Asset Quality Concerns Hit BankUnited

Florida-based BankUnited Financial Corporation (BKUNA: 0.42 +75.00%) is facing sanctions from the Office of Thrift Supervision as deteriorating asset quality has put the squeeze on the bank holding company’s financials (BKUNA is the holding company for BankUnited FSB).

While the company did not specify if it was subject to a formal order from the thrift regulator, BankUnited did say in its 10-Q, filed Monday with the Securities and Exchange Commission, that the OTS had “certain concerns” about the bank, which it is moving to address. No specifics around regulatory concerns were provided, but a look at the remedial measures makes it clear that capital adequacy is certainly one of them.

BankUnited said it had “agreed to maintain capital ratios substantially in excess of the minimum required ratios to be deemed well-capitalized upon raising the agreed upon amount of capital,” a nod to likely OTS expectations that such excess capital will be needed — and given that more than 68 percent of the bank’s entire $10.4 billion residential mortgage portfolio was in the form of pay-option ARMs at the end of Q2, such concerns would seem to be warranted.

(If that didn’t convince you, maybe the fact that 91.8 percent of the payment option portfolio was negatively amortizing at the end of Q2 will.)

In June, BankUnited announced a $400 million capital raise via common stock; the bank said Monday that the OTS is requiring it “to submit an alternative capital plan that accounts for an inability to raise the $400 million,” although it did not comment on its efforts to raise capital thus far.

“Based on a recent notification, BankUnited believes that, unless it raises significant capital, the OTS will reclassify the bank to adequately capitalized primarily due to the deterioration in the Bank’s non-traditional mortgage loan portfolio, the concentration of risk associated with that portfolio, and a resultant need for significant additional capital,” the SEC filing read.

It gets worse: the FHLB is pushing back on some of the collateral BankUnited pledged as collateral for access to FHLB funding, as well. The bank said that the FHLB had “changed its position regarding collateral” from the company’s primary REIT, and that $736 million of pledged collateral “may not be fully eligible to support borrowings.”

Fitch Ratings on Friday dropped its ratings on BankUnited, citing both reduced financial flexibility and asset quality deterioration, said that managing the bank’s financial position will be “difficult” going forward given “limited other sources of cashflow.”

BankUnited reported a Q2 loss of $117.7 million, mainly driven by $130 million in additional loss provisions; non-performing assets increased 61 percent between Q1 and Q2, reaching $1.1 billion at the end of June.

Disclosure: The author held no positions in BKUNA when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.