Signature Bank (SBNY) 2014 Q1 法說會逐字稿

Welcome to Signature Bank's 2014 first-quarter results conference call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer and Eric R. Howell, Executive Vice President, Corporate & Business Development. Today's call is being recorded. (Operator Instructions). It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin.

Thank you, Laurie. Good morning and thank you for joining us today for the Signature Bank 2014 first-quarter results conference call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Thank you, Joe. This conference call and all statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and may be beyond our control. 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 strategies.

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 those described in our Quarterly and Annual Reports filed with the FDIC, which you should review carefully for further information. 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. 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 EVP of Corporate & Business Development, 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 kicked off 2014 on a solid note with the first quarter marking our 18th consecutive quarter of record earnings. We again achieved record deposit growth, strong loan growth and expanded top-line revenue while maintaining stellar credit quality. Moreover, we further invested in the bank's future with the addition of five private client banking teams.

I will start by reviewing earnings. Net income for the 2014 first quarter reached a record $66 million or $1.37 diluted earnings per share, an increase of $15.4 million, or 30% compared with $50.6 million, or $1.06 diluted earnings per share reported in the same period last year. The considerable improvement in net income was mainly the result of an increase in net interest income primarily driven by record deposit growth and strong loan growth. These factors were partially offset by an increase in non-interest expense attributable to our revenue growth initiatives, as well as an increase in New York State corporate income tax.

Looking at the deposits that once again played a key role in the results, deposits increased a record $1.25 billion, or 7%, to $18.3 billion this quarter, including core deposit growth of $900 million and average deposit growth of $930 million. For the past 12 months, total deposits have grown $3.5 billion. Core deposits grew $2.6 billion and average deposits increased $3.2 billion. Non-interest-bearing deposits of $5.3 billion represented 29.1% of total deposits. With the substantial deposit and loan growth, as well as earnings retention, total assets reached $23.1 billion, an increase of $4.8 billion, or 27%, since the first quarter of last year. The ongoing strong deposit growth is attributable to the superior level of service provided by all of our private client banking teams who continue to service the single point of contact for their clients.

Now let's take a look at our lending business. Loans during the 2014 first quarter increased $699 million, or 5%. For the past 12 months, loans grew $3.85 billion and now represent 61.5% of total assets compared with 56.7% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate, multifamily loans and specialty finance. Non-accrual loans increased to $36.2 million, or 25 basis points of total loans this quarter, compared with $31.3 million or 23 basis points for the 2013 fourth quarter and $35.1 million or 34 basis points for the 2013 first quarter. The allowance for loan losses was 1.01% of loans versus 1% of loans in the 2013 fourth quarter and 1.09% for the 2013 first quarter.

Additionally, the coverage ratio or the ratio of allowance for loan losses to non-accrual loans is a high 396%. The provision for loan losses for the 2014 first quarter was $8.2 million compared with $11 million for the 2013 fourth quarter and $9.9 million for the 2013 first quarter. Net recoveries -- yes, I said net recovery -- for the 2014 first quarter were $244,000 or an annualized 1 basis point compared with net charge-offs of $2.8 million or 9 basis points for the 2013 fourth quarter and $4.5 million or 18 basis points for the 2013 first quarter.

Now turning to the watchlist and past-due loans. Watchlist credit decreased $7.5 million this quarter to $122.5 million or a very low 0.86% of loans. During the quarter, we saw a decrease of $10.3 million in our 30 to 89-day past-due loans of $44.6 million and a decrease of $1.8 million in the 90-day plus past-due category to only $689,000. While we are satisfied that all our credit metrics are strong again this quarter, we remain mindful of the prevailing uncertainty in the economic and political environment and continue to conservatively reserve.

Just to review themes for a moment, the 2014 first quarter was strong for (inaudible). We added four product client banking teams and one thus far in the second quarter for a total of five to date. Our pipeline remains relatively active and we look forward to opportunities for attracting talented banking professionals to our network. Additionally, we will be opening three offices later this year and expanding several others. 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 first quarter reached $186.5 million, up $38.4 million, or 25.9% when compared with the 2013 first quarter, an increase of 4.6%, or $8.2 million from the 2013 fourth quarter. Net interest margin was down 4 basis points in the quarter versus the comparable period a year ago and increased 7 basis points on a linked-quarter basis at 3.39%. When loan prepayment penalty income is excluded from the 2014 first quarter and the 2013 fourth quarter, core net interest margin for the linked quarter increased 4 basis points to 3.25%. 3 basis points of the linked quarter increase was due to two less days in the first quarter. Additionally, premium amortization on securities slowed further and we generally saw higher yield on recent loan originations and securities purchased.

Let's look at asset yields and funding costs for a moment. Interest-earning asset yields declined 10 basis points from a year ago. However, they increased 7 basis points from the linked quarter to 3.92%. Given the considerable growth in average loans for the quarter of $1.06 billion, the average investment securities portfolio decreased $34 million this quarter. Yields on the portfolio increased 7 basis points to 3.32% this quarter benefiting from higher reinvestment yields and a slowdown in premium amortization. The duration of the portfolio remains stable at 3.99 years.

Turning to our loan portfolio, yields on average commercial loans, mortgages and leases declined 2 basis points to 4.36% compared with the 2013 fourth quarter. Excluding prepayment penalties from both quarters, yields would have declined 5 basis points driven by continued pressure from refinance activity and lower yields on new loan production.

Now looking at liabilities, money market deposit costs this quarter declined 2 basis points, which helped drive a decrease of 1 basis point and our overall deposit cost to 49 basis points. Given our strong average loan growth, average borrowings increased $45 million to $2.93 billion or only 12.9% of our average balance sheet. During the quarter, we replaced short-term borrowings with core deposits and modestly extended the duration of our fixed term borrowing. This led to a 7 basis point increase in average borrowing costs for the quarter.

Onto noninterest income and expense. Non-interest income for the 2014 first quarter was $7.2 million, a decrease of $1.7 million when compared with the 2013 first quarter. The decrease was driven by a $1.8 million decline in net gains on sales of SBA loans. Non-interest expense for the 2014 first quarter was $70 million versus $58.9 million for the same period a year ago. The $11.1 million or 19% increase was principally due to the addition of new private client banking teams, the new asset-based lending team and our continued investment in Signature Financial. We anticipate these investments will lead to future growth. Even with the significant hiring over the last several years, the bank's efficiency ratio still improved slightly to 36.2% for the 2014 first quarter compared with 37.6% for the 2013 first quarter.

Looking at taxes for a moment, the 2014 first quarter included a $1.8 million tax charge related to New York State corporate income tax reform enacted on March 31, 2014. This reform lowered future marginal tax rate and changed apportionment factors resulting in a reduction of the bank's state-deferred tax assets.

Returning to capital, our capital levels remained strong with a tangible common equity ratio of 8.28%, tier 1 risk base of 14.05%, total risk-based ratio of 15.1% and leverage capital ratio of 8.51% as of the 2014 first quarter. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet. And now I'll turn the call back to Joe. Thank you.

Thanks, Eric. To summarize, Signature Bank started off the year with our 18th consecutive quarter of record earnings supported by record deposit growth, strong loan growth, solid credit metrics and top-line revenue growth. Notably, in 2013 and thus far in 2014, we made significant investment for the future with the addition of 15 private client banking teams, as well as an ABL team and increasing personnel in both our commercial real estate banking team and our equipment financing group. Now we are happy to answer any questions you might have. Laurie, I'll turn it over to you.

(Operator Instructions). Casey Haire, Jefferies.

Hey, good morning, guys. A couple questions on the loan growth outlook. Number one, can you give us a breakdown of what the growth was this quarter by product? And then also how does the pipeline look as we enter the second quarter versus year-end?

Sure, Casey, I will take the first part of that. Multifamily was up $282 million. Commercial other forms of CRE were up $194 million. Signature Financial was up about $180 million and then the rest was in personal lines of business.

And on the loan pipeline, it's fairly robust. We have -- going into the second quarter and this quarter, it's a fairly robust loan pipeline not only in commercial real estate, but we are also seeing it in Signature Financial (inaudible).

Okay. And the multifamily, I mean what is the outlook there? Is $280 million a low mark for the year or is that -- is there more downside risk?

No, the pipeline there is fairly robust.

Okay.

The second quarter -- the first quarter is traditionally the slowest one. We are very happy with the growth in the first quarter because it was $100 million more than our best first quarter we have ever had and there is a lot of pullforward into the fourth quarter. So we are very happy with the $700 million going into the second quarter.

Okay, great. And pricing update on the multifamily?

On a five-year fixed, it's 3 3/8%. The market we are seeing at 3% and 3 1/8% and we are getting our fair share at 3 3/8%. What makes us even more comfortable is the fairly robust pipeline that we have going into the second quarter getting our share of deals at the 3 3/8% level. And then also we are getting deals at a much higher level on the high 3%s, low 4%s, primarily high 3%s on office, mixed-use and retail.

Got you. And just last one from me. On the expense growth, pretty strong this quarter. Obviously some seasonal pressures, but that 19% year-over-year comp, is that a good comp going forward given all the team hires or can there be some acceleration going forward?

Well, we hope it decelerates a little bit from this level, Casey, but ultimately we see it being at an elevated level for the rest of the year. We did hire a number of teams in the fourth quarter, which is a little unusual for us. So we got the full expense for them in the first quarter. We hired four teams in the first quarter and we have already hired a fifth team the first day of the second quarter. So we are putting on expense, but for all the right reasons. We also saw payroll taxes kick in, we hired a salesforce at Signature Financial. We brought on the ABL group, so we are investing in the future and we expect to have an elevated expense growth level.

Thank you.

Okay, Casey. Thank you.

Steven Alexopoulos, JPMorgan.

Hey, good morning, guys.

Good morning, Steve.

Hey, Steve. Good morning.

I wanted to start, given all the comments from Mayor DeBlasio on wanting to freeze rents on the rent-controlled units, is that potential causing a reduction that you are seeing in demand for rent-stabilized properties?

We have not seen a reduction. In fact, it made surprisingly an unintended consequence. It is starting to create a little bit of a marketplace where those that want to get out and those that want to get in for various reasons. So actually an unintended consequence of that it may be creating a marketplace, which actually helps us because when a client or a prospect is looking to do a purchase or sale transaction, they usually go to the player that they believe is most efficient and we believe that we have the most efficient when it comes to the commercial real estate team and their ability to get things done in a timely fashion. Whether there is a freezing of rent or an increase in real estate taxes, we are continuing to monitor the situation and we are not getting a sense one way or the other at the moment. Our clients though we feel are better operators who have multiple properties and have been doing it for multiple years. So we believe that they can handle whatever situations are presented, including any counterproductive rent freeze.

Joe, could you give us a sense what percent of your multifamily loan book would be for rent-stabilized units?

I don't have that number, Steve.

Okay. And any impact from the weather in the first quarter on multifamily activity?

No, we have seen none whatsoever. Any closings that were delayed were done within the quarter.

Okay. And just one final one for Eric. What is the expected tax rate going forward given the change that you referenced?

Well, I would stay with 42%, Steve. We don't expect to see a benefit or a lowering of that tax rate really until 2016 when the lower rates start to kick in.

Oh, got you. Okay, thanks for all the color.

Thank you.

Thank you.

Dave Rochester, Deutsche Bank.

Hey, good morning, guys.

Hey, Dave. Good morning.

Hey, Eric, you had mentioned you recently saw higher yields on securities purchases. I was just wondering if you could talk about how you expect the margin to trend from here. Are you still seeing stability going forward?

Absolutely, Dave. I think we are going to maintain these relative levels. Ex-day count, we really got quite a bit of benefit in the first quarter from the day count, but that will unwind a little bit. So that should take a couple of basis points out of the margin for the second quarter but ex the day count, we really see ourselves being stable for the next several quarters.

Great. And what are securities or investment rates today?

Still in the low 3% range, between 3% and 3.10%, 3.15%.

And then would you happen to have the securities premium am expense for the quarter?

It was approximately $1.2 million better than the prior quarter. The overall amount of premium am was $16.2 million.

Got you. And I noticed on the deposit cost side, you were able to lower the rate on institutional money markets a little bit. I was just wondering if you're seeing any change or loosening up of the competition in that market, if you are seeing competitors reduce rates at all.

No, we are not seeing any reduction in competitor rates. What we have been able to do is we have not dropped really the current clients, our ability to bring in new clients, new prospects at lower rates that help drive that 2 basis point drop.

Great. And just one last one on the expenses. I was just wondering, Eric, if you happen to have that component that was FICA and maybe the more seasonal stuff in the quarter.

It's very hard to isolate, Dave. So we don't have a breakdown for that.

Okay. All right, guys. Great, thanks. I appreciate it.

Thank you.

Ken Zerbe, Morgan Stanley.

A quick question, just on the expenses again, the three new private client branches that you want to open up or banking offices open up, is that also in your expense? I mean should we see a tickup in expenses later this year as those get opened or how are you accounting for those?

Some of those are in and some are not, so we will see a further pickup in expenses, Ken. But it shouldn't be all that meaningful.

Okay. All right, just supported with NII growth. Understood. Okay, that is actually it for my questions. Thank you.

Matthew Clark, Credit Suisse.

Good morning, guys.

Hey, Matt. Good morning.

For the new teams that you've hired I think since the fourth quarter, can you give us a sense for if they've contributed at all on the loan or deposit side? Just trying to get a sense for the timing of the traction there and whether or not we might see stronger production as a result maybe later this year.

I would say the traction would come this year and minimal if at all any traction in the fourth quarter.

Okay. And in terms of the mix of the teams, I guess can you give us a sense for how many of them were kind of deposit-gathering types of teams relative to teams that came with books of business? Just trying to get a sense for the relative size of each of these.

They all came with books of business, but predominantly deposit-gathering.

Okay. Across the board?

Across the board.

Okay. All right, the rest of my questions have been answered. Thanks.

Thanks.

Bob Ramsey FBR.

Hey, good morning, guys. Joe, I know you described the loan pipeline heading into the second quarter as robust and also you guys noted the seasonality that is normal in your business. I was just wondering if you could in any way quantify what the pipeline looks like today versus entering the first quarter?

The pipeline today versus entering the first quarter is much stronger. So when you do comparatives to the first quarter 2014, the pipeline going into the second quarter 2014 is much stronger and it is much stronger than it was comparatively going into the second quarter of 2013 last year.

Okay. So then I guess it would be reasonable to expect that loan growth in the second quarter this year should be greater than either last quarter or the second quarter of 2013?

Yes.

Great. And then I wanted to ask too about margin. I know you said you guys expect net interest margin give or take a couple basis points on day count will be stable here. Just curious what gives you confidence around that given that loan yields are a little bit lower and probably losing ability to make much more progress on the funding side. Just how you are thinking about the different pieces of NIM.

Well, our major headwind cost has been the refinance activity. We had it again this quarter really due to one large choppy loan at the end of the quarter that refinanced, but we expect that headwind to slow down as we look forward. So that would be really the primary driver. Securities premium amortization has also been helpful to us and the runoff in the securities portfolio is at a lower level than it has been in the past. So it is really those higher-yielding loans and securities that have been running off are not as high level as they had been in the past. So we are not having quite that headwind.

Okay. And I guess lower levels of refi activity probably mean a little bit lower prepayment penalty income. It is not nearly as big for you guys as some others, but do you think that stays around this quarter, just continues to sort of gradually drift lower or what is sort of the -- I know you never know quarter to quarter, but general outlook?

Right, it's very difficult to predict, but we expect it to gradually slow down over the course of this year.

All right, great. Thank you, guys.

Chris McGratty, KBW.

Hi, good morning, guys.

Hey, Chris, good morning.

Eric, in terms the balance sheet, if you look back a year ago, securities were roughly 40% of earning assets. Today, they are call it 36%. Can you help us on the near-term outlook in terms of maybe dollars or maybe a percentage basis of where that ratio ultimately normalizes? Is it 25% to 30% over the next couple years? Any color on that would be great.

Well, I think we are well off from getting to a normalization. A lot of it is going to be predicated upon the levels of deposit growth that we have. Given all the focus from the regulatory side on liquidity these days, we wouldn't mind growing the securities portfolio as our balance sheet grows. But it is really going to be predicated upon deposits. If we see deposit growth outpace loan growth then I would expect to see the securities portfolio grow and vice versa. If loans outpace the deposits, we will probably see the securities portfolio remain relatively flat to where it is today. But ultimately we focus more on loans to assets and we expect to continue to drive that up a bit north of where it is today. But we have got a long ways to go before we can say what a steady state is for us.

Understood. Just one on the margin. A lot of discussion obviously about when and if the Fed moves kind of impact on bank margin. Can you help us with a little bit of color on how you guys are modeling longer term the margin dynamic when short rates go up?

Well, ultimately, we expect that margins will increase. There might be some short-term pressure when the low end moves, but over time we have a tremendous amount of cash flows that are rolling off the securities portfolio. We expect to have continued deposit growth put to use. We have short duration assets when you look at Signature Financial. So we will be able to put all that cash flow to use at the higher-yielding loans, which should be beneficial to the margin. And our core funding base will really -- should lag the increase in rate, which is what we've seen through earlier cycles. Although it was quite a while ago, Chris, but we should see our core funding lag (technical difficulty).

Thanks, Eric.

Jason O'Donnell, Merion Capital Group.

Good morning.

Hey, Jason, good morning.

I just had one question. I am wondering if you could comment on the status of the ABL unit at this point. What is the size of the portfolio and what opportunities are in front of you at this point to add additional lenders? Thank you.

Well, the ABL group had about $37.5 million in commitments outstanding at the end of the quarter and $7 million in outstanding loans. So we are pleased so far with the progress that they've made. They are spending most of their time right now working with the teams in prospecting what we have built up in our team pipeline. We've brought on one salesperson. We expect to bring on a couple more over the course of the year. So we see good prospects on that front.

Okay, thank you.

At this time, there are no further questions. I will now return the call to Joseph DePaolo for any additional or closing remarks.

Thank you for joining us today. We certainly appreciate your interest in Signature Bank and as always, we look forward to keeping you apprised of all our recent developments. Laurie, I'll turn it back to you.

If you would like to listen to a replay of today's conference, please dial 800-585-8367 and refer to conference ID number 29982536. A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your lines at this time and have a wonderful day.