BankUnited Pulls Some Financial Engineering On Earnings

BankUnited Financial (BKUNA) reported its 4Q numbers yesterday and beat by the “usual” penny. But the best part is that the press release can now be pinned to my wall as Exhibit A of the financial engineering available to banks in order to post the EPS number that suits their needs. (more background on BKUNA).

You may recall that BKUNA is involved in certain loans to a real estate JV which have since gotten it in trouble. BKUNA holds $14 mln of secured paper and $3 mln of unsecured loans to the JV. The total loan loss reserve recognized this quarter by BKUNA was $4.6 mln, $2.9 of which pertained to the $3 mln JV unsecured loan. Notwithstanding that in the secondary market the secured loan is changing hands at $0.70 on the dollar, no reserve -- ZIPPO -- was taken against the secured portion of the loan because - according to management - the loan is current. In addition to the JV loans, this quarter BKUNA incurred an additional $4.5 mln of new non-performing loans (NPLs), against which it reserved $1.7 mln.

Let’s assume for the sake of argument that BKUNA reserved just 30% of the JV secured loan, the portion that they would not be able to recover if they sold that loan in the secondary today. That amounts to $4.2 mln or $0.11/share pre-tax hit to EPS. Furthermore, this time last year BKUNA’s total reserve as a percentage of total NPL’s was 307%. Last quarter that number had fallen to 243%. This quarter it checked in at 175%, and for this quarter, excluding the JV loan, BKUNA reserved only 37% of new NPL's.

We don’t know why BKUNA has decided that the appropriate ratio of reserves-to-NPL’s was 307% last year but only 175% this year (actually we do know, but BKUNA would probably disagree). But if the company simply had maintained the ratio to last quarter’s level, pre-tax EPS would have been shaved by another $0.40/share.

Fortunately for BKUNA, however, it operates mostly in Florida, where, according to management, the much ballyhooed real estate problems are a figment of the media’s imagination. And besides, BKUNA is that rare breed of bank that is not affected by housing implosions, because BKUNA is too diligent to make any meaningful bad loans – they are bred apart. Never mind that the bulk of its quarterly net interest income is not paid in cash, but rather it’s added on to the principal amount of the loan, that’s the way the company has it all planned out.

It’s all good. All you have to believe is that in BKUNA’s “Happy Place,” home prices always rise, loans never go bad, and financial assumptions are always just right...just right to the penny.

Comments

[Paul Meisel:]

It certainly seem there is a lot more focus on quarterly earnings estimates than the quality of balance sheets and footnotes.

It would seem to me to behoove a CFO in the present environment to make sure reserves, derivative accounting, etc. would be managed to state earnings conservatively, so that any surprises are pleasant ones. Given that there is always some judgment in these matters, why not avoid unpleasant future surprises to the extent you legitimately can?

Making the quarter should never be as important as a sound balance sheet... but maybe we are looking for love in the wrong places.

2006 Oct 25 03:14 PM