Q3 2019 Earnings Call
Welcome to signature Bank 2019 third quarter results conference call.
Hosting the call today from signature Bank, our Joseph J., Depaolo, President and Chief Executive Officer, and Eric R., Howell Executive Vice President corporate and business development.
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It is now my pleasure to turn the for over two Joseph J., Depaolo, President and Chief Executive Officer, you may begin.
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, who 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 maybe beyond our control forward. Looking statements include information concerning our future results interest rates in the interest rate environment loan and deposit growth loan performance operations, New private client team hires new office openings in business strategy as you consider forward looking.
Statement you should understand that these statements are not guarantees of performance or results. They involve risks uncertainties and assumptions that could cause actual results could 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 old view into the quarter didn't know that Eric how long he VP of corporate and business development, We view the banks financial performance in greater detail.
Can I will address your questions at the end about remarks.
2019 third quarter was our strongest quarter for deposit growth number is three years need so all in on.
The quarter included record.
Average deposit growth of 1.75 billion, which allowed us to substantially pay down high of course long.
Additionally, we made significant strides in transforming how balance sheet to more floating rate assets, one increasing commercial and industrial loans like 885 million.
And meaningfully increasing fixed rate commercial real estate loan.
Really firing on all cylinders this quarter.
<unk> for more traditional private client banking teams and signature I mean, it's true.
Major initiatives, we put in place over the last several quarters.
Helping to drive deposit growth as well as further.
I I sit and geographic diversification strategy.
This includes launch a signal as well as contribution from the digital banking team won banking division and the venture banking.
Moreover, recently added, especially long as mortgage servicing banking team focusing on treasury management products to deposit, which residential and commercial mortgage services amongst others.
She now has the necessary infrastructure in place to support their clients need and is officially opened for business.
Now onto the cool so you shouldn't you back to live in 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.
Dolls, and 75 cents diluted earnings per share.
Paired with 155.4 million $2, maybe four cents non Shia who live here.
The decrease in net income was due to ride non interest expense on the significant investment.
New private client banking team, including 55 national because the phone banking divisions adventure banking group, and especially ones mortgage servicing banking team.
Well into the future contributions growth and earnings from these new tea.
Now looking at to pause.
Well confronted by challenging the positive environment, we've increased deposits by over 1.5 billion.
39.1 billion this quarter and average deposits grew a record 1.75 billion.
The under the 2018 third quarter.
<unk> peer isn't being an average deposits have increased by 3 billion.
Non interest bearing deposits are 12 billion, representing 31% total deposit.
Deposit and loan growth coupled with earnings retention. The two an increase of 3.5 billion or eight cents tone lessons from a year ago.
Now, let's take a look at all lending businesses.
Turning the corner and keeping when our diversification strategy made a conscious decision to not refinance CRB loans, we know deposit relationship existed.
We have essentially exited most of these.
One sided loan relationships, we do not expect the same level of decline.
That's good.
As it was all 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 rates you nine loans by 885 million driven primarily by a phone banking division.
And Conversely.
Dramatically decreased about six weeks, you RV portfolio by 873 million.
Floating rate loans on now 17% of total loan, which is a dramatic improvement from 10% a year ago.
Our loan to deposit ratio is now, 97%, Oh CRB concentration declined to 511% from its peak.
590, 593%.
Turning to credit quality.
Our portfolio continues to perform well nonaccrual loans, a 32.5 million would just nine basis points with total loans compared with 41.3 million well 11 basis points into 2019 second quarter.
Our past due loans remained in a normal range 30 to 89 days past due loans 69 money.
90, plus past due loans and alone 1.9.
Net charge offs are the 2019 third quarter was 2.9 million.
<unk> three basis points compared to net recoveries of 3.7 billion for the 2019 Suncor.
Provision for loan losses in 292019 third quarter.
Was 1.2 million compared with 5.4 million because the 2019 second quarter.
The allowance for loan losses remained stable at 64 basis points of loan.
<unk> coverage ratio.
Turning to 746%.
My last point before I turn the call over there I just want to remind you on the team.
Good for private client banking team, including the 20. We proceed venture banking group, which already has made meaningful contributions this quarter.
This team members specialized movie banking services he.
Which is now ready for business.
Just one I'll turn the call over that aren't you would be the quarter's financial results in greater detail.
Thank you John good morning, everyone.
I'll start by reviewing net interest income and margin.
Net interest income for the third quarter reached 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 2.62%.
Excluding prepayment penalty income core net interest margin from a 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.
Let's look at asset yields of funding cost for a moment.
Interest, earning asset yields decreased nine basis points from a linked quarter to 3.94% decrease in overall asset yields was driven by higher cash balances and lower reinvestment rates and all our primary asset classes from a lower rate environment.
Yields on the securities portfolio decreased nine basis points linked quarter to 3.18% due to the dramatic decline at market rates, which also led to our portfolio duration coming into 2.2 years.
Turning to our loan portfolio yields on average commercial loans of 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 in the 2018 third quarter.
We anticipate that prepayment penalty income will remain low as a result, the slowdown in theory transaction activity from the changes in rent regulation and the low interest rate environment.
Now looking at liabilities, our overall deposit costs this quarter increased by two basis points to 1.21%. However.
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.
Average borrowing costs 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 costs borrowings.
And on to noninterest income expense.
Noninterest 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 a 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.
70.1 million or 14.6% increase was mostly due to the meaningful addition of private client banking teams.
The banks efficiency ratio was 42 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 them and our investments in long term strategic initiatives.
Turning to capital and the 2019 third quarter the bank paid a cash dividend of 56 cents per share.
Additionally, the bank increased its stock repurchases to 630000 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 the balance sheet.
As evidenced by our tangible common equity ratio that increased five basis points to 9.51% and I'll turn the call back to Joe. Thank you.
Thanks, Eric.
This quarter, we continue to execute on game claimed by significantly growing deposits 1.5 billion, including increasing average deposits by a record 1.75.
Improving on 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.
Reducing fixed rate commercial real estate loans by 873 million, we or commercial real estate concentration.
511% from its peak of 593%.
Now we're happy to answer any questions you might have Nicole I'll turn over to you.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has been answered you may removed yourself from the Q by pressing the pound key again, we do ask why you pose your question that you pick up your handset to provide optimal sound quality.
Thank you I first question comes from beforehand, Poonawala with Bank of America.
Good morning, guys.
Good morning Ebrahim.
I guess first question.
I think if you can just talk about in terms of the marginal clue, 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 what sort of the borrowings that you have on the balance sheet.
Sure.
We expect that the NIM.
Your 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 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 CRT run off that we had in the third quarter.
So that should bode well for for the margin.
Ultimately, we're looking to use that cash it put into loans or to pay down higher cost borrowings.
Predominately paid off the overnight borrowings that we can't we're waiting for term borrowings to come to which we have a fair share about coming to us.
November December .
So given all that you expect to maintain margins with a slight downward bias.
And with the cost of interest bearing deposits do you expect that to start trending lower and to what magnitude.
It's been trending lower.
Allied was really are peak in the deposit costs, we've seen it come down.
Eight basis points from that peak.
Really the July move we moved down our deposit cost, 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 this morning to deposit growth and we think about going forward. If you could remind us in terms of.
Where we are in terms of the two or three different theme is that you hired over the last tend to move their production levels and what you expect from.
Mortgage servicing our team in terms of deposit growth like should we expect.
To begin kicking in the fourth quarter and if you can put a framework around the magnitude of grow that team can bring.
The mortgage servicing banking team.
Now open for business in the fourth quarter.
What they were doing was preparing along with.
Most of our operations in administrative and support.
Okay.
To work to get ready for this quarter. So with the 1.5 billion dollar growth we had in the third quarter.
None of it came from the mortgage servicing team because they want to open for business until now in the fourth quarter, So again that debt newly.
Bodes well because.
We expect significant deposit growth over the next couple of years.
From that team.
That team control over 22 billion in deposits at Wells Fargo.
Venture dementia banking group.
They contributed during the third quarter over 100 million deposit.
And we expect.
About that level on a quarterly basis.
Going forward.
And the the.
One banking team.
Contributing in large part on the loan side.
We'll take them a couple years so.
To work off where they would be funding themselves so well.
We were very excited about the new term intermediate term.
Future, because we've been having such success growing deposits.
And.
Now we're going to have even more success with the team that we just is not.
And do things, you'll just tied to the mortgage servicing theme given just the favor for what they did their previous spraying core deposit growth over the next 12 months action closer to the higher end of your three to 5 billion dollar.
Target.
It could.
It's very it's very possible.
Right now the deposit growth the year.
Last 12 months, it's always been 3 billion.
So we can right now as Eric mentioned the deposit flows in the fourth quarter, although it's only 17 days pretty good.
Got it thanks for taking my question.
Thank you.
The next question comes from the line of Jar Shah with Wells Fargo Securities.
Jeff Your line is open.
Can you hear me guys.
Now we can.
Okay, sorry about that.
Just following up on the 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 the cash.
Position to get back to a more normal position I know you said that deposits will first for use upon loans, but with that with the borrowing levels down that that should be a good pickup for margin.
Yeah, we've got about 400 million roughly in borrowings per quarter.
We should be able to pay down.
Said, we've got a better robust.
Loan pipeline.
We could easily see of billing and loan growth so.
Certainly is a little is 500 million, but we could see a billion.
You know and loans this quarter so.
So we anticipate put into cash.
Good years, and those borrowers are added about 2.5%.
Okay, Great and then on the Seery.
Right pay down did you say that.
The non relationship.
Rifai opportunities are done or that's 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 re shifting of out of CRT from that.
It's virtually done.
We now.
Doing business this quarter.
Essentially done.
It could be some strategies hearing it's essentially done so our expectation.
See flat growth.
You are we.
If one banking team as well as as traditional cnineteen, making up for.
I wanted to growth going forward.
And then just finally from me you know as the CRT capital concentration keeps coming down and your stock price slick side. It looks attractive here should we or could we expect to see the buyback become a bigger component of capital management and you know would what's your appetite I guess for reloading that if you if you finish out the 500.
Million earlier than expected.
Well I mean it was it was we meaningfully increase at this quarter. So I think you can see similar levels, if not a little bit more.
Going forward as you've said certainly a lot of that's dependent on stock price or that where that is where growth comes and we do we did increase it a bit this quarter as we saw that our loan growth was going to be.
So a little bit less than typical so we anticipate that.
Loan growth will be.
Much more positive, but it was this quarter so.
We'll have to take that into account as well.
Okay, but in terms of that that Siri as a percentage of capital you feel comfortable with it here just about 500% and continuing to be to be in the market with that with the buyback.
We think it will drift to under 500%.
Slide four.
We are comfortable at that level, yes.
Great. Thanks, a lot.
Thank you.
The next question comes from the line is Ken Zerbe with Morgan Stanley .
Great Good morning.
Good morning, Tom.
I was hoping you guys could address.
So the NIM outlook, a little bit and I guess, it's I know your comments as can be broken the flat to down a little bit of fourth quarter, but but I guess ever one me and probably the pull market. It look at you guys is being liability sensitive and this should be a fantastic time to own signature to be signature because your deposit 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 as Theres, a couple of things going on Kevin 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 see pressures on asset yields.
But there's also a lag.
Ability to reprice deposits down.
And I think you've got to look out several quarters and really through a time when the fed stops cutting we'll we'll continue to be reducing deposit costs or our processes buried negotiated with our clients were not like a traditional retail bank were can just cut cost across the board. So it's a negotiated processes.
Next time for us to work through those negotiations, but ultimately we will re price down deposits enough to more than offset the reductions on the asset side whats going to take a little bit upon where a lot more interested in reading.
New business continue to grow the existing clients that we have.
That's cost as a base on the tooling and that's that's so be it because we want to build the franchise value and we find that Oh.
It's better to build and have a little bit more cost continues to decline opportunities passed away.
Got it totally anish side, I mean could there be a point in first half of next year, where you actually do see NIM expansion can if the in curve remains converted.
Yes, they are absolutely could be.
And should be.
Got you Okay perfect and then just the second question I had in terms of C. So.
I would imagine is going to be fairly sizeable below the line or AOCI I hit from C., so but.
Question. It really is more on the ongoing impact of Cecil given you're running off this to see a repo anchor leases flat to down a little bit.
Do you have any guidance in terms of sort of the ongoing quarter by quarter provision expense.
Yes, Fortunately, it's a little bit early for us to tell we're still finalizing our models running through parallel test on those.
So it's hard for us to predict the go forward.
Certainly there'll be more volatility to that.
Yes.
Sure you're hearing from many of the banks.
But ultimately.
Our longer dated CRM CRT portfolio, mostly foreign flight rated credits.
Requires a bit more provisioning.
Three to four rated well structured fund banking.
Capital call facilities are reporting so.
That should be beneficial to the go forward provisioning, but we still have to see of Islam finalize all those models.
Gotcha, Okay, all right. Thank you.
Thank you.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
Good morning, Steve.
To start what was the capital call loan growth in the corner.
It was 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 terms of growth.
No. It was mostly new facilities that were put in place.
Pretty fully drawn.
Okay.
That's helpful and in terms of the reduction in Korea loans in the quarter was that all in multifamily and how did the renovation portfolio balances change in the quarter.
The reason, mostly on multifamily we had two very large.
Loans, there has helped drive.
No reduction.
100 million dollar facility in $104 million, assuming we opened in few use that we had alone we weren't able to establish.
Any sort of relationship and as a result.
That's helpful.
To have a reduction of nearly 900 million seen already.
Which we're really happy about.
The conference that was the whole purpose.
And the renovation portfolio, Joe ahead of the balance of their change in the corner.
It was down slightly.
Okay.
Finally did you guys wrap up I know you're doing phase two of the deep dive into the multifamily portfolio that done then what did you learn from that.
Yes.
Good morning that there would be.
Find very little effect.
We expect maybe a little effect.
On on portfolio.
Okay terrific. Thanks for taking my questions.
Thank you Steve.
The next question is from the line of Chris Mcgratty with KBW.
Hi, good morning.
Hey, Chris.
Eric I want to go back to the deposit.
Invitation for Dysmenorrhea I think.
Thing 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 you borrowings are elevated to where they were pre cycle. What's the what's the right amount of borrowings for 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.
Despite amount of borrowings we believe is about 7%.
And we think that wouldn't have significant deposit flows.
We will deploy oh reductions of borrowings now.
Hi, good loan growth.
Well, we expect to have loan will just from the phone banking team, we expect upwards of 750 million growth from corn.
Not including signature financial.
Not including.
Two banking group.
We'll have more somewhere between 715 billion.
A corner.
And that'll be all funded by deposit.
Okay, and Thats, 7%, that's as a proportion of interest bearing liabilities.
Operator.
Uh huh.
Assets.
Okay.
Great and then maybe one more if I could maybe I missed it the expenses I think last quarter, you said kind of mid teens kind of gliding toward that 12% as you make these investments and grow into them.
Any update on that.
And have in terms of timing.
Yes, I came in a little bit better this quarter than than we anticipated so want to standard.
12% to 16% range to be safe.
Fourth quarter, we close or about 60% hopefully a little better.
And then we'll see.
Trend down to 10% to 12% by end of 2020.
Great. Thanks.
Thank you Chris.
The next question is from the line of rock band of light with the vs.
Oh, Thanks, good morning.
Right.
Morning.
On the especial as mortgage servicing banking team I think that's a full title.
Obviously tied to a monumental amount of deposits at the former shop, how do you look at and a recreating that business at at signatures and I kind of a straight percentage of that jackpot number over a period of years or do you have them on kind of a cadence.
So of quarterly deposit generation that you think they can can do how do you how do you think about that.
Well, we think about it the way we've talked about each of the teams over the last 18 years almost 19 year.
Is that is very experienced.
They've been with an institution for a long time.
The relationship is primarily with Dan not institution.
No market themselves.
That way.
And deposits will flow, whether it's from the existing institution.
From other institutions.
We need just.
The person that meets that team.
Doing it be 26 years had over 22 billion in deposit.
So.
The Formula is not the secret sauce is hiring the right people and we are you able to get the the team that we wanted.
So there's no nothing special other than the team itself.
So how would how we give you an example.
We don't necessarily.
Set up a goal for them.
We just basically.
Take it on face value.
You're going to be able to generally.
Skin amount of deposits.
Based upon the type of clientele behalf.
When it becomes really fourth quarter what comes in first quarter.
In 2021 over a series of views.
Hi.
And if and then a number of say 500 million a a quarter.
After these folks have been in place for some period of time HM would seem reasonable.
More than before.
Okay. The one thing about this team.
Differs from the other teams that do you have the team and I mean 100 as so that we have.
Who worked very hard to grow your books of businesses.
Usually those team to talking about five to 10 million in deposits.
Sometimes 20 million in deposits.
Moving to specialize mortgage servicing banking team you, we talking about hundreds in the deposit.
Got it still generating generating 500 million a corridor.
Not on the ground.
And on the expense growth.
That was some of that Guidances. This based on an infrastructure need for for this team or is most of that plumbing in place and it's it's more just just comp.
It's more tons copper me that that plumbing is essentially plays we're probably at 95% of.
What they needed.
We're already fairly sizable player in that space.
So it's really just the compensation.
Okay. Thank you.
Right.
Your next question is from the line of Lana Chan with BMO capital markets.
Hi, good morning.
Good morning line.
I'm just trying to understand more electrode such a strong growth in deposits. This quarters since the mortgage servicing team hasn't started contributing yet which there.
Meaningful pickup in short term escrow deposits this quarter.
No. It basically is the hundreds so banking teams.
Continuing to work hard we had a accordingly second quarter, we had over 900 million.
Oh, so it's not unusual almost the best deposit quarter, we've had in three years.
That concludes the competition is the very tall, let's take one area the five area.
Prior to this quarter, we attend straight quarters will decline in you'd be fly it was actually down $1 billion in deposit until those previous headquarters.
Actually we very stealing the during quarter and actually went up because the government finalized.
So regulations, and we expect BB flat to contribute going forward.
Okay. Thank you that's helpful.
Let it in fact, most of the growth core deposit growth.
Okay fantastic.
And can you give us a ideas in terms of the mortgage servicing banking team to deposits that they should be bringing on board can you give us on ideas like what the average rates would be on those types of deposits.
Just for modeling purposes.
Yeah, you know, they're going to have initially they're going to be bringing over the excess funds with our clients are those rates will be.
I'd say around 2% now maybe a little maybe a little under that.
But over time, they are going to start to garner more of the operating accounts and those are noninterest bearing so this should get to a very high level of noninterest bearing over overall deposits.
So to be say between 30 and 50% of their overall should be a DDIY.
So that that should meaningfully bring down their overall deposit costs, but initially we're going to bring bringing over the higher costs interest bearing deposits for so those are the easiest to move.
Okay got it and just one more question if I could on the commercial real estate multifamily you know given where rates are and I don't know if you've changed your multifamily pricing recently I don't think he had up until a while ago.
Hi, how do you keep your balances slack going forward when you know sort of transaction transaction volumes have.
Really got ground to halt, but frankly farm and you're seeing in a lot of competition in the space with pricing.
Well when we leave.
During the third quarter.
When we were reducing the portfolio.
Our pricing was about 60 basis points above that about competition now in the fourth quarter, it's back to the new on which you usually about 25 basis points higher where we able to keep on book that we have and attract a little bit of the business. That's transacting out there. So it's really matter of keeping what we have.
Okay. Thank you appreciate it.
Thank you.
The next question is from the line of David Long with Raymond James.
Good morning, everyone.
Good morning are you.
Yeah, we've talked a lot about some of the recent teams and the hires and sort of new business lines. What does your appetite at this point to add to the fund services and the venture capital teams.
Well.
I mean, it's fairly new.
Oh.
They have been adding.
Persevering manner to fill in.
His opening that they need to.
Our appetite would be a would be fine we defined.
Tom Burn centers.
All stores out there.
Got it and as far as the build out on the West Coast, where were where does that stand at this point and and again you are your appetite to still add people there.
I mean, we're we're fully built out there.
For traditional banking teams.
We also have representation from the venture team with one banking division and no traffic what is out there.
With a few others runs our specialized mortgage banking services team so.
We're actively looking to hire more traditional banking teams that are we.
Dissipate that probably next year now, it's getting a little bit leading year for us that.
But we'll probably looked at teams there next year I mean, our appetite is that that such that we would open up an office in Los Angeles, If we found the right team.
Got it got I appreciate the color guys.
Thank you.
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Okay.