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BankUnited Financial Brought Back to Earth


BKUNA's financial delusions continue, undeterred by the facts.

My keen interest in BankUnited Financial (BKUNA) began many moons ago, when the disconnect between management delusions, the stock price, and reality offered up a great opportunity for a short side trade. Since then the stock has been shaved by about 60%, making it attractive only as a wipe-out trade (i.e. the company goes bye bye), which is not something that tempts me a whole lot. I continue to follow BKUNA's travails as it presents a rather unique example of a management's pathological sense of denial (if not something more sinister) in the face of reality. If you care to catch up on my history with this company you can look here (BankUnited Financial Assumes Its Way To An Earnings Beat; BKUNA Matata: Not Such A Wonderful Thing; BankUnited's Quarter: Same Show, Different Day).
When I first read BKUNA's earnings release and its decision to increase the quarter's loan-loss-reserves (LLR) $10 mln above what they had guided a mere 20 days ago, I thought that perhaps management figured it was time to rejoin the rest of the planet and acknowledge that the company is not as special as it thought it was. Silly me. Here are the lowlights from the last quarter and the conference call:
  • On September 6 BKUNA's management presented at an FTN Midwest conference in which it yet again asserted that its loan portfolio remained an island of stability in the midst of the 100-year flood that was wiping out a good chunk of the mortgage market. Hence the rationale for its LLR of 38.5% of Non-Performing Loans (NPL). Twenty-seven days later BKUNA warned that it would miss estimates due to an increase of LLR's. Today BKUNA doubled its LLR allowance estimated on 10/3. This from a management team self-described as "focused and experienced" in handling the current market turmoil.

  • NPL's jumped $63 mln (55% Q/Q) to $180.8 mln. Net charge-offs, i.e. actual loan losses, for the quarter totaled $5.5 mln, up from $1.1 mln in 3Q. Real Estate Owned (through foreclosures) increased $20 mln to $27.7 mln, encompassing 93 units (that's 90 more units than Comstock Homes' (CHCI) total net sales last quarter – but I digress). In the face of this data, management took a $19.1 mln LLR for the quarter, which results in the total allowance for loan losses as a percentage of NPL's falling to 32.4% from 38.5% in 3Q. Pardon my loud "voice": Are these people kidding?!?!

  • During the last reported quarter BKUNA's stock traded between $15-20 and BKUNA repurchased 315,000 shares. The stock now trades just above $10 right now, but management believes it is prudent to suspend the buybacks and safeguard capital. Nice move.

  • BKUNA's management asserts that all will be well because while NPA's may be rising, its strict underwriting and Loan-To-Value (LTV) guidelines will minimize losses. Meanwhile, back on planet earth, LTV's for loans in foreclosure rose to 86% from 79% last quarter; and that is including the effects of mortgage insurance, and excluding 8% foreclosure costs; which means that in a best case scenario the equity cushion for loans in foreclosure is currently 6%. Which also means that if LTV's rise another 7% this quarter, the loans are officially under water. Let's hear it for the strict underwriting standards.

  • Remember the stink BKUNA raised when management was supposedly forced by analysts with a sinister agenda to take a nominal loan loss reserve on a JV loan they had with Tousa Inc. (TOA)? Gone - the last portion of the $3.0 mln at risk charged-off.

  • "BKUNA has no piggy-back, subprime, or home equity loans": which I presume it means that the prime mortgage market is imploding as well.

  • "The Fed should lower rates aggressively to fix the current credit problems". I think my head just exploded.

  • And last, but certainly not least, "people fail to understand that the Florida market will recover much faster than other markets because of demographics, and because the low dollar will attract investors from Europe and South America, even Venezuela!" And to that I say "I'll have what they're having".
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