Signature Bank (SBNY) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Signature Bank's Third Quarter Results Conference Call.

At this time, all participants are in a listen-only mode, and following the formal presentation, instructions will be given for the question-and-answer session. Should anyone require assistance on the call today, please press the star, followed by the zero.

And as a reminder, this conference is being recorded today, October 27, 2009.

At this time, I would now like to turn the conference over to our host, Mr. Joseph DePaolo, who is the President and CEO, and Eric Howell, who is the CFO, of Signature Bank. Mr. DePaolo, please go ahead.

Good morning, and thank you for joining us today for the Signature Bank 2009 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 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.

Forward-looking statements include information concerning our future results; interest rates and the interest rate environment; loan and deposit growth; loan performance; operations; capitalization; new private client team hires; new office openings; the regulatory environment; and business strategy.

These statements often include words such as may, believe, expect, anticipate, intend, plan, estimate, or other similar expression. 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 statement.

These factors include but are not limited to, one, prevailing economic and regulatory 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 market, which can materially affect charge-off levels and required credit loss reserve levels; and, four, 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 in greater detail. Eric and I will address your questions at the end of our remarks.

Once again, by staying true to our depositive-focused model, Signature Bank reported solid results across all of our key metrics despite the challenging industry landscape.

During the third quarter, we set another record in core deposit growth of $535 million, and for the first nine months of 2009, core deposits have increased $1.32 billion. This fueled significant average interest earning asset growth of $848 million for the quarter.

Some of the highlights of our third quarter results --

Loans were up $361 million, or 9.6%, now totaling $4.13 billion.

Net income rose 65% to $15.2 million, or $0.37 diluted earnings per share, versus last year's third quarter.

Two private client banking teams joined, and another was added early in the fourth quarter, we opened our 23rd office, and our credit quality remains relatively stable despite the current difficult environment.

First, a look at deposits.

All the deposits for the third quarter increased a record $701 million, or 11%, to $6.8 billion. This includes record core deposit growth of $535 million, as previously mentioned, along with an increase of $193 million in short-term escrow deposits and a decrease of $26 million in brokered deposits.

To date this year, deposits grew $1.42 billion, or 26%, from year-end 2008. Let me say others would have to buy a bank to achieve this growth.

Average deposits for the quarter were at $6.61 billion, an increase of $734 million, or 12%, compared with the 2009 second quarter. As a reminder, this is a key deposit metric which we closely monitor due to fluctuations in short-term escrow deposits.

Non-interest-bearing deposits of $1.64 billion represented 24% of total deposits.

Off-balance sheet money market deposits declined in the third quarter to $1 billion, a decrease of approximately $300 million versus the 2009 second quarter.

Total assets were $8.6 billion, up $1.9 billion versus the same period a year ago, and average assets for the third quarter rose $1.87 billion, or 29%, when compared with the same period last year.

Now, on to loans.

Loans increased $361 million in the quarter, up nearly 9.6%, or to $4.13 billion, representing 48% of total assets at quarter end.

Non-performing loans remained relatively stable at 1.24% of total loans, or $51.2 million, versus the 2009 second quarter, which was 1.27% of total loans, or $47.9 million.

Provision for loan losses for the 2009 third quarter was $11.9 million, compared with $9.4 million in the 2009 second quarter, and once again, was well in excess of charge-offs.

The elevated level of provisioning in 2009 was primarily driven by the growth in the loan portfolio combined with an increase in charge-offs, non-performing loans, and provisions for the current economic environment.

Net charge-offs for the 2009 third quarter were $6.6 million, or an annualized 66 basis points, compared with $4.4 million, or 48 basis points, for the 2009 second quarter and $7.2 million, or 82 basis points, for the 2009 first quarter.

During the third quarter, we saw improvement in our 30 to 90 -- excuse me, 30 to 89-day past due loans, which decreased to $21.7 million from $32.8 million for the 2009 second quarter.

Additionally, the 90-day-plus past-due category declined slightly by $1.3 million to $13.9 million for the quarter. Approximately half of the 90-day-plus bucket includes SBA, 100% government-guaranteed loans held for sale.

Furthermore, our smaller, more granular business loans comprised the majority of our charge-offs this quarter. We did, however, see a slowdown in these credits, making their way to non-accrual status.

Although we are seeing some improvement in our forward-looking credit indicators, we are well aware of the impact the current economic situation could have on our portfolio. Therefore, once again for this quarter, our provision for loan losses remains high, and we expect this will continue.

Let's review earnings.

As we mentioned earlier, net income for the 2009 third quarter was up 65% to $15.2 million, or $0.37 diluted earnings per share, versus $9.2 million, or $0.29 diluted earnings per share, for the 2008 third quarter, which included an $8 million OTTI write-down on a single Lehman Brothers senior debenture.

The growth in net income is primarily due to several factors, including record core deposit growth, which fueled strong interest on the asset growth, combined with an expanded net interest margin. These factors were partially offset by an increase in the provision for loan losses, higher non-interest expenses, and a decrease in commission income.

I want to take a moment to talk about team growth.

Going to third quarter, two private client banking teams were added to our franchise while another joined early in the fourth quarter. Thirteen teams have joined to date this year.

Remember, we initially planned to hire four teams for the year. Clearly, the industry's chaos has created opportunities for us. We now have 68 teams and 88 group directors comprising our network.

Additionally, during the quarter, we opened our 23rd product client banking office located on West 57th Street in Manhattan to accommodate many of our recently hired teams.

Now, I will turn the call over to Eric, and he will review the financial results in greater detail.

Thank you, Joe, and good morning, everyone.

I will start by reviewing net interest income and margins.

Net interest income for the third quarter reached $68.6 million, up $18.5 million, or 37%, versus the 2008 third quarter, an increase of 13%, or $8.1 million, from the 2009 second quarter.

Net interest margin on a tax-equivalent basis grew 13 basis points in the quarter to 3.39% versus the same period last year.

On a linked-quarter basis, net interest margin remained unchanged at 3.39% as cash balances were excessive given our cautious deployment of the significant deposit inflows.

Look at asset yields and funding costs for a moment.

Overall, interest-earning asset yields declined 12 basis points to 4.96%, driven by higher-than-normal excess cash balances.

In keeping with our conservative investment philosophy, we are selectively trying to deploy cash while maintaining our high-quality short-duration investment portfolio.

Yields on investment securities decreased 12 basis points to 4.72% this quarter versus last quarter.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages increased 1 basis point to 5.52% this quarter from last quarter. We continue to selectively identify quality lending opportunities at appropriate pricing.

Now, on to our liabilities.

Cost of deposits for the quarter decreased 7 basis points to 1.33% due to lower prevailing interest rates as we gradually reduced deposit costs given the abnormally low interest rate environment.

We are employing our relationship-based pricing philosophy to attract new core depositors, which will prove beneficial in a rising rate environment.

Now, let's turn to the allowance for loan losses.

As Joe pointed out, our provisions were elevated again this quarter, and as always, they exceeded net charge-offs. This excess provisioning led to a further increase in our allowance for loan losses to 1.2% of loans compared to 1.18% last quarter and 1% at the end of the 2008 third quarter.

Although our leading credit indicators improved this quarter and we see credit as manageable, we are mindful of the current economic environment, and therefore, we continue to prudently build our credit reserves.

Looking at non-interest income expense, non-interest income for the 2009 third quarter was $7.3 million, an increase of $3.6 million when compared with the 2008 third quarter.

The 2008 third quarter included an $8 million OTTI write-down on one Lehman Brothers senior debenture.

This quarter, we recognized $623,000 in OTTI write-downs, primarily on two bank-pooled trust-preferred securities.

Commission income declined by $2.7 million versus the third quarter of 2008 as deposits and off-balance sheet money market funds decreased $783 million, and commissions we earn on off-balance sheet money market accounts continue to be significantly reduced and for some funds even eliminated in order to maintain positive yields on the funds in this unusually low interest rate environment.

Non-interest expense for the third quarter of 2009 was $38.6 million versus $32.8 million for the same period a year ago.

The $5.8 million increase, or 18%, was primarily due to two factors -- first, the addition of new private client banking teams, offices, and growth in client activity; and second, increased cost of $1.4 million related to FDIC deposit assessment fees and the FDIC Deposit Guaranty Program.

The bank's efficiency ratio improved to 50.8% for the 2009 third quarter despite substantially higher FDIC assessment fees as we continue to leverage our operating infrastructure.

Now, turning to capital, our capital levels are among the strongest industry-wide, with a tangible common equity ratio of 9%; tier-one risk-based of 14.46%; total risk-based ratio of 15.34%; and leveraged capital ratio of 9.8% as of September 30, 2009.

Our regulatory capital ratios were all well in excess of regulatory requirements and reflect the relatively low risk profile of the balance sheet.

Before I turn the call back to Joe, just a quick note on taxes. As we have pointed out in the past, we established a real estate investment trust in 2007 which reduced taxes over the last couple of years. The New York State legislature enacted in their budget the phase-out of tax benefits of REITs for banks with average assets in excess of $8 billion.

There is a chance that Signature Bank could average in excess of $8 billion in assets in 2009, and we almost certainly will in 2010. If we are to average greater than $8 billion in assets in 2009, we will lose 75% of our REIT tax benefit, and we will have to pass a catch-up adjustment to tax expense of approximately $2.9 million in the 2009 fourth quarter.

Now, I'll turn the call back to Joe. Thank you.

Thanks, Eric.

We are pleased with our strong performance and financial results for the third quarter, including the record core deposit growth in consecutive quarters.

Essentially, our outstanding organic deposit growth equates to a low risk in market bank acquisition.

Signature Bank continues to deliver because we remain focused on keeping our depositive interest the forefront of our business model. This is what has guided us through both good and tough economic times.

We have built a safe haven for our depositors because, quite simply, we provide a well-capitalized solid and strong institution with high-quality investment and loan portfolios, and we continue to offer a single point of contact to meet all of our depositors' needs while we pursue recruitment opportunities to fuel our future growth.

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

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator instructions)

And our first question comes from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Hey, good morning, guys.

Morning, Steve.

Hey, Steve. Good morning.

Is it possible to break out of the balances you gave for 90-day past due and 30 to 89 bucket what the commercial real estate balances were in those buckets?

You know what? I don't have a specific breakdown, Steven, but I think it was very little in those buckets.

Okay. I'm curious. Since credit's so good right now -- I mean essentially you're looking at 60 basis points of nonperformers. It looks like 1% of loans are delinquent. When we think about the reserve, are you really building the reserve for what could be down the road, say, as a commercial real estate cycle plays out over the next year or two today, or is this a case where you really can't build it until you start to see that pressure in the portfolio?

I think it's a combination of the two. I will say this first. I don't think we're building for the commercial real estate portfolio. I know that everyone seems to be focused on that there are going to be issues in commercial real estate. We're very confident in the commercial real estate that we're doing, both on the residential side and on the commercial office building side. 82% of our commercial real estate that we've done has originated in 2008 and 2009, so it's been in this environment.

We feel that we've had more stringent underwriting standards, and we're always doing current cash flowing multi-tenanted properties, so that's not what we're building for.

There seems to be a lot of uncertainty in the market as to what's going to happen with unemployment -- going to be over 10%. We don't know how long that's going to stay. We see that, because of that, some of our clients will be affected tangentially, so it's prudent for us to look at what has happened over the last couple of years and what may happen over the next couple of years to build up -- to build the allowance for loan losses.

It's not any -- it's not for any particular sector of the market. It's not for any particular industry. It's just the overall economic environment that we're building for.

Okay, and maybe just one final question. I understand the option in front of you to add new teams today still remains fairly sizable. How should we start thinking about expense growth for next year for you guys like in terms of 2010? Similar rate to what we're seeing this year in 2009, more or less?

I think it's safe to say we'd be at a similar rate to what we had in 2009. We had always said we'd be in the 20 to 25% arena. We've seen that tick down into the high teens, and I think that's safe to assume we would continue on that path.

Okay, but possibly some up side then, I guess, for 2010? You go back to that 20, 25%?

Possibly, but it's really going to depending on how much hiring we do.

Okay, thanks.

And our next question does come from the line of Bob Ramsey with FBR Capital Market. Please go ahead.

Hey, good morning. Thanks for taking the call.

Real quick, if you do lose the REIT tax benefits in 2010, what would be a reasonable effective tax rate?

It would be in the 42% range, Bob.

Okay. And then as you look at the provision, normally, you all have a larger provision in the fourth quarter than in the preceding three. Is it reasonable to assume the same as for the seasonal trend this year, or just given the elevated provision all year, do you think it will be any different?

I think that was coincidental. It wasn't anything seasonal that we have had over the last couple of years. So I would take it more that it was coincidental, but I think you could expect the fourth quarter to be at levels at or above what we've been doing.

Okay. That's all I have. Thank you very much.

Thank you.

Thanks, Bob.

And our next question does come from the line of Matthew Clark with KBW. Please go ahead.

Hey, good morning, guys.

Hey, Matt.

Morning, Matt.

On the watch list, can you give us a better sense as to how many credits might have been in that incremental increase this quarter and the types of businesses that might be migrating or migrating through that risk rating scale just to give us some more color there?

I don't have a count on how many loans made up the increase, but I think it's -- types of credits are really -- continue to be the smaller, more granular business revolving lines of credit and C&I credits, as well.

Okay. Okay, and then in terms of the securities that you've added during the quarter, I think on average they're up over 400 million. Can you give us a sense for the types of securities that you have been buying?

It's really well-structured agencies to control extension risk. That's predominantly what we've been investing in.

Okay. Anything outside of that?

Not really. We've done a few [reremicks](ph) where we'd add enhancement to the structures that we feel very safe and secure about, but predominantly well-structured agencies.

Ultimately, we expect interest rates to rise, and when they do, we expect that they'll rise rapidly, so we're making sure that we contain the extension and that we're getting good, solid cash flow back. We've got about $100 million in cash flow per month coming off the securities portfolio, and we want to maintain that cash flow to protect us in a rising rate environment.

Got it. Okay.

And then on the loan side, is there -- with the pick-up in growth this quarter, is any of that related to increased demand on the C&I front, or is it largely just taken over -- just taking business from other competitors as those credits come due?

It's more on the CRE side where loans have been maturing at their existing institutions and we're doing the refinancing because the bankers that were at their previous institutions when they did the original loans, they're now doing the refinances here. More than 85% of the CRE that we're doing are refinances of mortgages that are maturing.

Okay, and then again in terms of the outlook, is there some sense that that incremental growth might slow some here in the fourth quarter and into next year, or do you think you could put up a similar clip?

I would say about what we're doing right now. What we did in the third quarter is probably around what would do in the fourth quarter.

Okay, that's great. Thank you, guys.

Thanks, Matt.

Thanks, Matt.

And our next question does come from the line of [Amanda Larson] with Raymond James and Associates. Please go ahead.

Hi, guys. How're you doing?

Morning, Amanda.

Morning, Amanda.

On the loan growth, what have you been putting on in terms of -- any detail you can give me -- average loan size, average LTV, you know, what bucket? Even if you had an example of the type of loan just so we can get some idea of what you're putting on.

I'll give you an idea of -- basically, the average loan, the commercial real estate loan, is less than $5 million. It's usually five-year fixed. I won't get into the interest rates that we're doing. LTVs, probably 65% and less. We're seeing quite a bit of opportunity out there to, believe it or not, do deals at very low loan to values. Debt service coverage is usually 1 point rate. All within 75 miles of Midtown Manhattan, primarily I would say the boroughs of New York City. All --

Okay.

-- the loans are based on current cash flows -- not projected cash flows but current cash flows. I think that's important to distinguish because we've seen in the newspapers recently a number of these big projects whereby banks lent on the landlords' or the owners' ability to change rent control and rent-stabilized apartments to current market. All the loans we do are based on current cash flow, not what the landlords can do.

So am I [inaudible] that you're not going to have any impact from the change in the J51?

We had a -- we reviewed all -- we reviewed the entire portfolio. We will have no impact from the J51 [inaudible - multiple speakers].

[Inaudible - multiple speakers] good.

Okay, back to -- sorry.

The landlords may have some impact on some other properties but not on the properties that we've financed thus far.

Okay. And then back to the loan growth, is this mostly from the hiring of the new teams? And it's new relationships, for the most part, I would assume?

I would say for the most part, they're new relationships that are coming over from other institutions, yes.

Okay. And they have the same guidelines as a current lender, right? I mean they're going to get hit with the charge-off. Are they scrutinized any more so when they first come on?

If it's a new -- I don't know if I would say that they were scrutinized. They're under -- the fact that there is a relationship that exists and they come from another institution doesn't distract us from doing underwriting. We will underwrite it and then take into account after it's underwritten the relationship if it has to be taken into account.

Okay. And then I just want to talk a little bit about your watch list. If you will, did it go up this quarter? And of your watch list loans, what would be like the largest loan? And any type of cash [statistics] you can give about some of the watch list loans.

Well, yes, the watch list went up to $116.9 million, but I don't think there's any loan on the watch list that's north of, I'd say, 5, $6 million right now, so it's fairly granular. And, really, it's a continuation of the trends we've seen, a lot of smaller, more granular business revolving lines, as well as a C&I that we entered into several years ago.

Okay, that's it for me. Spectacular quarter yet again, guys. Thanks.

Thank you.

And our next question does come from the line of [Ken Huston] with Bank of America - Merrill Lynch. Please go ahead.

Hi. Good morning.

Morning, Ken.

Just wondering if you can give us a little bit more granularity into those problem credits that were around for the last quarter -- the Queens project, the CRA loan, whatever other -- those lumpy ones. Have they been worked out at this point?

They're still included in the nonperformers. I would say the two of them -- the two completed buildings are approximately $20 million. We had -- the one in Queens just received approval from the attorney general to go effective to be a condo, but there are six signed contracts with an expectation that they will start to close shortly, so they'll be closing between now and the end of the first quarter. That will start to pay down the principal of the loan because the current cash flow on the 31 out of 33 apartment rentals are not sufficient to service the debt; hence, it's on the nonaccrual/nonperforming list.

And then the other project, the one in Harlem, we actually have five apartments, of which four have signed contracts, which we have deposits on, and two are supposed to be all-cash deals, expected to close between now and the first quarter. So there are expectations on both of those that we will start seeing some principal paydowns because we're working both through.

Okay, so come fourth quarter, we could see a healthy amount of the outstanding MPA balance start to come off?

Well, on those two loans. I can't say -- I won't say --

Right.

-- they wouldn't be replaced by other loans, but on those two, we expect some of the apartments to close in the fourth quarter and some to close in the first quarter.

Got it.

And they say that they're at or above the appraised values.

Okay, great.

And then my second question is just about net interest margin. Can you just talk a little bit about how much room you have to reprice deposits further and your just general outlook for margin?

Well, there is an opportunity in the fourth quarter. We've already commenced the process -- more of a broad-based reduction in interest rates for particularly the money market accounts, so there is room, and you should see in the next quarter, in the fourth quarter, a continued reduction in the cost of deposits. We do it on a much slower measured pace because many of those money market interest-bearing deposits are tied to non-interest-bearing operating accounts, so you have to take relationship to pricing into account and, hence, we'll do it on a more measured basis, but there still is room from a margin perspective to drop the cost of deposits.

Okay, great. And then any thoughts on the margin?

Well, it all depends on when the deposit flows come in. If they come in evenly throughout the quarter, then you would expect that we would be able to maintain or grow the margin.

We had -- in the third quarter -- toward the end of the third quarter, actually, we were able to invest all the cash flow that we had, but there was significant cash flow coming in during the third quarter, and there were times that we had that excess cash and it took us a while to deploy. So it really is a matter of when it comes in. We can sustain or grow the margins in the fourth quarter.

Okay, great. Thanks a lot.

Thanks.

Thank you. And our next question does come from the line of Terry McEvoy with Oppenheimer. Please go ahead.

Thanks. Good morning.

Hey, Terry. Good morning.

Good morning, Terry.

Just one question. On the last call, and I believe in our meeting at some point in the third quarter, you talked about I think you called it "deposit fluff," and you were just kind of cautious about what you were seeing in terms of deposit inflows, and as market opportunities picked up at some point, some of those deposits could go into real estate, etcetera. And you didn't really mention that on today's call.

Do you have greater confidence in maybe the stickiness of those deposits, or do you still think there's some risk at some point from some of those inflows reversing themselves?

Terry, I was just waiting for you to ask the question. That's why I was holding back.

No, we still can't pinpoint -- and I'll use the word "fluff." I'm not sure. I mean we're very happy with the deposit flows, but we expect that there probably is in the flow included deposits that under different interest rate scenarios, they would not be with us. They would be invested in real estate, or they would be invested in other funds, off-balance sheet funds.

But the hard thing is pinpointing how much that is. But it's still our core clients that are bringing money over. It's not any hot money, per se.

Okay. That was the last question on my list. Thanks.

[Inaudible].

And our next question does come from the line of Lana Chan with BMO Capital Markets. Please go ahead.

Hi. Good morning.

Morning, Lana.

Hi, Lana. Good morning.

Joe, you may have mentioned this before, but I might have missed it, but what is the outlook in pipeline for further team hires for the rest of this year and into early 2010?

13's not enough, Lana?

It's a big market out there.

Yes. We don't expect there to be -- don't expect -- I can't say for sure that there would be any additional hires for the rest of this year. I would say the pipeline, comparatively to where it had been a couple of times throughout this year, is not as significant as it was. It was -- let me refresh our own memory.

When we hired eight teams in the second quarter, we said we thought we were depleting the pipeline, and then all of a sudden, the pipeline filled up, and we were fortunate to hire three additional teams.

Right now, I would say that the pipeline is in varying stages, but it's not what it was earlier in the year when it was pretty significant. We are being measured as we bring teams on, and [inaudible] I wouldn't expect anything over the next several months.

Okay, and just a follow-up to that, is there any way to quantify, given the significant growth that you've had in deposits and loans recently, the teams that you've brought over last year, what's -- have they reached the breakeven point, and does it accelerate sort of the breakeven point for some of the teams that you've hired this year given the growth that you've had?

The teams that we've hired in 2008, what's interesting is we've had a number of them pass the breakeven point, but what's great about it is they've passed the breakeven point but probably only brought over 20% of their business. That's how big some of the teams, their businesses were at their previous institutions.

We're fortunate that for the rest of this year and for 2010 that these teams have a clear opportunity to bring over much more of their business even though some of them have already met the breakeven point.

For 2009, it's hard to gauge. I mean these teams just came on board. What's interesting is that if you look at our deposit mix, 24% is DDA, and usually, that's a little bit higher, and that's because many of these teams have these business clients that it takes a while to bring over their operating accounts, which is their DDA, and they're able to bring over their interest-bearing deposits first.

So our expectation is that they'll start to bring their DDA over when they're able to get the cash management services, lockbox services, and the like completed. So there is great expectation for these teams to deliver. I would look for 2010 more for the teams that came on board in 2009.

Having said all that, the legacy teams, the teams that have been with us for a long time, they all still continue to show growth. So it's somewhat across the board. I mean the newer teams have a greater growth because they have a much smaller base by which to judge them from what has already come over here, so it's very encouraging for us.

Okay, that's great, Joe. Thank you.

And our next question comes from the line of Jason O'Donnell with Boenning & Scattergood. Please go ahead.

Good morning, and congratulations on the quarter.

Thanks, Jason.

Thank you.

Most of my questions have been answered. I'm just wondering, given your excess liquidity position, what opportunities do you have right now to pay down borrowings in the near term?

Well, we don't have much in borrowings to pay down in the near term. Most of those are longer structures. We do, however, have broker deposits. About $66 million will be coming off in the fourth quarter, and the rates on those are all north of 3%, so we will see some nice savings out of that. But, unfortunately, borrowings aren't rolling off for a little while.

Okay, great. And then just thinking about an environment in which some of your larger competitors are healthy or healthier, what are your expectations for normalized deposit growth, assuming you aren't able to expand your commercial lending force at a high rate? In other words, trying to get at what's your deposit generation capability excluding the lift-outs.

You know, I'm not so sure whether the big institutions, whether it matters if they're healthy or not. They seem to continue to be making mistakes. They all want to knock each other over for mass market retail business, and they seem to want to knock each other over for the high-end Fortune 500 business. But even in the good times when we weren't having this economic -- current economic situation, we were able to take business away from the big institutions. So I think it really is just a testament to the teams that they can continue to bring over the business.

I mean I know that in bad times sometimes, the large institutions take their eyes off the ball, but I think as things improve, that doesn't mean there's less opportunity for us to bring business over.

Okay, great. Thank you.

Thank you, Jason.

And our next question comes from the line of Andy Stapp with B. Riley & Company. Please go ahead.

Good morning, and nice quarter.

Thank you.

Good morning. Thank you.

You gave us the [inaudible] watch list at September 30. Could you refresh my memory where that stood at June 30?

It was $102.3 million.

And could you also talk about the migration of risk ratings in the watch list?

Well, I mean to get to the watch list, you have to migrate in the wrong direction, right? So the watch list is --

Right.

-- made up of predominantly 6, 7, 8-rated credits, so migration tends to go in the wrong direction there, Andy.

Okay.

Can't really quantify that for you.

Yes, well, I just wanted to know how much loans were previously in -- and I'm sorry, not watch list but the whole classified assets.

Well, again, an environment like this, it kind of runs in the wrong direction, right?

Okay.

Overall, our weighted average risk rating has remained stable. It actually remained flat quarter over quarter. You know, basically, we're seeing the credits that we entered into many years ago. Some of those are migrating in this environment in the [long] direction; however, the loans that we're putting out today are about as strong a loan as we've ever put on, so we're putting on those on at much higher quality. So we've seen the overall weighted average risk rating remain stable.

Okay, great. Thank you. That's all I had.

And our next question comes from the line of Tom Alonso with FPK. Please go ahead.

Hey, good morning, guys.

Good morning, Tom.

Hey, Tom. How're you doing?

Not too bad. How're you guys doing? Just real quick on that, the J51 issue, when you say it's not going to impact you, that you've gone through the portfolio, can you kind of --

Yes, Tom, there's 18 loans that we have with J51 tax abatements. None of them have been utilized to bring any of the apartments to a decontrolled or a destabilized status, so it will have no effect on us.

Okay. And then just sort of bigger picture from the J51, I mean do you think that that throws sort of the multifamily market into a state of -- I don't want to say disarray, but does it kind of people on the sidelines, and do you think it has an impact on your growth going forward?

I don't think so, Tom. I mean when you look at it, I think it's going to be more a building by building, loan by loan basis, but I mean ultimately, there's been a lot of numbers thrown out there. I think all the ones we're seeing -- it's about -- affects about 3 to 4% of the apartments -- had the J51s on them, but that doesn't mean that they were utilized to bring them to above -- to a market rate.

So the amount that's actually been used is much lesser, and I've seen estimates from 10,000 to 50,000 apartments. So in the grand scheme of things, I don't think it's going to have too much of an impact on the overall, but I would expect that on a building-by-building basis, it could be impactful.

Okay, great. Most of my other questions have been answered. Thanks, guys.

Thanks, Tom.

And our next question comes the line of Avi Barak with Sandler O'Neill Asset Management. Please go ahead.

Hey, guys. It's just Sandler O'Neill & Partners.

A quick question for you. Looking historically at your tangible common ratio, it's never fallen materially below 7% really ever. If you continue growing at the same pace you did this quarter, the current 9% falls to that 7%-ish by mid-next year. How should we reconcile the growth you did this quarter with the possibility of additional capital raises in the middle of next year?

Well, we -- Avi, good morning. We've never been shy about doing a capital raise. We did one in September of '08 and then one again in June of '09, and the reason why we're not shy about it is because it's usually -- well, I shouldn't say usually; it's never been for any sort of sins; it's been for growth. So we certainly would not be shy.

If we need to do a capital raise, the capital raise will be for the fact that we see continued growth opportunity. I don't know how to reconcile it yet because one of the things we've talked among our group here at the senior management is what tangible common equity level is appropriate. Since it's not a regulatory ratio where you can be considered well capitalized, should it be above 7? Should it be above 8? We haven't yet reconciled that. But certainly, if it gets down toward the level you're talking about, then there may be another capital raise in the future.

Okay, thank you very much.

Thanks, Avi.

[Inaudible].

And our next question does come from the line of Peyton Green with Sterne, Agee. Please go ahead.

Good morning.

Peyton, good morning.

Good. A couple questions for you. I wondering, Eric, if you could comment on kind of the marginal investment yield on the securities book in the third quarter versus the second and kind of what you would expect to put the liquidity to work in the fourth quarter.

Yes, it's in the high 3s to low 4s, I'd say, on average, Peyton, and I would expect that to continue. It's really -- the market's bouncing around a bit, so we're picking our opportunities as to when we get in. But I'd say in the low 4 arena.

Okay. And then is there any particular high-yielding buckets that caused kind of the overall portfolio to get repriced lower in the fourth quarter, or is it pretty much on average with the average yield?

I'd say it's pretty much on average.

Okay. And then on the money market repricing issue, back in '03 and '04 when the money market -- I guess the Fed funds rate was closer to 1%. Your money market rates bottomed between 1 and 1.15 in terms of the cost of money market funds. What kind of opportunity do you think you have going forward? I mean I know then, like you are now, you're very focused on pulling business from others, but in terms of the repricing that you referenced earlier, I mean is this something -- which looked more like a catch-up? Or I mean what's the order of magnitude you take?

Great question. I think part of it would be somewhat of a catch-up because what we're noticing is some of our competitors are certainly well below where we are in the money market rates. The reason why we've been doing it in a more measured fashion is because of the relationships and the fact that usually there's DDA tied to the money market.

But we do see some real opportunity because the statistics that you point out, our money market rates were much lower back in 2003. I think what has held us back a little bit from dropping them sooner has been the fact that where we're taking the business, some of those institutions have been holding rates for those particular clients not necessarily across the board but for a particular client that we're trying to bring over. So we're fighting that a little bit, and we're trying to attract that business. They'll tell their banker, "You know, I love you, but you need to be within a certain range of what I'm getting now."

Having said all that, we do believe that the fourth quarter and the first quarter are opportunities for us to continue to drop the interest rates on the money market. We started the process already in October. We did a fairly significant -- I wouldn't say fair -- I'd say a decent drop in interest rates for a significant portion of our population in the middle of October, and we'll do it again in the beginning of November. So you should see the cost of deposits continue to decline, but yet, the rates will be very reasonable for the clientele that we have.

I think this is a topic that is, Peyton, that is discussed by our Treasurer, Peter Quinlan, not daily but by the hour with the 68 teams and the 88 group directors who want to ensure that their clients are getting a reasonable rate. We think they're getting a more than reasonable rate and there's opportunity to continue to drop rates.

Okay. And then in terms of the liquidity drag on the margin in the third quarter, you mentioned that you got a lot of the liquidity invested towards the end of the quarter. Any idea of kind of a back-of-the envelope on what the drag was to the margin in the third quarter?

Well, it certainly cost us a few basis points. We actually ended September at a margin of 3.48 for the month of September, so that's obviously positive going into the fourth quarter, but I'm sure that we're going to have similar issues in the fourth quarter with the deposit flows coming in and us having to find a safe place to invest them, but we did end on an up note in September.

Okay, so it was down fairly significantly in September and Octo -- I guess I mean in July and August. You got a fair amount of deposit flows in but you couldn't put to work?

Right.

Okay. And then the loan growth, what was the loan growth? What did it consist of in the quarter?

It was predominantly commercial real estate.

And is this multi-family, or is there some other --

[Inaudible] commercial real estate [inaudible].

Okay, all right. Great. Thank you very much.

Thanks, Peyton.

Congratulations on a great quarter.

(Operator instructions)

And our next question does come from the line of [Greg Arquette] with [Valiant Capital]. Please go ahead.

Hi. Thank you for taking one last question. I just wanted to ask a few questions about the multi-family real estate and if you could provide more color on your loan book?

Well, on the multi-family, it's usually -- I'll try to give you some of our standards.

We're trying to do right now 65% loan to value; debt service coverage, 1.3. It's usually within 75 miles of Midtown Manhattan, primarily in the boroughs of Manhattan. Current cash flowing properties not based upon our future projects but based on current cash flows. The owners of those properties have usually been in the business for many years, well respected, and well known to the teams that we've brought over from other institutions. Our average is less than $5 million.

Smaller positions. And then what -- to get comfortable with valuation levels, what kind of cap rates do you use internally?

It depends -- there's so many factors in there. I know that cap rates certainly have changed over the last several years, but it really depends on the property.

Okay. Could you give an average, say, are you using 4% to 5% these days? Above 7%?

It's higher than that, but it's competitive.

Okay.

You know, it's so different from property to property, it's hard for me to give you, but I will say it's higher than what you mentioned.

Okay. Thank you.

Thank you.

And our next question does come from the line of Christopher Nolan with Maxim Group. Please go ahead.

Hey, guys.

Hey, Chris.

Hi, Chris.

Joe, can you give a little color? Are you seeing an acceleration in terms of refinance loan demand relative to what it was in the first half of the year?

No, we haven't seen any more demand. I think it's really just a matter of when they're coming up for maturity because usually where they're coming from, the bank that it comes from, there's a prepayment penalty, so it's really more a matter of when it comes to maturity, we'll then do the refinance.

Right. And, Eric, are you -- I know you're sort of keeping the line on not doing deals any longer than a five-year maturity term, but is there any consideration going out a little bit further to seven years?

No, no, not at all, Chris.

Okay. And final question, Joe. You mentioned early on what is the escrow deposits that was received in the quarter. Can you say that again?

Yes. The total -- just give me a second. The total right now [inaudible] growth was about $191 million. It was -- no, the growth in short-term escrows was $193 million. That's the growth during the quarter. And then the total is 393.

Great. Thank you.

Thank you, Chris.

And, gentlemen, at this time, there are no further questions in the queue. Please continue with any closing comments that you may have.

Thank you. Thank you for joining us today. We appreciate your interest in Signature Bank, and as always, we look forward to keeping you apprised of our development.

Craig, I'll turn it back to you.

Thank you.

Ladies and gentlemen, this does include Signature Bank's 2009 Third Quarter Results Conference Call. There will be a replay available on today's call, and you may access that at www.SignatureNY.com and clicking on the Investor Relations tab.

We do thank you for your participation on today's call. You may now disconnect your lines at this time.