Signature Bank (SBNY) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Signature Bank's 2011 fourth-quarter and year-end results conference call. During today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, January 24, 2012.

I would now like to turn the conference over to Mr. Joseph DePaolo, President and CEO, and Eric Howell, CFO of Signature Bank. Mr. DePaolo, please go ahead, sir.

Good morning and thank you for joining us today for the Signature Bank 2011 fourth-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; 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, low demand, real estate values and competition, any of which can materially affect origination levels and gain on sale results in our business, as well as other aspects of our financial performance, including earnings on interest-bearing assets.

Three, the level of default, 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.

Four, changes in the banking and other financial services regulatory environment. And five, competition for qualified personnel and desirable office locations.

Additional risks are described in our quarterly and annual reports filed with the FDIC. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made. New risks and uncertainties come up from time to time and we cannot predict these events or how they may affect the bank.

Signature Bank has no duty to, and does not intend to, update or revise the forward-looking statements after the date on which they are made. In light of these risks and uncertainties you should keep in mind that any forward-looking statements made in this conference call or elsewhere might not reflect actual results.

Now I would 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 had another exceptional year, culminating in delivering our ninth consecutive quarter of record financial performance. This quarter we again achieved strong core deposit growth, strong loan growth, net interest income expansion, and maintained solid credit quality, all leading to record net income.

I will start by reviewing earnings. Net income for the 2011 fourth-quarter reached a record $40 million or $0.85 diluted earnings per share, an increase of $9.6 million or 32% compared with $30.3 million or $0.72 diluted earnings per share reported in the same period last year.

The considerable improvement in net income is mainly the result of an increase in net interest income, driven by continued core deposit and loan growth. These factors were partially offset by a decrease in non-interest income and an increase in non-interest expense.

Looking at deposits. Deposits increased $566 million to $11.75 billion this quarter. For the year total deposits grew a record $2.3 billion or 24% and core deposits grew a record $2.13 billion or 24%.

Average deposits in the fourth quarter were $11.7 billion, an increase of $2.4 billion or 26% versus the $9.2 billion for the 2010 fourth quarter. Please keep in mind this is a key deposit metric we closely monitor due to fluctuations in relationship-based short-term escrow deposits.

Noninterest-bearing deposits of $3.15 billion represented 27% of total deposits and grew $698 million or 29% for the year. With this substantial deposit growth, total assets reached $14.7 billion, an increase of $2.99 billion or 26% since the fourth quarter of last year.

Now let's take a look at loans. Loans during the 2011 fourth quarter reached $6.85 billion, up $407 million or 6%, representing 47% of total assets at quarter end. The increase in loans was primarily driven by growth in commercial real estate and multifamily loans with continued conservative underwriting standards.

Loan growth for 2011 was a record $1.6 billion or 31%. Nonaccrual loans decreased to $42.2 million or to 0.62% of total loans this quarter compared with $51.1 million or 0.79% for the 2011 third quarter. Nonaccrual loans at year-end 2010 were $34.1 million or 0.65%.

The allowance for loan losses was 1.26% of loans versus 1.30% of loans in the 2011 third quarter and 1.29% for the 2010 fourth-quarter. Additionally, the coverage ratio, or the ratio of allowance for loan losses to nonaccrual loans, improved to 204% compared with 163% for the 2011 third quarter and 197% for the 2010 fourth quarter.

The provision for loan losses for the 2011 fourth quarter was $14.6 million compared with $12.1 million for the 2011 third quarter and $13.6 million for the 2010 fourth quarter.

Net charge-offs for the 2011 fourth quarter were $11.9 million for an annualized 71 basis points compared with $7 million or 44 basis points for the 2011 third quarter and $14.6 million or 116 basis points for the 2010 fourth quarter.

Now turning to pass due loans and the watchlist. During the 2011 fourth quarter we saw an increase in our 30- to 89-day past-due loans of $4.5 million to $56.5 million, and a decrease of $7.5 million in the 90-day plus past-due category to $10.3 million.

Watchlist credits increased this quarter by $23.5 million to $221.2 million or 3.23% of total loans, remaining in-line with our historical averages.

While we are pleased that both nonaccrual and past-due loans decreased this quarter and our credit metrics remain strong, we are mindful of the uncertainty in the economic environment, and we again conservatively reserved.

Just to review teams for a moment. In 2011 we forecasted adding four teams and we added seven, bringing our total teams to 78, headed by 105 Group Directors. Additionally, we added nine veteran banking professionals to existing teams.

Our pipeline remains relatively active and we look forward to opportunities for attracting talented banking professionals to our network. At this point I will 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 will start by reviewing net interest income and margin. Net interest income for the fourth quarter reached $125.3 million, up $29.4 million or nearly 31% when compared with the 2010 fourth quarter, and an increase of 6% or $7.4 million from the 2011 third quarter.

Net interest margin was up 5 basis points in the quarter versus the comparable period a year ago, and increased 4 basis points on a linked quarter basis to 3.55%. The linked-quarter increase was mostly due to an increase in prepayment penalty income, a further decrease in our deposit costs, continued loan growth, and the deployment of cash on hand from the July capital raise.

When you exclude prepayment penalty income from the fourth and third quarters of 2011, and take into account the excess cash from the capital raise in the third quarter, core net interest margin for the quarter was 3.46% compared to 3.50% for the 2011 third quarter.

Look at asset yields and funding costs for a moment. Overall interest-earning asset yields declined 5 basis points to 4.38% due to the continued low interest rate environment and benefiting from an increase of $1.5 million in prepayment penalty income on loans.

Despite lower yields in the marketplace, the volatility during the quarter allowed us to selectively add to our securities portfolio at appropriate levels. As a result, yields on investment securities declined 13 basis points to 3.61%. The reduction was mostly due to an increase in premium amortization on mortgage-backed securities and lower reinvestment yields. The duration remained stable at 3.13 years.

And turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 1 basis point to 5.37% compared with the third quarter of 2011. Excluding prepayment penalties from both quarters, yields would have declined 10 basis points.

And now looking at liabilities. Money market deposit costs this quarter further declined 7 basis points to 98 basis points as we again decreased deposit costs, given the low interest rate environment. This decrease, coupled with an increase of $241 million or 9% in average non-interest-bearing deposits helped lead to a decline of 7 basis points in our overall deposit costs.

And onto noninterest income and expense. Noninterest income for the 2011 fourth quarter was $7.9 million, a decrease of $2.1 million when compared with the 2010 fourth quarter, almost entirely driven by the decline in net gains on sales of securities and loans.

The non-interest expense for the fourth quarter of 2011 was $47.1 million versus $41 million for the same period a year ago. The $6.1 million or 15% increase was principally due to the addition of new private client banking teams.

The Bank's efficiency ratio further improved to 35.4% for the 2011 fourth quarter compared with 38.7% for the same quarter last year. The improvement was primarily due to growth in net interest income, coupled with expense containment.

Return on capital. Our capital levels remain strong, with a tangible common equity ratio of 9.6%, Tier 1 risk-based of 17.08%, total risk-based ratio of 18.17%, and leverage capital ratio of 9.67% as of year-end 2011. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet.

Now I will turn the call back to Joe. Thank you.

Thanks, Eric. The fourth quarter cast another exceptional year of achievement at Signature Bank. In 2011 we grew deposits a record $2.3 billion or 24%; grew loans a record $1.6 billion or 31%; maintained exceptional credit quality with nonaccrual loans to total assets of only 0.29%; increased net interest income by $115 million or 33% -- that is topline revenue growth; added seven private client banking groups while expanding nine others; increased expenses by only 11%, helping to drive our efficiency ratio to a low of 36.4% for the year; increased our capital position by nearly 50% through earnings and another successful capital raise, further solidifying our commitment to depositor safety.

And, lastly, delivered a near 50% increase in net income to a record $149.5 million on top of delivering a 100% increase in 2010.

Now we are happy to answer any questions you might have. Camille, I will turn it back to you.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). Dave Rochester, Deutsche Bank.

Nice quarter. Could you just give an update on multifamily and CRE pricing? And maybe the same thing on securities reinvestment rates, if you could talk about those and what you were buying this quarter?

On the commercial real estate side for multifamily, in the latter half of 2011 we were primarily pricing five-year fixed at 4.5%. Starting in 2012 that has come down a bit probably in the range of 4.25 to 4.5 with it primarily being closer to 4.25% to -- in that range.

On the CRE side, other than the multi family, I was saying we are probably getting something that started with a 5%, but now as we are in 2012 it is closer to 4.75%, and that is all on the five-year fixed.

On the securities portfolio, Dave, runoffs in the mid to high 3's still; reinvestments in the low to mid 3's. We have employed a number of strategies this quarter, including selectively adding agency CMOs. We still like the nonagency RE-REMIC space. Corporates, we have continued to add there as well CMBS.

Thanks for that color. Just back on the loan pricing real quick, are you seeing any change in the competitive landscape at all to drive lower rates or is it just a lower rate environment in general?

I think it is both. We have the benefit of some quality groups in particular on the commercial real estate side that are able to deliver the product more efficiently than others.

I will give you a few examples. We are closing within 45 days, where other others are doing it far beyond that. Once we issue a term sheet with the pricing we stay with that pricing, so it doesn't change prior to closing.

We also when we close a loan those that are closing it are those that are continuing to service it. And since we keep the loans on our books, the client knows that they will be dealing with that person throughout the life of the loan, and that has given us some benefit to keep our pricing a little bit ahead of our competitors.

We have seen some newer competitors come into the marketplace trying to drive the pricing into the 3's, but they don't have the quality that we have and that has given us a benefit to keep our pricing a little bit higher.

It sounds good. Just on the flip side of the equation, can you talk about the room you have -- you think you have on deposit costs and lowering maybe the money market account rates, as well as CDs?

One area we concentrate primarily is the interest-bearing money market. And it is -- we dropped it from 1.05% to 0.98%. We will be instituting some additional decreases. We started to do some just this week, but primarily we will be instituting some additional decreases on February 1, trying to get that down to below 0.95%.

So there is room. I don't know if it is the 7 -- I know for the year we averaged about 6.5 basis points decline per quarter in that interest-bearing money market. I don't know if we will still average that in 2010, but there certainly is some room for us to continue to decline the decrease of that interest-bearing money market.

It sounds good. Thanks, guys.

John Pancari, Evercore Partners.

Can you talk about -- how much did the prepayment penalties help the margin this quarter?

The prepayment penalties are up about $1.5 million over the previous quarter, so I think they added 5 BPs to the margin.

Then the increase in your total borrowings, I saw they were up notably in the quarter -- your total short-term borrowings. Is that tied to the actions you took in the securities portfolio? Can you talk about that a little bit?

No, not really. It was really tried to -- we had significant deposit flows during the quarter and we saw escrow deposits right out at quarter end, so we used borrowings to really fill that gap on the deposits flowing out.

That is helpful. Then, lastly, on the loan growth side, can you talk a little bit about your expectations here as we move through the year, particularly given some of the competitive comments you just talked about on the multifamily side, as well as if you can also talk about the expected ramp up ultimately of the C&I portfolio, given that is where a lot of the hiring that you have done has been concentrated around? Thanks.

We are not really going to give any guidance on deposit growth and loan growth, because we failed miserably in the last few years in giving our guidance. And you guys are much better at projecting and we are much better at executing.

But we will say, if you look at the last four years of our deposit growth, 2008 was about $1.4 billion. It was $900 million in 2009, about $870 million in 2010, and $1.6 billion in 2011. We would expect 2012 to be closer to the 2011 when you look at those four years.

And that is loan growth?

That is loan growth. In terms of ramping up on the C&I side, we have seen more activity in the C&I side. In fact, C&I loans balance grew 4% from the third quarter to the fourth quarter linked and we have seen some more activity already in 2012. Whether that will weight to growth or not we are not quite sure, depending upon whether they close or not. But we have seen more activity, and so that should help with the growth in 2012.

Okay, great. Thank you.

Ebrahim Poonawala, Morgan Keegan.

I guess just following up on the first question in terms of, Eric, when we look at the margin outlook, and I guess in the last quarter you talked about expectation for the margin staying in the high 3.40%s to about 3.50%-ish range. Looking out only about 3.46% now for the fourth quarter, how should we think about the margin overall in terms of do we trend closer to 3.40%-ish -- [3.14%] assuming no big change in the rate environment and growth remains at expected levels for the next few quarters?

Yes, I think that sounds reasonable. It is really going to be dependent on the level of deposit growth and our ability to deploy those deposits, but we should be able to maintain a margin in the low- to mid-3.40%s for the next couple of quarters.

Got you. And, I guess, another question on expenses. Anything seasonal this quarter or any ramp up in terms of FICO that we should expect in the first quarter going forward?

We always have a little bit of a pickup in the FICO so we will see that come through in the first quarter. I think that the fourth quarter this year gives us a good run rate going into next year. We expect overall expense growth to be in a 12% to 15% range for 2012 over 2011. This year we increased expenses at 13.3%, when you back out the effect of the benefit that we had from the FDIC assessment fee. So we expect to continue to grow expenses at a 12% to 15% clip.

Got you. I guess this is the last question in terms of Joe mentioned about the pipeline for hiring seems very active. Any specific areas of focus and any expectations were the team additions would end up versus 2011?

In our plan we have put in for a projection of about four teams. That is something that could occur rather quickly. It is quite active, although you don't really bring many teams on this early, because they get paid their bonuses from other institutions before they join us, and those bonuses are not paid sometimes until as late as the early part of March. So we hope to see some activity at the end of the first and the beginning of the second quarters.

But we are projecting team growth of four, and we are concentrating more on the C&I side. But as Eric has said many times in the past, if a team opportunity comes to us, and if it is a deposit gatherer and it is quality clients, we are going to scoop up that team. So it is not only just looking for the loan growth.

Got you. All right, that's all I had. Thanks, guys.

Matthew Clark, KBW capital markets.

On the borrowing costs, I think you had $80 million come due last quarter at an elevated rate. And it looks like the cost shook out around 240. I am just trying to get for additional runoff here as we go forward in 2012. And it looks like you added some borrowings at least on average in the quarter. I am trying to get a sense for where those borrowing costs might be trending.

We certainly expect it to trend down. We add a lot of short-term borrowing to really plug the gap on the short-term escrow deposits flowing out. So ex that, as you know, we have a decent amount of long-term borrowings coming due over the course of 2012.

And in the first quarter we've got about $30 million coming due at about 4.5%. In the second quarter we've got $25 million coming due, but that is just at 77 basis points. But we will really get more benefit in the third and fourth quarters next year where we have $75 million in each of those quarters coming due, the third quarter at 3.64% and the fourth quarter at 2.77%. So we will see some good benefit later in 2012.

Okay, great. Then on the watchlist, the uptick, can you give us a sense for the lumpiness of that increase and what your plans are to resolve those relationships?

It is predominantly one relationship that we have that we expect will cure on its own. We're really not overly concerned with property. There was some delays in payments, but we think that will be rectified shortly, so we are not too concerned about the uptick in the watchlist.

And the type of project?

That is CRE.

Okay, that's it for me. Thanks.

Casey Haire, Jefferies & Company.

Questions on credit quality. The charge-off rate up a little bit this quarter, can you give a little color as to what is driving that? And then just as a follow-up, what would the provision have been at a more normal rate of say 50 BPs where you guys have been for most of the year?

The charge-offs were really driven by two larger C&I relationships that we reached resolution on this quarter, so we took the charges in the quarter.

I would expect in this environment that our charge-offs should be in a 40 to 60 basis point range. So we think that over the course of the next couple of quarters that we will have a lower level of charge-offs so we would probably see a lower level in provisioning, more in-line with what we saw in the first three quarters of 2011.

So provision would have been -- like with a similar level of loan growth as you had in third quarter it would have been more in-line with a $12 million provision, ex the noise and the loss rates?

Yes, give or take.

Give or take a little bit.

You should look at it, as Eric said. Take the first three quarters, or even look at the first three -- if you look at the first three quarters of 2010 and the first three quarters of 2011, that is a better gauge. We had some noise in each of the fourth quarters, that is the better gauge for 2012.

Okay, great. Then just one last one on loan growth. I appreciate the color. It sounds like C&I is -- activity is picking up a little bit. On the CRE side are you seeing any increased appetite on the purchase side?

Anecdotally we have seen one or two deals or maybe a handful of deals that were involved in, but most of it has been multifamily refinance.

Okay, great. Thank you.

Steven Alexopoulos, JPMorgan.

On the pre-pays, how much of the pre-pays are being driven by rate versus driven by borrowers just looking to get cash for additional projects?

I would say it is predominantly being driven by rate.

Okay, so given we (multiple speakers).

But for instance, the client that has today a 5.75% and can drop it to 4.25% or 4.5% and pay a little bit of a prepayment, and it works out that his breakeven is going to be very quick, they're going to refinance that. So that is what is predominantly (inaudible).

Have you seen the pre-pays drop off here in the first quarter given that rate ticked up a little bit?

It is too early.

Yes, it is a little early.

It is really early.

I think I asked this last quarter -- the efficiency ratio. But it is pushing so low, are there any pressures that we should be thinking of in terms of how low it can go where you maybe could build out some additional infrastructure, or does revenue just continue to grow at 2X the expense growth rate?

I think it is the revenue growth that you have to think about. On the expense side there is not much to squeeze out. We are always looking to see how we can leverage things. Everybody in the world uses the term leverage, which we don't necessarily like, because it is an overused term. But for us it is really all about the revenue growth.

I think what helps us on the expense side is we don't have the retail real estate costs, we don't have the advertising costs, and we don't have some of the marketing costs. But then again we have the compensation cost, and that is really where it should be. The bankers should be rewarded for bringing in the business.

So I think it is the model that we have that encourages the continued revenue growth. I don't know how much lower we can go. It is hard to go -- we are already in the mid-30%s. So I think if we hover around that and just continue to drive revenue we would be very happy.

Got you. Just one final question, Joe, in the past you have talked about, it is almost a same-store sales number, like your original teams. How did it work out for 2011 in terms of how much deposit growth those original teams did?

A great question. We actually don't have the information yet. We don't have the information by team to look at year 2001 versus 2002. So we will probably have that in a couple of weeks.

Got you. Thanks for taking my questions.

Erika Penala, Bank of America Merrill Lynch.

I just had one question with regards to forward capital management. It is clear that the growth trajectory of this Company continues to be robust, but as Eric mentioned during the prepared remarks, your capital levels are well in excess of peers and likely well in excess of whatever -- however the regulators end up adopting the international standards. Can you give us some thoughts in terms of what benchmarks you would look at in terms of seriously considering capital return?

A very good question. Our hope is that, although we talk about it very infrequently here because our trajectory on the growth we believe will continue -- we have about a 1% market share, and a 2% marketshare can make this Bank a $25 billion institution, which we don't think is out of the question.

So we have always thought about how we can use the existing capital to grow the Bank, and I guess if you look at it over the last three years, deposit growth has been in excess of of $6 billion. So if we can keep that going over the next several years I don't think we would be talking about giving capital back.

Certainly if that growth slows, and with the earnings power that we have had, we would have to consider that, but it really hasn't been on our radar screen.

Got it. Thank you.

Lana Chan, BMO Capital Markets.

Just two quick questions. One, Eric, I think you mentioned there was accelerated MBS prepayment. How much did that cost the margin this quarter?

It probably cost us 5 basis point in the margin.

And then there was a slight increase in the average diluted share count this quarter, was that just options?

It was actually just the way that the averages worked out. There was the extra week or so that we had from the capital raise. It was done in July, so when you figure in a full quarters' worth of having the shares in the capital that increased it a little bit.

Okay, got it. Thank you.

Bob Ramsey, FBR.

I was just hoping you could maybe give a little bit of color on C&I versus CRE growth within the commercial portfolios. Is it still mostly multifamily, CRE or are you starting to see some C&I pickup?

We saw some C&I pickup linked quarter third to fourth quarter of about 4%, but it has been primarily the CRE. We have seen some activity already this quarter, not equating to actually booking of loans but a lot of activity -- a number of things we are looking at, a number of loans that we have been approving and determining whether or not we are going to get or not get the business.

So it is encouraging that we are seeing an uptick, because our loan growth has been primarily on the CRE multifamily side, and if we get some activity on the C&I side that can really bode well for us in the margin.

And thinking about the margin, I know you all mentioned that accelerated prepayments probably cost the margin about 5 basis points. Is that something you would think that you're likely to get back next quarter, or when you look at the premiums that are on the securities that you all own what is your thoughts in terms of likelihood of accelerated MBS prepayments (multiple speakers)?

I don't see us getting it back, Bob. I think we will still be at a heightened level of -- at this similar level of prepayments in the premiums. But we have tried to encapsulate the level of the decline by a number of the strategies that we've employed in the portfolio really well over a year ago. So we think we have done a good job in rotating out of certain assets that would have higher premium prepayments into other more stable asset classes.

Then last housekeeping question. What was the REO balance this quarter?

$566,000, the same as last quarter.

Perfect, thank you, guys.

Dave Rochester, Deutsche Bank.

Thanks for the follow-up. Just on the margin, Eric, you had talked about a low 3.40%s, I guess, going forward for the next few quarters, rough projection there. Was that excluding the prepayment penalty income or including it?

That is excluding.

Okay, great. Thanks, that is all I got.

Peyton Green, Sterne Agee.

Congratulations on a very good quarter -- also year, series of years for that matter. But with regard to the watchlist, are you seeing any particular trends develop in the kind of consistent and gradual ramp up in that or is it just more related to maturing of the loan volumes that you have put on in the last four or five years?

I think it is more related to the maturing of the loan volumes. And really we have just been very aggressive in putting loans on watch, much more so than we have in the past. Given the prolonged nature of the environment we have just been, I think, quicker on the trigger there in putting things on watch than maybe we had several years ago.

Okay, great. And then with regard to volume growth in 2012 versus 2011, certainly your guidance for the past has been fairly consistent and certainly conservative. Is the competitive environment changing enough to trouble you about that or is it still benign enough to make you feel pretty confident about growth going forward?

It is not troubling to us at all.

Okay, great. Thank you.

That does conclude the question-and-answer session. I would now like to turn the call back over to Mr. DePaolo for closing remarks. Please go ahead.

Thank you for joining us today. We appreciate your interest in Signature Bank. As always, we look forward to keeping your apprised of our developments. Camille, I will turn it back to you.

Ladies and gentlemen, this concludes Signature Bank's 2011 fourth-quarter and year-end results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 450-3216. An archive of this call can be found on the Company's website at www.signatureny.com.

ACT would like to thank you for your participation. You may now disconnect.