999 as compared to same periods in 1998
due to interest received in 1999 of approximately $954,000 from an affiliated
limited partnership that had not been accrued in prior years. During the quarter
ended September 30, 1999, the limited partnership obtained the funds through the
sale of its real estate properties allowing it to make the interest payment. The
loan to the limited partnership had been satisfied in 1996 but the accrued
interest remained unpaid. Interest on mortgage notes and related receivables
also increased during the nine months ended September 30, 1999 as compared to
the same period in 1998 due to the interest earned from advances associated with
the Company's development and construction of the Center Port property in
Pompano Beach, Florida.
Earnings on real estate rental operations, net increased for the nine months
ended September 30, 1999 as compared to the same period in 1998 primarily due to
decreases in depreciation and repair and maintenance expenses at the Company's
Burlington Manufacturers Outlet Center ("BMOC") property.
During the quarter ended September 30, 1999, a subsidiary of the Company sold
the ownership interest in land occupied by two Toy R Us stores located in
Springfield, Massachusetts and Aurora, Illinois. The Company recognized a net
gain on this transaction of approximately $766,000. Previously, during 1999, the
Company sold approximately 5 acres of the Center Port property for approximately
$1.1 million and recognized a net gain from the sale of approximately $324,000.
During the nine and three month periods ended September 30, 1998, the Company
sold approximately 35 acres and 17 acres of the Center Port property for
approximately $7.8 million and $4.4 million, respectively. The Company
recognized net gains from the sales of approximately $2.3 million and $1.3
million for the nine and three month periods ended September 30, 1998,
respectively. In 1996, the Company sold a 50% interest in a property included in
investment real estate. Since the Company was the maker of the non-recourse
mortgage note on the property and since the Company maintained a 50% interest in
the subject property, the gain on the sale of approximately $0.6 million was
deferred. In 1998, 50% of the deferred profit, approximately $0.3 million, was
recognized upon refinancing the property's mortgage note. The remaining deferred
profit will be recognized when the remaining interest in the property is sold.
During 1999, the Company received distributions of approximately $588,000 from a
real estate limited partnership in which the Company holds an interest when the
limited partnership sold 31 of 34 convenience stores that it owned. The Company
has a 49.5% interest in this partnership and had written off its investment of
approximately $441,000 in 1990 due to the bankruptcy of the entity leasing the
real estate. The $588,000 has been included in earnings from real estate limited
partnerships. In March 1996, as part of the sale of the Company's Cypress Creek
property in Fort Lauderdale, Florida, the Company received a 4.5% limited
partnership interest in the partnership that acquired the property. In January
1999, the Company received a distribution of approximately $259,000 from the
liquidation of this partnership. The $259,000 has been included in earnings from
real estate limited partnerships.
Other income increased for the nine months ended September 30, 1999 as compared
to the same period in 1998 primarily due to proceeds received relating to
advances due from an affiliate which were written-off in prior years.
BBC's net income (loss) available for common shareholders and the Company's
equity in earnings (loss) of BBC for the nine and three month periods ended
September 30, 1999 and 1998 are summarized below (in thousands):
For the nine months For the three months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Income from continuing operations $25,691 14,509 8,890 2,644
Income (loss) from discontinued
operations net of income taxes 1,174 (12,406) 373 (12,188)
------- ------- ------- -------
Net income (loss) $26,865 2,103 9,263 (9,544)
======= ======= ======= =======
The Company's equity in earnings
(loss) of BBC $ 9,113 1,607 3,187 (2,852)
======= ======= ======= =======
The increase in equity in earnings of BBC for the nine and three month periods
ended September 30, 1999 as compared to the same periods in 1998 was primarily
due to an increase in earnings by BBC.
Net income from continuing operations increased by 77% and 236% during the nine
and three month periods ended September 30, 1999 as compared to the same periods
in 1998, respectively. The primary reasons for the increase in BBC's income from
continuing operations were related to the following items:
1. an improvement in BBC's net interest income resulting from an increase
in interest earning assets reflecting higher securities available for
sale balances,
2. BBC's higher transaction fee income resulting from changes made to the
pricing of BBC's deposit products,
3. significantly higher income from RBCO operations,
4. BBC's sale of one parcel of previously foreclosed commercial real
estate for a $316,000 gain,
5. BBC's lower trading securities losses during 1999,
6. BBC's decline in employee compensation from bank operations due to a
reduction of BBC's full time employees resulting from the December
1998 restructuring,
7. BBC's lower other expenses from bank operations caused by the December
1998 restructuring, and
8. a decline in BBC's advertising expense.
The above improvements in BBC's income from continuing operations were partially
offset by:
1. an increase in BBC's provision for loan losses resulting from small
business loan charge-offs,
2. BBC's higher occupancy costs due to the expansion of RBCO activities
and expanded branch and ATM network, and
3. BBC's lower gains from real estate sales and real estate joint venture
operations.
The primary reason for the increase in income from continuing operations during
the nine months ended September 30, 1999 as compared to the same period in 1998
were related to the items discussed above for the quarter as well as increased
earnings from BBC's real estate joint venture activities.
BBC's income from its discontinued operations for the nine and three months
ended September 30, 1999 was $1.2 million and $373,000 compared to losses of
$12.4 million and $12.2 million net of income taxes, respectively for the same
1998 periods. All of BBC's mortgage servicing assets except for the building
were sold during the second quarter. BBC's income from discontinued operations
during the nine months ended September 30, 1999 resulted primarily from the
recovery of a portion of the 1998 valuation allowance. This valuation allowance
was established based upon the then interest rate environment which anticipated
certain prepayment speeds. Due to rising interest rates during 1999, prepayment
speeds were less than estimated and resulted in a partial recovery of the
allowance. BBC's income from discontinued operations during the three months
ended September 30, 1999 resulted primarily from lower than anticipated cost to
sell mortgage servicing rights. BBC's losses from discontinued operations during
the nine and three month periods ended September 30, 1998 resulted from
accelerated amortization of mortgage servicing rights reflecting prepayments of
loans during the period, related valuation allowances and higher operating
expenses.
The Company's ownership in BBC at September 30, 1999 and 1998 was 32.1% and
31.5%, respectively, of all outstanding BBC Common Stock. The increase was
primarily due to a reduction in the outstanding shares of BBC's Common Stock,
primarily due to BBC's repurchases of its shares. The following table gives
information regarding the Company's ownership interest in BBC at the dates
indicated:
BBC BBC
Class A Class B
Common Common Total
Stock Stock Outstanding
----- ----- -----------
September 30, 1998 25.3% 46.9% 31.5%
September 30, 1999 27.0% 47.6% 32.1%
Increases (decreases) in the Company's expenses for the nine and three month
periods ended September 30, 1999, as compared to the comparable periods in 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
-------------- --------------
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest on subordinated debentures $ 353 373 (20) 106 115 (9)
Interest on mortgages payable
and other borrowings 780 1,161 (381) 301 303 (2)
Cost of sale of real estate 807 5,521 (4,714) 59 3,141 (3,082)
Allowance for loss on mortgage notes 225 -- 225 75 -- 75
Write-down of investment -- 184 (184) -- -- --
(Income) expenses related to real estate
held for development and sale, net (47) 107 (154) (35) 36 (71)
Employee compensation and benefits 887 865 22 298 299 (1)
Occupancy and equipment 43 32 11 13 11 2
General and administrative, net 524 598 (74) 129 162 (33)
------- ------- ------- ------- ------- -------
$ 3,572 8,841 (5,269) 946 4,067 (3,121)
======= ======= ======= ======= ======= =======
</TABLE>
Interest on mortgage payables and other borrowings decreased for the nine months
ended September 30, 1999 as compared to the same periods in 1998 primarily due
to lower average borrowings outstanding.
The Company recorded an allowance for loss on mortgage notes due from affiliated
limited partnerships of approximately $75,000 for each of the quarters in 1999.
This allowance for mortgage notes was based upon management's determination
regarding the net carrying value of the loans and the estimated fair value of
the underlying loan collateral.
(Income) expenses related to real estate held for development and sale decreased
for the nine and three month periods ended September 30, 1999 as compared to the
same periods in 1998 primarily due to decreased property taxes, association fees
and administrative expenses and an increase in rental income.
Employee compensation and benefits increased for the nine months ended September
30, 1999 as compared to the same period in 1998 primarily due to an increase in
personnel and employee's profit sharing plan accrual contribution.
General and administrative, net decreased for the nine and three month periods
ended September 30, 1999 as compared to the same periods in 1998 primarily due
to a decrease in stockholders relation expenses, professional and consulting
fees, leasing fees and intangible taxes.
Financial Condition
The Company's total assets at September 30, 1999 and at December 31, 1998 were
$99.2 million and $91.3 million, respectively. The majority of the difference at
September 30, 1999 as compared to December 31, 1998 was due to increases in
securities available for sale, investment in BBC and real estate held for
development and sale and other assets.
Securities available for sale increased due to investments of venture capital
that the Company has provided to six companies in the early stages of their
development.
Real estate held for development and sale increased primarily due to advances
for development and construction costs. This increase in real estate held for
development and sale was offset in part by the sale of 5 acres of the Company's
Center Port property.
Investment in BBC increased by $1.3 million due to equity in earnings of BBC of
approximately $9.1 million. This increase was offset in part by the net effect
of BBC capital transactions of approximately $246,000 and BBC's change in net
unrealized depreciation on securities available for sale of approximately $6.7
million and dividends of approximately $914,000.
Market Risk
Market risk is defined as the risk of loss arising from adverse changes in
market valuation which arise from interest rate risk, foreign currency exchange
rate risk, commodity price risk and equity price risk. The Company's primary
market risk is equity risk through its investment in BBC. The Company also bears
a market risk in the investments included in securities available for sale.
Equity Price Risk
The Company's primary equity investment is its investment in BBC. Since this
investment is carried using the equity method of accounting, changes in the
market price of BBC stock would not have a direct impact on the Company's
financial statements, however, a change in the market price could likely have an
impact on the investment community's view of the Company. This investment was
entered into for purposes other than trading purposes. The following table shows
changes in the market value of the Company's investment in BBC at September 30,
1999 based on percentage changes in market price. Actual future price changes
may be different from the changes identified in the table below (in thousands):
Percent
Change In Market
Market Price Value
------------ -----
20.00 % $92,508
10.00 % 84,799
0.00 % 77,090
(10.00)% 69,381
(20.00)% 61,672
BBC maintains a portfolio of trading and available for sale securities which
subjects BBC to equity pricing risks. The change in fair values of equity
securities represents instantaneous changes in all equity prices segregated by
trading securities, securities sold not yet purchased and available for sale
securities. The following are hypothetical changes in the fair value of BBC's
securities sold not yet purchased, trading and available for sale securities at
September 30, 1999 based on percentage changes in fair value. Actual future
price appreciation or depreciation may be different from the changes identified
in the table below.
Available Securities Total
Percent Trading for Sale Sold Not Dollar
Change in Securities Securities Yet Change from
Fair Value Fair Value Fair Value Purchased 0%
- ---------- ---------- ---------- --------- -----------
(dollars in thousands)
20.00 % $21,582 31,584 4,165 9,555
10.00 % $19,784 28,952 3,818 4,778
0.00 % $17,985 26,320 3,471 0
(10.00)% $16,187 23,688 3,124 (4,778)
(20.00)% $14,388 21,056 2,777 (9,555)
RBCO is a market maker in equity securities which could from time to time
require them to hold securities during declining markets. BBC attempts to manage
its equity price risk by maintaining a relatively small portfolio of securities
and evaluating equity securities as part of BBC's overall asset and liability
management process.
Interest Rate Risk
The majority of BBC's assets and liabilities are monetary in nature, subjecting
BBC to significant interest rate risk. During 1998, BBC began trading government
securities which are generally bought and sold on the same day. During the
second quarter of 1999 BBC's trading activities were expanded beyond trading in
government securities to trading in options and futures on Eurodollar time
deposits which expire in three months or less. Eurodollar time deposits are
indexed to the LIBOR.
BBC has developed a model using vendor software to quantify its interest rate
risk. A sensitivity analysis was performed measuring BBC's potential gains and
losses in net portfolio fair values of interest rate sensitive instruments at
September 30, 1999 resulting from a change in interest rates. Interest rate
sensitive instruments included in the model were BBC's:
o loan portfolio,
o debt securities available for sale,
o investment securities,
o FHLB stock,
o Federal Funds sold,
o government securities,
o Eurodollar time deposit options and futures,
o deposits, including brokered deposits and public funds,
o advances from FHLB,
o securities sold under agreements to repurchase,
o Federal Funds purchased,
o Notes and Bonds payable
o Subordinated Debentures,
o Trust Preferred Securities and
o off-balance sheet loan commitments.
BBC has fixed rate loan commitments aggregating $12.6 million at September 30,
1999.
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 at market rates to
determine fair values at September 30, 1999,
(ii) discounting the above expected cash flows based on instantaneous
and parallel shifts in the yield curve to determine fair values,
and
(iii) the difference between the fair value calculated in (i) and (ii)
is the potential gain or loss in net portfolio fair values.
BBC's management 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, BBC's management has no basis to determine
whether the fair value presented would be indicative of the value negotiated in
an actual sale. BankAtlantic'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.
Presented below is an analysis of BBC's interest rate risk at September 30, 1999
as calculated utilizing BBC's model. The table measures changes in net portfolio
value for instantaneous and parallel shifts in the yield curve in 100 basis
point increments up or down.
Net Portfolio
Changes Value Dollar
in Rate Amount Change
------- ------ ------
(Dollars in thousands)
+200 bp $270,473 (77,835)
+100 bp 309,094 (39,214)
0 bp 348,308 0
(100) bp 380,643 32,335
(200) bp 351,428 3,120
In preparing the above BBC table, BBC makes various assumptions to determine the
net portfolio value at the assumed changes in interest rate. These assumptions
include:
o loan prepayment rates,
o deposit decay rates,
o market values of certain assets under the representative interest rate
scenarios, and
o repricing of certain deposits and borrowings
It was also assumed that delinquency rates would not change as a result of
changes in interest rates although there can be no assurance that this would be
the case. Even if interest rates change in the designated increments, there can
be no assurance that BBC's assets and liabilities would be impacted as indicated
in the table above. 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
above. Furthermore, the result of the calculations in the preceding table are
subject to significant deviations based upon actual future events, including
anticipatory and reactive measures which BBC may take in the future.
Liquidity and Capital Resources
The Company elected to redeem all of its outstanding Subordinated Debentures due
July 1, 2011 and July 1, 2009 on November 15, 1999 (the "Redemption Date") at a
price of 100% of the principal amount plus accrued interest through the
Redemption Date. In September 1999, the Company funded approximately $3.6
million to U.S. Bank Trust National Association, the Trustee for the Debentures
who is also acting as the Paying Agent. The $3.6 million payment to the Trustee
included the Subordinated Debentures principal balance of approximately $1.4
million and the payment of accrued interest through November 15, 1999 in the
amount of $2.2 million. The Company recognized an extraordinary loss from
extinguishments of debt, net of income taxes of approximately $179,000, due to
the write-off of the subordinated debentures valuation discount and other
related costs.
Pursuant to the terms of the applicable escrow agreements established to fund
payment of amounts associated with a settlement of litigation, at September 30,
1999, approximately $2.7 million remained in escrow accounts to fund future
payments. Any amounts remaining in escrow in January 2000 will be released to
the Company and any future payments associated with these settlements will be
paid from the Company's working capital. Payments are made when a claimant
presents a subordinated debenture that was cancelled upon settlement of the
litigation. At September 30, 1999, there was approximately $5.3 million
associated with these settlements that could be presented for payment. The
Company is not obligated to pay interest on these amounts.
In 1994, the Company agreed to participate in certain real estate opportunities
with John E. Abdo, Vice Chairman of the Board, and certain of his affiliates
(the "Abdo Group"). Under the arrangement, the Company and the Abdo Group will
share equally in profits after any profit participation due to any other
partners in the ventures and after interest earned on advances made by the
Company. The Company bears the risk of loss, if any, under the arrangement. On
such basis, the Company acquired interests in two properties. In June 1994, an
entity controlled by the Company acquired from an independent third party the
Cypress Creek property, consisting of 23.7 acres of unimproved land. In March
1996, the Cypress Creek property was sold for approximately $9.7 million and the
Company recognized a gain of approximately $3.3 million. In connection
therewith, the Abdo Group received approximately $2.9 million as their share of
the profit from the transaction, which was included in cost of sale of real
estate. As part of the sale of the Cypress Creek property, the Company received
a 4.5% limited partnership interest in the partnership that acquired the
property. In January 1999, the Company received a distribution of approximately
$259,000 from the liquidation of the partnership. In December 1994, an entity
controlled by the Company acquired the Center Port property consisting of
approximately 70 acres of unimproved land. Through September 30, 1999, 47 acres
had been sold from the Center Port property for approximately $12.8 million and
the Company recognized net gains from the sale of real estate of approximately
$3.1 million. Included in cost of sales is approximately $2.2 million,
representing the Abdo Group's profit participation from the transactions.
Payment of profit participation to the Abdo Group will be deferred until the
Company is repaid on advances and interest. The remainder of the Center Port
property is currently being marketed for sale.
The Company has provided venture capital to companies in the early stages of
their development. These investments are long-term investments and it is not
anticipated that the Company will receive any current distributions with respect
to these investments.
As previously indicated the Company holds approximately 32.1% of all outstanding
BBC Common Stock. BBC has paid a regular quarterly dividend since its formation
and management of BBC has indicated that it currently anticipates that it will
pay regular quarterly cash dividends on the BBC Common Stock. The availability
of funds for the payment of dividends by BBC is dependent upon BankAtlantic's
ability to pay dividends to BBC. The Company's cash position and its ability to
meet its obligations will in part be dependent on the financial condition of BBC
and the payment by BBC of dividends to its shareholders, including the Company.
At September 30, 1999, BankAtlantic's core, Tier 1 risk-based and total
risk-based capital ratios were 8.39%, 13.01% and 14.27%, respectively. Based on
these capital ratios, BankAtlantic meets the definition of a "well-capitalized"
institution.
Cash Flows
A summary of the Company's consolidated cash flows is as follows (in thousands):
Nine months ended
September 30,
Net cash provided (used) by: 1999 1998
---- ----
Operating activities $(1,777) (608)
Investing activities (3,747) 9,068
Financing activities 3,885 (7,907)
------- -------
(Decrease) increase in cash
and cash equivalents $(1,639) 553
======= =======
The primary sources of funds to the Company for the nine months ended September
30, 1999, were distributions from real estate limited partnerships, proceeds
from the sale of real estate, increase in borrowings, principal reductions on
loan receivables, revenues from property operations, and dividends from BBC.
These funds were primarily utilized to reduce mortgage payables and other
borrowings, redemption of the outstanding subordinated debentures and interest
accrued, to fund development and construction costs at the Center Port property,
to purchase securities available for sale and to fund operating expenses and
general and administrative expenses.
Year 2000 Considerations
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. The
consequences of incomplete or untimely resolution of year 2000 issues represent
an uncertainty that could affect future financial results. The year 2000 issue
affects virtually all companies and organizations.
The Company's computer system is composed of seven personal computers running on
a Windows NT network. The Company's primary in-house computer applications
consist of general ledger, accounts payable, property management, spreadsheet
and database applications. The personal computers have been tested and found to
be year 2000 compliant. The vendor of the general ledger, accounts payable and
property management packages have indicated that their software is also year
2000 compliant. The spreadsheet and database applications utilized are the most
recent versions available from Microsoft. Accordingly, the Company does not
expect to expend material amounts to third parties to remediate any year 2000
problems. Should any of the above systems fail, the Company believes it would be
able to process its data and monitor its accounts through manual systems or
other alternative means. Additionally, the Company does not anticipate that it
will have any material expenditures with respect to real estate owned by the
Company.
Since the Company owns an aggregate of approximately 32.1% of the outstanding
BBC common stock, the following is information regarding BBC's overall Year 2000
project. BBC has undertaken various initiatives intended to ensure that computer
applications will function properly with respect to dates in the Year 2000 and
thereafter. BBC has established a Year 2000 action plan that was presented to
BBC's Board of Directors on December 2, 1997. The action plan was developed
using the guidelines outlined in the Federal Financial Institutions Examination
Council's "The Effect of 2000 on Computer Systems". The six phases of BBC's
action plan are: (1) Awareness Define the Year 2000 issues, gain executive level
support, establish a project team and develop a strategy which encompasses
technology and business issues, (2) Assessment - Assess the size and complexity
of the issues and detail the magnitude of the effort necessary to address them,
(3) Renovation - Code enhancements, hardware and software upgrades, and system
replacements, (4) Validation - Testing of software, system components and
connections between systems, (5) Implementation - Systems should be certified as
Year 2000 ready by the business users, and (6) Contingency planning -
determination of strategy to handle the most likely worst case scenarios on Year
2000 issues.
BBC has completed its action plan for mission critical and non-critical systems
and processes.
The majority of BBC's mission critical information technology system structure
("IT") has been outsourced to third party vendors. BBC's internal IT primarily
consists of a minicomputer for item processing and a personal computer based
wide area network. The wide area network's primary function is to communicate
with third party service bureaus and secondarily to run non-critical personal
computer applications such as E-mail, word processing and spreadsheet programs.
BBC has various non-IT systems including but not limited to, vault security
equipment, branch security equipment, telephone systems, circuit boards on
building equipment, building elevators, and appliances. While the above IT and
non-IT systems could fail or create erroneous results by or at the Year 2000,
BBC believes that all mission critical IT and non-IT systems are Year 2000
compliant.
BBC relies on third party vendors to perform loan, deposit, general ledger,
clearing agent functions and other application processing. BBC has monitored the
Year 2000 progress of its mission critical and non-mission critical vendors.
Most contracts with vendors signed after January 1998 have included Year 2000
warranty language. While BBC believes that these contractual provisions are
enforceable, BBC nevertheless has established alternatives in its contingency
planning in the event Year 2000 problems arise. For those contracts signed prior
to January 1998, the BBC has worked closely with vendors to evaluate Year 2000
compliance. BBC sent out questionnaires to all of its vendors and 62% of the
total vendors responded, including 100% of the mission critical vendors.
Thirty-three vendors have been identified as providing mission critical systems,
processes or services. All but one of the mission critical vendors are believed
to be Year 2000 compliant. The one noncompliant vendor is a governmental agency
that provides software for regulatory reports filed with such agency. BBC
expects to receive an upgraded version of the reporting software from the
governmental agency later this year, however the reporting requirement can be
satisfied by filing manual documents if the software is not compliant. Although
BBC expects all of its vendors to be Year 2000 compliant, BBC may experience
adverse consequences if any of its vendors or the services provided by the
vendors are impacted by Year 2000 computer failures. Included in BBC's Statement
of Operations during the three and nine months ended September 30, 1999 and 1998
were $32,000 and $125,000 and $87,000 and $150,000, respectively, of third party
expenses related to the Year 2000 action plan. BBC estimates that it will spend
approximately $75,000 on Year 2000 consulting services, $100,000 on software and
hardware maintenance specifically related to Year 2000, $100,000 on RBCO system
upgrades and consulting services and $150,000 for contingency planning during
the remainder of 1999. The above items were or will be expensed as incurred and
do not include employee compensation allocated for time spent on the Year 2000
project. Included in the above Year 2000 expenses are remediation expenses.
Remediation expenses through September 30, 1999 were approximately $25,000.
Risk factors associated with the Year 2000 include the risk that BBC's business
could be disrupted due to vendors, suppliers, and customer system failures, or
even the possible loss of electrical power or phone service. BBC has assessed
the probability of these events and has formulated a contingency plan. BBC could
also be subjected to Year 2000 litigation from customers, borrowers and
suppliers as a result of both internal and third party system failures. Further,
the credit quality of BBC's loans may be affected by the failure of a borrower's
operating or other systems as a consequence of a Year 2000 issue or the related
failure of a borrower's key suppliers, customers, or service providers resulting
in higher provisions for loan losses. BBC's underwriting and credit policies
include consideration of a borrower's potential Year 2000 issues. BBC has
determined that consumer and residential loans involve little or no Year 2000
risk, while small business loans and commercial loans have potential Year 2000
risk. Small business and commercial lending departments have established
specific Year 2000 credit policies, which are summarized below.
Small Business Loans - The individual dollar amount of these loans in this
category is low. Most loans are for less than $100,000. BBC has sent out Year
2000 questionnaires to all small business borrowers and received a 60% response
rate. Based on our review of the responses, BBC attempted to assess the Year
2000 risk of each borrower.
Commercial Loans - The majority of BBC's commercial loans are collateralized by
real estate, some of which involve land only, which mitigates the Bank's risk
for this category of loan. BBC has sent out Year 2000 questionnaires to all
commercial loan borrowers and received a 54% response rate. The Commercial Loan
officers have had one-on-one meetings with each borrower to discuss Year 2000
issues. Based on the responses and the meetings, BBC officer's categorized each
loan as High, Medium or Low Year 2000 risk. High risk loans are being monitored
to determine the Borrower's progress towards Year 2000 compliance. Once
achieved, the loan is moved to a lower risk category. There have been no loans
made in 1999 that are considered High Risk. Should BankAtlantic decide to extend
credit to a high risk borrower, policies are in place to mitigate the risk, such
as charging a premium on the loan's interest rate.
There is no assurance that BBC's borrowers will be able to meet their
obligations to BBC if these borrowers experience Year 2000 problems.
Certain assets of BBC may have to be replaced, based on upgrades to equipment
and software that are part of the BBC's normal business needs, rapidly
developing technology, and a three year capital equipment and software
replacement plan. BBC does not anticipate impairment or significant replacement
of assets related to the Year 2000 issue.
There is no assurance that the foregoing has identified all costs, risks or
possible losses which BBC may experience associated with Year 2000 issues. The
failure to correct a material Year 2000 problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect BBC's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers, borrowers and customers, BBC is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on BBC's results of operations, liquidity or financial
condition. The goal of the Year 2000 Project is to significantly reduce BBC's
level of uncertainty about the Year 2000 issues and, BBC believes that, with the
implementation of new business systems and completion of the project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
PART II - OTHER INFORMATION
Item 1 through 5. - Not applicable.
Item 6. - Exhibits and Reports on Form 8-K
a) Index to Exhibits: 27. Financial data schedule for the nine months
ended September 30, 1999.
b) No report on Form 8-K was filed during the three months ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements 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
Date: November 10, 1999 By: /s/ Alan B. Levan
-----------------------------------------
Alan B. Levan, President
Date: November 10, 1999 By: /s/ Glen R. Gilbert
-----------------------------------------
Glen R. Gilbert, Executive Vice President
Chief Accounting Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 884
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,047
<INVESTMENTS-CARRYING> 7,893
<INVESTMENTS-MARKET> 8,047
<LOANS> 2,431
<ALLOWANCE> 997
<TOTAL-ASSETS> 99,193
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 748
<LONG-TERM> 18,318
0
0
<COMMON> 79
<OTHER-SE> 60,246
<TOTAL-LIABILITIES-AND-EQUITY> 99,193
<INTEREST-LOAN> 1,165
<INTEREST-INVEST> 173
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,338
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,133
<INTEREST-INCOME-NET> 205
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,454
<INCOME-PRETAX> 10,663
<INCOME-PRE-EXTRAORDINARY> 6,658
<EXTRAORDINARY> 113
<CHANGES> 0
<NET-INCOME> 6,771
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 772
<CHARGE-OFFS> 225
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 997
<ALLOWANCE-DOMESTIC> 997
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
