BankUnited (BKU) Q2 2025 Earnings Call Transcript

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DATE

• Wednesday, July 23, 2025, at 9 a.m. EDT

CALL PARTICIPANTS

• Chairman, President, and Chief Executive Officer — Raj Singh
• Chief Financial Officer — Leslie Lunak
• Chief Operating Officer — Tom Cornish
• Corporate Secretary — Jacqueline Bravo

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TAKEAWAYS

• Net Income: $68.8 million, or $0.91 per share; management cited consensus at $0.79 per share.
• Return on Assets (ROA): 0.78%, up from 0.68% in the prior quarter and 0.61% a year ago.
• Return on Equity (ROE): 9.4%, compared to 8.2% in the previous quarter and 8.0% last year.
• Non-Interest-Bearing Demand Deposit Account (NIDDA) Growth: NIDDA increased by more than $1 billion from Q1 to Q2 2025, with average NIDDA up $581 million.
• Total Nonbrokered Deposits: Total nonbrokered deposits increased by $1.2 billion. NIDDA now comprises 32% of total deposits, versus a historical peak of 34%.
• Deposit Costs: Spot cost of deposits decreased by 15 basis points to 2.37%, from 2.52% ninety days ago; total cost of deposits declined by 11 basis points to 2.47% on average for the trailing twelve-month period ended Q2 2025.
• Net Interest Income: Net interest income increased 6% ($13 million) quarter over quarter; net interest margin rose 12 basis points to 2.93% from 2.81% in Q1 2025
• Commercial Loan Portfolio: Net growth of $68 million in commercial loans. CRE up $267 million, C&I down $199 million.
• CRE Portfolio Composition: CRE comprises 27% of total loans. and is 185% of total risk-based capital at quarter-end (GAAP); weighted average LTV of CRE was 54%, DSCR was 1.76.
• Office Exposure: $1.6 billion in CRE office, including $300 million in medical office. NPLs increased by $117 million quarter-over-quarter, with $80 million tied to office loans.
• Loan-to-Deposit Ratio: Decreased to 83.6% as of June 30, 2025, from 85.5% as of March 31, 2025.
• Capital Metrics: CET1 ratio at 12.2%; pro forma CET1 including AOCI at 11.3%; tangible common equity to total assets was 8.1%; tangible book value per share was $38.23, a 9% increase over the last twelve months.
• Allowance for Credit Losses (ACL): ACL to total loans increased to 0.93%; provision for credit losses was $15.7 million; commercial ACL ratio at 1.36% at June 30, 2025.
• Net Charge-Offs: Net charge-offs totaled $12.7 million; net charge-off rate 0.27% annualized for the first six months of 2025, 0.23% on trailing twelve months.
• NPL Payment Status: About 75% of our NPLs were paying as agreed at June 30, 2025, according to Lunak.
• Buyback Authorization: New $100 million stock repurchase program authorized effective post-earnings.
• Guidance Affirmation: Management affirmed a double-digit NIDDA growth target for 2025, low single-digit loan growth for the full year 2025, and mid to high single-digit non-brokered deposit growth for the full year 2025.
• Expansion Activity: New teams established in New Jersey and Charlotte, with office presence in Charlotte forthcoming.
• CFO Transition: Jim Mackie appointed as new CFO effective Nov. 1, 2025, as Leslie Lunak retires Jan. 1, 2026.
• Senior Bond Redemption: The outstanding senior bond maturing in November will be redeemed in August, per 8-K disclosure.

SUMMARY

BankUnited (NYSE:BKU) delivered notable profitability improvements, supported by a strategic remix of funding sources and active management of both margins and credit risk. CRE and deposit portfolios experienced substantial inflows, driven by new relationship growth and targeted geographic expansion initiatives. Management cited precise loan selection and disciplined pricing as the principal drivers of a widening net interest margin, while deposit cost reductions and lower wholesale funding reliance also supported performance gains.

• Singh stated, Funding composition and remix are working. Deposit costs are lower. Spot cost of deposits declined by 15 basis points to $2.37, highlighting the extent of funding progress referenced throughout the call.
• Lunak detailed that, of the $142 million in total CRE nonaccrual, $124 million is office exposure. establishing market context for elevated NPLs within office loans.
• Management clarified that seasonality may bring that down some by the end of the year, but it still expects to meet double-digit year-over-year growth guidance.
• Cornish confirmed that new CRE loan growth remains focused across all asset classes. "I think overall, we still remain at the lower end of CRE exposure to capital compared to our peer groups."

INDUSTRY GLOSSARY

• NIDDA (Non-Interest-Bearing Demand Deposit Account): Deposits on which the bank pays no interest, often considered a core, low-cost funding source.
• C&I (Commercial and Industrial Loans): Credit extensions provided to businesses for purposes other than secured real estate finance, typically including lines of credit and working capital loans.
• CRE (Commercial Real Estate): Lending tied to income-producing property, such as office buildings, retail centers, or industrial facilities.
• DSCR (Debt Service Coverage Ratio): Ratio of net operating income to total debt service, used as a key metric for commercial loan underwriting.
• LTV (Loan-to-Value): The percentage relationship of a loan to the appraised value of the underlying collateral property.
• BOLI (Bank-Owned Life Insurance): Life insurance policies where the bank is the beneficiary, valued as an asset for its tax-advantaged returns.
• SOFR (Secured Overnight Financing Rate): A benchmark interest rate for dollar-denominated derivatives and loans, replacing LIBOR.
• AOCI (Accumulated Other Comprehensive Income): Accounting entry representing unrealized gains or losses not included in net income or capital calculations, relevant for pro forma capital ratios.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the BankUnited Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jacqueline Bravo, Corporate Secretary. You may begin.

Jacqueline Bravo: Thank you, Latanya. Good morning. And thank you, everyone, for joining us today for BankUnited, Inc.'s Second Quarter 2025 Results Conference Call. On the call this morning are Raj Singh, Chairman, President, and CEO; Leslie Lunak, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They reflect the company's current views with respect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the 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 as 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, including those relating to the company's operations, financial results, financial condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial services industry. The company does not undertake any obligation to publicly update or review any forward-looking statements, 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. These factors should not be considered as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended 12/31/2024 and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Raj Singh.

Raj Singh: Thank you, Jackie. Good morning, everyone, and welcome. I know it's a busy earnings day. Thank you for joining us. This is a pretty outstanding quarter for us. Very happy with the results. Net income came in at about $69 million or $0.91 a share. I think the last I checked consensus was around $0.79. So very happy for a nice beat there. ROA improved to 78 basis points from 68 last quarter and 61 basis points second quarter of last year. ROE improved to 9.4%, so we're getting closer and closer to the 10% mark. Last quarter was 8.2%, and last year was 8% at this time. The highlight of the quarter, obviously, has been the deposit front.

We had a very impressive deposit growth quarter. NIDDA is up more than a billion dollars. Average NIDDA is up $581 million. And total nonbrokered deposits grew $1.2 billion. So, and we did all this and achieved declining deposit cost, which I'll talk about in a second. We guided at the beginning of the year to a double-digit NIDDA growth. So far, we're already at 20%. So now I do acknowledge the seasonality in these numbers. But even if you look at our NIDDA growth from last year, this time to now, we're up 13%, which is a pretty sustainable, very nice growth rate.

NIDDA is now 32% of total deposits, so that was another milestone that we had been talking about, you know, getting past the 30%. And we're there. We crossed the 30%. We're at 32%. It's still not the highest level that we've ever been at, which was during the peak back, I think, in '22. We'd hit 34%. So we will set our target now to that high watermark, and we'll hopefully cross that in the near term, probably next year. Funding composition and remix are working. Deposit costs are lower. Spot cost of deposits declined by 15 basis points to $2.37 from, you know, ninety days ago when it was $2.52.

And a year ago, of course, it was much higher, 72 basis points higher. So wholesale funding was paid down again, $749 million paid down in wholesale. Loan to deposit ratio now stands at 83.6%, down from 85.5% last quarter. So all of this improvement in the funding mix had also improvement on the left side of the balance sheet contributed to a very nice expansion of margin. Margin expanded from $2.81 last quarter to $2.93, so 12 basis points improvement in margin. And net interest income increased by 5.6% just quarter over quarter. So we're very happy, which is, you know, all of this is driving the bottom line. With respect to loans, commercial loans grew by $68 million.

And if you break that up in between C&I and CRE, CRE grew by $267 million. And C&I declined by $199 million. Tom will talk more about that. You know, the production has been actually fairly good. The payoffs, unfortunately, have also been fairly good. Which is why we had a slight decline. Resi portfolio is running off as expected, so no surprises there. Let's get to credit. Total criticized and class loans declined by $156 million. I think this is one of the largest reductions we've seen in quite some time, so we're very happy about that. Not unexpectedly, though, we did see some migration into NPLs. NPLs grew by $117 million.

I think a majority of this, I believe, $80 million of that $117 million is office-related. So not all office loans will eventually get upgraded and pay off. Although some did pay off and some did get upgraded, but some did move into NPL as well. And, you know, there were no surprises here. This was expected. Respect to capital, CET1 now is at 12.2%. And on a pro forma basis, including AOCI, it is at 11.3%. TCE to TA ended at 8.1%, and, again, tangible book value per share grew to $38.23. I think that's a 9% increase over the last twelve months. So we're happy about that.

The board met yesterday to go over the earnings and talk about capital as they always do. And they authorized a $100 million stock buyback program which will go into effect after earnings. We will be, you know, you've often asked us about buybacks and capital accretion and how we think about this. Our priorities haven't changed. It is still the number one priority to run a safe and sound bank. Second is to grow our balance sheet in a safe and sound manner. And then, of course, increase regular dividends every once a year and then there's capital left over to actually return through buybacks. So we're executing on that strategy.

The environment today feels very different from ninety days ago when we last spoke to you. You remember ninety days ago in April, we were just still shell-shocked from all the tariff situations that we were dealing with. It feels like a different world today. But I will say that while there is less uncertainty today, relatively speaking, I think there is still uncertainty out there that we have to be careful of. And keep that in mind as we run the bank. So our priorities haven't changed. Manage the bank in a prudent way. Grow responsibly, focus on profitability, manage our credit and our pipelines, and continue to deliver on the recomposition of the balance sheet.

If you do that, earnings will take care of themselves and we will be a stronger company over time. Lastly, I would say you may have seen this in the news. I think we put this out already on recent expansion. We have expanded into New Jersey with a team in an office and also very recently into Charlotte where we have a team and we will soon have an office as well. Let me turn it over to Tom, and then Tom will pass it over to Leslie. And then I'll come back for a few remarks, then we'll open for Q&A. Tom?

Tom Cornish: Right. Thanks, Raj. So I'll cover deposits a little bit first. Raj went into a fair amount of detail on that. Obviously, we're clearly happy with the deposit numbers for the quarter, but over a billion dollars in NIDDA growth and $1.2 billion or so in total deposits. As Raj mentioned, there is some seasonality in that business, but I would also say as we look forward, into the third quarter, deposit pipelines remain very strong, and our deposit growth is predominantly driven by new relationships across all business lines. So we're feeling very comfortable and confident that we'll continue to add new core relationships across all of our businesses for the remainder of the year.

Raj also mentioned the core CRE and C&I loan portfolio segments. Grew by a net $68 million. We had very strong growth in CRE for the quarter at $267 million, just over 4% linked quarter. As Raj mentioned, C&I production has actually met our plan for the year, but we continue to see some higher level of payoff activity. I would say about half of that is really our own decision as it relates to opting out of credit opportunities where we do not see the kind of margin that will help us achieve our goals. Type of spread. And another half is unscheduled payoffs, refinancings, businesses selling, things like that.

I would believe that we will see less of that in the remainder of the year, and we expect production to continue to be strong throughout the second half of the year in both the CRE and the C&I area. Resi was down $160 million while franchise equipment and municipal finance were down a combined $10 million and mortgage warehouse grew by $46 million all of this largely in line with our expectations. So for the aggregate, that kinda solves for about a flat loan quarter overall. Little bit more on CRE. Our CRE exposure totaled 27% of total loans and 185% of the bank's total risk-based capital. At 06/30/2025.

Comparatively, based on 03/31/2025 call report data the median level of CRE to total loans for banks in the $10 billion to $100 billion range, was 35%, and the medium ratio of CRE to total risk-based capital was 217. So while our CRE portfolio has grown nicely across all asset classes, I think overall, we still remain at the lower end of CRE exposure to capital compared to our peer groups. At June 30, the weighted average LTV of the pre-portfolio was 54%, and the weighted average debt service coverage ratio was 1.76. So very strong numbers for the entire portfolio. 51% of the portfolio is in Florida, 24% in the New York Tri-State area.

So everybody's favorite topic for e office. Give you a little bit about free office. Not too much change really from the last couple of quarters. Continued trending downward of exposure gradually. At June 30, we had a total CRE office portfolio of $1.6 billion. About $300 million of that is in 100 medical office, so about a billion 3 in traditional office. Down $70 million from the quarter end with $59 million 59% in Florida, which is predominantly suburban, and 22% in the New York Tri-State area. I would say that this quarter we've seen more return to the capital markets in the office area. We saw activity with office exposure that we had go to the CMBS market.

And we continue to expect that will happen with some upcoming maturities in the remainder of the year. Criticizing classified CRE office loans totaled $383 million at June 30, down from $414 million at 03/31/2025, a net decline of $31 million. It's some upgrades and downgrades and payoffs in that you know, kinda led to the $72 million change. So I said $337 million or 20% of the total free portfolio.

Is medical office, The construction portfolio includes an additional $88 million in office-related exposure with $84 million of that in New York The weighted average LTV of the stabilized office portfolio was 63%, and the weighted average debt service coverage ratio was 1.52 at June 30, not too much different from the previous quarter. Pages 11 through 14 of the investor deck provide additional details on the CRE portfolio, including the office segment. So with that, I'll turn it over to Leslie.

Leslie Lunak: Thanks, Tom. So to reiterate, net income for the quarter was $68.8 million or $0.91 per share. So a great quarter from an earnings perspective. Net interest income was up $13 million or 6% quarter over quarter. And the NIM increased 12 basis points to $2.93 from $2.81 last quarter. As we've been saying all along, margin expansion has been and will continue to ultimately be primarily driven by the change in mix on both sides of the balance sheet. And continued execution on that remains our priority. A big contributor this quarter was the increase in average NIDDA, which grew by $581 million.

The total cost of deposits declined by 11 basis points to $2.47 from $2.58 on a trailing twelve-month basis, that's down 62 basis points. The cost of interest-bearing deposits declined six basis points, to 3.48 from 3.54, and on a trailing twelve-month basis, that's down 78 basis points. On a spot basis, the APY of deposits continued to move down and was down 15 basis points, sitting at $2.37 at June 30, down from $2.52 at March 31.

The average yield on loans increased to $5.55 for the second quarter from $5.48 last quarter, I think it's notable that in a largely stable rate environment, we saw the yield on our loan portfolio grow and the cost of our deposits decline, and that's just evidence of the fruit of the work we're doing on the balance sheet. And so we're really happy to see that. The increased yield on loans related to a couple of things. One is pricing discipline, new originations coming on at higher rates or higher spreads than pay downs and exits, as Tom mentioned. We voluntarily exited a number of thinly priced credits.

And while those decisions have impacted growth, we're seeing the contribution to the margin, which is our priority. And we also see in that rise the continued composition shift from resi to commercial. The average rate paid on FHLB advances increased this quarter from $3.69 to $3.79, and that was mainly due to the expiration of some cash flow hedges. Our guidance assumes two Fed rate cuts in 2025 and kinda smooths those the remainder of the year. But, again, as I said, that's not really the driver of our prognostication about March. Moving to credit and the provision in the reserves, the provision for credit losses this quarter was $15.7 million.

The ACL to total loans ratio crept up to 93 basis points. And I refer you to slide 16 of our investor deck that presents some details about changes in the ACL for the quarter. Couple things going on. We had an increase in specific reserves related directly to some of the NPLs that we added this quarter, and that was partially offset by the positive impact of overall positive risk rating migration. We had some deterioration in the economic forecast. Going the other way, we had some payoffs and paydowns of some criticized and classified assets.

And, generally, we saw improving quarter-over-quarter financial metrics for borrowers in the past portfolio, which had a positive impact on the expected loss modeling. Net charge-offs totaled $12.7 million this quarter. The net charge-off rate was 27 basis points for the six months annualized and 23 basis points for the trailing twelve months, both right in line with what we expect those to run. Few further observations on the reserve. Commercial ACL ratio, so C&I, CRE, franchise, and equipment finance, was 136 at June 30. Up slightly from 134 at March 31 and the reserve on CRE office was 192.

The reserve is actually a little more than double our historical net charge-off rate over the weighted average life of the loan portfolio. And I would also point out that a significant portion of our NPLs actually carry zero reserves because of the adequacy of collateral. You can see that in our LTV. Some of those loans have been charged down, partially charged down to take them down to liquidation value, but there are a number of those loans that are more than adequately collateralized. And the majority of our NPLs were also paying as agreed about 75% of them, in fact, at 06/30/2025.

As Raj mentioned, NPLs were up $117 million quarter over quarter. $86 million of that increase was in office exposure, and office overall is behaving wholly in line with our expectations, so no big surprises. Of $142 million in total CRE nonaccrual, $124 million is office exposure. Moving to noninterest income and expense, not a whole lot unexpected or unusual or material going on there, but I will say total non-income is up $5.5 million. Some of that is sporadic stuff you see with respect to BOLI, but most of that is actually some of our fee businesses gaining traction, whether that's syndication fees, commercial card revenue, capital markets derivative income.

So we're starting to see all of those businesses gaining some traction and happy to see that. Couple of comments on guidance. Overall, our guidance remains consistent with what we've told you previously. We guided to double-digit NIDDA growth. We're already at 20%. Seasonality may bring that down some by the end of the year, but we still expect solid double-digit growth year over year. We guided to mid to high single-digit non-brokered deposit growth. We're already there at 8.4%, so I expect that guidance to hold. We previously guided for low single-digit growth in total loans and mid to high single-digit growth in core C&I and CRE.

Given a slow start, with respect to C&I growth, we're probably expecting that C&I growth C&I in CRE growth core to be more mid-single digits as opposed to high single digits. I'll affirm the previous guidance for mid-single-digit increase in non-interest expense for the full year and still expecting to end the year at that 3% level with respect to margin, and we're already well on our way there. We previously guided to mid-single-digit growth in net interest income. I think we may do a little better than that considering where we are now. And one final point, as announced in our 8-K that we filed this morning, we will be redeeming our outstanding senior bond that matures in November.

We expect the redemption to happen later in August. So, with that, I will turn it over to Raj for the closing comments.

Raj Singh: Thank you, Leslie. We will put out another press release this morning, very important piece of news. On CFO succession planning. We have been working on this for some time. We ran a national search. Leslie had come to me a couple of years ago and said there's a timeline with which you would like to retire. Totally understandable. We ran a process very methodically over the last several quarters. And we have hired Jim Mackie, a veteran in the industry who will be joining us in a couple of weeks, I think mid-August. Right? And Leslie will remain CFO through next quarter. On November 1, we will make the official change.

Leslie will stay with the company through the end of the year and will retire on January 1. But no. I'll be on the next call. Yeah. You'll be on the next call, and Leslie has contributed tremendously to this company. We were a third the size of what it is today or what we are today and thus this contribution cannot be explained in a short call. But she's been my partner, and I thank her. But like I said, she's not going away anywhere. We'll be seeing you guys on the road over the coming weeks and months. But coming back to the quarter, we're very happy with the way things turned out.

You know, at a very high level, I look at this and say, okay. So we're stronger and more profitable. Right? Think about it. We have more capital, more reserves. Lower loan to deposit ratio, which is the definition of stronger in my mind. And ready for any kind of mishap in the economy if it were to ever happen. And we're delivering all of that while improving our profitability, margin, earnings, ROA, ROE, everything is up. So fairly decent quarter and hopefully, in ninety days, we'll come back to you with even better news. But let's open it up for Q&A. Operator?

Operator: Certainly. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. Our first question will be coming from Jared Shaw of Barclays. Your line is open.

Jared Shaw: Good morning. Good morning, everyone. Congratulations, Leslie, on the planned retirement. So maybe just starting with the credit and the office detail. When these loans are moving to non-performer, are you going out and reappraising those at that time and charging down to appraised value? Maybe just walk us through a little bit of the steps that happen once it moves into non-performers. And if the loan to value and debt service coverage ratio you referenced, if that's updated for valuation in the rate environment?

Leslie Lunak: Yes, Jared. We do reappraise. Actually, before they moved to non-accrual, typically, when they move to substandard, we would reappraise and then reappraise again if any significant amount of time had elapsed between when they moved to substandard accruing and to non-accrual. So, yes, we do reappraise those properties. And, yes, all of our debt service coverage ratios and LTVs that we disclose are updated. Our debt service coverage ratios are based on current NOI. And our LTVs, even if we don't have a current appraisal, we model an updated valuation based on very granular MSA level market dynamics. So we do our best to update all of that.

And we do charge, yes, when they move to non-accrual, we do typically charge them down to that liquidation value.

Jared Shaw: So when we look at the move this quarter and the provision, could you give us sort of a breakdown of what was charged off versus what was given a specific provision? Or maybe I guess it could be posted.

Leslie Lunak: Yeah. You can see that on the slide on page 16. I mean, obviously, we're not gonna talk about that at an individual credit level. But you can see this first thing, increase in specific reserves net of positive risk rating migration. So $33 million was the increase in specific reserves and then about $4 million offset due to net positive risk rating migration. So that's what's happening there. You can see total net charge-offs of $12.7 million and $5.2 million of that was office charge-offs.

Jared Shaw: Okay. That's great color. Thanks. Maybe shifting to the deposit side and the strength in DDAs, it's great to see that. One, I guess, do you have the ECR tied to DDAs? And then, two, you talked about the seasonality and potentially seeing that lower at year-end. How should we think about those balances moving over the next two quarters?

Leslie Lunak: So with respect to what you're calling the ECR, and I know we've talked about that term in the past, that number will be disclosed in the 10-Q, Jared, like we always do, and I don't expect it to differ materially from last quarter's number. I don't have it right in front of me, but it'll be about the same, and it'll be disclosed in the Q. You know, seasonality, over the next couple of quarters, that'll become a headwind. It was a tailwind this quarter. My best guess is it'll be relatively stable through the third quarter, and then decline in the fourth quarter.

But it's difficult to predict whether, you know, is that gonna happen in September or October or November, but that's generally the trend we would expect. And if you look back over the last couple of years, it's, you know, our expectation is it would be roughly the same.

Raj Singh: Yeah. It really is, you know, there are certain things that you really should look at on a twelve-month basis given the seasonality. So I wouldn't, you know, say, oh, look. It's a billion-dollar quarter. Great. I look at it. Okay. It's double-digit growth year over year. That's a better way to look at it. And a billion dollars year over year. Well, so high point to high point. Still had a billion dollars of growth.

Jared Shaw: Okay. Thanks. And if I could just sneak a last one in with the buyback. Good to see that. Is there a CET1 that you're sort of solving for? How should we think about the pace of buybacks or your appetite for deploying that given your stock price and capital here?

Raj Singh: I don't think we have a target to put out there, but I will say, yes. We do feel we have capital right now compared to industry peers. And, you know, we're doing a $100 million. Typically, we've gotten authorizations of $150 million. The board felt $100 million was a good place to start. But I'm sure this is not the end. As we keep accreting capital, and don't have much use for it, we'll probably come back and look at it again.

Leslie Lunak: And, Jared, part of this equation is, you know, as Raj said earlier, our preference to deploy capital into growth. So part of the continual evaluation that we'll be undergoing is to what extent we believe we'll be able to do that. Because that's always our better option. Profitable growth. Profitable growth. Yes.

Jared Shaw: Great. Thanks a lot.

Operator: And one moment for our next question. Our next question will be coming from Woody Lay of KBW. Your line is open.

Woody Lay: Good morning, guys. Hey, Woody. Wanted to follow-up on the deposits. And, I mean, it I know there's seasonality in the second quarter, but it feels like the growth is coming a little bit ahead of expectations. And was just curious, I know the title drives some of the seasonality in the second quarter, but I know there's a couple of other deposit verticals. And it's just wondering sort of what's broken right so far in the first half of the year to sort of see a little bit of outperformance relative to expectations?

Leslie Lunak: I think it's what Tom said earlier. You know, across our businesses, we are seeing the continued onboarding of new client relationships. And that's really the driver. I know that sounds pretty basic, but it is.

Raj Singh: Yeah. It does. But fine point on it. This one thing caused, you know, first of all, the numbers that we're at when we look at our own internal expectations, we're not that far ahead. Yeah. We kind of expected this in terms of this we will do. We knew that we have to hit our targets for the year. Before June? Which we haven't, but that was the case last year as well. Because we will face those tailwinds in the second half of the year. So we're happy. We're a little behind on C&I, but on CRE growth, DDA growth, total deposit growth, we're right in line with expectations. Yeah.

There's no one thing that I could point to. It's just seasonality of the business.

Tom Cornish: And I think the investment in producers has helped us throughout the year, investment in new markets. Has helped us, but it's a lot of blocking and tackling every day and we put a tremendous amount of focus on deposit growth. Yeah. Alright. Really helpful. And then one follow-up on the Office migration. It doesn't sound like this was a surprise on your end, but I was just curious on sort of what the triggering event was for the migration. Is it based on maturity schedules? Just for any color there.

Leslie Lunak: I mean, really, what triggers migration is if, you know, our risk rating system is largely driven by cash flow. We're cash flow lenders. So while we often have more than adequate collateral to support the debt, even at up valuations, it's really occupancy. And, you know, landlords that are struggling to fill buildings, those ones that are migrating to non-accrual, it's almost always an occupancy issue.

Tom Cornish: Yep. Exactly.

Woody Lay: Okay. Appreciate that. And then just last for me. Like, maybe they lost a tenant and haven't been able to replace the tenant. That could be a driver. Yeah. Things like that.

Raj Singh: Got it.

Woody Lay: And then last for me, you announced a couple new markets you're expanding corporate offices into. Was just wondering if you could sort of peel back the curtain and sort of walk us through the process on how you evaluate new markets and sort of what it takes to expand into them as it sort of team first and then build around them. Just on your thoughts there.

Raj Singh: Sometimes it's opportunistic. Other times, it's more strategic. So, you know, New Jersey was a little opportunistic. I don't think it was very high on our priority list, but we started doing some business. We hired some good people, and suddenly it became a priority. Charlotte, I would say, was also partially opportunistic, but it has been on our radar for quite some time. It's a very good market. It is we've looked at Charlotte for a number of reasons, not just for business reasons, but also for talent reasons.

And, you know, we've been waiting for the right opportunity for about a couple of years in Charlotte and when the right team came up, we were able to make this happen. But we have done a fair amount of work on trying to match markets that are growing, are healthy, and are conducive to the kind of business we do. Not every market is, but the kind of business we do and we've looked up and down the Eastern Seaboard. And, you know, we don't look national. We don't go out looking at California and, you know, the Pacific. We just look up and down the Eastern Seaboard.

Charlotte, Atlanta, these were markets that were always high on our list. And then it's a matter of waiting for the right team to come around. Before you can make your move.

Tom Cornish: Yeah. I would agree, and I would add a little bit to that. We study each market and look pretty heavily at overall growth in the market. You know, is it a business-friendly market? What's the state like? Are they attracting new to market? You know, relocations from other parts of the country? What's the business formation rate look like, and then we try to match it against our own sort of risk appetite from a credit policy perspective and say, you know, when we look at the industries that are growing in these markets, are these the ones we have, you know, knowledge of? Do we know these industry segments well? Are we comfortable in lending to them?

And, you know, those are all the lenses we look through when we look at new markets.

Raj Singh: And, also, what competition is like in those markets. Right? How competitive are they? Are those that's another factor.

Woody Lay: Alright. Very helpful. Thanks for taking my questions. And congrats, Leslie.

Leslie Lunak: Thank you.

Operator: And our next question will be coming from Ben Gerlinger of Citi. Your line is open, Ben.

Ben Gerlinger: Hi. Good morning. Congrats, Leslie. Morning, Ben. Morning. You know, we talked to credit a little bit here. Was just kinda curious when you think about just it seems like this was well known. I'm just kinda think most of credit seem to be improving, but all else equal, and it NPAs are ticked up. Is there an area or time frame where you kind of expect it to roll over? Maybe I'm just reading what you guys said a little bit incorrectly, but it just...

Leslie Lunak: No. No. I think it's a good question, Ben. And I think this is the natural progression of these credits that are experiencing some stress. You know, one of two things is gonna well, one of three things is gonna happen. They're gonna get taken out, refi-ed out by somebody who's willing to take them on and pay off. Or they're gonna improve. And turn around or they're gonna go through the workout process. And I think this is just some of them are gonna end up there. This is just a natural progression.

You know, we're seeing most of this activity in the office space, and, you know, I think surely at some point, there will be an inflection, but I still think there's a little time left before the whole office dynamic broadly finishes playing out. I don't think that's gonna happen this quarter. I don't know if it's a year or if it's two years, but I think, you know, that dynamic is still gonna play out over a period of time. None of these loans came out of nowhere, and we said, oh my gosh. We never would have thought that one would experience any stress.

So I think we have our hands around the portion of the portfolio that could experience some stress, and it's just still gonna take a while to play out one way or the other.

Tom Cornish: Yeah. Part of it is also when you look at the office book, you know, we're in largely growing markets. Yeah. So there is positive absorption. Absolutely. In most of the markets that you're in, but it, you know, until you get a very mature back-to-work environment, you're still in fairly lengthy abatement periods of time, you know, for new tenants coming in. So that, you know, it is a bit of an elevator ride on some of these where you've got some going up, some going down. When you start to get more positive absorption to the point where it does get more competitive and abatement periods shorten, the cycle will shorten.

Then the cycle will shorten, and you'll start to see that. Otherwise, you've got, you know, a variety of ups and downs that you're balancing.

Leslie Lunak: And I think Tom may have mentioned, I don't know if he did or not, but we are seeing some very positive developments for office properties in the CMBS market. So I think that's an encouraging sign not only that some of the loans that we'd like to see go may go there, but just generally, it's an indicator of positive activity in the office market that the CMBS market is picking up.

Ben Gerlinger: Gotcha. That's helpful. And then I can switch gears a little bit. Next one's a little more philosophical for, I mean, either you, Leslie, or Tom, whoever wants to answer. But Tom, you alluded to not writing some credits because you didn't wanna rent your balance sheet. It would be negative to the spread. And then, Leslie, I think you said spot rates and deposits were notably lower. It seems like margin should continue to go higher. So it more philosophical in nature. What do you think the franchise could run with on a kind of a core margin? Not this year or next year, just kind of the franchise value going forward.

What are you guys targeting as, like, a normalized NIM?

Leslie Lunak: Yeah. I would say mid-threes. I think anything much higher than that is probably moving out on the risk spectrum. You know, we're not gonna become a subprime lender or a credit card company. And then we don't do deals, so we don't have purchase accounting accretion feeding the margin. So, you know, I would say mid-threes.

Raj Singh: Yep.

Ben Gerlinger: Does mix get through there faster, or is it kind of mix as a part of that mid-threes as well?

Leslie Lunak: I think mix is the biggest part of it. It's not the only part. I think as Tom said earlier, you know, we've strategically exited some thinner margin credits. So I think pricing discipline is also an element. Both of those things.

Raj Singh: I mean, it's rare that you see a bank put out numbers where loan yields are going up. Deposit rates are going down. Did that this quarter. That's all pricing discipline. That's all saying we will not chase growth unless it is profitable growth. That's why a couple of minutes ago, I inserted my word profitable in Leslie's answer. Yeah. But that's a song we've been singing in the company for quite some time. You know, we're internally by line of business. Tracking and holding people, LOB managers responsible for margins, loan margins, and saying these need to move up even if it's two, three, four basis points that need to move up, and they are moving up.

And that is contributing to the 12 basis point increase in margin at the top of the house. You know, deposits? Help, of course, but loans are also helping and that discipline on selection is critical to doing that. What matters at the end of the day is NII growth. Right? That's sort of what we solve for. But when you get that right, you'll get your profitability. Right? So bit by bit, we're getting there. All this progress we've made as I did I think a couple of quarters ago, I'd just like to remind everyone, is we have not done anything unnatural of the balance sheet.

We haven't done some big restructuring and taken a big loss and then shown higher margin. It's all bit by bit by bit. Hard work. One loan, one deposit at a time.

Tom Cornish: One basis point at a time. We don't unfortunately, we don't in a vacuum. There is competition. Yep. And a lot of these loans that we're talking about opting out of, people are opting into. Yeah. You know, at much lower margins. But, you know, as we tell the team, we've gotta we gotta fight for every basis point to get to where we wanna get to.

Ben Gerlinger: Got it. That's really helpful. Thank you.

Operator: And one moment for our next question. Our next question will be coming from Timur Braziler of Wells Fargo. Your line is open.

Timur Braziler: Leslie, congratulations on the pending retirement. Well deserved. Maybe starting on just the improvement in DDA, end of period versus average like a nice little tailwind heading into 3Q. The unchanged guidance as it pertains to margin, Raj, should we expect to see margin over 3% and Raj over 10%? In 3Q? Then with seasonality, maybe that tapers off a little bit in 4Q. Just talk us through the timing on that.

Leslie Lunak: So, Timur, as I've said many times, I don't care. I know you do, so I'll try to answer your question. Currently, what we're looking at is margin expansion both in March and 4Q. That's what our current forecast has embedded in it, and that's our expectation. But, you know, what quarter things happen in is far less important to me than it is to you. But currently, our expectation would be continued expansion throughout the year and predicated mostly on continued mix shift on both sides of the balance sheet and pricing discipline. You know, rollover of fixed-rate loans. All of those things are gonna contribute, but that's currently what we're forecasting.

I'm not gonna try to say how much in 3Q versus how much in 4Q, but we are expecting an increasing trend.

Timur Braziler: Okay. Fair enough. And then not to belabor the point on credit, but I don't think we touched on the increase in C&I NPLs and corresponding increase in that allowance. Could you just maybe talk to what drove that increase?

Leslie Lunak: A couple things. You know, a portion of that I think about $26 million is some indirect office exposure that's embedded in the C&I portfolio. And the majority of the rest of it is one loan. You know, as we've said in the past, C&I credit performance will be lumpy and idiosyncratic and, you know, that nothing systemic that we're seeing in the C&I book or no correlation in industries or geographies or anything like that to comment on. So it's really just those things.

Raj Singh: On the topic of correlation, we're looking for that. So the only correlation we know in our portfolio is the office. Yeah. Right? That's a systemic thing across the industry. But in our C&I portfolio, yesterday, I actually looked at the top five loans that are problematic. And each of the five are in five totally different markets. Very idiosyncratic. Yeah. We're not seeing anything. We're not seeing any impact on tariffs or any other changes. It's just, you know, sometimes things do just go the wrong way. And if you ever see a pattern emerging, we'll share that with you.

Timur Braziler: Got it. If I can just sneak one in, last one here, just it seems like the momentum around M&A, particularly in the Southeast, is accelerating here. Can you just maybe talk to the level of conversations that you're having? Has that been accelerating? And then just maybe talk to what you would need to see in order to potentially consider a merger with a larger institution.

Raj Singh: Yeah. I mean, the level of conversation has been consistent since late last year. So there was obviously a little bit of a concern three months ago when the markets dipped as much as they did. But in terms of M&A, I still think there will be a lot of M&A over the course of the next twelve to twenty-four months. As a buyer, we are probably not gonna be very active because that's sort of our DNA for our company is to try and do things organically. We never say no, but it's unlikely.

And as to the other side of this, you know, we don't, you know, sit here and raise our hands all the time saying, you know, wanna be part of an M&A story. But we have a fiduciary responsibility. If the right deal is on the table, we will talk to anyone.

Timur Braziler: Great. Thank you.

Operator: Our next question will be coming from David Bishop of Hovgroup. Your line is open, David.

David Bishop: Yeah. Good morning, and congratulations again, Leslie.

Leslie Lunak: Thanks. Morning, Dave.

David Bishop: Hey, Leslie. Just in terms of the loan yield here, it sounds like the repricing outlook sounds positive from some of the back book or the rate loans repricing. Just curious maybe what that weighted average yield repricing in the near term looks like and what you're seeing in terms of new origination rates?

Leslie Lunak: You know, I don't have in front of me the weighted average yield on what's repricing. But, you know, it is true that what's rolling off is generally being replaced by something at higher rates because that's still primarily loans that were put on in a much lower rate environment. You know, I would say it comes back more to what we talked about is being more selective about the credits we are originating and choosing to engage in as opposed to, you know, just rate market dynamics per se.

Tom Cornish: Yeah. We have Yeah. I don't have all of those rates right in front of me, but I would broadly tell you on the C&I book when we look at things that we're opting out of from a pricing perspective. It's usually things that are floating rate deals that are under SOFR plus $1.50. And when we look at new production, it's generally at rates in the SOFR plus $2.00 to $2.25 type range. So dollar for dollar, you know, we're seeing 75 to 80 basis points of pickup. On that swap, sometimes even a little wider.

David Bishop: Got it. And then, Tom, in terms of the, you know, what's left in terms of maybe those C&I credits that are relatively thinly priced. Any sense how much is left from a dollar basis or percentage basis? If you have any optics there from that view.

Tom Cornish: Yeah. It's we're near the end of that journey. Now, you know, what you don't know is what deal was gonna be redialed if it was at $1.85 that now, you know, somebody thinks should be at $1.10. So that, you don't know. But when we go I went through this yesterday, actually. When we go line item by line item, of all of the deals today that are, you know, kinda sub $2.00 there's only a there's a small handful that I would say are, like, that sort of below $1.50. Which is kind of where Leslie has a baseball bat in her office. So I sit right across from her. Somebody gave me as a gift card.

I call that baseball bat territory.

Raj Singh: She will be passing on that baseball bat to Jim.

Leslie Lunak: Don't know that I will because my name's engraved on it.

Raj Singh: Then we'll have to get Jim a new baseball bat.

Leslie Lunak: Yeah. Raj is one of my favorites. Very back end of that.

David Bishop: Got it. And then back to credit quality. Just curious, Leslie. I think I heard in the preamble that, you know, loss rate overall for the bank, I think it's running, you know, mid-twenties or so. Year to date over the past twelve months or so. It doesn't sound like even with the office inflows, you're expecting much of a dramatic impact moving forward. Is that correct?

Leslie Lunak: Yeah. I would agree. I think that's in the range of what we would expect. I mean, in a given quarter, you can have higher or lower charge-offs, but, you know, on a running basis, I think that's in the range of what we would expect. Yes.

David Bishop: Great. Thank you.

Operator: And our next question will be coming from Jon Arfstrom of RBC Capital Markets. Your line is open.

Jon Arfstrom: Hey. Thanks. Good morning. Morning, Jon. Congrats, Leslie.

Leslie Lunak: Thank you.

Jon Arfstrom: Yep. Couple of cleanup questions. The other income drivers you talked about BOLI, but also mentioned a few other businesses. Is this a sustainable level or do you think we should pull back a little bit on that line item? Because of the BOLI?

Leslie Lunak: I think over the long run, this is not a sustainable level. It's gonna get better. You know, quarter by quarter, you can have a sporadic thing happen like we did this quarter with the BOLI and, you know, those things are sporadic. But I think looking out with a trajectory that's more than one quarter, I think we should see that line item gradually grow.

Raj Singh: Yeah. If that doesn't grow, then we're doing something wrong. Yeah. Our expectation is that will grow not over the year, but over multiple years is fair amount of effort and investment going into these businesses that I expect them to grow.

Leslie Lunak: I mean, is it possible that next quarter there will be a pullback because of the BOLI thing and that sure. But, again, I don't care. But if you look at the trajectory going forward, over the medium to longer term, I think you should see an upward sloping line.

Jon Arfstrom: Okay. I was gonna try to get you to say I don't care on a different question, but I got it. So that's good. And you asked me another little quarter question. Okay. Yeah. Yeah. Was the BOLI material? I know this is ticky tacky, but I was just curious. I would not use the word material. Okay. Okay. On the interest-bearing deposit pricing, how much more room do you think you have to bring that down?

I mean, I think it's without any Fed rate cut, there's no big catalyst, but we'll continue to work around the edges, you know, to still opportunities, where you can bring this customer down five or 10 basis points or that customer down five or 10 basis points and we'll continue to work around, you know, we'll continue to be focused on it, but there's no big catalyst for wholesale rate decreases unless the Fed...

Tom Cornish: Well, I would say every quarter, we sit and look at a number of relationships customer by customer, and it's not glamorous and fun conversations. But, you know, if you go out and adjust down four, five basis points here, eight basis points there, it adds up.

Jon Arfstrom: Yep. Okay. And then maybe one for Tom or Raj. I understand, like, the, you know, don't I don't even wanna say lower end of the loan growth guidance, but because a lot of things happen earlier in the year. But it seems like based on your answer to Dave Bishop's last question, feels like the C&I payoffs or voluntary exits are starting to slow down, and Raj, it sounds like you're saying it's still a little bit uncertain but getting better. Are you guys signaling that even though it's maybe a lower starting point midyear that growth could accelerate the second half of the year? Is that the right message?

Tom Cornish: Yeah. Yes. Yes. And the reason why we have confidence in that is because we're looking at the production numbers. And so the production numbers, you know, actually looked very good for the first two quarters of the year. We're expecting it to look very good in the third and fourth quarter. And so getting to the tail end of, you know, exits that we wanna do ourselves, we can balance that and see the growth opportunities. Our pipelines look very good.

Jon Arfstrom: Right. Okay. Very helpful. Thank you.

Raj Singh: Thanks, Jon.

Operator: And I would now like to turn the conference back to Raj Singh, CEO, for closing remarks.

Raj Singh: Thank you all for joining us. We're, again, very happy about the quarter. If there are any other questions, you know how to reach us. And if not, we will talk to you again in three months. Thanks. Bye.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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