BankUnited Inc (BKU) 2005 Q2 法說會逐字稿

Good day, and welcome to today's BankUnited fiscal 2005 second-quarter earnings conference call. Today's call is being recorded. This conference call may contain certain forward-looking statements which are based on management's expectations regarding factors that may impact the Company's earnings and performance in future periods. Words and phrases such as will likely result, expect, will continue, anticipate, estimate, project, believe, intend, should, may, can, plan, target and similar expressions are intended to identify forward-looking statements. Actual results or performance could differ from those implied or contemplated by such statements. Factors that could cause future results and performance to vary materially from current management expectations include, but are not limited to, general business and economic conditions, fiscal and monetary policies, war and terrorism, change in interest rates, deposit flows, loan demand and real estate values, competition with other providers of financial products and services. The issuance or redemption of additional Company equity or debt, by volatility in the market price of our common stock, changes in accounting principles, policies or guidelines, changes in legislations or regulation, reliance for other companies for products and services, attracting and retaining key personnel and other economic competitive governmental regulatory and technological factors affecting the Company's operation, pricing, products and services. At this time for opening remarks and introductions I would like to turn the call over to Mr. Alfred Camner. Please go ahead, Mr. Camner.

Thank you, and good afternoon. Thank you for joining us today on our conference call for the second quarter of fiscal year 2005. With me are Ramiro Ortiz, BankUnited's President and Chief Operating Officer and Bert Lopez, our Chief Financial Officer. We're happy to report today another quarter of positive earnings and solid performance in our core business areas of deposits and loan production. Net income for the quarter increased 13% for the same period one year ago to 13.6 million. Basic and diluted earnings rose to $0.45 and $0.42 per share, respectively, up from $0.40 and $0.37 per share the same quarter last year. Total assets increased to 9.3 billion, a 21% increase from the same quarter last year. We are especially pleased with our results and deposits including under despairing (ph) deposits and loan production. Our mortgage production was so strong this quarter that we generated loans beyond our internal benchmarks. This created an opportunity for us to meet the demand of the market for assets and sell our surplus. While this may not be a substantial line of business going forward we intend to revisit this strategy when opportunities arise. As for many financial institutions BankUnited was impacted by the flattening yield curve and increased costs of deposits in borrowing. We are monitoring the margin closely. During this second quarter we were adversely affected by the rising costs of deposits and borrowings and the lagging effect of increases in short-term interest rates, specifically those relating to the effects on adjustable-rate mortgages. In addition we experienced unusually high levels of prepayments on mortgages, particularly toward the end of the quarter. However, we expect that strong mortgage loan production our micro market strategy in the robust corporate and commercial pipelines position us well for the future. Ramiro will address some of those areas in a few moments.

In March our Board of Directors elected to declare a dividend that rewards current shareholders and positions our Company favorably with institutional investors that can invest only in stocks that offer such dividend payments. As we travel around the Country we have heard from any institutional investors that wish to purchase our stock but are limited to dividend paying stocks. However, the combination of Florida's strong housing market, our branch expansion and the ongoing strengthening of corporate and commercial relationships should position us well for the future. I will now turn this call over to BankUnited's President and Chief Operating Officer, Ramiro Ortiz who will share more details about our specific operating results.

Thank you, Fred. This was a strong quarter with many indicators of continued consistent growth. We're especially pleased with deposits. We reached a benchmark of $4 billion in deposits and grew non-interest-bearing deposits by 32%. This growth can be traced to our micro market strategies and our corporate and commercial teams continuing success and developing and strengthening customer relationships. Every conference call I give you a scorecard of the number of new commercial relationships that were added in the previous quarter. Now we are at 109 new commercial relationships since we started our commercial strategy in April of '03. We continued to do better than one per week, but I continue to tell you that that kind of growth is nonsustainable. Our retail network expanded by three to reach 53 branches. We will have opened between another 9 and 11 more by the end of the calendar year. Strategically located branches can add lift to our bottom line while adding greater convenience for existing customers.

We continue to be committed to growing our retail locations. With this branch expansion and quarter-over-quarter asset growth we are fulfilling our promise to be the neighborhood bank of choice in Florida, offering the highest level of personalized service, local decision-making and the financial muscle of a $9.3 billion institution. In other words, we are positioned in a best of both worlds. Florida's strong real estate market contributed to an increase in residential mortgage loan originations. For the quarter residential loan originations were 884 million, a 59% increase over the same quarter last year. Total deposits for the quarter were $4 billion, up from 3.4 billion at March 31, 2004. That is an increase of 18%. Core deposits, which include checking, savings and money market accounts rose 2% at 1.6 billion even in the face of highly competitive CD rates. The lead story here however is non-interest-bearing DDA, which again grew at 32% year-over-year. Anticipating continued increases in rates, BankUnited effectively converted some savings dollars and brought in substantial new dollars in longer-term time deposits.

We incurred some costs in the short run but we will be well-positioned as rates continue to rise. Continued growth in our core business areas and an emphasis on relationship based pricing of time deposits will have a positive affect on our overall profitability into the future. Commercial and commercial real estate balances increased by 149 million or 22% year-over-year. We also generated a $414 million increase in residential mortgage loan balances. We expect this increase in lending to continue as Florida's economy remains robust. Total loan production for the second quarter increased 38% from the same quarter last year to $1.1 billion. I will now turn the call over to CFO, Bert Lopez, who will discuss our financial indicators for the quarter.

Thank you, Ramiro. During the second quarter our net interest margin was once again a challenge for us as short-term interest rates increased. We experienced a lag in effect on the repricing of our monthly adjustable mortgage loans which contributed in part to a decrease in our margin from 181 basis points during the first quarter to 172 basis points this quarter. Naturally the trend of home buyers seeking lower rates have contributed to more applications for adjustable-rate mortgages and Florida home buyers are no different. Approximately 83% of BankUnited's loan portfolio in the second quarter consisted of adjustable-rate mortgages. Nearly half of our residential loan portfolios monthly adjustable ARMs tied to the MTA index. While we were impacted by the lagging affect of rising interest rates on these types of loans, this lag is beginning to diminish slightly.

For example, the index increased by 9, 11 and 13 basis points for each of the three months during the March quarter. This index will move by 15 and 18 basis points for the first two months of the June quarter. Therefore, we anticipate our assets will reprice higher than they have in the past few quarters which have placed us in a better position to combat anticipated increases in short-term interest rates. In addition, we experienced a higher-than-expected number of prepayments towards the end of the quarter. This increase in the level of prepayments when compared to the same quarter last year impacted our earnings by approximately $0.02 per share for this March quarter. Rising funding costs also impacted our margin. However, we anticipated increased interest rates and took the opportunity to lock in substantial time deposit dollars early in the cycle at slightly longer terms. These deposits may have cost more in the short run but given the current environment we believe we are well-positioned as these funds will take longer to reprice.

Continuing on the subject the deposits Ramiro mentioned we had solid growth in non interest-bearing deposits over last year. On a linked quarter basis even with the dramatic growth in deposits during the quarter of 9% our non-interest-bearing deposits grew at a rate of twice that or 18% for the quarter. Obviously continued increases in non-interest-bearing deposits bode well for the margin in the future. And while we continue to anticipate that a slowdown in short-term interest rate increases will have a positive affect on our margin going forward, the level of prepayments will continue to be an important factor on the ultimate level of our margin. In total non-interest income for the second quarter of 2005, we reached $7.8 million, a 53% increase over the same period in 2004. Non-interest income including gains from the sales of loans and investments in mortgage-backed securities of approximately $2.6 million.

As Fred mentioned earlier, this quarter we took advantage of extremely strong demand in the secondary market and sold some of our surplus loans on a service relief basis. We may continue this effort in the future if and when opportunities arise. As for fee income which includes loan fees and deposit fees, it was $2.9 million for the quarter, a 15% increase over the same time last year. Insurance and investment income for the quarter was $1.3 million, a 6% increase over the same quarter last year and a 30% increase over the preceding quarter. Our portfolio of residential loan service rather stood at 1.3 billion at March 31, 2005. We provided for amortization of $0.8 million of servicing rights, about level with the previous quarter and less than 1.1 million for the quarter ended March 31, 2004. In the area of expenses and efficiency ratios we're continuing to invest in infrastructure and personnel as we expand our branch network. During the second quarter as Ramiro mentioned we opened three branches and we set the wheels in motion to open between 9 and 11 branches over the next nine months. Our efficiency ratio was at 54.9% for the quarter, an increase from 52%, 52.9% for the same time last year. Non-interest expense for the quarter increased 4.4 million or 21% from the same quarter last year, and this reflects continued investments in infrastructure for both personnel and facilities to support our rapid growth and the continued application of resources required to comply with ongoing regulatory environment particularly Sarbanes-Oxley.

Asset quality continues to be a focus as we grow. Nonperforming assets as a percentage of total assets were 21 basis points, up slightly from 19 basis points for the prior quarter and down nicely from 33 basis points from the same quarter last year. The net annualized charge-off ratio remains at 5 basis points, the same as the previous quarter. Our allowance for loan losses as a percentage of total loans stood at 36 basis points at March 31, 2005 compared to 48 basis points the same time last year and 39 basis points at the end of our previous quarter. While our current level is low compared to the banking industry as a whole, we believe that the current allowance is prudent given our current loan portfolio of which more than 90% is secured by real estate, most of this is secured by residential property. And finally, BankUnited continues to maintain a strong capital position in excess of our regulatory requirements. Core and risk-based capital ratios were 7.6% and 15.6%, respectively. Our book value per common share stood at $16.45 for the quarter, up from $15.77 in the prior year. I will now turn the call back to Fred.

Overall we're pleased with our direction. Our management and associate team continues to focus every day on increasing deposits, strengthening corporate and commercial relationships and meeting customer's financial needs. The rising interest rate environment is a challenge. We feel we are positioning ourselves for the future, but we recognize the difficulties in terms of our margin, and we are working on it every day. We are now ready for questions. Moderator, please open up the call for questions.

(OPERATOR INSTRUCTIONS) Jed Gore (ph) with SuNOVA Capital.

Good afternoon, gentlemen. Thank you. Just a quick question. I think it was last quarter that you discussed the use of modification programs to avoid prepayments, and I was wondering whether there was -- whether you had any success with that this quarter and to what extent prepays affected the margin exactly versus last quarter.

We had a substantial effect on our margin from the prepaids, and frankly we thought we were making some progress, and then we learned that we've got a lot more of in a sense to learn. As we entered into March we felt we had some things under control, and that the trend was favorable for us. As circumstances turned out particularly to the latter part of March we were frankly somewhat surprised in a sense from what we got hit in terms of a lot of prepays.

Okay, so basically it will take time for you to remix your loan book to shield yourself from future prepayment. Is that a fair characterization? (multiple speakers) not going to happen overnight?

I don't think it is something we can control overnight. In terms of how we originate mortgages today, most of the MTAs that we originate or certainly a very large portion of them have prepayment penalties in them. Some of the older mortgages that we have don't as readily have prepayment penalties in them, but frankly what we've determined is we need to do a lot more analysis, and that is going under way right now in our financial areas and mortgage areas as to exactly what it is and where are we getting our prepays from. And some of the initial results indicate that we ended up with some prepays from some areas unexpected toward the end of the month. So all of that we are attempting to address but it is not an overnight fix, but it is something we are going to work very hard on and keep plugging away at. We thought we had it somewhat in hand, and appeared not to toward the end of the quarter.

And while Fred said it is not an overnight fix, let me just tell you that it's not something that we have a whole lot of time to fix and I can tell you that the attitude here is kind of an all hands on deck with a tremendous sense of urgency to go ahead and get this thing resolved.

Thank you very much.

Barry McCarver with Stephens, Inc.

Good afternoon, everyone. Just following on that last question refresh my memory is this mainly some pretty significant competitive pressure that that is causing these refinancings? And if so, can you give us an idea of what that really looks like?

I can't really tell you if it is necessarily competitive. I don't really feel per se it is. There is certainly a lot of competition always in our markets, particularly in Florida. But really what we are experiencing I think is more relating to certain moves in a market relating to interest rates and how they have affected certain segments of our portfolio. But as I said our financial area is doing a lot of analysis because in a sense from the December quarter to this quarter, we had an impression during our first several months of the current quarter that we pretty well had in mind where things were going, and what was happening. And we had made some adjustments and so forth for originations going forward. We felt pretty well positioned, and then we got quite a few prepays in the March period, and it takes a lot more analysis. We are really deep drilling this to understand it.

The common situation out there would be that MTAs prepay more in this market, but in fact while they certainly prepay at a faster rate in this market, we ended up having prepays from other parts of our portfolio that really affected us unexpectedly. So we've got a lot of work to do in getting a better handle on this, doing a better marketing job in terms of people who are looking to refinance their mortgages. This is a major project internally for us, but it is one as Ramiro referred to as having a greater urgency because clearly the path we had picked for this quarter wasn't the path that was going to completely take care of this issue, and we've got to make sure we take care of it.

Fair enough. Secondly, certainly very strong loan production in and of itself relative to past quarters and last year. Can you give us an idea of how much of that is strong loan demand and how much of it is -- you've added some new producers -- I think particularly on the commercial side, you just got more people out there making loans. Is that correct?

I would say both. We've got some more commercial loan officers but the pipelines continue to be strong. I would say a combination of both. Continuing to expand the relationships that we now have has been an important focus and new relationships, as well.

And definitely the consolidation that occurred again in the markets has brought even more relationships over to us. We more and more are the lender of choice, particularly in the South Florida market because a number of consolidations have occurred. Our name is becoming more pronounced in the area, and we just recently had a very major customer, for example, of one of the major entities that entered in a merger situation who contacted us and indicated that they wanted to bring most of their relationships over to us. And I think that is an ongoing concept of if you want to be able to talk to your bankers and get a decision on a local basis that we are the place to come to.

Very good. And last question, more housekeeping. I noticed that compensation and benefits is up pretty sharply in the quarter about -- it looks like 1.6 million. What is driving that number?

A big chunk of that number was just the effect of going from a December quarter to a March quarter when you get the FICA and the unemployment tax, that was about $408,000 of the $1.6 million. A couple of other items through there, is just that with the loan production incentives went up. And then the last piece of that is just as we continue to grow and add branches we are adding folks and adding infrastructure.

So we shouldn't expect increases at least of that magnitude going forward necessarily?

The expenses I can tell you are being watched very, very, very carefully and while it's not inexpensive to open up our targeted number of new offices for the balance of this year, I don't think you're going to see expense growth of great magnitude going forward.

Okay, perfect. Thanks, guys.

Jennifer Thompson with Oppenheimer will have our next question.

Good afternoon. I also was looking at the expense numbers and it -- was there anything unusual going on in the other expense line? Was that mostly related to some branch opening costs as well? It seemed like a pretty big jump in addition to the personnel costs?

Jennifer, there is one other thing in there. One of the things we do when we originate home equity loans as does most of the competition, we end up paying for the closing costs. That increasing production is reflected by an increase in closing costs and that is what you see coming down on that line down below. Eventually that is all captured in the FASB 91 number, and then credited back through that number, but what you did see this past quarter was an increase in loan closing fees. And that was sitting in the other category.

Okay. So is that something unusual, or in this environment would you expect similar levels going forward?

If you're thinking about a run rate I think we will see similar levels, probably a little bit lower than what you see there. Not so much because of production but more because of efficiencies and then we will capture another piece of that, or a greater piece of that I should stay up in the FASB, which is netted against salaries.

Okay. Thanks. And just thinking about it, then, in terms of an efficiency ratio, I know you had said in the past as you invest in the business that the efficiency ratio would be increasing. How should we think about it going forward if there was this big jump because of FICA scores etc. for the rest of the year, would you expect a generally stable efficiency ratio or maybe some more pressure because of the branch openings?

I would think it would be generally stable, kind of where it is at now.

Okay.

I think when you ask that question you are in a sense asking it from the expense side, and Ramiro is really making your reference more to the expense leveling, not to the efficiency ratio because efficiency ratio comes from two sides. One is the expense, the other is the revenues. Clearly in terms of where we would have been on a budgeted basis for which I obviously can't tell you what that would have been, but if you had a concept of where we wanted to be with our mortgage situated, the margin situation terming our adjustable-rate mortgages where you have that tremendous lag that is going on and you're having rates -- I think some people have referred to the idea that we would start getting some catch-up and in a sense that does happen because as the index drops off, the older numbers as a moving index and then picks up newer numbers that are at the higher range the margin pickup is there. So we have some revenue potential as we go forward. Clearly if the Fed stopped for once then we'd have a major catch-up, and that's a lot of revenue. That is part of it. Part of it is getting control of these prepaids, because the prepays definitely took $0.02 off. If you put those $0.02 back on in earnings that would have had a major effect on our efficiency ratio. So it's a revenue side, as well. And obviously we are working on both.

But we are going to continue to pay special, very special attention to the expense side and make sure that as we grow that we still have the control over expenses so that the growth itself doesn't kind of have a multiplier effect in terms of expenses. At the same time we need to get more revenues in here, and we've definitely been hurt on the margin side. But there are other ways of also producing revenue and we are going to keep working at it.

Okay, great. The margin, can you give a sense of what that trend was through the quarter? Was there a developing trend? Did the margin end close to what you had on average? What was going on there?

We don't normally do that, but basically you can interpret it from what I said, which was that we had a significant amount of additional prepays at a higher level in the March month. And going forward I can't really give you a projection on how prepays will be for this quarter other than to say that we have treated it as a matter of urgency to get what we would call a better program in, because we need to have a program much more attuned to our portfolio. We thought we had something along that way. We had some improvements even in that area, but they were way below what we need to do to -- I would call it controlled prepayments but effect prepayments, and that is something we're going to work very hard on. And that really is, I think in a sense going forward the number one thing in terms of our margin that if we can get some adjustments in that area we can ultimately get some positive benefit pending either a pause by the Fed or a continuing catch-up in the index.

And I think the index is now Bert you will correct me, but I think the next month it is supposed to be 15 basis points coming up, and the month after 15 basis points or 18 basis points going up. The index itself now is moving into a trend of upward increases in adjustments. So this possible, there may be some catch-up ultimately along those lines if you project that going forward. But we've got a lot of things to work on. I should mention it is not as major but it does have an effect to our margin. A lot of our production when you go into this particular quarter just for everybody to realize in somewhat of a historical basis, not always 100% this way, but very typically a lot of times in January you see a certain amount of slowdown; it picks up in February and then a lot of your closings come into March. A lot of our production also was put onto the books in March, and when those have the teaser rates in that period, they also clearly have an effect on your margin for that period because clearly they actually do a negative against your margin for the first month.

Great. Thanks very much.

Laurie Hunsicker with SBR.

Good afternoon. Some of my questions have been hit, but I just wondered just before we get off expenses totally if you could maybe quantify in terms of your previously announced target goal of 50% on efficiency? And I appreciate, Fred, your comments in terms of the prepay and obviously it is the revenue side now too. But I guess given the picture that you're seeing now, what would you assume is kind of your targeted goal for the rest of this year as we look at that percentage?

Well, in a way our targets aren't any different than they were and that is that our ultimate target is to be somewhere around 50. Whether I can get that for the whole year now that I've had a period that is 54, that is not the easiest thing to do. But we're going to keep working hard with the concept that you see future quarters here and a better light in terms of the efficiency ratio. But I don't want to get around the fact that we are expanding. We feel we are taking care of -- taking a certain concept of opportunity here in the market to expand when others are consolidating in the market in terms of mergers. And there is no question there are costs involved with that. That is occurring. We believe that we are building our overall total franchise. There is no question that we increased our deposits this last quarter.

Now I guess if I had had the foresight to realize the pickup and prepays, perhaps I would have change that. I am not sure I really would have changed that in terms of our pickup and deposits because I think it is important for us in the future to continue to attract customers and build our customer base. And so I guess you are in the range of that great philosophical discussion that everybody ultimately enters into. I saw a discussion the other day in the Financial Times, is every quarter drive the company or is it ultimately where w want to be long run? And by long run these days long run does not stretch out too far anyway. But the reality is that we have a certain concept of where we want to be in a year and a half, two years from now, and we want to keep on that path. And barring some real adverse consequences of the market some things not anticipated by any of us right now in terms of a countries' economy, we are in a very unique position to continue our expansion. Both not only in the South Florida area but up the East Coast and to some degree the West Coast of Florida; the markets cry out in a sense for what is effectively a Florida-based institution really being in these locations, and we expect to be there. The does have a cost. We expected ultimately long run that our revenues will more than cover those costs. But we can't always speak for some things not totally anticipated.

Sorry, also just to add something -- Fred is absolutely right, but I just wanted to add something else to that. Remember that in the last conference call we talked about this profitability enhancement project that Bert Lopez our CFO is heading. We spent a great deal of time during this last quarter coming up with different ideas and different criteria, and some of the benefits from that work will start rolling in in this coming quarter.

Okay, and I guess just as you look at expenses too it seems in professional fees there was a pretty big linked quarter jump. Was there anything nonrecurring there or is that line item just going to continue to run at a higher level?

That had increased partially because of some Sarbanes-Oxley costs that were in there.

Will that back down a little bit?

No, that really. It'll probably run the same run rate through the rest of the year, and that is because our compliance with 404 occurs at the end of this September, the way our financial year ended up where our first compliance comes at the end of September '05. So we're going to incur those costs between now and then. We anticipate those costs will drop by about 20% after we get past our year end, but they should run at about that run rate going forward.

Okay, and I guess should we look at expenses initially at the last quarter you probably opened 10 to 15 branches for calendar '05 and now it is looking -- I am just adding up, you opened 3, (indiscernible) 9 to 11 so 12 to 14, so you are at the higher end, so that we will probably going to have more expenses again as you said related to the branches that is going to be on the higher end. Is that a fair statement?

Yes, we will continue to have those offices opening; they will add expenses. I mean in a sense that is pretty well in our budgeting. If anything, a few of those offices just because of construction situations and permitting particularly in some areas that are in the hurricane were in the hurricane zone from this last year, there's a lot of delayed permitting so on, so a few of those may run a little later than that. They would have been added on some time certainly within a year from now, I think most of those offices will be open.

And Fred, what are your plans in terms of number that you will open in 2006?

I don't think I can give you a definitive statement of that right now. I don't expect it to be as fast as we will end up doing this year. But we, again, will look at the opportunities and see where the situations are. I sort of remind you that ultimately the gap in terms of our mortgage ruling (ph) of the portfolio is, and Bert you'll correct me -- I think it is about 40 basis points behind right now against the index.

Yes.

So on a margin basis if we regain back even two-thirds of that at some pause somewhere down the road if the Fed I assume will someday pause, that is a lot of dollars in income. So what we've tried to do is say we have a track for where we want to be and to fill in to particular locations in the market. And essentially we feel that the Palm Beach area north into markets that we believe deserve competition from us, going up the coast on the East Coast, and then likewise there are some areas we believe on the West Coast are places we want to be. We targeted these places, but the generality is that we probably would not be looking to expand them as quickly as we will end up doing this year.

Okay, and maybe you can just remind us of your stance in terms of looking to make an acquisition and maybe how big you would potentially go.

We have looked at acquisitions periodically, and one of the reasons that we are doing so much de novo expansion is because most of the acquisitions that have been presented to us with a few exceptions, have been what I would call very expensive. And yet nevertheless in terms of I guess a value of a Florida franchise on several occasions, others have paid what we consider was an expensive figure. So I don't really have within us the concept that in fact we're going to somehow expand by acquisition. That doesn't mean we won't. When the right deal comes through, and essentially in this kind of market given the kind of dollars that people are asking for franchises probably my definition of that is it would have to be a franchise that maybe was priced at where it was but which had a certain potential because of our abilities to make a great deal more of it. Otherwise our major emphasis is on de novo expansion.

Okay, and as we look at your deposit mix it certainly did have a big jump in terms of shift change linked quarter; your CDs grew from 55 to 59%, and I think Bert you had mentioned you locked in CDs. I wondered if you guys could comment in terms of the duration of the CDs that you locked in what those were costing. (multiple speakers) your cost of funds and maybe if you can just give us maybe a little color there so that we could --.

Yes, we stretch those out and I don't know if Bert has the exact number but we stretched those out beyond a year. I think they were about fifteen to eighteen month area on the average is where we did that. And we did it before a large piece of it, we did before certain increases and Fed rates. And so we seemed to hit the market just right. So we are hopeful that it will be very good for us down the road here.

Do you know roughly what those were averaging?

They were right about LIBOR, right on the LIBOR curve or LIBOR minus 5. And specific dollar amounts they were in the 3.25 to 3.50 range percentage points. So what we are thinking and what has occurred so far, as Fred mentioned, as those roll down the curve they are looking much better than the current forward curve is anticipating rates will be. So that is where we think we will get some insurance if you will against some increases in rates going forward.

Okay, great. And I wondered if you could just comment -- at least I heard dividend, which is great. I think that will probably expand your shareholder base just a little since I was looking for the dividend. But the share buyback -- even though it was small, just reading through your Q here it looks like you repurchased 11,500 shares at $29, and essentially still leaves you one million to go. Can we assume now that the stock is substantially lower than 29, that you're going to be more aggressive?

I think that would be very possible, but if that were the case all I've done is made my announcement, and if we ended up buying stock at periodically I guess your trading side of the Company would know, not your (technical difficulty) side until we put it back in the press release.

That's true. Thank you very much.

John Pandlte with Raymond James.

First question if I did the math right, $0.02 in terms of the impact on prepayments, that's about 4 basis points on the margin. Is that --

Yes, that's the number.

Okay. That is the impact on a sequential basis of the higher prepayments?

That is comparing this quarter to same quarter last year.

Okay, all right. You know as you look at the prepayments can you expand a little more color on what residential categories like you saw that? It sounded like you were prepared for the MTA prepayments, but you got deemed somewhere else.

Yes, but until I get more analysis I hesitate to say. I just know that a lot of it wasn't MTA. We had some other categories come in that were not. But I need some final more detailed information on that before we do it. I don't know if we will be in position to release it. I'm not sure what I want to do with that other than to let you know -- I just know people always start talking about the MTA and while that is always a factor, that was less of a factor for us in terms of the anticipated. It still represented a piece of it. I should let you know we for a while now -- and this dates back a number of quarters, we have had prepayment penalties set in our MTAs.

And we, in fact, have increased those levels of prepayment penalty situations even more so over the last couple quarters. So that generally on a historical basis when you do that that moderates the levels of prepayments and that type of product and adjustable-rate products. But there is no question that we have other areas of portfolio that we need to look at, and which as I said were unanticipated. And but I can't give you a real specifics on that, I'm not sure how much detail we want to do on a public basis.

Okay.

There are competitive reasons for that, other people could use that information.

Yes, understood. Looking at the margin going forward let's set aside the prepayment risk issue for a moment. If we look at the accelerated repricing of the MTA index, would you expect the margin to stabilize or be up going forward? And then layering back in the prepayment risk, is that the ultimate outlook dependent on your success to do a better job there?

That pretty well says it, yes. There is every evidence that the index will be benefiting us going forward in the sense that it will start narrowing against the Fed increases. But that is a big catch-up because we have a pretty large gap right now in that. So that is a thing that will happen gradually, and you know as we mentioned before if the Fed pauses once that has a very major impact for us. And of course none of us know if and when at all the Fed will pause -- I suppose I could have rates go up into the atmosphere somewhere, but my guess the bets are now that economy is not doing quite as well and maybe they're even thinking about pausing, maybe not, maybe they'll keep going. I've seen predictions everywhere from 3.25 to 4.50. So who knows.

One last question. Bert, you deleveraged the balance sheet a good bit this quarter. Securities down from 29% to call it 25.5%. Can you give us an outlook for how you're going to manage the securities portfolio going forward? Should we see it flat, decline on an absolute basis?

We've been doing in the last couple of quarters is with this loan production we've been concentrated on putting on the primary assets and not focusing on the securities portfolio. Yes you are right it has come down in the balances and I think you will continue to see that trend. Except for if we were to do some type of securitization of our own loans, and obviously the portion of which we don't sell would be placed back in that portfolio. So a decrease in except for maybe some internal securitizations, if those occur.

Yes, but do you think the level will decrease at the same pace we saw this quarter because frankly that hurt you from an earnings standpoint.

I think you will see that. We have in essence just allowed that portfolio to run down. Again with the ability to get higher margins on the loans reproduced versus securities. Securities are trading pretty tightly right now. So yes, I think you will continue to see that run rate coming down.

You would have thought the margin would have been up, though, if you delevered in securities, so.

But the initial impact is to bring your margin down. The long-term impact is to ultimately, down the road, help your margin. But initially the impact because you're replacing the -- what you're doing is you are getting a certain amount of prepayment and if that accelerates to some degree just like the rest of the portfolio accelerated, so it did have an adverse impact on the margin. But likewise what we replaced it with doesn't initially go to a higher yield as that starts out as a teaser yield. So eventually that obviously becomes a positive.

Okay. Thank you.

Erwin Katz with Raymond James.

I listened to all the questions and you pretty much hit on everything I had. My primary point was to get a sense of with the rates kind of ticking up do you see anything going on with the real estate values in your primary markets? And what impact that might have on your loan situation as you go forward?

We carefully monitor that, and there is no question particularly on what we call the construction or the condominium side. We try to look carefully at that. There is quite a bit of -- you know, Florida is in a boom, and it is sort of an incredible boom. So we have a risk department and actually even our loan officers particularly head of our commercial real estate area is very, very attuned to that whole concept. We have all been through cycles before. Mayor of Miami had a meeting the other day was talking about the 66,000 -- just in the city of Miami and for not everybody knows the city of Miami is only a small part of Miami Dade County, and in that one area alone that one city that has 66,000 permits for units being processed right now, and that doesn't include homes and town homes. So there is a great deal going on. A lot of people believe a lot of that is presold, but nevertheless we are cognizant that with all this going on that we've got to be careful about where we make our loans and so on. And we've been working on that. We keep vigilant on it. And history says that generally we've done a good job in the past, but what you do in the past doesn't mean you're going to do it in the future unless you keep as vigilant now. So we work that pretty hard.

Thank you. And you did address the branches. I remember you said you were talking between now and the end of the year of adding 9 to 11 additional branches.

The end of the calendar year.

(multiple speakers) that is calendar year, not the fiscal year. (multiple speakers) 9 months. And I think I heard Fred talk about markets other than where you are located also. So it is possible it is not just fill in markets, it is also moving into some new opportunities?

Absolutely. We think that is important for a number of reasons. One is long-term, it will help our cost of funds too as it puts us into markets where there is less competition and allows us to make an immediate impact in those markets. And we are talking about areas like Martin County, Indian River County, so on up the East Coast. These are occupied mostly right now by a couple institutions I think some of you all follow, and we feel that they will be happy to have some competition from us. And then likewise on the West Coast we believe we will be going up north of Naples. We have some offices planned in those locations, and again we feel they are ripe for our being there and being involved in those markets.

Thanks a lot, guys. And I look forward to talking to you again soon.

Donald Geist, a private investor.

This is a two-part question, and you kind of touched on one or two of those but let me ask it anyway. How does your business growth rate compare to Florida's overall economic and population growth?

Well I don't know about exactly our growth rate, per se, but I know you are out of Florida area, and you have been through here before.

I did spend some time in Brevard County and I'm just absolutely astonished at what is going on up there, just incredible --.

Absolutely, and that is sort of the tail end of where we are moving upward in that area and some of the locations we are looking at. But I can tell you that the growth is incredible. I was standing the other day on one side of the causeway in Miami Beach in an office building, happened to be with my son and he says look out that window, do you see what I see? How many cranes do you see? Just looking across that causeway a major size cranes, and within a I guess would be a mile and a half, maybe 2-mile distance there were 15 of them. There are pockets like that all up and down the East and the West Coast of Florida right now, and generally most lenders have pretty well kept to the concept that before you put the building up, you've got to have substantial amount of presales to cover the amount of the loan. And we kept to that concept; pretty well the market has kept to that concept. And it's incredible how much is going on. That and people worry about specs, and we try to go with what we think the builders generally don't have the specs and don't encourage them, but it is just really incredible.

Ramiro has an article he was reading us this morning, and you all can get this -- it is out of the Miami Herald. It was from Saturday's edition and it says "South Florida leads the nation in job creation, excuse me -- it's one of the strongest in the country and it is the strongest in Florida" and the numbers are substantial. It is incredible what is going on. They gave an example for anybody who is interested in these kind of statistics Miami Fort Lauderdale metropolitan statistical area includes Palm Beach County, saw payrolls rise by 62,900 jobs in the last year, a growth rate of 2.7%. That is pretty amazing growth rate when it comes to the job market. So in any event, you know, we are growing. We've had a lot of opportunity. There is certainly other people who want to be in the state; for the most part they are very large financial institutions that have a different mass-market approach. And so we think we have an extraordinary opportunity.

I'll infer from your response that you feel that you're going to stay in synch with the growth rate; you're not getting well ahead of it.

Donald, earlier in the call I mentioned that our assets had grown by 21% year-over-year, and that is pretty good growth. But I will tell you that credit quality is something that we look at very, very, very hard. And like I keep mentioning, our credit quality numbers are the governors that drive our loan growth. And we will not grow at the expense of credit quality. And I can assure you of that.

And my second question, which plays on to the first is with this aggressive growth history -- and I have asked this before and I keep asking it -- how is this being funded? How much from earnings, where does this put you in looking at new share issues etc. etc.?

Well, we had I think well-placed convertible that we did last year that I think most people would say was a heck of a deal for us at this stage, and that is funded a lot of growth along with a little bit of trust prefers we raised to the extent that we would go in the equity markets down the road. I can't predict when that might be, if we might do it, and I, frankly, couldn't even predict the size of doing it. A lot depends on what our real needs are as we do go down the road; how we are generating our profits and what we believe would be the continued growth opportunity. But at the moment that is not directly on the drawing board.

You don't have any new share issues sitting on the shelf somewhere ready to be announced here shortly?

No, not in an immediate fashion. But I always will say -- I mean I have always taken the philosophy depending on the times and circumstances that we do move to create capital when we think it is appropriate. When we did the convertible we were in a sense well ahead of when we needed the funds.

But the price was right.

But the price was right, right.

Thanks, guys. Good job, and I continue to watch with great interest.

Jefferson Harralson with KBW.

If I can just follow-up one more question on the refinancing area. Do you know what percentage of your refinancings came in loans that had a prepayment penalty attached to them?

You're talking about prepayments. That is part of the digging down. I will give you an offhand statement. There were some that had prepayments, and that we collected prepayment penalties on. But they were relatively small against the totality of the prepayments. But I put a big caveat in that that we need to do a lot more detail, and that is what the finance department is working on to get a better feel for that. We've had some of our investment bankers also doing some stuff with what they call the, we always put this in quotes, in a sense the tapes. I am not sure the tapes anymore, but in any event they are also going through some of that. And doing some advice, as well and trying to discern exactly what are the complete characteristics that we need to be looking for and understanding better our portfolio so that we could head off some of the prepays. As I said to you we thought we had it in hand but we definitely got hit pretty hard in March.

Maybe to answer your question from a different angle. If you look at our prepayment fees, we collected this past quarter about $751,000 worth of prepayment fees. Same quarter last year we were at 330,000. So the prepaid fees have gone up substantially. You may have to weigh that to get back to your question.

Okay, and how much is a typical prepayment fee as a percentage of the loans outstanding?

It is typically six months worth of interest, of the annual interest costs. So it runs about half of the interest costs at the time of prepayment. So 2.5, 3 percent.

Okay.

Depending on where the interest rate is.

Okay. Switch topics just briefly on, you sold some loans this quarter servicing relief. I think that might be one of the first times you sold loans in servicing relief, (ph) if so how much and what type of loans are you selling and what type of gains are you seeing, are you receiving there?

I'd rather not get exactly into the gains, and I don't know if Bert has anything to add to this, but basically we sold a fairly large amount -- for us a large amount -- it's not really for most people it wouldn't seem to be very large at all, but the largest thing we did was -- I think it was about 130 million, 125 million of MTAs. I don't want to say what we got for it other than to tell you that the price we think was top of the market kind of price, and it is one of the things that encourage us to do it. Because just like anything else we talk about that our convertible that we have the price right when we went and did it, well right now there is an extraordinary demand for adjustable-rate products of this nature in the market. And as a result, we felt it was appropriate to sell some.

We ended up reducing more than we in a sense had set up for our growth concept for this quarter. So it was extremely attractive. And it is not our object to build a servicing portfolio. So except in certain cases relating to our, somebody has walked in and we do a 30-year or a 15-year mortgage that goes over to Fannie Mae, Freddie Mac where we may have some capitalization from that. We generally do not look to grow our servicing portfolio other than the portfolio that relates to that which we hold directly for our customers. But if we sell a loan we are more likely to sell it off completely.

Do you think that with capital being where it is and the origination levels being where they are that you're more likely to sell more and more loans over time?

It is possible that to the extent we go beyond what we need for our portfolio growth quarter-to-quarter and depending on the market pricing of those we may sell some more loans. As I said, there is an extraordinary demand for MTAs and we have a -- of our production that brews (ph) above 80%, or somewhere in the 80 plus percent area of our production that are adjustables.

Yes.

We don't -- we mainly are a portfolio producer, but we have a lot of demand right now, and as a result it is very possible we end up selling some additional in the next several quarters or so. I don't know.

Okay. Thanks a lot.

James Ackor with RBC Capital Markets.

Good afternoon. I have a few questions for you, if I could please. First of all on reserves, Fred, I know you guys are well collateralized with the real estate and have a terrific track record with regard to charge-offs. But reserves as a percentage of total loans has been bleeding pretty consistently for the last six or seven quarters and now stands at 37 basis points if my model is correct. Where do you kind of draw the line in the sand and say that regardless of performance of the portfolio we need to maintain a certain level as it pertains to the average reserves against the loan balance?

Three letters; it's called the SEC.

Okay.

I mean, I --.

The SEC doesn't appear to be doing the same things for many other institutions.

Most of them historically already have larger reserves, and in fact, if anything, some of them have been put in the position of having to lower their reserves. But their percentage is still higher based on their historical record. And it is an accounting issue, and Bert probably should jump into this. He'll describe it better than I would. But essentially there's room here and there for a few hundred thousand here, a hundred thousand there. But accountants today when they come in they beat the heck out of you.

It's not like the old days. The old days the regulator came in, and everybody put in a point plus if they could in their reserve. Now what happens and has happened really the last ten years to some degree but certainly over the last five years in a very strange way, if you don't have losses -- I mean, in order for me to put more aside -- Bert, you can go --.

You're kind of a victim of your own success. The SEC doesn't want any type of anticipatory reserves being placed into the loan loss reserves. So we have to look back at our experience. Our experience has been very good. We've been running about 5 basis points in annualize charge-offs for the last few quarters. So when you look at the history you combine that with charge-offs -- or coverage of our nonperformers, which is up over 130% and has been running at that or above for the last couple quarters, you combine that with the composition of our portfolio, which is over 90% secured by real estate, we don't have too much in the way of arguments to really stand on to say we need to increase it by much more than we have.

We are still running about 150% of charge-offs. We run anywhere from 150% to 200% of charge-offs, and when you put everything together they come back and say well, you're doing too good of a job. You can't put too much more reserves than you already have. And another overriding factor is, certainly the real estate, but if you notice the composition in terms of volumes has been changed in the last couple of quarters, and that's where you see the reserve coming down as a percentage in terms of basis points. What we've been adding is a lot of residential loans, less risky loans, and that is what is driving the number down.

The other thing to understand is just an example, even though we had slightly higher delinquencies for this period, already we are in the position that a substantial portion of those have already reinstated, and it's not unusual for an April period -- excuse me -- for pre-April 15th period it has always been traditional in the home area that you can have some pickups and delinquencies if people anticipate having to pay taxes. So I -- it is hard to find a basis under the accounting rules to do much differently than what we're doing.

Okay. Fair enough. One more quick follow-up, if I could, or actually two. One housekeeping item. I think, Bert, you gave us in the last conference call average deposit costs for the quarter. I was wondering if you would be able to do that again.

Average deposit costs for the quarter? Sure, just one second. For the quarter we were at 231, 231 basis points.

Okay, and the last question -- I know that this topic is taking a fair amount of the time for the call, but in terms of the prepayment speeds picking up and detracting from the quarter by $0.02, I guess I'm assuming that in order for you guys to be able to calculate something like that, that would imply that there has to be some sort of premium amortization based on some purchased loans prepaying faster than you thought.

It's not purchased loans. It is just what happens. We have described this before; it's one of my greatest frustrations because when people look at a margin number the way that FASB requires you to record your cost of originating a loan, they put that into a figure which is then amortized over the life of the loan and is treated as a interest rate adjustment or a yield adjustment. Now instead of going back where that FASB was actually recorded, which was in a deduction or a reduction call it of expense number, instead of them having you go back and reversing it in that category, they then have you take it since they have now applied it against your yield, they have you apply it against the yield directly, reducing your interest income. And it is really deducted from your interest income.

So when it gets prepaid early the cost that originally went into an expense category now goes into an interest rate category and reduces your interest earned. That is the effect of the prepays. So when those prepays lift up in a higher fashion than you would otherwise anticipate for us or against what we ran last year, what we're basically saying is the difference in the amount of the prepayment penalty -- excuse me prepayment costs that are now taken against interest rates earned or interest earned, that has increased to the extent that it costs us $0.02 against last year's quarter. That is a lot. (multiple speakers) at one time, and as I said a great deal of that ended up happening in the last month of the quarter.

Okay. Thank you for the explanation. I appreciate it.

(OPERATOR INSTRUCTIONS) Gary Tenner with SunTrust Robinson Humphrey.

Bert, I was just hoping you could break out for me the average loan yield and security yield in the quarter and if you have it handy, also for the December quarter.

We have -- we look at them both combined since most of our securities are MBS's. Let me see if I can break these out quickly. The loan yields on all mortgage loans were 475 for this quarter versus 467 last quarter. So we got a bump up of 8 basis points. The MBS's were 383 up from 373. So we got a bump up of 10 basis points.

Okay, and then your nonmortgage loans would be somewhat higher than that I assume?

Non -- well (indiscernible) the mortgage loans that includes the commercial real estates, obviously secured by mortgages, but you have a nonmortgage loans are typically those that are tied to prime so they are slightly higher.

Okay, great. Thank you. All my other questions have been answered.

Bert do you recall offhand what the DA (ph) did the last three months?

Yes.

It may be helpful for you if we were giving you an idea of what the MTA has actually done in the last three months.

For the three months in the quarter -- the last quarter we finished -- we were up 9 basis points for January, 11 for February and 13 for March. That's what I mentioned earlier -- I'm sorry.

December, you're talking about.

Yes, -- no, no these are March. So it is 9, 11 and 13 for each of the months of this past quarter and that's what I mentioned earlier, we're anticipating 15 basis point increases for April, and then May looks like we got an 18 basis point increase in the index with the MTAs.

I don't know if that helps everyone get a more of a view in terms of what the MTA index is doing.

Al Savastano with Janney Montgomery Scott.

Good afternoon, guys. A quick question on deposit costs. Can you describe the market for me and how competitive it is and how quickly you think you have to respond to competitors?

I would say it's pretty competitive. Is it the most competitive I've seen? No. Are there a couple of people out there with some high rates? There is one institution that always runs high rates. They've done it for years so that's no different. Basically what you did have is I think most institutions probably experienced a move toward CDs and customers wanting CDs as they saw rates moving and thought they could get higher rates on a longer-term. As we mentioned we tried to anticipate that earlier in the quarter. For example, SunTrust which is not normally a CD entity and they've been running a very aggressive campaign over the last several weeks, if not the month.

But you know, I would call this a moderately competitive situation compared to some other times I've seen. There is certainly a desire by some of the bigger entities to try to recapture some market, and they will come out with some campaigns. But the consolidation that's going on and disruptions in the market have continued to help us out. So we've been able to grow notwithstanding that we've been in the higher quarter of payors, but we are not like the highest at all times. Here and there once in awhile we've run a one or two-day special campaign. But generally we haven't been in that category, and so it is good, strong competition, but it is not extraordinary. I've seen much worse. But of course a lot of the S&Ls that used to exist in the area don't exist anymore so I'm not sure if we will ever see the days of a lot worse again. I just don't know.

Okay, great. Give me a little color on how low you let your capital go? Is there a certain number you have in mind or can you give me your thoughts on how you manage that.

Well, I'm not sure which category you are talking about. On a tangible capital basis we think we're okay right now, and with respect to the whole company as a whole from a basis of what the bank has the bank has plenty of capital (indiscernible) presently.

We're at 7.6% in the bank.

Equity assets, can you go below 5%?

Could we go below 5%? Sure, there are plenty of people who have been below 5% -- I am not sure if that answers your question or not.

And the other thing you need to take into consideration is the composition of the assets that capital is supporting. Again 90% secured by real estate is not a very high risk asset base.

Okay. You had a little pickup in the MTAs this quarter. Can you, anything going on there?

No. As a matter-of-fact our MTAs picked up about $3 million for the quarter. Fred had touched on it but a little bit more than half of that is already been reinstated. So it was more of a temporary timing issue. So I don't think there's any long-term effects there.

Al in both cases they were residential loans, and half of our problem is behind us, and the other half I was told that by Thursday will be behind us.

Okay, so delinquencies are okay?

Yes.

We haven't had anything -- first of all as I mentioned, generally people use in obscene -- if anything I would be surprised if we had not seen more. And we didn't see as much but we did have a couple of larger residential loans that went delinquent during the period, and some of those have already reinstated. Nothing major that at the moment we don't have anything on the horizon that we know of.

Two more questions here, I believe you said your MTA balances were 50% of loans, is that correct?

Just about, they are at $2.6 billion at the end of March.

And what index is that off of the one month or the three months?

One month.

One month, and typical spreads are? 250, 275?

Higher than that.

3?

I don't want to say exactly, but higher.

(multiple speakers) am I in the ballpark?

We haven't calculated in the premium which gets against that, but generally they are not -- the MTAs that we have are not in the vicinity of the typical one-year, adjustable-rate mortgages 275 over. They are in the 350 a share area, 325, 375 generally depending on what the circumstances are. You know, as we tried to say, long run given a pause by the Fed and a catchup we could be doing pretty well.

I understand. And just the last question on prepayments, is there -- do you have any sense of the prepayments you had coming from your loan portfolio as far as your customer churn?

I'm not sure what you mean on the --.

You have a customer has a loan with you and he refinances with you. Instead of a modification, (multiple speakers)

There is a small piece that is them, and there's always a piece that is that and I don't have the specifics, that is why we're doing a lot more detailed analysis because we originally centered in on a particular areas of the portfolio, which we thought were our original problem but we've now learned that that isn't. If anything that's sort of become more of in a sense a constant problem where we have some other areas that popped up. But it is out of our portfolio, and there is a lot of competition out in the market. I myself in my house I think every other day I get a letter from WAMU that wants to refinance the mortgage that I had twenty years ago. Which my wife won't let me prepay. So I don't know. It is all across the board. There are a lot of different factors but I would say the ultimate thing that's going on is that the yield curves flatten a little bit and that has a tendency to create prepays, but interestingly enough, it wasn't as if the MTAs jumped a lot. They didn't. So that actually bodes well for us down the road.

Thank you.

Brian Hagler (ph) from Kennedy Capital Management.

My question has actually been answered. Thanks.

Jed Gore with SuNOVA Capital.

Thanks. Actually my questions have also been answered and I guess I will follow-up with Bert off-line, as well. Thank you.

And there are no further questions at this time.

Okay. That is good because I'm getting exhausted. And but I really appreciate everybody being on line and if anything I am going to try to get our council to agree that next time they don't have to read that long thing in front of the introduction; maybe that will cut the call down a little bit. But in any event I appreciate all of you being with us, and in a sense I know that some people in the market expected that one point not too long ago that we did that our earnings might be higher than they were. Nevertheless, they are significantly above last year. So I feel we are making excellent progress. But all of us here, particularly the three of us who are charged with the operations in this Company realize that we need to work very hard on our margin, and we're going to keep plugging away at it. Thank you very much.

And that will conclude today's conference call. Thank you for your participation.