Signature Bank (SBNY) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Signature Bank's 2007 third-quarter results conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Thursday, October 25, 2007.

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

Good morning. Thank you for to us today for the Signature Bank 2007 third-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 meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Forward-looking statements include information concerning our future results, interest rates and the interest rate environment, 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, one, prevailing economic conditions; two, 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; three, 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 fourth, competition for qualified personnel and desirable office location. 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.

We have again delivered solid results in the key areas of our business -- core deposits, loans, core margins, earnings, and banking teams.

Let me start by reviewing the deposit results. Deposits were $4.3 billion and the end of the quarter, which represents a decrease of $117 million but includes strong core deposit growth of $197 million and a $314 million decrease in short-term escrow deposits, which, as anticipated, were released during the quarter. For the first nine months of the year, core deposits have increased by approximately $542 million. When compared with deposits at September 30, 2006, our overall deposit growth was $847 million, or nearly 24%, of which $659 million represents core deposits.

Non-interest-bearing deposits were at $1.15 billion and represented over 26% of total deposits, decreasing from last quarter's amount mainly due to the expected outflow of the short-term escrow deposits.

Our off-balance sheet and money market deposits rose again this quarter to $1.77 billion, an increase of $250 million versus last quarter and an increase of $943 million or 114% since September 30, 2006. There was a total of $188 million in short-term escrow deposits at quarter end. We continue to attract and target these deposits from various quarter clients, which are then released throughout any given quarter, due to their nature and as expected. Still, more importantly, this client base remains stable and continues to grow.

At quarter end, deposits -- I'm sorry, total assets were at $5.6 billion, up approximately $899 million or 19% when compared with last year's third quarter.

Now, I will review our loan growth. Loans increased about $115 million or 6.4% in the quarter, reaching $1.9 billion at September 30, 2007. Since the end of the third quarter last year, loans have increased over $500 million or 36%. Average loans for the third quarter were up approximately $116 million, or 6.7%, to $1.86 billion compared with the second quarter of 2007. The increase in loans, coupled with the outflow of the short-term escrow deposits, drove our loans as a percentage of assets to nearly 34%.

Now, let's move onto earnings. Net income for the quarter increased nearly 30% to $10.7 million or $0.36 diluted earnings per share, versus $8.3 million or $0.28 diluted earnings per share reported in the 2006 third quarter. The growth in net income is primarily derived from expansion in core net interest margins and the increase in noninterest income.

Now, onto team expansion -- two new private client banking teams joined during the third quarter, totaling six new teams for the first nine months of the year. Additionally, a seventh team already joined in the fourth quarter. We will formally release details on this team in November.

I also want to bring you up to speed on the opening of our 20th and 21st offices. Our location in Borough Park, our third office in Brooklyn, is scheduled to open in mid-November. The one in Jericho, which will be our sixth office on Long Island, is expected to open in late December or early January. We will keep you posted on this front as well.

At this point, I will turn the call over to Eric Howell, our CFO, to review the financial results in greater detail.

Thank you, Joe, and good morning, everyone.

Let's first review the net income results for the quarter. As Joe said, net income reached $10.7 million or $0.36 diluted earnings per share, representing a 30% growth from last year's third quarter. Net interest income in the quarter growth rose to $38 million, a $7.6 million or 25% increase from the third quarter a year ago.

Looking at net interest margin, in the third quarter, net interest margin increased 13 basis points to 2.91% when compared with the same period last year. On a linked-quarter basis, net interest margin decreased 4 basis points, which is reflective of the outflow of short-term escrow deposits this quarter. If you exclude the effects of the short-term escrow movement during the 2007 second and third quarters, core net interest margins actually expanded approximately 3 basis points this quarter. This was due to the improvement in average loans to average earning asset mix, as well as growth in our core deposits.

Looking closely at yields, asset yields and funding costs this quarter, yields on investment securities grew 10 basis points during the quarter to 5.03%. This is a result of the runoff of lower-yielding securities replaced with accretive investments. The portfolio quality remains strong, with a stable average duration of 2.12 years and continues to provide consistent cash flow for reinvestment and higher-yielding securities or even higher-yielding loans.

Turning to our loan portfolio, our yield on average loans decreased 7 basis points to 7.56% for the quarter. This modest decrease can be attributed to the intense competition on the asset front and the Fed move at the end of the quarter.

Now, if we look at liabilities, the cost of deposits increased 12 basis points in the quarter, which predominantly reflects the competitive marketplace that we are operating in. We were, however, able to lower our borrowing costs 7 basis points by reducing higher-cost overnight borrowings. This helped to mitigate the rise in deposit costs.

The key drivers for margin expansion are raising core deposits and increase loans as a percentage of our balance sheet. We did both this quarter, and therefore expanded core margins.

Looking at noninterest income and expense, noninterest income for the 2007 third quarter rose 46% to $2.4 million -- or $2.4 million to $7.5 million versus $5.1 million reported in the same period last year. This is predominantly the result of an increase in commissions of $1.4 million, or 78%, due to a significant increase in off-balance sheet and money market fund deposits. Additionally, fees and service charges increased almost $800,000 or 32%, because of client expansion and increased client activity.

Noninterest expense for the 2007 third quarter was $25.5 million versus $20.6 million in the third quarter last year. This increase of $5 million or 24% is attributable to a few factors -- first, being a 21% or $2.7 million increase in salaries and benefits primarily due to the addition of seven new private-client banking teams since the end of the 2006 third quarter. Secondly, we saw a 39% or $2 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. Also, as discussed in previous quarters, $550,000 of the increase is from newly enacted FDIC assessment fees.

Looking at our efficiency ratio for the quarter, we saw an improvement to 55.9% from 57.5% for the third quarter of last year and 56.8% in the second quarter of this year. The improvement stems from the growth in interest and noninterest income, which outpaced our expense growth. I just want to remind everyone, however, that based on hiring in any given quarter, we ca expect our efficiency ratio to be impacted accordingly.

A few points relating to loans -- at September 30, 2007, nonperforming loans remained steady at $2.6 million when compared to June 30, 2007. This represents 0.14% of total loans. The allowance for loan losses to total loans is now 0.72%, and our allowance for loan losses to nonperforming loans is 520%.

At this time, I will turn the call back to Joe. Thank you.

Thanks, Eric.

Each quarter, we report to you that we've achieved solid growth across key areas of our business, and this quarter is no different. Our story is consistent and our growth impressive, especially given the chaos prevalent in today's financial-services marketplace. Our results and strong financial performance are due to our ability to continually attract new private client banking teams and from the continued success of our established ones. We stay extremely focused on executing our strategy, so while we might sound a little redundant quarter after quarter, we are pleased that we are consistent and successful.

In summary, as I said, we grew the business across all key categories with nearly $200 million in core deposit growth and $542 million in growth for the first nine months of the year; $115 million in loan growth, $325 million year-to-date; core margin expansion; considerable increases in noninterest income; earnings growth of 30% and continued team growth.

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

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Gary Townsend, FBR.

You mentioned the chaotic financial environment. I was impressed with how well your credit has held up in a chaotic environment. But could you just discuss what you're seeing and any migration that you've noticed in the past quarter?

For the loan environment and the credit quality that's going on out there versus what we are seeing, we are not seeing any trends in our portfolio. We are certainly -- the allowance for loan losses and our provision is reflective of the growth and the maturity in our loan portfolio, but any issues we've seen in our history and even more recent has been related to any particular events for those clients. So for our overall portfolio, which is approaching $2 billion, we haven't seen any trends that have been affected by what's going on in the environment. I would almost describe it in one word, for us anyway, as uneventful.

So far as migration goes, just nothing particular there, I would guess.

Nothing particular at all.

You will probably not have more teams to hire this year and perhaps some are disappointed by that, but could you talk about what your prospects are as you look out into 2008?

Sure. As I said earlier in the call, we have a seventh team that has joined us and we will be announcing details on that team in a November press release.

I will describe the pipeline as strong, that I think, as you are alluding to, at this time of the year, it's difficult to bring on many teams because of the -- being close to the end of the year and the fact that they would be expecting some bonus money early on in 2008. So I would characterize it as, from today on through the middle of 2008, that the pipeline would be characterized as strong and we would expect to bring on some more teams, absolutely.

When do you plan to give guidance with regard to the number of teams expected in 2008?

We would, in all likelihood, do that in the January 2008/fourth-quarter 2007 earnings conference call.

Thank you.

Thomas McGovern, Lehman Brothers.

I was wondering. Given some of the issues that the larger commercial banks are having with their capital markets operations, based on some of the earnings they've released, if that could be something that might help you guys in terms of your recruiting of relationship managers.

You know, I'm not quite sure. I know that, for us, the recruitment of the relationship managers or the group directors is from an unhappiness of them not being able to handle their clients. I don't think those that deal in the capital markets, either the bankers or the clients that they have are really our type of clients. It's more likelihood -- in all likelihood that the ones that are unhappy are because of an event of being taken over or them not being able to deal with their clients the way they have in the past. So what's going on in the capital markets I don't think would really help us in any way.

I got it. Thanks.

Mike Shafir, Sterne Agee and Leach.

Just the provision did go up this quarter and I'm assuming that's because of the substantial loan growth in your portfolio. Just kind of help us model things going forward. The 72 basis points on the loan loss reserve, I mean is that a level where you're going to be around going forward, or do you see some expansion into that as the portfolio grows?

I think, as the portfolio grows and seasons, that you can expect to see that number slightly trend upwards. I believe we talked about last quarter how we are probably at the low end of our range on the allowance and that, with the growth and with the seasoning of our portfolio, that we would expect it to slightly trend upwards over the next several quarters.

Then from the net charge-offs to average loans ratio at 17 basis points this quarter, you know, obviously that's higher than what we saw in '06 but that was kind of pristine anomaly in terms of credit. You know, you said you did not really see anything in terms of credit deterioration in your portfolio, but do you see a natural kind of uptick in the charge-off ratios?

In this particular quarter, I would attribute half of that to be a lot of small credits as part of the maturity in the portfolio, and the other half was related to one credit whereby there was an employee -- internal employee fraud at a law firm, and that was half of the charge-off. So it was a particular event that occurred that we decided to charge-off the entire amount because, if anything ever comes back, it's going to be through litigation and its going to be over several years.

Okay, thanks a lot, guys.

Christopher Nolan, Oppenheimer.

Could you give some color in terms of your perspective to the SBA loan sale outlook?

Well, you know, the SBA business has been a tough one for us over the last year with rising interest rates. We've seen prepayments go up in both the interest-only strip that we carry as well as the loans that we carry in our warehouse and the pools that we have. So you know, we really haven't been able to amortize that strip in a manner that's going to get us ahead of the prepaids and allow us to sell that strip for much of a gain.

So we have seen some -- we have seen, over the very recent months, some easing there. I think there's been some more rational behavior in that market and people aren't refinancing those SBA loans into conventional loans quite as quickly as they were, obviously given all the events that have taken place in the credit markets. So we are hoping that the yields will come back around on the strip and as well as on the warehouse and we will get some pickup there in future quarters, but you know, as it relates to gains, I wouldn't expect us to see any of the types of gains that we had back in '04 and '05 anytime soon, Chris.

Right. Eric, what is the investment securities one-off, per month, right now?

We are still in the $50 million to $60 million range on the runoff, Chris.

Avi Barak, Sandler O'Neill.

Two quick things from me -- first -- and I'm sorry if you touched on this already but what's your expectation for escrow deposits in the fourth quarter and what kind of effect will that have on the margin, linked-quarter?

You know, that's the one part of our business that is the least predictable. There's no seasonality to it. In fact, Eric and I were looking at the last seven to eight quarters, and we only had one quarter, which was the third quarter of '06, where we had no escrow deposits, short-term escrow at the end of the quarter. So although we've seen an uptick in the activity, it's very difficult to say what that activity is going to be in the upcoming quarter. So it could be $500 million or it could be down to nothing, depending upon the flows. It's really all event-driven. It could be driven by a real estate deal, by a private placement, by the distribution of a large class-action lawsuit, so it's very unpredictable. There's actually no seasonality.

Okay. Then secondly, I'm just wondering if you could comment on if you are hearing of any pickup in M&A chatter. I know that's a space that you haven't really been active in in the New York market, but it seems like now Commerce is gone and it's always an attractive banking footprint. Are you seeing more books, less books? If you could just maybe give us some kind of qualitative comments on that.

I hate to say this, but simply no. We're really not in that chatter. I think everyone understands that. We've kind of determined, or they've determined that they understand, if there was something we were looking at, what exactly that would be. There's nothing out there for us, so no one is approaching us about any deals to buy, and we really haven't heard any chatter at all.

Okay, thanks a lot, guys.

(OPERATOR INSTRUCTIONS). [Dean Unger], UBS Wealth Management.

I just have a question about the funding costs and the trend there on deposits, especially given the Fed rate cuts in late September. I noticed that the money market, the cost in the money market was up in the third quarter versus the second quarter. I'm just wondering if you are seeing any change there or if there's any -- what do you expect for funding for deposit costs going forward?

In the fourth quarter, we expect the funding costs on the deposit side to be down. When the Fed dropped their rate 50 basis points, the next day, our rate, our primary, dropped. So there's an immediate effect on the asset side. 70% of our loans float, and 55% of those loans float to prime. So we had an immediate hit on that end. More than 80% of our deposits are commercial deposits, and fairly large deposits. So it's not a straight across the board drop. What you do is the bankers work with our treasury group to call many of the clients to negotiate a rate downward. So there's a lagging effect on the deposit side, but that's speeding up now. So we expect, on the deposit side, particularly in the money market area, for those costs to drop, although they do lag the Fed cut.

Alper Sunger, Sidoti & Co.

Just a quick question on the effective tax rate due to (inaudible) [formation]. Where do you see the number going?

I think it will stay right around where it is now, Al. I don't expect it to move significantly from there.

Justin Maurer, Lord Abbett.

Sorry, did I miss that, Eric? Was that question just on [NIM] or --?

No, that question was on the tax rate.

Okay, so NIM expectation for the quarter? Are you assuming 50 BIPS down by the Fed?

Well, you know, I think that's the general consensus these days, is 50 basis points, at least 25. I don't know. There's a lot of chatter going on, so for us it really doesn't matter either way. We've just got to grow core deposits and grow loans as a percentage of the balance sheet, and that's going to give us the long-term margin expansion. If we get 50 points, in the near-term, it will be too difficult for us to reprice our liabilities quickly enough to keep up with the cut in all of those prime-based loans that Joe talked about. So it might be a little bit of a near-term pressure, but again, we can offset that through cutting the liabilities and through growing (multiple speakers) loans, so it wouldn't be significant pressure.

Okay, thank you, sir.

(OPERATOR INSTRUCTIONS). 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 for joining us (technical difficulty). We appreciate your interest in Signature Bank, and as always, we look forward to keep you apprised of our developments. Thank you again. Eric, I will turn it over to you.

Ladies and gentlemen, this does conclude the Signature Bank 2007 third-quarter results conference call. You may now disconnect, and we thank you for using AT&T Teleconferencing.