Bankatlantic Bancorp Loan Sours: Provisioning for Loan Losses

Abstract

This case describes how a smaller retail bank provisioned for loan losses in the period leading up to the recent financial crisis. The bank made a single loan based on an unsubstantiated appraisal that was so large that the quarterly financial statements clearly show how the loan moves to nonperforming status in one quarter, then is partially written off in the subsequent quarter. Despite the large increase in nonperforming loans, the bank does not materially increase the allowance for loan losses. As such, it provides an opportunity to analyze the riskiness of loan portfolios and the adequacy of the allowance for loan losses, and to discuss the potential effects (and controversy) of the new accounting update, which governs how retail banks account for loan loss allowance.

Excerpt

UVA-C-2392

Aug. 14, 2018

BankAtlantic Bancorp Loan Sours: Provisioning for Loan Losses

It was mid-November of 2006 and Nathaniel Harper was just settling into his new job as a financial analyst in a small southeastern investment firm. The St. Louis Cardinals had just won the World Series, and the five-foot-eight-inch shortstop David Eckstein had won the award for Most Valuable Player. Eckstein was known to be pesky: he never gave up, even when facing the league's best pitchers. Harper figured that he needed a bit of peskiness to prove he was great at this job. His first assignment was to cover the local banking sector. When Harper received the task, he recalled his retired grandma, who lived in a planned community in Florida, raving about the services offered by her bank, BankAtlantic Bancorp (BankAtlantic).

Trying to figure out what questions he needed to answer to make an informed investment decision, Harper shuffled through his notes from school until he found some relevant points on retail and commercial banks.

Main purpose of bank is to play match maker between those with excess capital and those with capital needs

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Keywords: loans, allowance for loan losses, accounting for retail banks, incurred loss model