BankUnited imploding
June 18, 2008 – 11:19 pm
After an analyst downgrade sent their stock diving 30% to $2.35 today, BankUnited Financial of Florida tonight issued a press release announcing a secondary stock offering. The bank is looking to raise $400 million of capital, which at the current stock price would translate into an additional 170m shares.
As of March 31st, the company had only 35 million shares outstanding. I’m no expert on secondary stock offerings, but seems to me that issuing another 170 million will effectively wipe out existing shareholders. With the stock down to $2 from a high above $30 back in 2006, I guess they’ve already been wiped out. But talk about adding insult to injury.
The management team vociferously argues that BKUNA shouldn’t be lumped together with the worst subprime lenders. In their investor talking points (slide 11) they emphasize….
No subprime lending
No piggyback loans
Strong underwriting standards
And yet they conveniently forget to mention that 60% of their loans outstanding are option ARMs. [For this tidbit, you have to go to the fine-print on page 15 of their most recent 10-Q filing.] And 91%(!) of those loans were accumulating negative amortization as of March 31st. Don’t let that ugly term scare you away, let me explain….
The “option” in Option ARM means borrowers have the option not to make a full mortgage payment each month. That’s the gimmick. It’s not unlike a credit card bill. You may have run up $1000 in charges on your credit card last month, but you can choose to make the minimum payment of $10 when you get the bill. Option ARMs let you make a minimum payment on your mortgage. And whatever portion you don’t pay just increases the balance of the loan.
The fact that 91% of option ARM loans were “accumulating negative amortization” means 91% of those borrowers were not making their full mortgage payment. But if you read deeper into the company’s filings it gets worse: not only are 91% making a full payment, 76% “were electing a minimum payment…” (see page 39 in the 10-Q for that gem)
This hasn’t hurt the company’s “profits” however. Each month the bank is recognizing accounting profits on “payments” that borrowers aren’t actually making in cash. It’s as if your credit card company recognized a full $1000 of income even though you only paid ‘em $10.
We see this in action on the annual cash flow statement, see page F-6 of the company’s proxy filing. The company’s TOTAL net profit in 2007 was $81.4 million. But that included over $181m of “negative amortization,” the accountants’ fancy word for “income” that wasn’t actually received in cash.
The cash comes in later when the borrower decides to get current on his mortgage or sells his house for a price high enough to pay off the mortgage balance. But I would hazard a guess the majority of BKUNA’s option ARM borrowers will do neither, forcing the bank to write off hundreds of millions in uncollectable debt.
It’s amazing that CEO Alfred Camner hasn’t been fired. Or not, considering he owns 93% of the Class B voting shares, which have 10 times the voting power of the Class A shares available to individual investors.
—WE INTERRUPT THIS POST FOR A LATE-BREAKING UPDATE—
As I write this, BKUNA just issued another press release with a sweetener for investors: if the secondary offering is successful in raising $400m of capital, Camner will give up his Class B stock in exchange for regular Class A stock: “Give me money to save my bank, and I’ll give you the voting power you need to fire me!” No doubt with a comfortable retirement package.
But don’t worry about dear Alfred. He won’t have to file for unemployment: he already works a second job as a lawyer……
Reading deeper into the company’s filings (do a keyword search for “related party transactions“) we find he is the Senior Managing Partner of law firm Camner, Lipsitz and Poller. Just in the last three years, CLP has billed BKUNA $12.0 million for legal fees related to “loan closings, foreclosures, litigation, corporate and other matters.”
As CEO of the bank, he pays himself to make bad loans. Then as Senior MP of his law firm, he pays himself again to clean up the mess his loans leave behind.
By the way, Camner’s daughter Errin is the Managing Director of that law firm.
And oh yeah, Camner’s other daughter Lauren sits on BKUNA’s board of directors and owns another small chunk of super-voting Class B shares.
Folks I found all of this stuff in about 30 minutes just skimming the company’s filings. No doubt there’s more….
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Can’t resist sharing some more fun facts I’m finding in BKUNA’s filings.
Just how toxic are option ARM loans for lenders? In the quarter ending March 31, 2007, BKUNA originated nearly $640 million worth of residential option ARMs. 71% of all residential loans they originated in that period. But in the same period this year, the company originated just $1.8m worth. 0.3% of the total.
A year ago 6% of BKUNA’s loans were the type Fannie and Freddie are willing to buy or guarantee. This year? 69%. That demonstrates just how much of the private lending market has disappeared over the last year…
Lastly this: “43% of our one-to four family residential loans were underwritten based on borrower stated income and asset verification and an additional 9% were underwritten with no verification of either borrower income or assets.”
