BankUnited's Quarter: Same Show, Different Day
By Fil Zucchi Apr 20, 2007 9:45 am
Given all of the commentary, it's mind boggling that BKUNA's stock trades at these levels.
If this piece looks eerily similar to last quarter's commentary on BankUnited's (BKUNA) results, it's because...it is. I started out trying to put together something different, but after sitting in a courtroom for two days listening to mind-numbing testimony, my creativity is running somewhat dry, and certainly nowhere close to that of the folks who put together BKUNA's financial statements. So, without further due:
Residential Non Performing Assets (without including the $1.3 mln related to TransEastern) jumped from $43.8 mln last quarter to $74.1 mln this quarter. NPA's rose to 0.53% (up 69% Q/Q), something which management touted as a glowing achievement insofar as it was better than what they had guided to (which was 0.60-0.80%). To most people that would suggest things continue getting worse and some prudence might be appropriate. Not so for BKUNA's management, which decided (again) to reserve $4.0 mln (maybe the calculator got stuck), or 13% of the new NPA's. The total loan loss reserve is now 59% of Non Performing Loans, or almost one fourth of what a typical bank usually reserves. This compares to last quarter's 12% reserve for new NPA's, and a total loan loss reserve of 87.6% of NPL's (down from 274% a year ago, and 175% two quarters ago).
Memo to BKUNA's management: when I wrote that "one can only assume that if bad loans continue to rise, BKUNA will soon be in a position to actually reflect a gain on its income statement," it was a joke, not a suggestion for future accounting assumptions.
If the quality of the earnings were not bad enough, non-cash interest income was 224% of total net interest income. Since such a number would have brought us into the realm of the absurd had we not already gotten there last quarter, consider that non-cash interest income was 74% of all interest income before any interest costs; i.e. 74% of what we generally would define as a company's revenues did not come in as cash but rather was tagged onto the outstanding balances of the existing loans. This may be the closest a banking outfit will ever get to implementing "vendor financing Y2K style"...at least until BKUNA reports its next quarter. (Yes, the last sentence was in the January piece too, but I am an optimist.)
And now a few gems from the conference call:
"The so-called payment shock as it has always been reported [by] the media has been rarely a factor in our situation, probably because of not only our strong underwriting, but in particular, because we have always underwritten our loans at the fully invest rate."
...Or perhaps because 74% of your interest income does not get paid anyway – how's that for a thought?
"Operator: The first question comes from John Pancari, with J.P. Morgan..."
...Who just happens to be the lead book-runner on BKUNA's $160 mln offering, based on a prospectus prepared by the CEO's law firm. Nothing wrong with that, just pointing out the obvious.
The obligatory meatball question from the JP Morgan analyst: "The properties that you have on foreclosure now, the 216 properties, what has been your experience now in going back to these borrowers and looking at their opportunities to sell the properties or not, just given that you implied in your press release, that you're seeing about an 80% average LTV on properties in foreclosure. So there's obviously still a fairly large amount of equity in these properties. I just want to see what you're hearing about why they're going into foreclosure."
Answer: "[blah blah blah blah]... John, let me just add a little bit more, just to give it color in terms of the delinquencies and where they don't end up. I say that because at the end of December, we had approximately 150 loans that were in this process of foreclosure. We only had three properties on hand. Even though we've gone through and obviously we've seen a lot of these properties pay off, not a lot of them make it to the Real Estate Owned level. We only added 11 properties during the quarter and then we ended up selling approximately seven so we ended the quarter right at 7, so what you're seeing is, although we have $216.5 mln [of loans), in the process of foreclosure, the vast majority of those files either were paid off before the auction at the courthouse steps or otherwise resolved before we get into an REO status."
Let me get this straight: BKUNA has $216 mln of loans in foreclosure and deems that $41 mln is an adequate allowance for loan losses? And by the way – at risk of being picky – REO's this quarter increased to $3.1 mln from $413k last quarter.
The "Are You Kidding Me" award for the quarter's most disingenuos commentary:
"Let me add one more thing to it, because I've mentioned this to some people before and I just want to make this clear. I think that in some respects we need to do a better job of what I would call the work-outs of residential because we have had a tendency to move files on into foreclosure and what I'm trying to do is get everyone focused in on trying to help people keep their homes. So you're probably going to see more of that in a sense from us. We need to do more of that. We need to be out there.
We need to be able to get some really good counseling and one of the problems that we've had is that a lot of our telephone time has been spent on the new property tax and insurance increases that are occurring in terms of escrows and so on. We're going to spend a lot more time over the next several quarters helping people keep their homes. I feel that's an obligation of our institution to do that. I think other people in some other institutions have also taken a view of that right now and there's been a lot of exaggeration in that whole area. So we want to make sure that we give everybody as much opportunity as possible to stay in their house."
...and cats will marry dogs, wolves will lie with sheep, The Koz will settle for Martha Stewart's shower curtains, and we will all live happily ever-after in a world where there are no bad loans – just very extended ones - and certainly none that require those pesky EPS-eating loss reserves.
Question: "With regard to the rising delinquencies that we are seeing in the mortgage portfolio... the scare stories talked a lot about massive declines in real estate values in certain parts of Florida. And the worry, I think, is that you're going to end up with a house that's worth 50% of what the individual who's borrowing the money paid for it and I'd just like to hear what you have to say about that, I guess."
Answer: "...Sarasota. Probably in some of their areas of town they have had more declines. Naples has suffered some decline but it has been modest and I have seen sales of properties there are really only 5 to 10% down... As far as what we've seen coming into delinquencies, very few properties;...we have now appraised just about every single one of our foreclosures and we have in house appraisers that go through that process and tell us where we stand on it."
Question: "And then if you'd just talk for a minute about how the regulators are viewing and considering non-cash earnings. What has that dialogue been like lately?"
Answer: "...Regulators don't publish what they think about you. But, we have excellent relations with our regulators. We've been in the business a long time. A lot of regulators actually know me way before the S&L crisis of the 80's because we used to go out and save institutions that had problems. So I haven't had any discussions other than they are extremely pleased. We're not allowed to give you our ratings, but I can tell you, you would be happy with our ratings."
Uuhmm, might I suggest new BKUNA uniforms consisting of blue long-johns, with a big "S" tattooed on the chest , and a red cape? That ought to attract a couple of extra deposit accounts.
So, given all of the above it's perfectly reasonable that BKUNA's management finds it "mind boggling that [they] are barely selling above book as an entity, [and that they] have had to face up to some of the most egregious rumors put out in the market by people who sold [the] stock short and they've managed to hammer [it] down to levels, that... are similar to the savings and loan crisis days."
And given all of the above, I too find it mind boggling that BKUNA's stock trades at these levels.
Position in BKUNA
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