BankUnited, Inc. (BKU) Earnings Call Transcript

Good day, and welcome to BankUnited Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions]. Note, this event is being recorded. I would now like to turn the conference over to Jackie Bravo, Corporate Secretary. Please go ahead.

Thank you, Chloe. Good morning, and thank you, everyone, for joining us today for BankUnited, Inc.'s Second Quarter 2026 Results Conference Call. On the call this morning are Raj Singh, Chairman, President and CEO, and Jim Mackey, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. Before we begin, please note that our remarks today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations and are subject to various risks and uncertainties that could cause actual results to differ materially. The company does not undertake any obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise. Additional information regarding these risks can be found in the company's annual report on Form 10-K for the year ended December 31, 2025, 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. Thanks, everyone. I know it's a busy day. We'll be quick with our comments and get you to Q&A. Before I start the earnings and get into the numbers, I was looking at the transcript from our last call, and I read the very last comment that I made. It was a question that was asked, I forgot who asked that question, which was the one thing that you're looking at that matters more than anything else, what is it? I'm paraphrasing. And my answer was NIDDA, NIDDA growth is the most important thing for us. And if we take care of that, everything else will take care of itself. So I'm happy to announce NIDDA growth this quarter came in exactly where we expected. But more importantly, we reached a pretty big milestone that internally, we've been focused on for quite some time. we have finally crossed the high watermark of NIDDA to deposits, which now stands at 34.4% and we set the high watermark during the height of COVID when money was free, rates were 0 and everyone was flushed with NIDDA and over the last few years, we've been working hard to bring that level back up. So we're very happy to report we have now -- we're now at a record high in the company's history of that ratio, which is a very important number for us in terms of building long-term franchise value. We're also almost at a milestone of $10 billion. It takes me off that we've missed it by just an interest to. It's [ 9.935 billion ] or something like that. But I hope you'll indulge me in let me call it $10 billion. So that was also a pretty big sort of battle cry inside the company for the last several months, and I'm very happy. I want to take a moment to thank everyone in the company. This is -- it takes a village. It's not just a few people in the company, everyone from the front line to the back office and everyone in between has been working very hard over many years to achieve this. So I actually even went back and looked at that over the last 10 years, we have grown our deposit portfolio by about $10 billion and $7 billion of the $10 billion has been NIDDA. That's a remarkable. And by the way, of course, it goes without saying, all of it done one client at a time, not through acquisitions. We didn't pay for this through goodwill or anything just good old-fashioned bringing in one client at a time. So I just wanted to start off with that. It's a pretty big thing for us, and we've been focused on it. Of course, the new targets will be sent out to everyone's inbox before at the end of the day. We're not stopping at 34.4%. We want to move this further. With that, having said that, let me get back into the earnings. These are [ peered ] numbers, obviously. This is our biggest quarter. So I've always said, focus on averages. So I'll talk more about averages because that's what drives the P&L, but I just wanted to get that out of the way. Earnings came in at $0.07 a share, net income of about $71 million. ROE improved last quarter was, I think, 8.1%. Now we're at 9 3%. Deposits, like I said, a pretty good quarter for us, no matter how you look at it, whether it's core deposits, which is excluding [indiscernible], they were up very strongly, NIDDA was up very strong. Actually, if I look at quarter-over-quarter and year-over-year, NIDDA year-over-year is up 13%. I think we guided that this year will be about 12%. So we're running a little bit ahead of the guidance we gave you. core deposits are up year-over-year. These are all averages, up about 7%, and that also, I think the guidance we gave you was about [indiscernible]. So we're doing a little bit better, but all within the rounding I would call that right on top of the guidance we gave you. Quarter-over-quarter, NIDDA was up averages again, 7% core deposits were up 3%. We did take this opportunity to pay down brokered. Another big milestone actually, is that we've now brought our brokered deposits down to just over 10%. And to go back in time to see when we were at this level, you'd really have to again go back to the highs of the COVID crisis when money was free. So achieving that in a time and money is actually cost 3.5%, 4%, that's also a remarkable milestone. Moving on to lending. While our deposit business follows a pattern of Q1 being the slowest Q2 being the best and then Q3 and Q4 falling somewhere in between. Our lending business follows a different pattern. Generally, it's more straight line. Q1 is the slowest, Q2 gets better, Q3 gets better, and Q4 is our strongest biggest quarter of the year, and then everything really sets again. So it's the pattern we've seen over the last couple of years. It's a pattern that we're following this year as well. So if you look at how we're tracking in terms of core loan growth year-over-year, we're tracking at about 4% average loans last year this year. If you look at quarter-over-quarter, it was about 1%. And I'll talk a little bit about what we're seeing in the lending market, but that's a little bit behind guidance we gave you. So we'll be adjusting all the guidance that we've given you and Jim will walk you through those numbers. Margin came in expanded, as you would expect, with all the deposit growth that we've had then came in at about 306, which was 7 basis points better than the first quarter and also [indiscernible] better than same time last year. Fee income, actually before fee income, lending, what we're seeing is -- we're seeing a lot of competition in lending, and we're seeing mispricing of credit from time to time. The second thing that we're seeing is the discipline that the industry had found a couple of years ago in sticking with the relationship business and insisting on getting the full relationship rather than just a transactional view, that seems to have really gone to the side. We're still holding the line and -- but it is harder and harder to hold the line. So we have lots of business go. There were some strategic exits that we did this quarter. about $230 million, $240 million that fall into this category. This was not something we had planned. But looking at the price of credit, we cannot justify pricing at the level that's. I mean, the good part is the economy is in a good place. Generally, there's a lot of optimism. It's reflected in asset prices. It's reflected in cost of credit as well. And just our view is that it has gotten a little ahead of itself, and that's why we're being a little more cautious at trading loan production for returns. That's really what it comes down to. Fee income, again, very strong quarter, did better than what we expected. Marginally it is the strength of our capital markets, especially the interest rate business. commercial card was strong service charges. I mean I'm really very happy. We put a lot of effort into it over the last 2 years and how much we've been able to achieve here. Lastly, I'll talk a little bit about credit. We've been saying to you, we'll continue saying that credit is a lumpy business. You can have a couple of loans can swing your numbers by a lot. And last quarter, our charge-offs were pretty elevated at $36 million. But proof is right in front of you this year -- this quarter, our charters were just $6 million, $6.4 million to be exact. So I'm very happy with that, but I'm really happy is the fact that NPLs were down again this quarter by 19%. So year-to-date, NPLs are down 40%. That's a pretty big swing in nonperformers and they're backed out to a very reasonable level. Criticized classifieds were essentially flat, and we were up $7 million, but I call that being basically flat. Capital, very well capitalized at what is at 12.3%. We did buy back a little over $15 million of stock this quarter, and we'll continue -- we are continuing to do that this quarter as well. We'll probably do a little more this quarter. Macro outlook, I don't want to -- I've been reading what other banks have been reporting. So I largely agree with the sentiment, which is the economy is doing well. the war has not really impacted Main Street as some might have predicted it. but we have to keep an eye on geopolitical developments because it is still not over and device inflation is still an issue. Rates are likely to go up and not damp. We think our house view was there will be 1 rate cut in the fourth quarter and likely more to follow. It's not rate cut rate hike in the fourth quarter and likely more to follow next year. So one thing I did forget to mention is we talk a little bit about NIDDA, but there was a lot of effort put in this quarter on interest-bearing deposits as well. And in a time when rates are actually headed up, we were able to bring down our interest-bearing cost, which I know was not a small task. So everyone who worked on that great job. So coming to guidance, we have put a slide in here, I think, towards the end of the deck where we've taken our best at revising the guidance we gave you at the beginning of the year. I would still call the revisions all fine-tuning rather than any big changes. A little bit better on deposits a little bit less on loans a little bit better on fee income, a little less on margin. So all within the margin of error, nothing that dramatic that would change numbers too much. Again, there's as much art as it is science. I do a pipeline review before this earnings call, and I'll tell you those meetings over the last 2 or 3 days have been fantastic. Pipelines and deposits and even loans have been -- are very strong and doing fine. We just have to fight the battle on pricing. And stay disciplined and not just put capital to work just to show volumes. So that's the discipline, I think you pay us for, and we're executing on that. What else? Now that said, I'll turn it over to Tom.

Great, Raj, thank you. A little bit more detail on some of the items that Raj covered. Overall deposit performance was really the operational highlight of the quarter. It was a really excellent quarter as we anticipated. NIDDA increased $991 million during the quarter and average NIDDA increased $564 million. Total deposits, excluding broker deposits, increased by $1.1 billion, and commercial operating balances remained really strong. Raj mentioned the 4.4% percentage of NIDDA to total deposits as being an all-time high. We continue to add new client relationships, core operating balances across the business units. Raj briefly touched on the service charges. I talked about this at the last call, kind of year-to-date to year-to-date. Service charge income was up 18.6%, which is a number we're really very proud of. It takes a lot of work to do that. We're actually touching the high points of product penetration per relationship on the treasury sales side and on the commercial side. So it takes a lot of effort to get that done. And I think that's reflective of the strategy of really focusing on core deposit growth, core operating accounts and fee income producing business. On the loan side, production remained good, I think, solid through the quarter. As Raj mentioned, Q3 and Q4 pipelines, which are typically our best quarters are looking pretty good at this point. I think we're pretty optimistic that we'll see the normal uptick in Q3 and Q4 that we see. Growth this quarter came predominantly from the CRE and mortgage lending businesses. Raj mentioned the C&I balance decline due to selected exits for either pricing or structure related terms. We are seeing substantial pricing pressure really in all businesses, probably a bit more in the CRE business than any business. Banks have returned to CRE lending in a significant way. I would say last year, when we didn't -- when a deal that was largely a LifeCo or other permanent market provider. These days, banks are back in the market. very aggressively at spread levels that we have not seen in quite some time, but we did increase overall CRE point-to-point balances by 120 and mortgage warehouse by $72 million. Average core loans increased $643 million from a year ago. And as Raj mentioned, we continue to focus our efforts on primary client-related business that brings in deposit accounts, transaction business, fee income business swaps and everything else we're trying to drive in the direct relationship business and we have deemphasized a lot of what I would call kind of market-driven lending business. The opportunities are out there, but we have chosen to put our time on the things that we think drive fee income, drive deposits and drive NIM force. We remain optimistic on the second half of the year, the markets we're in, predominantly from a geographic perspective, continue to do very well. We -- I'm happy to report that we expanded our operation in Dallas this quarter. We've essentially doubled our space and are investing more people there. We opened up our office in Charlotte a few weeks ago. We continue to invest in other market segments. We continue to invest in the Tampa market, and we're blessed to be in really good markets. So we're optimistic as we head into the to the second half of the year. With that, I'll turn it over to Jim.

Great. Thanks, Tom. Raj covered the earnings highlights, so I'll try not to repeat all the information that both he and Tom gave you. But I just want to remind everybody that if I start with NII and margin that we typically follow our seasonal patterns, we're a broken record on that, but it's a really important fact as we think of the ebb and flows during the year. We did see a significant pickup in the first quarter -- or from the first quarter as we expected, with NII up $6 million and up $9 million from a year ago, NIM, up 7 basis points from last quarter and importantly, up 13 bps from a year ago. The funding the improvement is largely due to a funding mix improvement. That's a story we've been telling for a while now. We saw our average deposit cost decreased 7 bps from last quarter and 42 basis points from a year ago. And of course, that's outpacing our decline in earning asset yields. So we had almost $600 million higher average NIDDA from last quarter and over $1 billion increase over a year ago. So this enabled us to reduce our higher cost wholesale funding. Average balances came down $636 million from last quarter and $1.2 billion from a year ago. So not only bringing down the wholesale funding, we also shifted the mix within the wholesale funding. We talked about that last quarter. that we'd probably rely more on FHLB Vances and Fed fund purchase over brokered, and that's what you saw this quarter. We also talked last quarter about some of the actions we were taking in the securities portfolio that did bear fruit this quarter. It improved the yields on that improved 9 basis points. So even with lower outstandings, it did modestly help margin. And as Raj mentioned, I think it's an important point. Our core interest-bearing deposits, that balance was up almost $250 million, and we were able to reduce that rate by 3 bps. So that growth at that lower cost helped us also reduce our wholesale funding. So it's important to note, I mean, we are tracking a bit behind where we expected to be at this point in the year. The shortfall really is on the asset side. We talked about some of the risk management, things that we did related to pricing and structure, et cetera. And so we're not seeing exactly the loan growth we expected. But -- so we'll talk a little bit more about the impact of that when we get to guidance. Credit quality, again, I just mentioned, obviously, charge-off ratio at 11 bps. That's down meaningfully from last quarter. Raj talked about the metrics related to improving nonperforming loans, criticized and classified, but nonperforming loans down 40% from a year ago and criticized and classified down 14% from a year ago. Provision expense, I thought was good this quarter at under $6 million, down $9 million from the last quarter, and we were able to take our coverage ratio and allowance up to 91 basis points. Just real quickly on noninterest income, Raj covered it, but I'll just remind everybody that there are ebbs and flows from quarter-to-quarter. We did see a pickup over last quarter as we expected because A lot of -- some of our activities such as swaps tracks our lending activity. So lending picked up that derivative activity picked up. So generally, we're on track for the full year. And on expenses, I just want to mention a few things. Expenses were up from last quarter, obviously, up from a year ago. Everything is generally tracking with how we project it. Deposit costs are seasonal, just like the NIDDA growth patterns. They are up a few million quarter-over-quarter. It's a mix of both volume and a bit of competition. We'll talk about that related to the full year guidance. We did have some elevated operational losses this quarter. It was just an elevated by $1 million, but I just call it out just because it's sort of a nonrecurring thing. These do ebb and flow each quarter. But generally, for the full year, ops losses are tracking where we'd expect them to be. We'll call out an REO disposition expense this quarter which, again, we even had some of those in a while. But we're only -- we only have $1.5 million left on the balance sheet of REO, and that's down from over $7 million a year ago. Capital, again, CET1 was 12.3%, up 10 bps. It was up even though we continue to buy back stock, that's largely due to the lower ending loan balances that we discussed. We repurchased just over $50 million of stock during the quarter. That leaves us about $146 million left on our current Board approved capacity. As we've discussed before, we are expecting to utilize that somewhere around year-end. It's obviously subject to market conditions, but we're committed to using the -- what we have. And obviously, once that's used up, we'll look at the balance sheet and earnings and talk to the Board about where to go next. But we are committed to getting to our targeted capital levels of CET1 in the mid-11s over time. So with that, I'll turn to guidance. We -- it's just important to note, as Raj said, the overall story has not changed. Deposit trends remained stronger than we originally anticipated. Specifically, NIDDA continues to grow. Fee income is tracking ahead of plan. And the main changes are really a function of the competitive conditions. We saw credit spreads tighten faster this year than we had expected. And both Raj and Tom talked about how we're going to remain disciplined on risk and pricing. So on Page 15 of the presentation, you can see the guidance we gave you the original guidance as well as the updated guidance. I'll focus on a few things that change the most. The loan balances, we're bringing the growth for core loans down to up 4% to 5% from our original projection of 6% total loan growth, therefore, would be potentially slightly lower. We're showing a range there as well. We always have -- the second half of the year is our strong part of the year. So there's always a chance that will hit the original guidance. But just given where we are at this point in the year, we thought it prudent to bring it down a bit. On the deposit side, we are bringing up NIDDA average balances slightly from 12% to 13%. And on the net interest income side, because of halfway through the year, given where we are. We're bringing the full year down to 5% to 6% growth. It's largely due to the year-to-date tracking a bit behind where we projected. As Raj said, pipelines look really good for the rest of the year. So if the wins align properly, we can make up some of that ground. But we're being prudent in bringing it down slightly. Because NII is coming down, we're bringing the revenue forecast down to 5% to 6%, and that's largely related to NIM and NII. Noninterest income, on the other hand, we're taking up slightly. Those numbers are smaller. So even though it's coming up, it doesn't -- it only mitigates some of the lower NII. On expenses, we took the guidance up just slightly. It's really driven by two items, deposit costs. I mentioned earlier, our volumes on NIDDA are expected to be a bit higher. So there is volume-related costs there. And also the competition, it's a highly competitive market, and so that's driving a little bit increased costs. And then on the compensation side, we had a really strong year last year, so there were incentive payouts earlier this year. And importantly, we've been opportunistic in our hiring and we've been hiring revenue producers, some good hires. And so the combination of those two things is going to drive our compensation expense a little higher than we had expected. All the other categories are largely in line. And I guess I've concluded and say we're always looking for efficiency. So where we can, we'll try to offset those two items, but we did take up the guidance slightly. Provision, the last thing I'll say on that is we -- it will be a range. We did have higher charge-offs earlier in the year. So that could mean a little bit higher provision expense for the full year, if you just look at the full year impact of it. A lot of it will depend on where loan balances play out in the second half. But it will be somewhere around our original guidance to a little bit higher, but it does reflect strong credit quality. All these projections reflect a strong economic environment. But as Raj talked about it, good economic environment brings a lot of competition. So we're trying to be balanced in our expectations for the remainder of the year. And we do assume 1 rate increase late in the year. So it doesn't have a lot of impact on this year's numbers. But obviously, I'll just remind everybody, we're modestly asset sensitive. So as rates rise, it would impact us, but it would be more of a '27 thing. With that, Raj, I'll turn it back to you.

No, let's go to Q&A.

[Operator Instructions]. The first question today comes from Woody Lay with KBW.

Wanted to touch on the NII guide. And as you mentioned, it's feels like it's more of a function of the assets and maybe some of the loan competition on pricing and some runoff. And looking at the loan growth guide, it would imply we see a nice little ramp-up here in growth over the back half of the year, which is your historically seasonally stronger part. But are you seeing any dissipation in some of these competitive factors that would help on the loan growth front? Or is it more just building in the pipeline to account for maybe additional runoff of tiers?

Yes, we would love to see a dissipation of the competition, but I don't think that's likely to happen. I think it's really going to be the continued efforts in building of prospect opportunities and loan transaction opportunities and funding acquisitions and expansions and things of that nature that we typically see building in the second half of the year as it generally has and -- but I don't think the competitive market will change over the course of the next couple of quarters.

The guidance -- the guidance really reflects -- we believe we'll hold our own in the second half. We think credit will be able to hold our own on credit spreads and whatnot. And so a lot of the guide is really just reflecting the actions we saw in the marketplace and actions we took year-to-date.

And by the way, our credit box has not changed. It is the same. It was 6 months ago or a year ago, we have not revised our credit box. The market has moved meaningfully in terms of pricing credit. So we're winning less because we really haven't moved our credit book. And it's just our view of price of credit. We could be wrong, by the way, we could be maybe a little too pessimistic. But we have to kind of hold our own in terms of what we think the right price of credit is. And that's the whole sort of essence of the lending businesses to say yes and no, when you think you need to call the yes and the no. So the other part of this is also we are very, very -- still very much disciplined on doing relationship business. And we might be the last bank left in that space, insisting on getting deposits. But if you're going to deliver NIDDA growth in 12%, 13%, 14% range, you have to do that. This doesn't happen by itself. People don't leave NIDDA because it just like you. It's because you assist is how you get that. And we see a lot of competitors not insisting anymore. So that's not quite a credit issue or a credit pricing issue, but it's a relationship pricing, you can call it that. So we're seeing less and less discipline on insisting on relationship, more willingness on unclarities transactional stuff. And we haven't forgotten the lessons from 3 or 4 years ago.

Yes, that's good color. And then maybe just one follow-up on BNII guide. You all have mentioned it's better look at average versus in the period given some of the seasonality movements. But if I just look at the spot rate of deposits, it's pretty meaningfully below where the average cost came in. And I was just Interested to know kind of what your deposit cost assumption is through year-end to hit that 15 year of end margin.

Yes. Spot deposit rates can be very misleading because especially at the end of June, when we just have a huge amount of deposits that are not going to be there for a long time. So I would not pay too much attention to that. I would look at what we did on actual deposit cost over the quarter, it came down, which we're very happy with. I don't think many banks have taken it down. And in the future, it will be hard to take down interest-bearing costs because the 2 years at, what, 420,430 and 10 years now, 465 this morning. It's going to be hard to have deposit costs come down. We will still keep mining our deposit portfolio for it. But the real breakthrough for us is always going to be on NIDDA. I expect NIDDA, average NIDDA to continue to grow. [indiscernible] may not grow, but averages to keep growing, and that's going to help margin. That's where the deposit cost lowering will happen. That's where the margin growth will happen from

And you typically see. Second quarter, third quarter margin expansion, if you follow our normal seasonal trends, and then the fourth quarter is, I'll call it, flattish. It can be up, but it's -- you don't see the rate change as much between first and second and then second and third.

Raj mentioned the word work several times when we talked about the reduction in deposit cost. The market clients and people tend to think about things like this and sort of 0.25-point moves timed with market interest rate moves, the process of trying to fight for 4 or 5 basis points across the portfolio is a lot of work and you have to kind of go relationship by relationship, account by account and really fight for each of those inches, and we're going to continue to do that work.

The next question comes from Jared Shaw with Barclays.

Good morning, everybody. Really good trends on the NIDDA. Could you share with us what portion of the portfolio is subject to ECR and what your implied payout on ECR is on that?

I think you're referring to deposit costs, not ECR. ECRs like all commercial deposits have some kind of ECR. But the ECR is just the fees that we don't charge you expressed in basis points. So that's generally the entire commercial portfolio. But I think you're referring to the deposit costs, which are sort of a cash expense. And that is largely driven by the HOA business. Which is like a round numbers, I don't have it in front of me, like $2.5 billion, right? So most of it is coming from that. That's just how that industry has evolved over the last 20 years is that this whole notion of these arrangements are kind of the norm and even small clients expect that. So that's where it's really coming from.

Okay. And was any of the -- or how much of that, I guess, the quarterly growth was from the HOA business?

Well, we had -- I think we disclosed in our Q last quarter, we had $13 million or so, I think, of deposit cost down and in OpEx and a couple of million dollar growth in that quarter-over-quarter due to volumes. So that's in aggregate just rough numbers.

Okay. Okay. And then I guess shifting -- going back to follow-up on the margin discussion and hear what you're saying about the spot deposit cost versus the average. How should we think about, I guess, maybe the total cost of funding for the second half of the year, is there likely to be a continued reduction in brokered and shift to FHLB? I guess how are we thinking about that 310 spend rate?

Yes. So, brokered versus FHLB, we basically look at whatever is cheaper and we tap that market. I would throw fed funds in that as well. So between those three buckets, we just try to be opportunistic whatever is cheaper. Brokered got more expensive starting, I think, March 1. And while it's that gap has narrowed somewhat in the last few weeks, it's still more expensive, which is why you see we really brought down very aggressively. Now if I think of these three buckets together, I call that sort of wholesale funding, and that came down quite a bit this quarter. I don't expect that to come down because this is seasonally high deposits from the title business are creating that excess cash that we have, which they do every due this happens. But going forward, I don't expect that number to continue to come down. In fact, it will probably grow. Would it be broker that will grow or FHLB or Set Funds it's hard for us to say because we'll tap whatever is the cheapest. By the way, that if you go back and look at our numbers last year, it's exactly what you saw last year. Very similar trends will happen again this year. I just don't know which bucket it will be. It will be one of those three buckets. Our guidance is based on following the same seasonal pattern we've seen in the last couple of years.

And then I guess just a follow-up on the margin side. On the yields, hearing what you're saying about the competition if we're assuming sort of flat rates here, I know you have one cut at the end of the year, but if we look at third quarter, most of the fourth quarter, should we assume that loan yields stay flat? I mean, is that possible? Or do you think that the -- how should we think about the trend in loan yields with what you're looking at is that pipeline?

So, Jared, I don't know if you misspoke or I misspoke. We're not expecting a cut. We're expecting a hike [indiscernible].

I'm sorry, I'm sorry, I meant a hike.

I think I also misspoke.

But I think generally -- I'll let Tom add this, generally, yes, we're looking at loan yields. The credit spreads staying stable from here for the rest of the year. again, to talk about is one of the things that hurt us while we generally had flat core loans, we had a mix shift. So some of the higher-yielding portion, C&I were a little bit lower. Our mortgage warehouse is a little bit higher. Some of the yield will depend on what the mix is at the end of the year, but asset class by asset class, I think we're expecting roughly similar credit spreads.

Yes. I would say we've held -- when we look at production across all of the business lines, for this past quarter and really for the whole year. We have held margins and spreads within a very small kind of variance. There is some mix difference that the C&I market has better yields in the CRE market right now. And part of what we'll try to do is balance that a bit better in the second half of the year. But I don't think we would have materially different yields than we're seeing right now, and we're trying to stay too. But a lot of that is also influenced by if we have very strong core deposit opportunities with these clients. We become a little bit more flexible on loan yields when we don't, we don't. And that's part of the trade-off you make.

The next question comes from David Chiaverini with Jefferies.

So a follow-up on NII. You mentioned about how weaker loan growth is the main driver for it. When I look at the updates on the guide, it looks like you went from 2% to 1% to 2%, but yet you took the guide down to 5% to 6% on NII versus 9%. So it seems like a modest tweak lower on loans, but yet a pretty decent cut on NII. Can you walk through? Is it a timing issue? Can you walk through some of the factors there?

It's timing, and it's also a little bit of loan mix. So Jim just mentioned, we did more growth in mortgage warehouse lending than we were expecting to. Also in CRE, we had growth. But C&I, we actually did some strategic exits. Well, if you look at C&I spreads, they are much higher than CRE spreads and that mortgage warehouse is kind of about the same as CRE spreads or even slightly a few basis points lower. So the mix is also not -- is also contributing to that. Well, timing and mix. But the pipelines right now, the C&I pipeline is pretty decent. If we can actually close on all that, we can probably make up some of it.

The issue is you're closing it ratably during the second half of the year, so you don't have a full year impact of those higher spreads. So you could still land the plane on loan volumes, but because we were sort of tracking behind in NII through midpoint of the year, you can only make up so much of that gap. So that's timing.

Got it. Very helpful. And then yes, it sure does. And then shifting over to the NIDDA, I think you mentioned about expecting continued growth despite the seasonal bump in the second quarter. Can you talk about the cadence and trajectory for 3Q and 4Q expectations there?

Yes. Generally, what we see is that end of period of June to September, you may not see much growth, but the average balance is still continue to grow because our average NIDDA is like $9 billion, and our period end is $10 billion. So that momentum carried into the third quarter. So average NIDDA is generally higher in the third quarter than the second, even though end of period may not be as high or maybe even flat but averages matter and that's what drives NIM and the P&L. Fourth quarter, again, it starts to decline in December, sort of mid-December balance structure decline and that can make year-end numbers look bad, but averages don't look that bad because for the most of the quarter, we're still doing a lot of business. It only starts to really slow down in the holidays. Just the slowest. That's just the nature of the business. It really -- once it slows in December, it doesn't come back up in any meaningful way until March 1.

The next question comes from Michael Rose with Raymond James.

Raj, I think you described the loan pipelines as fantastic. I think that's the word that you use. Can you just give some color on kind of what is comprising that pipeline? And then maybe the interplay as we think about kind of the continued rundown as we move through the next couple of quarters of the rest mortgage piece because it does sound like the...

Yes, Michael. So I would say when you look , it's obviously different for each business line. I would say when you look at the C&I line of business, it's going to be, which is comprised of different sort of segments within that market, but it's going to be pretty broadly diversified across a number of industry groups. There's not any significant concentration. We're seeing more growth in new office markets because we're starting from lesser numbers. We've had good growth in the Dallas office. We've had good growth in Atlanta, we're starting to see nice opportunities in the Charlotte, North Carolina, South Carolina kind of market. But it's kind of broad across 100 different industries. And that business is very granular based upon that. There is some M&A activity that we're seeing flow through that, that we're working on now that I think looks pretty good overall. The CRE pipeline, we're definitely seeing strong interest in the CRE market, foreign investment is coming back to the CRE market. our portfolio, as you can see in the data supplied is pretty well diversified across all major asset classes. I would say what we're going to likely see the most of is industrial in retail, some in the multifamily sector will be large, although we are seeing more competition in the construction market, particularly for nonrecourse construction loans, which generally we have straight away from. But I would say the major asset classes in CRE, if you look at our portfolio, each one is sort of in the 20% to 24% range. So it's a pretty well diversified and well-balanced portfolio. We expect to see good growth in that area. And I think in the smaller business lending teams, spread out over 1,000 industries, we expect to see good growth.