Signature Bank

Good morning, and thank you for joining us today for the Signature Bank 2012 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. These statements often include words such as may, believe, expect, anticipate, intend, potential opportunity, could, project, seek, should, will, would, plan, estimate or other similar expressions.

As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions that could cause actual results to differ materially from those in the forward-looking statements.

one, prevailing economic conditions; two, changes in interest rates, loan demand, real estate values and competition, any of which can materially affect origination levels and gain-on-sale results in our business, as well as other aspects of our financial performance including earnings and interest-bearing assets; three, the level of defaults, losses and prepayments on loans made by us, whether held in portfolio or sold in the whole loan secondary markets, which can materially affect charge-off levels and required credit-loss reserve levels; four, changes in monetary and fiscal policies of the U.S. government, including policies of the U.S.

Treasury and the Board of Governors or the Federal Reserve System; five, changes in the banking and other financial services regulatory environment; and six, competition for qualified personnel and desirable office locations.

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 and can change as the results of many possible events or factors, not all of which are known to us or in our control.

Although we believe that these forward-looking statements are based on reasonable assumptions, beliefs, if a change occurs, or our beliefs, assumptions, or expectations were incorrect, our business financial condition liquidity or results of operations may vary materially from those expressed in our forward-looking statements. Additional risks are described in our quarterly and annual reports filed with the FDIC.

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

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

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 Chief Financial Officer, will review the bank's financial performance in greater detail.

Eric and I will address your questions at the end of our remarks.

The 2012 third quarter was another exceptional one led by a strong deposit growth, record loan growth and topline revenue growth, leading to our 12th consecutive quarter of record net income while also improving our already strong credit quality position.

First, let's address earnings. Net income for the 2012 third quarter reached a record $47.7 million or $1 diluted earnings per share, an increase of $9.3 million or 24% compared with $38.4 million or $0.83 diluted earnings per share reported in the same period last year.

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

Looking at deposits. Deposits increased $670 million to $13.6 billion this quarter.

Core deposit growth for the quarter was $551 million. For the trailing 12-month period, deposits increased more than $2.4 billion or 22%.

Average deposits in the third quarter were $13.4 billion, up $2.1 billion or 19% compared with $11.3 billion for the 2011 third quarter.

Non-interest-bearing deposits of $3.9 billion represented 28% of total deposits. With our considerable deposit growth and earnings retention, total assets reached $16.5 billion, an increase of $2.6 billion or 19% versus last year's third quarter.

The ongoing strong core deposit growth is attributable to the unparalleled level of service provided by our product line and banking teams who continue to act as a single point of contact to their clients.

Now let's discuss loans. Loans during the 2012 third quarter increased a record $729 million or 9%.

Loans now represent more than 53% of our balance sheet compared with 46% just one year ago. This transformation is notable if you consider that during this timeframe, we have grown our balance sheet in excess of $2.6 billion.

The increase in loans this quarter was across all lending businesses, including commercial and industrial, commercial real estate, and specialty finance.

In the first 9 months of 2012, loans have increased $1.9 billion, already surpassing all of 2011's record growth while we maintained exceptional credit metrics.

Non-accrual loans again declined to $28 million, representing 32 basis points of total loans in the quarter compared with $31.9 million or 40 basis points for the 2012 second quarter and $51.1 million or 79 basis points for the 2011 third quarter.

The allowance for loan losses was 1.18% of loans versus 1.21% in the 2012 second quarter and 1.30% for the 2011 third quarter. Additionally, the coverage ratio or the ratio of allowance for loan losses to non-accrual loans further improved to 367%.

The provision for loan losses for the 2012 third quarter was $11.1 million -- excuse me, it was $10.1 million compared with $10.3 million for the 2012's second quarter and $12.1 million for the 2011 third quarter.

Net charge-offs for the third quarter of 2012 were $4.6 million or an annualized 22 basis points versus $4.7 million or 25 basis points for the 2012 second quarter and $7 million or 44 basis points for the 2011 third quarter.

Now turning to past due loans in the watch list. During the 2012 third quarter, our 30 to 89-day past due loans decreased $27.6 million to $30.4 million, while the 90-day plus past-due category increased $14.3 million to $30.9 million.

Watch list credits again decreased this quarter by $13 million to $187 million or 2.1% of total loans.

While we are pleased our non-accrual and watch list loans decreased this quarter and our credit metrics remained strong, we are mindful of the uncertainty in the economic environment and we're again conservatively reserved. Just to review recruiting for a moment.

With the implementation of Signature Financial largely completed, we are focused on traditional team hiring and are pleased 1 team joined and another expanded with the hiring of the group director in the third quarter. Additionally, a team has already joined in the fourth quarter which we announced last week, bringing our total new teams to 4 this year, while more than 50 professionals joined our specialty finance subsidiary, Signature Financial.

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, Joe, and good morning, everyone.

I'll start by reviewing net interest income and margin. Net interest income for the third quarter reached $141.7 million, up $23.8 million or 20% when compared with the 2011 third quarter, and an increase of 6% or $7.5 million from the 2012 second quarter.

Net interest margin increased 5 basis points in the quarter versus the comparable period a year ago and it increased 2 basis points on a linked-quarter basis to 3.56%. The linked quarter increase was mostly due to a $2.3 million increase in loan prepayment penalty income.

When you exclude prepayment penalty income from the 2012 second and third quarters, core net interest margin for the linked quarter declined 3 basis points to 3.41%.

Let's look at asset yields and funding costs for a moment. Overall, interest-earning asset yields declined only 3 basis points this quarter to 4.25%, as it was assisted by an improved earning asset mix and an increase of $2.3 million in prepayment penalty income on loans to offset the continued low interest rate environment.

Given the continued low interest rate market and tighter spreads, coupled with strong loan growth, we were again very selective in securities purchases. As a result, yields on investment securities declined 8 basis points to 3.33% and that the ratio remained stable at 2.8 years.

Turning to our loan portfolio. Yields on average commercial loans, mortgages and leases declined 2 basis points to 5.24% compared with the second quarter of 2012.

Excluding prepayment penalties from both quarters, yields would have declined 15 basis points.

Now looking at liabilities. Money market deposit costs this quarter further declined 4 basis points to 82 basis points as we again decreased deposit costs given the low interest rate environment.

This decrease, coupled with an increase of $286 million or 9% in average non-interest-bearing deposits, helped lead to a decline of 5 basis points to 62 basis points in our overall deposit costs.

On to non-interest income and expense. Non-interest income for the 2012 third quarter was $8.3 million, a decrease of $500,000 when compared to the 2011 third quarter.

The decrease was due to a $1.2 million decline in net gains on sales of securities. Non-interest expense for the third quarter of 2012 was $54.9 million versus $45.7 million for the same period a year ago.

The $9.2 million or 20% increase was principally due to the addition of new private client banking teams and the Signature Financial hirings.

Bank sufficiency ratio improved to 36.6% for the 2012 third quarter compared with 38.1% for the 2012 second quarter as we are now gaining leverage from our specialty finance business.

And turning to capital. Our capital levels remained strong with a tangible common equity ratio of 9.63%, Tier 1 risk base of 16.15%, total risk-based ratio of 17.23% and leverage capital ratio of 9.60% as of the 2012 third 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 will turn the back call back to Joe. Thank you.

Thanks, Eric.

This quarter, the evolution of our balance sheet continued with our third consecutive quarter of record loan growth, funded with solid deposit growth and leading to topline revenue growth and our 12th consecutive quarter of record earnings.

Our steadfast commitment to depositor safety, first and foremost, is allowing Signature Bank to flourish these tumultuous times and positions us for future success.

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

I was hoping, I know, Eric, you said that you were selective in securities purchases and certainly, didn't net add the securities positions this quarter. Could you just talk a little bit about what you were purchasing, where you were reinvesting cash flows and how you're thinking about the outlook for securities yield and net interest margin more generally?

Yes. We were very selective in securities deployments, especially given the loan growth that we've had.

I mean generally, we added the agency CMOs with lockout structures, specified MBS pools, some limited non-agency re-remics, [ph] a small amount of financial corporates and some CMBS. In general, our yields were in the high 2s to low 3s.

I would expect that our reinvestment will remain in the high 2s to low 3s given the continued loan pipeline that we have, Bob. So it should be able to help us with the pressures on the net interest margin.

Okay. And so are you thinking that altogether, the margin trends will be similar this quarter where you're down a couple of few bps, is that a good way to think about it?

I would think so, a few basis points to several basis points, Bob. We certainly don't see margins going up in this interest rate environment.

Sure. And then you mentioned the loan pipeline there.

Could you just talk a little bit about how the pipeline looks as you're headed into the fourth quarter and how to think about loan growth?

Well, we believe loan growth will be robust. The question is, is it going to be robust like the first quarter, second quarter or third quarter?

It's hard to say at this early part but we do see a pretty robust pipeline across the board in all businesses that we have right now in October. So it bodes well for us as we close out the year but it's hard to say.

There are a couple of things that really mix it up. One is, with the fiscal cliff, we're seeing some companies, as an example, do I buy the 50 trucks or lease the 50 trucks this quarter or do I wait to see what happens with the election and Congress before I decide whether I buy 30 trucks or 50 trucks?

So that's some uncertainty that creates, for us, uncertainty as to whether we're going to be like the first quarter, second quarter or third quarter. Having said that, with uncertainties we are still seeing a very strong pipeline.

Okay. And do you think the best way to think about that issue in clients minds is a timing issue that once you sort of get past the end of the year and the election and maybe there's a little bit more clarity around the budget that then, those orders come in and it's a timing issue?

It may or may not be. I guess it depends on the election.

It could be a timing issue or a deferment issue. Tough to say.

But the good news for us is whatever the results are, it's a matter of how much growth we're going to have. It's going to be robust.

But is it going to be similar to the first, second or third quarters, it's still -- whether it's one of those 3 quarters, it's still robust growth.

I wanted to start, given the pressure on asset yields, some banks seem to be rethinking how low they could push deposit costs. And I know last quarter, you talked about new money market clients coming in.

I think you said 65 to 75 basis points range. Are you rethinking that as well as where you could push existing money market rates to?

This 82 basis points still seems very high.

We are still -- look, if it's 82 basis points, the month of September was 81 as an example, so it's still trending downward. But we don't have the advantage of the retail.

So there are many banks out there that have lower money markets and have the advantage of bringing in clients that keep $5,000 or $10,000 and just pay them 25 bps, where our clients are still at the $5 million and $10 million and are commanding a much higher interest rate at the larger institutions although you don't see it because there's so much retail mix then. So we're not rethinking the 65 to 75, we are still bringing down that cost with some of our existing clientele who may be in the 80 or 90 range.

The reason why we're not rethinking it is because we are seeing where they're coming from, Steve, they are getting the 65 and 75 so we have to match that. But on November 1 next week, we'll be dropping some of our money market rates for those clients that are above that 81 basis point interest rate so that will help bring it below 80 but we're not rethinking it at this moment.

In fact, what we've seen, believe it or not, in the last few weeks, some banks have actually increased for these particular clients, their rates.

I'm curious, maybe for Eric. Since the fourth quarter of '11 comp expenses, it's pretty consistently now been running over 20% year-over-year.

Given the pace that you've been hiring new teams, should we be thinking about 20% plus, as sort of a new run rate for comp expense?

I think that for the fourth quarter, we should see 20% again. Remember, most of that was driven by the hiring that we did with Signature Financial right at the end of the first quarter.

So I would think, if you look into the first quarter of next year, again, we'll see a 20% growth, and then after that, we should see it tail off a bit. We had been growing prior to Signature Financial coming on board at a little bit below 10%.

So I would think we'd go back down to that number, but we'll give better indications of that when we speak about fourth quarter earnings.

Okay. Maybe just one final one and I know it's not an easy one to answer.

But given all the new recent team hires, do you guys have any stats which show your leverage or capacity you've created in the franchise with all these new hires?

Well, from a system standpoint, we have a lot of runway. I think where the leverage is less is where compliance comes in and the regulations that -- these regulators are coming down more and more.

With us having to do stress testing and with what's going on with the CFPB, the FDIC and the New York State Bank Department, all coming in and doing reviews, it requires us to have a few more people, but that's unrelated to the teams. From a system standpoint and from the support they're getting, we're in good shape and there's a lot more runway there.

I think the easiest statistic to point to on that is our efficiency ratio, Steve. We continued to make improvements in that quarter after quarter after quarter.

Obviously, a little bit of a setback with the large hiring that we did with Signature Financial, but again, we're already seeing the improvements, two quarters into our Signature Financial hiring in the efficiency ratios. So they're already driving efficiencies there once again.

So we've continued to move that down consistently over the years as we hire these teams.

Could you give us an idea on the loan growth this quarter in terms of how it was split between multi family, asset-based lending and C&I, it sounds like it was pretty balanced in the release, just looking for some incremental color.

Yes. The asset base through Signature Financial was up a similar amount to the prior-year quarter which is a little over $200 million, and then the rest was predominantly due to commercial real estate, and it was about a 50/50 split between multi family and other forms of CRE, and then there was a slight uptick in our C&I lending.

Okay. And then can you give us an update in terms of pricing on each of those categories and how it's holding up?

Well, on the commercial real estate, for the multi family, we're between 3.5% and 3.75% on our straight 5-year fixed, although there seems to be more pressure to be closer to the 3.5% than the 3.75%. On anything other than multi family, we usually like to have something with a 4% handle although again, more recently, we've done a few deals on commercial office buildings that started with a very high 3%, like a 3.95%, 3.85%, but we really try to be in the 4s for that.

And on Signature Financial...

Signature Financial continues to come in right around the 4% handle as well.

The one area where -- on C&I, the floaters, that's where we're seeing some real pressure. And something I said or we said in the last quarter earnings call was that we would give up some of the margin to put floaters on because you need to have a good mixture of fixed and floating.

And some of those floaters are very, very low 3s and very high 2s.

Okay. Last one for me.

I know it's hard, but can you give us your best guess in terms of what inning we're in, in terms of the prepayment penalties?

You know, that's very hard. I'm not even sure if we threw out the first pitch yet or we're calling in the reliever in the ninth inning.

I know that's a wide disparity, but it's very, very hard. Because just last year, think of it this way, in 2011, we had a record earnings, I'm sorry, record earnings of course, but we had record growth in loans, and so some of those loans will want to refi and there will be some prepayment, that was a record for us.

So they haven't started yet. So it's very hard to say.

It looks like the reserves to loans ratio came down a few basis points this quarter. Can you just give us some color around how you view the reserve at this point in light of Signature Financial and whether you expect to manage that lower going forward?

As a ratio, I would expect, as we continue to put on well-secured loans, whether it be in Signature Financial or in our commercial real estate portfolio, in particular multi-family, that you're going to see it as a ratio come down. I mean, we were traditionally, over our lifetime, a C&I lender but as we've been building up the CRE portfolio and now with Signature Financial, and their well-secured portfolio, I would expect that overall, that ratio is going to trend down over time.

Really, our competitors are -- especially, if you look at the multi-family space, putting, what? 50, 60 basis points in reserves on our loans.

So it's very difficult for us to be competitive, putting 120 in reserves on those well-secured loans. So I think you're going to see that trend to continue to come down, Jason.

Okay, great. That's helpful.

and then just going back to the margin issue, just given the differing trends with respect to the stated margin versus the core, how should we be thinking about that variance going forward? And I guess specifically, I'm sort of wondering, I mean, I assume you're going to have at least some prepayment penalties in interest income realistically, for the foreseeable future.

Is there a point at which we could get to potentially where those evaporate entirely?

Yes. I think eventually, that's going to happen, right?

If we're in a low interest rate environment for a prolonged period of time, there's going to be a point where every thing is refi-ed, right, Jason? And then if we see a rising rate environment, we're probably going to have a rush of people to refi, right?

And lock in rates in front of a rising rate environment. So there's obviously going to be a time when that comes to an end but right now, we're seeing people who put loans on last year or the year before refying again already.

So we still got a ways to go in the refi wave. That's why we've really focused on core NIM.

The prepayment penalties can be very choppy and very hard for us to predict but if we look at our core NIM, we expect that we'll see a similar trend with what we saw this quarter.

Okay, great. And then one final housekeeping.

I apologize if I missed it, but can you just give us the OREO balance at the end of the quarter?

There was no OREO.

Maybe I missed it. How should we think about the overall size of the investment portfolio, I guess, over the next year, 1.5 years as the growth and the earning asset remix continues?

We are hoping to see similar trends, right? It's predominantly going to be driven on how strong deposit growth comes in and how strong loan growth is but we really like the way that this quarter shaped up where we were able to move some of our loan growth -- move some of the securities into loans given the growth in loans slightly outpaced the growth in deposits.

I mean, that's somewhat ideal in this environment for us, but we'll see. Deposit growth can be choppy and we certainly have opportunities there and we certainly see deposit growth continuing to be robust, but we like the level of the securities portfolio to really stay where it is today, if not, trend down slightly.

Great. One other question on the investment portfolio.

Obviously, it's yet to be determined what the impact of QE3 will be, but can you help us with paving, maybe your thoughts on the prepayment speeds in the MBS boat, especially what the premium am in the books is today?

Actually, premium amortization was flat this quarter to the prior-year quarter, so that was strong for us. We really put in a lot of protective structures and underlying collateral to help us out with that.

Remember, we started moving the securities duration out 2 years ago to protect from this interest rate environment and we've been very selective in deploying into the securities portfolio, which has helped us to find securities with a little bit better yield and a little bit other protective structures to them so we certainly expect that we'll continue to have pressures from QE3 but it's obviously nothing that we can't overcome as demonstrated by this quarter.

Great. Last one, what's the tax rate we should be using?

I'd use 44% going forward. We still have some noise related to those CRE investments that we've made and the write downs on those, and we're still looking to get our arms around all that.

So we conservatively used the 44% rate this quarter.

I just had one follow-up question to Bob's earlier query on the bond portfolio. Eric, I have to confess, I'm quite the bond dummy and so, I mean, it feels like quarter-over-quarter, your securities yields continue to outperform that of other banks in terms of the compression, right?

And obviously, the loan growth in terms of that as a deployment avenue helped but could you -- and your duration is staying pretty tight at 2.8 years. I guess, could you give us a little bit more color within what you're reinvesting in the agency CMOs, the limited non-agency re-remics?

Is there sort of a credit -- a little bit more of a credit risk that you're taking that's maybe -- I guess, if you could just sort explain how you're able to get high 2%, low 3% reinvestment rate if the duration is staying so flat?

Well, it's really -- it is very beneficial for us to have the loan growth because it's really allowed us to be far more selective in the securities portfolio and we can pick up odd lot pieces that give us a little bit better yield. But it's really -- we've been working on finding securities that have prepay structures, that are better than the other securities, and there's a lot of work that goes into that and it's very general in the way I laid it out but we don't want to give away all of our secrets because unfortunately, that continues to bring in spreads as our competitors try to search out those same assets.

But it's a lot of HARP and HAMP paper. We like securities that have underlying loans with high LTVs so it's difficult for people to refi that.

We like low loan balance paper, where people seem to -- if they've got a $70,00 loan and they've been making the payments for the last 10 years and they're just going to continue to make that payment and not look to refi that. So there's a couple of different strategies that we employed and again, we stuck to structures that have helped us to have tighter prepay windows.

So it's all those things added together, it's our ability to be ultra-selective in this environment that's helped us to keep it this was and like I said earlier before, we started bringing our duration out 2 years ago and that certainly helped us as well.

Previously, you guys mentioned in the prior quarter that half of the specialty financial origination was taxi medallion. Where would that break down in the current quarter?

And looking forward, do you expect that mix to change with any potential ramp-up in equipment financing or transportation financing?

I mean, it was roughly the same. Overall, about 45% of their portfolio is in taxi medallions.

Because we already had that business line here at Signature, they were able to ramp that up a little bit faster. There may be similar areas so I would expect the other areas just to begin to pick up a bit more.

But in general, that's probably going to be their biggest asset class.

Got it. And on traditional C&I, it appears that contributed some loan growth in the quarter.

What are you seeing there and potentially going forward? And also, can you talk about line utilization at this time?

Well, we expect -- the last several quarters, we saw a lot of activity but it didn't result in growth and now we're seeing the benefit of all that activity that has taken place and the growth that we had this quarter, we continue to expect for the next several quarters. We hired a team back in the first quarter that -- their expertise was middle markets C&I and that's starting to kick in and we're also getting some opportunities to do some other deals and we want to put this C&I on our books.

Like I said earlier, we are willing to give up some margin to put these floaters on because we believe, that you need to have a good mixture of fixed and floating for our portfolio. So the expectation, albeit not at the same level of Signature Financial and not at the same level of commercial real estate, there still will be growth similar to what we had this quarter.

In terms of line utilization, we actually had some -- in the month of -- in July and August, we had our absolute lows in line utilization in both July and August, although it ticked up in September. So the unusual thing was that, it was the lowest we've had since 2008 or maybe even before that in terms of utilization.

So with the DDA guarantee expiration this quarter, are you guys anticipating any run off at all in that portfolio due to that?

You mean the expiration of the Transaction Account Guarantee Program, TAG? We expect some but nothing that would significantly affect the institution.

Okay. I mean it sounds like you're still expecting similarly robust levels of deposit growth in 4Q?

Yes. We hope that the loan growth is more robust than the deposit growth.

Got it. And back on the taxi really quick, it sounded like 44% was maybe a little conservative.

Is there a chance that, that goes down next year?

Yes, there is definitely a chance that, that goes down next year.

Okay. So maybe 43% or 43.5%?

Just trying to get a rough sense.

For next year, I would go with 43%.

One question for you all. I mean certainly, this has been a big year in terms of adding to the capacity and the diversification of the business but what do you think -- what opportunities lie in front of you as we move into next year?

Maybe talk about just kind of the general, normal hiring that you do, plus any particular strategic opportunities.

Well, strategic opportunities, we probably would not speak about because we wouldn't want to let others know what we are thinking. But at least on the asset generation side, having added another leg to the stool, maybe we would add an additional leg to the stool.

As we're looking at our strategic plan 2013 and 2014 without letting you know exactly what that leg would be, we're always looking for opportunities to see how we can diversify the asset generation side of the balance sheet. Now in terms of teams, we'll give a little bit more guidance in January when we do the fourth quarter earnings release but we've probably always looked at, in the last several years, 1 team per quarter.

Particularly since we hired this year, 4 teams, brand-new teams and we also added on a whole subsidiary. We don't need much in terms of add-ons to keep the growth.

I guess I was just wondering, to what degree the pipeline was at the end of the quarter?

The pipeline for team growth was pretty depleted. We wanted -- usually, at this time of the year, we start looking into teams to add on around the March timeframe of the following year.

So our expectations are that we wouldn't add on any more teams for the remainder of this year, wait until bonuses are paid and focus more on the end of the first quarter. So that pipeline will probably look very different 3 months from now than it does today in terms of team growth.

Thank you for joining us today. We appreciate your interest in Signature Bank.

As always, we look forward to keeping you apprised of our development. And Alicia, I'll turn it back to you.