Brutal First Quarter for BankUnited

Yesterday, BankUnited Financial Corporation(BKUNA Quote) said it took a loss in the first quarter amid impairment charges and provisions for loan losses.

BankUnited reported a net loss of $65.8 million for the first quarter of 2008, following positive net income of $24.4 million in the same period the prior year. Last quarter saw a loss of $25.5 million.

Not surprising in the current environment, the thrift-holding company's loss was driven mainly by $98 million in quarterly provisions for loan losses, up from last quarter's already-high $65 million and just $4 million a year ago. Securities impairment charges of $25.5 million also contributed to the trouble.

BankUnited's common shares were down 5% on the day, closing at $3.70. Through yesterday, shares were down 46% year to date and down 83% for the 52-week period.

Option-ARMs

A recent look at regional banks' asset quality and capital levels addressed BankUnited's high concentration in option-payment adjustable-rate mortgages with negative amortization features, also know as option-ARMs.

By now, almost everyone has heard of these innovative but risky instruments, which allow borrowers to choose a payment that could result in adding principal to the loan.

Along with BankUnited, big players in option-ARMS suffering in the real estate crisis include Washington Mutual(WM Quote), Wachovia(WB Quote) and Downey Financial Corp.(DSL Quote).

Option-payment mortgages totaled $7.4 billion and represented 59% of BankUnited's loan portfolio as of March 31. In the earnings release, CEO Alfred Camner reiterated the company's plan to transition to a "more traditional retail commercial bank."

Loan Quality Tumbling

Nonperforming loans increased 58% during the first quarter, totaling $609 million as of March 31. That compares with $384 million in December 2007 and $71 million in March 2007. In the discussion of loan loss reserves in its 10-Q filing, BankUnited stated that option-ARMs represented the majority of the increase in nonperforming loans over the past several quarters. These totaled $512 million, or 84%, of the company's problem loans as of March 31.