BankUnited Inc (BKU) 2006 Q1 法說會逐字稿

Good afternoon. My name is Cynthia and I'll be your conference facilitator. At this time, I would like to welcome everyone to BankUnited's first-quarter 2006 earnings conference call. 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, could, 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's expectations include, but are not limited to, overall business and economic conditions, fiscal and monetary policies, significant weather events such as hurricanes, war and terrorism, changes in interest rates, deposit flows, loan demand and real estate values, competition with other providers of financial products and services, issuance or redemption of additional Company equity or debt, volatility in the marketplace of our common stock, changes in accounting principles, policies and guidelines, changes in laws or regulations, reliance on other companies for products and services and other economic competitive servicing capacity governmental, regulatory and technological factors affecting the Company's operation, pricing, products and delivery of services.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Mr. Camner, you may begin your conference.

Thank you. Good afternoon. Thanks for joining us today for BankUnited's first-quarter conference call for fiscal 2006. Joining me on today's call are Ramiro Ortiz, BankUnited's President and Chief Operating Officer; Bert Lopez, our CFO and Jim Foster, Executive Vice President of Corporate Finance whom we introduced on the last earnings call.

It has been an exciting and rewarding quarter. It has been a great quarter. Despite two hurricanes, all our divisions did their job well. For the period ended December 31, 2005, we are pleased to report that BankUnited achieved the highest earnings for any quarter in our Company's history. Net income was 16.2 million, an 11.4% increase from the same quarter last year and total assets reached 11.3 billion, up 26.3% from last year.

In addition, we increased total deposits 34.4% from December 31, 2004 to 5 billion during the first quarter of 2006. Loan production experienced a similar increase of 32.7% to reach 1.4 billion. Affirming the market valuation of our mortgage assets, we completed the sale of 248 million in loans in the first quarter. This follows a similar sale of loans during the fourth quarter of 2005 and provides us with additional opportunities to strategically manage our balance sheet.

While we're on the subject of balance sheet management, we announced earlier today plans for offering 5 million shares of Class A common stock. This capital raising effort will support the rapid growth of our franchise as we increase the number of markets we service and create future earnings opportunities.

Back to our quarter-end results. One of the highlights for the quarter is our improvement in margin, which saw a gain of 12 basis points and reached 1.97%. We have worked hard to improve margin and have made these improvements in spite of a sustained period of rapidly raising interest rates. We are encouraged by recent indications that the Federal Reserve may slow down increases in Fed rates. As those of you know who follow us, our mortgage portfolio is comprised of 63% of MTA ARM mortgages. If the Fed does take the slowdown it has been signaling, our margin will benefit significantly from repricing of these adjustable-rate mortgage loan assets.

Basic and diluted earnings per share in the first quarter of fiscal 2006 were $0.53 and $0.50 respectively, up from $0.48 and $0.45 respectively during the same period last year. We have earned these stellar results despite being impacted by two hurricanes during the quarter. We recognize that markets have been waiting for us to show that we can build earnings ahead of street estimates. We have done this now for two consecutive quarters. We made some adjustments last year that raised some eyebrows but they are paying off in the way we anticipated. We never know what the future holds but we're confident that we are headed in the right direction.

Through our ongoing expansion, the efforts of our employees and the record financial results we achieved during the quarter, we have solidified our position as the largest bank headquartered in Florida. We will continue to deepen relationships with customers and partners in the communities we serve. We are continuing to build our Company as a leading Florida franchise. I will now turn this call over to Ramiro Ortiz who will provide more details of the specific operating results.

Thank you, Fred. We did have a very strong quarter and at the risk of repetition, I want to underline that this was in spite of the impact of two hurricanes, including a major one named Wilma. You talk about being able to test our business continuity (indiscernible), we can we can assure you that it works. With the dedication and hard work of all of our employees, we were able to overcome the destruction of the storm and literally be one of the very first banks that opened up immediately after the storm with 16 of our branches opening and servicing customers. Four days after the storm we had 85% of our complete branch network up and operational and I want to remind you that at that time everyone of our locations were in communities that were impacted by the hurricane. I can't stress enough the kind of job that our employees did. And although we had several teams that were on full-time crisis duty getting our branch network open, we still moved ahead with our aggressive branch opening schedule and we were able to open four new locations during the quarter, including one in the fast-growing Charlotte County in Southwest Florida.

By the end of the quarter, we had 65 branches that are already helping to fuel the double-digit growth in several of our key performance areas. Today, we have 67 branches and plan for more than 10 more this fiscal year.

Total deposits were $5 billion for the quarter and that is a 34.4 increase from the same period last year. Core deposits, which include checking, saving and money market accounts, increased 16.6% from the same quarter last year to $2 billion at December 31, 2005. Most importantly, non-interest-bearing deposit accounts rose to 359 million and that is up 37% from the period ending December 31, 2004.

Total loan originations in the quarter reached $1.4 billion. That is a 32.7% increase for the same period last year. Total loans grew 10.6% to 8.9 billion for the quarter ended December 31, 2005. This includes 1.2 billion in residential mortgage loan originations from the branches. The 40% increase from the same quarter last year.

Residential mortgage loan balances increased $739 million for the quarter and consumer loan production, which excludes specialty consumer mortgage loans originated through branch offices, was 67.9 million during the first quarter of fiscal 2006. That is a 21% increase from the same period of last year. Consumer loan balances also grew by $27.7 million to reach 305 million for the quarter.

This past quarter was highlighted by the affirmation of all of our strategies that we have been talking about coming together. More importantly, its acceptance by our customers throughout the state. In addition, the rapid pace at which new branches are contributing, all of them ahead of schedule, confirm our expectations that this is the right time for BankUnited.

I'll now turn the call over to our CFO, Bert Lopez, who will discuss additional financial indicators for the quarter.

Thank you, Ramiro. During the first quarter of fiscal 2006, our net interest margin improved to 197 basis points from 185 basis points during the prior quarter and 184 basis points during the first quarter of our prior fiscal year. Our asset yields improved by 41 basis points to 5.44% while our cost of interest-bearing liabilities increased by only 30 basis points this quarter. This improvement can be attributed to a combination of steps we took to refine our balance sheet in fiscal 2005, the upward repricing of mortgage loans tied to the MTA index and a slowdown in mortgage prepayments.

Our adjustable MTA loans, as Fred mentioned, now comprise 63% of our loan portfolio and the index adjusted up 45 basis points this quarter as opposed to 41 basis points last quarter. For comparison purposes, our prepayment fees were $2 million or approximately the same as they were during the September quarter. As Fred mentioned, the recent signals of possible slowdown in rate increases should have a positive impact from the furthest upward repricing of our adjustable-rate mortgages without the commensurate repricing of our liabilities.

Total non-interest income in the first quarter was $7.5 million, an 18.2% increase from the same period last year. Fee income, which includes loan fees, deposit fees and other fees, excluding loan service fees, was $2.7 million, up 22.2% from the period ended December 31, 2004. This reflects a reclassification of fees on mortgage prepayments from other income to interest income from the current and previous periods.

Fred mentioned that we've taken steps to refine our balance sheet and this process continues. This quarter, we completed the sale of $248 million in residential loans, which resulted in a gain of $1.9 million. We expect to sell and securitize loans in the future and are continuing efforts to manage the balance sheet and increase liquidity.

BankUnited's portfolio of residential loan service or other was 1.7 billion at December 31, 2005. Servicing and ancillary fees for the quarter, net of amortization, resulted in a fee income of $600,000 compared to an insignificant gain for the same quarter of last year. In the first quarter, our non-interest expense was $32.4 million, up 7.5% from last quarter and up 42.7% from the same period last year. This primarily reflects our rapid growth in branch network, operations and support areas. Included in this amount are approximately $350,000 or 0.6 of a $0.01 of expenses due to the two hurricanes we experienced during this past quarter.

In addition, our marginal difference as a result of adopting FASB 123R was 256,000 in pretax expenses. This is actually an increase in our option-based expenses of approximately $490,000 and a lower restricted stock expense of $240,000. Since part of these expenses are not tax-deductible, the net P&L impact was approximately $300,000 and we estimate our quarterly expense going forward will be approximately $300,000 to net income for each quarter.

The efficiency ratio was 55%, increased from 50.2% for the same quarter in fiscal 2004. Nonperforming assets as a percentage of total assets were nine basis points, a slight increase from eight basis points during the previous quarter and down from 19 basis points in the first quarter of fiscal 2005. The slight change during the quarter resulted from normal fluctuations within our portfolio.

Our provision was largely this quarter reflecting not only growth in our total loan portfolio but also a significant amount of growth in our commercial and commercial real estate portfolio, which increased $67 million and our consumer portfolio, which increased $28 million. We did have net recoveries for the quarter of approximately $600,000 while there is no guarantee that BankUnited's low levels of nonperforming assets can be sustained in the future.

Our allowance for loan losses as a percentage of total loans was 32 basis points at December 31, '05 compared with 39 basis points for the same period last year but unchanged from September 30, 2005. We continue to maintain our strong capital position in excess of regulatory requirements. Our core and risk-based capital ratios were 7.0% and 14.0% respectively at December 31, 2005.

Book value for common share was $16.92 during the first quarter of fiscal 2005, up from $16.39 at the same period last year. On December 30, BankUnited paid its fourth consecutive cash dividend of $.005 per share on its Class A common stock to shareholders of record as of December 15, 2005.

All in all, we're very pleased with our results for the quarter and this is an excellent beginning to 2006. I'll now turn the call back to Fred.

Thanks, Bert. Basically for us, we feel that this last quarter has demonstrated that we can continue to be a strong asset originator, keep our credit quality in top shape, have a strong deposit, core deposit growth and be positioned for excellent margin expansion for the future. We are now ready to open up for questions.

(OPERATOR INSTRUCTIONS). Jennifer Thompson, Oppenheimer.

Good afternoon, everyone. First, just a clarification on something you guys said real quick. You said going forward the quarterly expense of 300,000 related to FAS 123. That's a net number?

Net income number of about 350,000, yes.

Net of 350. Okay. Just in terms of the deposit pricing environment, it looks like a lot of your deposit growth is still being driven by CDs. Can you talk about how you are feeling about continuation of non-interest-bearing deposit growth and just in general what you are seeing in terms of deposit pricing competition in the markets you operate in?

Well let me express it. We had a certain amount of CD growth on a planned basis because when interest rates were increasing, we have taken an attitude of having a certain amount of CD growth from that concept of planning ahead and stretching out some of the maturities. But our overall core deposits, and we define that as the non-CD, was extremely strong and Ramiro can address more if you would like the whole concept of non-interest-bearing deposits, which we also had very strong growth.

DDA, Jennifer, as we have talked about, that continues to be the star of the show. That is up 37% from the period ending the same quarter December 31st of '04. Like Fred said, strategically we locked in some long-term money on CDs but we are very satisfied with the core deposit growth and particularly the DDA growth.

And in terms of pricing competition, are you sensing any changes, either positive or negative, more recently or is it still pretty much what you were seeing last quarter?

Well I think to some degree there has been some leveling off of where deposit competition has been. We always have had in Florida a very competitive market and I don't think that is going to change overnight. Basically we're always going to be in that position. In a sense, it is the usual folks who run high rates are still running high rates. We have always had that in our environment. But for us, we feel that the micromarket strategy has been working in terms of developing some very good customer relationships and that is in all areas. It's in our commercial as well as right out of our branches. And that has added to the core deposit growth, particularly in the non-interest-bearing. But we are in a competitive market so I don't think that is going to change.

Jennifer, I will just add something to Fred. While we are in a competitive market, I did not see anything unusual during the quarter that would cause me more concern over rates. It is the same game that has been played here in South Florida for years and years and years. But remember that our micromarket strategy allows us to price by market as opposed to one price for the entire bank.

Great. And just how should we think about loan sales going forward? Is there any way you can give us a little bit more color on how you are thinking about, either on a quarterly basis or on a yearly basis, what would you expect to do in terms of loan sales? Is this quarterly number that we saw something that would be a good run rate going forward?

We hesitate to give that kind of protection because we try to be opportunistic about when we do our loan sales. But over a year's period, I think you'll continue to see us have periodic loan sales as well as probably some additional securitizations that are combined with loan sales. What has been important for us is to get to the point where we can regularly go into the market, sell loans as we desire and securitize as we desire and we have built up to that position. We have shown it now for two quarters being able to do that and we expect to have repetition of that each year from now on.

It will be part of our ongoing strategy, Jennifer.

Laurie Hunsicker, FBR.

Just going back over here over the FAS 123 stuff that Jennifer asked you about, can you just take us through a little bit. I know that you decided to do a partial vesting. Just exactly what the specific pretax amount that shows up in the compensation line is, that $16.8 million. How much of that specifically is FAS 123? Somehow I think I missed that in my notes.

Laurie, what we have quoted is the change from prior periods and that change is $256,000.

That is a pretax number?

That is a pretax number.

256,000. So if we look at the number then on a linked-quarter basis, this compares to compensation last quarter of 14.5. What is the big increase there?

A lot of it is new branches. We have opened up a number of new branches and there are employees that run those branches.

That is an 8 million annualized increase in employee compensation.

There are other pieces that go in there, Laurie. The commissions that we pay to our folks who generate our loans and of course you heard we had very good production. That is increasing. There is also a component in there that is related to our FAS 91 costs that in essence is a credit against that. That changed some this quarter also. But the big difference was in the compensation in the salary expense and then on the commission side.

Just to also restate the thing related to FAS 91, to the extent that we have become more efficient and to the extent that we create better and better computer systems, FAS 91 reduces an amount per loan unit and the result of that ultimately will be that it will show a greater initial expense but a less deferred expense. So I guess you could say on an immediate basis maybe being more efficient isn't good but it is good for us long run. So that had an effect as well.

And Laurie, for clarity, the FASB change was about 1.2 million quarter-to-quarter. So that explains a big piece of the change. Then the difference would be the salary expenses from the added people, as Ramiro mentioned, as well as the commission expenses from added production.

And then if we look at your branch network expansion plans, 10 more branches to open, that was in your year ending September or calendar year ending December?

I think it is 10 more for the rest of the year because we have already opened some branches this fiscal year.

We are looking at December for that.

So you're looking at December. So you opened two in January before having this call. So you're saying 10 more so you'll have a total of 12 for calendar year January?

By December '06. I don't have the exact schedule here in terms of the openings.

These can vary a little bit. I know we will probably be having several more open up some time later this month, the beginning of next month. So it will vary because there are a lot of things relating getting offices open.

A positive indicator there, Laurie, is that most every single branch that we have opened up is ahead of schedule in terms of our deposit projections.

Can you remind us how many branches are less than a year and what they are averaging on deposits, how many are less than two years?

I believe that is somewhere around 23 offices.

23 offices are less than a year?

Open less than a year. It is about 33, 34 are less than two years.

Hold on a second because we have got the information here.

And it is taking about two years to break even?

About 18 months.

We know we have a projection of 18 months to two years to say what we consider is a conservative projection. We have been well ahead of that.

And then in terms of how expenses are going to increase related to these new branches, any guidance there?

Well to some degree as a totality it will be a slower pace than previously because even though we are opening more offices and we are hitting on the employees, a lot of infrastructure expense related to these openings and adding them onto the system have already really been built into the situation.

We are pretty excited about the operating leverage we can generate from these branches given the expenses already in our expense numbers.

So the infrastructure expense is built in plus you have the new ones that are less than a year or less than two years coming online. I guess just in terms of modeling purposes, certainly a chunk is FAS 91. I guess if we were to look at this quarter versus last quarter, what's that growth rate we could use --?

What I have to do is leave that with you, maybe with Bert as a call. I don't know if that is something we need to be putting out in a later release but by I don't have the specifics of that right now.

Okay. One last question for you, Fred. Can you go over specifically what your plans are for this $130, $140 million capital raise and why you made the decision to do common instead of doing some sort of preferred or convertible senior notes like you have done in the past and --?

We decided to do common and to proceed with this now because we really are in position to continue a strong growth pattern. We really are the leading Florida franchise at this point and expect to continue in that way and the opportunities are enormous now. We want to keep that expansion going and we have demonstrated that we can produce the assets justifying our growth trends. So that, combined with the franchise growth of offices throughout the state, we thought this was the time. In terms of this, there are a lot of ways of calculating why you pick preferred or common or so forth. But we felt in the really intermediate range -- in actuality, we think our stockholders are going to do very well by the fact that we raised common as opposed to what, in some respects, could have been a more expensive preferred.

Apparently the preferred would have been expensive but I guess the thought is that some people are out there raising capital on top of doing other things or else they are also doing a share repurchase.

Jennifer, we need to go on.

Am I cut off? Actually can you comment on just one more things?

I'm sorry, Laurie. Laurie, can we go on?

Yes. Yes. Absolutely. I'll catch up with you after the call.

We will try to get more answers (indiscernible). Thanks.

Ryan Hegler, Kennedy Capital Management.

Actually that was one of my two questions. One kind of goes back to the previous topic. Do you guys expect to have maybe fewer loan sales going forward to put this capital to work at maybe a little faster rate than normally would occur or how should we be thinking about that?

We expect to have certain repetitions above loan sales in securitizations, as I mentioned. And we believe our production is in line to continue to have growth in the future. And the reason we're raising capital is to support all that including the opening offices in Florida.

So you don't really see this change in the loan sales materially; it just maybe helps you more on the branch expansion side?

No. It affects all areas of growth in the Company. Our sales of loans are based on a concept that we are primarily a portfolio lender and we're going to continue strong growth in our portfolio. But in the process, the production that we have out of our offices, we are in a position to have periodic sales and we expect that to occur throughout the year. That is a continuing thing for us. So it is really both things happening at once, even though we expect very good portfolio growth and that is one of the reasons we're raising the capital as well as to support the opening of offices. We also expect to have good opportunities to sell loans and to securitize loans as we need to.

Great. And then I guess with your comments about continued strong growth and good opportunities going forward, can you give us any pipeline data for quarter and this quarter versus last, or --? I don't know if you guys --.

We don't normally give pipeline data. All I can tell you is that overall our pipeline is extremely strong.

And then finally, you guys are pretty optimistic about the margin I guess when the Fed stops, whenever that may be. But I guess between now and then, what do you expect? Can you maybe talk about trends throughout the quarter or was it higher at the end of the quarter than the average for the quarter? Whatever you could give there would be great.

Yes. When you say between now and then, if you could define the then part that would be great. But absent that, what we continue to see is an increase in the margin during the quarter as well as for the quarter. So we had the repricing of the MTA, as we mentioned earlier, up 45 basis point. We think it should reprice about the same, maybe a little bit more and given some of the recent press about the possibility of rate increases slowing down, we think that is where we are pretty well positioned for a continual repricing up of our assets without a repricing of the liabilities on the other side.

And overall, we feel that we are in position because of the pipelines and mortgage products that we have been able to originate to also benefit from additional adjustments in those products. We have mentioned that before. It is an undefined concept. We mentioned that really back in our call in July. We've also mentioned it I believe back in October on that call and we continue to develop additional products, which enhance our overall margin opportunities. Some of those actually we expect to be introduced in the markets and new ones fully this month and the beginning of next month. We think that also will benefit us ultimately. There's no assurance of their acceptability but we believe they will be well accepted.

And I guess just finally, why are you pretty confident that your deposits or CDs won't keep repricing upward? Is it because one, you said you saw some stabilization this quarter or is it because your current rates are already close to above average or near the upper end?

Well we have some old CDs that may do some repricing but we did go out in front of the market to some degree and lengthen out some maturities. So those will be around for a while. And we otherwise -- we are not the highest in the market. We are not the lowest in the market. We are probably in the top 30, 40% in the market. There are certain people who are constantly very high in this market throughout Florida frankly and we are in position by the kind of strategies we have for our offices, our locations, the types of activities we have, the micromarket strategies and so on to put us in position.

We believe that we will be in good situation to continue our growth, particularly with the new offices we have opening that are coming into maturity. But likewise, that gives us additional opportunity to adjust our rates on a number of market bases and right now, we have them divided down into 15 markets. But the reality is, to some degree, divide them even more than that at times to opening additional offices. We will have additional markets where we can adjust rates accordingly. (indiscernible) causes disintermediation of some of the older offices when those are under more pressure. So we feel we are getting more and more control over the cost of our deposits and the cost of our funds in terms of developing dollars for our growth in assets.

Greg Powell, Bernstein.

Could you tell me the amount of interest income that came from negative amortization this quarter?

For the quarter, it is approximately $9 million.

Does that make -- what would the balance sheet item then be? 21 million, that range?

Yes. $21.5 million as of 12/31 versus 12.5 million at 9/30.

Albert Savastano, Janney Montgomery Scott.

A couple of questions here on the capital rates, would that have any impact on your margin in the short term? Meaning will the expansion be muted the next couple of quarters?

The margin expansion? No. Obviously we're bringing in from a balance sheet standpoint, we're bringing in the 130 odd million dollars in free funds. I mean that should continue to help. But in terms of being able to grow the balance sheet profitably, that is what we're going to do by putting the capital to work.

So you have no plans to put on additional leverage. You're just going to use that to support balance sheet growth?

No, we are not looking for any -- well the leverage is always from CDs and borrowings and so forth relating to the actual fundings against assets. But if you are asking are we looking to do a bond offering or something like, that is not something that (indiscernible).

No, I'm asking if you are going to use the capital to put on borrowings and put on securities rather than just --.

Not securities. No. No. No.

If we do securities, they are generally overnight or very short-term at this point for us because what we have done is we have been in position to take pieces of our portfolio and securitize those to the extent we want to use that for any leveraged borrowing. So essentially when we go through that kind of process, we actually enhance our margins and that is a continuing thing that, as I mentioned, we are going to be doing both some loan sales and some securitizations as we go down the road.

Just two more questions. You mentioned that prepayments were slowing. Can you give me color as to why you think that is and just your outlook for that going forward?

We are fairly optimistic about that. You never know completely but one is clearly higher rates have had a slowing effect. Two is generally if you just look overall around the country, refinancings to some degree are down partly because of the rates and partly because a lot of people have already refinanced. And you only can do it so many times. People are out there always pushing people to refinance but it is an area slowing down. And then for us we have always emphasized financing the purchase of homes as opposed to refinancing. While we have some refinancing, we are generally at a lot lower level of that than what you see with a lot of major lenders nationally.

So if you combine all those things, our rates of prepayments have been running lower generally against national and we will continue in that frame. With the characteristics of a general slowdown in re-fis and higher rates, we think we're going to have lower prepays. There is no assurance of that, all the caveats. We have had fairly consistent prepaid levels for awhile now.

So you're not worried about the flat curve causing some of your borrowers to swap into fixed rates?

I'm sorry, say that again?

You are not worried about the flat yield curve that have some of your option ARM borrowers going to fixed-rate mortgages?

I don't think at these rates -- the attractiveness of the option ARM, that particular one is to have a lower payment rate and to be in position to have a greater cash flow for the individual borrower. So I don't anticipate that. There is always some of that relating to all ARMs. Fixed rates really got low in pricing. Sure, that would always have some effect but not at these levels. Somewhat less than this level I would still say it would be unlikely for us to have that much refinancing. And generally we haven't seen that much refinancing.

And remember we have prepayment fees also that would be associated with that. So we get the benefit of that.

Yes. Okay. Last question. What is your minimum payment rate? Have there been any changes to that and reaction to the Fed guidelines or the regulated guidelines that came out in December?

I'm not sure in terms of what exactly will be the ultimate result of guidelines or where the OTS will end up resting but we have had -- we, as the market has allowed, have raised some of our minimum payment rates and also we have developed some other products that we're introducing that have some different effects in that regard. And it relates to your initial accrual and what the ultimate guidelines and how that will be addressed. I am not sure. For the most part, there is a lot of details still to be known and understood but we have noticed some other lenders in the market adjusting certain things they have been doing to get to where we are. We have been there all along. For example, how do you qualify people and so forth, that is where we have been all along. We have a conservative attitude as to how we address the origination of MTA mortgages and we have done that all along.

It is also important to note with all the press that these option ARMs are getting, we are not rookies at this. We were one of the real pioneers of MTA loans in the South Florida marketplace. As a matter of fact, we've been in this business over ten years here in South Florida. So we have learned a lot of lessons about this product over the last ten years.

Skipping back to something that was mentioned because Ramiro just mentioned it briefly and I should have emphasized it too when we talked about prepay situation, we, over a period of time, have developed more and more of our products with prepayment fees required in order to prepay and that also has created a clear reduction in prepayments.

I'll give you an idea of the -- we have prepayment penalties on about 62% of our MTA ARM loans. And that keeps growing because when we originate, we are originating closer to 80% with prepay penalties. So those prepay fees should help us from a speed of prepayment standpoint and should they prepay, obviously they will compensate us for losing that income going forward.

Great. And what did you say the minimum payment rate was?

We didn't give a specific rate. We have different markets and it varies for different areas and types of product. There are all sorts of characteristics so we have a whole menu of figures but the overall initial level was raised some time ago.

So is it around 1%? Are you up around 2%?

It is higher than that but --.

Fair enough. Thank you.

I can't give you a specific.

Jefferson Harralson, Keefe, Bruyette & Woods.

I've actually got some questions on the core bank. Do you guys --what do you think the ROA is of your core bank and how big do think it is right now?

I'm not sure what you mean by core. Do you mean --?

The branch driven assets and liabilities.

Excluding the mortgage --

We don't break that out, Jefferson, but if we were looking at the size of something like that we're looking at about 1.5 billion in loans and a little bit larger than that in deposits. So if you were to take a guess it would be somewhere between 1.5 billion and 2 billion.

So are saying everything other than mortgages, is that what you're saying?

That's right. I would include the consumer mortgages that is branch lead but what I'm trying to get to is what do think the growth rate of that branch network is with all the new branches that you have and maybe if you can give an idea what the ROA is we can kind of get a handle on how quickly the profitability and get a size of the benefit that is going to come as these branches mature.

This will take a long conversation. So I don't know if Bert can try to develop stuff like that. It is very difficult because of the SEC regulations on this. But generally you will see that we have actually had some very rapid growth in commercial and commercial real estate loans and more recently some as well in consumer area. So some people define parts of their residential as consumer. Some people define them as not. All that would have to be worked out. But that area of the bank is certainly growing very rapidly.

Let me ask on the capital raise, how quickly do you think you can lever that capital? If you're doing 1.2 billion of origination, do think you can put on fully levering up at 2.5 billion or $3 billion? You can do it in six to nine months or what types of assets do you think --? I guess what is the mix of assets you expect to put on (indiscernible) the (indiscernible) of capital that you have?

I would not dispute what you've just said. I will tell you that at the rate we are able to produce assets, and quality ones at that, it is very rapid. And there is a certain acceleration going on in our whole production capability. So even what you see right now, a lot of things could happen in the market, put all the caveats in, we expect the rate of production could very well increase from where we are right now.

One quick question for Bert on the option ARM loan lag. I guess that was 93 basis points back in November. How has that changed since December came to a close?

It's actually going back to 6/30 of '04 when rates started to increase. It's still right at 90% -- at 90 basis points. I'm sorry.

James Ackor, RBC.

With regard to the option ARM for the MTA portfolio, I can tell you as the recent fan of the stock while I'm talking to people on the buy side about your Company, I do get a lot of pushback on the MTA portfolio, which is viewed as a largely wholesale portfolio that exposes shareholders to significant credit risk in the event of a real estate correction in South Florida because many view the product as largely untested in a real estate downturn. So Fred, I was hoping first maybe you could make some general comments on the state of the real estate market in South Florida and then with regard to the overall MTA portfolio or maybe you might be able to give us just a few statistics, combined LTV, FICO, percentage of --.

Our LTVs generally are around 74% in the portfolio and that is not adjusted for any increases in the asset since the time that we originated a lot of those loans. So probably the average is well below that. We have always had a relatively conservative concept as to how to originate our MTA loans. So we do have some history of MTA loans, including in rising markets, and basically we have never had really any serious problems with respect to these loans.

Part of this is we have also always originated these based on a higher payment level. In other words, when we underwrite it, we have already underwritten on the basis of the change in possible payment. So when you put all that together, really the product itself is far more attractive to the borrower because he does have options as to how he can address his payments. But at the same time, it is very good for us. Frankly I don't see any particular greater risk with respect to this product when it is underwritten properly as do adjustable-rate mortgages in general. And I could go back and go into periods of California because I have a lot of experience in what happened in California and we had an adjustable-rate portfolio. I can tell you that people's payments popped quite a bit and they had some real problems with prices that declined sharply if you will recollect back in California.

Nevertheless, our delinquencies, except for a piece of the portfolio that was fraudulent sold to us by a bank who rebought it, it was the only time I ever had high delinquencies in my life and when I say high, they were still way below national, except for that little piece of the portfolio that somebody bought back from of us, the rest of the portfolio we had very little problems. Did they go up compared to being almost at a zero level? Sure. Were they extraordinary? No.

My feeling is that all adjustable-rate mortgages to some degree have a little bit of suffering possible in changes in market conditions because of the upped possible payments. But this product gives people a lot more room. If you have underwritten, and we underwrite conservatively, we feel extremely comfortable about it and that has been our history. So I don't know if that gives you enough information. I could go through a lot more detail than that.

I know that over the last couple of calls, Fred, you have expressed a little bit of concern with regard to the condo market in particular in South Florida.

There's no question that we feel that certain areas of the state where there is some high-rise condos, and this is not generally along the water, there can be some exceptions of there. For example, downtown Miami area where they have some major high-rises going. We conservatively underwrite and if we have a problem with some of those areas, we are not going to end up with loans in those areas. But overall the market in Florida is extremely strong. There is some slowdowns here and there and I'd say primarily in some of the real high-rise products. I certainly expect that we will have some modest slowdown compared to where we have been because part of it has been so strong that you really need some backing off at this point and we think there will be some of that. But the number of people moving into this state is extremely strong. It is over 1100 and day.

The number of people coming here to invest from Latin America continues to be very strong. The disruptions there haven't changed. I have mentioned this many times before. It just sort of goes from country to country and just spurs more people to be interested in having money here as a safe haven and having assets here and likewise, unless there is a very dramatic change in the euro, we expect to continue to have people buying vacation type homes here in Florida from Europe because to buy something along in Spain or anywhere that is possibly comparable to Florida is extraordinarily more expensive than it is here.

So we expect to continue to have that demand and then overall, we expect to continue to have demand from a lot of people who in the economy in general are doing well and who want a second home in Florida and what we have found is that the age of the people involved gets younger and younger. It's not just people who are retirees now; it is people who are making good money and would like to have a second place to visit. And the prices, even with the increases we have had here in Florida, are still way below what they are if you'd look along in California or if you wanted something even in New York with a view of the water, etc. I always put a caveat. I'm not sure you do it in Secaucus but in any case we feel we are in very, very good shape for continued strong demand in housing in general.

James, also, the average FICO score in that portfolio is north of 700. So to Fred's point, it is being underwritten conservatively and we have limits as to the amounts of units that we underwrite in any one particular building. We stay on top of that.

James, just to add a little bit more to maybe help put your clients at ease a little bit. Fred mentioned a low LTV at 74% at inception. That should get better as payments are made but we underwrite pretty conservatively. Fred mentioned the fully indexed underwriting standard but also we have two backstops in here that we think are a little bit more conservative than the industry.

One is that at the 60 month or five-year point, the loan will recast in a fully amortizing principal and interest. Really what that gives us is another look at the credit history of the customer at the five-year mark. The other item is we do limit the negative amortization to be no greater than 115% of the original balance. And if you just simply do the math off 74%, I'll put 115, that will leave us with a maximum LTV at inception of 85, 86%. So we still think we're pretty well protected should it turn into a situation where we would have to take the collateral. Both that and the 60 month time frame give us another look as to the clients' credit worthiness and then gives us an opportunity to refinance it or just change it to fully amortizing principal and interest.

We have time for three, four more questions.

Brian Roman, Weiss, Peck & Grier.

Good afternoon. Most of my questions have been answered but just trying to look at again the reset on your loan portfolio. A different way to look at it is if you had not done the restructuring in the, what was it, the second or third quarter of calendar '05 -- (indiscernible). Pardon.

June quarter.

June quarter, the second quarter of calendar year, what would have happened to your net interest margin going forward?

On a (indiscernible) basis and we still would've had some improvement but not as dramatic. Overall it has put us in a position to really reflect more what our balance sheet will be producing. Clearly the other situation had a significant drag on us. So as rates level off, that drag would have continued because of the nature of the particular types of advances.

Given the favorable impact that it has had on the margin, is there any thought of another charge or another -- I know it is not something you want to do in the face of an equity offering but another rejiggering of the asset capabilities?

We are in pretty good shape overall. The way we have set ourselves up and how we have got ourselves from a GAAP viewpoint and so forth, I think we are in good shape.

One last question, from an astatic asset liability standpoint, meaning astatic in terms of what market rates would do, if the Fed were to come out in about two weeks and say, "No mas, we are done." One more rise before 50 I think on Fed funds. How much would your net interest margin go up? I understand there are a lot of variables there and how long would it take?

Well it is increasing at the rate -- what is it? About 15, it's anywhere from 11 to 16 a month?

Yes.

On average, about 15 a month.

That is the yield? Is that the yield?

That is the difference in -- let me -- Bert will get into this but just to explain it. Bert mentioned it. It's really 90 basis points behind. In fact, the reality is that, at some point, it may be more than 90 basis points because generally what happens is it then overshoots in the other direction. So instead of being behind the increases in LIBOR, you end up being, or treasuries, you end up being ahead.

So from that viewpoint, your cost of fundings becomes more attractive against it and you end up with a positive gap as opposed to the negative gap or lag that we're in right now. So basically though if you just take the 90, it means every month you're adding on 15 basis points of the margin of 63% of our mortgaged loans. Now that number continues to rise because we're producing more of those loans as we're going along. Now eventually come June, let's say it's at 70 or so percent.

It is a significant gain if you just take the amount of the portfolio and you start multiplying that in. That is one of the reasons certainly we have lagged. We have some repayment situations. We mentioned in the June quarter, we had some product glitches that we had to get fixed that hurt us somewhat in that quarter. But when you put all those things back together now and you see where we're going, we think we're headed in the very right direction in terms of our margin. And this is -- we're headed in that right direction before the Fed stops. So the Fed stops, it is all the frosting on top.

But basically though it is a year after the Fed stops that the yield on your portfolio has fully caught up or is it --?

It's about six months to eight months.

Six to eight months. Okay. Great. Thank you.

Casey Ambrich, Millennium.

Thank you very much for taking the question. I will keep it quick. I just want to try to understand this right. Is this -- I guess you think it is. Is this the right time to be roughly adding 3 billion in option ARM products right now in this part of the cycle?

I'm not sure what you mean by cycle.

Well I just wonder if there is negative and adverse selection issue where the volumes you're putting on might not qualify for fixed-rate loans.

No, this relates to payment relates to choices. With the interesting thing about our particular -- I can't speak for everybody who is involved in option ARMs, but for the customer that we look for, he is usually in better shape to carry payments and so forth but he has other uses for his cash and so on and he likes this type of product. I don't see -- I have mentioned this before, people have adjustable-rate mortgages if you're any kind of financial institution and you want adjustable type products. Frankly I don't see a heck of a lot of difference in this and Bert mentioned some of the more specific characteristics relating to the mortgage of this versus other types of adjustable-rate products that I have seen in the past. A lot depends on how you underwrite and who your borrowers are. And properties and where you have those properties, all those things count in terms of how you go about doing this.

Casey, just to add to that. Remember the LTV is at 25% -- or at 74% so we're asking them to put 25% down. When we underwrite them, we underwrite them at the fully indexed, which is a rate which is right about in the low to mid 6% range. So we underwrite them at that full rate, which is about where the longer-term fixed-rate loans are at a fully indexed PMI rate. So we know that they are able to make that kind of payment should they need to. So that, combined with LTVs combined with the prepayment fees and the high FICO scores, we think we have got a pretty strong product that is pointed at the right consumer and we don't think we're getting negatively selected.

Part of your portfolio origination, how much is re-fi related?

It's approximately half. It's fluctuated to half to a little bit less than half.

One last question. The reserve levels right now are at 32 basis points. Where is that going to drop do you think?

We hit -- we grew our reserve this last quarter based on the growth in the Company. So that will continue on.

But the reserve levels went down, didn't they? The reserve to loans.

No. Quarter-to-quarter, they stayed the same.

Maybe Bert needs to go because I know a couple people that had some questions on this. I saw some comments on -- some things online and so forth. I think Bert needs to probably go in and just discuss how and why we set this level and how it compares to our actual delinquency to our actual loss.

Casey, you are right. Our trend has been -- the reserve levels have been decreasing. That goes back really to the SEC requirements as to what you can substantiate your reserve and what you cannot. This quarter we did level off at 32 basis points to loans and it came from a combination of different things. The biggest driver was that we have been able to grow the commercial and the commercial real estate and the consumer loan balances significantly. It was 68 million for the -- 67 million for the former, 28 million for the consumer. By doing that, those carry a much larger reserve factor on them than a residential loan balance. And it is a pretty significant. We reserve up 2.5% on our commercial balances. Our residential loans based on our history only have nine basis points placed on them. So there is a pretty strong argument as to the mix or resultant issued due to the mix.

The other piece of that is just as we have grown the portfolio, that required some additional reserves on there also. As you saw, nonperformers are basically flat. They were nine basis points of assets and we actually had some recoveries this quarter. So when you put everything together, we felt that 2.3 million was the right amount to put in there. We had a little bit in their just from the unallocated standpoint from what the SEC allows for, the inherent inaccuracies in the computation as well as some economic factors. But we all came -- we worked everything through; we thought the 2.3 million was the right number to put in there. It is not from the asset standpoint, as I mentioned, asset nonperformers were relatively flat. It really is driven by the growth of the portfolio and more importantly the change in the mix of the growth of the portfolio.

Just one last question because it kind of all goes back to credit and margin and volume. Do you expect credit then to mildly deteriorate at all if re-fis slow?

We don't have any evidence of a deterioration in our credit situation whatsoever --.

No. I'm just saying if CPRs were to slow because it just seems like a lot of people want CPRs to slow. I'm just wondering if CPRs slow, maybe the weaker credits can't re-fi out of the bag. (indiscernible)

That has not been a problem for us in the past. It may be a problem for some other institutions that end up with a lot more loans in situations where the credits just aren't as good. Historically, we have never had that as a particular problem that I recollect.

Than you very much for taking the questions.

John Pandtle, Raymond James.

Bert, I was wondering if you could review -- I want to make sure I heard this correctly, the negative amortization, the impact to interest income in the quarter was how much?

$9 million.

$9 million. That's just for the quarter; that's not an annualized number?

Correct.

And then the securitization that you did in the September quarter, was there a residual associated with that that is on the balance sheet?

I'm sorry. The question -- was there a residual remaining on the balance sheet?

Right, an asset.

Yes, as we detailed last quarter, we do have a residual of approximately $6 million from that securitization.

And do you recall your CPR default and average life assumptions behind that?

For the securitization, we use 25% CPR.

What about defaults?

I don't have the information for defaults.

And then the last question I had -- as you look at your need to raise capital, I think it is somewhat driven by the lower profitability and your inability to self fund the balance sheet growth. And as you, Fred, look at the changes that we have seen in the progress in corporate governance, with your decision issue more common equity, have you given any thought to collapsing the dual share classes and putting everyone on the same footing?

No. I haven't given that any thought whatsoever and as far as the way you were phrasing that I think there are -- in terms of what we're doing as a company, and I can't speak for others who have had rapid increases in their internal growth, we decided to grow the Company as a franchise and to grow it primarily in this stage on a de novo or internal basis as opposed going out and paying four times book for something, which other people have done. And which I think ultimately gets people into trouble.

So given that, we have a lot of expenses for incurring those expenses upfront and know we're incurring those expenses rapidly. We also made a lot of infrastructure changes along the way. Our profitability certainly over a period of time was damaged by the fact that we ended up with some advances and types of advances from a home loan bank that clearly put a drag on our earnings power. The decision to write those off improved earnings but then took away a piece of capital under any regs, rules, FASB, etc. So for us, we need to ultimately replace that capital combined with increasing some capital for the purposes of growing the franchise. We think the opportunities are extraordinary to do so. We are pleased that we are well ahead ultimately of the profitability of the offices we have been opening. Ramiro has done a great job in instilling concept of developing markets and treating markets differently in the state as opposed to treating them all the same. By the way, I corrected the number. I said it was 50 and it was actually 17 micromarkets at this point. And that is our process and one of our goals.

And I understand the branch expansion but unless I'm looking at this incorrectly, isn't the majority of this capital being earmarked to support continued growth in the option ARM product really? How much of that option ARM product is produced through the branches? Isn't that really a wholesale source?

It is there to support asset growth in the general combined with the branch growth, which in turn helps fund the asset growth.

Thanks for the clarification.

That's what we're doing.

John, before you go, I just want to keep in perspective the $9 million. That's what was added this quarter but you've also got to look at the $9 million in relation to about $4 billion of MTA loans and $0.8 billion from loans overall.

Thank you. Your last question comes from Gary Tenner with SunTrust Robinson Humphrey.

Gary, your line is open.

He has had to step off. Thank you.

At this time, there are no further questions.

Thank you very much. We appreciate everyone being available for this call and listening to where we are. We are extremely proud of the very strong quarter we had. It's a continuation of what we did the prior quarter and we believe an indication that our Company and the hard work of our employees all stands for a great future of building what we believe is the number one franchise in Florida. Thank you.

Thank you for participating in today's BankUnited's first-quarter 2006 earnings conference call. You may now disconnect.