Earnings Call Transcript - BKU Q1 2026

Operator, Operator

Good day, and welcome to the BankUnited, Inc. First Quarter 2026 Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Jackie Brova, Corporate Secretary. Please go ahead.

Timur Braziler, Investor Relations / Corporate Secretary

Thank you, Clay. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s First Quarter 2026 Results Conference Call. On the call this morning are Raj Singh, Chairman, President and CEO; Jim Mackey, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we begin, please note that our remarks today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations and are subject to various risks and uncertainties that could cause actual results to differ materially. 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. Additional information regarding these risks can be found in the company's annual report on Form 10-K for the year ended December 31, 2025, 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, Chairman, President and CEO

Thank you, Jackie. Thanks, everyone, for joining us. I know this is a very busy morning. A lot of banks have these calls going on. So if you joined our call, we appreciate it very much. I know we had a difficult choice. But before we get into the numbers, I want to take a minute of your time and do my public service announcement which I usually do towards the end of the call, but I'm going to start this time with that. You heard this announcement from me before at previous earnings releases and in meetings with investors and conferences. We've been talking about this for some time, but I think it bears repeating. Our business is a fairly seasonal business. That seasonality is well understood by us and has been demonstrated over several cycles. I'll talk about that as a refresher. Deposits and loans behave differently, so I'll discuss them separately. Our deposit balances, especially NIDDA, start declining sometime in mid to late December and then bottom out deep in the first quarter. They start to rebound toward the end of the first quarter, and then they go straight up in the second quarter, which is usually our strongest growth NIDDA quarter. They stabilize in the third quarter, and then in the fourth quarter the cycle begins again with declines in December. We have observed this for many years. Loan production, and I mean production, not balances, especially C&I loan production, starts slow in the first quarter, which is our slowest quarter. It picks up steam in Q2 and Q3, and Q4 tends to be our biggest production quarter. We saw that last year and the year before, and we expect the same this year. There is some seasonality in expenses as well, which is common across the industry with items like FICA in the first quarter, so I won't get into those details. When these big swings in NIDDA happen, they impact our margin, which impacts our revenue, and that in turn affects our bottom line, EPS, and ROE. What you see from Q4 to Q1 is a meaningful drop in earnings, ROA, and EPS, but by Q2 it usually rebounds, often fully or more. Yesterday, as I was preparing my notes for this call, I went back and reviewed my notes from a year ago and realized this is exactly what happened then. I quickly compared Q4 to Q1 changes from last year to this year. Our earnings quarter-over-quarter declined by $11 million last year and declined by $10 million this year. EPS declined 13 basis points this year. ROA declined 10 basis points last year and declined 9 basis points this year, slightly better but in the same ballpark. That is the seasonality of the business. The model of the story is do not focus on quarter-over-quarter; look at year-over-year or trailing 12 months. I know it's a fast-changing world and we're all focused on the here and now, but looking only at the very short term can be misleading in quarters when seasonality works against us and in quarters when seasonality works for us, as it will next quarter. With that public service announcement out of the way, let me get into the numbers. Earnings for the first quarter came in at $62 million. EPS was $0.83. To compare to the first quarter of last year, earnings were $58 million and EPS was $0.78. NIM was 2.99% versus 2.81% last year. PPNR was $106 million versus $95.2 million last year, about 11.5% growth. Despite the seasonal pressure on NIDDA I mentioned, deposits did grow in the quarter. Non-broker deposits grew by $277 million. We used most of those to pay down brokered deposits, so net growth was about $7 million. Again, you should be looking at annual numbers or trailing 12 months. Over the last 12 months, non-broker deposits grew by $1.4 billion and NIDDA grew by $875 million. Ending balances are less informative than average balances; average NIDDA grew by more than $1 billion, I believe it was $1.5 billion, and I'm looking at Jim to confirm. Loans over the last year grew by $906 million. This quarter, loans grew only $9 million. Non-core loans continue to shrink consistently, which has been happening for several quarters, so nothing new there. Moving to credit, we made a lot of progress this quarter. NPLs were down $98 million, or 26%, and criticized and classified loans were down $146 million, or 12%. Those percentages reflect the progress in the last three months, not annualized. Our coverage ratio of ACL to NPLs improved from 59% to 76%. On provision, we continue to be cautious. The geopolitical landscape has changed in the three months since we last spoke to you, and we used $8 million of qualitative factors in our provisioning to account for that uncertainty. Tom can talk more about this, but we have not seen any meaningful change from what our customers are telling us about their plans and capital investments. They are, however, keenly aware of the situation in the Middle East and are watching it. Smart money seems to be betting that the conflict will wrap up in days or weeks rather than months, but only time will tell how that plays out. As I said, we used qualitative factors totaling $8 million to reflect that uncertainty. Regarding other aspects of the P&L, NIM came down to 2.9%, and that number was within the range of outcomes we expected when we modeled our numbers back in December. The other items are not notable enough for me to get into; I'll leave details to Tom and Jim. We did buy back 1.3 million shares as promised, so we're off to a good start on the buyback, and we still have just under $200 million in dry powder remaining and will continue to use that. Lastly, there is no change to guidance. The full-year guidance we gave you remains intact, and we are still feeling pretty good about those numbers. Not much has changed in our business or in the economy since we gave guidance. The conflict in the Middle East is the one new factor, but it appears to be moving toward a short-term resolution. With that, I will turn it over to Tom.

Thomas Cornish, Chief Operating Officer

Great. Thanks, Raj. So I have a little bit of my own public service announcement today as well, similar to Raj. So before I dig into some of the numbers, some of which Raj has already covered, I want to back up a little bit and just talk about what we are trying to do with the overall deposit and client book over a longer period of time and how that has performed. So when I look at it, I would say we have three major goals. One is to be a top-tier performer in NIDDA growth. And our NIDDA, as you know, is largely commercial and transactional. So when I look at that number, as Raj said, we're up period-to-period from first quarter last year, $875 million or 11%, which is a pretty impressive number. On an average basis, we're up $1.5 billion that Raj mentioned. So strategy number one of being a high-level NIDDA growth organization and that being a central part of our business focus, I think, has been well accomplished. The second major emphasis is being a payment processor and transactional bank for our clients and making sure that we maintain good pricing discipline around all the products and services that we sell that flow through commercial NIDDA and making sure that we are effectively cross-selling as many products as we can into the client base. So I kind of measure that by — is our service charges on deposit growth greater than our NIDDA growth? And when it is, to me, that seems to be a multiplier effect on that. So if we look at service charges on deposits year-over-year, first quarter to first quarter, we're up 18.8% versus an 11% deposit growth. So to me, that means we're executing on the strategy of ensuring that that book is well sold, well priced and client relationships are becoming very sticky. The last part, which is really the hardest work is managing deposit costs. And you'll see we had a decline in average deposit cost for the quarter, and I'll go through those numbers. But the process of managing deposit costs, especially in a period of time where we're not forecasting a Fed funds rate decrease that we can lean into is hard work. And we are consistently doing that. We have a series of rate cuts that are going in this week on the deposit front. So we are consistently analyzing the deposit book and looking to make it more cost effective. So I think those are the big three strategies that we try to execute around when we think about the client book and the deposit book as a whole. So with that, a little bit more detail, as Raj mentioned, non-broker deposits were up by $277 million from the previous quarter and $1.4 billion from a year ago. NIDDA represents 30% of total deposits. Our average cost of deposits declined by 6 basis points from the previous quarter. Wholesale funding declined by $70 million from the previous quarter and $749 million from the previous year. And as I said, service charge revenue was up 18.8% for the quarter. As we look into the second quarter, which is on the deposit side, traditionally, our best quarter. We have a high level of conviction around very strong deposit growth and NIDDA growth in the quarter. It's our best quarter typically, and all indications from pipeline and activity and business that's in closing documentation are that it will be a very strong quarter. On the loan side, as Raj noted, it was a fairly typical first quarter for us. CRE and mortgage warehouse lending were up $76 million and $77 million, respectively. C&I declined by $144 million from the previous quarter. Part of that is declining off of higher utilization rates that we tend to see at the end of the quarter. First quarter, particularly in our larger corporate business, tends to always be a bit softer because of the financial statements timing for new business that comes through. Residential continued to decline as part of our emphasis to focus on the commercial lending business. So I think it was about what we expected to see for the quarter. A few comments on CRE that I typically make: the CRE portfolio is now just under 30% of the overall book. If you look at the detailed analysis, you'll continue to see that it's a well-balanced portfolio across all asset classes; virtually all asset classes are somewhere between 20% and 25%. Maintaining a good quality balance in the CRE book is important. You'll note that the total weighted average debt service coverage for all property types is 1.84 and the average loan-to-value is 55.4%. So the portfolio continues to perform well. It's probably the last quarter I'll actually point this out, but we continue to see improvements in the office book. You'll note the office book in the detail, the weighted average debt service coverage ratio is now up to 1.78. It's typically been running in the 1.54 to 1.55 range. And what we're seeing is continued improvements in leasing. We've seen a reduction in the traditional office book, which is now only about 16% of the book and about 4% is medical office building. And each quarter, starting to see the narrowing that we've talked about in the past, which is the gap between physical occupancy and economic occupancy as lease rate abatements start to run off, we see a closing of that. So we saw a pretty significant increase in the weighted average debt service coverage over the last few quarters. And 1.78 is a pretty strong performing portfolio right now. So that's my coverage on CRE. And I think with that, I'll turn it over to Jim.

James Mackey, Chief Financial Officer

Great. Thanks, Tom. As Raj walked through, it's worth mentioning again, our first quarter is our seasonally light quarter for most of our businesses. So therefore, comparisons to the fourth quarter are always difficult to make. I don't want to repeat a bunch of the numbers that Raj took you through, but I do want to hit just a couple of other highlights. So if I just focus on the full year trends, you definitely see steady improvement in most of our key performance indicators that we look at. Net income was up 5%. PPNR was up 10%, ROA was up 6%, and NIM was up 18 basis points. So the trends year-over-year are really good and definitely in line with the guidance that we gave you at the last quarter. We put in the press release just for full transparency, we do want to call out a couple of notable items this quarter. The impact was largely just due to the really strong performance last year and also the strong stock performance. This was more than offset by the reversal of our previously accrued FDIC special assessments. Turning to NII and NIM. As Raj mentioned, relative to the prior quarter, we typically see a downward trend. We also added in the materials a chart for the last few years, so you could easily see those trends, I thought it would be helpful. Now the dip from first quarter to fourth quarter this year was a few basis points larger than last year, certainly less than back in '23. But I just wanted to call out what was driving that. And it was a variety of small things. It was nothing large. It was all the things that we were sort of modeling going into it broadly. We saw the full quarter impact of the Fed rate cuts last year as it flows through the balance sheet. And notably, in the securities portfolio, some of the timing of those cuts were present more in the first quarter than in the fourth as certain coupons reset. We also had a higher reliance on brokered deposits due to the NIDDA seasonality that we've been talking about. We also did some activities in our investment portfolio. We had some opportunities to prefund some purchases and things like that because of the actual situation in the marketplace. So we had a higher reliance on brokered deposits in the quarter and also the broker deposits were a little more expensive this year than historical. It's a little unclear exactly what was driving that. I don't know if it was from the war, the activities in Iran or what, but it was elevated costs that we don't typically see. NII was up $16 million or 7% from a year ago. And as I mentioned, NIM expanded 18 basis points. This is driven by the common theme that we've been talking about that we've been reducing the cost of our deposits at a faster clip than the decline in our loan yields. Importantly, the NIDDA balances were up $875 million from a year ago — those are the spot, not the average. On the credit side, as Raj mentioned, credit trends are quite positive overall, which portends improvement going forward. Criticized and classified was down $333 million or 24% from a year ago. And just since last quarter, nonperforming loans were down $98 million or 26%. Now some of these improvements were resolved through charge-offs. That's why you did see some elevated charge-offs this quarter. It was $36 million. It was largely driven by just a few C&I loans. So this brings our trailing 12-month charge-off rate to 37 basis points, which as we've talked about before, we'd like to see that closer to 25%. So it is elevated from what we'd like to see. But again, the trends that we are seeing more recently in some of these books, the inflows are a lot slower than the outflows. So barring any economic shocks, we expect to see improvements in charge-offs later this year. And as we mentioned, especially related to the guidance, we definitely felt like more of the provision expense would be more front-end loaded versus evenly spread throughout the year. Our allowance for credit losses was $209 million, down $11 million from last quarter. Provision expense was elevated at $25 million. We did add some qualitative reserves, about $8 million. So our coverage ratio ended at 87 basis points, which is down a few basis points from the prior quarter. If we purely followed our models, they would have told us to bring those reserves down a little bit more, but we felt prudent to add some into our qualitative, which brought it up to the 87 basis points. And I do want to mention, and we disclosed this, most of our charge-offs are coming from the C&I portfolio of late. And if we look at the coverage of our C&I portfolio, it's around 160 basis points. So quite a solid coverage to cover the risk in that portfolio. On the noninterest income and expense side, just a few quick comments. Noninterest income was $25 million. It's up $2 million from a year ago. If I normalize for some of the securities gains — we always have securities gains, they bounce around from quarter-to-quarter — but if I normalize for that, noninterest income was basically flat. We felt good about the activity that we saw in our capital markets fee income, but they are dependent on activity in the quarter, when loans close, when syndication fees occur, size of the types of swaps that are booked — and so we're generally in line with where we expect to be at this point in the year and still feel good about the guidance that we provided. On the expense side, it is up from a year ago to $167 million. That's largely due to the investments that we made last year into our businesses to go into new markets, higher specialty talent, et cetera, and also just cost of living increases and basic things that are going on in that space. So it's in line with expectations. It's consistent with our full year guidance, and it's really driven by employee compensation and benefits as we grow our businesses. And then just before I turn it back to Raj, I'll just reiterate a comment that he said that we are not changing our full year guidance. We always have volatility quarter-to-quarter. That's a theme that we talk about constantly, just the nature of our commercial businesses, but we're performing consistently with our seasonal patterns and in line with expectations, and all of that was modeled as we provided our guidance and so no changes. And with that, I'll turn it back to Raj.

Raj Singh, Chairman, President and CEO

Just one thing I forgot to mention on credit. So we took down NPAs pretty meaningfully this quarter. And I expect NPAs to go down into the rest of the year as well, probably not at the same clip. I mean if we did the same clip, we wouldn't have any NPAs left in a couple of quarters. So I expect NPAs to reduce in second quarter, third quarter into the fourth quarter. Another anecdote I'll give you. One of the things I do generally before this call a day or two before is I talk to my Chief Credit Officer / Chief Risk Officer. And I generally ask him how he's feeling about this quarter. And this was, I think, the best call I've had in the last three quarters. And I measure the success of the call by the length of the call. The longer the call is, the worse I feel because generally he's walking me through names of things that he's worried about. This call, I have to actually ask them, "What about this loan? What about that?" and he was like, "No, are going fine." So the call lasted maybe about 3 or 4 minutes versus last call 3 months ago, which lasted a lot longer. So it's only 3 weeks into the quarter, but I'm feeling much better about credit and feeling much better about how much lower our NPAs are. And I also get updates like that on pipelines from Tom; the deposit pipeline is better than I expected, honestly speaking. And we're feeling pretty good. With that, I will turn it over for Q&A.

Operator, Operator

The first question comes from Dave Rochester with Cantor.

David Rochester, Analyst (Cantor)

I wanted to ask you about the title business. I noticed the deposits were down this quarter. Normally, they get stronger as we head into Q2. I would imagine that's still the expectation. And we're down like three quarters on that at this point. So if you could just talk about that outlook. And then are you still bringing in plus or minus new customers a quarter there? And if you can just update us on the competitive backdrop, that would be great.

Raj Singh, Chairman, President and CEO

Sure. Actually, we're bringing in more than 40 now. So our average over the last three quarters has been more closer to 50. So the relationship intake has actually increased a little bit. And I'm very, very positive on the outlook for the title business. It is the most seasonal of our businesses. HOA is also a little seasonal, not as much, but title is what drives a lot of that NIDDA volatility. But overall, in terms of gathering market share, we have not lost momentum. In fact, we picked it up.

Thomas Cornish, Chief Operating Officer

I would add that's net client relationship growth as well, not just gross.

David Rochester, Analyst (Cantor)

Yes. Great. And those relationships tend to be $2 million to $3 million on average in size, right?

Raj Singh, Chairman, President and CEO

On average, it's about $3 million, give or take, yes.

David Rochester, Analyst (Cantor)

Have you been adding more sales people to that business or any other technological enhancements, anything like that?

Raj Singh, Chairman, President and CEO

Yes, we have added more people in fulfillment in the back office. We've added more people in the front office. So clearly, yes. We also have two large technology projects going on that will impact that business and the entire bank: we're upgrading our treasury platform and our payments platform. Those are infrastructural changes that every business line will use, and NTS uses them as well.

Thomas Cornish, Chief Operating Officer

I'd just say average deposits are up year-over-year in the title business, so nothing meaningful to be concerned about.

David Rochester, Analyst (Cantor)

Yes, yes. And maybe just one last on the competitive landscape there. Occasionally, you see a larger bank come in and try to defend a relationship and it may not just be for the title piece, but something else. Can you just talk about what you're seeing from any of the larger banks that might be snooping around and what you're seeing out of banks more of your size, if you're seeing any interest in this type of business?

Raj Singh, Chairman, President and CEO

There is certainly more competition today than a year or two ago, both from larger banks trying to get into this, but they've not been able to replicate what we have. So they've not been able to make much progress. We have seen banks smaller than us and somewhat our size also compete. But honestly, I think it's a lot easier for them to take market share away from the 90% or 89% of the market that we don't bank than it is to take away from us. So there is more competition. I've seen very small community banks trying to play in this space, but we have an eight- or nine-year head start. It's not like we have some kind of a trademark or intellectual property that is the moat. The moat is the fact that we have the largest market share. We've seen every issue that comes up with this. We have the largest sales force, and we've been doing it the longest in the way we are. We're most integrated with ERP providers, and that gives us the advantage to keep going forward. So there's more competition. I expect the competition to be even more going forward, but so far, we're doing just fine.

Thomas Cornish, Chief Operating Officer

And we're not sitting still. We're continuing to focus on improving operations, getting better at everything we do. So we're sharpening the iron.

Raj Singh, Chairman, President and CEO

We made a pretty significant investment in the back office, fulfillment, and customer service because the book has grown quite rapidly. When things are growing, it's easy to hire salespeople because they add revenue, but you have to pay attention to the back office that actually keeps the lights on for our clients. It makes them happy in the long term so we don't lose them. That was a pretty big investment we made last year.

Thomas Cornish, Chief Operating Officer

This is a heavy operational business.

David Rochester, Analyst (Cantor)

Well, it's a great business and certainly a nice advantage for you guys. So I appreciate all the color there.

Operator, Operator

The next question comes from Jared Shaw with Barclays.

Jared David Shaw, Analyst (Barclays)

I guess just looking at the guidance and when you're saying reiterate the guidance, I'm just going back to last quarter's deck. With that guidance you were assuming two cuts; if we don't get cuts, can you walk us through the ability to get to that 3.20% margin at the end of the year?

Raj Singh, Chairman, President and CEO

Yes. Our balance sheet is very, very neutrally hedged. So we're very, very slightly asset sensitive. So just mathematically speaking, it probably should give us a basis point advantage if the Fed doesn't cut, but it's really rounding. For the most part, it really does not do anything for us. Our risk to our guidance would come from market competitiveness, especially on the lending spread side, which we've been calling out for some time now. We're still seeing very tight spreads, CRE tighter than C&I, but everything has tightened up this year for several quarters now. That is actually a bigger risk than what the Fed does unless the Fed does something bizarre and moves several unexpected times one way or another; it really will not impact our guidance materially. So we're not really worried about the Fed cutting once or twice or not cutting; it will not have a big impact. If we miss our NIDDA guidance, if you're not able to grow, that would obviously be the single largest driver of risk, and the second would be loan pricing and credit spreads.

Jared David Shaw, Analyst (Barclays)

Okay. All right. And then on the provision, you called out the $8 million qualitative overlay. Should we think about that as just maybe front-loading some of that provision and that the $68 million is still the right number? Or is it really $68 million plus the $8 million for the full year?

James Mackey, Chief Financial Officer

No. We're still sticking with the guidance that we provided for the full year. And like we said, I do think based on what we see, more of that $68 million would be front-end loaded versus at the back end. So you can't just take the 68 and divide it by four and project it out; skew it more to first and second quarter.

Jared David Shaw, Analyst (Barclays)

Yes. Okay. And then if I could just sneak one more in. Just on the fee income. Capital markets was obviously very strong in Q4. How should we think about the components of growth in fee income as we move forward through the rest of the year?

Raj Singh, Chairman, President and CEO

Our capital markets income is probably closely aligned to production in both C&I and CRE. And then within production, I would say slightly larger loans tend to drive that, like syndication. They're not going to syndicate a $10 million loan, but we will syndicate a $60 million, $70 million, $80 million loan. So production is light in the first quarter and then typically increases. Within the production, if you're doing most of it in the lower end, then your capital markets income generally is impacted. So you saw lower capital markets income this quarter for both those reasons. Last quarter was the biggest production quarter and that's why capital markets income was strong. So it will vary quarter-over-quarter, plus it's a little bit episodic as well and can be lumpy. You can have a big deal you're working on that slips into the next quarter. But overall, the capital markets business should be a double-digit growth business for us. FX is still in the very early stages and just beginning to gather momentum; it's hard for me to predict what it will do but that's a very small number right now, but that can have a very big impact over the coming year or two.

Thomas Cornish, Chief Operating Officer

If you look at the number of clients we've added on to the FX platform in the last six months, it's an impressive number. Even though the raw revenue is small, the client count is up over 100% from the previous year. So we have good hopes for FX income, especially in the markets we're in where clients have international trade and payroll transactions. We would expect service charges on account business to deliver double-digit fee income growth; it was up 18.8% year-over-year and our expectation is somewhere in the 15% to 20% range. The swaps business is interesting because there's a sweet spot related to profitability where transactions are large enough but pricing has more room; the mix matters and can move margin per transaction by basis points. We have confidence in our syndications business; it's been a strong point for us and we've added good quality resources. Commercial card revenue was up strongly year-over-year as well. So activity is there; it depends on the size and mix of transactions in any given quarter.

Operator, Operator

The next question comes from David Chiaverini with Jefferies.

David Chiaverini, Analyst (Jefferies)

Wanted to swing back to credit quality — mixed in the quarter, criticized and classified down, but you did mention in the release about two credits being charged off and we did see the elevated NCOs this quarter. Are you able to share which industries those were in? And then the second part of it, you mentioned about how we should see a decline in NCOs later this year. So it sounds like we should expect elevated NCOs in the second quarter as well. Is that a fair interpretation?

Raj Singh, Chairman, President and CEO

No, I think as a general statement the first half of the year would be more front-loaded for net charge-offs because we already have first quarter at $35 million to $36 million. It's hard to predict exactly quarter-by-quarter. But generally speaking, I would say charge-offs should be front-loaded. The two industries that you asked about were healthcare and transportation. Those two made up a large portion of the charge-offs, and one was in Atlanta and one was in Florida, so geography varied as well.

Thomas Cornish, Chief Operating Officer

And our larger charge-offs last quarter were in two completely different industries from each other.

David Chiaverini, Analyst (Jefferies)

Got it. And then back to the NIDDA discussion. Nice trends year-over-year, 11%. Your guide is for 12% given this higher-for-longer rate environment. To what extent could that be a headwind to NIDDA growth? Because in the past few quarters, you've mentioned the NIM expansion being driven by mix shift rather than the Fed, but curious about your thoughts there.

Raj Singh, Chairman, President and CEO

Yes. We were growing double digits in NIDDA when Fed funds was over 5%. So it is not about pricing. What is driving our NIDDA growth is our focus, our products, and the specialty capabilities we've built. This is not lazy money. This money is transactional — we do a lot of payments — which is why it sits in our pipes and people use us not because of price but because of capability, and we continue to gather market share. So I'm not worried about rates being 50 basis points higher or lower; that will not materially impact our NIDDA outlook. It will have an impact on interest-bearing deposits. If the Fed moves down, it gives us an excuse to reprice deposits. When the Fed is not moving, it's harder, but we're still doing that. As Tom said, this week we are pushing through certain pricing actions on portfolios. It's just easier when the Fed moves. So the Fed being up, down or sideways doesn't really impact our NIDDA outlook.

Thomas Cornish, Chief Operating Officer

NIDDA growth is largely driven by net new client acquisition across business lines and geographies. Probably 75% to 80% of the growth is driven by that.

Operator, Operator

The next question comes from Michael Rose with Raymond James.

Michael Rose, Analyst (Raymond James)

Given the absence of rate cuts now that the market is expecting, any updated thoughts around deposit beta expectations as we move forward? I think last quarter you talked about an 80% beta with cuts.

Raj Singh, Chairman, President and CEO

With cuts, we referenced an 80% beta, but the Fed is not moving. If we get complacent and don't manage interest-bearing deposits, they have a natural tendency to price up. The hard work is in the hand-to-hand combat: client-by-client, portfolio-by-portfolio, and we are attempting to do that. New money competition is high. As an example, broker market cost was 15 basis points wider than it was about six weeks ago. I don't know the exact driver — maybe geopolitical events, maybe other factors — but we did see a meaningful change. We are leaning more and more towards NIDDA; if I could have my way, it would be all NIDDA growth. That's not realistic, but our job is to keep interest-bearing costs within reason and, where possible, reduce them slightly. It will be hard to make them come down a lot if the Fed doesn't move. But if we don't do the hard work, they will naturally drift up, and we don't want that.

Michael Rose, Analyst (Raymond James)

Helpful. And then maybe just a follow-up. Obviously, the margin guide for the year and the decline this quarter imply a pretty steep ramp from here. Can you help with what the second quarter margin could look like given inflows coming back? People are trying to get comfortable with the path to 3.20%.

Raj Singh, Chairman, President and CEO

I won't give you quarter-by-quarter guidance. What I will point to is last year as an example: in Q4 2024 we were at 2.84%, we came down to 2.81% in Q1, and in Q2 we went up to 2.93%, then to 3.00% in Q3 and 3.06% in Q4. You can look at that pattern: we dip down and then come back strongly in Q2 and then maintain some of that growth in Q3 and Q4, then come down again in Q1. That's the best guidance I can give you: look at historical patterns because it tends to follow a similar seasonal pattern. There are a lot of moving parts, so it's not exactly the same each year, but it gives you context. More than that, what we've already said is Q2 is typically a very strong NIDDA growth quarter.

Michael Rose, Analyst (Raymond James)

Totally get it, just framing the conversation. Maybe one last follow-up: the repurchases were strong this quarter. Any reason to think that pace would be different going forward? I know you said up to $250 million; stock is down a little today. Any reason to change pace?

Raj Singh, Chairman, President and CEO

Not really. We're still being opportunistic where we can be. We're not trying to manage it on a day-to-day basis. There's still volatility in the market, and we try to use that volatility to our advantage the best we can.

Thomas Cornish, Chief Operating Officer

We're working steadily towards the target of about 11.5% CET1, and that's the gravity we're working towards.

Operator, Operator

The next question comes from Woody Lay with KBW.

Wood Lay, Analyst (KBW)

Wanted to follow up on credit. You noted NPLs saw nice improvement even excluding the charge-off benefit — that incremental roughly $65 million of improvement. Could you give some color on either the resolution or upgrades there?

Thomas Cornish, Chief Operating Officer

If you look at that, you have a couple of fairly large loans that moved out of the bank. They were either refinanced in the longer-term capital markets or taken out by another lender in the group; several of the large ones were handled that way. You have a couple of upgrades in performance. That would be the mix of the other items other than the charge-offs.

Wood Lay, Analyst (KBW)

And then on the outlook that NPAs should continue to decline from here. The Middle East represents some uncertainty and the whipsaws back and forth on when that could potentially end. What's driving the positivity that NPAs could continue to decline?

Raj Singh, Chairman, President and CEO

I think we're very familiar with every loan that is either in NPA or in the criticized/classified bucket, and we're looking at them very granularly to see where performance is getting worse, better or stable. My assessment on NPAs looking into the future is based on that granular knowledge of the portfolio rather than macro drivers like oil prices. For example, two days ago, there's an NPA of about $17 million to $18 million in the CRE space that has been sitting there for almost a year and it looks like it's going to resolve and we might get a small recovery out of that. I know the likely close date is in the third week of June. So it's things like that: specific events in the portfolio that indicate resolution. There's another in the C&I space where performance has stabilized or improved; we may keep it in NPA for now but it could be a couple of quarters until it's fully resolved. Three months ago I was not as positive about how things were tracking; now we've seen things in the last two or three months that are looking better. So it's based on granular, loan-by-loan knowledge rather than a big macroeconomic change.

Thomas Cornish, Chief Operating Officer

In some instances, we're aware of refinancings in the private credit market that are occurring, and in some instances we're aware of asset sales that will pay down debt. Those are specific items we can identify that give us conviction for near-term improvements.

Wood Lay, Analyst (KBW)

Got it. That's really helpful color. Last one for me: that little over $5 million of performance items in compensation this quarter — was that included in the expense guide from last quarter or is that in addition?

Thomas Cornish, Chief Operating Officer

No, it's included.

Operator, Operator

The next question comes from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom, Analyst (RBC Capital Markets)

Maybe for you, Tom, anything else to note on the C&I decline? You flagged the Q4 utilization, but anything else to note on commercial lending pipelines and what you're seeing there?

Thomas Cornish, Chief Operating Officer

Different parts of the business operate differently. When we say C&I, it really encompasses larger middle-market corporate lending and commercial lending for midsized companies. We're having higher levels of success in the mid-level and down areas, which are less volatile and tend to have smaller credit sizes and slightly better pricing. The further you go upmarket, the more pricing competitiveness and tighter terms you face. A big part of managing growth this year is managing mix and focusing on segments where we have the right pricing and risk profile. We're fairly disciplined about managing segments within risk tolerance and appetite levels for industry exposures. I expect we'll see good quality C&I growth over the rest of the year. We're seeing good penetration in new markets we're in, particularly southern markets like Atlanta and Charlotte. We expect Texas to continue to grow well. So there's good market segments for us to grow in, but it's a very competitive business right now. We're working hard to manage margin versus volume and maintain pricing discipline.

Jon Arfstrom, Analyst (RBC Capital Markets)

How much more room do you guys think you have on deposit pricing from here? It sounds like you've got some deposit repricing coming, but how much more room do you think you have?

Raj Singh, Chairman, President and CEO

If the Fed doesn't move, it's not like there are 30 basis points of room left to cut. The existing book will probably move down 5 to 10 basis points here or there, but you can't really move too much unless the Fed moves. New money typically comes in at higher pricing than the existing book. So that will depend on market conditions. Broker markets were heated in March; we'll see where that lands. We'll cut where we can but there's not a wholesale reduction left if the Fed doesn't move.

Thomas Cornish, Chief Operating Officer

It is our commitment to focus on this. We spend a lot of time on it and have many detailed discussions internally to find incremental basis points of improvement. It is account-by-account and relationship-by-relationship work.

Jon Arfstrom, Analyst (RBC Capital Markets)

I know it's not easy. But you're still thinking 3.20% NIM by the end of the year and holding the provision guide? If you can deliver that, that's what matters. I appreciate it.

Operator, Operator

The next question comes from David Bishop with Hub D Group.

David Bishop, Analyst (Hub D Group)

Staying on NIM: Tom or Jim, you mentioned securities took a hit a bit from Fed rate moves. From an earning asset yield perspective, do you think with an absence of rate cuts in the near term you might see average earning asset yields stabilize or start to turn? I'm curious how you're viewing yields relative to roll-off.

Thomas Cornish, Chief Operating Officer

Yes, excluding competition-related movements in loan spreads, we think there are levers to pull. Continued rundown of residential and emphasis on commercial lending categories will help. We also have some CRE credits up for repricing this year from an older fixed-rate book; we estimate a portion of the portfolio that can be repriced in the 7% to 8% range. There are different elements and levers — asset mix, repricing, portfolio runoff — that we can pull throughout the year to improve asset yields.

David Bishop, Analyst (Hub D Group)

Got it. Final question: as you look across the commercial portfolio, any particular segments that are particularly impacted by rising energy or gas costs? Any segments that jump out as potentially at risk in the near term?

Thomas Cornish, Chief Operating Officer

Everything is impacted a bit. We're not in the energy lending business per se, so we don't have heavy direct exposure to energy. But every consumer is impacted by rising energy prices, and that can feed through to consumer expenditures. We don't have heavy consumer lending portfolios of the B2C type, so we think we're reasonably insulated, but it will have some impact across customers. We're watching it closely and will react quickly if we see concerning signals. For example, food distribution companies would feel some impact from gas prices, and we monitor credits like that closely, credit by credit.

Operator, Operator

The next question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten, Analyst (Piper Sandler)

I'm curious what you guys are using for your economic scenarios as you calculate your loan loss reserve? And what about your portfolio gives you confidence at what appears to be a below-peer loan loss reserve to loan ratio?

Thomas Cornish, Chief Operating Officer

We look at Moody's scenarios primarily, with overlays from our internal views. When comparing aggregate coverage to peers, you must look at portfolio mix. For example, our C&I book, which has incurred a lot of recent charge-offs, has coverage ratios comparable to peers. We have a larger portion of residential in our book than some peers and coverage there tends to be lighter, but residential performance is very good. You need to look at the sum of the parts to compare properly and when you do, we look much more comparable to peers.

Stephen Scouten, Analyst (Piper Sandler)

Fair enough. My other question — you mentioned year-over-year profitability ROA is basically flat around 66 basis points on a core basis. What's the biggest driver of improving that ROA on a year-over-year basis through the rest of this year?

Raj Singh, Chairman, President and CEO

NIDDA growth. If I had to pick one thing, that would be it. Deliver on NIDDA growth and many other things take care of themselves.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Singh for any closing remarks.

Raj Singh, Chairman, President and CEO

Thank you all for joining us. I know this is a very busy day. If we missed anything, of course, you know how to reach me or Jim will be available. Thank you so much. Talk to you again in 90 days. Bye.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.