BankUnited, Inc.

Good day and thank you for standing by. Welcome to the Bank United Second Quarter 2025 Earned Use Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. 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 Bank United 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. It reflects 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 as 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 statement, 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 considered 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 checked consensus was around $79 million, so very happy for a nice beat there. ROE improved to 78 basis points from 68 last quarter and 61 basis points 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 obviously has been the deposit on the deposit front. In a very impressive deposit growth quarter, NIDDA is up more than $1 billion. Average NIDDA is up $581 million, and total non-broker deposits grew $1.2 billion. We did all this and achieved declining deposits cost, 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 pretty sustainable, nice growth rate. NIDDA is now 32% of total deposits, so that was another milestone that we had been talking about getting past the 30%, and we're there. We crossed the 30%. We're at 32%. It's still not the highest level that we've ever been at, which was during the... Its peak was back, I think, in 22. We'd hit 34%. So we will set our target now to that high watermark, and we'll hopefully cross that in the near term, probably next year. Funding composition and remix are working. Deposits costs are lower. Spat cost of deposits declined by 15 basis points to 237 from 90 days ago when it was 252. A year ago, of course, it was much higher, 72 basis points higher. So wholesale funding was paid down again, $749 million paid down in wholesale. Loan to deposit ratio now stands at 83.6%, down from .5% last quarter. So all of this improvement in the funding mix and also improvement on the left side of the balance sheet contributed to a very nice expansion of margin. Margin expanded from 281 last quarter to 93, so 12 basis points improvement in margin. And net interest income increased by .6% just quarter over quarter. So we're very happy, which is... All of this is driving the bottom line. With respect to loans, commercial loans grew by $68 million. And if you break that up in between CNI and CRE, CRE grew by 267 million and CNI declined by 199 million. Tom will talk more about that. The production has been actually fairly good. The payoffs, unfortunately, have also been fairly good, which is why we had a slight decline. Resi portfolio is running off as predicted, so no surprises here. Let's get to credit. Total criticized classified loans declined by 156 million. I think this is one of the largest reductions we've seen in quite some time, so we're very happy about that. Not unexpectedly, though, we did see some migration into NPLs. NPLs grew by 117 million. I think a majority of this, I believe 86 million of that 117 is office-related. So not all office loans will eventually get upgraded and pay off, although some did pay off and some did get upgraded, but some did move into NPLs as well. There were no surprises here. This was expected. With respect to capital, SET1 now is at 12.2%. On a former basis, including AOCI, it is at 11.3%. DCE to TA ended at 8.1%. Again, tangible book value per share grew to $38.23. I think that's a 9% increase over the last 12 months, so we're happy about that. The board met yesterday to go over the earnings and talk about capital as they always do. They authorized a $100 million stock buyback program, which will go into effect after earnings. You've often asked us about buybacks and capital accretion and how we think about this. Our priorities haven't changed. The number one priority is to run a safe and sound bank. The second is to grow our balance sheet in a safe and sound manner and then, of course, increase regularly dividends every once a year and then there's capital left over to actually return it through buyback. So we're executing on that strategy. The environment today feels very different from 90 days ago when we last spoke to you. If you remember 90 days ago in April, we were just still shell-shocked from all the tariff situations that we were dealing with. It feels like a different world today, but I will say that it is a fairly... Well, there is less uncertainty today, relatively speaking. I think there is still uncertainty still out there that we have to be careful of and keep that in mind as we run the bank. So our priorities haven't changed. Manage the bank in a prudent way, grow responsibility, focus on profitability, manage our credit and our pipelines, and continue 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, I would say, you may have seen this in the news. I think we put this out already on recent expansion. We have expanded into New Jersey with a team and an office and also very recently into Charlotte, where we have a team and we will soon have an office as well. 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 then we'll open for Q&A. Tom?

Right. Thanks, Raj. So I'll cover deposits a little bit first. Raj, you went into a fair amount of detail on that. Obviously, we're clearly happy with the deposit numbers for the over a billion dollars in NIDDA growth and $1.2 billion or so in total deposits. As Raj mentioned, there is some seasonality in that business, but I would also say as we look forward into the third quarter, deposit pipelines remain very strong and our deposit growth is predominantly driven by new relationships across all business lines. So we're feeling very, comfortable and confident that 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 CNI loan portfolio segments grew by a net $68 million. We had very strong growth in Cree for the quarter at $267 million, just over 4% link quarter. As Raj mentioned, CNI production has actually met our our plan for the year, but we continue to see some higher level of payoff activity. I would say about half of that is really our own decision as it relates to opting out of credit opportunities where we do not see the kind of margin that will help us achieve our goals type of spread. And another half is, you know, unscheduled payoffs, refinancings, businesses selling, and things like that. I would believe that we will see less of that in the remainder of the year, and we expect production to be, continue to be strong throughout the second half of the year in both the Cree and the CNI area. RESI was down $160 million, while franchise equipment and municipal finance were down a combined $10 million. The mortgage warehouse grew by $46 million, all of this largely in line with our expectations. So for the aggregate, that kind of solves for about a flat loan quarter overall. A little bit more on Cree. Our Cree exposure totaled 27% of total loans and 185% of the bank's total risk-based capital at June 30th, 2025. Comparatively based on March 31st, 2025, call report data, the median level of Cree to total loans for banks in the $10 billion to $100 billion range was 35%, and the median ratio of Cree to total risk-based capital was 217. So while our Cree portfolio has grown nicely across all asset classes, I think overall we still remain at the lower end of Cree exposure to capital compared to our peer groups. At June 30th, the weighted average LTV of the Cree portfolio was 54%, and the weighted average debt service coverage ratio was 1.76, so very strong numbers for the entire portfolio. 51% of the portfolio is in Florida, 24% in the New York tri-state area. So to everybody's favorite topic, Cree office, give you a little bit about Cree office. Not too much change really from the last couple of quarters and continue trending downward of exposure gradually. At June 30th, we had a total Cree office portfolio of $1.6 billion, about $300 million of that is in medical office, so about $1.3 billion in traditional office, down $70 million from the quarter end with 59% in Florida, which is predominantly suburban and 22% in the New York tri-state area. I would say that this quarter we've seen more return to the capital markets in the office area. We saw activity with office exposure that we had go to the CNBS market, and we continue to expect that will happen with some upcoming majorities in the remainder of the year. Criticizing classified Cree office loans, total $383 million at June 30th, down from $414 million at March 31st, 2025, and net decline of $31 million. Some upgrades and downgrades and payoffs in that kind of led to the $72 million change. So I said $337 million or 20% of the total Cree portfolio is medical office. The construction portfolio includes an additional $88 million in office-related exposure with $84 million of that in New York. The weighted average LTV of the stabilized office portfolio was 63%, and the weighted average debt service coverage ratio was 1.52 at June 30th, not too much different from the previous quarter. Pages 11 through 14 of the investor deck provide additional details on the Cree portfolio, including the office segment. So with that, I'll turn it over to Leslie.

Thanks, Tom. So 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 $293 from $281 last quarter. As we've been saying all along, margin expansion has been and will continue to ultimately be primarily driven by the change in mix on both sides of the balance sheet, and continued execution on that remains our priority. A big 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 $247 from $258 on a trailing 12-month basis, that's down 62 basis points. The cost of interest-bearing deposits declined six basis points to $348 from $354, and on a trailing 12-month basis, that's down 78 basis points. On a spot basis, the APY of deposits continued to move down and was down 15 basis points, sitting at $237 at June 30th, down from $252 at March 31st. The average yield on loans increased to $555 for the second quarter from $548 last quarter. I think it's notable that in a largely stable rate environment, we saw the yield on our loan portfolio grow and the cost of our deposits decline, and that's just evidence of the fruit of the work we're doing on the balance sheet, and so we're really happy to see that. The increased yield on loans related to a couple of things, one is pricing discipline, new originations coming on at higher rates or higher spreads than paydowns and exits. As Tom mentioned, we voluntarily exited a number of thinly priced credits, and while those decisions have impacted growth, we're seeing the contribution to the margin, which is our priority, and we also see in that rise the continued composition shift from resi to commercial. The average rate paid on FHLB advances increased this quarter from $369 to $379, and that was mainly due to the expiration of some cash flow hedges. All of our guidance assumes two Fed rate cuts in 2025 and kind of smooths those over the remainder of the year, but again, as I said, that's not really the driver of our prognostications

about margin.

Moving to credit and the provision and the reserves, the provision for credit losses this quarter was $15.7 million. The ACL to total loans ratio crept up to 93 basis points, and I refer you to slide 16 of our investor deck that presents some details about changes in the ACL for the quarter. A couple things going on, we had an increase in specific reserves related directly to some of the NPLs that we added this quarter, and that was partially offset by the positive impact of overall positive risk rating migration. We had some deterioration in the economic forecast going the other way. We had some payoffs and paydowns of some criticized and classified assets, and generally, we saw improving -over-quarter financial metrics for borrowers in the past portfolio, which had a positive impact on the expected loss modeling. Net charge-offs totaled $12.7 million this quarter. The net charge-off rate was 27 basis points for the six months annualized and 23 basis points for the trailing 12 months, both right in line with kind of where we expect those to run. A few further observations on the reserve, the commercial ACL ratio, so CNI, Cree, franchise, and equipment finance was 136 at June 30th, up slightly from 134 at March 31st, and the reserve on Cree office was 192. The reserve is actually a little more than double our historical net charge-off rate over the weighted average life of the loan portfolio, and I would also point out that a significant portion of our NPLs actually carry zero reserves because of the adequacy of collateral. You can see that in our LTVs. Some of those loans have been of those loans that are more than adequately collateralized, and the majority of our NPLs were also paying as agreed, about 75% of them in fact, at June 30th, 2025. As Raj mentioned, NPLs were up $117 million -over-quarter. $86 million of that increase was in office exposure, and office overall is behaving wholly in line with our expectations, so no big surprises. Of $142 million in total Cree non-accruals, $124 million is office exposure. Moving to non-interest income and expense, it's not a whole lot unexpected or unusual or material going on there, but I will say total non-interest income is up $5.5 million. Some of that is sporadic stuff you see with respect to BOLI, but most of that is actually some of our fee businesses gaining traction, whether that's syndication fees, commercial card revenue, capital markets, derivative income, so we're starting to see all of those businesses gaining some traction and happy to see that. A couple of comments on guidance. Overall, our guidance remains consistent with what we told you previously. We guided to double-digit NIDDA growth. We're already at 20%. Seasonality may bring that down some by the end of the year, but we still expect solid double-digit growth year over year. We guided to mid- to -single-digit non-broker deposit growth. We're already there at 8.4%, so I expect that guidance to hold. We previously guided for low single-digit growth in total loans and mid- to -single-digit growth in core CNI and Cree. Kind of given a slow start with respect to CNI growth, we're probably expecting that CNI growth, CNI and Cree growth core to be more mid-single digits as opposed to high single digits. I'll affirm the previous guidance for -single-digit increase in non-interest expense for the full year and still expecting to end the year at that 3% level with respect to margin, and we're already well on our way there. We previously guided to -single-digit growth in net interest income. I think we may do a little better than that considering where we are now. One final point, as announced in our 8K that we filed this morning, we will be redeeming our outstanding senior bond that matures in November. We expect the redemption to happen later in August. With that, I will turn it over to Raj for closing comments.

Thank you, Leslie. We just put out another press release this morning, very important piece of news. On CFO succession planning, we have been working on this for some time. We ran a national search. Leslie had come to me a couple of years ago and said there's a timeline with which you would like to retire. Totally understandable. We ran a process very methodically over the last several quarters and we have hired a, we've hired Jim Mackey, a veteran in the industry, who will be joining us in a couple of weeks, I think mid-August, right, Leslie? Leslie will remain CFO through next quarter. On November 1st, we will make the official change. Leslie will stay with the company through the end of the year and will retire on January 1st. Bye.

Bye.

You'll be on the next call. I'll be on the next call. Yeah, you'll be on the next call. But Leslie has contributed tremendously to this company. We were a third the size of what it is today or what we are today and Leslie's contribution cannot be explained in a short call. But she's been my partner and I thank her. But like I said, she's not going away anywhere. We'll be seeing you guys on the road in the coming weeks and months. But coming back to the quarter, we're very happy with where things turned out. You know, at a very high level, I look at this and say, okay, so we're stronger and more profitable. I think about we have more capital, more reserves, lower loan to deposit ratio, which is a definition of stronger in my mind, and ready for any kind of mishap in the economy if it were to ever happen. And we're delivering all of that while improving our profitability, margin, earnings, ROE, ROE, everything is up. So a fairly decent quarter and hopefully in 90 days, we'll come back to you with even better news. But let's open it up for Q&A. Operator?

Certainly. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A roster. Our first question will be coming from Jared Shaw of Barclays. Your line is open. Good morning, Jared.

Good morning. Good morning, everyone. Congratulations, Leslie, on the planned retirement. So maybe just starting with credit and the office detail. When these loans are moving to non-performer, are you going out and reappraising those at that time and charging down to appraise value? Maybe just walk us through a little bit of the steps that happen once it moves into non-performers. And if the loan to value and debt service coverage ratio, you reference if that's updated for valuation in the rate environment?

Yes, Jared. We do reappraise. Actually, before they moved to non-accrual, typically when they moved to substandard, we would reappraise. And then reappraise again if any significant amount of time had elapsed between when they moved to substandard accruing and to non-accrual. So yes, we do reappraise those properties. And yes, all of our debt service coverage ratios and LTVs that we disclose are updated. Our debt service coverage ratios are based on current NOI. And our LTVs, even if we don't have a current appraisal, we model an updated valuation based on very granular MSA level market dynamics. So we do our best to update all of them. And we do charge, yes, when they moved to non-accrual, typically we would charge them down to that liquidation value.

So when we look at the move this quarter and the provision, can you give us a breakdown of what was charged off versus what was given a specific provision? Or maybe I guess it could be both.

Yeah, you can see that on the slide on page 16. I mean, obviously, we're not going to talk about that on an individual credit level. But you can see this first thing, increase in specific reserves net of positive risk rating migration. So 33 million was the increase in specific reserves, and then about $4 million offset due to net positive risk rating migration. So that's what's happening there. You can see total net charge-offs of $12.7 million, and $5.2 million of that was office charge-offs, Jared.

Okay, that's great, Coller, thanks. Maybe shifting to the deposit side and the strength and DDAs, it's great to see that. One, I guess, do you have the ECR tied to DDAs? And then two, you talk about the seasonality and potentially seeing that lower at your end. How should we think about those balances moving over the next two quarters?

So with respect to what you're calling the ECR, and I know we've talked about that term in the past, that number will be disclosed in the 10-Q, Jared, like we always do. And I don't expect it to differ materially from last quarter's number. I don't have it right in front of me. But it'll be about the same, and it'll be disclosed in the Q. Seasonality, over the next couple of quarters, that'll become a headwind. It was a tailwind this quarter. My best guess is it'll be relatively stable through the third quarter and then decline in the fourth quarter. But it's difficult to predict whether, is that going to happen in September or October or November? But that's generally the trend we would expect. And if you look back over the last couple of years, our expectation is it would be roughly the same.

There are certain things that you really should look at on a 12-month basis, given the seasonality. So I wouldn't say, oh, look, it's a billion-dollar quarter. Great. I look at it, okay, it's double-digit growth year over year. That's a better way to look at it. And

a billion dollars year over year as well. So high point to high point, we still had a billion dollars of growth.

Okay. Thanks. If I could just sneak a last one in with the buyback, good to see that. Is there a CT1 that you're sort of solving for? How should we think about the pace of buybacks or your appetite for deploying that, given your stock price and capital here?

I don't think we have a target to put out there. But I will say, yes, we do feel we have excess capital right now compared to industry peers. And we're doing 100 million. Typically, we've gotten authorizations of 150. The board felt 100 was a good place to start. But I'm sure this is not the end. As we keep creating capital and don't have much use for it, we'll probably come back and look at it again.

And Jared, part of this equation is, as Raj said earlier, it's our preference to deploy capital into growth. So part of the continual evaluation that we'll be undergoing is to what extent we believe we'll be able to do that. Because that's always our better option. Profitable growth. Profitable growth, yes.

Great. Thanks a lot.

And one moment for our next question. Our next question will be coming from Woody Lay of KBW. Your line is open.

Hey, good morning, guys.

Hey,

Woody.

I wanted to follow up on the deposits. 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. I was just wondering what's broken right so far in the first half of the year to see a little bit of outperformance relative to expectations.

I think it's what Tom said earlier. Across our businesses, we are seeing the continued onboarding of new client relationships. And that's really the driver. I know that sounds pretty basic, but it is.

Yeah. A fine point on this one thing because,

you know,

first of all, the numbers that we're at, when we look at our own internal sort of expectation, we're not that far ahead. We kind of expected this involved. We knew that we had to hit our targets for the year before June, which we haven't. That was the case last year as well, because we will face those tailwinds in the second half of the year. So we're happy. We're a little behind on CNI, but on CRE growth, DDA growth, total deposit growth, we're right in line with expectations. There's no one thing that I could point to. It's just the seasonality of the business.

And I think investment in producers has helped us throughout the year. Investment in new markets has helped us, but it's a lot of blocking and tackling every day. And we put a tremendous amount of focus on deposit growth. Yeah. All right. Really helpful. And

then one follow-up on the office migration. It doesn't sound like this was a surprise on your end, but I was just curious on sort of what the triggering event was for the migration. Is it based on maturity schedules? Just looking for any color there.

I mean, really what triggers migration is if, you know, our risk rating system is largely driven by cash flow. We're cash flow lenders. So while we often have more than adequate collateral to support the debt, even at updated valuations, it's really occupancy. And landlords that are struggling to fill buildings, those ones that are migrating and not accrual, it's almost always an occupancy issue.

Yep. Exactly. Okay. Appreciate that. And then just last for me- Maybe they

lost a tenant and haven't been able to replace the tenant yet. That could be a driver. Yeah. Things like that.

Got it. And then last for me, you know, 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. Is it sort of team first and then build around them?

Sometimes it's opportunistic. Other times it's more methodical. So, you know, New Jersey was a little optimistic. I don't think it was very high on our priority list, but we sort of business. We hired some good people and suddenly it became a priority. Charlotte, I would say, was also partially opportunistic, but it has been on our radar for quite some time. It's a very good market. It is- We've looked at Charlotte for a number of reasons, not just for business reasons, but also for talent reasons. And, you know, we've been waiting for the right opportunity for about a couple of years in Charlotte. And when the right team came up, we were able to make this happen. But we have done a fair amount of work on trying to match markets that are growing, are healthy, and are conducive to the kind of business we do. Not every market is, but the kind of business we do. And we've looked up and down the Eastern Seaboard. And, you know, we don't look nationally. We don't go out looking in California and, you know, the Pacific or the- We just look up and down the Eastern Seaboard. Charlotte, Atlanta, these were markets that were always high on our list. And then it's a matter of waiting for the right team to come around before you can make

your move. I would agree, and I would add a little bit to that. We study each market and look pretty heavily at overall growth in the market. You know, is it a business-friendly market? What's state-like? Are they attracting -to-market, you know, relocations from other parts of the country? What's a business formation rate look like? And then we try to match it against our own sort of brisk appetite from a credit policy perspective and say, you know, when we look at the industries that are growing in these markets, are these the ones we have, you know, knowledge of? Do we know these industry segments well? Are we comfortable in lending to them? And, you know, those are all the things we look through when we look at new markets.

And also what competition is like in those markets, right? How competitive are those? That's another factor.

All right, very helpful. Thanks for taking my questions, and congrats, Leslie.

Thank you.

And our next question will be coming from Ben Gerlinger of Citi. Your line is open, Ben.

Good morning, congrats, Leslie. Good morning, Ben. I'm going to talk 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 those equal NPAs have ticked off. Is there an area or time frame where you kind of expect it to roll over? Maybe I'm just reading what you guys said a little bit incorrectly, but it just seems like… No, I

think it's a good question, Ben. And I think this is the natural progression of these credits that are experiencing some stress. You know, one of two things is going to…well, one of three things is going to happen. They're going to get taken out and refied out by somebody who's willing to take them on and pay off, or they're going to improve and turn around, or they're going to go through the workout process. And I think this is just, you know, some of them are going to end up there. This is just the natural progression. You know, we're seeing most of this activity in the office space, and, you know, I think surely at some point there will be an inflection, but I still think there's a little time left before the whole office dynamic broadly finishes playing out. I don't think that's going to happen this quarter. I don't know if it's a year, if it's two years, but I think, you know, that dynamic is still going to play out over a period of time. I don't…none of these loans came out of nowhere, and we said, oh my gosh, we never would have thought that one would experience any stress. So I think we have our hands around the portion of the portfolio that could experience some stress, and it's just still going to take a while to play out one way or the other.

Yeah, part of it is also when you look at the office book, you know, we're in largely growing markets, so there is positive absorption absolutely in most of the markets that you're in, but, you know, until you get a very mature back to work environment, you're still in fairly lengthy abatement periods of time, you know, for new tenants coming in, so that, you know, it is a bit of an elevator ride on some of these where you've got some going up, some going down. When you start to get more positive absorption to the point where it does get more competitive and abatement periods shorten, then the cycle will shorten, and you'll start to see that otherwise you've got, you know, a variety of ups and downs that you're balancing.

And I think Tom may have mentioned, I don't know if he did or not, but we are seeing some very positive developments for office properties in the CNBS market, so I think that's an encouraging sign not only that some of the loans that we'd like to see go may go there, but just generally it's an indicator of positive activity in the office market that the CNBS market is picking up.

Got you, that's helpful. And then I can switch gears a little bit. The next one's a little more philosophical for, I mean, either you, Leslie, or Tom, whoever wants to answer. Tommy, you alluded to not writing some credits because you didn't want to rent your balance sheet, it would be negative to the spread. And then, Leslie, I think you said spot rates and deposits are notably lower, so it seems like margins should continue to go higher. So more philosophical nature, what do you think the franchise could run with on a kind of a core margin, not this year or next year, just kind of the franchise value going forward? What are you guys targeting as like a normalized minimum? I would say mid

-3s.

I

would say mid-3s. I think anything much higher than that is probably moving out on the risk spectrum. We're not going to become a subprime lender or a credit card company. And we don't do deals, so we don't have purchase accounting accretion feeding the margin. So I would say mid-3s.

Does MIX get through there faster or is it kind of MIX is a part of that mid-3s as well?

I think MIX is the biggest part of it. It's not the only part. I think, as Tom said earlier, we've strategically exited some center margin credits. So I think pricing discipline is also an element, both of those things.

It's rare that you see a bank put out numbers where loan yields are going up and deposit rates are going down. We did that this quarter. That's all pricing discipline. That's all saying we will not chase growth unless it is profitable growth. That's why a couple of minutes ago I inserted my word profitable in Leslie's answer. That's a song we've been singing in the company for quite some time. We're internally, by line of business, tracking and holding people, LOB managers responsible for margins, loan margins, and saying these need to move up even if it's two, three, four basis points they need to move up. And they are moving up. And that is contributing to the 12 basis points increase in margin at the top of the house. Deposits help, of course, but loans are also helping. And that discipline on selection is critical to doing that. What matters at the end of the day is NII growth. That's what we solve for. Because you get that right, you'll get your profitability right. So bit by bit we're getting there. All this progress we've made, as I did a couple of quarters ago, I'd just like to remind everyone is we have not done anything unnatural with the balance sheet. We haven't done some big restructuring and taken a big loss and then shown higher margins. This is all bit by bit by bit hard work, one loan, one deposit at a time.

One basis point at a time. Unfortunately we don't operate in a vacuum. There is competition. And a lot of these loans that we're talking about opting out of, people are opting in too at much lower margins. But as we tell the team, we've got to fight for every basis point to get to where we want to get to.

That's really helpful. Thank you.

One moment for our next question. Our next question will be coming from Timra Braziller of Wells Fargo. Your line is open.

Hi, good morning and lovely congratulations on the retirement. Well deserved. 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, ROTC, should we expect to see margin over 3% and ROTC over 10% in 3Q and then with seasonality maybe that papers off a little bit in 4Q. Just through the timing on that.

Timra, as I've said many times, I don't care. I know you do. So I'll try to answer your question. Currently what we're looking at is margin expansion both in 3Q and 4Q. That's what our current forecast has embedded in it. And that's our expectation. But what quarter things happen in is far less important to me than it is to you. But currently our expectation would be continued expansion throughout the year and predicated mostly on continued mixed shift on both sides of the balance sheet and pricing disciplines and rollover fixed rate loans. All of those things are going to contribute. But that's currently what we're forecasting. I'm not going to try to say how much in 3Q versus how much in 4Q, but we are expecting an increasing trend.

Okay, fair enough. And then not to belabor the point on credit, but I don't think we touched on the increase in CNI NPLs and corresponding increase in that allowance. Could you just maybe talk to what drove that increase?

A couple things. A portion of that, I think about $26 million is some indirect office exposure that's embedded in the is one loan. As we've said in the past, CNI credit performance will be lumpy and idiosyncratic. Nothing systemic that we're seeing in the CNI book or no correlation in industries or geographies or anything like that to comment on. So it's really just those two things. On the topic

of correlation, we're always looking for that. So the only correlation we know in our portfolio is the top five loans. That's a systemic thing across the industry. But in our CNI portfolio, yesterday I actually looked at the top five loans that are problematic, and each of the five are in five totally unrelated. So we're not seeing anything. We're not seeing any impact from tariffs or any other changes. It's just sometimes things do just go the wrong way. And if you ever see a pattern emerging, we will share that with

you. Got it. And if I can just sneak one in, last one here. It seems like the momentum around M&A, particularly in the Southeast, is accelerating here. Can you just maybe talk to the level of conversations that you're having? Has that been accelerating? And then just maybe talk to what you would need to see in order to potentially consider a combination with a larger institution?

Yeah. I mean, the level of conversation has been consistent since late last year. So there was obviously a little bit of a concern three months ago when the markets dipped as much as they did. But in terms of M&A, I still think there will be a lot of M&A over the course of the next 12, 24 months. As a buyer, we are probably not going to be very active because that's sort of our DNA for our company is to try and do things organically. We never say no, but it's unlikely. And as to the other side of this, we don't sit here and raise our hands all the time saying, we want to be part of M&A's story. But we have a fiduciary responsibility. If the right deal is on the table, we will talk to anyone.

Great. Thank you.

Thank you. Our next question will be coming from David Bishop of HOV Group. Your line is open, David.

Yeah. Good morning and congratulations. Good morning. Thanks.

Morning, Dave.

Hey, Leslie, just in terms of the loan yield here, it sounds like the repricing outlook sounds positive from some of the back book of the fixed rate loans repricing. Just curious, maybe what that weighted average yield repricing in the near term looks like and what you're seeing in terms of new origination rates?

You know, I don't have in front of me the weighted average yield on what's repricing, but it is true that what's rolling off is generally being replaced by something at higher rates because that's still primarily loans that were put on in a much lower rate environment. I would say it comes back more to what we talked about is being more selective about the credits we are originating and choosing to engage in as opposed to just rate market dynamics per se. I don't have all of those rates right in front of me.

I would broadly tell you on the CNI book when we look at things that we're opting out of from a rate deals that are under SOFR plus 150 and when we look at new production, it's generally at rates in the SOFR plus 200 to 225 type range. So dollar for dollar, we're seeing 75 to 80 basis points of pickup on that swap, sometimes even a little wider.

Got it. And then, Tom, in terms of what's left in terms of maybe the CNI credits that are relatively thinly priced, any sense of how much is left from a dollar basis or percentage basis on our 50

optics

there from that

view? Yeah, we're near the end of that journey. Now, what you don't know is what deal was going to be redialed that was at 185 that now somebody thinks should be at 110. So that you don't know. But when we go, I went through this yesterday so we go line item by line item of all of the deals today that are kind of sub 200. There's only a small handful that I would say are like that sort of below 150, which is kind of where Leslie has a baseball bat in her office. So I sit right across from her. I actually do. Somebody gave me as a gift. I call that the baseball bat territory.

She will be passing on that baseball bat to Jim. I don't know that I

will because my name's engraved on it. Well, then we'll

have to get Jim a new baseball bat.

Got it.

And then back to credit quality. Just curious, Leslie, I think I heard the preamble that loss rate overall for the bank, I think it's running mid 20s or so.

You

had a date over the 12 months or so. It doesn't sound like even with the office inflows, you're expecting too much of a dramatic impact moving forward. Is that correct?

Yeah, I would agree. I think that's in the range of what we would expect. I mean, in a given quarter, you can have higher or lower charge-offs, but on a running basis, I think that's in the range of what we would expect.

Yes. Great. Thank you.

And our next question will be coming from John Orfstrom of RBC Capital Markets. Your line is open.

Thanks. Good morning. Good morning,

John.

Congrats, Leslie. Thank you. A couple of cleanup questions. The other income drivers, you talked about Bollie, but you also mentioned a few other businesses. Is this a sustainable level? Do you think we should pull back a little bit on that line item because of the Bollie?

I think over the long run, this is not a sustainable level. It's going to get better. Quarter by quarter, you can have a sporadic thing happen like we did this quarter with the Bollie, and those things are sporadic. But I think looking out with a trajectory that's more than one quarter, I think we should see that line item gradually grow.

Yeah. If that doesn't grow, then we're doing something wrong. Yeah. So our expectation is that will grow not just over the year, but over multiple years. There's a fair amount of effort and investment going into these businesses that I expect them to grow.

I mean, is it possible that next quarter there will be a pullback because of the Bollie thing? Sure, but again, I don't care. But if you look at the trajectory going forward over the medium to longer term, I think you should see an upward sloping line.

Okay. I was going to try to get you to say I don't care on a different question, but I got it, so that's good.

You asked me another little quarter question. Okay.

Yeah. Was the Bollie material? I know this is ticky tacky, but I was just curious.

I would not use the word material.

Okay. Okay. On the interest bearing deposit pricing, how much more room do you think you have to bring that down?

I mean, I think it's without any Fed rate cut, there's no big catalyst, but we'll continue to work around the edges. There's still opportunities where you can bring this customer down five or 10 basis points or that customer down five or 10 basis points, and we'll continue to work around, we'll continue to be focused on it. But there's no big catalyst for wholesale rate decreases unless the Fed moves.

Well, I would say every quarter we sit and look at a number of relationships customer by customer, and it's not glamorous and fun conversations, but if you go out and adjust down four or five basis points here, eight basis points there, it adds up.

Yeah. Okay.

And then maybe one for Tom or Raj. I understand the, you know, I don't even want to say lower end of the loan growth guidance, but because a lot of things happened earlier in the year, but it seems like based on your answer to Dave Bishop's last question, it feels like the CNI payoffs or voluntary exits are starting to slow down, Raj, it sounds like you're saying it's still a little bit uncertain, but getting better. Are you guys signaling that even though it's maybe a lower starting point mid-year that growth could accelerate in the second half of the year? Is that the right message? Yes.

Yes. And the reason why we have confidence in that is because we're looking at the production numbers. And so the production numbers, you know, actually looked very good for the first two quarters of the year. We're expecting it to look very good in the third and fourth quarter. And so getting to the tail end of, you know, exits that we want to do ourselves, we can balance that and see where we see the growth opportunities.

Our pipelines look very good.

Right.

Okay. Okay. Very helpful. Thank you. Thanks,

John. And I would now like to turn the conference back to Raj Singh, CEO, for closing remarks.

Thank you all for joining us. We're, again, very happy about the quarter, but are there any other questions so you know how to reach us? And if not, we will talk to you again in three months. Thanks. Bye.

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