BankUnited FSB appeared on the verge of being shut down this week, after its federal regulator rejected the bank's plan to raise capital and ordered it to sell itself or most of its assets within 20 days.

The Office of Thrift Supervision's prompt corrective action, which comes after months of trouble for the subsidiary of BankUnited Financial Corp. ( BKUNA), requires management to make strong efforts to sell itself and to cooperate in OTS efforts to "market" the institution. The OTS also said that its directive was issued in order to "resolve the institution's problems at the least long term cost to the deposit insurance fund," referring to the costs that would be incurred by the Federal Deposit Insurance Corp. if BankUnited were to fail.

The Coral Gables, Fla.-based thrift was included in TheStreet.com's list of undercapitalized banks and thrifts published last week. It was considered critically undercapitalized by regulatory standards, with a Tier 1 leverage ratio of just 1.37% and a total risk-based capital ratio of 3.60%. These ratios need to be at least 5% and 10% for a bank or S&L to be considered well capitalized under ordinary regulatory guidelines.

The institution's nonperforming assets, including loans past due 90 days or in nonaccrual status and repossessed real estate comprised 9.95% of total assets as of Dec. 31, and it's net charge-offs (actual loan losses) for 2008 totaled $438 million, or 6.12% of average loans. Net losses for the year totaled $1.1 billion.

BankUnited's problems sprang from its concentration in option-payment adjustable-rate mortgages, one of the worst mortgage products to proliferate during the housing boom. These loans -- known as option-ARMs -- gave the customer several monthly payment options early in the life of the loan. While options varied, they generally included a high option to make an ordinary amortized payment of principal and interest, a middle "interest only" option to pay just the last month's accrued interest, and a low option to pay an amount less than the last month's accrued interest. It was this last option that caused all the problems, since if a customer pays less than the accrued interest, the unpaid interest gets tacked on to the loan principal balance. This is known as negative amortization.

Combining these questionable lending methods with low down-payment requirements and declining home prices led to 91% of BankUnited's $7.4 billion in option-ARMs to have negative amortization of $354 million as of June 30. That's the most recent information we have on BankUnited's option-ARM portfolio, since the second quarter is the most recent for which the holding company managed to file a 10-Q report with the SEC, and the OTS, which is the regulatory agency that allowed several large thrifts to implode from these toxic loans, doesn't require thrifts to break-out option-ARMS on the Thrift Financial Report.

OTS Action

Under a previous OTS order, BankUnited submitted a capital plan to the regulator on Feb. 25. On April 10, the OTS notified BankUnited of its intent to file the April 14 prompt corrective action order, and rejected the thrift's capital plan.

The first part of the order requires BankUnited to be "recapitalized by (a) merging with or being acquired by another financial institution, financial holding company, or other entity, or (b) the sale of all or substantially all of the Institution's assets and liabilities to another financial institution, financial institution holding company, or other entity, within twenty (20) days."

The second part of the order requires the institution to achieve and maintain Tier 1 leverage and total-risk-based capital ratios of 4% and 8% within 20 days. Of course, the requirement to sell the institutions or most of its assets within the same timeframe renders the capital ratio requirements moot.

Despite the temporary increase of the FDIC's basic individual deposit insurance limit to $250,000 and waiver of limits on insurance coverage for non-interest-bearing checking accounts until the end of 2009, BankUnited reported $2.7 billion in uninsured deposits on its Dec. 31 Thrift Financial Report filed with the OTS.

Ratings

While the data is over three months old, BankUnited's level of reported uninsured deposits was very high as of Dec. 31, considering the institution's condition. This is another instance pointing to the need for depositors to monitor the health of their financial institutions.

Another thing to consider is that even if your personal deposits are under FDIC insurance limits, you or someone you know are probably associated with a business, organization or government entity (such as a school district) with large deposits of somebody else's money in a local bank.

TheStreet.com Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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