Signature Bank

Good morning, and thank you for joining us today for the Signature Bank 2015 Fourth Quarter and Year-end 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.

Signature Bank delivered another exceptional year of record growth and performance, resulting in our eighth consecutive year of record earnings. And for the fourth quarter, we again delivered strong average deposit and loan growth, expanded top line revenues, maintained solid credit quality, culminating in our 25th consecutive quarter of record earnings.

Moreover, while achieving these substantial results, we spent this past year building an even stronger foundation for the future success of Signature Bank. I will start by reviewing quarterly earnings.

Net income for the 2015 fourth quarter reached a record $103 million or $2.01 diluted earnings per share, an increase of $21.6 million or 26.5% compared with $81.4 million or $1.60 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.

These factors were partially offset by an increase in noninterest expense attributable to our revenue growth initiatives and also, in part, regulatory and compliance costs.

Looking at deposits. Deposits increased $163 million or 0.6% to $26.8 billion this quarter, including core deposit growth of $627 million and average deposit growth of nearly $1 billion.

For the year, deposits increased $4.15 billion, core deposits increased $3.3 billion and average deposits increased a record $5.36 billion.

Noninterest-bearing deposits of $8.6 billion represented 32% of total deposits and grew $1.5 billion or 21% for the year. The substantial deposits and record loan growth, coupled with earnings retention, led to a record increase of $6.1 billion or 22% in total assets this year, which reached $33.45 billion.

The ongoing strong core deposit growth is attributable to the superior level of service provided by all from our product client banking teams who continue to serve as the single point of contact for their clients.

Now let's take a look at our lending businesses. Loans during the 2015 fourth quarter increased $1.56 billion or 7%.

For the year, loans grew a record $5.9 billion and represent 71.1% of total assets compared with 65.4% 1 year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate, multifamily loans and specialty finance.

Turning to credit quality. Our credit metrics all remain strong.

However, as anticipated, we did see continued deterioration in our medallion portfolio. Watch list credits increased by $43 million this quarter to $350.4 million, was still a low 1.5% of loans compared with the $308 million or 1.4% of loans for the 2015 third quarter.

During the fourth quarter, we saw an increase of $23.6 million in our 30- to 89-day past due loans to $90.8 million. And 90-day-plus past due loans decreased slightly by $3.7 million to only $6 million.

Nonaccrual loans increased to $71.9 million or 30 basis points of total loans compared with $59.6 million or 27 basis points from the 2015 third quarter and $21 million or 12 basis points from the 2014 fourth quarter.

The provision for loan losses for the 2015 fourth quarter was $16.7 million compared with $11.4 million for the 2015 third quarter and $7.6 million for the 2014 fourth quarter. Net charge-offs for the 2015 fourth quarter were $4.6 million or an annualized 8 basis points compared with net charge-offs of $5.5 million or 10 basis points for the 2015 third quarter and net recoveries of $181,000 or 0 basis points for the 2014 fourth quarter.

The allowance for loan losses was 0.82% of loans versus 0.82% in 2015 third quarter and 0.92% for the 2014 fourth quarter. Additionally, the coverage ratio remained very strong at 271%.

While we are pleased that our credit metrics were strong again this quarter, we remain mindful of the uncertainty in the global economic and political environment and again, we are appropriately reserved. For a moment, let's review teams.

In 2015, we added 5 teams. We also added 2 new business lines to Signature Financial, Municipal Finance and Commercial Vehicle Finance, which expand our product offerings and further diversify our revenue streams and asset composition.

Also, earlier in the year, we opened our 29th office in Greenwich, Connecticut, which marked our first out-of-state banking office.

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 fourth quarter reached $268.3 million, up $52.6 million or 24% when compared with the 2014 fourth quarter, an increase of 7% or $18.4 million from the 2015 third quarter.

Net interest margin increased 7 basis points in the quarter versus the comparable period a year ago and increased 8 basis points on a linked-quarter basis to 3.3%. Excluding prepayment penalty income, core net interest margins for the linked quarter increased 4 basis points to 3.15%.

The linked-quarter increases in overall and core margins are due to the deployment of excess average cash balances from the 2015 third quarter, a slowdown in amortization of premium on securities due to slowing CPR speeds and stronger reinvestment yields in the securities portfolio.

Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2015 fourth quarter remained stable at 3.71% compared to the fourth quarter of last year.

However, on a linked-quarter basis, they increased 7 basis points, mostly due to the deployment of excess cash balances as well as an increase in loan prepayment penalty income.

Yields on the securities portfolio increased 3 basis points linked-quarter to 3.07% due to a slowdown of premium amortization from slowing CPR speeds and better reinvestment yields. Consequently, the duration of the portfolio increased to 3.4 years.

Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 3 basis points to 4.06% compared with the 2015 third quarter.

This is due to a rise in prepayment penalty income. Excluding prepayment penalties from both quarters, yields remained stable.

Now looking at liabilities. Our overall deposit costs this quarter declined 1 basis point to 39 basis points, mostly due to an increase of 5% or $411 million in average noninterest-bearing deposits.

With the outflow of escrow deposits at the end of the quarter, average borrowings increased $413 million to $2.5 billion or only 7.6% of our average balance sheet. Given the low cost nature of the borrowings we put on, the average borrowing cost decreased 14 basis points from the prior quarter to 1.13%.

The overall cost of funds for the quarter remained stable at 46 basis points.

On to noninterest income and expense. Noninterest income for the 2015 fourth quarter was $9.3 million, an increase of $2 million when compared with the 2014 fourth quarter.

The increase is predominantly due to a decrease of $1.1 million in other losses from the amortization of low income housing tax credit investments that occurred in the prior year's fourth quarter.

Noninterest expense for the 2015 fourth quarter was $88.4 million versus $76 million for the same period a year ago. The $12.5 million or 16.4% increase was principally due to the addition of new private client banking teams, our continued reinvestment in the growth of Signature Financial as well as an increase in costs in our risk management and compliance activities.

We anticipate these investments will facilitate further growth.

Factoring in the significant hiring since last year and increased regulatory costs, the bank's efficiency ratio still improved to 31.8% for the 2015 fourth quarter compared with 34.1% for the 2014 fourth quarter.

And turning to capital. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet, as evidenced by a Tier 1 leverage ratio of 8.87% and total risk-based ratio of 12.1% as of the 2015 fourth quarter.

And now, I'll turn the call back to Joe. Thank you.

Thanks, Eric. In summary, the 2015 fourth quarter contributed to yet another exceptional year for Signature Bank, where we grew deposits an astounding $4.15 billion or 18%, increased loans a record $5.9 billion or 32%.

Loans now account for 71.1% of assets. Maintained solid credit quality with nonaccrual loans at only 21 basis points of total assets.

Expanded net interest income by $176 million or 22%. Now that's top line revenue growth.

Added five Private Client banking teams, expanded Signature Financial with the addition of Municipal Finance and Commercial Vehicle Finance; improved our already superb -- superb efficiency ratio to 31.8% while significantly enhancing our risk management compliance function; and delivered a 25.7% increase in net income to a record $373.1 million.

In closing, I would like to thank all my fellow colleagues for their efforts and execution, which led to our 25th consecutive quarter and 8th consecutive year of record earnings as well as once again being named as one of the top 10 best banks in America by Forbes in 2016 for the sixth consecutive year.

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

I was just wondering if you could talk about the loan pipeline heading into 1Q. I know you mentioned you pushed a couple of hundred million in volume into the first quarter, and then just any large packages you see coming?

Any color there would be great.

As you said, we did push a couple of hundred million of loans from 2015 into 2016. So the start of the year went very well.

The pipeline is very strong or robust. We had one credit for $135 million.

That's now closed already, and we have another loan scheduled this month for $100 million. Now some of that may be participated out, but those are 2 of the loans that I'm aware of.

And regarding some packages, I'm not aware of any big ones at the moment. But the pipeline is robust and we started out very well.

Great. Sounds good.

And on the margin, can you guys just provide your 1 quarter outlook on that and if you could just update us on where you're pricing 5/1 ARM, multifamily and commercial real estate? That would be great.

Yes. We really anticipate the margin will bounce around these levels for the next several quarters, ex any large movements in the yield curves.

So we really should be stable for the next few quarters up or down a few basis points. As for pricing, on the real estate, for our high-quality borrowers, we were at 3 3/8%.

We're really in the 3 3/8% to 3.5% range right now.

Great. And then CRE, 50 bps lighter, roughly?

Correct.

Great. And then I guess on the funding side, with the first rate hike, are you guys thinking you can hold the line on deposit costs here, or are you seeing any signs of pressure there on the market, especially in the institutional space?

We see very little pressure to raise the rates. Anecdotally we have 1 or 2 here and there.

But for the most part, we've been able to hold the line.

Great. And then just one last one.

Any thoughts as to what the expense growth will look like in 2016? I know you will continue to have reg costs going up as all banks will.

But are you thinking maybe low to mid-teens in terms of growth, or maybe just some color there?

That's exactly right, Dave. We're looking at probably low- to mid-teens versus the mid- to high-teen range that we were in this year.

We should see expenses moderate a little bit as we're coming off of a larger base.

Could you guys talk a little bit about your commercial real estate concentration? Obviously, regulators have been making noise that they're worried about underwriting risk in the industry.

And concentrations at certain banks, just wondering if that impacts you guys at all, given that it's 50% of your loan portfolio.

You're referring to the interagency joint statement, correct?

Yes.

Well, it's no surprise to us. We've been on the radar screen of the FDIC, both here in New York and in Washington, for many years.

We actually passed the 300% level in the first quarter of 2010. So we've been there over 6 years.

But there are a lot of positives as it relates to that; one, we rarely lend for construction and development, it's very rare. And generally, we lend to current, cash-flowing, multi-tenanted properties.

So with respect to multifamily, because of rental apartment regulations here in New York, there are rarely vacancies. And so we've done -- and additionally, we've done significant work on stress testing and data enhancement, and that will continue.

So when you look at it, there's a lot of pressure around the rest of the country because multifamily is very different in the rest of the country than it is here in New York. Also, for us, as a group, we underwrite using higher cap rates, and we also, in the underwriting, we stress the cap rate by increasing it 100 basis points and 200 basis points before we approve the credit.

So in closing, to your question, not surprised, ready for it and don't see any issues.

Okay, great. And then just switching to the capital front.

The Tier 1 leverage now below 8, 9. I think at your current run rate of earnings, you guys can support 15% balance sheet growth without eroding capital ratios, but you're clearly growing faster than that.

Just some updated thoughts on capital adequacy.

Well, we fully realize that since we are a deposit-gathering institution, we talk about capital every day. But it basically comes down to this.

We don't necessarily look at the ratios today. We compare our internal generation versus what our expectations are for growth.

And we will address the need for a capital raise if the internal generation doesn't generate enough capital for the amount that we expect. So don't look at today's ratios, it's more of a forward-looking on our part.

Okay. And just lastly, on the loan growth front, just following up to the earlier question.

Obviously, this was a really big year for you guys in terms of packages. But it was also the fifth straight year of accelerating loan growth volumes.

What's -- I mean, do you see that trend continuing in 2016? And what's to stop you from continuing that trend?

Well, we're pretty confident and we're fairly consistent in our message that we believe we're going to grow between $4 billion and $6 billion. And we'll stick with that growth of $4 billion to $6 billion.

In terms of what can stop us, I'm not really sure I can think of anything. The performance of the group that underwrites and services commercial real estate is superb.

Our interest rates are a little bit higher, but they've been consistently higher for years. And that's because of the premium service that we provide.

In fact, if we lowered our rates, we would probably increase the book substantially. So I don't know if that answers your question in total, but I would stick with the $4 billion to $6 billion in growth.

Can you talk a little bit about what you're seeing in terms of the yields on the portfolio -- on the new multifamily? You had said you're in that 3 3/8% to 3.5%.

What are your thoughts on being able to continue to upcharge in a rising rate environment for these? And what are your thoughts if we see 2 more rate increases?

Do you think you're going to able to pass most of that through, or will the market be able to pass most of that through to the multifamily product?

Well, we've had, in a rising -- we've been in a rising rate environment in our 15-year history, and we've been able -- we were able to -- when rates were increasing, to pass that along, not necessarily basis point for basis point. But we were able to pass that along, so that hasn't been an issue for us.

Although I'm not so sure we see any rate rise coming anytime soon. On the yields, I think, as Eric has mentioned, it's somewhere between 3 3/8% and 3.5% and we've been able to do that.

We saw a little increase in our competitors of 1/8 or so in the market. When the 10-year was 160, we were getting 3 3/8%.

So you have to remember that if the 10-year drops, there's no reason for us to drop the rate on the 5-year multifamily.

Okay, great. Can you also give us an update on the credit trends on the medallion side of things?

Sure. I'll start with Chicago first.

I mean, everything remains pretty stable there. Our LTVs remain around that 95% level and debt service coverage around the 1.28x, similar to last quarter.

We did refinance about $10 million more in that portfolio, so refinanced about $120 million in total of the $168 million. So the remaining $48 million in Chicago is paying as we expect, and we expect will continue to pay, and we ultimately will look to restructure those as they come due.

Nonaccruals there increased slightly by $3 million, so it's not surprising. And we've really restructured a fair amount of those nonaccruals at this point, and we have a few going through foreclosure.

We are finalizing the terms on the sale of the 7 medallions that we pushed off into this quarter to avoid higher transfer tax in 2015. So we hope to conclude that shortly.

And we charged approximately another $500,000 off in Chicago. So Chicago seems to have stabilized a bit.

We've worked through the majority of the issues there. And what we're seeing as they do go to charge-off is that the amount of loss is pretty minimal.

Turning to New York, the LTVs there remain stable at 86%; debt service coverage around 1.15x. We have seen more delinquencies there, so at $42 million in the past-due bucket, only about $1.5 million in the 90-day bucket, so that's down a little bit.

But some of that transferred into nonaccruals, which increased to $23 million. So we're seeing things start to deteriorate a little bit more, but really, as anticipated and as we expected.

So we took our first charge-offs in the quarter, about $980,000 in New York on 11 medallions. So again, very similar to Chicago.

We're seeing a pretty low level of losses when we do get to a charge-off point. And we did auction 2 medallions in December, one for $705,000 and another for $725,000.

And we took no losses on both of those. So that's a positive note.

So we expect that New York will be our focus for the next several quarters as we work through weaker credit there and restructure a number of those similarly to what we did in Chicago. And we anticipate that we'll see more past dues and nonaccruals, but we don't anticipate a significant level of charge-offs in either of the markets.

And what was total balance in New York City at the end of the quarter?

$618 million, it's down $4 million from September .

Okay. And then finally -- and thanks for that color.

Finally, any plans or opportunities to add additional verticals in Signature Financial?

Well, we've really added 4 verticals over the last couple of years and we're in the digestive state, I'd say, where we're looking to really just focus on growing those and our existing verticals. So I don't really anticipate us adding anything further for this year.

Where we are going to add is we have a very strong pipeline of teams, particularly deposit gatherers, and we're very excited about. And hopefully, we'll be talking about that when we talk about first quarter results.

I wanted to start, just given the essential global market meltdown we're seeing, how is this impacting New York City multifamily? Are you seeing less foreign money come in?

What are you seeing on volumes? Any impact to note there?

None. None at all.

We think the foreign impact is at the higher-dollar levels. We have not seen anything on our space that we're in.

Okay. That's helpful.

And just a follow-up on the expenses, what are you assuming in terms of new team hires, Eric, in terms of the guidance that you provided?

I'd say 4 to 5 teams.

Same range? Okay.

And can you talk about the pipeline of team hires at this point?

It's robust.

Yes. I just mentioned it on the -- right before you asked the question, it was -- we're very excited.

We've got some very strong deposit gathering teams lined up. And if all goes well, they'll be onboard in the first quarter.

Okay. And then just a final one, now that you guys finally have the credit rating, could you give us a sense of the additional business opportunity that you'll have because of that in 2016?

Great question. It's hard to quantify.

But certainly, there's more opportunity because of the rating.

I just had a follow-up question, Eric, regarding your margin outlook to stay relatively around -- bump around fourth quarter levels. Was that for the core margin or the GAAP margin?

Core margin. It's too difficult to predict prepayment penalties.

And any reason just from a rate backdrop standpoint, why PPA may not be on average as strong as it was in '15? I mean, I realize it's hard to predict, but is there any reason why it should be stronger or weaker relative to what we've seen over the last 4 to 8 quarters?

It's very hard to predict. I mean, quite frankly, we've been saying and we've been talking about it internally for several quarters that we were surprised at how robust it's remained throughout the course of this quarter.

But I think the one thing that we underestimated was the amount of prepayments that would happen. People just looking to extend duration and that certainly will continue, but it's very hard to predict at what pace.

That's why we always speak to the core NIM.

Understood. And just in terms of one follow-up around the expense guidance.

How does that sort of play into how you're thinking about the efficiency ratio? Does it continue to get better or are we -- I know we've been asking this for the last year, but can it continue to improve from an operational standpoint?

Is there more leverage there?

How much better do you want it to get? It's so low to begin with.

How do we placate you? I don't know.

It's almost like the limbo stick, how low can you go? It's very hard to predict.

We're very happy where it is. And if we have the expenses of one, the new teams coming on board.

We have the compensation expense of our existing teams as they continue to do well. We have the expense related to the risk -- improvement in the risk area that we have to do, compliance, BSA.

So in all that, and we're still able to keep the efficiency ratio where it is. So I don't know if it will ever get any lower, but maybe a little bit.

But we're looking to continue to grow the bank.

Just a quick question on the interagency joint statement, just going -- kind of going back to that issue. I mean, the way you described it was almost like it doesn't apply to New York -- to lending in New York City.

I get that it doesn't apply to you necessarily. It doesn't impact your business per se.

But when you think about the competition in New York, is there other banks that might be more affected or is that just a regional issue?

No, we're affected in that they're going to be coming in and looking at us like they have been over the last number of years -- last 6 years. Very detailed -- very professional, I may say, but very detailed in their approach.

They're going to run models and it's going to require a lot of time and effort on our part to work with them. What we were saying is that, we weren't surprised about the interagency statement because we had really been in this mode for 6 years.

We've been on the radar screen. But what we were saying is that the positives for us is that there were areas where there are more risks.

And those areas, such as construction and development, we generally or rarely do. And the vacancies in the New York City area are far less to none for the space that we're lending to versus the rest of the country.

So and -- not that it doesn't apply, it does apply. It is just that we feel we're in better shape than if we were lending to multifamily in Houston.

Understood. And do you think that that, sort of the increased scrutiny on all the lenders could actually create opportunities from a competition perspective in your niche or again, is it more just outside of -- to other areas of the country are probably more likely affected?

I don't know. I've not given it any thought about using this for competitive purposes.

I would say that any banks that fit the mold of over 300% will -- has to go through what we go through. I don't know if it creates any more opportunity unless they told another institution you can no longer lend.

I think, Ken, if anything, we're hopeful that it might bring some more rational behavior to the overall marketplace. We've talked for several years how we get a higher rate, how we get better terms, how we actually lose more deals because we're not willing to give out as much money on a refinance as some of our competitors.

So we're hoping that this guidance and this reiteration of the 2006 guidance from the regulators will bring some more rational behavior to the marketplace.

Okay, perfect. And then just one last question.

One of your competitors, who had a call a little bit earlier than this, mentioned they have a 5% reserve against their taxi portfolio. Have you guys provided or would you provide reserves against taxi or the medallions?

We have. We have, overall, about 3% reserve on our overall portfolio.

Approximately 5% in Chicago and 2.5% in New York.

Joe, you talked about the seasonality in the deposits in kind of some late pay downs or late declines in the deposit base. Your loan-to-deposit ratio has moved up over the last couple of years, which, I think, we'd all argue is a good thing.

Can you put the outlook of that in the context of the teams that you're talking to, whether they be focused on more deposit gathering or lending? And then I think last year, a lot of the teams were deposit focused.

The teams that we have in the pipeline are far greater deposit gatherers than loan generators. So it bodes well for us as we continue to grow the deposit base.

I would say all the teams that we're talking to in various stages, from those that are close to come onboard and those that are a little further away, all deposit gathering at the moment.

Okay. And maybe if I could, I think we touched about it.

There was a previous question about the New York market. I'm interested in your outlook given what's going on in the market, on the rental market.

Have you seen any kind of changes in growth rate expectations, maybe you're underwriting a little bit different? Any color on the outlook -- on the rental market would be great.

Yes. We increase the cap rates.

That's how we are underwriting a little different. Other than that -- and we're doing that because we're being a little more cautious.

But we haven't seen anything different, anything out there that troubles us.

This is actually Kyle Peterson speaking for Bob today. I was wondering if you guys would be able to possibly share your thoughts or anything you guys witnessed on possible kind of competitive changes in some of your major markets like the New York City market.

If you have noticed anything?

Not -- we've not noticed any changes for the last couple of years. I would say that -- yes, I don't know if I can give any more color other than just saying it's been highly competitive and that hasn't gotten any more intense.

Okay, great. And then just, I guess, more of a modeling question, looks like you guys had a decent pop in the commissions line on the fee side this quarter.

I was wondering if maybe there was kind of an anomaly in there, or if that -- like if you could provide an estimate on what might be a good run rate for kind of commissions moving forward?

Yes, we did have a client purchase a significant amount of treasuries during the quarter. That's helped that commission line item.

I'd go back to the third quarter for a little bit more reasonable trend on that line item.

All right. Great.

And then I guess just one last question and I'll hop out here. I guess, some more insight on the expense side, it looks like the FDIC assessment fee went up a little bit -- had a little bit of a bump in the fourth quarter versus kind of the trend they had been following.

Was there any, kind of one-off things in there? Or is that kind of trend now something we should be looking into?

There's nothing one-off there. I think that's just tied to growth.