BankUnited Financial Corp.'s stock has taken its lumps in the last month as investors have grown leery of its reliance on option adjustable-rate mortgages in a cooling real estate market.
But confident executives say that the Coral Gables, Fla., company is sticking with its strategy, and that they have been working hard lately to counter what they believe are misunderstandings about its option ARMs.
Unlike other such lenders, BankUnited makes the loans only to prime borrowers who are underwritten at the fully adjusted rate, executives have said in interviews and in recent presentations to investors and analysts.
"We've gotten lumped in to some degree with other option ARM lenders when we're not doing the same thing that they're doing," Alfred Camner, the chairman and chief executive officer, said in an interview last week.
BankUnited's stock is down more than 15% since Aug. 8. Mr. Camner said a couple of recent news articles that slammed option ARMs in general, and mentioned BankUnited in particular, are at least partly to blame.
At least one article also suggested the company is in denial about the Florida economy's heading for a downturn.
"Every time you see something come out that's negative about housing or mortgages, you see the stock take a hit," said Joseph Fenech, an analyst at Sandler O'Neill & Partners LP. "They are one of the biggest option ARM lenders out there, and these are products that are untested in a significant downturn."
Bert Lopez, BankUnited's chief financial officer, said option ARMs make up 66.5% of its $8.9 billion residential loan portfolio and 57% of all its loans.
The company is maintaining strong credit quality amid "stupendous" overall loan growth - 40% since last year, Mr. Lopez said.
"The proof of that is in our loss ratio," he said. "Over the last 16 years we've had a loss ratio that's averaged only 7 basis points of loans. I would stack that up against anybody in the country."
BankUnited executives are going on the offensive. They held a conference call last week, gave a presentation at an investor conference this week, and plan to attend another one next week.
The public relations effort appears to be yielding at least mild results. The stock has rebounded slightly in recent days and was trading at $26.45 a share late Thursday. It hit a 52-week high of $32 in early May.
Still, some analysts do not need any persuading.
"Not all option ARMs are created equal," said Laurie Hunsicker of Friedman, Billings, Ramsey & Co. Inc., who has an "outperform" rating on the stock.
Investors are overlooking important statistics about BankUnited's option ARMs, Ms. Hunsicker said. The average loan size is $299,000, the average loan-to-value ratio at initiation is 77%, and the average borrower's FICO score is 710.
She also said the company qualifies borrowers at the fully indexed rate - "not the teaser rate like some other lenders have done."
Jennifer A. Thompson, an analyst at Oppenheimer & Co., said she thinks the strict underwriting will insulate BankUnited from potential problems ahead.
"Even with a slowdown in housing or a spike in interest rates, I think they'll perform relatively well," said Ms. Thompson, who has a "buy" rating on the stock.
But John Pandtle, an analyst at Raymond James & Associates, said he thinks the company remains overvalued.
Negative sentiment about option ARMs, the potential for slowing loan growth, and deposit pricing competition are among the pressures facing BankUnited, according to Mr. Pandtle, who has an "underperform" rating on the stock.
"Sentiment risk could persist over the foreseeable future as housing data deteriorates in several formerly red-hot housing markets where they have exposure to negatively amortizing option ARMs," he said.
Mr. Pandtle said he is not very concerned about credit quality risk. "The bigger fundamental concern is prospective loan growth as the housing market slows."
He also said BankUnited has a high loan-to-deposit ratio - over 180% - and he expects some of the expected lift to the net interest margin to be offset by higher deposit costs.
But other analysts said the company's fundamentals are unchanged, and they blamed the stock selloff mainly on news articles.
They cited two in particular that mentioned BankUnited. One, published Aug. 11 in the newsletter Grant's Interest Rate Observer, predicted trouble ahead and mocked the rosy business statistics that executives cite. The Sept. 11 cover story in BusinessWeek echoed that sentiment with the headline, "How Toxic Is Your Mortgage?"
Both articles questioned the common accounting practice for negative amortization that lets lenders record as income interest payments that borrowers defer. The Grant's article said these "ethereal dollars" accounted for 42.6% of BankUnited's profits for the 12 months that ended June 30. BusinessWeek referred to them as "phantom profits."
Analysts who do not share that pessimism said the selloff makes the stock even more of a bargain.
"Their underwriting on option ARMs seems conservative at this point," said Albert Savastano of Janney Montgomery Scott LLC, who has a "buy" rating on the stock.
He conceded that the product is yet to be tested by an economic downturn, but he said strong employment levels in Florida continue to benefit housing values.
"To get a serious negative decline in housing prices, you'll have to see a sharp rise in unemployment, which is not really happening," he said.
Florida's unemployment rate is now 3%, versus 4% a year ago and 4.8% in the second quarter of 2004, Mr. Savastano said.
He also said BankUnited caps negative amortization at 15%, a conservative level compared to the 25% at some other lenders. (Negative amortization occurs when borrowers do not make payments high enough to cover the interest, and the difference is rolled into the principal. If the principal increases by 15%, BankUnited requires the borrower to start paying full monthly payments.)
An analysis Mr. Savastano did of the option ARMs BankUnited originated over the past three years indicates that most would not hit the cap until at least 2009.
"Why that's important is when the cap reaches, the loan becomes fully amortizing. That's when you have payment shock," he said.
But an expanding net interest margin should work in BankUnited's favor, insulating it from a possible increase in chargeoffs, Mr. Savastano said. If the Federal Reserve Board stopped raising rates today, BankUnited could add as much as 32 basis points to its margin over the next 12 months, as its outstanding loans reprice, he said.
"We think the net interest margin expansion should be more than enough to absorb an increase in credit costs," he said. "Every 8 basis points of margin expansion can offset a 10-basis-point rise in net chargeoffs."
