David Rochester

David Rochester asked about Prosperity Bancshares' capital discussion, specifically if the current stock price below past buyback averages presents an opportunity, and details on blackout periods for buybacks. He also inquired about the net interest income and margin trajectory through 2026, assuming Stellar closes by June 30, and the confidence in cost save estimates and potential branch closures in Houston.

Answer

David Zalman (Senior Chairman and CEO, Prosperity Bancshares) reiterated an opportunistic approach to buybacks, confirming no 10b5-1 plan and acknowledging current blackout periods for earnings and mergers. Asylbek Osmonov (CFO, Prosperity Bancshares) projected a standalone Prosperity margin of around 3.50% for 2026, increasing with Stellar's 4.2% margin, driven by bond portfolio repricing and fixed loan repricing. He also expressed high confidence in achieving the 35% cost savings for Stellar, which includes branch consolidation due to overlapping footprints.

David Rochester sought clarification on the expected magnitude of Net Interest Margin (NIM) decline in Q1, similar to Q4 2024, and the nature of 'other loan income' on slide 17. He also asked for confirmation on mid-single-digit expense growth and the trajectory for Live Oak Express gain on sale.

Answer

Walter Phifer, CFO, confirmed the 18 basis points NIM compression range for Q1 is reasonable, noting 'other loan income' was inflated by non-recurring prepayment penalties. He confirmed mid-single-digit expense growth for next year. Regarding Live Oak Express, he stated that doubling gain on sale in 2026 is aspirational and likely less, citing a slowdown in H2 2024 due to SBA SOP changes. William C. Losch III, President, outlined long-term aspirational goals of $1 billion/year production and detailed strategic efforts to enhance capabilities and efficiency.

David Rochester sought confirmation on the magnitude of Net Interest Margin (NIM) compression expected in Q1 2026, referencing Q4 2024 trends. He also asked for clarification on a new 'other loan income' line item impacting NIM and its expected recurrence. Additionally, he inquired about the projected expense growth rate for the next year and the trajectory for Live Oak Express's gain on sale contribution, specifically if it could double in 2026.

Answer

Walt Phifer (CFO, Live Oak Bancshares) confirmed that the NIM compression magnitude in Q1 2026 could be similar to Q4 2024, but efforts to reduce deposit rates and strong growth would help mitigate it. He clarified that the 'other loan income' line was inflated by one-time prepayment penalties from large solar and senior housing loans and is not expected to recur at that degree. He also confirmed a mid-single-digit expense growth rate for the next year. B.J. Losch (President, Live Oak Bancshares) and Walt Phifer (CFO, Live Oak Bancshares) discussed Live Oak Express, stating that while doubling its gain on sale contribution in 2026 is aspirational, the bank is intentionally building capabilities and increasing leads to achieve an aspirational goal of $1 billion in annual production over time.

David Rochester inquired about the increase in non-performing assets (NPAs) and new default trends, seeking color on whether charge-offs are expected to decline or remain elevated. He also asked about the potential impact of an extended government shutdown on loan growth and credit, and quantified benefits of AI enhancements on processing times and the expense base.

Answer

Michael Cairns, Chief Credit Officer, explained that the increase in non-accruals was manageable and expected, stemming from the SBA portfolio and related to small business stress, noting strong past due management and healthy reserve coverage. Walter Phifer, CFO, detailed the playbook for government shutdowns, including pulling PLP reservations to maintain loan growth and secondary market execution. William Losch III, President and COO, highlighted AI's potential to significantly enhance productivity, improve operating leverage, and streamline processes, citing pilots in AI-driven loan origination for small dollar loans.

David Rochester inquired about the increase in non-performing assets (NPAs) and new default trends this quarter, seeking clarity on whether charge-offs are expected to decline or remain elevated. He also asked about the potential impact of an extended government shutdown on loan growth and credit, and later, the quantifiable benefits of AI enhancements on processing times and the expense base.

Answer

Chief Credit Officer Michael Cairns explained that the NPA increase was a continuation of previous trends in the SBA portfolio, with past dues remaining low at 14 basis points, indicating effective servicing. CFO Walter Phifer detailed the government shutdown playbook, including pulling $900 million in PLPs to mitigate immediate loan growth impact, noting secondary market sales could be affected if the shutdown extends past Thanksgiving. President and COO William Losch III highlighted AI's potential for significant technological advancement, emphasizing its role in enhancing employee productivity, improving operating leverage, and streamlining loan origination, particularly for small dollar loans.

David Rochester inquired about the significant multifamily loan growth, particularly from CCFG, asking what drove it and if it signaled a future focus. He also asked about the core expense run rate heading into 2026, given the decrease in Q4.

Answer

Chris Poulton, President of Centennial Commercial Finance Group, explained that multifamily growth was client-driven, capitalizing on distressed or semi-distressed vintage loans from around 2021, rather than a strategic shift. Kevin Hester, President and Chief Lending Officer, added that Community Bank growth stemmed from construction funding in strong markets like Texas and Florida. Stephen Tipton, CEO of Centennial Bank, outlined the expense run rate, noting Q4 included $500,000 in merger expenses, with a standalone growth target of approximately 1% for 2026, plus the impact of the Mountain Commerce Bank acquisition.

David Rochester inquired about the significant multifamily loan growth, particularly within CCFG, whether it signals a new focus, the geographic distribution of loan production, and the outlook for the expense run rate in 2026.

Answer

Christopher Poulton, President of Centennial Commercial Finance Group, explained that multifamily growth stemmed from clients purchasing distressed or expiring multifamily loans/assets, not a strategic shift, and primarily occurred in the Sunbelt and New York, not Florida. Kevin Hester, President and Chief Lending Officer, added that Community Bank growth includes construction funding in Texas and Florida. Chairman John Allison indicated a standalone expense run rate just under $114 million, with a projected 1% growth, plus additions from the Mountain Commerce Bank acquisition.

David Rochester of Compass Point asked about the bank's experience with down-rate deposit betas, the outlook for net interest income (NII) and expense growth, and the reason for the increase in the loan loss reserve ratio.

Answer

Incoming CFO Dan Geddes explained that the down-rate deposit beta is expected to be similar to the up-rate beta of ~45 bps, though the CD portfolio mix may cause a slight lag. He declined to give NII guidance but noted significant securities repricing opportunities in 2025. Geddes and outgoing CFO Jerry Salinas indicated expense growth would not decelerate due to continued investments in expansion and technology. The reserve ratio increase was attributed to strong loan growth and a specific credit, not a deteriorating economic outlook.

Asked for an update on the previously announced plan to exit $2 billion to $5 billion in noncore assets and whether further portfolio analysis for noncore assets is ongoing.

Answer

The company has completed a business review and likes its current businesses. The C&I runoff was related to reducing exposures and hold levels rather than exiting entire businesses. No significant portfolio repositioning is anticipated in the near term, though some minor rescaling of credits might occur.

Inquired about the quarterly expense run-rate for 2024, the updated timing for the Signature Bank integration, and sought clarification on the credit analysis assumptions, specifically whether the reserve build fully captures all expected multi-family repricing risk for 2024 based on current interest rates.

Answer

The Signature integration has been pushed to 2025 to minimize customer impact. Expenses will be highest in Q1 and trend down to the lower end of the guided range by year-end. The Q4 credit analysis was a deep dive that conservatively assumed current rates (no future cuts) and the more punitive SOFR-based repricing option for all multi-family loans coming due in 2024, which is reflected in the increased classified loan balance.

David Rochester requested more specific guidance on the expected Q4 expense increase and asked if the net impact on Q4 net interest margin (NIM) could be stable or positive due to late fee mitigants.

Answer

EVP and CFO Perry Beberman advised looking at the historical Q3-to-Q4 expense increase over the past two years as the best guide. Regarding NIM, he stated that while he does not expect expansion, the benefits from CFPB rule mitigation actions will 'mute' the typical seasonal compression that occurs in the fourth quarter.

David Rochester of Compass Point questioned the bank's capital management strategy, specifically regarding share buybacks, as the TCE ratio approaches 10%. He also asked about liquidity management, including whether excess cash from deposits would be used to grow the securities book and the preference for fixed versus floating-rate securities.

Answer

Chairman and CEO Dominic Ng stated that while the TCE ratio rose, the bank remains "patient and opportunistic" in its approach to capital. Regarding liquidity, he mentioned the bank might let some higher-cost deposits run off and is not looking to over-leverage the balance sheet. He added that they are thoughtful about the fixed vs. floating mix in the securities portfolio, noting recent rate backups have presented new opportunities.

David Rochester of Compass Point Research & Trading, LLC asked for specifics on the decline in title business deposits, customer growth in that segment, and the status of a large client won in Q2. He also questioned the dollar impact of stock price on compensation expense and the Board's rationale for hesitating on a share buyback.

Answer

CEO Raj Singh estimated the title business accounted for about one-third of the $430 million NIDDA decline and noted strong customer acquisition continues. He confirmed a large client win from Q2 has a complex, year-long implementation and could add a couple hundred million in deposits. EVP & CFO Leslie Lunak stated the railcar expense would be about $8 million in Q4 and the majority of a $6.2 million compensation increase was from stock price moves and incentive accruals. Mr. Singh explained the Board's buyback caution was due to market volatility, geopolitical uncertainty, and the small potential EPS impact.

David Rochester asked for the outlook on noninterest-bearing (NIB) deposits and inquired about the drivers of C&I loan growth, specifically when a meaningful increase in middle market line utilization might occur.

Answer

CFO Daryl Bible stated that NIB deposit runoff has slowed significantly on the commercial and consumer side, and he expects the NIB mix to stabilize around 30% (excluding brokered deposits). Regarding loan growth, he noted that while line utilization is still down, possibly due to pre-election caution, the bank continues to grow lines and customer accounts, positioning itself for when clients increase borrowing.

David Rochester of Compass Point asked about the funding mix assumptions for earning asset growth within the NIM guidance, particularly the roles of CDs and borrowings. He also questioned the expected duration of noninterest-bearing deposit outflows and the bank's comfort level with its CET1 ratio dipping below 9%. Finally, he requested current pricing details for key loan products.

Answer

CEO and President Michael Roffler stated that loan growth would be largely funded by deposits, with a greater mix of CDs, supplemented by borrowings. He noted that average deposit balances per account are returning to pre-pandemic levels and affirmed there is no issue with the current capital levels, as the bank remains opportunistic. Chief Banking Officer Mike Selfridge provided current lock pipeline rates: single-family mortgages around 4.80%, multifamily at 5.4%, commercial at 5.6%, and capital call lines at prime minus 75-100 basis points.

David Rochester inquired about the strength of the loan pipeline heading into Q3, activity levels in the capital call business, and current yields on new loans and securities. He also asked about the net interest margin (NIM) guidance and expectations for deposit betas in the current rate cycle.

Answer

Chief Banking Officer Mike Selfridge stated the loan pipeline is up significantly year-over-year but down slightly from the prior quarter due to seasonality. He provided new loan yields, including single-family at ~3.7%. Acting CFO Olga Tsokova detailed new securities yields, with munis at a 5.25% TEY. CEO Mike Roffler emphasized the bank's focus on stability, feeling good about the high end of the NIM range. Tsokova added that deposit betas are expected to be slightly higher than the 19% seen in the last cycle.