SBNY (2019 - Q3)

Welcome to Signature Bank's 2019 Third 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 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 questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin. Joseph D

Thank you, Nicole. Good morning and thank you for joining us today for the Signature Bank 2019 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 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 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 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 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. The 2019 third quarter was our strongest quarter for deposit growth in the last three years leading to solid earnings. The quarter included record average deposit growth of $1.75 billion which allowed us to substantially pay down higher cost borrowing. Additionally, we made significant strides in transforming our balance sheet to include more floating rate assets by increasing commercial and industrial loans by $885 million and meaningfully decreasing fixed rate commercial real estate loans. We are really firing on all cylinders this quarter with contributions from our traditional Private Client banking team and Signature Financial. The major initiatives we put in place over the last several quarters are helping to drive deposit growth as well as further our asset and geographic diversification strategy. This includes the launch of Signet, as well as contributions from the Digital Banking team, the Fund Banking division, and the Venture Banking Group. Moreover, we recently added a Specialized Mortgage Servicing Banking Team, focusing on treasury management products to deposit rich residential and commercial mortgage services, amongst others. This team now has the necessary infrastructure in place to support their client's needs, and is officially opened for business. Now onto the quarter. Signature Bank delivered another quarter of solid performance led by a record $1.75 billion average deposit growth, while maintaining overall strong credit quality and delivering solid earnings. Net income for the 2019 third quarter was $148.7 million, or $2.75 diluted earnings per share compared with $155.4 million or $2.84 diluted earnings per share from last year. The decrease in net income was due to a rise in non-interest expense from the significant investment in new private client banking team, including 55 professionals across the Fund Banking division, the Venture Banking Group, and the Specialized Mortgage Servicing Banking Team. We look forward to the future contributions to grow earnings from these new teams. Now, looking at deposits. While confronted by a challenging deposit environment, we've increased deposits by over $1.5 billion to $39.1 billion this quarter and average deposits grew a record $1.75 billion. Through the end of the 2018 third quarter both period ending and average deposits have increased by $3 billion. Non-interest bearing deposits at $12 billion represent 31% of total deposits. Deposit and loan growth coupled with earnings retention, led to an increase of $3.5 billion or 8% in total assets from a year-ago. Now let's take a look at our lending businesses. During the quarter, and keeping with our diversification strategy, we made a conscious decision to not refinance CRE loans with a no deposit relationship existing. We have essentially exited most of these one-sided blown relationships; we do not expect the same level of decline prospectively. As a result, loans during the 2019 third quarter increased $5 million to $37.9 billion. For the prior 12 months, loans grew 2.83. This quarter we significantly increased floating rate C&I loans by $885 million driven primarily by our Fund Banking division. And conversely, we dramatically decreased our fixed rate CRE portfolio by $873 million. Floating rate loans are now 17% of total loans, which is a dramatic improvement from 10% a year-ago. Our loan-to-deposit ratio is now at 97% and our CRE concentration declined to 511% from its peak of 593%. Turning to credit quality. Our portfolio continues to perform well. Non-accrual loans of $32.5 million were just nine basis points of total loans compared with $41.3 million or 11 basis points to the 2019 second quarter. Our past due loans remain in a normal range with 30 to 89 day past due loan at $59 million, 90 days plus past due loans at a low $1.9 million. Net charge-offs for the 2019 third quarter were $2.9 million or three basis points compared with net recoveries of $2.7 billion for the 2019 second quarter. Provision for loan losses for 2019 third quarter was $1.2 million compared with $5.4 million for the 2019 second quarter. The allowance for loan losses remained stable at 64 basis points of loans and our coverage ratio stands at 746%. My last point before I turn the call over to Eric. I just want to remind you on the team front. We have added four private client banking team, including the 28 person Venture Banking Group which already has made meaningful contribution in this quarter, and the 15 member Specialized Mortgage Banking Servicing team which is now ready to business. 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 third quarter reached $328 million, up $3.2 million when compared with the 2018 third quarter and an increase of $1.7 million from the 2019 second quarter. Net interest margin decreased 20 basis points in the quarter versus the comparable period a year-ago and declined six basis points on a linked quarter basis to 2.68%. Excluding prepayment penalty income, core net interest margin for the linked quarter decreased five basis points to 2.66%. Four basis points of this decrease was from excess cash balances driven by significant deposit growth. And let’s look at asset yields and funding cost for a moment. Interest earning asset yields decreased nine basis points from the linked quarter to 3.94%. The decrease in overall asset yields was driven by higher cash balances and lower reinvestment rates in all our primary asset classes from the lower rate environment. Yields on the securities portfolio decreased nine basis points linked quarter to 3.18% due to the dramatic decline in market rates which also led to our portfolio duration coming into 2.2 years. Turning to our loan portfolio, yields on average commercial loans and commercial mortgages decreased four basis points to 4.2% compared with the 2019 second quarter. Excluding prepayment penalties from both quarters, yields decreased two basis points. Prepayment penalties for the 2019 third quarter remained low at $2.1 million compared with $3.6 million for the 2019 second quarter and $4.1 million from the 2018 third quarter. We anticipate that prepayment penalty income will remain low as a result of the slowdown in CRE transaction activity from the changes in rent regulation and the low interest rate environment. Now looking at liabilities, our overall deposit cost this quarter increased by two basis points to 1.21%. However, they appear to have peaked in July, which is a good sign for future quarters. Average borrowings excluding subordinated debt decreased $1.1 billion to $5.2 billion, or 10.5% of our average balance sheet. The average borrowing cost decreased four basis points from the prior quarter to 2.59%. Overall, the cost of funds for the linked quarter decreased two basis points to 1.4% as lower cost deposits replaced higher cost borrowings. And on to non-interest income and expense. Non-interest income for the 2019 third quarter was $6 million, an increase of $1.4 million when compared with the 2018 third quarter mostly due to the rise of $1.3 million in fees and service charges. Non-interest expense for the 2019 third quarter was $134.3 million versus $117.2 million for the same period a year-ago. The $17.1 million or 14.6% increase was mostly due to the meaningful addition of private client banking teams. The bank's efficiency ratio was 40.2% for the 2019 third quarter versus 39.4% for the 2019 second quarter. The efficiency ratio has been negatively affected by the declining NIM and our investments in long-term strategic initiatives. And turning to capital, in the 2019 third quarter, the bank paid a cash dividend of $0.56 per share. Additionally, the bank increased its stock repurchases to 630,000 shares of common stock for a total of $75 million. The dividend and share buybacks had a minor effect on capital ratios which all remained well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet, as evidenced by our tangible common equity ratio that increased five basis points to 9.51%. And now I'll turn the call back to Joe. Thank you.

Thanks, Eric. This quarter, we continue to execute our game plan by significantly growing deposits $1.5 billion, including increasing average deposits by a record $1.75 billion. Improving our liquidity position by reducing borrowings of $1 billion -- by $1 billion excuse me and decreasing our loan to deposit ratio to 97%. Increasing floating rate, commercial and industrial loans by $885 million and reducing fixed rate commercial real estate loans by $873 million bringing our commercial real estate concentration to 511% from its peak of 593%. Now, we're happy to answer any questions you might have. Nicole, I'll turn it over to you.

The floor is now open for questions. [Operator Instructions]. Thank you. Our first question comes from Ebrahim Poonawala with Bank of America.

I guess first question, Eric, if you can just talk about in terms of the marginal outlook particularly in the context of where you see cost of interest bearing deposits going over the next few quarters, and just the thought process around the excess liquidity, given the negative carry of the cash versus the borrowings that you have on the balance sheet?

Sure, Ebrahim. We expect that NIM next quarter will be flat, with a slight downward bias given the fact that we are still sitting on cash. And we've had some pretty significant deposit flows again thus far this quarter. We're obviously looking to deploy that into loans and we do anticipate that we will have significant loan growth in the fourth quarter, we have a pretty robust pipeline, and we do not anticipate having anywhere near the level of CRE run-off that we had in the third quarter. So that that should bode well for the margin. Ultimately, we are looking to use that cash to put into loans or to pay down higher costs borrowings. We predominately paid-off the overnight borrowings that we can to avoid any term borrowings to come due which we have a fair share of that coming due in November and December. So given all that, we expect to maintain margins with a slight downward bias.

And does the cost of interest bearing deposits, do you expect that to start trending lower and to what magnitude?

It's been trending lower. July was really our peak in the deposit costs, we've seen it come down eight basis points from that peak, and really the July move, we moved down our deposit costs but not nearly as much as we did coming off the September move. So that should really bode well for October and for the fourth quarter.

Got it. And just moving to deposit growth as we think about going forward, if you could remind us in terms of where we are in terms of the two or three different teams that you hired over the last year in terms of their production levels, and what you expect from the Mortgage Servicing team in terms of deposit growth like should we expect growth to begin kicking in, in the fourth quarter, and if you can put a framework around the magnitude of growth that team can bring?

The Mortgage Servicing Banking team is now open for business in the fourth quarter. What they were doing was preparing along with lot of our operations and administrative and support team to work to get ready for this quarter. So with the $1.5 billion growth that we had in the third quarter, none of it came from the Mortgage Servicing team because they weren't open for business until now in the fourth quarter. So again, that that really bodes well because we expect significant deposit growth over the next couple of years from that team. That team controlled over $22 billion in deposits at Wells Fargo. The Venture Banking Group, they contributed during the third quarter, a little over $100 million in deposits. And we expect about that that level on a quarterly basis going forward. And the Fund Banking team is contributing in large part on the loan side, it's going to take them a couple of years or so to work up where they would be funding themselves. So we were very excited about the near term and intermediate term future because we've been having such success in growing deposits. And now we're going to have even more success with the team that we just added on.

And do you think Joe just tied to the Mortgage Servicing team given just the size of what they did at their previous bank, could deposit growth over the next 12 months trend closer to the higher end of your $3 billion to $5 billion target?

It could. It's very, it's very possible. Right now the deposit growth for the year -- for the last 12 months or so has been $3 billion. So right now, as Eric mentioned, the deposit growth in the fourth quarter was only 17 days, pretty good.

The next question comes from the line of Jared Shaw with Wells Fargo Securities. Your line is open.

Can you hear me guys?

Now we can.

Okay, sorry about that. Just following up on the margin, what should we -- what term borrowings are rolling off as we look over the next few quarters. And once we see those pay down, should we expect the cash position to get back to a more normal position? I know you said that deposits will first be used to fund loans but with that -- with the borrowing levels down that that should be a good pick up for margin?

Yes, we got about $400 million roughly in borrowings per quarter that we should be able to pay down. Like you said, we've got a -- we've got a robust loan pipeline that we could easily see it filling in loan growth. So certainly as little as $500 million, but we could see a $1 billion in loans this quarter. So we anticipate putting the cash to good use.

And those borrowings will add about 2.5%.

Okay, great. And then on the CRE, what pay down, do you say that the non-relationship refi opportunities are done? Or is the pace won't be at the same level? And if it is still continuing, I guess, how much more could we see in terms of the reshifting of -- out of CRE from that?

No, it's virtually done. We're right now doing business this quarter. We are essentially done with. Now it could be some straggles here and there, but it's essentially done. So our expectation is a flat growth on CRE with the Fund Banking team as well as the traditional C&I team making up for a lot of the growth going forward.

And then just finally from me as the CRE capital concentration keeps coming down and your stock price looks attractive here, should we or could we expect to see the buybacks become a bigger component of capital management? And what's your appetite, I guess for reloading that if you finish out the $500 million earlier than expected?

Well, it was -- we meaningfully increased it this quarter. So I think you can see similar levels, if not a little bit more going forward. As you said, it was certainly a lot of that dependent on stock price where that -- where that is where growth comes in, we do -- we did increase it a bit this quarter as we saw that our loan growth was going to be a little bit less than typical. So we anticipate that that loan growth will be much more positive than it was this quarter. So we'll have to take that into account as well.

Okay. But in terms of that, that CRE as a percentage of capital, you feel comfortable with it here just about 500% and continuing to be to be in the market with about that?

We are getting drift to under 500% in Form rated 4, we are comfortable at that level, yes.

The next question comes from the line of Ken Zerbe with Morgan Stanley.

I was hoping you guys could address so the NIM outlook a little bit. And I guess it's I know your common sense can be broken flat to down a little bit in fourth quarter but I guess everyone me and probably the whole market and look at you guys as being liability sensitive and this should be a fantastic time to own Signature to be Signature because your costs going down, you're going to have NIM expansion. We're not seeing that yet. Can you just talk about sort of why fourth quarter is flat to down in terms of NIM and if you can definitely love to hear more about early 2020 as well? Thanks.

Well there's a couple of things going on, Ken. First of all, we have an inverted yield curve. So that's not very helpful at all on the asset side of the equation, so we're going to continue to see pressures on asset yields. But there's also a lag to our ability to reprice deposits down. And I think you've got to look out several quarters. And really to a time when the Fed stops cutting we will continue to be reducing deposit costs. So our process is very negotiated with our clients. We're not like a traditional retail bank where can just costs across the board. So it's a negotiated process and it takes time for us to work through those negotiations. But ultimately, we will reprice down deposits enough to more than offset the reductions on the asset side. But it’s going to take a little bit of time.

And we're a lot more interested in bringing in new business to continue to grow the existing clients that we have. And if that causes a base form for NIM, that's so big because we want to build a franchise value. And we find that it's better to build and have a little bit more cost than it is to let decline opportunities pass away.

Got it. Totally understood. I mean, could there be a point in first half of next year where you actually do see NIM expansion and if the in-curve remains inverted?

Yes. Perhaps we could do and should do.

Got it. Okay, perfect. And then just a second question I have in terms of CECL, I would imagine there's going to be a fairly sizable below the line or AOCI hit from CECL but my question really is more on the ongoing impact of CECL given that you are running off the CRE book where lease is flat to down a little bit. Do you have any guidance in terms of sort of the ongoing quarter-by-quarter provision expense?

Yes, unfortunately, it's a little bit early for us to tell. We're still finalizing our models and running through parallel tests on those. So it's hard for us to predict the go-forward. Certainly, there will be more volatility to that as I'm sure you're hearing from many of the banks. But ultimately our longer dated CRE portfolio of mostly Form 5 rated credits requires a bit more provisioning than the three to four rated, well structured, fund banking, capital call facilities that we're putting on. So that should be beneficial to the go-forward provisioning, but we still have to see a new slot to finalize all those models.

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

Wanted to start, what was the capital call loan growth in the quarter?

It approximated $900 million.

Okay. So it stepped up. Was that a function of line utilization, Eric, that's a bit higher than where you've been running in terms of growth?

No, it was mostly new facilities that were put in place.

Okay.

Pretty fully drawn.

Okay. That's helpful. And in terms of the reduction in CRE loans in the quarter, was that all in multifamily and how did the renovation in portfolio balances change in the quarter?

Mostly multifamily. We had two very large loans that help drive the reduction, they are $100 million facility and $104 million facility where over the few years that we had the loan, we were unable to establish any sort of relationship and as a result that drove us to have a reduction of nearly $900 million in CRE which we're really happy about because that was the whole purpose.

And the renovation portfolio, Joe how did the balances; there change in the quarter?

It was down slightly.

Down a bit, okay. And then finally did you guys wrap up, I know you were doing Phase 2 of the deep dive into the multifamily portfolio, is that done and what did you learn from that test?

We learn that there will be we find very little effect -- we expect very little effect on our portfolio.

The next question is from the line of Chris McGratty with KBW.

Eric, I want to go back to the deposit conversation for just a minute. I think Joe; you mentioned that you could be at the high-end of three to five if the momentum continues on deposit growth. I guess the question is net balance sheet growth, how much your borrowings are elevated to where they were pre-cycle, what's the right amount of borrowings for the company, and maybe what I'm asking is like the three to five total asset growth, like where do you expect to be in that range once you put the pieces together?

With the amount of borrowings, we believe is about 7%. And we think that we're going to have significant deposit flows. We will deploy reductions of borrowing and we will have loan growth. We expect to have loan growth just from the Fund Banking team, we expect up with the $750 million in growth per quarter. Not including Signature Financial, not including the Venture Banking Group, we will have somewhere between $750 million to $1 billion a quarter and that will be all funded by deposits.

Okay. And that 7%, that says a proportion of interest bearing liabilities is that's the right dominator?

Well of assets.

Of assets, okay. Great. And then maybe one more if I could, maybe I missed the expenses I think last quarter you said kind of mid-teens kind of gliding towards that 12% as you make these investments and grow into them. Any update on that and in terms of timing?

Yes, came in a little bit better this quarter than we anticipated and we still want to stand at say 12% to 16% range to be safe. Fourth quarter we are closer at 16% hopefully a little better. And then we'll see it trend down to 10% to 12% by end of 2020.

The next question is from the line of Brock Vandervliet with UBS.

Good morning. On the Specialized Mortgage Servicing Banking team, I that's the full title. Obviously, tied to a monumental amount of deposits at the former shop, how do you look at kind of recreating that business at Signature is it kind of a straight percentage of that jackpot number over a period of years? Or do you have them on kind of a cadence of quarterly deposit generation that you think they can do, how do you think about that?

We think about it the way we thought about each of the teams over the last 18 years, almost 19 years is that they are very experienced; they've been with an institution for a long time. The relationship is primarily with them and not with the institution. And they'll market themselves that way. And deposits will flow whether it's from the existing institutions or from other institutions. We may just; the person that leads that team has been doing it for 26 years, had over $22 billion in deposits. So the formula is not the secret sauce is hiring the right people. And we hired, we were able to get the team that we wanted. So there's no nothing special other than the team itself. So how we -- to give you an example, we don't necessarily set up a goal for them, we just basically take it on face value that they're going to be able to generate significant amount of deposits based upon the type of clientele they have. And whether it comes it in fourth quarter, it comes in first quarter, it comes in 2021, over a series of years, it'll happen.

And a number of say $500 million a quarter after these folks have been in place for some period of time would seem reasonable?

More than reasonable.

Okay.

One thing about this team that differs from the other team is that the other team and I mean 100 or so that we have who work very hard to grow their books of businesses. Usually those teams are talking about $5 million to $10 million in deposits, sometimes $20 million in deposits for the Specialized Mortgage Servicing banking team, you'll be talking about hundreds of millions in deposits.

Got it.

So generating -- generating $500 million a quarter is not out of the realm.

And on the expense growth, was some of that guidance is just based on an infrastructure need for this team or is most of that plumbing in place and it's more just comp?

More just comp, I mean that that plumbing was essentially in place; we probably had 95% of what they needed. We're already a fairly sizable player in that space. So it's really just the compensation.

The next question is from the line of Lana Chan with BMO Capital Markets.

I'm just trying to understand more what drove such a strong growth in deposits this quarters since the Mortgage Servicing team hasn't started contributing yet, was there a meaningful pickup in short-term escrow deposits this quarter?

No it's basically is the 100 or so banking teams continuing to work hard. We had accorded, the second quarter we had over $900 million in deposits. So it's not unusual, almost the best deposit quarter we've had in three years. That's because the competition has been very tough. I'll tell you one area the EB-5 area. Prior to this quarter we had 10 straight quarters of declining EB-5 and it was actually down $1 billion in deposits over those previous 10 quarters and actually reversed here in the third quarter and actually went off because the government finalized some regulations. And we expect EB-5 to contribute going forward.

Okay, thank you. That's helpful.

In fact most -- Lana in fact most of the growth were core deposit growth.

Okay, fantastic. And can you give us idea of in terms of the Mortgage Servicing Banking team, the deposits that they should be bringing on board, can you give us an idea of like, what the average rates would be on those types of deposits just for modeling purposes?

Yes, they're going to have, initially they're going to be bringing over the excess funds of our clients. So those rates will be, I'd say around 2% now maybe a little, maybe a little under that, but over time, they're going to start to garner more of the operating accounts. And those are non-interest bearing. So they should get through a very high level of non-interest bearing to overall deposits. To be safe, between 30% and 50% of their overall should be in DDA. So that that should meaningfully bring down their overall deposit cost. But initially they're going to bringing over the higher cost interest bearing deposits for us, those are the easiest to move.

Okay, got it. And just one more question if I could on the commercial real estate multifamily. Given where rates are and I don't know if you've changed your multifamily pricing recently, I don't think you had up until a while ago. How do you keep your balances flat going forward, when sort of transaction volumes have really got ground or halt or frankly, reform and you're seeing a lot of competition in the space with pricing?

Well, when we during the third quarter, when we were reducing the portfolio; our pricing was about 60 basis points above that of our competition. Now in the fourth quarter, it's back to the norm which is usually about 25 basis points higher where we are able to keep our books that we have, and attract a little bit of the business that’s transacting out there. So it's really a matter of keeping what we have.

The next question is from the line of David Long with Raymond James.

You've talked a lot about some of the recent teams and the hires and sort of new business lines. What is your appetite at this point to add to the fund services and the venture capital teams?

Well I mean they are fairly new, they have been adding of course here and there to fill in the opening that they need to. Our appetite would be fine if we could find as Tom Byrne says all stars out there.

Got it. And as far as the build out on the West Coast, where does that stand at this point and again, your appetite to still add people there?

We’re fully built out there. We have four traditional banking teams. We also have representation from the venture team, the Fund Banking division, and [indiscernible] what is out there with a few others who runs our Specialized Mortgage Banking services team. So we're actively looking to hire more traditional banking teams there and we anticipate that probably next year now, it's getting a little bit late in the year for us to add but we'll probably look to add teams there next year.

I mean our appetite is that is such that we would open up an office in Los Angeles, if we found the right team.

This concludes our allotted time in today's teleconference. If you'd like to listen to a replay of today's conference, please dial (800) 585-8367 and refer to conference ID number 8188917. 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.