BankUnited Inc (BKU) 2007 Q2 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the BankUnited second-quarter conference call. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation.

This conference call may contain certain forward-looking statements which are based on management's expectations regarding factors that may impact the company's earnings and performance in future periods. Words and phrases such as will likely result, expect, will continue, anticipate, estimate, project, believe, intend, should, 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 and significant weather 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; volatilities; changes in laws or regulation; reliance on other compliance companies for products and services and other economic, competitive servicing capacity; governmental, regulatory, and technological factors affecting the Company's operations; pricing products and delivery of services.

I will now turn the call over to Alfred Camner, Chairman and Chief Executive Officer of BankUnited.

Good morning and welcome to BankUnited's report of earnings for the second 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, Senior 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. In response to requests from several analysts, we will attempt to keep this call to one hour. Because of the securities offering we announced last night, there are some topics we will not be able to go into in-depth discussion.

BankUnited had a solid second quarter and we continue to achieve balanced profitable growth. I'm very pleased to report our year-over-year net income growth of 24% in spite of an uncertain economic climate and an area of negative press about the mortgage market.

For the quarter ended March 31, 2007, BankUnited had record net income of $24.4 million, an increase of 24% from the same quarter last year. During the quarter we experienced an after-tax expense of $1.1 million incurred to call $48 million of high rate trust preferred securities and after-tax loss of $400,000 on securities sold. By the way, under accounting rules, these are not technically deemed to be one-time charges.

Basic and diluted earnings per share for the quarter were $0.67 and $0.64 respectively compared to $0.57 and $0.54 for the same quarter in the 2006 fiscal year. Total assets grew to $13.9 billion, a 14% increase over the same period last year. Total loan balances reached $11.8 billion, a 19% increase, and total deposits were $6.8 billion, a 26% increase over the same quarter last year.

The second quarter started off slowly in our loan production areas, but they picked up as the quarter progressed. We had previously mentioned that we have several new initiatives that impacted every business line. These included new products, additional offices, efforts on controlling expenses including our cost of funds, and increased asset retention programs to reduce prepayment. These initiatives and others have positively impacted our gross commercial real estate small business and mortgage lending areas.

The pipelines for residential are robust and we're at $665 million at the end of the quarter, as compared to $425 million at the end of the December quarter. This is an increase of 56%.

Credit quality has been a hallmark of our company since the beginning. Our history shows that we have been able to maintain a low level of charge-offs even when nonperforming assets increase. As a portfolio lender, we treat each loan as if it is our own. Our residential mortgage loan portfolio consists of more than 31,700 files. Of these, only 216 are presently in foreclosure. Net charge-offs were $77,384 against a residential portfolio of $9.4 billion. Let me reiterate that. Our loss on our residential portfolio that we reported for the last quarter is now $77,384.

Compare that to any number of the other lenders, the majors involved in the residential area as well as compare MBAs and you'll see that we are significantly below the others in our industry.

When borrower situations change, we have a team of local counselors to assist them. We find that most individual scenarios are due to health, employment or property taxes and insurance increases. The so-called payment shock has always been reported in the media has been rarely a factor in our situation. Probably because of not only our strong underwriting but in particular because we have always underwritten our loans at the fully indexed rate.

Our reduced documentation loans are counterbalanced by stringent requirements for other underwriting criteria including lower loan to value ratios, higher credit scores, and lower debt to income ratios. Historically it has been our experience that reduced documentation loans perform as well if not better than full document loans. In addition, we sold more than 3 billion residential loans in the last two years, a total of more than 8000 files. Of all these files, only two have been returned by the purchasers for early payment default.

I guess you need to contrast that with a number of announcements others have made and others who have seen problems in that area. We put this in so you see again the quality of our portfolio and what we produce.

The secondary markets have proven their appetite for our loan files and for borrowers of our quality. We will ask to be mindful of percentages when talking about nonperforming assets. In the second quarter, our [MTA]s were at 0.09. We mentioned repeatedly that or low levels were unsustainable. Today we are 0.53. Yes, it is an increase but it is significantly lower than we had previously estimated and as I said, if you look at the MTAs of a number of the major thrifts that have reported so far, we're at about half their levels. Certainly as you look at all thrifts above 5 billion for the December, you can see we are well below December's figure.

More detail can be found in charts at the back of the press release. We added this additional detailed information from requests from some of the analysts who follow us.

Essentially we do not expect nonperforming assets to exceed the highs we have experienced in past real estate 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 industry.

Net interest margin improved to 2.39% at the end of the quarter, an increase of 32 basis points over the same period last year. We are especially proud of our continuous increases in margin because they have been taking place in an environment with a challenging yield curve. Many financial service providers are reporting compressed reduced margins again this period.

We are building a successful Florida bank complemented by a national residential mortgage lending business. In the last several years, we have diversified our company into becoming a well rounded financial institution in a strong market. This coupled with our discipline in credit standards and lending practices is helping us weather the storms that are impacting other companies in our industry. We are building a company with the right people, the right structure, and the right products.

I will now turn the call over to our President and Chief Operating Officer, Ramiro Ortiz, who will provide more detail about our market strategies.

Thank you, Fred. The second quarter of '07 was a result of strong performance once again at all levels of the BankUnited team. We continued to expand our branch footprint and opened five new locations including two in Vero Beach, Florida and now have 81 neighborhood banking facilities which are becoming the financial hubs of the areas they serve. New branches are contributing at a fast pace and we intend to continue to open branches through the next two quarters.

The success of our branch strategy is evident in strong deposit growth during the quarter. Total deposits reached $6.8 billion. That is an increase of 26% compared to the same period last year. Core deposits of $4.9 billion represent a 22% increase over the previous year. These numbers highlights our increasing marketshare within the state and the success of our bankers at the local branch level. Our cross sell, our retention, and new household numbers are showing steady, impressive improvement.

As we become more rooted in the markets we serve, we have strategically added lenders, a small business bankers, and investment professionals to meet the needs of our customers and expand the reach of these business lines.

Commercial and commercial real estate loan balances were flat at $1.2 billion. Our credit guidelines have always been very conservative and we were minimally exposed to a condo development or conversion business. This foresight has kept us from experiencing the direct impact of the slowdowns facing many builders and their lenders.

As Fred has always said, we would rather get out of this business two years early rather than five days too late.

As expected, total loan originations declined in the quarter. Total originations were $1 billion, that's 22% under the same period last year. After loan sales and prepayments, total loans grew to $11.8 billion and that's a 19% over the same quarter last year. Although these growth percentages are smaller than what we reported in previous quarters, we are remaining diligent in our credit standards and will not compromise quality to make up for volume.

We will continue to add regional mortgage production offices this year. Our Portland, Oregon office opened in February and our Denver office opened in March. These locations are already contributing to our loan volumes. Remember that the slice of the market we gain as these teams of lenders gain traction will compensate for contraction that may occur in existing markets during the cycle.

As we reach the midpoint of the fiscal year, we are pleased with our results so far. It has not been easy. Our management team has been through these cycles before and we are working our way through this one.

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

Thank you, Ramiro. This year is off to a strong start as (inaudible) value in the economy we're managing to our strengths and reaching new benchmarks. Many of the product refinements, expense control and process streamlining we have made in the past few quarters are having positive effects. Our goal is balanced, profitable growth. We continue to focus on activities that will provide incremental increases in margin, profitability, and return on capital.

Our results for the quarter included three items related to the call of a $48 million of high rate trust preferred securities and the sale of certain investment securities. For clarity, the expenses related to the redemption of the trust preferred securities appears in two places on the income statement. First, the acceleration of the deferred issuance cost is reflected in the margin as a $600,000 charge or about 2 basis points to the margin. The call premium of $1.2 million is recorded in other expenses. The net loss of $600,000 on the sale of the securities is booked in other income.

Our margin continues to improve, the result of new and refined loan products and the success of our neighborhood banking branches. The lightening effect of repricing of adjustable-rate mortgage loans should continue to have a positive effect on margins for the next several quarters, especially if the Federal Reserve's open market committee maintains rates at the current level or slowly implements rate changes. Over the last several quarters, we have diligently focused on reducing our overall cost of funding by prudent deposit growth and using our ample wholesale funding sources as appropriate. Our mortgage area was prepared for the inevitable corrections we are experiencing now.

Improved efficiencies, new products, and new offices have enabled us to handle a slowdown in the mortgage areas better than others in the industries. We have said it before, but it bears repeating. We do not engage in subprime lending.

Fred mentioned the addendum to our press release. Many of our investors have requested more data about our loan portfolio. The charts at the back of the release include attributes of our loan portfolio should provide additional insight. Of particular note is not only the excellent overall credit parameters, but you can see that the level of documentation has reduced other compensating credit factors such as higher FICO scores and lower LTV are required. As Fred mentioned with these parameters, reduced documentation loans perform as well if not better than full documentation loans.

We obviously closely monitor our loan portfolio to manage our risk and the provisions for loan losses is $4 million this quarter, nearly 3 times our level of charge-offs. As you know, loan loss provisions are based on previous levels of losses. Our charge-offs have always been very low because of the quality of our borrowers and our underwriting standards.

As Fred mentioned, the net charge-offs on our residential portfolio was only $77,000 for the quarter. The remainder of our charge-offs or $1.3 million was related to the previously mentioned disposal of a commercial real estate loan. Our non-performing assets increased at 53 basis points for the quarter compared with 33 basis points the previous quarter. We've been saying for more than three years that our low levels of [NPAs] cannot be sustained. We still believe NPAs could rise to the level of 60 to 80 basis points by the end of our fiscal year, which is September 30. Based on what other banks have reported so far, we seem to be well below the industry average.

Our net interest income -- non-interest income was $10.2 million, an increase of 37% over the same quarter last year. We sold $360 million of residential loans during the quarter, resulting in a gain of $3.5 million compared to a gain of $1.9 million for the quarter ended March 31, 2006.

Last quarter we took advantage of favorable pricing in the secondary market and sold an additional $200 million for a gain of approximately $2 million or $0.04 per share. Early in the quarter we locked in pricing for loans to be sold in the secondary market and achieved a gain on sale of approximately 100 basis points.

While our option ARM loans continue to be well received due to our credit quality and our low prepayment rates, the secondary market prices have dropped during the latter part of the quarter. Adjusting for current prices, our gain on sale would have been in the range of 40 to 50 basis points and while we cannot predict future price levels historically, loan originators have adjusted their pricing to increase their gain on sale and we have seen those adjustments beginning to occur in the marketplace. We do expect loan sales and securitizations to continue to be used as an effective balance sheet management tool.

As Fred mentioned of the 8000 files we sold since 2005, only two have returned by the purchasers for early payment default. I should point out that while we have a standard responsibility for representations and warranties in these loan files, we are only responsible for any first payment default on the loans we sell. We obviously stand by the quality of our loan files and our borrowers.

Noninterest expense increased to $51.3 million for the quarter and obviously that includes the aforementioned $1.2 million charge for the premium call on the trust preferreds. The expense number also represents continued branch expansion of which we opened five this quarter, and ongoing expenses related to regulatory compliance. We were able to slow our expense growth by reallocating resources particularly headcount.

For instance, while the compensation and benefits line expense increased $2.3 million, that category had the credits for FASB 91 loan fees embedded within. That credit because of the lower production this quarter decreased by $1 million, thus the net compensation and benefits increase was $1.3 million. And of that amount, over half the increase was due to the resetting of payroll taxes for the new calendar year. We will obviously continue to concentrate daily on reducing our level of expense increase.

Let me give you just a little bit of some detail on outlook for the next two quarters. While we do not do specific EPS guidance, let me give you some numbers for modeling purposes. As Fred mentioned, our pipelines are strong. We do expect our production to increase but we also expect our prepayments to increase slightly as the loans mature. We are expecting to have about $13 billion in total loan balances by the end of the fiscal year or September 30.

Talk a little bit about the margin. While the MTA increases -- the rate of increases now beginning to slow for the last few quarters we've been focusing on a funding side and improvements in the margin should come from us managing our cost of funding. Provisions for loan loss for the next two quarters will be about the same run rate of the last two, in the neighborhood of $3 million to $4 million per quarter. As we mentioned, loan sales will be dictated by the level of pricing, but we do expect to continue to sell into the secondary market. And looking at our expenses, our run rates should be about $53 million to $54 million in the final quarter.

One other note, as we announced yesterday, we did announce the launch of a $160 million mandatorally convertible issuance. This will price at the end of the day but we do expect to be able to get a high premium and a coupon in the range of about 6.25 to 6.5. We expect to use the proceeds from this offering to shore up our capital levels eventually, but also to use a good portion of these proceeds to buy back shares of our stock.

With that, let me turn the call back over to Fred.

Thanks, Bert. Bert just mentioned about our buying back stock and I just want to mention that we are barely -- our stock price is barely above book now. I find that fairly amazing having been in this industry for 30 years to think about that. The price of our stock has basically reflects pretty closely to the situations that you had in the S&L crisis. I don't think anything in our economy approaches the S&L crisis of the late '80s. So for our purposes, we feel that it is important that we begin some serious buy backs of our stock and clearly this offering is of some assistance in getting that done.

We have a lot of confidence in the Florida market. A lot of people asked us about this and we just note that the U.S. Department of Labor released national unemployment figures for March in the 4.4% as unemployment. You should all know that Florida has the lowest unemployment rate of the 10 most populous states for some time now and has consistently been in the low threes. There have been [65] consecutive months of job growth in Florida, the state where we conduct our entire branch banking business and a majority of our commercial small business and mortgage lending activity.

There are however a number of issues that have faced Floridians and we believe those are close to being resolved. First of all, insurance reform was extremely important with respect to the entire situation for Floridians owning homes. It has taken some effort, but the Legislature passed a bill that gives substantial relief to the difficulties involved in insurance area. The other item has been property taxes. Because values have increased a great deal over the last number of years, property taxes have become a major issue in Floridians upsizing their homes or buying homes.

Again, right now the state legislatures, (inaudible) being both houses, have addresses and both have proposed significant real property tax relief. I think we find that most realtors even though they have seen some uptick in terms of buying of existing houses in the state essentially are waiting for this legislation to finish so that people know whether they will be able to carry the caps on their real estate taxes proposed from one house to another or whether they are just in general the overall reduction in their real property taxes will occur.

A lot of people feel they are on the sideline pending this final decision. It looks extremely positive and as I said about the Legislature and the Governor, are very much behind a state property tax relief.

As we look ahead to the third quarter, we are certainly optimistic overall. There's been a lot of headwinds, but as we've noted, our production has already started off very well. While it had begun slowly in the January, it started picking up in the February and through the March periods and then it has come on pretty strong since.

Now we've announced our strategies before. That strategy, we can repeat it. We only need a little piece of a market. We don't have offices on every street corner in terms of loan production on the residential side. So in a market that is overall contracted, as we open additional offices, we are in a position to pick up additional volumes that ultimately make up for that we would have lost in the overall contraction.

We are well positioned to expand upon our ranking as the largest bank headquartered in Florida.

We are ready to open the call up to questions. Operator, please.

(OPERATOR INSTRUCTIONS) John Pancari, JPMorgan.

Just a question on loan growth. I know it's your $13 billion target for loans by the end of the year. Does that imply any pull back, intentional pull back on your part at all? And how does what you are seeing in terms of your gain on sale for your loan sales influence your on-balance sheet growth you are expecting?

No, it does not show particularly a pull back at this point. As we have gone through the markets over this last year, we have continuously tightened, tightened, and more tightened credit, but overall there has been a lower amount of loans available in the market. We've done a number of initiatives. We have new products that we have put out in the market and we have combined this with opening additional offices.

But there is no question that we have to make up a shortfall that was present really starting somewhat in December. You saw it in January. It was still there in February. But our new offices are kicking in. It takes awhile for them to build up the volumes and then you also have to process them to closing. That is one of the reasons we gave the pipeline information to you.

We feel fairly confident that that'll continue to build as we go along. We also anticipate doings some sales possibly some securitizations. We're going to look at that as we go along as to which is the most profitable for us in each instance.

How far below the 30% expectation in terms of your loan sale as a percent of production per quarter do you think you'll be now that the gain on sale has come in a bit?

If a pipeline is picked up, we ultimately believe we will be somewhere back in the same typical ballpark. And that would be the 25% to 30% area. I think -- we have announced that the prior quarter, the December quarter, we sold an extra large amount of loans at that time because we felt that the circumstances warranted it. The prices we were getting in the market at that point were so much higher that we felt we would take advantage of it. And we announced at the time we did our earnings and tried to guide everybody in that manner.

But generally about 25% to 30% will end up as sales. That relates a lot of things we -- (inaudible). In order to get what we need for our portfolio and as we pick our portfolio, we likewise need to offer enough products out there to -- on the wholesale side as well as this other retail side and in the process of doing that, we always are going to end up with some surplus. For example, we have always made Fannie Mae, Freddie Mac and [forming loans] but we've always sold the fixed-rates into the market. So again, about 25% to 30%.

Okay and then I have one more quick question. The properties that you have on foreclosure now, that 216 properties, what has your been your experience now in going back to these borrowers and looking at their opportunities to sell the properties are not? Just given that you implied in your press release that you are seeing about an 80% average LTV on properties in foreclosure, so there is obviously still a fairly large amount of equity in these properties. And just trying to see what you're hearing about why they are going into foreclosure.

You know, I've been through a lot of cyclical periods before and to some degree there's some differences in this period, but also a lot of similarities to the past. Yes, we had equities in properties. I always reflect upon a prior cycle, not this one, where I always remember we had to foreclose a property that had a 40% LTV in Boston. I never could understand it and never could figure it out.

So we have some of those kinds of things that are in our portfolio. In reality we feel we have very little in the way of any losses and in fact a review right now would probably say somewhere at approximately a dozen or so files there could be some losses out of that entire set of foreclosures. Obviously things could change. It's got all the caveats -- when I make that kind of comment. But the details of it is that we don't see any significant losses now.

We have seen more of the traditional employment questions, saw those out of the Midwest. There is no one set of reasons as to what is exactly happening in terms of the foreclosures right now. That pretty well sticks to the situation. Generally in high unemployment you would find a lot more delinquencies. The delinquencies also have some seasonality. They are already showing that because as we go through it and again, this is historical in the industry -- usually December, January, February sometimes running into March into tax season, you'll see more of your delinquencies. And we believe that it is really following to some degree that same pattern right now.

I don't know if I've answered everything you wanted in all that.

John, let me just add a little bit more maybe just to give it color in terms of delinquencies and where they don't end up. And I say that because at the end of December we had approximately 150 loans that were in this process of foreclosure. We only had three properties on hand even though we've gone through and obviously we've seen a lot of these properties pay off. Not a lot of them make up to the OREOs level. We only added 11 properties during the quarter and then we ended up selling approximately seven properties so we ended the quarter right at seven. So what you're seeing is although we have $216 million in the process of foreclosure (multiple speakers)

216 files -- I'm sorry -- in the process of foreclosure, the vast majority of those files are either paid off before the auction at the courthouse steps or otherwise resolved before we get into an OREO status.

Let me add one more thing to this because I've mentioned this to some people before and I just want to make this clear. I think that in some respects we need to do a better job of what I would call the workouts of residential, because we have had a tendency to move files on into foreclosure and so on and what I am trying to do is get everybody focusing on trying to help people keep their homes. So you're probably going to see more of that in a sense from us.

We need to do more of that. We need to be out there. We need to be able to get some really good counseling in. One of the problems that we have had is that a lot of our telephone time has been spent on the new property tax and insurance increases that were occurring in terms of escrows and so on. We're going to spend a lot more time over the next several quarters helping people keep their homes.

I feel really that is an obligation of our institution to do that. I think other people and other institutions have also taken a view of that right now and there's been a lot of exaggeration in that whole area. So we want to make sure that we give everybody as much opportunity as possible to stay in their house.

Okay, great. Thanks for the detail.

Al Savastano, Janney Montgomery Scott.

Let me ask a couple of questions. Could you give us a little color on these new loan products you're talking about? What specifically they are --?

I don't know if I'm going into that much detail. One of the products is a neg am type product (inaudible). It has a longer period, a fixed-rate set up and it has a much higher start rate. That product has taken off. It already is a substantial portion of our loan production and we've had a lot of success with that. We will be doing more also of the 5-1 traditional so we're looking at some of the other traditional ARMs because we believe that the yield curve will be in a process of adjusting during this year. So a piece of that will go in our portfolio. Pieces of it will go into some conduits who have really made some excellent terms with us.

We want to see more of that production. We normally were a 5-1 traditional lender as well as neg am, but the market for us a year or so with the yield curve and the way the Fed was raising rates really made a lot more sense to do option ARMs. As we just yield curves here, we will have more and more of the 5-1s coming into our portfolio.

Al, this is Ramiro. We're also expanding significantly our focus on consumer mortgages throughout the branch system and expanding that product set as well.

Thank you and just my second question and then I'll go back in the queue; Bert, can you give us a little idea of how to think about the rate of expense growth in the last couple of quarters? You mentioned the $53 million to $54 million in the last quarter, but what are you thinking in the third quarter?

I think we can -- certainly between 51 and the 53 and $54 million. We're probably looking at about $52 million for the third quarter.

I just want to say, that a decent piece of this a decent piece of this is driven by the production itself because clearly FASB effects how the expenses looked out and because we had somewhat lower production this last quarter, it gives a higher expense look at the moment than it actually is.

We have streamlined our offices. I think Ramiro mentioned that because we know to some degree the existing offices were not going to have quite as high volumes as they have had in the past and there it was one of the reasons we felt we needed to open up additional offices in the markets that we were not previously as strong.

We have opened our Northeast offices. It's now really doing a nice flow. We recently opened up both Portland and just opened up Denver and we expect those offices again to do very well for us as they add on volumes. As those volumes come in and we report additional loan production, the FASB 91 effect in a sense takes over. It will go to higher levels that it didn't have before.

Jefferson Harralson, KBW.

I want to explore how the mandatory convert affects your buyback in the near term? And to the extent possible, explain how this mandatory convert works? It looks like it is senior debt that in 2010 -- mandatorally converts into common stock.

That's correct, it does. We felt that we looked at a number of instruments during the quarter with our investment bankers who would best satisfy what we wanted to accomplish and one of the things we do want to accomplish is to be able to buy back our stock without at the same time affecting our ability to have the franchise to grow particularly in where we are in Florida, which is the best state in the union for it.

So essentially it does give us an opportunity to buy back the stock. Some people might refer to it almost as an arbitrage. Of course I can't say those kind of things while we have an offering going on, but the ultimate effect is that is very important to us. I have mentioned this. I find it mind-boggling that we are barely selling above book as an entity. We've had to face up to some of the most egregious rulers put out in the market by people who have sold our stock short and they have managed to hammer us down to levels that as I have mentioned, are similar to the savings and loan crisis days.

And I find that more interesting because I guess except for some of the older people that we go around and see on road shows, a lot of the people we meet don't even know what the S&L crisis was. And housing -- new housing slowdown, existing housing sales slowdown to some degree, they really do not particularly -- they somehow equate that as a situation almost equivalent to the savings and loan crisis. Crazy to me.

I had so much involvement in seeing companies back at that time that I just don't think people -- there is a total disconnect with the reality of what is going on in the market right now. And frankly the tie of new housing to old, existing housing also has a lot of problems in it too and yet do you see scare articles out in the newspaper. They frequently equate the two. And it is just not correct, how you view the housing.

I had noted a Columbia professor the other day who actually got it right and explained the difference between what happens on existing housing sales and new housing sales. So there aren't too many of those that do get it right, but we just feel doing this offering right now is a tremendous opportunity for us to gain. I know a lot of people have wanted this buy back. We need to find a way to do it that also allowed us to continue to grow properly.

How does the mandatory convert affect your near-term capital ratios?

Actually, Jefferson, the way the transaction is booked and I should mention in terms of what Fred was saying, we did look a lot of different options obviously going from common stock, which is the most expensive, down through preferred stock, mandatory convertible -- even looked at some stuff there. But we thought this was the best combination of assuring ourselves of getting capital, albeit in three years versus the cost of acquiring that capital.

How it will specifically work and I should also mention this is being run by J.P. Morgan as the book manager with co managers of UBS and Bear Stearns, so we think we've got a pretty strong group assisting us with this. The way it will work is the J.P. Morgan product is called a high med and the reason it's called high med, is it looks to achieve a pretty high conversion premium hopefully in the area of 40% or so. And what this will be is five-year senior debt that also has a forward purchase contract attached to it so it is a unit structure. That forward purchase contract will mandatorally convert into common stock at the end of three years.

Literally as we went back through it, there is one very, very minor item of how it won't convert and that is just if there was in some sort of bankruptcy, but it will convert mandatorally into common stock at the end of three years. We like that obviously because it is mandatory but we also like it because it has preferable treatment from the rating agencies and being senior debt, we were able to do that at a coupon that was less than the trust preferred [range].

So the debt will continue on for two years after that (inaudible) remarketing process that goes through which is very detailed, but in essence at the end of three years, we will have $160 million of capital coming in as common capital into our P&L -- I'm sorry -- into the balance sheet section.

Given that status, we are then in a comfortable position to do buybacks at a much lower price than the conversion price.

And in reference to the capital level you were mentioning, this gets booked as debt originally so it does not affect our tangible equity to tangible assets other than the level of debt. So we are slightly above 550 now. We expect as we mentioned to be in the 500 to 550 range and of course that will help govern the level of buybacks that we state within that capital range.

I should also mention that a couple of days ago the Board of Directors approved an additional amount of shares that we can repurchase. They added $800,000 of that. We now have a total of 3.5 million shares that we can repurchase on the open market. And as Fred mentioned, part of the reason for doing this transaction is to acquire more cash to be able to buy back our common stock.

Doing that, we have got some rough numbers but assuming that the pricing goes as we'd would like, somewhere a little bit over 1.5 million shares of repurchases will yield us accretive EPS for the transaction this year.

I'll pass it to someone else and ask one, no more follow-ups on -- do you expect to buy -- is that that 1.5 a good target for where you expect to buy?

No, the amounts depending on pricing, market timing and etc. will be somewhere between the figure that Bert just gave you up to the 3.5 and it may exceed that 3.5 because we may go back to the Board. I will all depend on what is the opportunity in the market.

Jennifer Thompson, Oppenheimer.

Good morning everyone. I had a question on your NPA guidance which you reiterated at 60 to 80 basis points by the September quarter. Is that still your outlook for the peak NPA ratio through the cycle? And is the loss ratio that you had been talking about as a peak previously, the 10% to 15%, do you feel like that's still a good range? Do you feel better or worse?

About our losses?

Well, first of all -- yes -- on the loss guidance that you'd given but also first of all is that NPA ratio guidance for the peak through the cycle?

At the moment the [ratio] I have of the files that are coming in and that went across the delinquency are realizing that we really have not done enough modifications for our customers where they really deserve to be able to stay in their house. The answer is yes, somewhere between 60 and 80 to us still appears to be the peak of what is going to happen in this cycle. A lot will also depend on how much of the way we do some adjustments to people's payment plans if they really deserve to stay in the house and they're not just a flipper or something going on.

For our viewpoint on a loss basis at the moment on a residential side, there is only a couple handfuls of the mortgages that we see that may have losses in them ultimately when we sell the property, if in fact they get all the way to final foreclosure. If anything, at the moment the loss figure would be much lower than we would be contemplating even in the past.

But I have got to expect that somewhere here a couple of flaws or something will pop up and maybe it will go a little higher.

On the commercial side, where we stand right now is everybody knows that we had announced the last period that we were going to exit a particular commercial loan, commercial real estate loan. We did that primarily because we had gotten such adverse publicity with an error that had occurred in announcements into the market that our phones were in a sense off the hook about this item. We just determined to exit it and we sold it off. A piece of that closed this quarter even though it really was all underway the prior quarter. But on the accounting rules, it had to show up in this quarter.

So reality is that really normally it would've been in last quarter, this quarter would have just shown a $77,000 item. We do not at the moment have anything of any severity or concern of any significance in the commercial area, but as the [FICO] market, something could pop up. But we do not see it right now.

So however it is and whether or another commercial loan did pop up or not, we look to have very low losses. We seem to be in an extremely well secured position. As somebody mentioned, we announced our LTV where it stood for the loans actually in foreclosure, but if you actually even looked at that, this one loan dating back to several years which was put together as an elaborate fraud it appears on the surface and what I see in the portfolio now almost half of the entire possible loss, it is a residential loan that is probably just in that one loan right now. The others have very little in the way of losses listed.

So we're still sticking by the concept and we do not believe we will have any truly significant losses in our portfolio as we go through this cyclical period.

Okay and then my second question is on the net interest margin up 4 basis points this quarter. Can you give us a little bit more color -- 2 basis points of that was the trust redemption, which I assume is nonrecurring, but how much did day count hurt and also what was the impact of the MTA portfolio differential this quarter versus last?

Jen, you're right, 4 basis points up. There's 2 basis points of trust preferred that went against that. So you would add the two together to get back to what we call the nonrecurring number.

In terms of adjustments, the MPA went up about 15 basis points this quarter. It moved that portfolio up about 10 basis points in total. Other repricings had up about 12 basis points in total.

On the liability side, we were able to keep our cost of funding down. We were at about 10 basis points overall, so those are the dynamics of the margin. The MTA as we mentioned is slowing down. We do expect it to come up about a handful, maybe 6 basis points during the next quarter. So we're expecting a slower decrease from that but nonetheless it should continue to go up.

The other part that is affecting the margin is the prepayment speeds and also the prepayment fees we have to help protect the margin against those speeds. This quarter, net to the margin was right about the same as last quarter. It was 2.97 million, last quarter right at $3 million net benefit for this quarter. So that stayed about level. We do expect prepayments to pick up as the loan portfolio does mature, but also we have about 80% of our loans have prepayment fees on them. So that should help cushion the level of prepayments.

But we do expect to see some margin increase mostly because of the continued repricing of the MTA and also the diligent effort of trying to keep our funding costs down, which we have been able to do to a certain extent this quarter and look to continue to do that in future quarters.

Let me mention something else. In a sense of looking to where we wanted to be at fiscal year end on the deposit side, and the way we've already reached what we had as some of our goals for the year in the different deposit categories, so as we're going to go through this next six months while we will be increasing deposits somewhat, we will end up using and balancing that with more overnight funding, which will be less expensive than some of the deposit funding.

So that is another area we should have some margin benefit as we go forward.

Matthew Kelly, Sterne, Agee.

Just to clarify, the capital raise, this all-year initiative, there is in no way anybody forcing you to raise this money? It is just you guys wanting to take advantage of your stock price and find a way to fund that?

I don't know who you could be referring to that would force me to raise money, no --

Just capital levels and regulatory. I just wanted to get that on the record. (multiple speakers)

No, our capital levels in both -- not only the holding company are excellent as far as our regulators are concerned, but our capital levels in the bank are even more so. They are much higher than required, almost double what is actually required for an institution. So it is not that at all.

Let me say something. It is an opportunity one, with respect to our stock. It is also an opportunity that we felt was an appropriate time in the market to gain some additional capitalization because we do believe that when you go through a cycle like this, there are going to be some opportunities for us out there. But we have had different people contact us. Some people have talked about possible acquisitions, other situations. And if the right ones come along, you can always finance some of those concurrently with the happening frankly with some of those very opportune times to add some additional dollars so that we can take advantage of any of those opportunities that occur.

I would remind people that some of the major growth that happened in our company a number of years ago was right through one of those cycles where we did a number of acquisitions of some entities -- in this case they were both in the Dade and Broward markets -- that today form actually very strong basis and core basis of a number of our [depository] offices.

So we think that is going to happen again. We have been approached in a few situations and I can't tell you if anything will end up happening in those in the end, because we are and we like to pay as little as possible for our opportunities but we are certainly and looked upon that as something going on that in this type of cycle is a good chance we will have some benefits down the road here.

Then could you just talk for a minute how the regulators are viewing and considering non-cash earnings? What has that dialog been like lately?

I haven't had that dialog per se. I haven't -- we -- regulators don't publish what they think about you, but we have excellent relations with our regulators. We have been in the business a long time. A lot of the regulators actually know me way before the S&L crisis of the '80s because we used to go out and save institutions that had problems. So I have not had any discussions other than they are extremely pleased. We are not allowed to give you our ratings, but I can tell you, you would be happy with our ratings.

This is Ramiro. That has not been an issue.

Okay and then final question. Just to clarify, did you say this is a 40% conversion premium on the units?

The high med is designed to get a high conversion premium. We won't know the exact premium until pricing but we were hoping that it would be in that range.

Okay, it's all -- it's counted all as debt for the first three years and then you get the immediate equity treatment in year three once it converts? There is no equity treatment on any portion of it in the first three years?

Not on a book basis, no. It sits as debt and then it will mandatorally convert after three years, yes. But in terms of rating agency credits and also from the regulatory side, they will give you credit for mandatory convertible debt that's within a three-year period. So we expect to get some benefits from that.

On that 460 or a portion of that?

It depends on the rating agency. They have different percentages that they agree to count as capital.

Okay. Thank you.

Jim Ackor, RBC Capital Markets.

Well done, Bert. And question for I guess for Fred. With regard to the rising delinquencies that you're seeing in the mortgage portfolio, can you explain or maybe just give us some broad color on what you do with regard to accessing existing real estate value of these delinquencies or nonperformers? Because one of the biggest problems from a perception perspective from people that I talk to is everyone is worried about the option ARM generically I think across the board. But specific to Florida, a lot of the stories that you were referring to, Fred, the scare stories talk a lot about massive declines in real estate values in certain parts of Florida.

And the worry I think is that you're going to end up a house that is worth 50% of what the individual who is borrowing the money paid for it and I just would like to hear what you have to say about that I guess.

I guess -- let me put it this way. My family goes back for the 19-teens in Florida, so and certainly as a kid I grew up with a lot of things and my father was in the construction business. I find that mind-boggling. We have a lot of people moving to the state everyday. They continue to move to the state every day. The employment situation is excellent in the state. There has been enormous exaggerations.

Now on the other hand, you can't get around that in some areas of the state there has been some overbuilding by some of the really big developers, the national ones. So you'll find pockets where that's a the problem, but as I had mentioned briefly and if I can, I will try to get some help and data on this and maybe some explanation, but existing housing and new housing are spilling over in the sense of being somehow the same and they are not.

So for example if you went through Coral Gables, where we have our headquarters, you will find very little if any price decrease. If anything, it may actually still be going up. Existing housing generally represents for the most part that which is closer to jobs. Where people build and where land is available in Florida where they can build a lot of homes at once, the national builders, they are going to be on the outskirts of different areas.

Now there are some exceptions. Downtown Miami has some high-rise condos. Everybody is waiting for those to finish. Some will finish this year. A number of them won't finish for another year or more. They are all presold. A few of them have had some attempts of cancellations, but we haven't heard anything that creates a major problem there yet. But it may happen. But we stay away from that type of situation. We are not involved in it.

Sarasota has probably in some of their areas of town have had more declines. Naples has suffered some decline, but it has been modest. I have seen sales of properties there really earning 5% to 10% down. The over building, one of the things we thought was important is for builders to stop building so much for those outskirt situations.

As far as what we see coming in the delinquencies, very, very few properties with current appraisals -- and we have now appraised just about every single one of our foreclosures -- and we have in-house appraisers that go through that process and tell us where we stand on it. And as I said, there's probably maybe a dozen or so of those files that would have some loss to them. And of that loss, there was only what I'd call a couple significant losses for those particular houses. One of them a fraud situation where it appears that two appraisals that the person actually managed to find a way of getting two appraisers to possibly give false statement on value.

Other than that, we just have not seen that much that is really of a problem that has come in the door, on the foreclosures side, the NPA side. So we feel very good about where Florida is in all of this. We think it is highly exaggerated and as I mentioned earlier, if anything some of the people, a lot of the people that we go out and talk to they want to upgrade their housing. They want to move into additional houses. A lot of demand for houses otherwise in the area.

But both the insurance situation and the property tax situation had to be resolved. The insurance situation has been substantially resolved where they've rolled back basically rate increases relating to insurance. It is (inaudible) more expensive than it was a few years ago, but it will be a lot less than where it had gone. And they are about to do the same thing on property taxes. They're going to roll those back, probably increase to some degree the sales tax in the state.

And in the process of doing that, that in itself is probably going to kick up housing substantially in this state. It enables people -- I mean your property tax is a big part of what you pay when you buy a house. So we at the moment are very optimistic. We've got a great employment situation. It is just excellent. I -- is there higher inventories in locations? Absolutely. Some of those inventories are a little higher than they were in other periods of time in the past when everybody thought was still a good market.

That is one of the other things I have had trouble understanding is when you see the scare headlines, it's sort of the same thing when people talked about our MTAs going up for several years in a row and we said, look it can't possibly stay this low. It is ridiculous. There has got to be some cyclical adjustments. Well, likewise in inventories, a lot of the areas in the state, the inventories really just going back to what is normal but since they had such a huge demand previously, people are comparing it to that as opposed to comparing it to normal circumstances.

Now in terms of home prices, you know with some of those inventories, if you take Dade County and Broward, which are your two biggest counties by far in this state, one has reported a very slight decline in home prices and the other one has reported a plus. It hasn't really totally slowed down.

So I can't be more optimistic about it than you can. We are in a cycle, but the people who are talking about as if this has all been the bus that drove over the cliff. It is not driving over the cliff. We don't see it, haven't seen it and don't know what they are talking about.

And, Jim, just to add a little bit to that, (indiscernible) brings up a good point. We've got the median housing prices in Dade County year-over-year were actually up about 5%; Broward was down just slightly at 2%. But couple that with the continued level of unemployment at Dade County for instance just had its lowest recorded unemployment level in the history of the county, this area continues to do extremely well economically, continues to do very well from the influx of [new] individuals and has helped stabilize the housing prices.

So the other flip side of that is just looking at the OREO portfolio I mentioned earlier. We are able to bring properties into OREO but more importantly, we are able to get the back out the other end. So being able to do that but selling the prices, the prices have held up. And as Fred mentioned, we only had a $77,000 net loss on all of that, so the market continues to be pretty solid.

Just on the last item of all that, I've mentioned this before. The situation was some people publish -- oh the housing -- by slowing down new housing we lose jobs but the problem with that statement is that there was almost in a sense an inflationary situation because there was job -- circumstances of over demand for people to work. And as those people exit the housing area, to the extent that the big housebuilders slow down some now which they are, that's what helps reduce the inventory in new homes so that the existing homes will probably maintain their value.

And secondly, the construction of infrastructure projects of hospitals, of schools, the universities, I can just go on and on -- roads, so on -- they are all behind the growth, so a lot of was happening is those jobs are moving on into the industrial and commercial the areas and the public authority areas in a major way.

I mentioned before just the University of Miami alone, which I'm a trustee on, has got over $1 billion of projects pending. Some of them starting. Some of them in the process of getting started. You can just multiply that with universities. You can multiply it with government. School districts, so on. And definitely from the commercial area. We've been interested that we have had demand slow down a little bit and then we've kind of seen some steady demand back in the commercial area because there are shopping centers that need to be built. There are office buildings that need to be built. There are warehouses that need to be built to keep up with the population increases in the state.

Anyway, we have overstated that, taken an extra long time, but we think it is a very important point for everybody to understand. A lot of the articles are absolutely -- you've got to look past the headlines -- frequently things they tell you they give you some -- a bunch of information -- much of it absolutely meaningless to actually determine what is happening in the economy. And if you're lucky, they might put something, oh, but by the way -- employment is extremely low, and such and such at about the 12th to 20th paragraph on these crazy headlines.

Thank you very much for the color. I appreciate it.

David Bishop, Stifel, Nicolaus.

Good afternoon, gentlemen. Bert or Ramiro, I don't know if I heard this earlier on but did you guys detail in terms of the outlook for new branch openings and new markets and body count added this quarter or projections in the third and fourth quarter into '08?

Well, we've already opened up five, six branches this fiscal year so far. We have another five or six that we will be opening up through the balance of the year. And while yes, you have to staff those offices, we have been reallocating resources throughout the entire company to get the headcount for it. Our headcount, while it has increased, it has increased on a proportionate basis to our increase in assets and deposits and so forth much lower than the growth of the company.

And that's through constant reallocation of resources throughout the entire company.

Just to give you some numbers this quarter, our FTE's only increased 23 for the quarter from 1376, so that level of increase is much slower than it has been in the past. was while opening up three or four offices.

Plus residential production four offices.

We go through a process before we add any headcount where we absolutely review staffing levels throughout the entire company. Then we match that up to production numbers, number of new accounts, etc., etc. and it is a very dynamic process where we are constantly just reshuffling and reallocating people throughout the enterprise.

Got you. The outlook for 2008?

In terms of branches, we believe they will probably be more like in a 4 to 5 category right now. Ramiro, and some of his commercial people would really like us to do some primarily in-fill offices. So we believe it will be more in the process of building that. And beyond that we have not come up with a figure going past that period. So to some degree there will be a little bit of a slowdown but the offices that we will be doing would be more of a larger, full service offices.

James Shanahan, Wachovia.

I'm glad you were able to take my call. Couple of quick questions please. The first one for Bert. Was there any positive impact on nonperforming assets in the March quarter from loan modifications or is this really something that you are just now ramping up in your third fiscal quarter?

No, the loan modifications are for those loans that are performing as agreed. Obviously we take a look at the credit first and we do not modify anything that is in the nonperforming asset level.

But let me say we need to do some of that. I know other people do it and we need to do it and so some of that will occur. But the answer is that we initially take an attitude, move files quickly and so we accelerate it into to some degree foreclosure. We did not wait for example the 90 days which a lot of people do. So that's had somewhat of an effect, but we do need to do more of a workouts.

I'm starting to review files and we basically are telling our collection area that we should set up payment plans for people who are going through temporary situations, particularly employment, hospitalization type situations. We need to do something right for the community and not just so I can immediately get our property to the courthouse step.

Thank you, one quick follow-up please. Given the capital activities that you have announced yesterday and discussed this morning, and in the portfolio growth targets here, where would you anticipate a ratio such as equity to assets or tangible equity to tangible assets being by the end of the fiscal year?

Bert pretty well said that we would like to be in the 5-ish area. A lot depends on the opportunities or the buybacks of stock. One of the reasons we did -- I put in place a mandatory type issue was specifically it enables us to adjust that number in terms of how we went about doing buybacks. That was an important item for us. We felt that we wanted to maintain and (inaudible) a relative range but at the same time be able to do the buybacks that we wanted to do and this form of capital and the rating agency and to some degree the regulator treatment, this type of issue that we have while it is not equivalent to equity capital, it is pretty close to it. And it gets very good reception from a rating agency, regulatory viewpoint. It enables us to open up more ability to buy back stock as we feel it is appropriate.

As I mentioned, opportunities will be opportunities. That is one of our major opportunities. The other is -- are we going to have any other questions?

No, I think that was the final question but before we leave I just want to mention something to you all on a transaction. For modeling purposes, we expect this transaction to [achieve] treasury stock method, so we will not have any dilution of shares until the stock price crosses the conversion price. As I mentioned earlier, that conversion price will determine today at pricing but we will not have any share dilution until we cross the conversion price.

Yes, and to the extent obviously that we buy back stock, it will have our -- an effect, a very strong effect on earnings per share.

I think that is it for us. We said we'd try to give [short]. I know some of you were still in queue for questions. Please call us. We will try to do whatever we can within the realm of what the attorneys allow us to do on the offering circulars that are out presently. But we will do our best to give you answers to questions, other information as necessary.

Thank you very much. As we've stated, we are extremely optimistic as we're going forward. We have got a lot of things that are pluses to us. And we certainly with this offering expect to be out in the market to be able to buy stock back. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.