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Executives

Mary Harris - SVP, Marketing

John Kanas - President & CEO

Doug Pauls - CFO

Analysts

Ken Zerbe - Morgan Stanley

Robert Placet - Deutsche Bank

Brady Gailey – KBW

David Peppard - Janney Capital Markets

Connor Preshaw - Bank of America/Merrill Lynch

Herman Chan - Wells Fargo

BankUnited (BKU) Q1 2012 Earnings Call April 25, 2012 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2012 Bank United Earnings Conference Call. My name is Carissa (ph) and I will be your operator for today. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Ms. Mary Harris, Senior Vice President of Marketing. Please proceed.

Mary Harris

Good morning and welcome. It’s my pleasure to introduce our Chairman, President and Chief Executive Officer, John Kanas and our Chief Financial Officer, Doug Pauls but first I’d like to remind everyone that this call contains forward looking statements within the meaning of the Private Securities Litigation Reformat of 1995 that reflects the company’s current views with respect to among other things, future events and financial performance.

The company generally identifies forward-looking statements by terminologies such as outlook, believe expect, potential, continues, may, will, could, should, speaks, 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 representation by the company that future plans, estimates, or expectations contemplated by 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 other risks, or uncertainties materialize of if the company’s underlying obstructions prove to be incorrect, the company’s actual results may vary materially from those indicated in these statements. These factors should not be construed 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 the forward looking statements. Information on these factors could be found in an Annual Report on a Form 10-K for the year ended December 31, 2011 available at the SEC's website.

Now I'll turn the call over to John Kanas. John?

John Kanas

Good morning everybody. Just for the record Raj Singh is here and so is John Bohlsen. So when we get questions here if you have a question for either of them they're sitting by me.

Obviously we are very pleased with the quarter. The numbers speak to themselves and I'll remind you that over this past quarter we also implemented about a 20% increase in our dividend. We during the quarter also completed the acquisition of Herald National Bank in New York and that is up and running under Raj's attentive car and getting well organized and ready for us to merge it into this bank at some time in the future.

Also during the quarter we completed the shorter conversions of the holding company from being a drift holding company to becoming a bank holding company and the bank, Bank United that is, from being a drift institution to becoming an OCC Bank and also of course Herald as an OCC Bank.

We are particularly pleased with the continuation of the trend of the growth of loan assets. You can see that even excluding Herald we grew just under $400 million for the quarter which is about on the screws from where we expected it to be, sort of the interesting point. That's the first time as a result of this growth and as a result of the fact that the shrinkage of the FDIC asset in the covered loans was just about $100 million this quarter. So the first time now our covered loans are actually less than 50% of our total portfolios running at 49 down from where they were at quarter end at the end of the year about $59%. So 49% versus 59%.

Deposits obviously showed continued growth. The cost of deposits continues to come down and while the average for the quarter was 0.9 it's actually continuing to decrease as the quarter unfolds and it’s probably at this moment, probably closer to 80 basis points than 90 basis points.

Demand deposits as a result of our emphasis on commercial relationships now represents almost 20% of total deposits and were less than 2% when we came here and we were very pleased with the fact that that trend is continuing, in fact picking up velocity. Probably the most important thing for me and for us here at the bank is that while this comes largely as a result of our very strong competitive position in Florida and the fact that a lot of the banks here are weakened and the larger banks have not really gotten their act together yet.

We are seeing a significant influence from a noticeable improvement in the underlying economy particularly in South Florida, particularly in Miami Dade where almost three quarters of our branches are located. So we did not expect to get that kind of help from the economy but that growth that we're seeing is continuing to build and it would appear that it's going to continue to build for the balance of this year and on into next year.

The oversupply of real estate assets in the market has been well absorbed mostly from Latin Americans that are rushing north to get money out of Latin America and making real estate investments in the Miami area and that has had the effect of spurring growth in the entire market.

Interest margin, which we'll take questions on, is just 36% as a result of reclassifications. Remember that we're comparing this quarter to last year's first quarter which was a pretty noisy quarter with $100 million surcharge in conjunction with our IPO.

So all in all we are very pleased. It is about right on the nose where we expected to see the quarter come in and we are poised at this point based on what we're seeing so far in the second quarter for a continuation of this trend to the balance of the year. There has been before, I'll prompt you before, I get the question, there has been no M&A activity for us during the quarter. While we continue to prospect here in Florida and other parts of the country we still are believers that the organic growth that we are experiencing is far more reliable and profitable than anything that we can create as a result of an acquisition at least at today's prices.

So having covered I think everything that I can comment about right about let’s take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ken Zerbe from Morgan Stanley. Please proceed.

Ken Zerbe - Morgan Stanley

John you've just mentioned obviously the continued prospect for M&A in Florida but can you address you appetite for acquisitions in New York if they were coming up on the end of the non-compete in August. Just wondering what you were thinking about there.

John Kanas

Yes, Ken, we are obviously aware that there are some M&A opportunities in the North East. Raj and his team are running numbers on any of those prospects all of the time. At the moment we don’t see anything that's sort of earth shattering that would represent the spectacular opportunity for us but it is entirely plausible that we could turn something up in the north east over the next year and truthfully we aren’t zeroing in on anything at the moment. We are looking at half a dozen situations in the north east but quite frankly, they're still expensive. We think that there is a number of institutions out there who's earnings go in the wrong way and we believe that their business models are probably not well suited for today's rate environment or competitive environment. We understand that the cost of regulatory compliance for particularly the smaller banks are going to do nothing but go up and make this business even tougher for them. So we feel confident that over time there will be opportunity there but we are as you know, ready to be patient.

Ken Zerbe - Morgan Stanley

Understood. And then how far outside of the New York Metro area would you consider? Broad north east or just New York?

John Kanas

Well our strongest suit is New York and particularly centered around New York City. That doesn’t mean that we're not looking at an adequate debt, things in the broad northeast quarter to the extent that they could add strategically to the value of the company. We certainly look; it's not going to be our first choice but certainly on our radar screen.

Operator

And your next question comes from the line of Robert Placet with Deutsche Bank. Please proceed.

Robert Placet - Deutsche Bank

Just in keeping on the topic of New York, just in terms of expansion, so you closed the Herald deal last quarter but obviously you can't do much in New York until August. So what steps are you taking now to kind of prepare for your entry into that market?

John Kanas

Bank United has secured three branch locations in New York City. One at the 35th and 6th, John sitting next to me, one at 48th and Park and one at 57th and Lex and so are all in various stages of development. I would say the one that’s furthest ahead is 35th and 6th and one or all of those will be ready at various times later this summer and on into the fall. But we're obvious being cautious about that in light of litigation and so Raj is spending his time running Herald and cleaning it up and getting it ready for integration with the rest of the bank. Herald has represented decentralized branch eventually when we make that merger happen and we expect to be or certainly hopefully to be in full swing by the end of the year.

Robert Placet - Deutsche Bank

Okay, great. And then just on your NIMB outlooks, NIMB declined meaningfully this quarter. I wonder if you can just give us an update on your outlook for the NIMB.

John Kanas

Yes, that's as you know sort of a complicated issue in this balance sheet but Doug wants to take a crack at it.

Doug Pauls

Yes, I think the best way to look at it, we have a little bit of volatility in the NIMB quarter-to-quarter but if we look at last year the overall NIMB was 614 I believe and as we sit here today, for the year we expect the NIMB to be between 550 and 560 which is certainly in line. It's actually better in terms of year ago where we were on the IPO where we thought we would be with our NIMB and its certainly with guidance that we've been giving over the last three to six months.

Operator

Your next question comes from the line of Brady Gailey of KBW. Please proceed.

Brady Gailey – KBW

John if you look at the press release, you speak pretty positively about what’s going on in South Florida, I was just wondering if that will translate into better loan growth when you look to back half of this year, you are running around 400 million, do you think that ticks up ticks up from here with the improvement in the economy.

John Kanas

It's kind of hard to say I mean remember that and you should be aware that my comments are really about South Florida we are not seeing that spill over particularly into Northern Florida or even the West Coast. We are seeing a noticeable improvement in the Tampa area. We are seeing I mean a slightly uptick in the Orlando area but not much almost negligible, Broward County doing better but less than Miami-Dade. So it's hard to say how quickly this is going to spread to the rest of Florida, I mean we certainly encourage that this underscores our ability to meet our growth targets and loans this year and possibly see it's hard to say and remember that we are people jockeys and so we are always interviewing people who we could add to the team here that we could rely on to help us build quality assets and to the extent we are able to nail down few of those going forward that could make a material difference.

We hired a couple of weeks ago, we hired a young lady named Rosary Falero who was for 17 or 18 years the head of the private banking group at Citi National Bank here at Miami and she and some of her partners will make a meaningful contribution to the balance sheet of both assets and liabilities over the balance of this year and there are other people around like we are talking to that could make a big difference to us but obviously we are encouraged and we hope that the trend continues.

Brady Gailey – KBW

Okay and when you look in the New York, come August take away the opportunities that you will have to acquire when you look at it in on an organic growth basis. Do you think you can see a similar level of loan growth at New York that you are seeing in Florida around that 300 million to 400 million or is it just too early to quantify that?

John Kanas

It's early obviously and it's difficult to predict these. I will tell you that if in the first two years in business in Manhattan that we showed only that kind of loan growth on quarter-to-quarter basis in New York, I would be disappointed.

Operator

Your next question comes from the line of David Peppard of Janney Capital Markets. Please proceed.

David Peppard - Janney Capital Markets

Quickly given the core deposit growth you continue to experience, how do you expect to put that funding to work for the rest of this year?

John Kanas

If you extend the churn line of loan growth, I mean that’s give or take $2 billion worth of loan growth for the balance of the year and I think that’s going to hopefully that’s going to absorb it and in this kind of market to be frank with you increasing deposits is not exactly rocket science. Here or any place else in the United States because of the moment because of the rate of environment the banks aren’t valuing deposits, we think that that is short sighted, we think that the day will come again when deposit liabilities will be a strong component of the value of any strategic franchise. So we are using this opportunity to be aggressive and draw into garner as much deposit growth and particularly cheap deposit growth, non-interest bearing demand deposits as we can and we are going to push that as far as we can even if we push deposit growth to a point where it outpaces loan growth I still think that’s a valuable component to our balance sheet but right now short answer based on the trajectory of loan growth I would say we are going to absorb it.

David Peppard - Janney Capital Markets

And how does the loan pipeline breakdown between commercial real estate and commercial business pan out and what is the structure of some of those loans that you are getting right now.

John Kanas

Of course real estate is a smaller component that we expected it to be by now. We are only now beginning to get comfortable with commercial real estate. I don’t have the precise numbers but it is around 25% in commercial real estate and the rest of it sort of traditional CNI lending. Remember that we are hiring relationship managers from other institutions to bring those relationships that many of them have had 15 or 20 or even 25 years over from other banks and they tend to bring over whatever they specializing and for the most part we are hiring people who specialize in commercial loans. So commercial that we can do a lot more commercial real estate lending, we have demand for here. We are just being super cautious and waiting to make sure that we are getting the right signals from this market before we get any more ambitions in that area.

David Peppard - Janney Capital Markets

So it sounds like most of the loan growth this fueling market share is supposed a true organic loan growth, but how exactly are you taking the market share from your competitors.

John Kanas

It's by putting Bank United out in front of the talented bankers in Florida and convincing them that this is the place where they got to come to finish out. Their careers and frankly it's not hard to do, excess capital, excess earnings, a lot of overcapacity and almost every category that you are going to imagine, a great relationship with the regulators, virtually no non-performing loans and the public company that allows us to offer these employees a share in the equity ownership of the company which is a very important component and if you knew us when we were managing North Fork that was our incentive plans, very, very important part of our success to New York and it does two things, it builds a comminatory in employee base that translates into a greater results and an ambitious workforce and it also creates a sense of partnership with all of us.

There is 240-250 or so of our employees today who are actually equity owners and are watching these quarterly numbers as close as you are. And believe me that makes a difference.

David Peppard - Janney Capital Markets

What is the yield you are getting on new loan growth this quarter?

John Kanas

The total loan average was what 380, 376, high 3s in commercial loans. Generally small business loans probably more on the order 5 to 6 and commercial real estate more in the order of six.

Operator

Your next question comes from the line of Erika Penala of Bank of America/Merrill Lynch. Please proceed.

Connor Preshaw - Bank of America/Merrill Lynch

Just quickly on New York, I know you said that 400 million a quarter would be a disappointment but do you think you can see that type of growth right out of the gate or is there going to be a lag time kind of as you build out your footprint.

John Kanas

Take a quarter or two for us to get organized but within two quarters we should be at that pace at least.

Connor Preshaw - Bank of America/Merrill Lynch

Got it and then couple of other banks have reported so far have talked about pricing in the South East kind of stabilizing broadly, I know you touched on what you are getting on new originations but what are you kind of seeing in terms of pricing pressure on new originations?

John Kanas

On competitive banks down here?

Connor Preshaw - Bank of America/Merrill Lynch

Yes.

John Kanas

People are beating each other up pretty badly on price, there is a limited amount of finite amount of business to go around down here and as typically the economy improves managers are under pressure to perform and under pressure to create loan growth. So there is clearly more competition on a price line than there was year ago, that has not particularly translated into credit structure yet we don’t seen anybody getting crazy and doing improperly structured credits yet. But to be frank with you, I have been in this business a long time. If the economy keeps heating up down here we will see that too and then we will have to be disciplined and make sure not to fall to that trap.

Operator

(Operator Instructions). And your next question comes from the line of Herman Chan of Wells Fargo. Please proceed.

Herman Chan - Wells Fargo

John you mentioned the hire of the City National Team, can you give an update on the pipeline for new producer hires both in New York and Florida. Thanks.

John Kanas

In Florida, City National has got a $1 billion in there private banking area; we try not to be overly optimistic about how much of that business that we can eventually grab it. We will I mean I think 20%-25% of that business pretty quickly and that pipeline is beginning to grow at least that level a little bit better right now. In New York, different story, in New York the pending funds who were able to attract to come to work for us, the pipeline there could get very big very quickly understanding that the long relationships in New York are much bigger and the deposit relationships in New York are much bigger and we are very familiar with both in market and the customers in that market, expect that growth will not just to point for sure in the North East and to be frankly these growth in Florida looks like it won't disappoint either.

We are optimistic about that going forward. And it's by the way it's not just the private banking group that came over but got over the last year Jones (ph) hired almost 200 people in the lending discipline area and all of them come with relationships customer relationships that translate into new business for us. Some of it comes over the first month, some of it takes six to eight months, some of it takes a year to get here if it's complicated relationship but we are not starting to see, larger customers and larger relationships knocking on our door and coming over John (ph) and I met with couple over the list once or two and particularly we are seeing some action down here in the multi-family lending arena.

Where we see big opportunity in Florida and haven’t done anything in that space yet, so, I am always been around long enough not to overprice you guys or myself but it's hard not to be excited about this.

Operator

And there are no further questions at this time. I would like to turn the call back over to Mary Harris for closing remarks.

Mary Harris

Thank you everyone for participating in today’s call. Have a great day. Thank you.

Operator

Thank you for your participation. You may now disconnect. Have a wonderful day.

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