BankUnited Inc (BKU) 2007 Q1 法說會逐字稿

Good afternoon. This conference call 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, would, 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 expectations include but are not limited to general business and economic conditions; fiscal and monetary policies; events beyond our control, including natural disasters insignificant 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; the issuance or redemption of additional Company equity or debt; volatility in the market price 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, servicing capacity, governmental, regulatory and technical factors affecting the Company's operations, pricing, products and delivery of services.

At this time, I would like to welcome everyone to the first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Camner, you may begin your conference.

We apologize for those of you who may have been waiting, but there appeared to be a technical glitch in the conference operations set up. Good afternoon and welcome to BankUnited's report of earnings for the first quarter of 2007. 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.

We will begin the call with a brief overview of our results and devote the balance of our time together to the question-and-answer session. Detailed information is available in the press release which was distributed this morning.

We have achieved another quarter of strong earnings and continue to build a successful Florida bank, complemented by a national residential mortgage lending business. In the last several years, we have diversified our business to become a well-rounded financial institution in a strong market. This, coupled with our discipline in credit standards and lending practices, has helped us to grow as the economic environment has changed.

For the quarter ended December 31, 2006, BankUnited had record net income of $27.4 million, an increase of 69% from the same quarter last year. Basic and diluted earnings per share for the quarter were $0.75 and $0.71, respectively, as compared to $0.53 and $0.50 for the same quarter in the 2005 fiscal year.

Total assets grew to $13.8 billion, a 23% increase over the same period last year. Total loan production was $1.3 billion and total deposits were $6.3 billion. Net interest margins reached 2.35% at the end of the quarter, an increase of 39 basis points over the same period last year. As we have mentioned in previous discussions and quarters, we have spent a lot of energy on improving our margin. We are especially proud of our steady increases, because they have taken place in an environment with a challenging yield curve. Many banks reported compressed margins again this period.

BankUnited's Board of Directors declared an eight consecutive quarterly cash dividend for holders of Class A common stock in the first quarter. We will continue to pay cash dividends at the Board's discretion.

In spite of all these positives and one Ramiro Ortiz will discuss shortly, our industry is facing a headwind. We have an experienced management team with an average of 29 years in all areas of the banking business. We have been preparing for cyclical forces for some time, and have many initiatives in place that will help us weather these headwinds.

These economic cycles typically result in decreased asset production and increased levels of nonperforming assets. The multi-step program we have implemented should enable us to achieve growth while dealing with these issues in upcoming quarters. The plan impacts every business line. We will launch products that will steadily build loans and deposits. We will add new markets throughout the year, both in bank branch locations as well as regional mortgage production offices. We will take measures to control our cost of funds, and are initiating increased asset retention programs that will reduce prepayments.

While we expect delinquencies to rise -- they always do in these environments -- the historically conservative underwriting process and loan-to-value standards should keep our loss experience well below industry averages. We do not expect nonperforming assets to exceed the highs we have experienced in the past several cycles. Those of you who have followed BankUnited for many years know that our highs are still low when compared to the rest of the thrift industry in that area.

Finally, we have implemented a number of tough expense control policies across all areas of the Company. It's important to remember that credit quality is a hallmark of our company as a strong defense against changes in the economy. We fully intend, therefore, to continue to grow.

I will now turn this call over to our President and Chief Operating Officer, Ramiro Ortiz, who will provide you more details on our market strategies.

Thank you, Fred. The first quarter of 2007 was another quarter of strong performance at all levels of our BankUnited team. Our micromarket strategies continue to pay dividends. Our neighborhood banking locations continue to perform and deepen relationships with local civic groups and community organizations through partnered events and promotions. Our customers understand that we are here for them; it's a local thing.

As a result of these efforts, new accounts continue to increase at a rapid rate, far outpacing last year, which was a pretty darn good year. We will add at least 10 more branches, both inside and outside our footprint, by the end of this fiscal year. Matter of fact, we just opened up number 78, Lantana, in Palm Beach Count. That is the third branch we've opened up this fiscal year.

The success of our strategy is evident in strong deposit growth during the quarter. Total deposits reached $6.3 billion, an increase of 26% compared to the same period last year. Core deposits of $4.5 billion represent a 24% increase over the previous year.

These numbers highlight our increasing market share within the State of Florida and the success of our bankers at the local branch level. Matter of fact, I am looking at the last deposit share numbers that were issued. We were the only major bank that increased market share in Dade, Broward and Palm Beach County, as well as we had the largest increase in market share in the State of Florida of the top 16 banks that report. As we continue to become more rooted in the new markets we serve, we have strategically added lenders, small business bankers and investment professionals to meet the needs of our customers and expand the reach of those business lines.

Commercial and commercial real estate balances grew to $1.2 billion; that's a 13% increase over the same period last year. Non-interest-bearing deposits, DDA, rose $372 million, and that's an increase of 3.6% year over year, a year in which many of our competitors reported decreases. Non-CD deposits increased 11% of the same period last year.

Total loan originations were $1.3 billion. That's a slight drop on the same period last year. After loan sales and prepayments, total loans grew by $151 million or 1.3% during the quarter, to reach $11.6 billion as of December 31st, 2007. Although these numbers were smaller than what we've reported in previous quarters, we are remaining diligent in our discipline on credit standards, and will not compromise credit quality to make up for volume.

We will continue to add regional mortgage production offices in at least two markets this year. We have proven that our residential mortgage production office formula with each new location works. Our Portland office had a soft opening this week, and our Rhode Island office, which opened in September, has already been contributing to production. The small slice of the market we gain as these offices open, gain traction and will compensate for softening that may occur in existing markets during the cycle.

The 2007 fiscal year is off to a strong start. We are pleased with our results so far and recognize we're facing a challenging year. Nothing we haven't seen before. We believe we're prepared for it. As Fred said, we've got an experienced management team who have been through these cycles before, and we feel optimistic. Our business lines and support units all know we have to work hard; our work is cut out. Everyone is onboard to make sure we stay true to our customers and the policies and credit standards that have been hallmarks of our company since the beginning.

For more specific details now about our financial results, I will turn the call over to our CFO, Bert Lopez.

Thank you, Ramiro. As noted, this year is off to a good start. In addition to the items Fred and Ramiro mentioned, we had a strong growth in earnings per share, which jumped 42% year over year. This is after the dilutive effects of the 5.75 million share offering we did in January of 2006. So despite an uneven economy, we're managing (technical difficulty) strengths in reaching new benchmarks.

Fred mentioned our net interest margin. We continue to expand margin this quarter, up now to 2.35%, which is up 68 basis points from our low in June of 2005. This was accomplished through repricing of the MTA, the development and refinement of mortgage and other loan products and the success of our neighborhood banking strategies. If the Federal Reserve's open market committee maintains rates at the current level or slow increments thereof, the lagging effect on the repricing of the adjustable-rate mortgages should continue to have a positive effect on our margin.

Our mortgage offerings meet the needs of educated borrowers while maintaining our strict underwriting standards. This line of business has spent a lot of time preparing for the inevitable slowdowns in the market we're experiencing now. We have introduced several new products this quarter. As Ramiro mentioned, we will continue to expand our production abilities.

We can continue to experience low prepayment speeds on our option ARM portfolio, due in part to our asset retention programs as well as our implementation of prepayment fees a number of years ago. Our CPRs on the residential portfolio was at 16%, well below other lenders. The prepayment fees contributed $5.9 million of revenue this quarter, up from $4.9 million last quarter. However, the net amortization, which is the effect on the income statement, remained constant from last quarter at $2.9 million.

As Fred mentioned, we're in the midst of a residential credit cycle, and we expected nonperforming assets to increase, and they have, reaching 33 basis points this quarter compared to 16 basis points last quarter. The increase was in the single-family residential loans, where our conservative underwriting standards and low LTVs should keep our charge-offs from increasing significantly. Our best estimate, given where we are in the housing cycle, is that nonperformers will increase to between 60 and 80 basis points of assets.

Last quarter, we discussed a $17 million commercial real estate loan to Transeastern, which became a troubled asset. In early December and again in January, we took steps and made a financial decision to dispose of a total of $14 million of these loans at a discount.

At 12-31-06, the first $7 million loan was off our books, and we recorded a $1.3 million charge-off for the quarter. So at December 31st, we have approximately $10.3 million of this relationship remaining.

In early January, we sold a second loan of $7.3 million, also at a discount of $1.3 million. This $1.3 million was fully reserved for as of December 31st. The remaining $3 million of this relationship was classified as nonperforming back in September of 2006, and we now have a 60% reserve as of December 31st.

Our provision for loan losses was $4 million this quarter, up from $2.3 million the same quarter last year, reflecting the aforementioned items on the Transeastern loan and the increase in nonperforming assets. Charge-offs were $1.2 million for the quarter, significantly below our provision. If we exclude the $1.3 million charge-off on the Transeastern loan, we actually had recoveries on the remainder of the portfolio of $144,000. The allowance for loan losses as a percentage of total loans increased to 34 basis points as of December 31st, compared to 32 basis points for the quarter ended September 2006 and 32 basis points for December of last year.

Our non-interest income grew by a healthy 51% year over year. As we have grown our loan and deposit portfolio, we have been able to increase fee revenue by double-digit margins.

During the quarter, we also sold $545 million of mostly option-on loans, yielding a gain of slightly better than 100 basis points for a total of $5.6 million. We announced last quarter that we would sell a higher percentage of our production, and we did so. Our goal was to take advantage of exceedingly strong secondary market pricing and reduce some geographic concentrations for risk management purposes.

While gain on sale amounts have held up through this month, we cannot be sure they will stay at these levels for the remainder of the year. We did take the opportunity to sell the higher percentage of production this past quarter, and we anticipate reverting back to our previously stated 25% to 30% of production, or approximately sales of $300 million for this coming March quarter.

BankUnited continues to maintain its strong capital position in excess of regulatory requirements. Core and risk-based capital ratios were 7.4% and 14.5%, respectively, at December 31, 2006.

As we have discussed with you, we would like to take advantage at opportunistic level to repurchase shares. During the quarter, we did repurchase 130,000 shares at an average price of $25.38.

I would now like to turn the call back over to Fred.

Thanks, Bert. We are very pleased with our results for this quarter. Despite a challenging economy and uncertainty about how long it will continue, we still have faith and confidence in the Florida market, as well as our national economy. We understand the nuances of our customers and communities, and backup our product offerings with strong credit discipline. We are well positioned to expand upon our distinction as the largest bank headquartered in Florida.

We're ready now to open up the call to questions, operator.

(OPERATOR INSTRUCTIONS). John Pancari.

Just wanted to see if you can give us additional color on the increase in MTAs this quarter. You mentioned the single-family residential. If you have any additional detail on that increase, and basically what markets and any other just expectations regarding that portfolio, and how much of your expectations around the increase in MTAs that you are looking for is really based on what you're seeing in that portfolio versus anything else in your commercial portfolio.

Let me start with the last part first. We've done regular reviews, a number of them. I actually have the piece of the collection area that gives me regular reports every approximately 10 days, and we have meetings on it.

For those not totally familiar with us from the past and when we have been through other cycles, I have personally gotten involved in how we treat what we're doing with our delinquencies, how we adjust the rates or foreclosure and so forth in addressing them. For all of you not totally aware, my background is that I was a principal workout attorney, in addition, for a lot of other financial companies over the many years that I've been in South Florida.

So we have very substantial experience all through, really, our team and understand the workout area. We have reviewed, and I can just say as of the last times that we have reviewed, which was only a very short time ago, essentially, we have not found that we have any commercial or corporate loan concerns at this time, with respect to our portfolio.

The only one we had related to the Transeastern situation, and frankly, I doubt we would have sold it. It would have been a close question, because we felt that we would ultimately recover our entire proceeds. But because someone had a special agenda, for some reason put our name on the whole $670 million of the loan, we felt we needed to get that behind us. So we did, and we went ahead and sold it. It's not my normal thing. I usually like 100% plus recoveries.

So we proceeded to do that, and that essentially leaves us, at this time, with no commercial loans that we are aware of presently. We have had our departments really deep-drill that. Now, that doesn't mean something isn't going to pop up. Everybody knows all the caveats. But the economies where we have our commercial loans have been very strong, and we don't anticipate further problems in that area.

As a matter of fact, with respect to the Transeastern loan, so everybody will have it perfectly clear, because of things that happened with respect to that loan, relating to the servicing of that loan, only because of that was there any question of having a loss in that loan. It should never have been, really, in that position.

With respect to the residential area, again, we monitor that very carefully. I'll give you some generalities. Essentially, for the most part, the nonperformers in the residential area pretty well reflect our portfolio, plus or minus a few percent. So, for example, there's not really a significant difference in the defaults and the option ARMs, as opposed to our other products on the books. It's more interesting, in a sense, about that because technically the option ARMs are relatively newer, and the other loans are relatively older and have LTVs that are, of course, still low but are even much lower than you could imagine, because they've had a number of years already on the books and prices certainly have increased in the area.

In reviewing the residential portfolio, except with a few exceptions [I hear of] their fraud situation, which is typical of this type of portfolio situation, for the most part, we do not find or anticipate that we will incur any significant losses, if at all, greater than what has happened in the past to us in these cycles. For those of you, again, not familiar, we generally have had, over the years, through the cycles, very low loan losses reported.

So we don't see anything at the moment that changes that. We recognize that in some markets, there has been a reduction in prices of housing. There's certainly some increased inventories; I think almost anybody would tell you that. But overall, if you look at where our LTVs are at the inception -- and that inception, if adjusted, really, for prices increases incurred since the inception of a number of these loans, that LTV would be, I think, significantly lower. But if you just look at the LTV at inception average, that is plenty of room to take care of any of the kinds of price decreases that many of you may have heard about in different areas of the country.

There are always some pockets that may suffer more in a housing price decline as we have right now, where maybe some of you that may recollect the situation in California a number of years ago -- they went through this type of cycle. NegAm lenders existed then and did very well with it. For example, of course, Golden West was very active back then.

So we are very optimistic in terms of that. But we know that no matter how it's going to work out, you have got to have increases in nonperforming when you go through a period like this. We expected that, and as we announced, we anticipate that we will ultimately, as we go through the December through April period, will ultimately be somewhere in the 60 to possibly 80 basis points of nonperforming. We do not anticipate significant losses.

So I don't know if that gives you all enough information. I'm glad to even go into more detail if you'd like, and I'm open for additional questions on this area. I realize that a lot of people are concerned with this area.

I just have one follow-up on that. So I guess, based on your loss expectations there, are you comfortable with where your reserve stands now? Just looking at it as a percentage of NPLs, it's clearly around -- took a big dip there around 88% of NPLs. So where do you see that going, in light of your expectation for a 68 to 80 basis point ratio on the MTA side?

We did an extremely thorough review of where we thought we were, with respect to our portfolio and the reserve under the rules that we could be permitted with respect to that portfolio. Essentially, what you see is a lot of time spent on looking at loans in a foreclosure list. I should say -- I don't want to call it acceleration of foreclosure, but we, depending on our collectors' recommendations, in a sense, had moved up the time period by which a loan goes into foreclosure. So in a sense, we've created a certain amount of ballooning of numbers coming through here.

What happens is that you when you are in a position that you originally had a very, very low number -- and we kept saying how this is an impossible number, how can it stay? I don't know how many times Ramiro, both in our phone calls and before our Directors, has made that comment. I think others probably had numbers that were extremely low like that, too. But if you get to the situation of understanding that, when you start the foreclosure procedure, and even though we have done some expeditious treatment of it, you end up with a situation that if you had nothing previously, you have a time lag somewhere around nine months or so, plus or minus, depending on the jurisdiction of the country, as to when you recover the property and then are in a position to go ahead and sell it.

So it's first in, generally, first-out. But we are only now starting to get to the point that a lot of the first in's will get to the actual foreclosure judgment and then later a sale. So we're going to have some accumulation, pending being in a position that a number of these properties start going out of the portfolio, in terms of the sale of what would then be an REO.

So that's essentially a cycle. The other thing everybody should understand is some additional information. We believe, as part of what we have described to you, that the insurance situation in Florida is having some effect and will, with respect to escrows. So again, typically, in the December holiday period through the tax payment period at the beginning of April, you will normally see higher delinquencies of some kind in any event. This will be temporarily exacerbated, we believe, by people trying to get insurance on their homes for escrow purposes in Florida, for our Florida portfolio.

The state legislature is meeting now. They have already indicated they are going to be passing insurance premium reduction laws. We believe that will ameliorate that situation, but we will probably have a lag in there, where we are developing programs internally through the servicing area to help people out to get over that until the legislation takes effect, and the various insurance companies are able to go ahead and start correcting their policy notices.

So that's going to have some effect in here as well. So we've given you a figure. We have been in other cycles; the figures we gave you generally -- that's where we've been. We don't see anything right now, in our estimation of what has been coming through in the foreclosure -- and I've reviewed this quite a bit -- that would indicate that we will have losses of any great significance.

We are pretty optimistic about that. Like anyone today in this industry, we feel bad that housing is down somewhat, that prices have declined somewhat. But most of the markets also have very strong economies. Certainly, the national economy overall has been very strong. The Florida economy is especially strong. Even though we have had a reduction in housing construction, there has been substantial continued increases in the whole area of infrastructure and public and other types of major building, financing, hospitals and so forth.

So our very low unemployment numbers in Florida -- we expect those to continue. The primary ultimate determinant of whether you get residential foreclosures or recoveries and so forth relate to unemployment. With an economy that's still moving along well, we really expect to be pretty well in the range that we've talked about.

I hope that's enough detail, but I am happy to even go into more detail if anybody wants it.

Jennifer Thompson.

Previously, I think, on the last call, you sort of thought that provision run rate of $1.8 million plus or minus a couple hundred thousand was a good sort of prophecy going forward. Is that something you feel comfortable reiterating, given what you have seen in NPA growth?

I would say -- and again, it's very hard to do these with the way the SEC rules are. If I could, I would have -- in the old days, you would have slapped on a bunch of dollars and said, isn't that great, and we've done that, but in actually measuring by loan and looking at your loss experience situation and so forth.

So I would estimate that we could possibly be as high as a $4 million again this quarter. But we could also be lower; it's very possible. I think we will be a little higher than the number you gave. So if I were picking a range right now -- and this is an educated guess situation, because obviously it depends on what it is at the end of March -- I would say $3 million to probably $4 million is where we may end up resting. It could be less than that, but you can take one of those figures and probably feel pretty comfortable about it.

As I've indicated, at the moment, those loans are in foreclosure. We've looked at them. We've actually done some sampling appraisals on some of the houses that are in foreclosure. Essentially, with a few exceptions like there are a couple fraud situations, typical things. When Bert mentioned that we actually had net recovery, if you exclude the Transeastern loan for this quarter, one of the losses within that gain that made that number not as high was a borrower, I think, knocked down their bearing wall in the house, and so it had to have huge repairs. You know, there was a great contractor who did that.

So those things pop up. But at the moment, we're optimistic in terms of the properties. They're ultimately coming in when they are recovered, go into REO and we expect sales of those. The LTVs overall in this are pretty low. The only exceptions are those houses which have mortgage insurance. Obviously, those LTVs will be higher.

Just to decompose it a little bit for you, we were guiding at $1.8 million plus or minus a couple hundred thousand. Then after our call, we made that financial decision to get rid of the two pieces of the Transeastern loan. So we did that at a discount of $1.3 million for each loan. So that's the other part that contributed to a higher provision.

But in general, Fred is correct. When we are taking a look at the foreclosures and rising MTAs, I think we will be in that $3 million to $4 million range for this March quarter.

But is that what you are saying going forward? Is that a good run rate, or you are just saying that the March quarter, what's --?

I'm saying that's the March quarter. I'm not sure -- unless you see a deterioration in the economies that we are in -- obviously, we have a very strong presence in Florida. But we pretty well mirror how our loans are, and I think it's about 56% or so is in Florida of our loans. Then we are kind of -- there's no other place beyond I think it's 7% or 8% in a state in the country.

So essentially, with some exceptions, a few exceptions here and there, pretty well the foreclosures mirror geographically where we are overall, if you were to look at regions. I can just give you an anecdotal story, because I keep seeing -- everybody puts out scare headlines and et cetera. My wife's uncle, who is elderly and he had a nice condo with a kind of decent view of the ocean, a high-rise. At the height of the market about a year ago, he put the condo up for sale for I think it was $830,000 or $840,000 or something, and they didn't want to reduce it. This was in the Naples area, by the way. They didn't want to reduce the price, but ultimately they decided to go ahead and do it, reduced it. They just now contracted to sell it for I think it was an 11% reduction from that. That's off the very high.

So you have got to understand our LTVs. We have give you the average figure, adjusted for the insurance. So we feel that we are in very good position in terms of what is happening. We are not a subprime lender. Nothing in our portfolio -- for example, there's really no significant greater foreclosures going on with respect to option ARMs than there is for the non-option ARM in our portfolio. I know some people keep thinking that's going to have some big effect. We don't see that at all; it has not appeared whatsoever in anything we have been doing.

Just as a follow-up, the MTA yield was up 42 basis points last quarter. Could you give us that number for this quarter?

The adjustment that went up was 27 basis points, the MTA (multiple speakers).

So is it going to keep decreasing from this level going forward? How does that run?

It will increase, but at a decreasing rate, yes. It's just natural phenomenon of us catching up with the lag. Remember, we used to talk about the difference between the MTA and three-month LIBOR as a proxy was about 90 basis points, going back to June of 2004. Well, obviously, as we've picked up that lag, there's less of a difference. Right now, it sits at about 42 basis points of differential. So we will continue to get increases, but yet it will increase at a decreasing rate.

The real challenge for us, and we will keep doing this going forward, is really on the funding side, where we're going to be able to keep our deposit costs from increasing. Also, on the wholesale side, where rates have not increased as much, we have taken advantage of the lower rates on the wholesale side. In fact, three-month LIBOR, for instance, actually decreased 7 basis points this past quarter. So certainly, that's helpful from a wholesale funding standpoint.

Laurie Hunsicker.

Fred, I just wanted to go back to your commercial portfolio and just make sure I got this right. Of your $1.2 billion in commercial loans, except for the residual piece of Transeastern -- which is $3 million out of reserve, call it $1.2 million, whatever -- you have no other nonperformers. Is that correct?

That's correct (multiple speakers).

In commercial areas, yes.

So again, just to sort of reemphasize, if we look at your nonperformers, you finished out the quarter at $45 million. Obviously, you have the $7 million resolution in January, so that takes you down to $38 million. For the $17 million increase, linked quarter (multiple speakers).

It's already passed through, so the number is actually net of that.

Yes, the $7 million pieces were not in the nonperformers, because they were performing, obviously.

So they pass through directly? Okay. So, again, that call it $24 million differential, the $21 million to $45 million -- that is all residential?

The growth this past quarter, yes, was all single-family residential.

It's all residential. There's no really significant concentrations in any particular thing, by types of loan or by types of borrower or so forth, that is particularly unusual. It's just cyclical, and when you have some slowdowns in some areas of the economy, and there's no question that the house prices have come down some, there are effects.

There are effects on people who over-stretch themselves, and they may or may not be able to go out and borrow the money to make sure they are paying us. So we are in first position. While we have home equity lines, we have practically -- I guess, because of the way we underwrite those, we have practically no nonperformers in the equity line.

So essentially, these are first mortgages. Some are in Dade, Broward, Palm Beach, Martin, Orlando area, Naples. They are also in the Chicago area, in the Midwest. If anything, if I were just looking at it as a generality, from what we have been talking about, except for some areas in the Orlando market, we feel pretty comfortable with everything else, really, that is in Florida at the moment. Then there's some areas in the Midwest where you have, still, industrial plant closings, particularly auto company situations, and it's possible that we may have a few loans in some of those areas. I would say those could be problems.

But overall, the review, as I mentioned, indicates that with the LTVs of the properties being foreclosed, we feel there are very few loans that are of question now. What happens with a foreclosure is once you get there and you get the judgment and you go to sell the property, you frequently and up in a recapture, because we reverse 90 days of interest on anyone that goes into delinquency, plus you end up with other charges and fees and so forth.

So, to the extent that the property value ends up covering that, we will ultimately, as they get to a disposition point, probably start having recoveries. Some of these will have losses out there. There are a few that we went through the list and we marked them as marginal. Practically none of them, when we were trying to work up our list of what is coming through as foreclosures, reached a category of a question as to whether we might have a loss.

Now, this is only as of today. This is what we have reviewed. We have talked with appraisers, talked with real estate brokers. We actually have a Board committee that is going over and looking at this. My wife's former partner of a number of years ago -- the two of them had headed up the national firm, one of the largest for the FDIC, on residential disposition back in the old days of FIRREA and the RHTC and so forth, and they disposed of thousands of properties around the country. He recently joined our Board, and he's actually heading up a committee that's helping us looking around (technical difficulty) price changes and so forth.

So we're trying to adapt and understand all those things. But as best we can determine at this point, we feel very comfortable with believing that we do not have significant losses.

The fact that a loan gets to an NPA doesn't mean that it's going to end up at a loss. It means the borrower is having trouble making payments, sometimes from unemployment, sometimes for having overstretched themselves. That's all -- we have to address that as we go through.

Just to go back, can you just give a breakdown of your $45 million in nonperformers of how much are in Florida versus outside, and maybe how much are in sort of those hotter markets, i.e., the Orlando and possibly the Midwest, where you might have some industrial plant closings that you would be concerned about?

The amount in Florida is -- I believe it was about -- it's in the 50% area, which is about what the portfolio is. If anything, we have, I think, a little higher delinquency rate in the Midwest. We feel that relates -- when people talk about hot property, prices may have gone up and some point, and you get to the peak, and there may be some loans that were at the peak. But for the most part, it smooths over. Really, a lot of the markets haven't suffered as much as people try to tell you. There are lots of scare headlines. There's no question there's larger inventories in the areas.

But anecdotally, my daughter, who just got engaged and had been looking at houses that she might ultimately be interested in -- she was following three houses in Dade County, and she had seen them there for a little over a month, and boom, they were gone one day and sold.

Wait a minute. I missed that. Did Lauren get engaged?

Yes, she is. Right.

Well, congratulations, if she's on the call. Okay. No, I hear what you're saying, and I think you summarized it really well, saying the highs are still [level]. Your overall credit looks good. I guess there was just some concern we saw such a large uptick.

We believe, and we've said this, that given the insurance situation, the fact that now you have to redo the escrow account, which -- we have escrow accounts, and most of them are paid out in the November-December period. So now the replenishing, even though they are done on a part basis, if either taxes or insurance go up, you end up with some payments coming in upfront that are higher. That, we think, will also contribute that we will end up with some higher NPAs.

Then the question is, what happens to those? With respect to the insurance, the state legislature, as I mentioned, is working on that. They expected a bill in a few days now that will actually lower insurance rates from where they are right now. We think that's going to help a lot, but we also -- Ramiro can tell you that he's got a program underway with our servicing people that we help out borrowers when they initially may get some shock on insurance payments until that gets all resolved.

But, given the normal cycle, the number I gave you -- we feel pretty comfortable with that. We could end up being wrong; I know that. We have been in this a long time. We think this is going to rest somewhere in this cycle period, about 60 to 80 basis points NPAs. But we don't look at our losses being significant out of that.

If you were to forecast in terms of charge-offs, charge-offs might peak at maybe 10 basis points? Would that be a fair number?

It might be a little higher than that. It may not reach that.

One other question on credit. Your $144,000 of recoveries this quarter -- those were all on the revenue side?

Yes. (Multiple speakers).

I know I have hogged this call a little bit, but just one other line item. Just looking at your noninterest income/noninterest expense, can you just touch a little bit on the other other for noninterest income? It jumped linked quarter from $1.3 million to $1.7 million. Was there anything non-recurring?

Then can you also touch on your noninterest expense? The employee comps jumped linked quarter as well. [I think] that's all core; if there's anything non-recurring in that --

I'll jump in after Bert. Bert can --

On the other income side, there really wasn't anything unusual in that. It's just that's a compilation of a number of different accounts, but no one that particularly increased in that area. The other is marked-to-market on swaps. There's a couple of other things that have fluctuated slightly, but nothing large happened in there.

On the employee compensation --

She asked if it's recurring, the noninterest income.

Yes, not the swaps but just exclusive of that, the $1.718 million as it compared to the $1.275 million the quarter before?

That's recurring items. (Multiple speakers).

That's all recurring? Okay, perfect.

(Multiple speakers) also, I think, a [beef-up]. We started out in our wealth management area, and we are starting to pick up fees in that area. We believe, as we go through that, that we will continue to have some very good improvement there. We totally revamped the whole area, have a new person handling it. We also believe that sometime soon, we will be making some additional announcements on wealth management about expanding that whole area.

Just to expand on that just a little bit, if you look back at a year ago, we were $1.649 million, so we are back to a normalized run rate. In September, we had a couple of things that we put through, other other interest income. That's what depressed the September number (multiple speakers) a better run rate.

In terms of the employee compensation number, we were up to $24 million. That's a component of a couple of different things. One, this is the quarter where we trued it up for the bonus accruals. So we had a little bit more there, based on our results. So we had a higher number in there. The compensation piece coming from the commission side went up for the quarter, and then we also had a couple of the tax payments that we started making for this particular quarter. So that moved the number up a little bit.

Also, in terms of our production, as you probably know -- I won't go into too much detail -- but there is a FASB 91 credit that we take when we originate loans. With our slightly lower production this quarter, we had less of a credit coming into that number. So that made the number higher on a comparative basis.

So if we were looking to the next quarter out, it might be closer to $23 million run rate?

Yes, I would say mid $23 million for a run rate from there.

Barry McCarver.

You have answered most of my questions, but your comments, I think, on the economy and housing market in general beg the question about asking about the loan pipeline and what you see there for the next couple of months.

Actually, I'm glad you said it that way, because the real thing that pertains to where we will be is not going to be on the credit side, as far as we can see. Those are kind of built-in, and we know we're going to go through a cycle period, et cetera. So while it has some effect on earnings, as you dispose of properties, you pick back up parts of what got affected by NPAs.

So what you're asking is the best question for us at the moment. Everybody -- a bunch of people put out things on the credit, and we are actually much less concerned about that. On production, we had excellent production in October and November. We had some weakening in December, some of which is not that unusual, because of the holiday periods and how they fell this year, in particular.

But we got a little bit concerned as we went into January, and then more recently, we have been seeing the numbers start moving back up to where our applications were previously. So they have gone up nicely now. We think this will be a little bit choppy as we go forward. What's very important, and what we've tried to emphasize to everybody in the past, is our strategy is that we're not on every street corner like Washington Mutual and some other entities you are all familiar with.

Therefore, one of the ways that we can make out for volume contractions in existing offices is by opening in some additional markets. We did that in the Providence office. As Ramiro had mentioned, that one is really starting to give us some good production, and it's just really getting into that position. It usually takes three months or so to really get up and moving.

We just opened -- not officially, but it is open in Portland, and we will have an announcement saying it's open. But they are already taking applications, and we expect that will start adding into our production.

We have plans for an additional office either at the very end of March or beginning of April. We expect to open around that time, and believe that will help assist us. So if there's further contraction of applications in the offices, then we will open enough offices to essentially pick all that up and put us back in the position where we were this last quarter and, to some degree, the quarter before.

But on the other hand, as I mentioned, not having opened all those, and the Portland thing having just opened, it seems like our applications have been moving back up, in any event. Furthermore, we have introduced, recently, some additional products; we plan on introducing some other products to help in that area. It was not our normal desire to sell as many loans as we did last quarter. There were a lot of reasons for that. One was that the people we sell the loans through were beating up on us in their great need to have our product, as one of the investment houses. So we finally decided that, given how much they were offering us, we'd go ahead and do something more than we would normally do.

We look as we go forward to be adding more into the portfolio, because it's our desire and our target to be somewhere at the $15 billion plus area at fiscal year end. We expect that will be growth in all areas. The one area I'm not sure we will grow as rapidly will be commercial real estate, though there's some additional markets and areas we may pick up additional business, and maybe that end up growing as much, too.

But there's no question all of this is in view, and everybody has to remember that we have continuously tightened our standards as we have gone through the year. I can assure you, in the last four or five months, we have even tightened them more. So some of the contraction that has happened in these offices hasn't simply been an applications problem; it has also that we tightened credit even more, and are looking for nuances and we have deep-drilled the portfolio to try to avoid concentration and so on.

So this is what is going on. I hope that helps you enough.

Actually, that's very helpful. Just so I'm clear on your loan sales quarter to quarter, you wouldn't expect to come back this quarter quite as strongly on the amount?

We don't anticipate doing that. We normally will do about 25% to 31%, 32% of our production. There are a lot of reasons for that number. What we are also more doing is adjusting depending on products and which products we're going to have in our portfolio versus which ones we sell. There's a lot of things going on, and our finance department is doing a great job of putting all of it together.

What is really amazing is [to think] how much people, last quarter, they really -- that's a really excellent premium that we got paid, because amongst everything else, we did various adjustments and concentrations. So normally, that would get you a little bit lower figure, but we still ended up with a very high figure.

Secondly, you mentioned in your opening comments on the deposit side the competitive nature of deposit gathering, and that you might have some additional products rolled out there over time to help out on your deposit growth. Could you give us just a little bit more color on what you might be thinking they are?

I can't be that specific at this moment. We did make some changes in terms of the whole direction of our deposit gathering area, our branch operations and so forth. The officer who is now head of that is a very strong marketing person, very well-known in South Florida. He had been doing another area of the bank and we moved him on into that position, amongst everything us. Because we felt that he would give a little more oomph in the direction of not only following through with Ramiro's -- and Ramiro eventually will jump in here, because I've been talking to much. But he will give a little more oomph in terms of not only the neighborhood concept and really getting more developed, but at the same time, he will be more attuned for products, ultimately, that will be sold out through the branches. That's an area we want beefed up, which, if it enters into the mix as we improve in that area, that can be a tremendous positive to us.

Ramiro, I don't know if you want to --

No, I just want to reiterate, Barry, that what we have been doing has worked fairly well. It's being done now with even more (technical difficulty). We picked up almost 40 basis points of market share. We were by far the largest -- we had by far the largest pickup in market share year over year in Florida.

So deposit gathering is something that we have been pretty good at. We are also measuring net new accounts, and we are doing very, very, very well in that, not only in terms of total deposit accounts but particularly important DDA accounts.

Jim Ackor.

I was curious, Fred, if you could just reiterate -- did I hear correctly that you thought NPAs might get to somewhere between 60 and 80 basis points of total assets between now and --?

Yes, (multiple speakers) in this cycle, when you run up to income tax day, generally you get higher. As it is, we also have an insurance problem in Florida that is going to have some effect and is going to create some confusion. So overall, my belief is yes, we will end up somewhere between 60 and 80. That actually -- if you look at past cycles, that's about where we ended up in those cycles. Also, if you look at the past cycles, when we end up in that area, you'll end up seeing that the losses were extremely low compared to those levels. I believe those levels that I'm talking about will be well below other institutions.

Did I hear you say correctly that you thought net charge-offs might get up to somewhere between 10 and 15 basis points? Is that --?

I think it's hard to marry any figure, but excluding this Transeastern thing that we had, yes. I think it could get to that point, possibly. I want to be conservative about it. On the other hand, when I went through the entire list of foreclosures and we went by market to market, and what was there, while there were some loans, a couple of them particularly, that involved fraud not actually by the borrower but by somebody else on the borrower, not us. It involved a real estate broker or some type of real estate manager that seems to have defrauded some customers.

When you add it all up, yes, we may have some losses here and there. But a lot of the recoveries, it looked to us, would be positive recoveries, which is like Bert said last quarter -- we had positive recoveries. We haven't had that many go into the REO and then out the door stage yet, because the foreclosure process takes six to nine months in most jurisdictions. Then there's some jurisdictions where you are stuck with the property another two, three months because of a redemption requirement in a few states.

But for Florida, we expect to start seeing more dispositions of property this quarter off of the foreclosures. So we will start having properties flow out, not just come in.

Something else, just give you all more comfort -- painstakingly, we go through the nonperforming and foreclosure list. The LTVs that we see in there do not give us cause for any headaches.

It's probably worthwhile drawing a contrast, because I know you know this because (indiscernible). But some folks are just following banks which see $45 million in nonperforming assets and think we're going to have 50, 60 basis points of charge-offs.

Remember, these are single-family homes; they are secured. Our LTVs are at 74%, on average. That gives us quite a bit of room for any disposition costs and any possible decrease in the value of the property.

So the coverage ratio went down, obviously, but when you're talking about something that is fully secured, it doesn't give us rise to concern. This is a situation that we've talked about, where nonperformers are going to go up. We're going to have to carry those nonperformers. But the ultimate losses, as we said, shouldn't be significantly higher than where we are at today.

If I could just ask a couple of quick follow-ups, I totally understand what you're saying, Bert, with regard to having these loans being secured. But does it concern you guys at all that you're seeing a fairly sizable spike in delinquencies or nonperformers in the mortgage portfolio when you have, still, such a strong economy and low unemployment rate?

The answer is yes and no. There are a lot of different factors going on. One is some of the cost of having a home in Florida went up. But the prices now of homes have somewhat leveled in some markets and gone down in some others. But to carry it, some of the insurances situations, I believe, and some other additional costs relating to increased values in the properties sometimes make it tough for people who are have already been stretched to make their payment.

So the answer is we're always concerned. But I believe this is a clear cycle going on. While the overall economy everywhere is good, if you look at the Midwest, there are pockets that aren't as good now, because the motor companies have taken some hit and some of the associated manufacturing entities have. So that has some effect.

Yes, there is a working-out going on of building inventories. A lot of homebuilders way overbuilt. As they chop away at their inventories, and some of them are wholesaling out their houses right now, that has some effect on the market for the people who thought they could just run down and get a home equity line if they needed to pay. All of a sudden, it's not so easy to do that. So you're going to end up with some higher delinquencies.

To us, yes. But we have kept saying, all these phone calls, that the figure we had, where at times we only had a couple foreclosures going on at any one time, it was crazy. It's very unusual to be in this period. The averages for most people are much higher, anyway. At some point, you're going to have some of these problems, because people out there do go out. Particularly during this period from Christmas on to April, they have trouble because they have got to pay the taxes. They may not beginning the refund they thought they were getting. They went and spent money on their Christmas goods for the kids, et cetera. This is always happening, but now it's happening at the same time there's a housing slowdown.

In terms of looking at some of the reasons why you're seeing, and you're just going through with the insurances and some of the slowdown in the Midwest, do you have any ability or sense as to what impact resets on mortgage rates are having on the delinquency ratios?

On us, we -- reseat has not been a problem. It has not been mentioned by one collector with respect to any loan at this point.

Not a single one?

No. It has been that the people themselves have gotten in an overstretched position. Most of the loans involve -- if they were NegAm, they had the option of having paid just a couple percent on the loan. So there's very few of these that are in reset position. Very few.

As I mentioned, the percentage of loans relating to option ARMs is not -- it's just slightly higher than the percentage of option ARMs actually in the portfolio. Essentially, we're seeing the default in any kind of loan; they are approximately all the same. So those loans -- we're carrying wherever the payment was all along, and now some people are having trouble making those payments.

Are you going to give Lauren first dibs on all the stuff that comes into the REO portfolio?

I hadn't thought about that, but --

Thank you, Jim.

Under the regulations, I don't think we can.

Jefferson Harralson.

I was going to ask you guys about prepayments. I was trying to get to the 16% number with the information you gave us. You had about $1.2 billion in originations, you sold $545 million, and the loan portfolio grew by $146 million. So it seems like there was about $500 million or so in prepayments. But am I missing something or miscalculating some piece of that?

I'd have to put a pencil to that, but yes, that's (multiple speakers).

Yes, but you are including amortization, probably, in the figure. There's amortization, too.

So what do you think the dollar amount of prepayments were this quarter?

On the residential portfolio, we were running at right about $379 million for the residential portfolio. All told, we have other residential loans, about (indiscernible).

Do you guys have thoughts on a theoretical recasting schedule of the current rate of increased amortization? Do you know what dollar amount of loans would be scheduled to recast in fiscal 2007 or fiscal 2008?

Recast because they would hit the limit of the 115% over the timeframe?

That's correct.

Yes, there's very few. Just a little bit of color -- when we take a look at our amortization, there's only about -- well, 9% of the loans had amortization greater than 4% of its original balance. We don't have anything, I believe, that is above 107%. So it's still pretty distant from 115% cap.

Most of these loans were made within the last five years, last three to four years. So I don't think we're that close on the timing, either. So it's something that we watch carefully when we slice and dice the portfolio, but I don't think we're close to that yet.

On the increased NPAs, are you finding a difference in credit with the NRA portfolio versus the regular option ARM portfolio?

We have not had a significant differential with respect to NRAs either. Not everything mirrors exactly the percentages of the portfolio, but the differentials are not so great as to be significant when you look at them. So it really hasn't come into the framework. To some degree, we had a lot of restrictions are the last year and a half on some types of the nonresident alien part. So it just hasn't been there.

I'll tell you the truth. I think the thing that puzzles me the most -- because I've been through this a lot of times -- is I expect all the high LTV loans to have mortgage insurance, but I expect those to be more predominant in the foreclosures. But oddly enough, they are not. Everything just sort of mirrors what we've got.

Some of the loans, at least some of the loans that [were not] option ARMs, the reality -- a lot of them have relatively low LTVs. There are only a couple loans in the entire foreclosure list that actually showed above 80% that are not insured, that started out as maybe a 79% or 78% loan or 80%, and maybe went into default as an 81% or 82% LTV. Essentially, when we look at the LTVs, even given some price decreases in some of the markets, we're still in excellent shape.

Just to follow up on an earlier question, is it fair to say it's less than 2% of your portfolio would be scheduled to recast in 2007 and 2008? Or do you think it's less than 5% or 7%?

I'd have to get the figures here. (Multiple speakers). We don't have that right here, but we will get that figure for you. We'll put it out in something so everybody can have it.

I'm comfortable in 2007 it will be a minute amount. 2008, if we continue -- if someone were to continue with minimum payments, they may hit the 115%, the upper fringes of (multiple speakers) portfolio.

That would be the older loans. In the older loans, the LTVs then, for adjusted, would be very low. Even if you take a back-off in prices, even in some of the worst areas in this state, those loans that would have reached there, since they have been on the books for four years, they would end up being a little over three years, at the least. You'd have a very low LTV at that point.

David Bishop.

As we think about the funding of the loan pipeline there, in terms of liquidity, should we -- mortgage-backed securities continue to look like just to amortize [down] -- continue to model a run-down on that portfolio to fund loan production?

The question was along the lines of what you model, [with the] continuing runoff of the investment securities portfolio. Yes, I think you're correct. When we take a look at where we want to place the assets, we're getting a much better yield on our loans. So we would replace the securities with those primary assets.

We may make some adjustments in the security portfolio, because part of those securities we use as collateral for repos on the funding side. As I mentioned earlier, we're getting pretty good funding rates on the wholesale side right now. But we don't have any wholesale plans to add to [that] security space now.

We have also said in the past that we'd do sales as well as possible securitizations. So, depending on which way we go, you may see that our securities portfolio would increase. But the probability of that happening would be with our own assets under a securitization process.

We think there's an opportunity to profit more, ultimately, when we are in position to do some of our own securitizations. Then we would be doing some sales and some securitizations at that point. Our treasury area is working on that. Probably we won't end up with a securitization this quarter that we are in, but it's a very good chance that the quarter after, we might be at that position where we start doing that because, even with as good a price as we've been getting, we feel we are leaving some profit on the table.

The last significant securitization was fourth quarter 2005, correct?

[September] of 2005, correct. (Multiple speakers).

Going back to fee income, deposit-related fees -- it looks like an outsized jump there. Any change in pricing in terms of how you're pricing power you are pricing NSF fees and the like in terms of this quarter?

No, it's just a continuation of growing the deposit base. No, there wasn't any real change.

Joe Fenech.

There was no response from his line.

Al Savastano.

Could you comment if you have any exposure to CCI community? That was the homebuilder around the Sarasota area that got into trouble, I guess, over the past week.

No. I don't even know who they are.

Great. Just a little more color on the increase in nonperforming assets. Have you looked at increases in any particular year of origination or in any geographic area?

You mean as to -- you're saying where we have our foreclosures? The number of -- (multiple speakers). Well, they're basically foreclosures. Our nonperformers are equivalent to foreclosures, when we are talking about them. So the answer is no, there isn't any -- we think, for the amount of loans we have in the Midwest, we have a little more. But the total amount isn't significant, if you understand what I am saying. If you are looking at percentages they owe, I've got more in that area, but the amount itself isn't major.

When I've gone through it, there isn't anything that just pops out. I did mention earlier that for our Florida loans, we have what I would call a little bit more in the Orlando area. But that sometimes is cyclical, relating to having gone over summer, people get late in payments on second homes.

But there really isn't anything in particular that pops out and says, oh, wow, that's the item. We had an interrogation of our collection people -- brought them in, and they couldn't come up with anything, either, that was particularly outstanding, as to any other item.

Believe me, we're looking at all of this. Every time we think that there's a lead somewhere, it's just kind of across the board in all populations of loans.

To your point on the vintages, we've looked across all of the foreclosures. They are spread across all the years. As a matter of fact, those areas that we had some concentration, the average life in months was about 24 months. So these were loans that were done in 2004, 2005, when valuations were lower. So that's where we gained some comfort.

I think we're all set. We have had a lot of questions. A lot of the emphasis in the questions is obviously on credit, because we realize the NPAs have some concern and make some people nervous.

Just to reiterate, a lot of us have a lot of experience in this area. Having numbers like this on a cyclical basis isn't anything different than we have had in other cycles. If anything, we were at one time more of a wholesale entity, and we had a good portfolio out in California during the days when California had problems, which is really the best example of understanding the downturn in housing. This situation at the moment does not to us appear anything as significant us what happened out in California in that earlier period.

So there are going to be lenders that report additional problems where they actually will resolve in losses. Some of those were subprime lenders; others had weaker underwriting. We have done a lot of deep-drilling, and at this point, we feel very comfortable about this. Our real emphasis -- ultimately, as you all are looking at, are we going to make the numbers you would like us to make, is our ability to continue having good production and continuing to build a franchise in Florida? We are very optimistic about all those things. We feel our ultimate strategy, while you may see some choppy results in the production area, the concept that we are not in every market and we can open up in additional markets to make up for periods when there's a contraction in the home mortgage lending is very good for us.

The commercial area has been doing great. But there's no question that for quite some time, we have tightened up our credits also in the commercial area. So we feel very optimistic at this stage. We will welcome to -- invite calls to Burt, Ramiro, myself, any others here if there's some additional thing any of you out there would like to know. Thank you very much for joining us on this call.

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