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BankUnited Inc. (NYSE:BKU)

F2Q11 Earnings Call

July 27, 2011 09:00 a.m. ET

Executives

John Adam. Kanas – Chairman, President and CEO

John Bohlsen – Vice Chairman and Chief Lending Officer

Douglas J. Pauls – CFO

Rajinder P. Singh – COO

Mary Harris – SVP of Marketing and Public Relation

Analysts

Erika Penala – Bank of America, Merrill Lynch

Zerbe Ken - Morgan Stanley

Robert Placet – Deutsche Bank

Brady Gailey – KBW

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2011 BankUnited Inc. Earnings Conference Call. My name is Crystal and I will be your operator for today. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Mary Harris, Senior Vice President of Marketing and Public Relation. Please proceed.

Marry Harris

Good morning and welcome, it's my pleasure to introduce John A. Kanas, our Chairman, President and Chief Executive Officer. But, first I would like to remind everyone that this call contains forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 that reflect our current views with respect, among other things, future events and financial performance.

We generally identify forward-looking statements by terminologies such as “outlook”, “believes,” “expects,” “potential,” “continues,” “may,” “well,” “could,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Any forward-looking statements contained in this call based on the historical performance of us and/or subsidiaries or on our current plans, estimates and expectations. This inclusion of the forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operation, financial results, financial condition, business prospects, growth strategy and liquidity.

If one or more of these other risks or uncertainties materialize or if our underlying assumptions prove to be incorrect or actually results may vary materially from those indicated in this call. These factors should not be construed as exhaustive, we do not undertake any obligation to publicly update or review any forward-looking statement whether as a result of new information, future development or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. John.

John Adam Kanas

Good morning. You know, while since I have done one of these, so, it’s nice to be back on here talking about the quarterly report of BankUnited. I’m going to just for the record owing to the wonders of technology, we have a number of people in the room and actually we have Raj with us as well, but he is in New York. So, Doug Pauls is with me, I will turn over – my comments in a few minutes and he will go into more detail, John Bohlsen is here with me and Raj Singh is here with us, although he is in New York today he is here to answer any questions that you might have.

So, let me to give an overview. We’ve been around to see many of you lately and we’ve talked about some of the subjects that now are materializing in front of view in the form of this quarterly report.

We are particularly pleased even though we told you that we expected to see significant velocity, a loan growth picking up later this year, and you can see that on an annualized growth rate actually loans are up 134%. We’ve seen non-covered loans go up by over $350 million this quarter and I’ve talked to many of you, individually, and some of you in groups that’s how this is happening, the teams that we are hiring in Florida are beginning to take hold and the business that those people are bringing to us is getting onto the books everyday and our market share continues to grow.

A lot you asked, when we were traveling when we will you start growing enough to stop shrinking in other way of saying you know when will loans actually start to net grow and you could see that on year-to -date basis. So far this year we’ve only shrunk about $100 million, I think we’ve shrunk from 3.9 billion to 3.8 billion in loans for six months.

However, if you look into the quarter, you will see that in the second quarter this year, we actually grew up by about $70 million. We had about $232 million worth of shrinkage in the covered portfolio, and we’ve booked about $302 million worth of new loans.

So, in the quarter itself we had net growth of loans of $69.9 million. Now, that when I was answering that question on the road with many of you. I said that, in our hearts we believed that this trend would begin to materialize towards the end of 2012 what’s happening is two things.

One, we are able to sign on more teams than with expected to, and also there is a very slight uptick in the Florida economy, some of it being witnessed by some of the housing staff that came out yesterday although most of us believed that those are seasonal, but we are seeing encouragement here and John will tell you if you ask him that we’re off to a very strong start again for the third quarter in loan growth. So, we expect that to continue to ramp up.

Also core deposits, which is something that we talked a lot about on the road, we spend our life driving expensive CDs out of the bank and mining the Florida market for core deposits. And core deposits even this quarter non-interest bearing, demand deposits are up 45% and core deposit growth itself had grown at an annual rate of 19%.

So, we are both the asset class and the liability class that are the most important to us and that are the focal point of our business strategy are growing nicely. Book value obviously is enjoyed a nice move as a result of this over 15 bucks for book value and almost 14, 15 are tangible basis, so we are very pleased with that.

Earnings are about where we expected earnings to be, but I hesitate to remind you up for those of you cover earnings and cover this company. Well, of course, earnings are important to us and current earnings are important to us, I said to you, because they continue to build the value of our company. We are less focused on current earnings then we are building a strategically important bank here in Florida and pennies one way or the other in the earnings line are much less important to me than the trajectory of growth of the assets and liabilities that we are focusing on.

I had told many of you the story of how we actually have hedged this balance sheet tremendously against rising interest rates and are probably punishing ourselves – we are punishing our earnings to tens of millions of dollars, but we’re guarding against a sudden and unexpected rising risk, none of us expect that and obviously so forth that has caused us money, but we will continue to do things that will protect the company against those type of moments.

And, we will continue to spend as much as we can reasonably of our current earnings to build out these teams in Florida, particularly as we keep seeing small amounts of evidence that the Florida market at least in some areas is improving is a good article in today’s Miami Herald home prices rise slightly in South Florida, unfortunately that most of us believed that seasonal, but I think example in June, there were 5,000 homes in Condos traded in Miami-Dade and Broward counties that’s the good news, the bad news is 60% of those sales were foreclosures and short sales. But, there is a robust market prices have stabilized at many of these markets and we’re getting a little bit more excited about the Florida economy than we were sometime ago.

I really have nothing further to say other than, before you ask the question about the lawsuit, let me bring it up. We made a comment to the press and let me try to paraphrase it. We said that John and I are well aware of our obligations under our non-compete agreement. We under the advice of council have operated under that agreement many years. We are in compliance with it, according to our sales and according to our council and we continue to be in compliance with it.

We have obviously engaged council to look at this issue and then we’ve engaged other council at other council at other council to look at this issue. And we continue to believe there firmly that the results of this case will have no bearing on our expansion plans in New York or anywhere else. So, obviously I’m not going to get into details of the lawsuit, but I know it’s something of interest and I don’t want to duck the subject.

I think that’s about it from me, and I’m going to kick it over to Doug, who’ll give you couple of minutes about some more detail.

Douglas J. Pauls

Thanks, John, and good morning everyone. I’d just like to touch briefly on the financial highlights of the quarter as reflected in the press release. We reported net income of $44 million and EPS of $0.44 per share which is inline with consensus. As John mentioned, very strong loan growth for the quarter of over $300 million of growth in non-covered loans and this growth keeps us on track to meet all previous loan growth targets that we shared with many of you when we were on the road for 2011.

We continue to transform our deposit base with core deposit growth of $145 million for the quarter and as John said, when you look at year to-date core deposits have grown at an annualize rate of almost 20% to a very pleased with.

Asset quality remains very strong with non-performing loans to total loans of 90 basis points. The vast majority of the non-performing loans are covered loans. In anticipation of being asked the question, I did want to point out that our provision for loan losses for the quarter was impacted by a partial reversal at the allowance related to a pool of home equity loans, covered home equity loans, ACI loans. We’ve recorded significant allowances for this pool in the second half of 2010.

The projected cash flows for that pool have improved significantly over the last six months. And we provided detail on the roll forward of the allowance in the press release and you can see that that reversal comes to the ACI column. And, I think we’ve mentioned you again on the road when we talked to you that the provision is going to be, can be somewhat lumpy, given the accounting for covered loans and the ongoing projection of cash flows related to those loans.

Net interest income grew to $117 million for the quarter, which is a 22% increase over the same quarter from 2010. As we talked with you before, our net interest income in 2011 has benefited from significant re-classes, from non-accretable difference to accretable yield in 2010 and that’s help push our margin close to 6% for the quarter, I think it was 5.99% actually. We have indicated previously that those re-classes will likely decline in 2011 and you can see that again in the detail in the press release. And that will impact our margin percentage over the next several quarters, again, all inline with our previous guidance to you folks.

Non-interest income for the quarter reflected lower FDIC accretion and lower loan resolution income, again inline with our previous guidance. Increases in non-interest expense were primarily related to OREO and permit, and related expenses and foreclosure expenses. We expect these costs to remain elevated for the balance of 2011, although please keep in mind, we see an offsetting benefit for these expenses in non-interest income.

And finally, as you’re all aware, I’m sure on June 2nd, 2011, we announced a Merger Agreement with Herald, a $500 million bank in the New York Metro area. We expect this acquisition to close in late 2011 and Herald will serve to jump start our planned expansion in New York.

We are very encouraged by our second quarter results. We continue to perform inline with our previous guidance and we look forward to continued strong performance in 2011 and beyond.

And with that, I think John and Raj and I would be happy to respond to any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Erika Penala with Bank of America, Merrill Lynch. Please proceed.

Erika Penala – Bank of America, Merrill Lynch

Good morning.

John Adam Kanas

Hey Erika, how are you doing?

Erika Penala – Bank of America, Merrill Lynch

I’m doing well. Could you remind us what your loan growth targets were for the balance of the year and also given John’s comment that you were able to sign on more teams. If it’s possible that growth could accelerate at least on the commercial side from what we saw in the second quarter?

Douglas J. Pauls

Well, in terms of targets Erika, you know, we told everyone that we thought we could do between 500 million and 600 million of growth in the commercial portfolio which includes commercial loans, commercial real estate and leases. And we thought we could do 125 million to 150 million of growth in the residential portfolio. And we’ve actually achieved that target on the residential side. John, do you have any comments about potential growth in the second half with the new teams.

John Adam Kanas

I mean, Erika, it’s hard to say. I mean, the current quarter and the encouragement that we’re getting from our lenders would lead us to believe that our growth assumptions as we went into the year, might have been a little bit light. So, do I personally believe that we’ll do a little bit better than we had originally said, yeah, I do. But you know, markets come and go and I would want to turn it into a promise. But, certainly based on what we’re seeing this quarter and based on the strong start that we’re getting in the third quarter, and what we’re seeing and hearing from our lenders. I think there is every reason to be optimistic.

Erika Penala – Bank of America, Merrill Lynch

Given the traction that you’re getting in Florida with regards to your core deposit growth, do you expect to continue to purchase, I think more the same volume that you did in this quarter given that, you know, putting it to work on the bond portfolio is just, you know, the yields are terrible at this point.

John Adam Kanas

Well, I think Erika, what we’ll continue to do is you know, look at the best alternative for us to invest our cash. And we, for this quarter, we certainly felt that we saw some good opportunities to purchase residential loans. Certainly a better yield as you say, the bond market is a bit tough right now. So, we will continue to evaluate those alternatives. You know, I wouldn’t be surprised if we continue to purchase residential loans. I might just add that the portfolio of residential loans that we purchased is performing very well, we have zero delinquencies, Fico scores that are you know, 730 and above, LTB is below 70%. So, we’re very happy with the quality of loans we’ve been able to purchase and will probably continue looking down that path.

Erika Penala – Bank of America, Merrill Lynch

I mean, I just had one last question, John I understand that your ability to comment on currently go proceedings is very limited, but when all this being moved by August in next year anyway?

John Adam Kanas

I am not a lawyer, Erika, but our agreement as drafted and you know August of next year.

Erika Penala – Bank of America, Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed.

Zerbe Ken - Morgan Stanley

Yeah, thanks. Hi guys, just a quickie on the capital one thing have you guys estimated potential legal costs of fighting the dispute over the next year?

John Adam Kanas

Again, it is a little tough for us to comment on something that this or I mean this not very far in the proceedings. What I can say is, we do not expect those costs to have any type of material impact on our financial performance for the next year.

Zerbe Ken – Morgan Stanley

Okay, I got. And then, in terms of the FDIC cost, I understand that they are largely offsetting, but do you have a net impact on the swing a penny or two up or down on a net basis?

John Adam Kanas

I am sorry Ken, for which.

Zerbe Ken – Morgan Stanley

Just all the FDIC related costs, like the high approval yield with a reductions in the non interest income and the OREO costs and their reductions or their offsets?

John Adam Kanas

Well, again we talked about this before in terms of the ups and downs, right and I think forgetting the accretion for a second, you know, we continually demonstrated that the resolutions and the offsets in general tend to have an immaterial impact. I think, where we’re into that Ken is, you know, we are performing pretty much inline with the guidance that we gave folks starting late last year as we started the IPO process so, that’s how we answer that question rather than looking up a penny up or penny down.

Zerbe Ken – Morgan Stanley

Okay. And then, just a silly quick question. Do you guys have your average diluted share count that you could provide to us?

John Adam Kanas

Actually that’s not a silly question.

Zerbe Ken – Morgan Stanley

I did not find it in the release and let’s hope you can provide that going forward.

John Adam Kanas

Well, let me answer it this way. And I am going to go into a very minimal amount of detail here and would be glad to talk about this offline with anyone who wants a lot more accounting technical jargon. Because we have a couple of securities which are participating securities we have to go through a different EPS calculation and coming up with basic EPS then you would expect and that calculation is a little convoluted and we will provide a lot more detail on that calculation in the 10Q. We pull that number of shares out of the press release because we were concerned that people would not be able to do the straight map and it would be more confusing.

So, I do not want to go into too much more details just as I said, it is pretty technical accounting stuff but if you want to give me a call I will walk you through it.

Zerbe Ken – Morgan Stanley

Okay, all right. So, you guys are not going to provide just the end result average shares outstanding?

John Adam Kanas

Yeah, when we file the 10Q in couple of weeks Ken, we will have a lot more detail and walk through the actual EPS calculation. We didn’t include it in the press release because frankly it’s little convoluted and we frankly thought it would take way from story which is you know, strong performance to strong loan growth. So, give me a call and I will walk you through it.

Zerbe Ken – Morgan Stanley

All right. Thank you.

Operator

Our next question is from the line of Robert Placet with Deutsche Bank. Please proceed.

Robert Placet – Deutsche Bank

Hi, good morning guys.

John Adam Kanas

Good morning, how are you?

Robert Placet – Deutsche Bank

First question, just a follow up on the non-compete so you remain confident you are not in violation, but I guess ultimately if you are found of violated it you know, can you kind of help frame what exactly that means for BankUnited and how big of an impact that would be for your business?

John Adam Kanas

That’s one that my words if they were sitting, it would stick a sock in my mouth if I try to answer that question for you. So, I mean I really can’t.

Robert Placet – Deutsche Bank

Okay, sorry. Next question just regarding your NIM specifically, the accretable yield so just be clear you expect the re-classes from non-accretable difference to accretable yield to slow from here?

John Adam Kanas

I think what we have said and I think what you can see if you look at the roll forward in the press release is that we expect the re-classes for 2011 be much lower than in 2010 and the first six months you’ll certainly bear that out.

Robert Placet – Deutsche Bank

Okay. So, as it relates to the accretion flowing through net interest income seems like it’s been fairly consistent at about 100 million per quarter, I guess going forward should we expect a similar run rate and –?

John Adam Kanas

I think the way I would answer that is to say and again this is inline with what we said before, these large re-classes in 2010 have helped push our margin up you know, through the first six months of 2011. Our margin is going to stay high for the next several quarters, but we would expect it to start trickling down a bit as we invest in new assets which are lower yielding, these re-classes will have less impact going forward. So, we would expect a margin percentage to begin the decrease again inline with what we’ve talked about before with everybody.

Robert Placet – Deutsche Bank

Okay, I appreciate the color.

Operator

And our final question comes from the line of Brady Gailey with KBW. Please proceed.

Brady Gailey – KBW

Hi, thanks guys, good morning.

John Adam Kanas

Hi, Brady.

Brady Gailey – KBW

I wanted to ask about the average yield on that 300 million of loans originated, do you all know what that was?

John Adam Kanas

Yeah, the commercial stuff that we are putting on is slightly above 450, the residential stuff is high threes to low fours.

Brady Gailey – KBW

Okay, and is that 300 million is that predominately just stealing market share or is there any true organic loan growth better than that number?

John Bohlsen

No, this is John. That’s I would say 90, 95 or 98% taking market share from others, you know, this is a strategy that we’ve employed since we got here, we hired teams of people who are veterans in the Florida market and those people tend to bring us other people to come to work here and they all bring their customers from other institutions all of whom have had years of experience as borrowers in this market. So, we got to be thoroughly familiar with their credit history and, of course, with thoroughly familiar with the lenders credit performance and history. So, this is just a continuation actually in a bit of ramping up of what we started when we first came in.

Brady Gailey – KBW

And John I know you guys hired a couple of decent size teams in six months before you went public. Can you give us an update and just quantify the amount of commercial lenders that you hired over the last couple of quarters since going public?

John Bohlsen

I would be guessing John since – I guess with this year, I would guess at 50.

John Adam Kanas

50, yeah.

John Bohlsen

Probably something in the order of 50.

Brady Gailey – KBW

And all those are commercial lenders?

John Bohlsen

Yeah and their support people around the commercial lenders credit people and other one.

John Adam Kanas

More business, middle market.

John Bohlsen

More business middle market all lenders.

Brady Gailey – KBW

Okay, and then, John can you just give us an update on your outlook on acquisitions, I know you talked about a little bit during the road show, but on the FDIC front and the open bank deal similar to what you did with Herald National. Can give us an update on your thoughts regarding explaining the company by acquisition?

John Adam Kanas

Yeah, as you know, as so many of you, we are always engaged in the dialogue with one or more institutions down here either literally or on paper. And we continue to examine all of the opportunities that are coming up here. And for – and you know, that you heard me say that that FDIC deals are just not very attractive financially anymore for any number of reasons, probably most important is because they come with a tremendous amount of restrictions that would impede our business strategy at the host bank, not the least of which is the fact that you can’t, sorry bank for 10 years if you do a current FDIC deal. And while we’ve engaged and continue to engage with people who would like to sell their banks and their banks are not going to fail but they’re stumbling along, we just cannot get our arms around asset marks, we continue to. And we’re trying to realistic here, we are not trying to, we understand that, one could be too conservatives in this regard. But given the fact that that Florida is where it is and while it is probably in recovery, it is going to be a long slug out. We just can’t get ourselves to meet the pricing for these companies as a result of the marks that many of them have on their assets.

Brady Gailey – KBW

Okay, then finally, I think your stocks have been a little under pressure due to the expiration of the 180 day lockup for some of your private equity investors. You know, I think the top for PES still own a little over half of the company. Can you just remind us of the details as far as how much of that private equity ownership can be sold right now? Is it all of a lockup or is it just, you know, a portion of their investment are for lockup now?

John Adam Kanas

Raj is our resident expert on that, Raj, what do you say?

Rajinder Singh

Sure. The private equity firms are locked up even now, they’ll be locked up for basically 18 months from the ideal date. They cannot do open market sales, they can, they are freed up to do a secondary if and when they choose to. But they can’t just sell shares in the open market.

Brady Gailey – KBW

Okay. So who rolled off restriction at just a 180 day mark or was there anybody?

Rajinder Singh

There is a really small, I mean, there is a couple of families who’ve put in very small amount of money, there are a couple of employees who have been $1 million with their share here and there, put their money. But the four of us, John, John, Doug and myself and the key firms, we cannot sell them the open market.

Brady Gailey – KBW

Okay, all right, great guys. Thank you.

Rajinder Singh

Thank you.

Operator

That concludes our question-and-answer session for today. I would like to turn the call back to Mary Harris for closing remarks.

Mary Harris

Thank you everyone for being part of the call. We appreciate it, have a great day.

Operator

Ladies and gentleman that concludes today's conference. Thank you so much for your participation. You may now disconnect and have a great day.

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