BKU

NIDDA and Deposit Franchise Growth

• NIDDA growth is the bank's top strategic priority, with the quarter hitting major long-planned milestones: crossing near-$10 billion in NIDDA and reaching a record 34.4% NIDDA-to-total-deposits ratio, surpassing the previous high set during the COVID-19 pandemic.
• Over the past 10 years, the bank grew total deposits by $10 billion, $7 billion of which was NIDDA, all generated organically client-by-client with no acquisitions.
• The bank successfully reduced average interest-bearing deposit costs by 7 bps quarter-over-quarter (42 bps year-over-year) even in a rising rate environment, driven by continued NIDDA growth shifting the deposit mix to lower-cost funding.
• Brokered deposits were aggressively reduced as they became more expensive than other wholesale funding options (FHLB advances and Fed Funds), with the mix of wholesale funding shifted to lower-cost alternatives.

Lending Discipline and Strategy

• Management emphasized maintaining strict discipline on credit pricing and relationship requirements even amid intensifying competition, choosing to walk away from mispriced, transactional loan business rather than chase volume at the expense of returns.
• The bank's credit box (underwriting standards) has not changed, despite the broader market moving to looser pricing and weaker credit structures; management prioritizes long-term returns over short-term loan volume growth.
• Management continues to focus exclusively on relationship lending that brings accompanying deposit, fee income, and swap business, rather than standalone credit-only transactional deals, which competitors have increasingly pursued.

Geographic Expansion

• The bank expanded its Dallas operation this quarter, doubling its office space and adding more staff, and opened a new Charlotte office within the quarter. Continued investment is also ongoing in the Tampa market, with all target geographic markets seeing solid economic performance.

Credit Quality

• Credit quality remains strong, with sharp quarter-over-quarter improvements in charge-offs and non-performing loans; criticized classified loans were essentially flat, and the allowance coverage ratio increased to 91 basis points. REO (real estate owned) balances have been reduced to just $1.5 million, down from over $7 million year-over-year.

All guidance changes are described as fine-tuning rather than material revisions to the bank's core outlook, as follows:

• Core Loan Growth: Lowered the 2026 full-year growth forecast to 4% to 5%, from the original 6% projection, due to faster-than-expected credit spread tightening and strategic exits of mispriced loan business year-to-date. Management noted that the second half of the year is seasonally stronger for lending, and there is a chance the original guidance could be hit if pipeline deals close as expected.
• NIDDA Growth: Raised the 2026 full-year average NIDDA growth forecast to 12% to 13%, up from the original 12% projection, as NIDDA growth has outperformed original expectations year-to-date.
• Net Interest Income (NII) Growth: Lowered the 2026 full-year NII growth forecast to 5% to 6%, down from the original 9% projection, driven by year-to-date lower-than-expected loan volumes, a shift to lower-yield loan mix, and timing of deal closings (late-second half closings will not generate a full year of income).
• Non-Interest Income: Raised the 2026 full-year non-interest income forecast slightly, driven by stronger-than-expected capital markets and fee income performance year-to-date.
• Total Expenses: Raised the 2026 full-year expense guidance slightly, driven by higher NIDDA volume-related costs, competitive pressure on deposit costs, higher incentive compensation from 2025 performance, and opportunistic hiring of new revenue-producing staff.
• Provision Expense: Full-year provision is expected to be in a range around original guidance to slightly higher, reflecting higher year-to-date charge-offs; all guidance assumes a strong economic environment and one rate hike in late 2026.
• Stock Buybacks: The bank has ~$146 million remaining in approved buyback capacity, which management expects to utilize by year-end subject to market conditions, with a long-term target Tier 1 capital ratio in the mid-11% range.

There is no formal breakdown of distinct product segments provided in the transcript, but key performance for core business lines is as follows:

• Deposit Business: NIDDA (non-interest bearing demand deposits) reached $9.935 billion, with the NIDDA-to-total-deposits ratio hitting an all-time high of 34.4% (a new company record). NIDDA grew 13% year-over-year (average), and core deposits (excluding brokered deposits) grew 7% year-over-year (average). NIDDA increased $991 million quarter-over-quarter (end of period), with average NIDDA increasing $564 million quarter-over-quarter. Total deposits excluding brokered deposits increased $1.1 billion quarter-over-quarter. Brokered deposits were reduced to just over 10% of total deposits, a level not seen since the peak of the COVID-19 pandemic.
• Lending Business: Year-over-year average core loan growth is tracking at 4%, with 1% quarter-over-quarter growth. The bank exited approximately $230-$240 million in low-yield, transactional loans this quarter due to competitive mispricing. C&I (commercial and industrial) balances declined due to these strategic exits, while CREE (commercial real estate) balances increased $120 million point-to-point and mortgage warehouse balances increased $72 million point-to-point. Average core loans increased $643 million year-over-year.
• Overall Financial Performance: Net income was ~$71 million, with EPS of $0.97. ROE improved to 9.3% from 8.1% last quarter. Net interest margin (NIM) expanded 7 basis points quarter-over-quarter to 306 bps, and is up 13 bps year-over-year. Charge-offs totaled $6.4 million, down from $36 million last quarter; non-performing loans fell 19% quarter-over-quarter and 40% year-to-date. Fee income was stronger than expected, driven by capital markets interest rate activity, commercial cards, and service charges: year-to-date service charge income is up 18.6% year-over-year. Tier 1 capital ratio is 12.3%. The bank repurchased just over $50 million of common stock during the quarter.

• Intensifying competition in lending has led to widespread mispricing of credit and loosening of credit structures and covenants across the industry, forcing the bank to choose between accepting lower returns or forgoing loan volume, resulting in lower-than-projected loan growth year-to-date.
• Geopolitical instability remains an ongoing risk, and inflation is still an unresolved issue, with rates expected to rise further before any cuts.
• Obsolescence risk on long-dated assets like data centers has led management to avoid this fast-growing lending segment, even as many competitors pursue the business.
• Non-recourse construction lending in commercial real estate has become more competitive, a segment the bank has traditionally strayed from due to risk profile.
• Operational and one-time losses can be elevated quarter-to-quarter; the bank saw $1 million in elevated operational losses and a one-time REO disposition expense related to a property with asbestos in Q2 2026, though full-year operational losses remain on target.
• Loan closing timing is not fully within management's control, which can impact quarterly and full-year financial performance even with a strong overall pipeline.

Q: Given that the lower NII guidance is driven by weaker year-to-date loan growth from competitive pressure, will competitive factors ease in the second half, or is the guidance just accounting for continued competitive runoff? / A: Management does not expect competitive pressure to ease over the next two quarters. The bank has not changed its credit box or its requirement for full relationship business (including NIDDA), while competitors have loosened both pricing and relationship requirements. The lower guidance reflects year-to-date strategic exits of mispriced deals, and management will maintain discipline even if that means lower near-term volume. Competitive pressure is not expected to dissipate, so the guidance builds in that ongoing dynamic. (378 characters)

Q: Why is the NII guidance cut larger than the relatively modest downward adjustment to loan growth guidance? / A: The larger cut comes from two key factors: timing and loan mix. Year-to-date, the bank has seen more growth in lower-spread asset classes (CRE and mortgage warehouse lending) and strategic exits of higher-spread C&I loans, which pulls down overall net interest income even if total loan volumes end up near original guidance. Additionally, most pipeline C&I loans are expected to close in the second half of the year, so they will not generate a full year of higher-spread income, leaving a gap that cannot be fully made up by year-end. If all current pipeline deals close, some of the gap can be recovered. (463 characters)

Q: Can you give specific examples of the mispriced competitive deals you are walking away from, and why this is happening? / A: A clear recent example was a re-priced private credit deal for a private equity sponsor: credit quality had weakened since the original deal, market conditions for private credit are tighter than a year ago, yet the market cleared the deal with lower pricing and weaker covenants and structure. Management chose to exit rather than accept the terms. This dynamic is widespread across middle market corporate lending: competitors are prioritizing volume and balance growth, leading to irrational pricing that does not compensate for credit risk, and management will not chase volume at the expense of long-term returns. (434 characters)

Q: What is driving the strong NIDDA growth, and what should we expect for the cadence of NIDDA growth in the second half of the year? / A: NIDDA growth is driven by the bank's long-standing focus on requiring deposit relationships for lending, a discipline competitors have abandoned. For the second half, end-of-period NIDDA may not grow much from Q2's seasonally high June level (driven by seasonal title industry deposit inflows), but average NIDDA balances will continue to grow because Q2's high average balances carry over into Q3. Average balances are what drive NIM and net income, so that is the key metric to track. Seasonal December balance declines will not materially impact full-year fourth quarter average NIDDA. (447 characters)

Q: Why has the bank chosen to avoid the fast-growing data center lending segment that many peers are pursuing? / A: Management has not been able to adequately model the long-term obsolescence risk for data center assets, which are long-dated loans. Additionally, most data center lending is standalone credit-only transactional business that does not come with accompanying NIDDA or fee income relationships, which diverts organizational focus from the bank's core mission of building a low-cost deposit franchise. Management continues to study the segment but has chosen not to participate in the current rush to originate data center loans. (395 characters)