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BankUnited, Inc. (NYSE:BKU)

Q2 2013 Earnings Conference Call

July 24, 2013 9:00 am ET

Executives

Mary Harris – Senior Vice President of Marketing and Public Relations

John A. Kanas – Chairman, President and Chief Executive Officer

Leslie Lunak – Chief Financial Officer

Rajinder P. Singh – Chief Operating Officer

Analysts

Robert Placet – Deutsche Bank

Brady Gailey – Keefe, Bruyette & Woods

Matthew Clark – Credit Suisse

Herman Chan – Wells Fargo Securities

Matthew Lee – Inner City Press

Operator

Good day, ladies and gentlemen and welcome to BankUnited Incorporated 2013 Second Quarter Earnings Call. My name is Sandra and I’m here as operator today. At this time, all participants are in a listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

And now I would like to hand the call over to Mary Harris, Senior Vice President of Marketing and Public Relations. Please go ahead.

Mary Harris

Good morning. It’s my pleasure to introduce our Chairman, President and CEO, John Kanas. But first I’d like to remind everyone that this call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things future events and financial performance.

The Company generally identifies forward-looking statements by terminology such as outlook, believes, expects, potential, continues, may, will, could, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of those words or other comparable words. Any forward-looking statements contained in this call are based on historical performance of the company and its subsidiaries or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations contemplated by the Company will be achieved.

Such forward-looking statements are subject to various risks and uncertainties, and assumptions relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy, and liquidity. If one or more of these or other risks or uncertainties materialize, words of Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. These factors should not be considered as exhaustive.

The Company does not undertake any obligation to publicly update or review any forward-looking statement whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by forward-looking statements. Information on these factors can be found in the company’s Annual Report on Form 10-K for the year ended December 31, 2012, available at SEC’s website, www.sec.gov.

Here’s John.

John A. Kanas

Good morning everybody, obviously we’re happy to report our second quarter results. This is the first quarter for me that has been significantly impacted by our presence in New York and as we had anticipated New York has begun to make a serious contribution to loan growth, $0.52 a share for the quarter, a little better than the market had expected to see from us.

New loans grew at a pace of about $1.1 billion for the quarter that’s broken up as follows, that’s about rounding here about $260 million out of New York commercial out of New York, about $340 million out of commercial out of Florida, and then the remaining $450 million is a combination of our indirect lending platform, our leasing companies and residential mortgages.

Deposits for the quarter have reached $9 billion with the demand deposits now reaching 24% and total deposits, a target that we set for ourselves earlier this year; net interest margin, a little bit stronger than we had given you guidance on at above at 614.

We really have completed our current plans to build out in Manhattan by opening two additional banking centers in the second quarter and that brings us now to four branch locations in Manhattan and one about halfway out Long Island on Route 110 in Melville.

Deposit course continue to trend down, 64 basis points for the quarter down from 70 basis points in the prior quarter and significant gain in tangible book value to $18.43. Deposit growth in New York, all-in it’s about $100 million so far this year. That deposit growth tends to lag loan growth in these new initiatives since the loans that go on the books right away and a lot of deposit relationships are fairly complicated and complex and it takes a while to get them open and up in running. But we are well underway to seeing significant in more deposit growth come out of the New York market.

We talked to you last two quarter about the fact that New York, we viewed New York as a significant outlet to allow us to grow loans and to diversify our risk between South Florida and New York and that is exactly what’s happened as the result of that has been, we’ve now gotten our loan to deposit ratio up to just about 75% from roughly 65% at the beginning of the year.

Loan quality as you can see has remained stellar for us. We continue to work off the FDIC assets, although at a declining rate and we are feeling very good about the fact that interest rates in the marketplace while we believe are beginning to move and will continue to increase over the next year or two, the timing of that is perfect with our entering into to the New York market, and certainly rather being entering now at this stage in the interest rate cycle than six months ago before this was as predictable as it now seem to be.

So all in all, a quarter that we are pleased with and a continuation of building strength in this balance sheet and a rather impressive growth trajectory centered around I think the two most vibrant markets possibly in United States, but certainly on East Cost and that is Manhattan and Miami. We are not surprised by the early growth that we’ve seen out of the Manhattan market and we won’t be surprised by the growth we continue to get there for the balance of the year.

We are little surprised about how quickly Florida, particularly South Florida is recovering and how much more growth we are getting out of Miami Dade area than we had anticipated earlier this year. For those you who haven’t visited in a while particularly to downtown Miami, where there were 30,000 or 40,000 empty condos four years ago, they are now full and there is – we just drove up from there this morning and there is probably fifteen construction cranes that are rigged and busy and building new buildings along Brickell Avenue and then over on to the beach.

So happy times in South Florida, while those happy times in those growth rates are not being felt all over Florida certainly not in the North and not as much on West Coast, the East Cost and particularly South Florida continues to recover at a very impressive rate. I know that the most interesting part of these presentations is responding to your questions. And so many of you have listened to me for enough years, I give these reports. I don’t think you need to hear me talk anymore.

So Leslie is here with me, and so is Raj who is just Jeff Starr, Bank Counsel, and I think right now it would be an appropriate time for us to for taking your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Okay. We have one question for you. This one is from apologies for pronunciation, Robert Placet from Deutsche Bank. Please go ahead.

Robert Placet – Deutsche Bank

Hi, good morning.

John A. Kanas

Hi Rob.

Robert Placet – Deutsche Bank

First question as it relates to your outlook for new loan growth from here, the 2Q run rate was obviously very strong at a $4.4 billion. I guess how should we be thinking about pace of loan growth from here? And then has your outlook for the mix between New York and Florida changed at all?

John A. Kanas

We’ve said in the last quarter that we thought that after we were in New York for two full quarters that we could expect to see roughly the same amount of loan asset growth out of New York in those five locations as we do out of all Florida. And based on what we can see right now looking forward, I’m looking at Leslie and you could give us the finer point of this.

Based on what we can see right now, we think that prognostication is right on the nose, I mean we were forecasting something on the order of $1 billion worth of loan growth into the next quarter and beyond. It’s a little tricky trying to give you the exact breakdown of how much is coming out of New York and how much out of Florida. But we can expect to see both of these markets continue to grow certainly over the balance of this year.

Robert Placet – Deutsche Bank

Okay. And then secondly, how should we think about the growth in kind of overall earning assets? You sold some security this quarter to fund loan growth, I’m assuming we should expect that to continue and then longer-term, how do you think about the size of the securities portfolio as a percent of overall earning assets?

John A. Kanas

I give that Raj.

Rajinder P. Singh

Yeah, I mean we’re coming from a place where we were not capital constraint to as we look forward to six or eight quarters, we have to start thinking about allocating balance sheet space widely or even more widely than today. So securities portfolio which has been about $4 billion and $4.5 billion for us, you should expect that to shrink, do not right away, but into next year, we will start to shrink that and make room for higher yielding loans.

Even within the loan portfolio, for example, we had $250 million of growth in resi mortgages; I would expect that number to be in lower going forward as we grow more C&I and CRE, and leasing assets, which are high yielding. So there will be that adjustment of the balance sheet, securities will still be a major player on that balance sheet, but it won’t be to the – you shouldn’t expect it to grow, you should expect it to shrink more so in 2014 than 2013.

Leslie Lunak

And another – securities that were sold this quarter obviously other factors enter into this, those were some fixed rate securities with fairly long-duration given the movements we are seeing in rates, it made sense for several reasons…

Robert Placet – Deutsche Bank

Yeah.

John A. Kanas

To sell those particular security sold.

Unidentified Company Representative

Remember that we continue to have a sizable macro hedge on this balance sheet that we really put on years ago. We’ve increased that. We actually made a significant long-term liability borrowings with Federal Home Loan Bank before the first speech Mr. (inaudible) made this past quarter, which worked out significantly in our favor. So it allows us to be very competitive in the loan market at least for the time being.

John A. Kanas

On the right side of the balance sheet, you just start seeing deposits growth something which obviously we’re growing deposits, but not as aggressive as loans, but we’ll start to grow deposits as well as we tweak around our incentive plans.

Also on the FHLB front, it’s been pretty flat for the last four or five years and we’ve used just to term out our liabilities, but as our balance sheet grows we will start to want to grow that a little bit, but also that process of terming it out and having it longer-term continue to see that, it’s a process. We’ll continue to have long duration in liabilities through with FHLB.

Leslie Lunak

Yeah.

Robert Placet – Deutsche Bank

Thanks very much.

Operator

Thank you. Your next question comes from Brady Gailey from KBW. Please go ahead.

Brady Gailey – Keefe, Bruyette & Woods

Thanks. It’s Brady Gailey with KBW.

John A. Kanas

Hey, Brady. How are you?

Leslie Lunak

Hi, Brady.

Brady Gailey – Keefe, Bruyette & Woods

Good everyone. That the margins continues to be analysts estimates that it continues to come ahead of kind of your guidance and where you think that it’s headed? What’s the updated thought on where the margin goes in the back half of this year and then into 2014?

Leslie Lunak

Sure, Brady, the margin was positively impacted this quarter by a couple of factors one, as John and Raj just alluded to the cost of funds is coming down. Two, loans are comply even though loan yields are coming down they still are higher than yields on other types of earning assets and the loan book is comprising a greater proportion of our interest earning assets.

And our earnings and margin continue to be favorably impacted by the loan sales, this quarter in particular, I know the last couple of quarters, interest income as you know Brady has gotten a benefit from the loan sales and the effect of that this quarter about $15.5 million ran through interest income and without that the margin would have been about $5.57 million.

So that gives you an idea of the impact of that. We’re going to see that particular item trail off over the next several quarters would be a little less next quarter, little less the quarter after that. By the time we get to mid 2014 that particular item will be de minimis.

Our guidance for NIM by the end of the year, we’re still kind of sticking to the guidance we gave you earlier, which will be about down between $60 million and $70 million bps from what it was last year. So and then maybe 5.30 to 5.40 range by the end of this year and then north of 4% by the end of 2014 as what we’re seeing.

And that’s all consistent with what we’ve said all along that as new assets coming on at lower yields replace these legacy assets. We’re going to see margin compression. If rates continue to tick up we’ll get some benefit from that. But I haven’t factored that eventuality...

John A. Kanas

Right, what we can’t anticipate and we are don’t going to try is, if rates continue to move up in the marketplace as a results of a more robust economy and these two marketplaces that we serve continue to heal and grow at a greater velocity, I mean that is an ideal situation for this balance sheet given our position and given the velocity of loan growth. So this is sort of if we could have written this book, we couldn’t have written it much better.

Leslie Lunak

Brady another thing I would reiterate, you know, we’ve been saying for a long time that our expectation is that there will be a trough in earnings, as the benefits from these legacy assets winds down and as new assets are put on. We still expect that to happen our estimate of when we’re going to see that trough is probably mid-2014. So we’ll see – we expect to see earnings come down quarterly from now until then and then the trajectory to head up, that keeps getting pushed out, we are happy about that?

Brady Gailey – Keefe, Bruyette & Woods

Right that’s a good problem.

Leslie Lunak

That’s a good problem to have, but we still anticipate seeing that happen.

Brady Gailey – Keefe, Bruyette & Woods

Okay. And then I know it’s looking further out, but as analysts start to think about 2015 is specifically the margin, if you’re going to be little north of 4% by the end of 2014, and do you think that’s a pretty stable level, or do you think that kind of bottoms in the higher 3% range? Or is it just decline obviously even though?

John A. Kanas

I don’t know what Leslie is going to say but I’m dying to hear the answer actually myself, because it’s so unpredictable. I’ll profess here a real answer by saying look if rates continue to trend up and the market stays healthy that – it could be solid and up from there. But then it’s a little earlier on. I’m still trying to figure out what’s going to happen next month.

Brady Gailey – Keefe, Bruyette & Woods

Okay that’s fair, that’s fair. And then lastly one thing I was surprised about was the comp line it was pretty much flat at $43 million, John I know you hired the ton of people in New York this quarter. I guess what’s going to be the news…

Leslie Lunak

And they are volunteers.

Rajinder P. Singh

Yes. They are listening into that Brady.

Leslie Lunak

They are volunteers. Brady you’re going to see some uptick in that next quarter, we haven’t felt the full impact of that yet, some of those people didn’t come until midway through the quarter, there were a few conflicting things going on in the top line, but you’re going to see some uptick next quarter and that we look – fortunately we’re able to put that uptick off the quarter. But you’re going to see that.

Brady Gailey – Keefe, Bruyette & Woods

How much of an uptick do you think we would see, I mean is it a $43 million to may be like $46 million and wasn’t that?

Leslie Lunak

Yeah. It’s about that.

Brady Gailey – Keefe, Bruyette & Woods

Got that. Okay, all right. Thanks for the color guys.

Operator

Thank you. Your next question comes from Matthew Clark from Credit Suisse. Please go ahead.

Matthew Clark – Credit Suisse

Hi, good morning guys, as a follow-up to Brady’s question, should we begin to then see stabilization in comp and just the overall run rate of expenses I guess with all, well there is some noise in there obviously but just wondering if we could start to see some positive operating leverage?

Leslie Lunak

Yes. I think you will see stabilization in comp, you will see a little bit of an uptick in occupancy next quarter to as depreciation comes online for some of the assets we’ve added, but not huge there is also probably going to be a little bit of an impact in Q3 and Q4 this year, the cost of doing our stress testing and capital planning exercise you know that we have to do for the first time this year moving into the [sea car] world. But you could see a few million dollars of uptick and then it really should stabilize.

Rajinder P. Singh

I mean the sort of gut feeling I have is about the fourth quarter is when if you take out the cost of the stress testing, that’s probably a good run rate going into next year, we are pretty well there on people in New York, we’ve hired gosh we’ve hired 89 new people, our branches are pretty well staffed, our private banking group is 95% done, our lending group is 95% done. So we about – and remember too that talking about operating leverage that a lot of these loans that you’re seeing got booked into very later, at the very last part of this quarter, so we really didn’t, we don’t see much revenue from that. We will start seeing that in this next quarter. So I think we will see positive operating leverage as a result of this whole exercise starting in the fourth quarter.

Leslie Lunak

Absolutely.

Matthew Clark – Credit Suisse

Okay and then on the pipeline any update there, I think it was around a billion a month or so a few weeks back, just curious if that has changed dramatically at all?

John A. Kanas

No that’s about where it is, I mean it’s obviously a little higher than that, but we find it those thing are hard to predict, because while the pipelines is higher than that, they don’t really get across the finish line. But as we said, our forecast is about a billion dollars worth of loan asset growth again in the next quarter.

Matthew Clark – Credit Suisse

And I think your original guidance for New York included the resi mortgage purchases you had 260 without it, do you feel like you’re there with the resi stuff that you did in the trusted area?

Unidentified Company Representative

I think with the resi business the origination business in the side is just beginning to pickup, we’ve just hired the right people for that in New York, but the numbers you see here are mostly from purchases and like I had said earlier, I expect to see less purchase in the coming quarters than the 250 we had this quarter.

Matthew Clark – Credit Suisse

Okay. Thanks guys.

John A. Kanas

The loan growth prognostications in New York, do not anticipate a significant amount of residential origination.

Matthew Clark – Credit Suisse

Okay, fair enough.

Operator

Thank you. Your next question comes from Herman Chan from Wells Fargo. Please go ahead.

Herman Chan – Wells Fargo Securities

Thanks. Of course learn more about the loan yields from the New York originations versus that of Florida and hearing competitors, there is mention that some of the pricing in New York has alleviated somewhat and wanted to get your take on the competitive environments in New York? Thanks.

John A. Kanas

It’s competitive. It’s highly competitive in both markets. Depending upon the loan categories, some categories are more competitive than New York than they are at Florida. Multi-family lending as an example in New York is a very crowded space. We have a lot of new entrants into that business that are compromising on rate, as well as terms which has kept us away from some of that work. Generally speaking, I mean the loan yields for this quarter in the mid-3s, of this $1.1 billion worth of growth, residential is slightly less, and we expect to see that uptick slightly from here.

But in terms of competition they have not given it away anywhere, everybody is scrambling pretty hard for a deposit share, but obviously, we’re rekindling old banking relationships that we’ve had for many years at New York so.

None of this business that we are putting on the books in New York like this or to people that we don’t know, this is all customers that we’re familiar with and we’ve had for many, many years and we see a strong pipeline of those people on for the rest of the year. So, well pricing will continue to be an issue, as rates move up, we think we’ll be able to improve our spreads.

Herman Chan – Wells Fargo Securities

Great, thanks. And what are some of your expectations for future branch expansion both in New York and Florida, given the strong loan growth in Q2 and that should continue. I’m wondering about the need to grow the deposit base little bit faster to fund the impressive loan growth that you are expecting?

Rajinder P. Singh

Yeah, we think about that, but unfortunately owing to some change in customer behavior today, building new branches doesn’t necessarily translate into growing deposits. And we can see that demonstrated in lots of different bank franchisee across the country. So we are thinking about the need to fund this robust loan growth over the next six quarters. But I would say that at least for now the idea of aggressively opening branches is not on the top of our list.

We’ve got a 100 or so locations in Florida, four, five new ones coming up this year in New York with those four locations in the Manhattan, I mean don’t be surprised to see us open something one or two more in Long Island possibly in the Bureaus and one or two more Manhattan, but no aggressive branch opening plans effective.

More and more with the advent of electronic banking of people were less and less dependent, you can see it yourself I mean walk by your local bank and you know longer see the lines out the windows out the door rather on Friday afternoon with people cashing their paychecks or business customers lined up to do transactions, so those – that business is not really being done in the branches anymore. So we are going to be very careful about that we don’t think it’s the most efficient way to fund loan growth although it will be part of the picture.

Herman Chan – Wells Fargo Securities

Understood. Thank you very much.

Operator

Thank you. You have no more questions at this time. (Operator Instructions) Here we do we have a question for you. And this one is from Matthew Lee. Please go ahead

Matthew Lee – Inner City Press

Yes, it’s Matthew Lee at Inner City Press. It’s very interesting. I wanted to ask one thing about the way that you did, BankUnited is serving New York, but that what’s called the Community Reinvestment Act assessment areas only parts of Manhattan and (inaudible). I wanted to know if that’s true and also Mr. Kanas can say more about the possibility of opening branches in Boroughs, the mid-Boroughs this would be?

John A. Kanas

Matthew, I didn’t hear the first part of your question, hello again by the way, I’m seeing you here.

Matthew Lee – Inner City Press

Sure, that has to do with the CRA assessment area.

John A. Kanas

Okay.

Matthew Lee – Inner City Press

Any idea that you’re going to suppose to lend and loan community, but in your community but it is defined whether your branches are, I wanted to know if it’s just in Manhattan it’s up currently and if there is any ideas of changing them?

John A. Kanas

Our branches currently are just in Manhattan and one in South. We do think that there maybe open a branch or two in the Boroughs and many of those areas as you know are lower mark areas. We’ve had great success there in the past with our other institution in Hartford. But we have nothing, no plans that are concrete right now.

Matthew Lee – Inner City Press

Just one follow-up if you don’t mind. You said that some of these relationships are ones that you had in the past. That is why I’m sort of wondering even though the branches are in Manhattan are any of these deposit or lending relationships in the other Boroughs where you use to do business.

John A. Kanas

Generally speaking, the Manhattan deposits are from Manhattan and the deposits we have on Long Island are aggregated in Melville and are from (inaudible) so we can add to that actually. That Long Island branches almost on the line between separate counties on Rule 110 carried on Route 110.

Matthew Lee – Inner City Press

Got it.

Operator

Thank you. We have no more questions. I would now like to hand over to John Kanas for closing remarks.

John A. Kanas

Appreciate your turning in this morning. Obviously, we are very excited about the balance of this year for BankUnited, we have got a target about the tail here and we believe that this growth rate will continue. Some quarters ago a number of you raised a question about stock repurchases and increasing dividend and what are we doing with those extra capital and we said to you at the time that we thought that our growth was going to take care of that and it’s looking more and more like that’s exactly what’s happening and I think last quarter we said we think we will grow into this capital by the middle of 2014 certainly looks like that’s right.

We are as always mindful of M&A opportunities don’t see anything in particular right now that makes a great deal of sense either in the north or in the south, but that market changes from time to time and we are always on the look out for something that might make a contribution.

One thing that is worth highlighting and that we don’t really talk about very much is that the subsidiary lenders that are one out in I mean as up a lease lending operation out in Arizona and our small business lending operation Baltimore, we haven’t talked about it much, because they really haven’t had a big impact, but they are starting to make significant contributions and we think that those kind of activities may well be more and more important part of our Bank’s story as we go forward. The New York market is growing by leaps and downs particularly in Manhattan and we think that will share in that success and get at least our portion of growth if not a little bit more than our portion of growth over the balance of this year and frankly looking at into 2014 things look quite good.

As Leslie said we can see the EPS trailing off between now and the middle of next year. And we think that that trough is about in the end, I know we’ve kept moving that out as we’ve done better and better and maybe next quarter we will move it out again another quarter, but this balance sheet is performing almost to the T as we had hoped and predicted that it would.

Loan quality continues to be a non-issue in for the most part in all industry, for those of you have been around long enough you know that that will change some day and when it does, there would be other things to talk about, but right now we’re very pleased with this performance and look forward to the balance of the year.

I thank you again for your participation and I look forward to seeing many of you on the road over the next two or three months.

Rajinder P. Singh

Thank you.

Mary Harris

Thank you.

John A. Kanas

Okay.

Operator

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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