BankUnited Inc (BKU) 2006 Q3 法說會逐字稿

Welcome to the BankUnited Financial third quarter earnings conference call. This conference call may contain forward-looking statements which 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, results, expects, will continue, anticipate, estimate, project, believe, intend, should, may, can, could, plan, targets, 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, events beyond our control including natural disasters and significant weather conditions such as hurricanes, war on terrorism, changes in interest rates, deposit flows, loan demand and real estate values, competition with other providers of financial products and services, the assurance or redemption of additional company equity or debts, [Inaudible] in the market place of our common stock. Changes in accounting principles, policies or guidelines, changes in laws or regulations, reliance on other companies for products and services, and other economic, competitive serving capacity, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products, and delivery of service. I will now turn the conference over to Mr. Alfred Camner, BankUnited's Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon and welcome to BankUnited's report of third quarter results for fiscal 2006. Joining me on today's call are Ramiro Ortiz, BankUnited's President and Chief Operating Officer; Bert Lopez, the CFO; and Jim Foster, Executive Vice President of Corporate Finance.

Let me start by explaining we have changed the format of the call based on feedback. Rather than delving into all financial details found in the news release we issued this morning we will provide you with a brief overview of our quarterly results and devote the balance of our time together to question and answer session. To make the best use of everyone's time, please limit yourselves to one question and one follow-up. If you have additional questions, you can reenter the queue. Let us begin.

The past three months proved to be another record breaking quarter for BankUnited. Our team has worked hard to implement our plans and follow through on steps we took in prior quarters to achieve positive results in all of our key benchmarks. Net income for the quarter reached 23.8 million, total assets increased 29% from the same period last year and reached 12.9 billion at June 30. Our return on assets reached 76 basis points and our return on equity was 13.48%, up from 12.2 in the previous quarter. This improvement can be attributed to several factors including the continued slow down of the rate of loan prepayments and an increase from prepayment fees. We also executed loan sales this quarter that resulted in higher than expected returns.

The results of our loan sales reflect the market's very favorable perception of BankUnited's products and underwriting standards. Despite the rising interest rate environment and speculation of a slow-down in the housing market, net interest margin improved by 52 basis points to 218, up from 166 in the same period last year. These numbers solidify BankUnited's position as the largest bank headquartered in Florida. Overall we're pleased with our results and intend to build on this momentum as we enter the final quarter of our fiscal year. We believe that we have reached a position of building consistency of earnings, a benchmark we have worked toward for several quarters. Subject to all the usual caveats, we feel very good about what we have accomplished so far and the outlook for the future. To provide more detail on our local market success, I am turning the call over to Ramiro Ortiz, our President and Chief Operating Officer. Ramiro, please.

Thank you, Fred. This was a strong quarter at BankUnited. We opened two new branches including our first location in Sarasota. Sarasota is located on Florida's West Coast. With these additions our retail network currently stands at 73 branches in 11 Florida coastal counties and that makes twelve branches the branches that we've opened up so far this fiscal year.

With our continuation as we continue to expand our geographic footprint and implement our strategy of putting decision making power into the hands of local bankers, key steps in this direction are evident with the recent appointments of market presidents and market managers in our core operating regions. Where customers are increasingly turning to our bankers for financial expertise in our diverse range of products and services. As national banks continue to enter our competitive Florida market, we remain committed to local customers and our micromarket strategy. This strategy which has been in place for three years now, really gives us a competitive edge and differentiates us from other financial institutions. Deposits remained strong in the third quarter. Increasing 39% from the same period last year to $5.9 billion.

Core deposits which now include CD's of $100,000 and less also increased 35% from last year to 4.2 billion at June 30, 2006. In addition to 34% year-over-year growth in our commercial, commercial real estate, and consumer portfolios, consumer loan balances have now surpassed the $1 billion mark. Total loan originations were 1.8 billion at the end of the year. This is a 17% increase from the same period last year. We're proud to say that our growth in loan production has continued within our conservative credit culture and credit guidelines. Non-performing assets are well below industry expectations and our credit quality remains strong. For more financial details I will now turn the call over to our CFO, Bert Lopez.

Thank you, Ramiro. As Fred mentioned we are not going to reiterate all the details in the press release, but I did want to point out a few highlights. We're especially proud of the improvement in the margin. This number has been moving in the right direction for several consecutive quarters now and as we continue to add to our product mix and execute initiatives that we launched in previous quarters we anticipate continued improvement in this area. We've done a lot, but we're not finished. Of course the business slow down in the Fed rate increases, the upward repricing of adjustable rate mortgages without the commensurate increase in pricing of the banks liabilities could result in continued improvements of the net interest margin.

The margin increase was a result of several factors, the previously mentioned structural changes to our residential products including the collection of prepayment fees, our asset retention strategies which allowed us to maintain a lower rate of prepayments and a focus on our commercial banking areas. Our negative amortization stood at 57 million at June 30, 2006. While the dollar amount increased $20 million quarter-over-quarter, the percentage increase declined from the previous three month period. At June 30, 2006, the negative amortization of individual loans remains low with only 4% of these loans having negative amortization greater than 3%.

We continue to experience excellent asset quality. We remain in a net recoveries position for the year, and this quarter we had a large recovery of $600,000. This recovery plus our provision of 1.2 million kept our reserve to loans at 31 basis points, the same as our prior quarter. Non-performing assets grew by a slight $2.5 million, but as Ramiro mentioned still remained low at 11 basis points. As reported this quarter, we had a rather robust gain on sale driven by strong acceptance of our MTA product in the secondary market. We sold just over $449 million this quarter versus $376 million last quarter. As we've noted in previous quarters, the sale of loans is a deliberate part of our strategic balance sheet management process, and will continue to be an integral part of our efforts. The aforementioned growth in revenue also helped improve our efficiency ratio from 52 basis points -- to 52 basis points this quarter from an adjusted 63 basis points same quarter last year. I will now turn the call back over to Fred.

Thanks, Bert. We're proud of the results we had this quarter. We have a lot of momentum going into the final quarter of the fiscal year. We're ready to open the call up to questions. We hope this new format makes better use of everyone's time. Please send us our feedback after the call. Moderator.

[OPERATOR INSTRUCTIONS] Your first question comes from Jennifer Thompson with Oppenheimer.

Good afternoon, everyone.

Hi, Jennifer.

I have a question on loan growth. Can you talk about the trends you're seeing on the commercial and commercial real estate side, and just your overall thoughts on trends once adjustable rate mortgage appetite starts to slow? Are you guys confident that there is enough demand out there that you're going to still be able to put up the earning asset growth that we've come to expect in a different environment?

Okay. Let me answer the last question first. From my viewpoint, we certainly expect there is going to be some type of slowdown in the overall markets relating to the total amount of mortgages originating in the country. I think that's already taken place. That's already become a trend somewhat. We've been able to run counter to that trend.

I guess what it really comes back to, and sometimes we've explained it this way, that if we were one of our larger entities such as a WAMU or a Countrywide that has an office on every street corner, then you're in a position subject to the overall decline. If you're in our position where we look to get just a little sliver, a little piece out of any market we go into for originations of our particular products, we still have a lot of places we haven't gone to and some of those places we'll probably end up opening offices. Overall, right now we continue to experience pretty good demand for our mortgage products, so we feel very comfortable that we can continue. Now, clearly if we enter some type of more serious recession, then everybody is going to get hit by that. But assuming a mild or slowdown, we feel we're going to be still increasing our mortgage originations. With respect to the commercial situation, Ramiro, do you want to address that.

Jennifer, on the commercial side we have not noticed a significant slowdown in the commercial real estate side. We have noticed some slowdown. The main thing for us is maintaining to our credit quality standards and want bowing to the pressures of competition because there is still a lot of competition chasing a lot of deals, and we would rather pass on a deal if the underwriting doesn't make any sense to us at this stage of the real estate cycle.

Is that something that you're starting to see or become more concerned with, the situation in commercial real estate or do you feel the slowdown is just more cyclical maybe?

No. I think that what's to some degree happened overall is that we certainly are going to see a slowing, it's already started in overall housing markets. So when we're really talking about real estate, if we're doing construction loans with respect to town houses, single-families, so on, we certainly look very carefully at where we're doing it, what the demand is. We test the loans that come in based upon a much slower absorption rate, so forth, and we also are pretty careful about the track record, experience records, the people we make our loans to. We've been feeling pretty comfortable about the situation.

Just as a generality, this may take up for some people who want to know about Florida and what's happening in Florida, essentially Dade County which is the greater Miami area and then Broward, the greater Fort Lauderdale areas are still actually experiencing some demand for housing. There is no question it's slowed some and there's some inventories and some segments increasing, and certainly in some of the, what I call the high, luxury high rises that are not directly on the water, we find that those places, and we've said this all along, may end up with some problems. Those counties are actually otherwise doing decently.

As you move north in the Palm Beach, things have slowed quite a bit in terms of absorption rate. There certainly needs to be some spec selling through there, and in a sense through all the places in Florida and some of the other what you would call hotter or stronger growth markets in the country. I think they are all in a sense experiencing that. West Coast of Florida has definitely slowed also, but again it gets back to who you are dealing with, what kind of projects they have, and that's the kind of thing we look at. So we feel pretty comfortable about the situation. Always of course with the caveat that if the country itself is brought into a more severe recession because of much higher interest rates, that's always a question for everybody.

Also, Jennifer, as we're expanding now in the West Coast of Florida, there will be opportunities, both commercial and commercial real estate, we've hired experienced lenders in that area, so if some of our volumes slow down on the East Coast as we enter our new market markets in the West Coast, that will make up for some of the slow down in the east side.

Just our general strategy both from the residential side as well as the commercial side is the belief that we can become more conservative about what we do in the markets we're already in and by entering additional markets that we know and are familiar with. We can therefore still expand by again getting our little sliver of what we want of the total market. We're not looking to dominate markets. We're looking to get good loans in those market, and there is no question over this last year that we've tightened our credit standards. In fact, if you will remember, many of you may remember for our calls it has really been over a year since we have talked about this.

Great. Thanks very much, guys.

Yes.

Your next question comes from Gary Tenner with SunTrust Robinson Humphrey.

Good afternoon. I was just wondering on the personnel expenses, just with the senior branches open this quarter, the expense line increased sequentially more than I would have expected. Anything specific in that? Anything accelerated with the large gains on the loan sales?

No, Gary. The number moved for a couple of different reasons, and the branches certainly had something to do with that. We also have a big piece of our compensation is tied to the variable rate of the loans we produce, so the commissions on the loans we produce went up because the volume went up. We don't see a significant change due to the branches. We also had a little bit more for bonus accruals and whatnot based on the earnings that we had this quarter. Also, another change in that line is related to the FASB 91 as we had less deductions because we sold more loans that, net number did increase some for the quarter.

Okay. Great. And if you could just touch on your -- the rest of your branch's plan for the second half of the year, that would be great. Thank you.

For the--. Yes. Remember our fiscal year ends in September. We will open one more new branch, and that's in -- another branch in Sarasota, up in Venice, the Venice area, so that will give us a total of 13 branches for this fiscal year, and then we plan to add another 12 to 14 branches next fiscal year.

Your next question is from John Pandtle with Raymond James.

Thanks and good afternoon. First question, Bert, you mentioned the percentage of loans with negative amortization above the 3%. Do you have the number for all of the loans regardless of percentage?

You mean as percentage of the original balance?

No, no, what percentage of option ARMs are negatively amortized, and I think it was 55% in the March quarter.

It is still about that same range. We'll issue that number in our Q, but it is still about the same range.

Okay.

We find that not everybody takes the option. People either choose to have no amortization, but not negative amortization, they'll keep it even, and some people pay higher, so this is another reason why we find the product to be a very good product.

Okay. And then in terms of the CPR rate on that portfolio in the quarter, how did that compare versus the March quarter and to what extent did higher prepayment penalties benefit the margin on a sequential quarter basis?

We've continued at a low figure.

We stayed right about the same figure we were at last quarter, John, we were just a basis point off, we're running at 17 versus 16. The prepayment fees helped a little bit. This quarter we were at just under $3 million for the March quarter, and we're at $4.4 million in prepayment fees that came into the margin this quarter: both of those numbers are up substantially from the June quarter. We had $1.4 million worth of prepaid fees. That's where we mentioned earlier about our programs are kicking in and helping us protect the margin.

And then as a separate question on the funding side, looking sequentially at deposit growth, it looked like there was a pretty big mix shift at a lower cost than the CD's which admittedly is a bit of an industry phenomenon, but with the new branches, were you surprised to see that decline in lower cost accounts?

You're talking sequentially?

Yes, unless I looked at it--.

Do you mean from March to June? Because we're way ahead of where we were in June last year. There's a certain amount of seasonality there-.

--in June. I mean non-interest income bearing was down, interest bearing down.

There is a certain amount of seasonality involved in that to some extent. There is also -- at times you're always subject to a certain amount of corporate payments that occur when you go into your March period onto April and you end up with smaller businesses where people pay their taxes and I guess the government is right. People are paying more taxes. And there is no question that in Florida in general some entities such as Suntrust have run extremely high rate campaigns, so you're always subject to some of that as well.

But overall we have emphasized depending upon where we thought things were going to be, I think you may remember this, we've done some of this on a steady basis to have a concept where we thought interest rates were going to be, and that's affected this figure for us. Additionally, there has been some effects in terms of the new offices that we've opened up, and depending on the particular locations they're in, we may have picked one or more different types of deposits, products to run initially in their opening since we did a lot of openings these last several months.

And as a general comment, John, in this rate environment as rates go up, consumers are just more sensitive to rates than they were in the past.

I think it is an interesting phenomenon for Florida, and the circumstances is that while some people have gone on a concept that they can maintain a very low or 0 interest rate situation, I am thinking of some people who are opening up or setting to open up a lot of offices, I note that their cost of funds on their deposit side is starting to increase because now that you're in a position, and this has to have effect for everybody, now that you're in a position that you're sitting with a checking account that supposedly is non-interest bearing versus the fact that they could have not that long ago gotten 1 or 1.5% in their accounts, now they can get 5 something percent in their accounts that gets a little tougher to do the non-interest-bearing part, and we've noticed a number of entities that are well known and espouse that viewpoint that their cost of funds is going up. So we feel to some degree that ours has always recognized more where the market is and how it is going to be down the road. Thanks, John. If we could go to the next question.

Your next question comes from Barry McCarver with Stephens Inc.

Good afternoon, guys.

Good afternoon, Barry.

Fred, I like this new format by the way.

Thank you.

Just one question that I get a lot on BankUnited that I guess I don't have a great answer for, but putting on additional option ARMs and what that does to the risk profile of the bank, I certainly wouldn't argue the profitability of the product, but just in terms of the risk profile, how do you guys feel about that?

We feel extremely comfortable about it. We've had experience of it in the past both in up and down periods, but the reality is it gives the borrower a really good option in terms of how they're going to address this situation. Since we originate loans at good LTVs for our perspective and Bert had cited how fuel really even in a small way negative AM against the actual percentage, we feel extremely good about our portfolio, and the oddity is that in a rising rate market such that we have until there is some stability of rates, our particular pool of loans put us in a much better position because it does have a lower payment rate. We don't look to have any significant depreciation in housing prices per se in the state unless we have a deep recession, and much of our portfolio even though we give you numbers, many of those units already have higher values since those loans were closed.

So if you look at the rates of payment, the people who have taken these loans out have lesser pressure. Remember we have underwritten to the higher rate, but they have the option of paying at a lower rate, and all of our numbers and we spent a lot of time on this, our credit scores are quite high on the average on these loans as well. There is a lot of underwriting characteristics and time we spend on this. There is no question that as we also go forward in terms of our portfolio, that -- and we've mentioned this before. We adjust our sales of loans as they come in, and we adjust the concepts of what types of loans go into the for sale category and get passed on into securities or onto the Street, and likewise as we mentioned at the beginning of this and which was evident by the gain on sales we had this time, the Street seems to like our product more and more and has gotten to trust it, so we feel we're in really very good shape in that regard.

Barry, an element of this product that I am surprised that more people don't pick up on it, if you're a consumer and you're stuck in a fixed rate mortgage, and you're facing difficult times, either you can make the payment or you can't. In our situation the customer has some flexibility and can choose some other options to weather the storm till times are better.

Fair enough. Thanks, guys.

Yes.

Your next question comes from Ben Johnson with KBW.

Hey, guys. Just real briefly, could you give me a little more color on the difference between average balances and end of period balances for deposits? Was there some kind of one-time event there at the end of last quarter or this quarter that just optically makes one look like you had a really great quarter of growth and one looks it was flat to down?

You're talking about-- ?

I am looking at on average basis for example, non-interest bearing deposits went up 381, 425 up from 366, 455, but on the period-end basis they were down by call it 11 million. I was just wondering what's the big difference here between the end of period and the average?

No, there was no one-time item that we can point to. It is just the general fluctuations of the commercial deposit balances as folks get ready for their quarter ends, and we didn't see anything in particular we can point to. It is just a natural flow.

Your period end actual balances are the snapshot of that particular day where as the averages tend to show you the average balance over a longer period of time and really tends to be a number you need to focus on.

Also we have with respect to certain some of the larger corporate clients we have been in a steady progression of kind of tightening their rate against our regular rates, and by bringing those rates down, you inevitably lose some of those deposits, and that probably relates to the non-interest bearing which I think is one of your references.

Okay. And then a little more color on the construction loan -- or the commercial loans, specifically what part of that is construction loans and do the construction loans kind of lead the downturn in commercial loans in general this quarter?

Oh, our construction loans are classified in the commercial real estate category. I don't have the breakdown.

The main reason that -- in actuality we had a really good production quarter. What happened was that we had a major loan that we participated out after the end of the last quarter. It had closed just before quarter end and was participated out to a number of well recognizable lenders, and we lead the loans, so that's what happened. It is a extremely well known builder, and they had come to us because as we say we're the local bank, the local thing, really matters here, and they asked us to lead the loan.

We had funded it quarter in and then the participations all came in in I think it was April. So that gives you a -- we actually are doing very well on the commercial side. We have kept our standards, tightened them up more and more as the year has gone by, and on a volume basis we're sort of making up for that by having more people into the Broward Palm Beach area, and we have people on the West Coast now, same strategy is that we got a little piece of the market. We can be more restrictive and more careful about the loan quality and at the same time by getting a little piece, that's growth for us if you were talking about Bank America or Wachovia or something, it wouldn't be growth for them.

We've got a strategy that we marketed over the last couple of years is now starting to pay off and will pay off for us handsomely going forward. As we were booking commercial and commercial real estate credit, our credit standards are somewhat tight, and we used to tell our clients that while it was a little bit tougher to get in, what we were going to offer them was consistency over a period of time because by just underwriting stronger credit we wouldn't face the downturns that many others will. We actually have clients now that are reminding us of that, and we think that we'll have a competitive edge going forward in that we will maintain our consistency with clients and others may be turning off the spicket if times get tough.

Great. Could you just update me on the -- are all the new branches still on track or ahead of schedule for profitability?

Yes. Most all of our branches are outperforming our internal targets.

Great. Thanks so much.

Your next question comes from Peter Mitchell, private investor.

Good afternoon. My question, I have heard a lot of talk in the press about the property and casualty market down there, specifically that a number of people have had their policies canceled and the rest of them are seeing 2 to 400% increases. This looks like it is occurring through homeowners and commercial property and businesses. It seems to be occurring everywhere. How has this affected your loan portfolio and what sort of steps are you going to take to make sure it doesn't affect you in the future?

It hasn't really affected our loan portfolio. It is a problem in some areas in the state, and there are different pockets that get different ratings, and there have been some insurance companies that pulled in, there is others that came in. It will probably become a hotter topic because the people who are running for state treasurer at the moment, their entire campaigns are based on them each finding the grand solution to insurance in Florida, so I would suspect you're going to see a lot more articles about this. There is no question that the legislature has to finish some items in this regard.

The dust central from Katrina hasn't really totally settled with respect to that, but thus far we've had very little in the way of problems or more like discussions with a few of the builders relating to insurance, and our requirements stay intact, certainly for people who are right on the water or close to it, they are going to have some higher insurance premiums. That is going on. No question. The entire state is being affected by that, but we haven't seen that really have a major effect. I read articles all the time, and I am not sure whether everybody -- somebody once said that since everybody looks to Katrina for Biloxi and New Orleans are the center is the fact that Katrina came through here as well as well as a couple other hurricanes last year. So the insurance companies are looking for rate increases, and they're going to get them, and they have to go through the treasurer which is now the insurance office, and some of them will be knocked down, some of them will increase. It is a process. But overall it has not really had a significant effect on anything we're doing.

Do you think it will affect you in the future?

We've gone through this before after hurricane Andrew, likewise a number of companies pulled out, they had to establish a different wind storm pools. There is a lot of things going on. The person who helps us out in understanding all of this, and we actually have a board member who has been in the insurance industry and the family for a long, long time, and he is part of the committee that reviews stuff relating to insurance and so on, and there is no question that just like you would say that oil prices go up that that's somewhat of a tax, well, obviously since insurance when it goes up is somewhat of a tax, but you usually enter this phase where the insurance companies come in, beat everybody up, raise their rates, then people see the rates went up, so then the Companies come back in, start fighting for the business again, and then the rates come down a little bit off what they initially charge, but higher than the last hurricane. That's how really hurricane Andrew went and I expect you to see the same thing here. It didn't affect us after hurricane Andrew in our areas anywhere in terms of building or success because what happened afterwards is we ended up in a mini boom not long after the hurricane.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Dave Bishop with Stifel Nicolaus.

Good afternoon, gentlemen.

Hi.

Quick question for you. Just sort of jumping back to the loan sale gains there, was there anything that changed I guess in terms of the mix of the loans sold that drove the increase there or maybe you can -- is there a way to quantify the increase or is it for us to use an effective run rate?

It is two things that happened. One is that notwithstanding people who like to publish articles in the Wall Street Journal, et cetera, the secondary market loves the product, and what's happened for us is not only do they love it to the extent that they think it is a better interest rate hedge type product, but secondly we're in a position that now that we've been through a securitization, and we did some additional loan sales, and we had more conduits that we're in touch with and people who are involved with us, the price people are willing to pay for our product has been going up. So it is -- both things are happening at the same time and that makes it great. We definitely did extremely well.

The other thing to understand, too, is that as we have been producing larger volumes and our finance and treasury areas are running different scenarios relating to portfolio adjustments and so on, we've ended up in a much better position not only in terms of our contacts and understanding of what does well for those sales and which products we may or may not want on a risk profile basis within our portfolio versus that, but also our costs are going down now. We've started a program to get those costs down in terms of our overall origination costs that clearly affect the spread you get on the sale, and we're still working on that. We think we're going to have a lot more success even in this quarter because we instituted some new structural back office situations to even further cut down on the cost of origination.

Then one follow-up, I think Bert just running my numbers differently. I have an actual increase in terms of prepayment rates this quarter sort of backing out the -- increase in the -- adding back the originations, backing out the loans sold, and sourcing the differences principle repayments, amortization, anything I am missing there in terms of--?

The absolute number increase because we have a larger base that we're working that over. The rate did not increase. As I mentioned we're 17% CPR versus 16, so it was in essence flat. Part of this that we can't forget is the asset retention group and what they've been able to do to keep those CPR's down. We haven't seen an increase in rate, actually dollars, but obviously it's a bigger balance sheet.

And what was the, I am sorry, the prepayment penalty fees this quarter.

This quarter, 4.4 million.

Great.

Versus 3.0 last quarter.

Our portfolio is getting larger. We've been growing it quite a bit. We anticipate continuing to do that barring as I said any severe economic situations, and likewise we end up with more loans to sell when we go through this process because we've said this before. We still have characteristics of what we want to hold in our portfolio, and versus characteristics of what we end up selling, and we adjust those depending on market, depending on credit risk, et cetera, and all the things that have happened in the market is repetitive, but it appears the market really likes our product right now, and we have quite a bit of demand for it.

Got you. Great. Thank you.

Your next question comes from Al Savastano with Janney Montgomery Scott.

Good afternoon, guys.

Good afternoon.

Just to follow-up on the last question, are you implying that the gain on sales margins can stay stable from here?

I don't know if it will stay stable. There is no way of totally predicting that because tomorrow the Fed could make some incredible move and move things in a different fashion. We've had indications going into this quarter that essentially we've had very strong demand still for our product at very attractive pricing. Can I tell you it will be exactly the same in September? There is always some fluctuations in the market depending on interest rate moves, but we think we're at a position that, one, we can continue to produce at a lower cost as we go forward, and on the other hand we have very good demand in the market. It is always possible that could soften a little bit, but we would expect it certainly to be higher than it was two quarters ago, and certainly three quarters ago because our product now the market knows us, the people know us, and they're happy, so we expect to still have good gain, good sale opportunities. Our emphasis will still be to grow the portfolio, but we are going to take advantage of also some sales.

Okay. And just to follow-up on the loan sales part, how should we think about that going forward? The volumes you're selling and because I notice you have a large held for sale portfolio at the end of the quarter.

We have a general rule of thumb of -- sort of as a matrix kind of concept of what is the risk profile, geographic profile, types of loan, and certain characteristics, and we institute that and so I would say if you are trying to figure out things, we generally expect of the total production we have and don't forget we have a small amount of Freddie Mac, Fannie May, too, because we feel you have to offer that to customers. You are going to essentially somewhere between 25 and a little over 30% of our total production probably gets sold. It's worked out well for us. We think the process has helped us always be able to be in the position that our portfolio grows not only very attractively for us in terms of deals and types of loans, but at the same time it gives us to shape the risk profile as we sell loans.

Your next question comes from John Pandtle with Raymond James.

Thanks for the follow-up. On the prepayments, do you track those in terms of FICO scores when they repay?

We track them on various characteristics, yes.

Is there any difference between the FICO scores and the stuff that's prepaying versus the average?

No.

Average score on the portfolio.

What's prepaying is the pretty indicative of the portfolio as a whole in terms of FICOs, LTVs, et cetera.

Okay. Then on the non-accrual loans or the non-performing loans, I know it wasn't as a big move in terms of the percentage of the portfolio, but the $2.5 million increase, what type of loans were those and kind of how many loans?

We don't have the exact count, John. It was in the residential area is where we saw the increase on the loans.

It is going to be income, it's impossible forever to have practically nothing, so there is going to be some increase because our portfolio has been growing so much.

Just to put things into perspective, John, we have got 43 for foreclosures that we're working on. On a portfolio of--.

Understood. Understood. Just to clarify, did you mention what the recovery was in the quarter? Was that a commercial loan?

It was a commercial loan that went way back.

Okay. Thanks for the follow-up.

Sure.

Your next question is from Bill Maher with Red Ridge.

Hello. Can you hear me?

Yes.

I would like to focus on the residential loan portfolio and of the 8.9 billion, can you give us an idea what the geographic distribution is of that? And I want to know particularly how much of that is -- are the properties in Florida? And then also some of the other characteristics such as the weighted average loan to value and the average FICO score? And after that I would like to follow-up with--you had mentioned your costs to acquire originate loans, if you could elucidate the percentage that are broker generated, the percent that are retail generated, and the percent of purchased closed loans? Thank you.

I don't know if I have all of the details of that right here. We haven't always given out some of the information. I can give you some things and Bert can join in on this. Florida represents what percentage right now?

A little over 70%.

Our total loan, is that just residential? Yes. It is total -- of our total loan portfolio, something over 70% is Florida. That includes some commercial, and the commercial almost entirely in Florida with some very minor exceptions, so -- and obviously the same in our business loan. We look at Florida as being the markets that we are in for those kind of loans. In terms of LTVs, I think we publish the LTVs in the release, and generally on the MTA part of the portfolio, the whole thing of the MTA was 77?

77.

And then if you adjust it for insurance, it is 73.

Correct.

It is pretty well been running that for quite some time, and that's how we've had it for many years. Generally we've been at a lower LTV.

And the average FICO score is north of 700.

That has remained stable that way for quite a number of quarters. Just a little more color on the residential loans. Residential loans in Florida are north of 60% of the total.

Your next question comes from Dave Bishop with Stifel Nicolaus.

Hey, one follow-up related to that previous question. In terms of loan origination flows, can you give any sort of breakdown in terms of just states there? Is that still predominantly Florida?

I am sorry, you said what?

The loan originations -- current production loan originations, what percentage is Florida.

Generally we're running over 50% in Florida. That may fluctuate from month to month somewhat, but it is going to be in the 55 to 60ish area depending on a lot of different circumstances. We put out different products in different markets, and we have choices to make at different times as to what we do. But it generally is going to run in that area.

Okay.

Your next question comes from Jennifer Thompson with Oppenheimer.

Hi. Quick follow-up. What was the increase in the MTA loan yields this quarter compared to the cost to funds?

Jenn, we didn't publish separately the MTA loan yield, but the MTA--.

Are you talking about -- are you saying where is the MTA index versus--?

Yes, yes. How much did it increase this quarter?

That's what I was going to say. We don't publish the rate, but the MTA index went up 39 basis points during the quarter. What we peg it to is three months LIBOR and that went up 45 basis points. So as we've been discussing in the past, the lag is still there, actually was a little bit more accentuated this quarter. We're now just under 100 basis points in differential between the MTA index and three months LIBOR as approximately going back -- well, now back to June of '04. That lag actually spread a little bit. As you can tell-.

It will vary depending on the dates of the meetings of the Fed, so it is generally going to run relatively consistent as a gap of 90 to 100 basis points until they stop, but that's one of the things we feel very good about this quarter is we still moved our margin up notwithstanding the Fed was still moving and hasn't stopped. We feel very optimistic about our margin opportunities. We're still plugging away, and we think we have chances to even do better.

Great. Thanks.

You have no further questions. Please proceed with your presentation or any closing remarks.

I just want to thank everybody for being on and listening to what I think has been a great quarter for us. We really feel that we have reached in a sense a lot of things that we've been talking about over the last year in items that we said were going to happen, but we knew we had a lot of hard work, and that's all coming about and you're start to go see all of that really working, and we're optimistic that barring something severe happening with respect to the Fed or some other unfortunate incidents that we really are in an excellent position to continue the kind of progress that we've been telling you our goal is. I appreciate all of you being on. Thank you.

This concludes the BankUnited Financial Corporation third quarter earnings conference call. You may now disconnect.