Signature Bank (SBNY) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Signature Bank's 2007 second quarter results conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded Thursday, July 26, 2007.

I would now like to turn the conference over to Joseph J. DePaulo, President and Chief Executive Officer, and Eric R. Howell, Chief Financial Officer of Signature Bank. Mr. DePaulo, please go ahead.

Good morning, and thank you for joining us today for the Signature Bank 2007 second quarter 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 all 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. Forward-looking statements include information concerning our future results, interest rates, loan and deposit growth, operations, new private client team hires, new office openings, and business strategy. These statements often include words such as may, believe, expect, anticipate, intend, plan, estimate, or other similar expressions. 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 but are not limited to - 1) prevailing economic conditions; 2) changes in interest rates, loan demand, real estate values, and competition, which can materially affect origination levels and gain on sale results in our business, as well as other aspects of our financial performance; 3) the level of defaults, losses, and prepayments on loans made by us, whether held in portfolio or sold in the whole loan secondary markets, which can materially affect charge-off levels and required credit loss reserve levels; and 4) competition for qualified personnel and desirable office locations. Additional risks are described in our quarterly and annual reports filed with the FDIC. 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. New risks and uncertainties come up from time to time, and we cannot predict these events or how they may affect the Bank. Signature Bank has no duty to and does not intend to update or revise the forward-looking statements after the date on which they are made. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this conference call or elsewhere might not reflect actual results.

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

Thank you, Susan. I will provide some overview, and then Eric Howell, our Chief Financial Officer, will review the Bank's financial results. We will address your questions at the end of our remarks.

As you can see from the press release, we delivered another quarter of strong deposit, loan, and earnings growth by focusing on our core philosophy - offering privately owned businesses underserved by today's megabanks a single point of contact to meet all their needs. While I am sure that I am sounding a bit repetitive every quarter, it is this focus which continues to reap these solid results. Let's take a look at these.

Deposits reached $4.51 billion at the end of the quarter, an increase of $540 million. This includes core deposit growth of $160 million, coupled with a $380 million increase in short term escrow deposits. We are pleased with our solid core deposit growth this quarter and the first half of 2007, which totaled about $345 million. When compared with deposits at June 30, 2006, our overall deposit growth was $792 million, or 21%. This growth includes nearly $600 million of core deposits. Non-interest-bearing deposits were at $1.53 billion and represented almost 34% of total deposits, an increase from last quarter of $294 million, mostly due to the short term escrows. Our off-balance-sheet deposits remain high, at $1.52 billion from $968 million at June 30, 2006. There was a total of $501 million in short term escrows at quarter end.

Our growth was spurred by our ability to garner short term escrows from various core clients that institutions our size simply do not attract. Our increasing client base is recognizing we have developed a core competency in this area. We continue to actively pursue these types of deposits, and this has become an integral part of our business. While the escrows flow in and out, our clients remain stable. It's important to remember that, behind these escrow deposits, is an existing or potential core client relationship.

Total assets were up over 21%, reaching $5.71 billion compared with the end of last year's second quarter.

Now let's look at our loan growth in the second quarter. Loans increased $122 million, or 7.4%, reaching $1.79 billion at June 30, 2007. Since June 30, 2006, loans have increased $528 million, or 42%. Average loans for the second quarter rose $138 million, or 8.6%, to $1.74 billion compared with the first quarter of 2007.

Turning to earnings, net income for the quarter reached $10.2 million, or $0.34 diluted earnings per share, a 24% increase when compared with $8.2 million, or $0.28 diluted earnings per share, reported in the 2006 second quarter. The expansion in net income is basically due to solid core and short term escrow deposit growth, expanding net interest margins, and strong fee income.

Reviewing team growth, two new private client banking teams joined in the second quarter and another this month. Since the onset of 2007, we've added five teams from four different financial institutions and also expanded some of our established teams with the appointment of additional key banking professionals.

We've also announced the planned openings of our 20th and 21st offices, one in Borough Park, our third in Brooklyn, and another in Long Island, which will make six Signature Bank offices there. These locations were chosen based on the established client relationships of the new teams. Currently, we have a total of 52 teams. We continue to identify the right bankers, and, with the market the way it is right now, these bankers are identifying us as well. They know that it is difficult to personally service clients at the megabanks, particularly amid the changes and consolidation and that, at Signature Bank, we afford them the autonomy and ability to focus entirely on the client, which has always been our top priority.

At this point, I'll turn the call over to Eric Howell, our CFO.

Thank you, Joe, and good morning, everyone.

Let's first review our net income results for the quarter. As Joe noted earlier, net income was up 24% to $10.2 million, or $0.34 diluted earnings per share. Net interest income in the quarter rose to $36.8 million, up $7.2 million, or 24%, versus the second quarter of last year, and approximately $3 million, or 9%, from the 2007 first quarter. Clearly, one of the drivers of the net interest income has been our net interest margins, so let's take a closer look at that.

Our net interest margin on a linked-quarter basis increased 12 basis points to 2.95% and 14 basis points when compared with the same period last year. The linked-quarter expansion is due to a few contributing factors. Yields on investment securities grew 4 basis points during the quarter to 4.93%. The increase is the result of the runoff of lower-yielding securities replaced with accretive-yielding investments. The average duration moved out slightly, to 2.1 years, given the more favorable yield curve from the pickup in the ten-year treasury. And the securities portfolio continues to provide consistent cash flow for reinvestment in higher-yielding securities or even higher-yielding loans. We also remain focused on maintaining a high quality portfolio, avoiding subprime exposure.

Turning to our loan portfolio, we were able to maintain our yields here, given the tremendous competition on the asset front. Overall, our blended yield on our average loans was up 4 basis points.

Now if we look at liabilities, cost of deposits increased a modest 6 basis points in the quarter. While competitive pressures remain prevalent in the market, our focus on growing core deposits significantly benefits our funding structure.

Another driver to our margins this quarter was the significant reduction in our borrowing costs, which improved 19 basis points to 4.66%. We utilized the inflow of short term escrow deposits to pay down higher cost overnight borrowings, which lowered our average amount of borrowings for the quarter, and we invested in overnight funds. The short term escrows added approximately 8 basis points to the margin. However, we were also successful in raising core deposits and reinvesting cash flows from the securities portfolio into higher-yielding investments or even higher-yielding loans, all of which led to an increase in core margin of 4 basis points.

Turning to non-interest income and expense, non-interest income for the 2007 second quarter increased 45% to $7.4 million versus $5.1 million for the comparable period a year ago. The main component to this increase was a $1.2 million, or 70%, rise in commissions, predominantly due to growth in our off-balance-sheet escrow deposits. Additionally, fees and service charges increased over $800,000, or 35%, due to client expansion and increased client activity.

Non-interest expense for the second quarter of 2007 was $25.1 million compared with $19.3 million reported in the 2006 second quarter. This increase of $5.8 million, or 30%, is attributable to several factors. First, there was a 23%, or $2.8 million, increase in salaries and benefits, primarily due to the addition of eight new private client banking teams since the end of the 2006 second quarter. Additionally, there was an increase of 21%, or $443,000, in occupancy and equipment expense that is mostly due to the three new locations in the last year. Lastly, we saw a 50%, or $2.5 million, increase in other general and administrative expense. This is primarily due to increased client-related expenses, including the operating expense associated with short term escrow deposits. We receive a tremendous benefit from the short term escrows, which is visible in our net interest margin, where we already talked about the 8 basis points of expansion. The operating expenses associated with these short term escrows are reflected in our other G&A expense. Also, as previously discussed, $650,000 is due to an increase in FDIC assessment fees.

There are a couple more points I'd like to touch upon. At June 30, 2007, nonperforming loans, which represent 0.14% of total loans, decreased to $2.6 million from $5.7 million at March 31, 2007. We've been mentioning a nonperforming loan for several years now, and this quarter, it was charged off in the amount of $3.4 million. This caused a corresponding decrease in our allowance for loan losses, which is now at 0.68% of total loans. And our allowance for loan losses to nonperforming loans is at 479%.

As we look at our tax expense for this quarter, we received the full benefit of the REIT established in February, which helped to lower our effective tax rate to under 41%, as we expected.

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

Thanks, Eric. We continue to carefully execute on our business plan and take advantage of market opportunities, as evidenced by our achievements this quarter, which include over $160 million of core deposit growth with $345 million year to date; $123 million of loan growth with $210 million year to date; significant margin expansion; substantial increase in non-interest income; a 24% increase in earnings, having surpassed the $10 million mark for the first time; and solid team expansion. We will continue to take advantage of the changing marketplace to ensure the consistent delivery of steady, solid growth to our shareholders.

Now, we will be happy to answer any questions you might have. Eric, I'll turn it over to you.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question is from Thomas McGovern of Lehman Brothers. Please go ahead.

I noticed that provisioning was a little higher in the quarter. In terms of what you're seeing out there in the market for commercial real estate and commercial loans, is there any signs that some of the slippage we're seeing in residential might be migrating over into the commercial sector?

Particularly for us, we have not seen any trend in our portfolio. With our residential portfolio, most of those loans are to high net worth individuals, the owners of the businesses. And the long term values there are pretty significant for us in terms of them being very low. They're in like the 50% to 60% range. And we have not seen any slippage there.

As it relates to the commercial side, most, if not all, of our loans-- I'll use the term 99%-- are in the New York, New Jersey, Connecticut metropolitan area, which continues to be robust. And we have not seen any slippage there at all.

Great. Thanks.

Our next question comes from Christopher Nolan with Oppenheimer. Please go ahead.

I have a question. Duration that you mentioned at 2.1 years for the investment securities portfolio - Eric, do you see that progressively getting longer as this yield curve-- this changed yield curve environment stays with us?

I wouldn't expect it to really move out much further, Chris. I mean, we maintain a very short duration-stable portfolio. So I don't expect it to move much further out.

Great. And, also, what are you estimating is the rate that investment securities are maturing per quarter or per month?

About $50 million per month. Still, it's in line with what we've had over the last, I think, several years now.

Right. And, Joe, strategically, are you starting to look at loan growth from markets outside of the metro New York market?

No, not right now. For businesses, it has to be in the New York area. And, if we do commercial real estate, it's usually within 75 miles or so of our headquarters. We don't see, at least in the near term, expanding beyond that.

Right. And, finally, Eric, back to that AOCI adjustment to equity. Assuming no further change in the yield curve, we shouldn't have any further runoff through there sort of increase?

Right. I wouldn't expect that to markedly change either.

Okay. Great. Thank you very much, guys.

Our next question comes from Gary Townsend with FBR Capital Markets. Please go ahead.

Just looking at the non-interest income - very good results in your brokerage and insurance commission lines over the last three quarters. And, if you could just discuss the sustainability of that at these levels, please.

Yes. What's driving a large portion of the non-interest income are the commissions that we're receiving from off-balance-sheet money markets, Gary. And we're actually pleasantly surprised, because we've been able to sustain over the last three quarters an amount of off-balance-sheet deposits that have been driving the commission incomes. And I think that that's attributable to us being able to bring on new clients that have been putting their escrows in the off-balance-sheet money market. As an example, we expected at the end of the first quarter, which was at about $1.5 billion-- we expected there to be a drop. And we actually, at the end of the second quarter, are up just slightly, about $5 million, a little bit above $1.5 billion. So, if you compare it to a year ago, where we were at $968 million, we would expect that we could sustain it at probably a $1 billion level. I'm not quite sure we can sustain it at $1.5 billion.

However, what also has been contributing to the non-interest income that will help offset any drop that we would have in the commissions from off-balance-sheet money markets is our expanded client base. And we're seeing that our fees and service charges are contributing more so than they ever have. So that would somewhat offset any of the drop we would have. It's a hard question to answer regarding the sustainability because escrows flow in and out. And what we try to do to expand our world there is go out and actually meet with more and more clients that have these escrows so that, when there is an outflow from one deal, there's an inflow from another.

Well, you're obviously competitive in that marketplace. But could you discuss, too, just what the marketplace dynamics are there and how your competitors are changing? Do you need additional infrastructure or products to build that business?

We don't need any additional infrastructure or product. It's a very simple thing to do in terms of the escrows. It really just comes down to being able to respond to the client and execute when a deal is happening. For example, if it's a 1031 exchange, and let's say it's the last day that a deal can be done before it becomes a taxable event, the client needs to know-- In particular, let's say it's a title company. The title company needs to know that you'll be able to get that money out to close the deal, because, tomorrow, their client would be in a bad position because it's a taxable event. Or, if it's a class action lawsuit or a private placement, they just need to know that, when checks are coming in, you're giving them information on a daily, if not hourly, basis and, when it goes out, that you're able to get it out. So, from a product and structure standpoint, we're fine. I think in terms of-- We're in this market. Where we have a slight disadvantage is that we're nearly a $6 billion bank, and we're competing with banks that are $1 trillion. So we have to work a little bit harder in terms of the clients doing due diligence because they see a $6 billion bank versus a trillion-dollar institution. So that's where our disadvantage is. Other than that, product and service wise, we're okay.

Thank you.

Our next question comes from Albert Unger with Sidoti & Company. Please go ahead.

Joe, what percentage of your teams would you say - these new teams - have matured so far?

What percentage of our teams has matured? I would say, out of the 52 teams, probably close to 35 to 40.

35% to 40%. Okay. Thank you.

Right. Thanks.

Our next question comes from Avi Barak with Sandler O'Neill. Please go ahead.

Just to maybe follow up on the previous question, Joe, I think in the past you mentioned that the breakeven time for the new teams you were bringing on was sort of extending out. I think the term you used was that the clients had more tentacles in them. Is that trend continuing, or it is getting worse or improving?

I would say it's about the same. What's happened is, yes, the institutions that we're recruiting from-- they have more tentacles into the client. We're saying it's taking us about 15 to 18 months in terms of a breakeven, whereas, earlier, it was more like a 9- to 12-month breakeven.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up from Christopher Nolan. Please go ahead.

Hey, Joe, are you still looking for a 500 to 700 basis points in the loan to asset ratio on an annual basis? Could you give us an update and some perspective on that?

Yes, Chris. We're still expecting that we'll expand the loan to asset ratio to north of 35% this year. I would expect to see that trend continue in future years.

As a follow-up, do you look to commercial real estate mortgage loans as being the primary driver of the loan growth?

No. I mean, we're looking at traditional C&I as being the primary driver on that.

Okay. Great. And, since it's C&I, I guess it's all going to be variable rate loans, so it doesn't really change your interest rate sensitivity a huge amount.

It will be predominantly variable rate loans. From time to time, we might do a five-year bullet. But, for the most part, it is.

Great. Thanks, Eric.

The next question comes from Steve Gorski from Brown Brothers. Please go ahead.

Can you clarify the questions on how many of the teams are mature? Is that 35% to 40% or 35 to 40 teams?

It's 35 to 40 teams.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, at this time, I'm showing no additional questions in the queue. I'd like to turn the call back over to management for their concluding remarks.

Thank you, Eric. Thank you, all, again, for joining us today. We appreciate your interest in Signature Bank. And, as always, we look forward to keeping you apprised of our developments.

Eric, I'll turn it back to you.

Thank you, sir. Ladies and gentlemen, thank you for participating in the Signature Bank 2007 second quarter results conference call. As a reminder, a web replay of this conference call can be accessed at Signature Bank's website at www.signatureny.com by clicking on the Investor Relations tab and then selecting Company News, followed by Conference Calls. You may now disconnect, and have a pleasant day.