Signature Bank (SBNY) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Signature Bank's fiscal 2010 third-quarter results conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). Today's conference is being recorded October 26, 2010. I would now like to turn the conference over to Joseph J. DePaolo, President and CEO, and Eric R. Howell, CFO of Signature Bank. Mr. DePaolo, please go ahead.

Thank you, Alicia. Good morning and thank you for joining us today for the Signature Bank 2010 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 interment, loan and deposit growth, loan performance, operations, competition, 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 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 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 default, losses and prepayments on loans made by us, whether held in portfolio or sold in a whole loan secondary market which can materially affect charge-off levels and require credit loss reserve levels; four, competition for clients, loans, deposits, 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 statement 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 into the quarterly results and then Eric Howell, our Chief Financial Officer, 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 again posted a quarter of strong financial performance across the board. Deposits grew $582 million, loans increased $208 million, net interest margin expanded, non-performing loans declined and net income increased 80% reaching record levels. I will start by reviewing earnings.

Net income for the 2010 third quarter reached a record $27.4 million, or $0.66 diluted earnings per share, an increase of $12.2 million or 80% compared with the $15.2 million or $0.37 diluted earnings per share reported in the same period last year. The considerable improvement in net income when compared with the third quarter of last year is mainly the result of an increase in net interest income fueled by significant core deposit growth and continued loan growth. These factors were partially offset by an increase in non-interest expense.

Looking at deposits, deposits increased $582 million to $9.05 billion, this includes quarterly core deposit growth of $409 million or 5%. Since September 30 of last year total deposits grew in access of $2.25 billion or over 33%. Also in the quarter relationship-based short-term escrow deposits rose $171 million now totaling $693 million. Average deposits in the third quarter were $8.79 billion, an increase of $2.18 billion or 33% versus $6.61 billion for the 2009 third quarter.

Please keep in mind this is a key deposit metric we closely monitor due to fluctuations in relationship-based short-term escrow deposits. Non-interest-bearing deposits of $2.12 billion represented 23.5% of total deposits. With a considerable deposit growth, total assets reached $10.9 billion, an increase of $2.3 billion or 27% since the third quarter of last year.

Taking a look at loans now, loans during 2010 third quarter reached $4.90 billion, up $208 million or 4.4%, representing nearly 45% of total assets at quarter end. The increase in loans was primarily driven by growth in commercial real estate and multi-family loans with continued conservative underwriting standards.

Non-performing loans decreased 24% this quarter to $33.8 million or 0.69% of total loans. This compares with $44.6 million at the end of the 2010 second quarter and $51.2 million for the 2009 third quarter. The provision for loan losses for the 2010 third quarter was $10.4 million compared with $11.1 million for the 2010 second quarter and $11.9 million for the 2009 third quarter.

This is not the 12th consecutive quarter where our provisions significantly exceeded charge-offs. This continued elevated level of provisioning was driven by the effect of the current economic environment. This provisioning lead to a further increase in our allowance for loan losses which was 1.40% of loans versus 1.38% in the 2010 second quarter and 1.20% for the 2009 third quarter.

Additionally, the coverage ratio or the ratio of allowance for loan losses in non-performing loans improved again to 203%. Net charge-offs for the 2010 third quarter were $6.8 million or an annualized 56 basis points compared with $6.3 million or 55 basis points for the 2010 second quarter and $6.6 million or 66 basis points for the 2009 third quarter. Also, on a positive note, our watch list credits decreased this quarter by $9.4 million to $131.1 million.

During the 2010 third quarter we saw an increase in our 30- to 89-day past-due loans of $28 million to $63.2 million and a slight increase of $2.8 million in the 90-day plus past-due category to $16.3 million. The 90-day plus category was $16.4 million at the end of 2009, so this is not a concerning level for us.

The increase in the 30- to 89-day category was due to two client relationships -- one that we are in the process of renewing and the other client is selling properties to pay us off. We do not anticipate a problem with either relationship as we are well secured with both.

Although our credit metrics further improved and we see credit as manageable, we remained mindful of the uncertainty in the economic environment, therefore we continue to prudently build our reserves.

Just to review teams for a moment, we currently have 72 teams headed by 92 group directors. Our pipeline is more active now than any other time this year. As we approach year end, in all likelihood this active pipeline will be a good start for 2011. We continue to pinpoint opportunities for attracting new talented banking professionals in our network.

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 third quarter reached $89.1 million, up $20.5 million or nearly 30% when compared with the 2009 third quarter, an increase of 10% or $8 million from the 2010 second quarter.

Net interest margin was up 2 basis points in the quarter versus the comparable period a year ago and increased 3 basis points on a linked-quarter basis to 3.41%. The linked-quarter increase was mostly due to the deployment of cash on hand during the quarter, continued loan growth, a further decrease in our deposit cost and the runoff of higher cost borrowings.

Let's look at asset yields and funding costs for a moment. Overall interest-earning asset yields declined 10 basis points this quarter to 4.59% due to the continued low interest rate environment and slightly higher levels of cash.

In keeping with our conservative investment philosophy, we are selectively deploying cash while maintaining our high-quality, stable duration investment portfolio. As a result yields on investment securities decreased 13 basis points to 3.96% this quarter versus the second quarter of 2010.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages remain the same as the second quarter of 2010 at 5.62%. We continue to selectively identify quality lending opportunities at appropriate pricing.

Now looking at liabilities, cost of deposits for the quarter further decreased 8 basis points to 1.02% as we again decreased deposit costs given the abnormally low interest rate environment. Our borrowing cost substantially declined by 40 basis points this quarter as $122 million in long-term borrowings at an average rate of 4.73% rolled off in August. There is another $50 million in borrowings at an average rate of approximately 4.44% that will roll off early in the fourth quarter.

Non-interest income and expense -- non-interest income for the 2010 third quarter was $11.3 million, an increase of $4 million when compared with the 2009 third quarter. Given volatile market conditions we again capitalized on the opportunity to sell securities resulting in gains of $4.9 million. Conversely during the quarter we recognized OTTI of $2.1 million primarily on CDOs and Bank Pool trust preferred securities.

Additionally, net gains on sales of loans increased $1.1 million this quarter in our SBA pooling activities. Non-interest expense for the third quarter of 2010 was $42.5 million versus $38.6 million for the same period a year ago. The $3.9 million or 10.1% increase was principally due to the addition of new private client banking teams and growth in client activity.

The Bank's efficiency ratio improved to 42.3% for the 2010 third quarter compared with 50.8% for the same quarter of last year. The improvement was primarily due to growth in net interest income coupled with expense containment.

Turning to capital, our capital levels remained strong with an intangible common equity ratio of 8.41%, Tier 1 risk-based of 13.5%, total risk-based ratio of 14.51%, and leveraged capital ratio of 8.66% as of September 30, 2010. Our regulatory capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet. Now I'll turn the call back to Joe. Thank you.

Thanks, Eric. In conclusion, this was yet another quarter with Signature Bank delivering on all fronts. Our relentless adherence to our proven business model again reaped substantial core deposits growth, solid loan growth, improved net interest margin, improved credit quality and record net income.

We continue to stay focused on catering to our clients through our single point of contact approach, putting their safety, needs and interests first and foremost. Clearly this bodes well for the success and reputation of our growing institution. Now we are happy to answer any questions you might have. Alicia, I'll turn it back to you.

(Operator Instructions). Matthew Clark, KBW.

Good morning, guys. On the margin outlook can you give us -- is it fair to assume that the mix of earning assets will start to shift more toward loans going forward? And also what do you have in the way of variable rate loans that don't have floors that might be repricing here in the fourth quarter as well as what new rates -- at what rate might you be adding new securities?

I'll start off on the loan side. I would say we've already gone through the cycle and most of our loans have floors already because we started that probably six quarters or more ago. So on the loan side we certainly have floors.

I think what's going to depend with the margin is what happens with cash flow. If we have robust deposit growth, which we would consider $250 million to $300 million in deposit growth, most of that can go into loans. And that will help on the margins and we won't have a lot of excess cash flow.

But what I like to say is we've beyond robust deposit growth. Because we've been able to bring in just a plethora of clients and it continues to happen quarter after quarter after quarter. So, if that occurs that cash flow will then have to -- a large part of that cash flow will have to be put into securities and that could have some pressure on the margin.

But we want to point out on the liability side we continue to drop client interest rates and you'll see with the money market accounts we've been doing that and on October 15 we dropped some client interest rates and we're going to do so again on November 1 for clients that we haven't touched on October 15.

And as Eric mentioned, we have on the borrowings $50 million rolling off at [444]. So on the liability side there are things that are going to help us. I think the key is going to be what we can get on the asset side. I'll let Eric comment on the security piece.

Certainly like Joe said, it's going to be really based on the level of deposit flows. If we get that normal level of $200 million to $300 million of deposit growth we'll be able to deploy most of that into the loan portfolio and that will certainly be beneficial to the margins. If we continue on this $500 million to $600 million clip we're going to have to invest back into a securities portfolio.

We're not really focused on one strategy right now, we're out there looking at multiple strategies. Ultimately we're investing in the mid 3% range and roll-off is in the low to high 3%. So we will see some pressure from the securities portfolio, but we ultimately expect to be able to offset by bringing down the deposit costs, as Joe said, lower borrowing costs and obviously (inaudible).

Okay. And then just on the expense growth this quarter, it looked like you were able to contain it a little bit better than expected. Any change as to your expectations for call it 17% to 20% expense growth?

Yes, I think we've been growing in the 15% to 18% band. I mean, this is obviously a very good quarter for us on the expense front. Could that continue at the 10% level we were at this quarter versus a year ago? Yes, it could. But I think to be conservative and safe that we'll probably be in more of that 15% arena on expense growth year over year. If we continue to see 10% for another three quarters then I guess we can change it then.

Okay, that's it for me, thanks.

Bob Ramsey, FBR Capital Markets.

Thanks for taking the question. Could you give a little bit of color on the loan portfolio growth and sort of which portfolios? Was it mostly CRE multi-family or where -- what are you seeing and kind of how are you thinking about the outlook?

Yes, the growth continues to come from the multi-family sector as well as other CRE. That's where we'd expect for it to continue for a while. C&I has been flattish now for a few quarters and we've seen the utilization on the lines in C&I really trend down now over the course of this year from a high of about 49% utilization down to about 43% in September.

So, our clients on the C&I front continue to tighten down and not look to ramp up their businesses in this current economic environment. So, we expect to see loan growth continue to come from the CRE space.

Okay, thank you. And could you give me just the total dollar amount of non-performing assets? I think I've got FPLs on the release, but it doesn't have the REO with the securities piece.

Sure, the total amount of non-performing is $41.7 million, that's down from $51.1 million at the end of the second quarter of 2010. There was not a meaningful pickup in non-accrual investment securities or other real estate owned. REO went from a balance of almost $600,000 to $1.7 million -- we took over one more property that we placed in REO. So we've managed to keep all those balances in check.

Great, thank you very much.

Lana Chan, BMO Capital Markets.

Good morning. Just a follow-up if I could on the margin and could you talk about what kind of yields you're getting on the newly originated commercial real estate and multi-family? And then on the flip side, if you could give more color on how much you're repricing on those deposits recently?

Sure. On the loan side, as much as this pains me to say, we've crossed the threshold on the five-year fixed multi-family to below 5%, we're at about 4.78%. I know others have been out there a little bit lower, but we've been able to keep it at about 4-7/8. That's on the multi-family.

I would say on the commercial side, the office building side, probably mid 5% range, 5.5%. And with both the multi-family and the office buildings, that also includes bringing in the operating account, the tax escrow, the rent security account. So it's a positive for us because we also bring on some low cost deposits.

On the liability side, the money market accounts for the third quarter average 1.33, that's down from 1.41 in the second quarter. That's just on the money market side, the interest-bearing money market. We expect that will be somewhere in the mid 1.20s in the fourth quarter. We reduced some rates, as I said, October 15. We decreased a number of money market accounts and on November 1 we're increasing -- decreasing those, excuse me, that we hadn't touched on October 15.

So our overall cost of deposits was 1.02% for the third quarter, we're focusing clearly on bringing that down below 1%. But that total is somewhat dependent upon how much non-interest-bearing demand that we have, so that's why we focus on the money market because we certainly can bring that down further. So we would expect that to be down to about the mid 1.20s.

Great, thanks, Joe. Very helpful.

Christopher Nolan, CRT Capital.

Hey, guys. What's the remaining exposure on the CDOs and TruPS?

Have approximately $13.5 million remaining in CDOs and $29 million remaining in full trust preferreds.

And, Eric, what is the current investment securities portfolio duration?

2.53 years.

Okay, so it's pretty much flat with what it was --

Right.

-- the last few months. Great, that's it. Thank you.

Peyton Green, Sterne, Agee.

Yes, I was just wondering will there be any bonus accrual catch-up in the fourth quarter or does the third quarter reflect that level?

Well, obviously we're still going through that process now, Payton. So it's difficult to say being it's early in the quarter. But I would expect we'd have a little bit of catch-up in the fourth quarter.

Okay. So I mean there was not any run rate for that necessarily in the second or third quarter. It reflects the (multiple speakers) ?

Let me clarify when I say catchup, typically what we've seen in the fourth quarter is that we will -- we tend to want to be in an over a crude position. So I would expect if anything that we'd be over accrued again for this year and you would see some bonus reversal of that accrual in the fourth quarter as we seen the last several years.

Okay. And then thinking about 2011 in terms of the expense growth, Joe, you characterized that the pipeline had built back up again in terms of the talent that's available. Certainly 2009 was a huge year for you and certainly 2008 was also a big year. How would you characterize it, deposit gatherers versus lenders and just in terms of the quality?

I would say that the teams that we're talking to on bringing over are more deposit gatherers than loan generators, although they do have an element of loans in their portfolio. They're coming across from three different banks at least, three different financial institutions. The difference is in that in 2008 and 2009 and even in -- I'm sorry, in 2010 and 2000 this year we really haven't had to expand our office capacity and we were able to fill up the teams or fill up our offices that we had empty space with the teams that we brought on.

However, with the teams that we're talking to today it will require us to open up offices. I had mentioned that we were going to open up an office in the fourth quarter. And right now if I had to bet I would say it would be January that we would open up the office, because if it gets too late in December it doesn't make sense to bring on the team during the holidays because it's not going to be useful to bring clients over.

So, and then we're talking to a number of other -- as I mentioned, the pipeline is pretty strong, that's probably going to require us opening up a second office. So we'll probably be going from 23 offices to 25 offices in 2011 just in response to the teams that we're talking to. And like I said, they do have a mix, but if you had to pick one over the other it would be more deposits than loans.

Okay, great. And then just in terms of the loan pipeline, how did it look towards the end of the quarter? I know you've had some pretty good success in growing the volume -- (multiple speakers) at the end of the second quarter, how did it look at the end of the third?

Yes, it looked pretty good. I will tell you this, I was looking at loan growth. We had 200 plus -- we had about $208 million in the third quarter growth, $195 million in the second quarter and $115 million in the first quarter. And I would probably say that the growth is going to be somewhere between the $115 million and the $208 million. But I qualify that with the following -- it's the end of the year.

And when you have a crossover going from 2010 to 2011 we have some that want to close their deals now because if they're doing a sale or a refi, worried about what's going to happen with tax rates in 2011. Then you have some clients that are pushing it out to 2011. So it's hard to predict; the fourth quarter is most hard to predict not only on loans but also on deposit flows because we have so many professional clients and they have to make a decision if they want to do distributions now or in the future.

And sometimes they hold back on making deposits and just put the checks in their desks. So it's a hard question to answer, but we'll say somewhere between the $115 million and the $208 million if you're projecting out.

Okay, great. And then last question. In terms of the watch list, I think you referenced that the 30-day past dues increased to $63 million. What was the look and feel of the watch list?

The watch list actually declined, Peyton, from $141 million to $131 million. So we've had some good success in knocking that watch list down.

Okay, great. Thank you very much.

Andy Stapp, B. Riley & Company.

All my questions have been answered. Thank you.

Thank you. I show no further questions in the queue at this time. I'd like to turn the conference back to Mr. DePaolo for closing remarks.

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 developments. Alicia, I'll turn it back to you.

Ladies and gentlemen, this concludes and Signature Bank fiscal 2010 third-quarter results conference call. If you would like to listen to a replay of today's conference you may do so by dialing 1-800-406-7325 or 1-303-590-3030 and entering the access code of 437-4779 followed by the #. Thank you for your participation. You may now disconnect.