David Rochester

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.