BankUnited, Inc. Q2 FY2025 earnings call

• Net income beat consensus, with ROA and ROE improving. - Impressive deposit growth, with NIDDA up significantly and deposit costs declining. - Loan-to-deposit ratio improved, and margin expanded. - Commercial loans had mixed growth with CRE up and C&I down. - Credit quality saw a reduction in criticized and classified loans but an increase in NPLs, particularly in office. - Capital position is strong with CET1 at 12.2% and a stock buyback authorized. - The company has expanded into New Jersey and Charlotte. - Priorities include prudent bank management, safe balance sheet growth, regular dividend increases, and returning excess capital via buybacks.

Net income came in at about $69 million or $0.91 a share. 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%. NIDDA is up more than $1 billion. Average NIDDA is up $581 million and total non-brokered deposits grew $1.2 billion. Deposit costs declined, with spot cost of deposits down 0.15% to 2.37%. Loan-to-deposit ratio now stands at 83.6%, down from 85.5% last quarter. Net interest income increased by 5.6% quarter-over-quarter. Commercial loans grew by $68 million, with CRE growing by $267 million and C&I declining by $199 million. Total criticized and classified loans declined by $156 million, but NPLs grew by $117 million, with a majority of the increase in office-related loans. CET1 is at 12.2%, and the Board authorized a $100 million stock buyback program.

• Previously guided to double-digit NIDDA growth, already at 20%; seasonality may affect year-end but still expects solid double-digit growth year-over-year. - Guided to mid- to high single-digit non-brokered deposit growth, already at 8.4% and expects this to hold. - Total loans expected to have low single-digit growth, core C&I and CRE expected to have mid-single-digit growth. - Non-interest expense expected to have mid-single-digit increase for the full year. - Net interest income may do better than previously guided mid-single-digit growth. - Will redeem outstanding senior bond maturing in November, expected to happen later in August.

• External circumstances impacting the financial services industry can affect results. - Uncertainty remains in the CRE office segment with potential migration of loans to nonperforming status. - C&I loan performance can be lumpy and idiosyncratic with individual loan issues potentially impacting results.

Q: Congratulations, Leslie, on the planned retirement. Maybe just 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 appraise value?

A: Yes, we do reappraise before they move to nonaccrual, typically when they move to substandard, and reappraise again if significant time has elapsed. We charge them down to liquidation value when they move to nonaccrual.

Q: So when we look at the move this quarter and the provision was -- could you give us sort of a breakdown of what was charged off versus what was given a specific provision?

A: You can see on Slide 16 that there was 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. Total net charge-offs were $12.7 million, with $5.2 million of that being office charge-offs.

Q: I wanted to follow up on the deposits. And I mean, I know there's seasonality in the second quarter, but it feels like the growth is coming a little bit ahead of expectations. And I 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 I was 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?

A: Across our businesses, we are seeing the continued onboarding of new client relationships, which is the driver of the deposit growth.

Q: You announced a couple of new markets, you're expanding corporate offices into. I 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?

A: Sometimes it's opportunistic, other times, it's more methodical. New Jersey was somewhat opportunistic, while Charlotte was partially opportunistic but had been on the radar for some time. We evaluate markets based on growth, business-friendliness, talent, and competition, and wait for the right team to come around before expanding.

Q: Congrats, Leslie. We've talked to credit a little bit here. I was just kind of curious, when you think about just -- it seems like this was well known. And I'm just kind of think -- most of the credit seems to be improving, but all else equal, NPAs have ticked up. Is there an area or time frame where you kind of expect it to roll over?

A: This is the natural progression of stressed credits. They can be refi'd out, improve, or go through workout. Most of this activity is in the office space, and it will take time to play out, with no immediate inflection expected soon.

Q: Maybe starting on just the improvement in DDA,, end of period versus average, looks like a nice little tailwind heading into 3Q. The unchanged guidance as it pertains to margin, ROTCE, should we expect to see margin over 3% and ROTCE over 10% in 3Q? And then with seasonality, maybe that tapers off a little bit in 4Q. Just talk us through the timing on that.

A: Currently, we expect margin expansion throughout the year, predicated on mix shift, pricing discipline, and rollover of fixed rate loans, but we can't specify exact timing between 3Q and 4Q.

Q: A couple of cleanup questions. The other income drivers, you talked about BOLI, but you 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?

A: Over the long run, this is not a sustainable level and is expected to grow. Quarter-by-quarter, there can be sporadic fluctuations, but over the medium to longer term, we should see an upward trend.