Executive Summary / Key Takeaways

• BankUnited is executing a deliberate balance sheet transformation strategy focused on improving its funding mix by growing low-cost core deposits, particularly non-interest-bearing demand accounts (NIDDA), and reducing reliance on higher-cost wholesale funding.
• This strategy is yielding tangible results, with significant NIDDA growth ($453 million in Q1 2025) contributing to an improved deposit mix (NIDDA now 29% of total deposits) and a declining average cost of deposits (down 14 bps in Q1 2025).
• Concurrently, the bank is repositioning its asset mix by growing higher-yielding core commercial loans (C&I and CRE) while strategically allowing lower-yielding portfolios like residential mortgages and operating leases to run off.
• Despite a challenging economic backdrop and increased uncertainty, management maintains its full-year guidance, anticipating continued net interest margin (NIM) expansion driven by the balance sheet remixing, and expects core commercial loan growth to pick up after a seasonally slower first quarter.
• Asset quality metrics remain relatively stable, though the bank is proactively managing risks in segments like office CRE with increased qualitative reserves, while maintaining robust capital and liquidity positions that exceed regulatory requirements.

The Balance Sheet Transformation: A Strategic Imperative

BankUnited, Inc., a national bank holding company operating through its subsidiary BankUnited, National Association, has been a public entity for approximately 14 to 15 years, primarily serving Florida, the New York metropolitan area, and Dallas, Texas, alongside national platforms for certain commercial and deposit products. The bank's journey has been shaped by significant external events, notably the financial disruption in March 2023, which underscored the strategic importance of a stable, low-cost deposit base and prompted a focused "balance sheet transformation" initiative over the subsequent quarters.

This strategic pivot, now several quarters in the making, is the core narrative driving BankUnited's performance and future outlook. The objective is clear: enhance core profitability by fundamentally altering the composition of both sides of the balance sheet. On the liability side, the emphasis is on aggressively growing core deposits, particularly non-interest-bearing demand accounts (NIDDA), to reduce reliance on more expensive and potentially less stable wholesale funding sources like Federal Home Loan Bank (FHLB) advances and brokered deposits. On the asset side, the focus is on shifting the loan portfolio towards higher-yielding commercial relationships while shedding lower-yielding, less strategic assets.

This transformation is not a quick fix but a sustained, long-term approach. Management views it as an optimization journey to move away from a "thrifty-looking" balance sheet that accumulated residential loans during periods like the COVID-19 pandemic, towards one better positioned for profitability and resilience in varying rate environments. The success of this strategy is paramount to the bank's ability to improve its net interest margin and ultimately enhance shareholder value.

Enabling this strategy are targeted investments in technology and specialized business lines. The bank has invested over several years in technology platforms supporting specific niches like the Homeowner Association (HOA) business and the national title business (NTS). These investments are designed to enhance digital capabilities, improve operational efficiency, and provide a service-driven approach that attracts and retains sticky, low-cost deposits. The recent implementation of a new general ledger accounting system, while not customer-facing technology, aims to standardize processes, improve efficiency, and enhance internal reporting, further supporting operational excellence. Specific quantitative metrics on the performance advantages of these technologies (e.g., percentage faster processing) are not readily available, but management attributes significant deposit growth, particularly in the title business, to these multi-year efforts and market share gains. This strategic investment in digital platforms and operational technology, rather than a single, groundbreaking core technology, forms a key part of BankUnited's competitive approach in its chosen niches.

Performance Reflecting Strategic Progress

BankUnited's recent financial performance provides tangible evidence of progress on its strategic transformation. In the first quarter of 2025, net income reached $58.5 million, or $0.78 per diluted share, exceeding consensus estimates. This result was achieved despite a slight decrease in the net interest margin (NIM) to 2.81% from 2.84% in the prior quarter. The quarter-over-quarter NIM decline was primarily attributed to the expected impact of declining rates on a modestly asset-sensitive balance sheet and the expiration of certain cash flow hedges.

However, looking year-over-year, the NIM tells a more compelling story, increasing to 2.81% in Q1 2025 from 2.57% in Q1 2024. This expansion is a direct result of the improved funding mix. Average non-interest-bearing demand deposits (NIDDA) grew significantly, contributing to a lower average cost of total deposits, which declined by 14 basis points in Q1 2025 to 2.58%. On a spot basis, the annualized percentage yield (APY) of total deposits also decreased to 2.52% at March 31, 2025, from 2.63% at December 31, 2024. This ability to lower deposit costs, even in a relatively high-rate environment, is a key outcome of the strategic focus on core deposit growth. Non-brokered deposits grew by $719 million in Q1 2025, while wholesale funding (FHLB advances and brokered deposits) declined by $1.1 billion, further strengthening the funding profile. The loan-to-deposit ratio improved to 85.5% at March 31, 2025, from 87.2% at December 31, 2024, indicating enhanced liquidity.

On the asset side, total loans declined by $308 million in Q1 2025. This was a mix of a planned reduction in lower-yielding portfolios like residential mortgages (down $116 million) and specialized lending (franchise, equipment, and municipal finance down $80 million combined), and a seasonally slower quarter for core commercial lending (CI and CRE down $106 million). Management noted that core commercial growth is typically lighter in the first quarter due to the timing of financial information availability and was also impacted by a continued high level of unscheduled payoffs. Despite the quarterly decline, the strategic shift towards core commercial lending is ongoing, with new production generally coming on at higher yields than the portfolios running off.

Non-interest income saw a decrease in Q1 2025 compared to Q1 2024, primarily due to a decline in lease financing revenue as the operating lease equipment portfolio continues to shrink, no longer considered core to the business strategy. Non-interest expense was relatively stable year-over-year, with increased employee compensation and benefits (due to headcount and variable compensation) offset by lower deposit insurance expense (absence of the Q1 2024 special assessment) and reduced depreciation on operating lease equipment.

Competitive Landscape and Positioning

BankUnited operates in a competitive banking landscape, primarily facing other regional banks and, increasingly, fintech firms in specific product areas. Compared to larger regional peers like Regions Financial (RF), Fifth Third Bancorp (FITB), and KeyCorp (KEY), BankUnited's overall commercial real estate (CRE) exposure is notably more modest. At March 31, 2025, BKU's CRE exposure totaled 26% of loans and 173% of total risk-based capital, significantly lower than the median levels of 34% and 218%, respectively, for banks between $10 billion and $100 billion in assets as of December 31, 2024. This relatively lower concentration, particularly in a segment facing market uncertainty, positions BKU defensively compared to some peers.

BankUnited's competitive strategy emphasizes building deep relationships, particularly in its core commercial and specialized deposit niches. The multi-year effort and technology investments in areas like the national title business and HOA banking are designed to create sticky, service-driven deposit relationships, differentiating the bank from competitors who may rely more heavily on price-sensitive funding. Management explicitly prefers the smaller client nature of the title business, viewing it as less susceptible to price competition than larger, more complex clients.

In the lending market, BankUnited faces competition from both traditional banks and non-bank lenders, including debt funds that are becoming more dominant in the corporate and middle-market space. This competition can lead to pressure on loan spreads, as observed in the CRE market in Q1 2025. However, BankUnited is selectively opting out of opportunities where pricing or the potential for a broader relationship (including deposits) does not meet its criteria. New commercial deals are described as more relationship-oriented and deposit-focused, with favorable pricing compared to loans paying off, suggesting a strategic focus on profitable growth over sheer volume.

While larger peers like FITB may possess greater scale and potentially faster innovation cycles in certain digital areas, BankUnited's targeted technology investments in specific business lines aim to provide a competitive edge within those niches. The bank's focus on organic growth and operational efficiency positions it to be agile in its chosen markets. However, its smaller scale relative to national players can result in higher operating costs per unit, and its growth pace may lag behind competitors with broader geographic reach or different strategic priorities.

Financially, BankUnited's focus on margin expansion through balance sheet remixing is a key differentiator. While its return metrics like ROE (annualized 8.2% in Q1 2025) may currently trail some peers, the trajectory of NIM improvement and the potential for enhanced profitability as the transformation progresses are central to the investment thesis. The bank's robust capital levels (CET1 of 12.2%) also provide a buffer compared to some competitors and support its ability to navigate potential credit cycles or pursue growth opportunities.

Outlook and Risks

Management remains committed to its full-year guidance provided earlier, indicating confidence in the ongoing balance sheet transformation despite the prevailing economic uncertainty. The outlook anticipates continued NIM expansion over the remainder of the year, driven primarily by the strategic remixing of assets and liabilities rather than external rate movements. Key assumptions include the continued ability to lower deposit costs as higher-rate time deposits reprice and as the mix shifts towards lower-cost funding, coupled with the addition of higher-yielding commercial loans.

Loan growth is expected to pick up in the coming quarters, particularly in the core commercial segments (CI and CRE), following the seasonally slower first quarter. Management expects the residential portfolio to continue its planned runoff. Deposit growth is anticipated to continue, although the pace of NIDDA growth may be influenced by seasonal factors, typically stronger in the first half of the year.

The determination of the Allowance for Credit Losses (ACL) remains a complex process involving significant judgment and subjectivity, particularly given the level of uncertainty about the general economy and the evolving dynamics in segments like office CRE. While the ACL to total loans ratio remained stable at 0.92% at March 31, 2025, the provision for credit losses in Q1 2025 reflected increased specific reserves, risk rating migration, and higher qualitative overlays related to economic uncertainty. Management acknowledges that future ACL levels could change materially depending on economic conditions, portfolio composition, and collateral values.

Specific risks highlighted include interest rate risk, particularly the potential impact of severe downward rate shocks, although the bank aims to maintain a relatively neutral position. Credit risk in the CRE portfolio, especially the office segment, is actively monitored, with management noting some deterioration in collateral performance but asserting that the high credit quality and subordination levels in their securities portfolio mitigate impairment risk. The potential impact of broader macroeconomic factors, such as tariffs and general economic activity, introduces a wider "cone of uncertainty" for the outlook, although management feels well-prepared to handle various scenarios.

BankUnited's capital position is robust, with CET1 ratios well above regulatory requirements. Tangible book value per common share continues to accrete, reflecting solid earnings generation. While capital is building, the strategic shift towards higher-risk-weighted commercial assets consumes capital, influencing discussions around capital deployment. Management has opted to maintain a level of excess capital given the current uncertainty and growth opportunities, although share buybacks are a topic of ongoing discussion with the Board, alongside a commitment to steady dividend increases.

Conclusion

BankUnited is actively engaged in a fundamental balance sheet transformation aimed at enhancing its core profitability and resilience. The strategic focus on growing low-cost core deposits through targeted business lines and technology investments, coupled with a deliberate shift in the loan portfolio towards higher-yielding commercial relationships, is beginning to yield tangible results, particularly in the form of NIM expansion. While the path forward is subject to macroeconomic uncertainty and competitive pressures, the bank's robust capital and liquidity positions provide a strong foundation.

The investment thesis hinges on the successful execution of this transformation. Key indicators to watch include the continued trajectory of NIDDA growth and the average cost of deposits, the pace and quality of core commercial loan growth, and the stability of asset quality, particularly within the CRE portfolio. Management's commitment to its guidance, anticipating continued margin improvement and growth in core segments, suggests confidence in the strategy's ability to navigate the current environment and unlock greater profitability over time. The ongoing balance sheet remixing, supported by strategic technology investments and a disciplined approach to risk and capital, positions BankUnited to potentially enhance its financial performance and competitive standing in the coming quarters.