BankUnited, Inc. Q1 FY2025 earnings call

• GL conversion led by Leslie Lunak was flawless. - Net income was better than consensus. - Deposit growth was solid excluding brokered deposits. - Total loans had a $300 million decline, with parts in resi book and core commercial book. - Macro environment was uncertain but clients were engaged. - Dividend was increased. - A large client event in New York showed positive client engagement. - On the loan side, CRE was flat for the quarter, and most of the loan decline was in the corporate banking space. - The GL system upgrade is expected to make the bank more streamlined in the future.

Net income for the quarter was $58.5 million or $0.78 per share. Margin was 2.81%, down 3 basis points from the previous quarter. Cost of deposits decreased by 14 basis points to 2.58 from 2.72 in the prior quarter, and cost of interest-bearing deposits dropped 21 basis points to 3.54. Non-interest net income (NIDDA) increased by $453 million. Total deposit growth excluding brokered deposits was $719 million. Total loans decreased by $300 million. The total loan-to-deposit ratio stood at 85.5%. Common Equity Tier 1 (CET1) was 12.2%, and tangible book value per share was $37.48.

• The company is not changing its guidance. - The cone of uncertainty is larger than a month ago, but the previous guidance is maintained. - The second quarter is expected to be better for NIDDA growth.

• Economic uncertainty. - Interest rate risk. - Credit and pipeline risk. - Impact of external circumstances on the financial services industry, such as adverse events affecting the sector.

Q: Good morning. Maybe I can -- just on some of the components of margin. When we look at asset yields or loan yields, how much are you seeing spread compression impacting new loans right now? Is it -- it seems like you're calling out some competition there. Is that increasing? How should we think about the competitive environment for new loans?

A: So it's a very good question, but it has a long answer because there's so much that is happening. I'll go -- not just loans, I'll even talk about securities, starting there, the easiest one to answer. Credit spreads have widened out in the securities land over the last several weeks, especially over the last four or five weeks if not more. On the lending side, which always gets to news a little bit later than the securities world, we saw, at least in CRE, a tightening of spreads in the first quarter. One of the reasons we actually did less business in the CRE space was tighter spreads. It seems that a lot more banks are -- kind of get back into the CRE business, maybe because it's a new year, maybe because it's a different world today. But we're seeing more CRE competition than even a quarter or two ago. Having said that, when I look at the pipeline for CRE from here forward, again, the spreads look a little bit better than they looked in the last three months. So it is really in flux, and maybe that's got to do with the -- all the noise in the market for the last month or so. But spreads are again moving back higher by 20, 25 basis points when I look forward in CRE. In C&I, I would say that while we saw compression in spreads all through last year, especially from summer into December, they are largely steady. There wasn't that much change in the first quarter or in the pipeline. So CRE is the one that has gone down the whipsawing a little bit, but C&I is more steady. And securities have, of course, have widened out.

Q: Okay. Great. That's helpful. I guess maybe as a follow-up or a second question shifting over to credit. Any color around the growth in nonperformers? Is there any industry that stands out more than the other? Or is it just more broad-based?

A: No, Jared. I mean, as you can see, it's mostly in the C&I book, but it's cats and dogs, ins and outs. I think it's up total maybe $9 million, which is like -- really equates to one low. I wouldn't say it's one long. It's just different things moving in and out, not we're seeing...

Q: Okay. Great. And then if I could just sneak in last one in. When we look at the growth in end-of-period DDAs, what percentage of balances are subject to ECR, that growth?

A: I mean, if you mean true ECR, pretty much all commercial deposit accounts are subject to ECR.

Q: Okay. Thank you.

Q: Hi. Good morning, guys. A couple of follow-ups on credit to start. First, I just wanted to start with -- it looks like there were some downgrades from special mention to substandard accruing just based on balances. Any color on what drove the increase to substandard?

A: I mean, you're right. There was some migration that's not unexpected. I think the quarter was characterized by a combination of upgrades and downgrades. And I don't think there's anything specific to call out, Woody. It's just loans going in, loans going out, normal migration. Nothing in particular to call out, I don't think.

Q: Got it. And then, Leslie, based on your opening comments, it sounded like if you factored in April, Moody's that would imply a reserve pickup. But it sounds like you have some flexibility on the scenario waiting. So how should we think about order levels here if things remain sort of the same?

A: Yes. One thing I should have mentioned in my comments -- my prepared comments and I didn't is we did add to our qualitative reserves this quarter. And we added more related to just general, to Raj's point, the cone of uncertainty getting wider.

Q: Okay. All right. That's really helpful. And then maybe just last for me, shifting over to the loan pipelines and production in the quarter. Any way to quantify the production in the core CRE and C&I segments in the first quarter and how that compared to previous quarters? And then just a follow-up there. Second quarter outlook is a little murky just given the macro. But how should we think about that growth opportunity in the back half of the year?

A: Woody, we don't disclose production numbers, and I'm hesitant to go down that path. But I will say that production slightly exceeded our budget for the first quarter. So it's coming in slightly ahead of expectations, and the pipelines are pretty robust.

Q: Hi. Good morning. Leslie, I want to start just on the setup, particularly into 2Q. So if we look at first quarter results year-over-year, they're pretty similar, margin down 3 basis points both years. You got the DDA component where the balance has been -- while average is still down. Can we see a similar level of margin expansion 2Q this year as you get some of the remixing on the funding side? I guess just maybe talk more broadly about how you see margin and NII trajectory in the second quarter.

A: Sure. I'm not going to provide that guidance quarter-by-quarter because unlike you, I don't really care which quarter it happens in. But we do expect the margin to expand over the course of the rest of the year. And again, we expect that irrespective of the Fed cuts. There are four built into our forecast, by the way, in an inverted yield curve, so honestly can't get worse, I don't think, but -- from that perspective. But we expect margin expansion, and that will be driven on growth or transformation of mix on both sides of the balance sheet. So putting on core commercial loans that are higher yielding and more core deposits replacing high-cost funding, and that's what will drive that margin expansion. But I hesitate to say exactly how many basis points I would expect in each quarter because the timing of some of that can be a little bit difficult to predict with precision.

Q: Okay. Maybe asking a different way, Leslie, do you have the spot rate on deposits exiting the quarter? Is something I can get us on...

A: Yes, yes. 2.52, I think.

Q: Okay. Thanks for that. I guess next, maybe either for Raj or for Tom, but there's more news on just the Florida condo market softening. Can you just give us some color around your exposure to the Florida condo market and then what you're seeing just in terms of boots on the ground?

A: We really have... We don't have any.

Q: Okay. And then just last for me. I guess just given some of this uncertainty, does this push out your thoughts around buyback? Any kind of color you can provide on just what you're looking for internally before you might get more comfortable in accelerating the capital return beyond just the dividend?

A: Yes. I would say that given the level of uncertainty -- and the comments that I made last quarter also, they probably apply even more so today. Having a little bit of excess capital when there's so much uncertainty around is probably not a bad thing. And even if we were to deploy this capital in a buyback, it's not like there's that much of excess capital that would make that big a difference in EPS. So as of right now, we'll just sit it out, but we'll continue to look at it every three months and revisit this. But right now, with the level of uncertainty there is, it's probably best to just hold on to a little bit of excess capital.

Q: Hi. Good morning, everyone. So it sounds like you guys remain pretty confident around the NIM trajectory through the rest of the year, which is great, and it seems like your assumptions are pretty conservative there. Any ability to kind of narrow the range on potential NII growth as a result of that? Or maybe said a different way, what could lead you to the kind of low end of that mid- to high single-digit range? And what could get you to the top end if there is not the ability yet to narrow that?

A: I will say there are a number of things that go into the NIM projection, right? There is what's going to happen to the right side of the balance sheet? What's going to happen on the left side of the balance sheet? What are the spreads going to be on the left side of the balance sheet? And what is the slope of the curve, right? So there's a lot of math that goes into predicting that. On the right side of the balance sheet, I feel very confident on our pipelines because they're not really impacted by the -- what's happening with tariffs and general macroeconomic situation. The left side of the balance sheet is going to be sensitive, especially if we have a -- this plan doesn't land well, to take a term from CNBC. So there is that. But then there is credit spreads also, which, like I just explained the questions ago, they seem to be moving around quite a bit. And lastly, the curve -- the slope of the curve, which Leslie mentioned a minute ago, that is also pretty meaningful. There, I actually see good news. We have been modeling much flatter curves.

Q: Yes. No, that makes sense. Yes. We're all hoping that curve steepens a little bit, for sure. Okay. And then on this remix away from the resi book that's happening over time, is there anything that you guys would consider doing to maybe expedite that remix in any way? Any sort of loan sales or larger-scale actions that...

A: We've analyzed it and we do so – two, three times a year, we get this urge to go do this exercise. And then we come out and say, no, we'll just let it happen organically.

Q: Just given the duration of the assets, is that the biggest issue there?

A: Yes, exactly.

Q: Exactly. That makes sense. And then just last thing for me. Obviously, the balance sheet is kind of, at year-end at least, was pretty similar to where it was year-end 2020. Deposit growth has been great. Are we -- do you think we're finally getting to like kind of an inflection point where we can actually see some more balance sheet growth? Or how confident do you feel like we can start to see some overall balance sheet growth from here?

A: I think we've been on this, especially since 2023 or beginning of '23 to now, we've really been on this optimization journey to make the balance sheet less -- it became very thrifty-looking. Because during Covid, we put a lot of resi, and it's still not anywhere close to ideal. So I think for the rest of this year, this strategy will still continue. But going into next year, we will come back and revisit it. I don't want to preempt and talk about next year's guidance. But at least what we've signed up for this year is an improvement of the balance sheet driver of profitability rather than just let's just grow everything and let's get to $40 billion and $50 billion.

Q: Hi, thanks. Good morning. Thank you for hosting us. Leslie and Raj, I wanted to ask about expenses. And do you think of expenses going forward more as a percentage of average assets? Or is the efficiency ratio kind of become more prominent as time passes?

A: I don't think we think in terms of efficiency range...

Q: Sounds great. Thank you for taking our questions this morning.

A: Let me throw out the answer to the broker deposit question real quick: down from $5.2 billion to $4.7 billion, a total decline of $528 million for the quarter.

Q: Good morning. Just, I guess, a couple of housekeeping things here. But should we expect the same decline in residential that we saw last year? Is that the glide path we should be on?

A: Roughly.

Q: Okay. Okay. On your overall guidance, margin is still path to 3% by the end of the year. Is that the big-picture objective for you?

A: Yes.

Q: Okay. And there's been some questions on the reserves as well, but it feels like you're in a decent spot. So is the path to 1% also still an objective for the end of the year or...

A: I wouldn't call that an objective unlike loan growth, the reserve isn't something you can set a goal for that you achieve.

Q: Okay. And then, Raj, I think maybe some of the best of your prepared comments was the client event with the top 75 clients. Any other color from that meeting just kind of collectively what you were hearing there?

A: What I would say is the best thing for me was taking away kind of a temperature, like how concerned are people, how is their hair on fire. And I went in with an expectation that was -- that there will be at least some who will be really not happy and in a bad place, but that's not what I found. So I stand corrected. I was more pessimistic going into it than the clients were. Now of course, you've heard very interesting stories about sort of the unintended consequences of everything that's going on, and those always make for great anecdotes. But we, as a Main Street bank, let's call us that, we live in a world that half our time is spent kind of like people on this call looking at screens and CNBC and Bloomberg and what have you. And half of our time is spent in -- on Main Street talking to our clients and visiting them and walking warehouses and buildings and what have you. So we kind of split our time between the finance -- high finance world and what I would call the real work and...

Q: Yes. And I guess it's helpful to hear the pipeline comments as well.

A: I would also add, a lot of the conversation that we had was well-run businesses that have strong capital positions, look at times of uncertainty as an opportunity. And we saw a fairly large amount of clients who felt like now there are times to invest in certain aspects of their business. While they're knowledgeable and thoughtful about the risks that are out there, they're also seeing this as a time of opportunity.