BankUnited, Inc. Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the BankUnited Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jackie Bravo, Corporate Secretary. You may begin.

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 that 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 that the future plans, estimates or expectations contemplated by the company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, 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 construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 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.

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 to report a nice beat there. ROA improved to 78 basis points from 68 last quarter and 61 basis points in the 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 has been the deposit growth. We had a very impressive deposit growth quarter. NIDDA is up more than $1 billion. Average NIDDA is up $581 million and total non-brokered deposits grew $1.2 billion. We achieved all this while maintaining declining deposit costs, which we'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%. I will 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 sustainable growth rate. NIDDA is now 32% of total deposits, which was another milestone we aimed to achieve. We crossed the 30% mark and we're at 32%. It’s still not the highest level ever, which was 34% back in '22, but we will set our target to that high watermark and hopefully cross that in the near term, probably next year. Funding composition and remix are working. Deposit costs are lower. The spot cost of deposits declined by 0.15% to 2.37% from 90 days ago when it was 2.52%. A year ago, it was much higher—at 72 basis points higher. Wholesale funding was paid down, again, $749 million paid down in wholesale. The loan-to-deposit ratio now stands at 83.6%, down from 85.5% last quarter. All of this improvement in the funding mix contributed to a nice expansion of margin. Margin expanded from 2.81% last quarter to 2.93%, a 12 basis point improvement in margin. Net interest income increased by 5.6% quarter-over-quarter, so we're very happy. With respect to loans, commercial loans grew by $68 million. If you break that up in between C&I and CRE, CRE grew by $267 million while C&I declined by $199 million. Tom will talk more about that. Production has been fairly good, but the payoffs have also been fairly high, which caused a slight decline. The residential portfolio is running off as predicted, so no surprises there. Let’s discuss credit. Total criticized and classified loans declined by $156 million. This is one of the largest reductions we've seen in quite some time. Not unexpectedly, though, we did see some migration into non-performing loans. NPLs grew by $117 million; $86 million of that is office-related. Not all office loans will eventually be upgraded and paid off, although some did pay off and some did get upgraded, but some did move into NPLs. There were no surprises here; this was expected. With respect to capital, CET1 is now at 12.2%, and on a pro forma basis, including AOCI, it is at 11.3%. TCE/TA ended at 8.1%, and tangible book value per share increased to $38.23, a 9% increase over the last 12 months. The Board met yesterday to go over the earnings and discuss capital and authorized a $100 million stock buyback program, which will go into effect after earnings. Our priorities haven't changed. Number one is to run a safe and sound bank. Second is to grow our balance sheet in a safe and sound manner, and finally, increase regular dividends once a year. If we have capital left over, we can return it through buybacks. We're executing this strategy. The environment today feels very different from 90 days ago when we last spoke. If you remember 90 days ago in April, we were still shell shocked from the tariff situation we were dealing with. It feels like a different world today. However, while there is less uncertainty today, relatively speaking, we still need to be cautious of uncertainties that remain as we run the bank. Our priorities involve managing the bank prudently, growing responsibly, focusing on profitability, managing our credit and pipelines, and continuing to deliver on the recomposition of the balance sheet. If we do that, earnings will take care of themselves, and we'll be a stronger company over time. Lastly, you may have seen this in the news; we have expanded into New Jersey with a team and an office and also recently into Charlotte, where we will soon have a team and office. 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 and open for Q&A.

Great, thanks, Raj. I'll cover deposits first. Obviously, we're very happy with the deposit numbers for the quarter with over $1 billion in NIDDA growth and approximately $1.2 billion in total deposits. As Raj mentioned, there is some seasonality in that business, but looking forward into the third quarter, our deposit pipelines remain very strong. We feel confident 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 strong growth in CRE for the quarter at $267 million, just over 4% quarter-over-quarter. As Raj mentioned, C&I production has met our plan for the year, but we're still seeing a higher level of payoff activity. I would say about half of that is really our decision to opt out of credit opportunities where we do not see the margin that will help us achieve our goals, and the other half is unscheduled payoffs, refinancings, businesses selling, and similar activities. I believe we will see less of that in the remainder of the year, and we expect production to continue to be strong in both the CRE and C&I areas. The residential portfolio was down $160 million, while franchise, equipment, and municipal finance declined a combined $10 million, and mortgage warehouse grew by $46 million, all of this largely in line with our expectations. Our aggregate results reflect a flat loan quarter overall. A little more on CRE: Our CRE exposure totaled 27% of total loans and was 185% of the Bank's total risk-based capital at June 30, 2025. Comparatively, based on March 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 median ratio of CRE to total risk-based capital was 217%. While our CRE portfolio has grown nicely across all asset classes, we still remain at the lower end of CRE exposure to capital compared to our peer group. At June 30, the weighted average LTV of the CRE portfolio was 54%, and the weighted average debt service coverage ratio was 1.76. Strong numbers for the entire portfolio, with 51% of the portfolio in Florida and 24% in the New York tri-state area. Regarding office space, our total CRE office portfolio is $1.6 billion, with about $300 million being medical office, leaving $1.3 billion in traditional office, having declined $70 million from the quarter end with 59% in Florida, which is predominantly suburban and 22% in the New York tri-state area. This quarter, we've seen more return to the capital markets in the office area, with activity in the CMBS market. Criticized and classified CRE office loans totaled $383 million at June 30, down from $414 million at March 31, 2025, with a net decline of $31 million due to upgrades, downgrades, and payoffs that led to the $72 million change. $337 million, or 20% of the total CRE portfolio is medical office, while the construction portfolio includes an additional $88 million in office-related exposure, with $84 million of that in New York.

Thanks, Tom. 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 stated before, margin expansion has been and will continue to be primarily driven by changes in the mix on both sides of the balance sheet, and continued execution on that remains our priority. A significant 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 12-month basis, that's down 62 basis points. The cost of interest-bearing deposits decreased by 6 basis points to 3.48% from 3.54%. As of June 30, the annual percentage yield on deposits fell by 15 basis points to 2.37%, down from 2.52% on March 31. The average yield on loans rose to 5.55% in the second quarter, up from 5.48% in the previous quarter. In a predominantly stable rate environment, we are seeing the yield on our loan portfolio increase while the cost of our deposits decreases, which reflects the effectiveness of our balance sheet management, and we are very pleased about this. The higher yield on loans is due to our recent pricing discipline, with new originations being at higher rates or spreads compared to paydowns and exits. As Tom mentioned, we've voluntarily exited a number of thinly priced credits. While these decisions have impacted growth, we're seeing contributions to margin, which is our priority. Our average rate paid on FHLB advances increased this quarter from 3.69% to 3.79%, mainly due to the expiration of some cash flow hedges. All of our guidance assumes two Fed rate cuts in 2025, effectively smoothing out the impact over the remainder of the year. Moving to credit and the provision and reserves, the provision for credit losses this quarter was $15.7 million. The ACL to total loans ratio crept up to 93 basis points. We noted an increase in specific reserves related directly to some of the NPLs added this quarter, partially offset by positive risk rating migration. Net charge-offs totaled $12.7 million this quarter. The net charge-off rate was 27 basis points for the 6 months annualized and 23 basis points for the trailing 12 months, both in line with where we expect those to run. Observations on the reserve: The commercial ACL ratio, so C&I, CRE, franchise and equipment finance was 1.36% at June 30, up slightly from 1.34% at March 31, and the reserve on CRE office was 1.92%. The reserve itself is more than double our historical net charge-off rate over the weighted average life of the loan portfolio. Additionally, a significant portion of our NPLs carry 0 reserves due to adequate collateral. 75% of our NPLs were paying as agreed at June 30, 2025. As Raj mentioned, NPLs were up $117 million quarter-over-quarter, with $86 million of that increase from office exposure, which is behaving in line with our expectations. Moving to noninterest income and expense, total noninterest income is up $5.5 million. We'll likely see gains related to BOLI, but most of that relates to our fee businesses gaining traction, such as syndication fees, commercial card revenue, and capital markets derivatives income. These businesses are starting to gain traction, and I'm happy about that. Now on guidance, overall, our guidance remains consistent with what we've shared previously. We guided for double-digit NIDDA growth, and we're already at 20%. Seasonality may bring that down somewhat by year-end, but we still expect solid year-over-year growth. We guided for mid- to high single-digit non-brokered deposit growth, and we're currently at 8.4%. I'm confident that guidance will 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 C&I growth, we might expect that C&I and CRE growth to be more mid-single digits rather than high single digits. We previously guided for mid-single-digit increase in non-interest expense for the full year, expecting to end the year around the 3% level for margin, and we're on track. We had previously guided for mid-single-digit growth in net interest income, and I believe we may perform a bit better than that considering our current momentum.

Thank you, Leslie. We released another press piece this morning regarding CFO succession planning. We've been working on this for some time and conducted a national search. Leslie approached me a couple of years ago about her retirement plans, which are understandable. After a methodical process, we've hired Jim Mackey, a veteran in the industry, who will be joining us in a couple of weeks, around mid-August. Leslie will remain CFO through next quarter, with the official change on November 1. She'll stay with the company through the end of the year before her retirement on January 1. Leslie has made significant contributions to this company; when she joined, we were much smaller than we are now. Her impact cannot be captured in a brief call. She has been a valuable partner, and I appreciate her for that. Regarding the quarter, we are very pleased with our results. Overall, we are stronger and more profitable. We have accumulated more capital and reserves and maintained a lower loan-to-deposit ratio, indicating our strength and preparedness for any potential economic challenges. At the same time, profitability metrics such as margin, earnings, ROA, and ROE are all up. We look forward to sharing even better news in 90 days. Now, let's open the floor for questions.

Certainly. One moment while we compile our Q&A roster. Our first question will be coming from Jared Shaw of Barclays.

Congratulations, Leslie, on the planned retirement. So starting with credit and the office detail. When these loans are moving to nonperformer, are you going out and reappraising those at that time and charging down to appraised value? Walk us through the steps that happen once it moves into nonperformers and if the loan-to-value and debt service coverage ratios you referenced are updated for valuation in the rate environment?

Yes, Jared. We do reappraise actually, typically when they move to substandard, and we would reappraise again if a significant amount of time has elapsed between the transitions. Yes, we do reappraise properties, and all of our debt service coverage ratios and LTVs are updated. We charge them down to that liquidation value when they move to nonaccrual.

Could you provide a breakdown of what was charged off versus what received a specific provision when we analyze the move this quarter?

You can see that on the slide on Page 16. We will not go into individual credit levels, but you can see this first thing with an increase in specific reserves net of positive risk rating migration. $33 million was the increase in specific reserves and about $4 million offset due to net positive risk rating migration. We had total net charge-offs of $12.7 million, with $5.2 million being office charge-offs.

Okay. That's great color. Shifting to the deposit side and the strength in DDAs; do you have the ECR tied to DDAs? And how should we think about those balances moving over the next two quarters?

The ECR number will be disclosed in the 10-Q, and I don't expect it to differ materially from last quarter’s figure. Regarding seasonality, that could pose a headwind. It was a tailwind this quarter. It should be stable through the third quarter and might decline in the fourth quarter.

There are certain things that should be looked at on a 12-month basis due to seasonality. So I wouldn't say it’s just a $1 billion quarter, but consider the double-digit year-over-year growth we're achieving.

And $1 billion year-over-year as well, so high point to high point, we still had $1 billion of growth.

One last question on the buyback; is there a CET1 that you aim for?

We don't have a specific target to communicate on that front, but we do feel we have excess capital compared to our industry peers. We're doing a $100 million buyback, but it's probably not the end. As we keep accreting capital, we will consider it again.

We prefer to deploy capital into growth. Our assessment will depend on how many growth opportunities we believe we can pursue profitably.

I wanted to follow up on the deposits. It seems like the growth has been ahead of expectations. What’s driven the outperformance relative to expectations?

The continued onboarding of new client relationships across our businesses has driven this growth.

There's nothing substantial to pinpoint, but we expected we would need to hit our targets for the year before June.

Investment in new markets and producers has helped us throughout the year, and we've put considerable effort into deposit growth.

On office migration, what triggered the migration?

Migration is typically driven by cash flow. In the office sector, occupancy issues are often responsible for loans moving to nonaccrual status.

Can you walk us through the market evaluation process for your new expansions?

Sometimes it's opportunistic, but mostly methodical. New Jersey was opportunistic due to business growth. Charlotte was monitored for some time and became a priority when the right team emerged. We assess growth potential, talent, and competition before making moves.

We analyze overall growth in each market, the business environment, and industry familiarity to assess lending risks before entering.

On credit quality, with NPLs ticking up, are there areas or time frames where you expect improvements?

This is the natural progression of credits under stress, which may result in refinancing or workout processes. Office sector stress will likely take time to resolve.

Many of our office loans are in growing markets. As positive trends develop, we expect absorption rates to improve, which will benefit our positions.

We are observing improved activity in the CMBS market as a positive sign of recovery for some office properties.

With the trajectory of net interest margin (NIM) and ROTCE guidance, should we expect margin over 3% and ROTCE over 10% in 3Q?

We are currently forecasting margin expansion throughout both Q3 and Q4, based on mix shifts, pricing discipline, and loan maturity rollovers. Timing is less significant than the overall trends.

Can you provide insight into the increase in C&I NPLs and the corresponding allowance?

About $26 million of that is from indirect office exposure in the C&I portfolio, with the majority stemming from one loan. C&I credit performance can be lumpy with no broader correlation.

There is no systemic pattern to the problematic loans in our C&I portfolio; they remain idiosyncratic. If we see any correlated trends, we will share that information.

Is the confidence you've expressed about accelerating growth in the second half of the year because of current production numbers?

Yes, both the production numbers and the decreasing payoffs signal a positive trend in our ability to grow.

We're seeing positive signs in our pipelines, which present strong growth opportunities.

Can you comment on the sustainability of noninterest income? How do you see this growing over the long term?

While noninterest income may fluctuate from quarter to quarter due to sporadic activity, we expect gradual growth given our ongoing investments in these businesses.

If it doesn't grow, then we’re going astray; that’s our expectation.

How much more room do you have to reduce interest-bearing deposit pricing?

There are no large catalysts unless the Fed moves, but we will continue to work on down-adjusting rates as we can.

We review customer pricing regularly; slight adjustments build up significantly over time.

Our narrative focuses on profitable growth; we will avoid lower-margin opportunities. We appreciate your time today and look forward to our next call in 90 days. Thank you, and have a great day.

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