Signature Bank (SBNY) 2020 Q4 法說會逐字稿

Welcome to Signature Bank's 2020 Fourth Quarter and Fiscal Year-end Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Senior Executive Vice President, Corporate and Business Development. Today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin.

Thank you, Lori. Good morning, and thank you for joining us today for the Signature Bank 2020 Fourth Quarter and Year-End Results Conference Call.

Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Thank you, Joe. This conference call and oral statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are different to predict and may be beyond our control.

Forward-looking statements include information concerning our future results, interest rates and the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings, business strategy and the impact of the COVID-19 pandemic on each of the foregoing and on our business overall.

As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions that could cause actual results to differ materially from those in the forward-looking statements. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made.

Now I'd like to turn the call back to Joe.

Thank you, Susan. I will provide some overview into the quarterly and annual results. And then Eric Howell, our Senior EVP of Corporate and Business Development, will review the bank's financial performance in greater detail. Eric and I will address your questions at the end of our remarks.

Signature Bank continued to experience extraordinary growth during the country's protracted and challenging recovery from the COVID-19 pandemic. Our business philosophy of a client-centric, single point of contact model led by experienced group directors continues to distinguish us particularly in times of distress. Additionally, the bank has an accelerating multifaceted growth profile with traditional private client banking teams leading the charge in New York, San Francisco and Los Angeles.

Further fortifying the bank's market position are a multitude of national businesses, including Signature Financial, asset-based lending, fund banking; venture banking; digital banking, including Signet; and specialized mortgage banking solutions. The collective strength of our franchise led to an unbelievable quarter of record deposit growth, record loan growth, record pretax pre-provision earnings and record net income. We look forward to a healthier 2021 as recovery from the COVID-19 pandemic commences.

Now let's take a look at earnings. Let's take a close look at earnings. Pretax pre-provision earnings for the 2020 fourth quarter were $261.5 million, an increase of $45 million or 21% compared with $216.3 million for the 2019 fourth quarter. Net income for the 2020 fourth quarter was a record $173 million or $3.26 diluted earnings per share compared with $147.6 million or $2.76 diluted earnings per share reported in the same period last year. The increase in income was predominantly driven by substantial asset growth of $23.3 billion offset by the investments we made in new businesses, including our West Coast expansion.

Looking at deposits. Deposits increased a record $9 billion or 16.5% to $63.3 billion this quarter, while average deposits grew a record $10.4 billion. For the year, deposits increased a record $22.9 billion, and average deposits increased a record $12.5 billion. Noninterest-bearing deposits of $18.8 billion represent a high 30% of total deposits. Our deposit and loan growth led to a record increase of $23.3 billion or 46% in total assets for the year, which reached nearly $74 billion.

Now let's take a look at our lending businesses. Core loans or loans excluding PPP during the 2020 fourth quarter increased a record $2.7 billion or 6.2% to $47 billion. For the year, core loans grew a record $7.8 billion or 20%. The increase in loans this quarter was again driven primarily by new fund banking capital call facilities. This is the ninth consecutive quarter where C&I outpaced CRE growth, furthering the rapid transformation of the balance sheet to include more floating rate assets as we continue to diversify our portfolio.

Nonaccrual loans were $120 million or 25 basis points of total loans compared with $81 million or 18 basis points for the 2020 third quarter. Our date -- 30- to 89-day past due loans increased to $234.9 million. It is important to note that $88.3 million of the 30- to 89-day past dues were caused by processing and documentation delays given COVID-19 circumstances, but we are now current. Our 90-day-plus past due loans remained very low at $5.8 million.

Net charge-offs for the 2020 fourth quarter were $11.4 million or 10 basis points compared with $10.5 million for the 2020 third quarter. The provision for credit losses for the 2020 fourth quarter was $35.6 million compared with $52.7 million for the 2020 third quarter. This brought the bank's allowance for credit losses to 1.04%, and the coverage ratio stands at a healthy 423%. I would like to point out that if we took -- if we look at the ACL ratio, excluding very well-secured fund banking loans, the government-guaranteed PPP loans would be much higher at 1.41%.

Turning to modifications. As of December 31, 2020, the bank has entered into COVID-19 principal and interest modifications of $1.3 billion or 2.7%. Of that balance, $107 million remain in short-term modifications. We fully anticipate that we will have increased nonaccrual loans and charge-offs in the coming quarters due to the effect of COVID. But given the level of our allowance for credit losses, where we prudently doubled the allowance, adding $258 million since the adoption of CECL, we believe we are adequately covered for what may come.

Now on to the greatly expanding team front, where we had much success. In 2020, we added a total of 20 private client banking teams: 2 in New York, 5 in San Francisco and 13 in the Greater Los Angeles area, marking our entry into the Southern California marketplace. The bank now has a total of 116 private client banking teams, of which 23 are located on the West Coast.

At this point, I'll turn the call over to Eric, and he will review the quarter's financial results in greater detail.

Thank you, Joe, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the fourth quarter reached $395 million, an increase of $6.3 million from the 2020 third quarter. Net interest margin for the quarter declined 32 basis points to 2.23% compared with 2.55% for the 2020 third quarter. The entire decrease and then some was due to excess cash balances from significant deposit flows, which impacted margin by 46 basis points.

Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2020 fourth quarter decreased 41 basis points from the linked quarter to 2.75%. The decrease in overall asset yields was again driven by the excess average cash balances, which grew from $5.6 billion to $12.5 billion during the quarter. Additionally, asset yields continue to be affected by lower reinvestment rates in all of our asset classes. Yields on the securities portfolio decreased 46 basis points linked quarter to 2.13% due to the decline in market rates as well as the bank investing in floating rate securities, and our portfolio duration remained low at 2.2 years.

Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages decreased 6 basis points to 3.6% compared with the 2020 third quarter. This was mostly due to lower origination yields. And excluding prepayment penalties from both quarters, yields decreased by 4 basis points.

Now looking at liabilities. Our overall deposit cost this quarter decreased 9 basis points to 42 basis points due to the low interest rate environment. We anticipate this downward trend to continue in 2021. During the quarter, average borrowing balances decreased by $744 million to $3 billion. The overall cost of funds for the quarter decreased 9 basis points to 57 basis points driven by the reduction in deposit costs and decreased average borrowings, which was slightly offset by the addition of subordinated debt with a 4% coupon.

On to noninterest income and expense. Noninterest income for the 2020 fourth quarter was $24.2 million, an increase of $8.2 million or 51% when compared with the 2019 fourth quarter. The increase is mostly due to a rise of $5.5 million in fees and service charges as well as an increase of $2.4 million in trading income. Noninterest expense for the 2020 fourth quarter was $157.7 million versus $138 million for the same period a year ago and $19.6 million or 14% increase was principally due to the addition of new private client banking teams.

And despite our significant team hirings and margin compression from significant cash balances, the banks actually gained operating leverage. And as a result, our efficiency ratio improved to 37.6% for the 2020 fourth quarter versus 39% for the comparable period last year and 38.9% for the 2020 third quarter.

And turning to capital. During the quarter, the bank successfully raised $730 million in noncumulative perpetual Series A preferred stock, which qualifies as Tier 1 capital. Additionally, the bank issued $375 million in subordinated debt, which qualifies as Tier 2 capital. All capital ratios remained well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet as evidenced by a Tier 1 leverage ratio of 8.55% and a total risk-based ratio of 13.54% as of the 2020 fourth quarter. And finally, the bank paid a cash dividend of $0.56 per share of common stock.

And now I'll turn the call back to Joe. Thank you.

Thanks, Eric. I'd like to thank my colleagues, a number of who are listening on the call today, who have demonstrated their dedication to our clients and their needs during this pandemic. Times like these, our clients truly value the level of care and advice that my colleagues provide. And our performance for the year reflects their extraordinary efforts and the strength of our franchise as we continue to execute on many, many fronts.

2020 was truly a remarkable year of growth and achievement for Signature Bank. On the deposit front, which is our key metric, we delivered unbelievable record deposit growth of $23 billion or 57%. And we reduced the cost of deposits from a high of 121 basis points in Q3 2019 to 42 basis points at year-end with room for further reductions. Demand deposits increased a record $5.7 million -- excuse me, $5.7 billion for the year and remain at a high 30% of total deposits.

And most importantly, our deposit growth came across the board from our existing teams to all of our new businesses. There were literally 26 traditional banking teams in New York that grew over $100 million each. Our newly established teams on the West Coast grew over $1 billion. The specialized mortgage banking solutions team grew over $3.5 billion. The Venture Banking Group grew nearly $1 billion, and our digital banking team grew over $8 billion in deposits. We have clearly distinguished ourselves as the predominant bank in the digital space.

Turning to loans. We had record core loan growth of nearly $8 billion, driven by another of our new businesses, the Fund Banking Division, which delivered nearly $7 billion in loan growth. Additionally, Signature Financial had another strong year and surpassed $5 billion in outstanding loans and ranks as the 15th largest bank lender in this space, a truly remarkable accomplishment for that team. Congratulations, guys. Furthermore, as planned, we held our commercial real estate loan balances flat over the last 2 years and made great strides in reducing our CRE concentration to 276% from 551% at year-end 2018.

Looking at earnings. The bank's pretax pre-provision earnings grew by $136 million or 16% for the year, and we had a strong ROE of 10.75% despite a heavy amount of provisioning and margin compression due to excess cash balances. Fee income or noninterest income grew by 20% or $13.5 million for the year, and several of our fee income initiatives are just starting to take hold. Additionally, we improved our already best-in-class efficiency ratio during the year to 37.6%.

On the capital front, we meaningfully improved our capital position by over $1 billion with the issuance of $375 million in subordinated debt and $730 million in preferred stock. Moreover, we maintained our dividend while turning off our buyback program to support the tremendous level of growth. And most importantly, we set the stage for future growth with the hiring of 20 private client banking teams and the opening of 5 new offices in the Los Angeles marketplace.

Everything we said we would do this year, we did. Everything we said we would do this year, we did. Our growth for 2020 was equivalent to acquiring a top 50 bank, but we did it organically and without expending shareholder value. Signature Bank enters 2020 (sic, 2021) as a strong financial institution, and we very much look forward to years to come.

Now we are happy to answer any questions you might have. Lori, I'll turn it back to you.

(Operator Instructions) Our first question comes from the line of Ken Zerbe of Morgan Stanley.

Fantastic deposit growth this quarter. I mean just downright stunning. But I guess my question on the deposit growth, are you guys earning a positive spread on the new deposits coming in?

No. That's the issue. We have to deploy it and we have to deploy it quickly. So the new deposits coming in, even though they're coming in at a much lower cost than we had just recently, we're still not making the spread.

And that's clearly affecting our net interest margin, but this is a trade-off that we'll take every time. We've been through cycles before. We've been through rising rate environments before. And when rates rise, we will see the deposit growth moderate. But what we'll also see is continued loan growth, and we'll have -- we have the deposits now to fund the substantial loan growth that we have in the future. So we're loaded for bear. And this is a very high-class problem for us to have, Ken.

Yes. Ken, we are taking market share. Like for instance, with the mortgage servicing -- specialized mortgage servicing team, they grew by $3.5 billion this year. That's market share that they're taking, and we're getting an opportunity to bring the business in. So we'll take it all day and deploy it later.

Yes. I guess, I think, like I said, it's -- your quarter was very awesome in my view. But I guess with the negative spread that you're getting, I mean, it just -- like, I could see how you would gain share by paying a much higher rate than the market is currently paying. So the question is just like, do you feel that you have to keep paying this elevated yield on your new deposits? It seems like there might be some room to lower your new deposit yields that you're offering and still definitely more than support your loan growth.

Yes, we had 42 basis points cost in the quarter -- for the fourth quarter. The month of December was down to 41 basis points. And in January, thus far, we're at 37 basis points. So we're continuing to bring the rate down, we'll be probably in the mid- to low 30s by the end of the quarter. So we brought it down 9 basis points in the fourth quarter. There's no reason why we can't bring it down 9 basis points or more in the first quarter of 2021.

Got it. Okay. And then maybe just switching gears a little bit. Joe, I think you mentioned that you do expect higher net charge-offs over time, which is a very reasonable expectation. But one of the concerns around Signature has just been the potential for significant loss content in the CRE portfolio. Can you guys help quantify -- when you say higher charge-offs, like what exactly are you thinking when you say that?

Well, we're not seeing -- what we're saying and what was happening is not necessarily meeting. I'll tell you what I mean by that. We're not seeing charge-offs right now coming through. We expect it to be more than it had been in the last couple of years, which was pretty negligible. But our clients are just not handing back the keys. We've had some charge-offs in the last 2 quarters, and they've been some CRE retail. But with the CARES Act, a lot of the clients are saying, "I have an opportunity to get by during the pandemic," and then start paying again. And that's why we're not seeing a lot of charge-offs. But we expect it to be higher than it had been in 2018, 2019, which I said was pretty negligible.

Yes. In fact, we've challenged our team to get ahead of this to find the bad credits now to identify and deal with them. And quite frankly, we're just not finding them. Our clients see their properties, their businesses as their livelihood in the future. They're not at a point where they want to give up. With the vaccines and the news of the vaccines, more vaccines on the horizon, the potential stimulus that will come from the new administration gives them a lot of positive things to look forward to in the future, and it's just giving them less reason to want to give up. So as much as we're looking for the charge-offs, and we're anticipating we'll have them, they're just not coming through fruition.

I mean we've doubled our allowance to over $0.5 billion during this year. So we're certainly well prepared for it.

Our next question comes from the line of Dave Rochester of Compass Point.

On the NIM or the NII outlook, whichever, I guess, is easier to talk about. I was wondering what your thoughts were there just following the curve steepening we've seen recently, and then your outlook on the deposit cost there that you mentioned being in the low to mid-30s at some point. And then maybe as a part of that outlook, you guys obviously have a ton of cash on the balance sheet. I was just curious to hear your thoughts on how fast you're willing to deploy that into securities and then how much more in the way of borrowing should pay down for this year?

Yes. There's a little bit more -- I'll take the latter part first. There's a little bit more on borrowers to pay but not a substantial amount. So we won't see too much of a savings there, Dave. We do, as Joe pointed out, we hope to get the deposit cost down another 9 basis points or so, and we'll be in the mid- to low 30s come quarter end.

Certainly, we have ability to deploy on the asset side. We can really put $1 billion to $2 billion per quarter to work in the securities portfolio and another $1 billion to $2 billion per quarter to work on the loan side. So we're going to have $2 billion to $4 billion in asset growth. I mean that's a little bit easier for us to predict. The hard part is the deposit flows. Thus far, this quarter, it slowed down a little bit, but we still have growth. We certainly don't anticipate $8 billion worth of deposit flows this coming quarter, but we expect it to continue to happen, which is great.

So all that being said, the NII will be up, and that much we can predict. And it should be up pretty nicely. The NIM is impossible at this point to predict because of the nature of deposit flows, and it's hard to say. More are going to come in, and we'll be able to make a meaningful impact to all the cash that we're sitting on. But we should have some pretty substantial NII growth.

That makes sense. So when you're talking about $1 billion to $2 billion in securities growth a quarter and $1 billion to $2 billion in loan growth a quarter, is that right? So you're getting $2 billion to $4 billion in asset growth a quarter or you cap that at $3 billion just for capital concerns? Or what are your thoughts?

No, I mean, we're not concerned about capital. We have ample ability to drive capital generation through earnings. We are in 13.5% return on common equity this quarter. So the earnings are there to get to a normalized provision, and I think we're going to get there relatively soon. That gives us even more earnings power. Like I said, I don't think the deposit growth is going to be quite as robust as it was last year. So we'll have a little bit less growth there. So earnings should really be supportive of our growth, and we feel very comfortable where we are on the capital front.

Yes. Right. And where are you seeing asset pricing today just on securities? I know you said you're still doing some of those floaters, which are sometimes lower yielding. And then on the capital call lines, where those pricing would be?

On the capital call lines, the pricing has become a little tighter. But it's LIBOR-based, and where it's become tighter is on the floor because we like to have the floor of 50 basis points or thereabouts, and that's becoming tighter. But the pricing is anywhere from LIBOR 150 to LIBOR 225.

Yes. And security -- on the security side, the floating rate securities that we're putting on are anywhere from 40 to 60 basis points. And then other investments are in the high 1s, I'd say. So blended, we're probably coming in a little bit over 1% on security reinvestment. We're still being selective on the long side as we do anticipate rates will continue to rise, at least on the longer back end of the curve.

And for the first quarter, we're going to have the PPP loans. Thus far, for the last 2 days, we have a little bit more than 2,000 applications and exceeding $600 million. So we have -- we've deployed a significant number of personnel to be ready to get the applications into the system and have the SBA give us an SBA number. So the process is done, and we hope to get up to $1 billion, if not more.

Yes. Sounds good. Maybe just one last one real quick on the deposit side. I know you guys bank cryptocurrency firms. I was just wondering if you could talk about what you do for these guys. And I know you mentioned the strong deposit growth in digital. That's been a nice positive to the story. I was just curious how big of a chunk of that is coming from crypto customers and then what your outlook is for growth in that segment.

Well, there's a number of different types of clients, whether it's stable client or OTC desks or digital asset exchanges or blockchain type tech companies and others that we bank in that space. So we have approaching -- I think we've just crossed over $10 billion in deposits with our digital asset team. So it's been a very solid area of growth. We've clearly become the preeminent player in that space, so we're very excited about what's happening there. It's obvious that the digital assets and cryptocurrencies are not going away, and there are something in the future. We're not sure who the winners and losers are going to be, but we're very happy that we're the bank for all those various firms.

And what helps there is the Signet platform that we announced on January 1, 2019, very exciting, 24/7 by 365. The team that handles that does continuous enhancements, and there's a world beyond cryptocurrencies where we can have other ecosystems using the platform. So it's very exciting. It's one of the areas -- one of the few areas where we're staying ahead of the pack and not being a follower but being the leader technologically wise.

Your next question comes from the line of Ebrahim Poonawala of Bank of America Securities.

I guess, Eric, just in terms of expense outlook, you previously talked about just expense growth generally in terms of a quarterly basis peeking out maybe early part of the year. So give us some color on expense growth and how that translates into operating leverage and efficiency ratio based on what you see for the year.

Yes. We anticipate hiring a reasonable number of teams early on in the year, probably 10 to 15 teams, but not the 20 teams that we hired in 2020. So we should see our expenses really start out in that 14%, maybe 15% range, but hopefully we keep it to 14% and then trend down slowly over the course of the year. We gained operating leverage this year, right? Even though we had a declining NIM, we are sitting on a ton of cash. We hired 20 teams, so we have a very powerful model that can really drive net income, right? And we have some leverage yet in our infrastructure.

So we should see positive operating leverage, especially as we put the cash to work and have more on the earnings side. And I think we'll be able to keep expenses in check and gain efficiencies.

Got it. And on the cash, going back to just the negative carry, $12.5 billion in the fourth quarter. From what I have, I think you said previously that you see that number should be maybe about $2 billion to $3 billion where you feel the cash position should be adequate. So is it fair to assume that there's about $9 billion to $10 billion that you will redeploy towards loans and securities over the next few quarters? Just how do you think about that?

I think it's going to take us a little bit more than a few quarters, but yes, absolutely. We should have $10 billion flowing into interest-earning assets over the course of this year, at least.

And that number doesn't stay static because more deposit is going to continue to come in.

Right. Right. And I'm not sure if you're able to disclose, but going back to the earlier question around bringing in deposits that may be marginally higher rates than what the market offers. Like, I'm assuming the new deposits that are coming in are fairly much lower than the low to mid-30s where you expect the total cost of deposits going through. Any color around that?

And just talk to us, Eric, in terms of why it is worth paying up for these deposits in terms of what franchise value these add in the near term and over time for Signature?

Well, I think, as an example, the mortgage servicing -- specialized mortgage servicing team. They bring in, on a daily basis, tremendous number of accounts of DDA noninterest-bearing and then some of the escrows that had big dollars that stay -- that flow in and out much less frequently, we're paying right now in the 30% -- 30 basis point range.

But when you combine the 2, 30 and then the DDA, you're coming down below 30. So I think everyone focuses on NIM, but the real place to focus is on the efficiency because we're a lot more efficient bringing these deposits in than a retail group. A retail group will have much lower deposit costs, but they will have high real estate costs, high marketing and high advertising costs, but we don't have that. So that bodes well for the efficiency ratio.

But we have a lot of room. Like I said earlier, we brought the cost down to 37 basis points from 41 basis points in December to January now. So within 1 month, we're down 4 basis points, and we continue to drive it down further. We don't have that retail component. So we don't have the expense, but we also don't have the retail component where we can drop the rates as quickly as you would for the large clients that we have in our portfolio.

That's helpful. And just one quick one, Eric. Just the outlook for tax rate for the year.

I'd use 28%. We had some onetime state tax true-ups as we filed those returns, so that brought our rate down. And we're a little bit higher than we probably should have been earlier in the year. So we should get back to a 28% effective tax rate for next year, barring any changes, obviously, like taxes.

Your next question comes from the line of Jared Shaw of Wells Fargo.

Maybe first, going back to Signet and the growth in digital, and that's great deposit growth. Can you share with us how else there's -- what other ways can you monetize those relationships? And I'm looking at the fee income line as well, up almost 40% this quarter. Is that a level we can see growth from? And is that dependent upon or conditioned upon Signet as well? Or how should we be thinking about other ways of monetizing beyond just deposit balances?

Well, the digital clients right now are generating very little fee income. We're improving our foreign exchange system to the point that the digital clients will be using foreign exchange quite a bit. So the team that handles that is waiting for the improvements to happen in our FX system, and we could drive some foreign exchange there. But Signet drives really deposits. Right now, we're not charging fees and getting the new ecosystems on, and we'll probably won't start fee income on Signet for some time until we get a large amount of ecosystems on there. So the fee income that's being driven right now in our institution is nondigital.

Right. And we've certainly -- we're pleased with the growth that we've seen in the fee income. A lot of that's coming from the new teams that we brought on board, whether it's the mortgage banking team, which is pretty fee intensive; or venture or the fund banking team, which generates a lot of unutilized fees. Joe talked about foreign exchange that we're putting a new system in place that should help us to really bolster profits there. And all the new groups that we've added, in particular, the West Coast, will really benefit from better foreign exchange capabilities. So that's a way for us to continue drive fee income.

We're working on a new credit card for us to issue. We'll need that for the West Coast as well as our venture team. So that hopefully will come out midyear, and we'll start to see some revenues generated from that. Our trade finance group, we continue to build that out and starting to see some nice traction gain there. And really, we're talking to our bankers more and telling them that, you know what, we provide an unbelievable level of service to our clients.

And we certainly saw that play out in this current environment where other -- some of our clients would tell us they couldn't even get a banker on the phone at XYZ Bank, right? Well, we need to be paid for that, right? The fact that we've got a team that is there all the time for their clients' needs, we need to get paid for that. So we're focusing on that with our banking teams, and that also will hopefully drive revenues.

Okay. That's great color. And then I guess shifting to credit. Obviously, you sound optimistic when you're talking about the loss content and the potential losses and the loans that you're working with the borrowers on here. Maybe can you share with us, as you've gone through year-end and you did the modifications in the second round of deferrals, I guess, why do you feel that confidence, whether it's in the loan-to-value or debt service coverage ratios or vacancies? Maybe just give us an update on sort of the strength of that underlying portfolio and where you're getting that confidence from.

It's somewhat everything you said, but added on top of that is that in the commercial real estate world, we deal with these multigenerational, high net worth families that do deals with other partners that are multigenerational, high yield, high-earning families. And they want to keep the buildings, particularly in multifamily, in their portfolios, and they stepped up when they've had to. And that gives us the confidence that the type of clients that we have are not a client that has 1 building that relies on that 1 building for their livelihood. We have these large clients that have multiple buildings that some may be hurting but most are not, and they're able to take care of.

What gives us confidence also is that on the deferrals, the fact that they're not paying us on a principal and interest deferral, they still have operating costs. They have the cost to operate the building. They're still paying taxes. They're paying insurance. So that gives us confidence that when the pandemic starts to subside, that they'll have the cash flow when rents start moving up to pay the interest-only piece and then pay the principal and interest piece for the third leg of the deferral. They just don't want to give up on keeping their properties.

I think what's different now than any of the cycles in the past is that we have the CARES Act, and the banks can be more flexible for them, and it's more of a timing issue than it is a cycle.

And then -- that's great color. And then I guess, when you look at that second round of PPP, are you going to be really able to target it to those borrowers that may need the most? Or I guess, how important is that second round of PPP to the loans that are already in deferral or modification?

They really aren't -- they're really separate. I think the PPP is going to help them, but it's not going to help them pay their loans. It's going to help them pay the employees so that they can survive while the pandemic is going on. I think it's more of a humanistic piece than it is paying for the rent.

Your next question comes from the line of Matthew Breese of Stephens Inc.

Following up on the credit question. So the 6.6% of loans that weren’t full P&I deferrals, could you just provide us with the composition, the LTVs and the types of modifications being provided there? And what was that balance last quarter?

Not sure what the balance was last quarter, but it's -- those are predominantly interest-only loans where we modified into an interest-only structure in mind with what our LTVs were on the entire portfolio [mid 50] on an LTV 1.25 to 1.45 on a debt service coverage. Those loans, we're really not concerned about. The clients are paying us interest-only or interest-only plus partial principles. So not overly concerned.

Okay. And that debt service coverage was as of most recent or at the time of underwriting?

No, at the time of underwriting.

Okay. Understood. The second question was just on loan growth for this year. In 2020, fund banking was the primary driver. And I recognize the team is still fairly new. I'm just curious how much of the growth this year was driven by the teams recapturing old customers versus general private equity market tailwinds? And then looking ahead, how much do you think the Fund Banking Division will contribute to loan growth in 2021? What other verticals will grow?

Well, I think the fund banking team will still lead. We'll have Signature Financial, which has passed $5 billion in outstanding, probably somewhere between $400 million and $500 million. So that's $400 million, $500 million in growth. The Venture Group could probably have somewhere upwards of $100 million to $400 million. We have then -- the teams in Los Angeles and San Francisco are really truly traditional C&I teams, and we expect several hundred million in growth there.

The PPP loans will discount because we don't know how long they'll stay on. The Fund Banking Division could do probably anywhere between $1 billion to $1.5 billion a quarter. And then we have 2 initiatives that we're discussing right now to bring on 2 verticals that will be asset generators. We haven't disclosed what they are because we're still in the midst of bringing them on board, but they will contribute in the second half of the year on the asset side.

Okay. Understood. And just to be clear, the Signature Financial, $400 million to $500 million to [VC], that's all on a quarterly basis, not for the year, correct?

No, that's for a year.

That's for the year.

Okay, with fund banking doing $1 billion to $1.5 billion a quarter?

Right. Like Signature Financial, it's a lot more short term. So they have to overcome a lot of the amortization. They could be doing several billion, but it's net $400 million to $500 million.

Okay. And -- I'm sorry, the last one was just on digital and Signet banking deposits. As you wind back the tape and you look at when you first hired the digital banking team, you mentioned catering to the institutional investors playing in that space. It was a different time for crypto back then. I think folks are much more skeptical. Can you just talk a little bit about how sentiment adoption investing in crypto, how appetite and interest from the institutional investors changed over the past couple of years, but really over this year? And what the growth opportunity for this line of business could be?

Well, it's growing by leaps and bounds. We are doing -- we were only taking institutional deposits in this space. And in fact, that's pretty much what we're doing. But for the exchanges, with the top 5 exchanges we have as clients, we're allowing for some retail funds flow, and we're doing enhanced compliance. Now these exchanges have been given licenses by the state. But the regulators are starting to regulate the business, and we're only doing with 5 some retail. But for the most part, we're still institutional, and they just keeps on growing by leaps and bounds. I think what drove it in part is the pandemic.

Right. And with that, do you see enhanced or outsized growth on the back half of the year than the first half?

Yes, it's likely. Yes. I would agree with that. We would agree with that.

Yes.

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

So just to start. So the 6.6% of loans that are COVID-19 modified, it's still not clear to me what's exactly in that bucket. Are those loans on deferral? Or are they not on deferral?

Those are loans that were modified to an -- predominantly modified to an interest-only structure. So there's loans that are on full payment deferral, the P&I full payment deferral. That's the $1.3 billion that we disclosed in the table. And then there's other loans that were modified to an interest-only structure.

Okay. So essentially, they are being deferred, right? I mean the least principal payments being deferred.

Right. Principal is being deferred. That's right.

Principal's being deferred. And Eric, what's the term of these? Like, how long are the -- are you providing these deferrals for?

Somewhere -- anywhere between 6 and 12 months.

Okay. Got it. Yes. I think what I...

So what they do is the ones that pay, the ones that are paying interest only are paying their insurance, they're paying their operating costs and they're paying their taxes, and we're giving them a little relief. So it could possibly be -- maybe it would be a TDR. So instead of it being a TDR, it's an interest-only modification.

Right. So Joe, if we think about it from a big picture view, the NPLs are relatively low. You still have relatively high deferrals, and the CARES Act modifications also seem relatively high. But if you thought either of those 2 buckets were not going to pay you at the end of this deferral term, they would have to be an NPL today, correct? I mean you're not postponing moving them to NPL.

We would not postpone them. If we believe someone is not going to pay us, they will be moved to nonperforming. If we believe somebody is not going to pay us, we'd also take a charge. The specific -- well, we put a specific reserve on it, right? As an example, I won't give the amounts or tell you who the client is, but we have one situation where the client is paying, but we don't believe that it's going to end up being good. So that has a specific reserve on it.

Yes, okay. Yes. Okay. That's helpful. And then to shift directions to the growth side. So we used to talk, not that long ago, I think, it was actually 2020, of $3 billion to $5 billion per year was the asset growth target, and you did $23 billion in 2020. What is a reasonable target now as we think about Signature Bank in its current form?

Well, as you know, what we talk about, Steve, is that we have the ability to grow securities $1 billion to $2 billion a quarter, the ability to grow loans $1 billion to $2 billion a quarter, that basically sets up to $2 billion to $4 billion in asset growth per quarter. So you're looking at anywhere from $8 billion to $16 billion in growth. We've put in place some very meaningful businesses over the last couple of years that will really allow us to drive future growth.

We wrote on all these new initiatives, which are now full-fledged businesses. We didn't know how quickly they would come to fruition. So the $3 billion to $5 billion for the year, we didn't realize it was going to be $3 billion to $5 billion per quarter.

Yes, yes. I guess what I'm trying to drill down to also, so you grew deposits $23 billion, but loans grew by $10 billion in 2020. And when we think about this mix, is there -- and I know you said there might be new teams coming on the asset side. But should we expect the loan-to-deposit ratio, which I think was like 77% range? Is there enough on the asset side to absorb the deposit verticals all contributing? Or do you think the loan-to-deposit ratio from here just continues to trend lower through the year?

It will probably trend a little lower initially because we are going to have, we think, these 2 new verticals on the back end of the year, the second half of the year. So that will mean that we'll do much more asset generation in the second half than we would in the first half. So yes, that ratio could be -- come down slightly.

Steve, we've been through cycles, right? And we've seen when rates rise, right, deposits tend to find other uses, whether it's people building their business or investing in off-balance sheet investments that can earn them more. And we've seen deposit growth then slow down, right? And that's when we'll ultimately be able to take the current deposits that we have, really deploy them and maximize our earnings potential.

But the important thing -- and I think people are losing sight of this a little bit. We grew by about $10 billion this quarter, and we returned 13.5% return to common equity shareholders. I mean what other bank is doing that? So now imagine putting the cash to use, and what does that do for earnings? Tremendous amount of earnings power in our balance sheet right now.

And we're continuing to drive down the cost of deposits. Like I said, we went from 42 for the quarter to 41 in December to 37 thus far in January. So we have a little more room to drive that and create more ROE.

Your next question comes from the line of Chris McGratty of KBW.

Most of the questions have been answered. Just a couple of nitpicky ones. Joe, can you remind us -- or Eric, to remind us the remaining PPP fees that are scheduled to come through in the next couple of quarters?

We haven't really forgiven that much. So it's a little bit of a guess, but it's got to be around $50 million still that we have to come through.

$50 million? Okay.

Yes.

Yes.

And then on the noninterest income, going back to that for a moment. A couple of quarters back, you used to have an amortization line that ran through it, and there was an offset on the tax line. That seemingly has gone away. Maybe it's being masked by some other items, but how do we think about that other noninterest income line?

We reclassified that at the beginning of the year. So we took that out of the expense, out of the noninterest income line. It was a negative noninterest income component, and we moved that down into taxes. So that's why our tax rate, our effective rate bumped up at the time from 25% to 28%.

But we also took out the previous year. So when we do -- when we're saying about the growth, that growth is apples-to-apples because we reclassed previous year’s as well.

Okay. And then if I'm just looking at that fees, that fee line was, call it, $24 million this quarter, a little over $20 million if you back out the bond gains last quarter. These are kind of a stepped-up run rate that's sustainable is what you're messaging?

Correct. That's right.

Your next question comes from the line of Mark Fitzgibbon of Piper Sandler.

Just follow-ups to prior questions. I guess I'm curious, do you have any plans for new lending businesses to sort of help sop up some of the liquidity?

Yes. We actually have 2 initiatives that just -- we're in the midst of discussions, but we should have them on board sometime in the next -- certainly this quarter. And then we'll start seeing the fruits of their labor in the second half of the year. And then both initiatives, they're both asset generators.

And they're scalable right away?

It will take them 3 to 6 months to get up and running for sure. One is a bit more scalable than the other. But realistically, we'll have some impact to the fourth quarter numbers, I'd expect, but more so really in 2022, where they'll really be able to ratchet it up.

We're not trying to be coy about it. It's just that we haven't brought them on board yet.

Fair enough. Just, Joe, correct me if I'm wrong, but I thought you had said in the past that some of the large deposits coming in the second half of 2020 might not be that sticky, that there were some that maybe were temporarily parked. Do you see sometime during 2021, some of those flowing back out?

There's some fluff. There's always been some fluff. We had some very large deposits during the year that were class-action deposits. We had 3 -- believe it or not, we had $3.7 billion or nearly $4 billion of deposits. You don't see in the end of the third quarter or end of the fourth quarter because it came in the beginning of the fourth and left during the month of December. So we had another $3.7 billion in deposits, but it was all DDA. And so we saw about $4 billion flow out.

We expect that there'll be some fluff. In fact, we expect that when rates rise, some of that money will go off balance sheet to money market mutual funds. But we're okay with that because we don't use capital, and we get a fee for putting it off balance sheet. In fact, it wasn't too long ago when we get $3.250 million a quarter. And today, we're getting less than $200,000 a quarter on fee income for off balance sheet. So we expect some of that to flow out. It won't reverse the growth, it just slows it down a little.

This concludes our allotted time and today's teleconference. If you would like to listen to a replay of today's conference, please dial (800) 585-8367 and refer to conference ID number 4079502. A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your lines at this time, and have a wonderful day.