Signature Bank (SBNY) 2016 Q1 法說會逐字稿

Welcome to Signature Bank's 2016 first-quarter results conference call. Speaking today for Signature Bank are Joseph DePaolo, President and Chief Executive Officer; and Eric Howell, Executive Vice President - Corporate and Business Development.

Today's call is being recorded.

At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Joseph 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's 2016 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 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 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 opening 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 read 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 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 our remarks.

Signature Bank had another exceptional quarter of growth and performance, resulting in our 26th consecutive quarter of record earnings. We again delivered strong deposit and loan growth with standard topline revenues, maintained overall solid credit quality and continue to invest in our future with the hiring of another private client banking team.

Moreover, during the first quarter we successfully raised $319 million in common equity and yesterday we issued $260 million in subordinated debt. These two capital raises were strictly motivated by future growth expectations.

I will start by reviewing earnings. Net income for the 2016 first quarter reached a record $104 million or $1.97 diluted earnings per share, an increase of $20.6 million or 25% compared with $83.4 million or $1.64 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, primarily driven by strong deposit and loan growth, each surpassing $1.2 billion in growth during the quarter. These factors are 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 $1.3 billion or 5% to $28.1 billion this quarter, including core deposit growth of $1.5 billion and average deposit growth of $600 million. Since the end of the 2015 first quarter, deposits increased $4.1 billion, core deposits increased $3.7 billion and average deposits increased $4.3 billion. Non-interest-bearing deposits of $9 billion represented 32% of total deposits and grew $417 million this quarter.

The substantial deposit and loan growth, coupled with earnings retention and our equity capital raise, led to an increase of $6.3 billion or 22% to total assets 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 have continued to serve as a single point of contact for their clients.

Now let's take a look at our lending businesses. Loans during the 2016 first quarter increased $1.25 billion or 5.2% to $25 billion. For the prior 12 months, loans grew $5.7 billion and represent 71.8% of total assets compared with 67.5% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate and multifamily loans as well as C&I loans.

Turning to credit quality, our credit metrics remains strong this quarter. However, as expected, we again saw a deterioration in our [tax medallion] portfolio, which impacted each of the following.

Watchlist credit increased by $52.9 million to $403.3 million, still below 1.61% of loans compared with $350.4 million or 1.5% of loans in the 2015 fourth quarter. During the 2016 first quarter, we saw an increase of $10.3 million in our 30 to 89 day past due loans to $101.1 million while 90 day plus past due loans increased $13.8 million to $19.8 million. Nonaccrual loans increased to $105 million or 42 basis points of total loans compared with $71.9 million or 30 basis points for the 2015 fourth quarter and $27.8 million or 14 basis points for the 2015 first quarter.

The provision for loan losses for the 2016 first quarter was $19.8 million compared with $16.7 million for the 2015 fourth quarter and $7.9 million for the 2015 first quarter. Net charge-offs for the 2016 first quarter were $7.8 million or an annualized 13 basis points compared with $4.6 million or 8 basis points for the 2015 fourth quarter and $1.5 million or 3 basis points for the 2015 first quarter.

The allowance for loan losses increased slightly to 0.83% of loans versus 0.82% in the 2015 fourth quarter. It was 0.88% for the 2015 first quarter. Additionally, the coverage ratio remained strong at 197%.

Just to review teams for a moment, we started 2015 with the addition of one team. Our team pipeline remains active and we look forward to the opportunity of 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. Good morning, everyone. I'll start by reviewing net interest income and margin.

Net interest income for the first quarter reached $278.3 million, up $55.8 million or 25% when compared with the 2015 first quarter, an increase of 3.7% or $10 million from the 2015 fourth-quarter. Net interest margin increased 6 basis points in the quarter versus the comparable period a year ago and increased 2 basis points on the linked quarter basis to 3.32%.

Excluding prepayment penalty income core net interest margin for the linked quarter also increased 2 basis points to 3.17%. The linked order increases in overall and core margins are due to an increase on yields in the securities portfolio and an increase in loans as a percentage of the balance sheet.

Let's look at asset yields and funding costs for a moment. Interest-earning assets yields increased 4 basis points from a year ago and increased 5 basis points from the linked quarter, to 3.76%. Increase in overall asset yields was due to a slowdown in premium amortization on securities, an increase in loan prepayment entities and, again, an increase in loans as a percentage of the balance sheet.

Yields on the securities portfolio increased 8 basis points linked quarter given the slowdown in premium amortization on securities from slowing CPR speeds and stronger reinvestment yields. The duration of the portfolio decreased to 2.8 years.

Turning to our loan portfolio, yields on average commercial lines or commercial mortgages remain stable at 4.06% compared with the 2015 fourth quarter. Excluding prepayment penalties from both quarters, yields would have declined 1 basis point.

Now, looking at liabilities, our overall deposit costs this quarter increased 2 basis points to 41 basis points, mostly due to an increase of 2 basis points in money market costs, driven by selective increases to certain deposit clients as a result of the Fed rate increase in mid-December. Average borrowings increased $504 million to $3 billion or only 8.8% of our average balance sheet. The average borrowing cost increased 11 basis points from the prior quarter to 1.24% as a result of the Fed raise.

Overall, the cost of funds for the quarter increased 3 basis points to 49 basis points.

On to non-interest income and expense -- non-interest income for the 2016 first quarter was $8.5 million, a decrease of $1.7 million when compared with the 2015 first quarter. The decrease was due to a decline in net gains on sales of loans of $1.8 million, predominantly from our SBA pool assembly activities. Non-interest expense for the 2016 first quarter was $92.3 million versus $81.7 million for the same period a year ago. The $10.6 million or 13% increase was principally due to the addition of new private client banking teams, our continued investment in the growth of Signature Financial, as well as an increase in costs in our risk management and compliance activities.

Factoring in the significant hirings since last year and increased regulatory costs, the Bank's efficiency ratio still improved 32.2% for the 2016 first quarter compared with 35.1% for the 2015 first quarter.

Now turning to capital, into 2016 first-quarter we successfully raised $318.7 million in common equity to further bolster our capital base and prepare for future growth. 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 of 9.79% and the total risk-based ratio of 13.19% as of the 2016 first quarter. Additionally, yesterday we closed the subordinated debt offering for $260 million, which will further enhance our total risk-based capital ratio.

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

Thanks, Eric.

As we kick off 2016, which marks our 15th year in operation, Signature Bank delivered another quarter of solid financial performance. 2016 first quarter saw a record earnings for the 26th consecutive time as well as both strong deposit and loan growth. Additionally, in 2016 we successfully raised $579 million in capital, motivated by future growth expectations. Also this quarter, we added one private client banking team.

We remain focused on growing our network by continuing to attract veteran bankers who can flourish at Signature Bank and, in turn, provide the levels of service to which our clients have grown accustomed.

In light of our 15th anniversary this year, we see this as an opportune time to reflect on the growth of our businesses [are] founding. We are extremely proud of the strong foundation and the infrastructure we have built and nurtured over the years which has helped sustain our consistent, strong, organic growth.

Now we are happy to answer any questions you might have.

(Operator Instructions) Jared Shaw, Wells Fargo.

Could you speak a little bit about what you've seen in terms of the potential large packages created in 1Q and how that pipeline looks going into second quarter?

We have no large packages but we did have about $500 million in loans that were in excess of $25 million for the quarter. And the pipeline is, for the second quarter, as strong as it's ever been.

Okay, great, thanks. And in terms of the specialty finance business, Signature Financial, how has hiring been going there and what are the growth expectations that we can expect to see from there for the rest of the year?

They grew about $82 million in the first quarter, which is typically their slowest quarter coming out of year end, where a lot of clients are looking to get the full year tax benefits by closing deals in December. We anticipate that they will grow in an area around $100 million per quarter going forward.

Great, thank you.

Chris McGratty, KBW.

Your provisioning rates, because of the [taxi] book, have moved from the 20 basis point range per quarter to about 30 over the past six months. Can you maybe opine about the outlook for additional needs to provide for not only growth but also rising non performers in the taxi books?

I think we anticipate provisioning levels to be at similar levels this quarter. We certainly don't see it going meaningfully down from these levels. It could be slightly up from these levels as we look at, but that's going to be dependent on any variables, most of which is probably growth.

And just so I'm clear, that's as a percentage of the book right now, not at the dollars?

Correct.

Maybe one more on deposit pricing -- maybe I missed it in your prepared remarks. Have you seen any notable changes in the market? I noticed your checking and NOW accounts are up a couple basis points. Anything notable from December?

No, nothing notable. I would say that it's pretty stable out there. There was some noise in like the first raise, but most of it was just noise.

Great, thanks a lot.

Ken Zerbe, Morgan Stanley.

Just a quick question on the taxi, actually taxi charge-offs. When we think about provision of $20 million this quarter all in, the charge-offs still remain pretty low. How are you looking about how taxi losses materialize in the portfolio? I'm just trying to get a sense of when we would start to see it.

We saw about $4.4 million in charge-offs this quarter. We are really working through the not as good credits in that portfolio now, so I would anticipate things to continue to get worse in that portfolio for the next couple of quarters. We will probably see an uptick in charge-offs over the next couple quarters and then we should see it start to stabilize, Ken.

Understood. And when you guys renegotiate the taxi loans, if I'm right, I think you extend the duration or at least you put them into new three-year loans with some amortization. Does that alter the loss history or are you taking -- like does it delay for three years? I'm just trying to get a sense of if that changes the dynamics a little bit.

Well, it depends. If we restructure those prior to going into non-accrual, then we wouldn't take the charge-off and we will have to obviously make an assessment if we believe that they can pay us back full amount of principal, even if it's over an extended period of time. We would not have to charge it down, so it [would] delay a charge-off and if it goes into nonaccrual, at the time the loan goes to nonaccrual, we would take a charge down to the fair market value.

Then we will look to either sell the medallion in the open market or restructure it to the existing borrower on new terms but we would have to take a charge-off at the time that it goes to nonaccrual. (multiple speakers) So it really depends on the timing of the restructuring.

All right, that makes sense. And then just on the commercial real estate market, in general, I know NYCD had a conference call this morning, fairly cautious in terms of the overall industry, slowing activity.

Given that your pipeline is really, really strong, can you just help make sure we understand the difference between -- are you seeing different dynamics in the market? I know you have a great sales process and service, but is that enough to overcome broader weakness in the overall industry if it continues to worsen?

Well, we don't see a broader weakness. We are being more selective, number one, because we can be. And number two, in the market that we are in, primarily the low and moderate income areas for the multifamily, we have seen very little, if any, vacancy. We are not seeing any weakness in the markets that we are in. Now, there is weakness in the higher end, the large-dollar co-ops, the large-dollar condos. But that's not the market that we are in. The cautiousness on our part is that, in terms of being selective, because we can be and yet have a robust pipeline.

Okay, great. That helps. Thank you.

Casey Haire, Jefferies.

I wanted to follow up on the medallion. Just looking at the transfer of medallions in the quarter, down pretty significantly, about 20% versus fourth quarter, which appears to outpace a little bit of the reserve build in the medallion portfolio for you guys. And was just wondering -- Eric, you are saying that you expect provision levels to be pretty similar.

Does that presume that we hold the line on medallion transfers? And where is the LLR today and LTV? Sorry, a lot of questions there.

It's okay. LTV is right around 100%, depending on the values that you use. There's not a lot of transfer activity today, so we are really looking more at cash flow modeling to provide us with a value for these medallions. The cash flows in New York are roughly -- debt service coverage is about 1.2%. So there is good debt service coverage still there.

We have seen cash flows stabilize. We do expect them to continue to get worse before they get better, but they seem to be leveling off. And we hope that a number of the changes in regulations that happen at the end of the first quarter will continue to help cash flows for the medallion.

So, the debt service coverage remains above 1, the LTVs are around 100%. We anticipate that we will continue to get paid back through the cash flows.

Okay, understood. Just switching to capital adequacy, the sub debt raise last night -- my assumption is that is to address the total capital ratio, which has been eroded over the last couple years due to growth. Should we be thinking about you guys addressing capital going forward? The tier 1 leverage obviously will continue to be common, and then the total capital would be ongoing sub debt raises? And if so, how much capacity do you guys have for further sub debt raises?

I would say that you are correct in terms of what you said regarding equity, common equity and the sub debt.

First, I'll say this. We said it in our remarks. Where our pipeline is and our expectations of growth -- we did the issuance of both common equity and the debt strictly for -- and it was motivated by growth, future growth. We get the added benefit with the sub debt of it being tier 2 and it's not dilutive as much as the common equity would be. And when you take that into consideration and the fact that it counts against total capital, that helps against the CRE loans, where we were about 600% and now we are down to about 500% with the debt rate.

Okay, great. And last one for me -- on the team outlook last month, you guys were pretty optimistic about some high-profile teams around earnings with expectation -- obviously haven't seen that. Just an update on the team outlook, if you would?

Well, we did have one team come on board several weeks ago. It was actually in the first quarter. And we expect another team or two to come on board rather quickly. So around earnings, today's earnings we announced one. We surely will have another one or two very quickly.

Okay, thank you.

The team outlook is very good.

Ebrahim Poonawala, Bank of America.

I want to quickly touch base on expenses. The 13% yield growth for the first quarter -- as we look at, should we expect that sort of growth to be sustainable? Or is that likely to drift higher as you bring on these teams and just the rest of [tech] compliance expenses?

As we said in the last quarter's call, we anticipated expenses to be in the low teen growth range. So we continue to expect that through the course of this year, that it will be in the 12% to 15% growth range on overall expenses.

Got it. And just a separate question in terms of everything non-CRE that we are doing on the loan growth side. Are there any new initiatives like as you think about it in terms of any industry verticals or business lines that you might expand into as you see the opportunity to pick up talent or from market dislocations?

Well, we do have an initiative. It's not on any particular industry, but we recently made a change by creating a new position in C&I. And we filled it internally, so we are very excited about this position and the person in it who is going to be working with the teams and the lenders, because we see that we are getting more opportunities to do C&I where it's primarily variable-rate loan. And so, having floaters added onto our portfolio would be a very good thing for us.

Good, thanks for taking my questions.

Bob Ramsey, FBR.

This is actually Kyle Pearson speaking for Bob today. I was wondering if you might be able to go into a little more detail, tack on to the previous question regarding pipeline. I know you guys said it was probably one of the strongest ones ever. But is that still predominantly multifamily or when can we start to think about when C&I might start to contribute a bit more and add a little more floaters to the book?

I would say in the second and third quarters you should start seeing more C&I. When I was thinking of pipeline, I was thinking predominantly multifamilies and CRE. But in addition to that, we do have a pretty good pipeline on Signature Financial. We have a couple of fairly large deals in ABL. And we actually have some fairly large deals on the C&I side.

So, it seems like all the cylinders are clicking. But, relative one to the other, the CRE and multifamily are probably still the largest for at least the near term.

Okay, great. Thank you for taking my question there.

Dave Rochester, Deutsche Bank.

On the NIM trend, sorry if I missed this but what was your expectation therefore next quarter and then for the back half of year if we continue to have this interest rate curve persist for year end?

Looking at next quarter, there is some pressure with day count as well as the cap with sub debt rates that we did, so expect 2 to 3 basis points of pressure in the second quarter and then looking out beyond that we should really be right around these levels, up or down a basis point or two.

Great. And then any sense for whether securities [premium am] could tick up in Q2? I would imagine that's already baked into your guidance. I was just wondering what you are seeing there.

Yes. We do anticipate that we will see a slight uptick in that. It's come down over the last three quarters, so given where rates have been for a little while and where we would anticipate them to be, we would expect the premium amortization will pick up a little bit.

Great. And then switching to multifamily commercial real estate, you guys had mentioned and some other banks had mentioned during the quarter seeing some of the smaller players pulled back of it, just given some pressure they were getting. I was curious if you're continuing to see that dynamic persist into this quarter and how that is impacting you guys.

It is persisting but it's not much of an impact because the competition is still very strong, particularly with the seven-year product.

Got you. And then switching to securities, you had a little bit of growth there. Can you talk about what you are buying this quarter and at what yields and where reinvestment rates are today?

Yes. Reinvestment rates are really in the high 2s. We are being very selective as to when we enter the market. We selectively purchased when the 10-year broke 1.85 during the course of the first quarter. And we are continuing to target 4 to 5 year average life securities from primarily agencies as well as some new issue nonagency securities and selective corporates.

Great. And then on multifamily pricing, are you guys still in that 3 3/8, a 3 1/2 range for 5-year?

Yes, exactly.

And then on the 7s, did you actually lower pricing at all or is it about where it was?

Unfortunately, we are at 3 7/8, but we had to do some deals at 3 3/4. There are some very good deals at 3 5/8.

Sounds good. All right, thanks, guys.

Steven Alexopoulos, JPMorgan.

You gave some of the stats around taxi, but can you also give outstandings, where they ended up with the balances that are now in TDR and what the reserves are and maybe dice it between New York and Chicago?

Sure, Steve. So, balances in New York are $597 million and in Chicago they are $166 million. I don't have balances on TDRs. I don't think they have meaningfully changed in Chicago. I think we had a slight uptick in New York as we are just starting to work through the more troubled credits. Allowances -- overall, it's around 5% overall reserves, a little under 5% in New York and a little over 5% in Chicago.

Okay, and Eric, I know you said you're looking at cash flow to establish the value and the [diems], not where we have had a couple of transfers. Have you taken any medallions back at this point? Just curious what the experience has been with exiting these.

We have. We've recently taken a number of them back. And ultimately, right now we are in the process of marketing about 18 medallions that we anticipate selling at fairly reasonable levels, in the mid $600,000 range on those. So we are pretty pleased with what we are hearing about sales prices in the market.

We are also hearing of other sales have been with the 6 handle on them in the marketplace right now. But ultimately, when we take them back we will either restructure or try to work with the existing borrowers still, even though we have taken it back to medallion, or we will look to foreclose and sell, or we might even put them in other assets held and lease them out to qualified garages where we anticipate we can get between [2,000 and 4,000], let's say, per month.

I assume those are in New York City. Have you taken any back in Chicago?

We have, not as many in Chicago. We are still working through some of those.

Okay. It seems to us like the credit cycle is advancing for taxi. Is anything noticeably changing? Are you noticing any behavior change on the part of the borrowers? Are you seeing more of this come through this quarter?

Not meaningfully. I think we are just seeing the first -- the worst credits working their way through first. We do anticipate that, like I said, it will get worse for a few more quarters but then we should, by then, abort through the real troubled credits. There are a number of loans, many loans that continue to pay as expected under the existing terms that we just don't see having a problem. So we are just really working through the worst credits now.

Okay, okay. And then completely shifting gears, just regarding eventually crossing the $50 billion threshold, do you have any thoughts around moderating growth at some point to manage when you cross, or you just keep doing whatever the market gives you and you cross when you cross?

We are just going to keep on seizing the opportunity. We started more than a year and a half ago with a plan of what needs to be done operationally to get ready for $50 billion. And that plan will be executed before we reach the $50 billion so we are ready for it.

It's hard to pass up business. You only get one opportunity and you sometimes don't get a second opportunity. So we will still stick with that $4 billion to $6 billion on an annual basis.

Right. Thanks for all the color, guys.

Peyton Green, Piper Jaffray.

Just a question on the 18 taxi medallions that you are marketing. Would those be a cash sale or would you advance the loan to somebody that might take those?

I am anticipating we will have to advance the loan, Peyton.

All right, and then just as you think through it, you mentioned a couple times during the call that these were the more problem taxi medallion loans that moved into NPL from performing during the quarter. Was there any material change in the TDR amount? I'm sorry if I missed you clarifying that earlier.

Yes, not that I'm aware of. I don't have TDR numbers right now but I don't think there's much of a change in Chicago because we had got through most of that portfolio a couple quarters ago. And I'm assuming there was a small change in New York.

Okay. And then you mentioned you were optimistic the cash flows would start to stabilize. What gives you more confidence about that now, relative to 90 or 180 days ago?

First of all, it's just what we are seeing happen in the industry. There has been about a 15% to 20% decline from the peaks and cash flows, and we haven't really been seeing that meaningfully change over the last several months.

There were a number of things TLC in New York had done, such as universal licensing, which will allow second-shift drivers to come back more easily into the taxi space because that's really where the issues are, and attracting second-shift drivers over. They have also done away with the owner must drive rule, so that allows owners to find other people to drive that first shift, also allows us to take back taxis, make it easier for us to take them back and to lease them out to fleets and garages.

And we have also seen already a pretty nice impact out of the illegal street hails and pickups, where the TLC is enforcing that more aggressively, has significantly increased the fines to the T&Cs. So we are seeing less illegal street hail activity. So that's helping with the cash flows as well.

So those are some of the things that we are starting to see a stabilization there in the cash flows.

Okay, great. And then, Joe, you mentioned that there's a renewed effort on growing C&I outside of Signature Financial. Could you talk about maybe what you would expect that to do from a volume perspective? Historically, Signature has been a very good C&I lender prior to the entry into the multifamily. Is this -- maybe if you could characterize the growth opportunity there.

Well, there's a big growth opportunity. I won't dare to try to predict what the volume will ultimately be on a quarterly basis near term for us until we had an opportunity to see how it just works out with the new position and how that's executed. Again, clearly it's a big opportunity.

Okay. And then --

But rather than me talking more about the growth of all our loans, instead of talking about taxis.

Right. I get that. But in terms of price, as you look to get more variable-rate credit, what pricing would you expect to achieve on those loans, given current market conditions?

It's probably, in all likelihood, going to be LIBOR-based. Some of what to do in the high 1s, some low to mid 2s and some 3s, 3 handles. It will be quite a different mix. Some of it could be healthcare, some of it could be manufacturing. But we are getting opportunities, more so than we've had in the past. And we want to [seat] it on that. And if we have to give up a little NIM we will do so to get floaters because with C&I you get a big opportunity to bring in deposits and do cash management services. In fact, the deposit opportunity in C&I is greater than the deposit opportunity in CRE.

So over time you expect this to balance out the dependency of commercial real estate and multi-family growth? Is that fair?

We are a long way off of that.

Okay, great. You for taking my questions.

This concludes our allotted time and today's teleconference. If you would like to listen to a replay of today's conference, please dial 800-585-8367 and refer to conference ID number 87922279. 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.