Signature Bank (SBNY) 2015 Q3 法說會逐字稿

Welcome to Signature Bank's 2015 third-quarter results conference call. Hosting the call today from Signature Bank are Joseph DePaolo, President and Chief Executive Officer, and Eric Howell, Executive Vice President of Corporate and 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.

Good morning and thank you for joining us today for the Signature Bank's 2015 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. You should not place under 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 strategy. 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 any forward looking statements made by signature bank speak only as of the date on which they were made.

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 EVP of Corporate and Business Development, will review the Bank's financial performance in greater detail. Eric and I will address your questions at the end of remarks.

Signature Bank delivered another exceptional quarter of growth and performance, resulting in our 24th consecutive quarter of record earnings. We again, delivered record deposits and record loan growth, expanded top line revenues, maintained strong credit quality and continued to invest in our future.

I will start by reviewing earnings. Net income for the 2015 third quarter reached a record $96.2 million or $1.88 diluted earnings per share. An increase of $19.4 million or over 25% compared with $76.8 million or $1.52 diluted earnings per share, reported in the same period last year.

This significant improvement in net income is mainly the result of an increase in net interest income. Primarily driven by both record deposit and loan growth. These factors were partially offset by an increase in non-interest expense attributable to our revenue growth initiatives, as well as, in part, regulatory and compliance costs.

Looking at deposits. Deposits increased a record $2.16 billion or 8.8% to $26.6 billion this quarter, including core deposit growth of $1.15 billion and average deposit growth of $1.54 billion. In the past 12 months deposits increased $5.3 billion, core deposits increased $3.7 billion and average deposits increased $5.4 billion. Non-interest-bearing deposits of $8.1 billion represent 30.6% of total deposits and grew $356 million this quarter.

The record deposit in loan growth, coupled with earnings retention, led to an increase of $5.97 billion or 23% in total assets since the third quarter of last year. Total assets are now approaching $32 billion. The ongoing, strong deposit growth is attributable to superior level of service provided by all of our private client banking teams, who continue to serve as a single point of contact for their clients.

Now let's take a look at our lending businesses. Loans during the 2015 third quarter increased to a record $1.7 billion or 8.3% to $22.2 billion. For the past 12 months loans grew $5.68 billion and represent 69.6% of total assets compared with 63.8% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate and multifamily loans.

Turning to credit quality. Our credit metrics all remain very strong. However, we have seen further weakening in our medallion portfolio. We watched those credits increased $41 million to $308 million, still a low 1.4% of loan compared with $266 million or 1.3% of loans in 2015 second quarter.

During the 2015 third quarter, we saw an increase of $29.7 million in our 30 day to 89 day past-due loans to $67.3 million. 90 day plus past-due loans decreased by $14.3 million to $9.6 million.

Nonaccrual loans increased to $59.6 million or 27 basis points of total loans, compared with $41.6 million or 20 basis points for the 2015 second quarter and $24.4 million or 15 basis points for the 2014 third quarter. The provision for loan losses was $11.4 million compared with $9 million for 2015 second quarter and $7.7 million in 2014 third quarter.

Net charge-offs were $5.5 million or an annualized 10 basis points. Compared with $2.6 million or 5 basis points for the 2015 second quarter and $1.5 million or 4 basis points for the 2014 third quarter. The allowance for loan losses was 0.82% of loans versus 0.86% in the 2015 second quarter and 0.95% for the 2014 third quarter. Additionally, the coverage ratio remained very strong at 307%.

While we [off] these credit metrics are strong again this quarter, we remain mindful of the uncertainty in the global economic and political environments and again, we appropriately reserved. Just to revert to teams for a moment, we added a private client banking team in the third quarter bringing the year-to-date total to five. Additionally, we began lending in our municipal finance and commercial vehicle finance businesses.

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 John. Good morning everyone.

I'll start by reviewing net interest income and margin. Net interest income for the third quarter reached $250 million up $44.7 million or 22% when compared with the 2014 third quarter, an increase of 6% or $13.7 million from the 2015 second quarter. Net interest margin decreased 3 basis points in the quarter versus the comparable period a year ago and decreased 5 basis points on a linked quarter basis to 3.22%. Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 6 basis points to 3.11%. 4 basis points of the linked quarter decrease was due to an increase in the average cash balances, stemming from record deposit growth, coupled with a challenging market for securities reinvestment and day counts.

Let's look at asset yields and funding costs for a moment. Due to the prolonged low interest rate environment and heightened competitive landscape, interest-earning asset yields declined 11 basis points from a year ago. And on a linked quarter basis yields decreased 6 basis points to 3.64%.

The linked quarter decrease was predominately driven by headwinds from CRE refinance activity and considerable excess, cash balances. Yields on investment portfolio remain stable linked quarter at 3.04% as lower reinvestment rates offset benefits from a slight decrease in CPR speeds. The duration of the portfolio decreased to 2.84 years as a result of the continued flattening of the yield curve.

And turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 3 basis points to 4.03% compared with 2015 second quarter. Excluding prepayment penalties from both quarters' yields would have declined 6 basis points. Now looking at liabilities, our overall deposit costs this quarter remain stable at 40 basis points. And our cost of average borrowing was down 7 basis points, leading to an overall decline of 1 basis point in our total cost of funds to 46 basis points.

And on to non-interest income and expense. Non-interest income for the 2015 third quarter was $7.9 million, a decrease of $200,000 when compared with the 2014 third quarter. Non-interest expense for the 2015 third quarter was $86.2 million versus $74.3 million for the same period a year ago.

The $11.9 million or 16% increase was principally due to the addition of new private client banking teams and our continued investment in the growth of signature financial, coupled with an increasing cost in our risk management and compliance activities. We anticipate these investments will facilitate further growth. Factoring in the significant hiring since last year and increased regulatory costs, the Bank's efficiency ratio still improved slightly to 33.4% for the 2015 third quarter compared with 34.8% for the 2014 third quarter.

Turning to capital. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet. As evidenced by a tier 1 leverage ratio an 8.95% and a total risk-based ratio of 12.34% as of the 2015 third quarter.

And now I will turn the call back to Joe. Thank you.

Thanks Eric. Once again Signature Bank delivered another quarter of stellar performance as exemplified by record deposits and record loan growth, as well as record earnings. The banks disciplined approach to client centric banking allows us to continue to flourish, while meeting the rigorous of the unprecedented current regulatory environment. We are proud of our ongoing accomplishments in our twenty-fourth consecutive quarter of record earnings. Which were achieved, through the collective efforts of all our colleagues and we look to further our growth in all facets of signature bank.

Now we are happy to answer any questions you might have. Crystal, I'll turn it over to you.

Jared Shaw with Wells Fargo.

Hi, good morning. Could you give us an update on where you stand now with the taxi portfolio, specifically in Chicago and the restructuring balance there?

What we're going to do, we figured, we would have a number of questions as it relates to medallion. So, Eric will provide a significant amount of information about the taxi medallion portfolio, both New York and Chicago in his answer. We believe we will answer all, or nearly all, potential questions. We just want to point out it only represents 2% of our assets and we hope not to spend more time than is necessary. Eric, I will turn it over to you.

Let's talk about Chicago first, where we've really worked through a lot of the issues there and they're seeing the market settle down a bit. Currently, we have 753 medallion loans that total $171 million. The current LTV is at 95% and that is based on a $240,000 value. Our debt service coverage remains at the 1.28 times.

Approximately $110 million of the portfolio has been refinanced. We worked very closely with the borrowers so they would receive overall cash flow relief and we would receive amortization. We're fairly confident they will continue to pay us. And actually, on the $57 million that we refinanced in June we received 3 payments on that this quarter. It's very positive that we restructured a significant amount of that portfolio.

We've got about another $13 million that we're in the process of refinancing currently. And then the remaining $48 million of that portfolio is paying and we expect they will continue to pay. And ultimately we will look to restructure those as they come due.

We've got proximally $20 million of that portfolio that is on nonaccrual. $12.8 million of the $20 million has been restructured and are paying under the new terms. They'll come off of nonaccrual after six months of payments. Another $3.2 million of the $20 million is in foreclosure. And we actually have a contract for sale on seven medallions at that value of around $240,000. That is where we are coming up with our value of $240,000 on those, for a total of $1.68 million and ultimately, we will have a slight recovery on all of those medallions when we sell those. The remaining $4 million are in various stages of collection and workout. And there's a potential for foreclosure there as well.

And for the year, we've charged off approximately $2.4 million of the Chicago medallions $500,000 this quarter. I think that is the most important factor; is that we are ultimately not seeing much losses in these medallions when we do take them back and foreclose or restructure on them. So a very low level of losses again this quarter of $500,000.

If we turn to New York, our portfolio there is about $622 million in loans, down from $628 million in June. The LTV is 87% based on $700,000 for individual medallions and $800,000 for corporates. They're actually five individual medallions sales in August and September ranging between $715,000 and $725,000. And again we are using $700,000 to value ours. There were four corporate sales, two at $875,000 and two at $805,000. Again we are using $800,000.

The debt service coverage remains stable at 1.2 times. It's about $38 million in the 30 day to 89 day past-due bucket. Which is not really surprising, given we are coming out of the summer months which are typically slower. We're actively working on collecting those loans. There is about $7 million in the 90+ days past due. These credits are all to be collectible and have likely made partial payment in the last 60 days.

On nonaccrual in New York, we have $6.5 million on 9 medallions. One is being auctioned and we have a pre-auction approved buyer at a level where we would have no loss. One is going through a normal restructuring, where the driver was disabled for period of time. And again, we expect no loss. And seven of the loans which totaled $5.1 million are moving to a foreclosure.

If we assume a sale price of $700,000 on each, we'd have an overall exposure of approximately $200,000. So again, similar to Chicago, we are just not seeing much of a loss factor on medallions that are in foreclosure process. Thus far in New York we have not taken any charge loss. However, given what we just said we expect to have a small amount in the fourth quarter.

That is really the details on the portfolio. I think we can open it up for further questions.

Great thanks. That is great detail. As you look at the capital levels, specifically looking at tier 1 leverage down below 9% this quarter, are you comfortable with that going lower in the 8% range? Or at what point would you like to see capital be a little higher?

Let me tell you Jared, we think about capital every day because we are a deposit driven institution. And we have a significant amount of deposits uninsured and a lot of clients that are in the service business that have a fiduciary responsibility. One thing we like to let you know is that we fully realize that we no longer have to maintain capital levels anywhere near the mega banks. They need capital buffers, because of the risks they take and we don't need the capital buffers because of the lack of risk that we have on our balance sheet.

So having said that; right now we have a significant amount of capital and we're generating internally a significant amount of capital as we approach $100 million in earnings on a quarterly basis. So the way we are looking at it, is not so much the ratios, we're going to look at it; if growth in the near future, for an extended period of time, exceeds our internal capital generation, then at that point we'll assess the need for capital.

Okay, thank you. And finally, just looking at the securities portfolio with the duration continuing to come down, any thought to maybe potentially putting a little more duration on, as we're apparently in a lower, for longer, rate environment here?

We kind of like the three year duration. We will probably look to maintain around there.

Okay great. Thank you very much.

Bob Ramsey with FBR.

Good morning. On net interest margin. I know you all highlighted that about half of the core compression this quarter reflected the deposit growth and liquidity. Is there any potential to recapture some of that next quarter? Or do you think, that as you lever the deposits the core pressures will mitigate that potential benefit?

Look, we can see the [debt], the NIM go up or down a few basis points from these levels. But ultimately, it's got to be mostly predicated upon deposit flows. If we have another strong quarter we'll probably have some NIM decline. But we could get some recapture if deposits remain at that $1 billion to $1.5 billion level or normalized growth.

Great and any sort of sense of loan pipeline heading into the fourth quarter and deposit flows? There obviously was some short-term stuff in there this quarter. Just wondering, how you're thinking about the average balance growth on loan and deposits for the fourth quarter?

We have a pretty robust pipeline. We are looking toward the fourth quarter being similar to the second quarter, where we had a growth of about $1.2 billion or so, for the loan pipeline. Fourth-quarter is very difficult to judge because it is calendar year end. And who wants to push loans in to get them closed before year-end and who wants to already decide to push them into 2016. Even though it's a little unpredictable, we do have a pretty solid pipeline.

Okay. Great. Thank you guys.

Dave Rochester with Deutsche Bank.

Good morning guys. Nice gross this quarter. Your loan pipeline comments just then, how much in the way of volume to get from package deals in 4Q that you're seeing right now? And how much did you have this quarter?

I will give you some information. I would think that the package deals are not nearly, right now in the pipeline, not nearly as great as they were in the third quarter.

To give you an idea the fourth quarter of 2014 between large loans and packages, so anything above $25 million, we did $400 million. Then the first quarter we did $691 million. In the second quarter $326 million. So for the third quarter we had $824 million. That was nearly $470 million in single large loans and $355 million or $356 million in packages. That helped drive, the $824 million, helped drive a large increase in record growth of the $1.7 billion.

We have some large loans in the pipeline for the fourth quarter, but not nearly as much as we had in the third quarter on a comparative basis. Hence, we're looking at $1.2 billion or so as opposed to $1.7 billion.

Got you. That's helpful. Maybe, just following along the same lines on the loan side. Do you happen have the loan balances by bucket this quarter?

Yes, commercial property was $6.5 billion, multi-family was $11 billion, residential mortgages were $530 million, we had $81 million in construction and land, and home equities of $169 million. C&I loans were $3.9 billion and consumer loans were around $10 million.

How large is Signature Financial now?

Signature Financial is $2.9 billion.

Perfect thanks. And just switching to the margin, I was just wondering what the impact was from securities premium AMEX expenses for this quarter? It sounded like you're saying it was maybe down a little bit this quarter. And then, on your NIM guidance, were you saying it could be up or down a couple of basis points in 4Q?

Right. Then we really expect to be stable. Again, the positive flows will be biggest factor there and obviously, shape the yield curve. On the securities amortization we had about $900,000 less in securities amortization.

Got you. And where are reinvestment rates today?

In the high two's.

But you were not really buying that much, right? Just replacing what's running off at this point?

We're being very selective as to when we enter the market. That's correct.

And then on loan pricing on the multifamily site are you still 3 3/8 on the 5/1 ARMs?

Yes, still 3 3/8. During the quarter we had increased it for short period of time to 3 1/2 and then went back down very quickly to 3 3/8. That is where we are, and we expect to be for the remainder of the year.

Perfect. Just one last one. You've been able to keep that institutional money market rate fairly low and you brought it down a little bit earlier this year. It sort of stabilized, maybe picked up basis point. Can you update us on the competitive dynamics there? And what's your outlook is, if you think you can potentially lower those anymore?

I would say it would be difficult to move it lower. Maybe a basis point here or there. Because the new money that we're bringing in, is likely less, than what we have right now in the bank. But I would say don't count on it moving.

Okay, great. Thanks guys.

Ken Zerbe with Morgan Stanley.

Good morning. On that tax and medallion credit side; the way I understand the commercial real estate side, is that you have clawbacks for the bankers if there is losses. Is there a similar type structure on the medallion side? Has anyone held accountable for the losses that may materialize on the taxi medallions?

Yes. That would be the P&L Signature Financial.

So it's the same type of structures, the same as CRE?

Fundamentally it's the same type.

Okay and on the medallions, when you put these loans into foreclosure and sell them off at auction are you involved in any way in the purchase of those loans? Are you financing any of the buyers of those loans, or sorry, of the medallions when you sell them?

Yes, if it's a medallion that we have foreclosed on. Yes, we would finance those.

Presumably, at better terms, I would hope.

Absolutely.

Understood. Thank you very much.

Casey Haire with Jefferies.

On the deposit growth, I know can be tough to predict order to quarter, very strong this quarter. We're also seeing headlines of some of the larger banks, obviously, trying to push their deposits off balance sheet. I was just wondering are we entering a new dynamic where we should get used to seeing accelerating deposit growth because of a different landscape for the larger banks?

I would say to us, to some extent, but not a great extent. It is a combination of many things. It's getting [referrals] from existing clients. We are seeing quite a bit of that, unrelated to the big institutions.

We've mentioned before that we have a number of deposit initiatives that we are not talking about because we don't want our competitors to know. But some are related to the big banks and some are not related. For instance, there is one initiative that is totally unrelated to the big institutions and them trying to get rid of deposits. And that growth was $0.5 billion in the third quarter.

It's a combination of things. I don't of it is a new dynamic. Certainly there are opportunities there. But I would say it's a combination.

Okay, understood. Just following up on the team's prospects and outlook there. Obviously, fourth quarter I expect would be quiet. But how is it setting up for discussions for 2016?

Very well. There is quite a bit of discussion or discussions going on. There seems to be for us, some clear opportunities to bring on some very large, very professional teams. But you're right, it's all working toward 2016. One because of the bonus situation. And two, as we digest 2015 we're getting ready for 2016.

Got you. And one more on the medallion, if I could Eric. On the utilization rates, I don't know if you disclosed that and all the metrics you gave, but the utilization rates for New York and Chicago, in the third quarter?

They're down slightly, Casey. But I don't have exact figures on that.

Okay got you. And one more housekeeping. The tax rate came in a little late this quarter; what are you expecting going forward?

I would stay with the 41% the we've been saying. There is always a lot of moving pieces in the third quarter because we file our actual returns. So to be safe I would go back to the 41% rate moving forward.

Okay, thank you.

Chris McGratty with KBW.

Good morning. Following up on the expense question; you made some progress on efficiency ratio. As you look to next year, in the context of the team pipeline, how should we be thinking about either your [reorg] expense growth or any marginal progress in efficiency ratio? Kind of what the context said, if we do see the [Shelby] bill get pushed in, I wonder if there's any expense [relief in] there? Thanks.

Right now we are seeing on the expenses about mid-teams. That includes team growth and it also includes any of the cost for the regulatory side. As we have because we're over $10 billion and as we get closer to $50 billion. One of the things I will tell you, in any particular quarter, if we hire more than what we projected internally and that was going to change the costs or the expenses from a mid-teen to a high-teen, we would tell you that somewhat in advance.

Got it. Just a follow-up on the team comment about potentially large team. I know you hired a fairly large team earlier this year from a smaller peer. Is that the type of size, which is a little atypical of the size you have been hiring? Is that more along the lines of what you're thinking? Or are we talking something even more significant?

When I meant large, I meant the size of their book. Not necessarily the amount of people. So, we hired a team of eight. We're not looking at eight. We're looking at something half that, but a large book of business.

Okay. And the last question on the reserve. It came down because of the growth. In the context of the taxi comments; can you remind us where you're reserving for multi-family in theory today. Thanks.

We're at, on commercial property, about 73 basis points, and on multi-family we are at 69 basis points. And non-taxi, we are still around that 4% number on Chicago and we've more than doubled our reserves in New York to 2%.

Great, thanks Eric.

Steven Alexopoulos with JPMorgan.

Good morning. I just have one question. With rates moving down here, they seem like they're going to be lower fourth quarter than third quarter. Are they low enough for you to see a pickup in refi? I'm just curious what your customers are doing here. Are they extending term to lock in the lower rates? Thanks.

Steve, they have been doing that. We don't see rates on our loans coming down. To give you an example, at one point when the 10 year was at 1.6% we were at 3 3/8%. So it's got to come down pretty dramatically for us to make any sort of movement. But they have been refinancing all along. Hence, we are getting decent amount of prepayment income.

Joe, to follow up on that, when they refi, I noticed two quarters ago you were saying you are seeing customers extend out term. Just curious, if you are still seeing that here? Or if low for long means your customers don't necessarily want to lock in longer term.

When they're extending term, it could be that they have three years left to go and they're coming back to refi for five years. It's not as if they're going from a 5 year term to a 10 year term. They're just seeing that the rates are low and it gives them an opportunity to extend by adding on another two or three years. We have seen that for the last couple of years and we continue to see that.

Okay. That was my question, thanks.

David Long with Raymond James.

Hey guys. In talking with bank executives and investors, it seems like the multi-family sector is a area where there seems to be some concerns and the term, bubble, sometimes gets thrown around. You guys are obviously growing the book pretty nicely still. How should we think about what you guys are doing in multi-family versus what maybe, some other banks across the country are doing there?

Well, I can tell you this, we're losing, we lose deals, because we are coming up with the dollar amount that is less than what our competitors are coming with or less than what the client or prospect wants. So we are fairly comfortable with our underwriting, in that we are not getting ourselves sucked in any sort of bubble situation.

Okay, great. Thanks guys.

This concludes our allotted time and today's teleconference. If you like to listen to a replay of today's teleconference please dial 1- 800-585-8367. And refer to the conference ID number 50148126. A webcast archive of this call can be found at www.signatureny.com.