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Signature Bank, Inc. (NASDAQ:SBNY)

Q3 2010 Earnings Call

October 26, 2010 10:00 a.m. ET

Executives

Joseph J. DePaolo - President & Chief Executive Officer

Eric R. Howell - Chief Financial Officer

Susan Lewis - Investor Relations

Analysts

Matthew Clark – KBW

Bob Ramsey - FBR Capital Markets

Lana Chan - BMO Capital Markets

Christopher Nolan – CRT Capital

Peyton Green – Sterne, Agee

Andy Stapp – B. Riley and Company

Operator

Good morning, Ladies and Gentlemen. Thank you for standing by, and welcome to the Signature Bank’s Fiscal 2010 Third Quarter Results Conference Call.

During today’s presentation all participates will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) Today’s conference is being recorded, October 26, 2010.

I would know like to turn the conference over to Joseph H. DePaolo, President and CEO, and Eric R. Howell, CFO of Signature Bank. Mr. DePaolo, please go ahead.

Joseph DePaolo

Thank you, Alisha. Good morning, and thank you for joining us today for the Signature Bank 2010 Third Quarter Results Conference Call.

Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead Susan.

Susan Lewis

Thank you, Joe. This conference call and oral statements made from time to time by our representatives contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties.

Forward-looking statement include information concerning our future results, interest rates and the interest rate environment, loan and deposit growth, loan performance, operations, competition, capitalization, new private clients, team hires, new office openings, the regulatory environment and business strategy.

These statements often include words such as may, believe, expect, anticipate and plan, estimate or other similar expressions. As you consider forward-looking statements, you should understand that these statements are not guarantying the 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, but are not limited to one, prevailing economic and regulatory conditions; two, changes in interest rates, loan demand, real estate values and competition, which can materially affect origination levels and gain-on-sale results in our business as well as other aspects of our financial performance. Three, the level of default, losses and prepayments on loans made by us, whether held in portfolio or sold in the hold-on secondary market which can materially affect charge-off levels and require credit-loss reserve levels; and four, competition for clients, loans, deposits, qualified personnel and desirable office location.

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 of 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 intent to update or advise 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.

Joseph DePaolo

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.

Signature Bank, again, hosted a quarter of strong financial performance across the board. Deposits grew 582 million, loans increased 208 million, net-interest margin expanded, non-performing loans declined and net income increased 80% reaching records level.

I will start by reviewing our ins. Net Income for the 2010 third quarter reached a record 27.4 million with $0.66 diluted earnings per share, an increase of 12.2 million, or 80% compared with 15.2 million, or $0.37 diluted earnings per share reported in the same period last year.

A considerable improvement in net income when compared with the third quarter of last year is mainly the result of an increase in net interest income. Fueled by significant core deposit growth and continued loan growth, these factors were partially offset by an increase in non-interest expense.

Looking at Deposits. Deposits increased 582 million to 9.05 billion. This includes quarterly core deposit growth of 409 million, or 5%. Since September 30 of last year, total deposits grew in excess of 2.25 billion or over 33%. Also in the quarter, relationship-based short-term escrow deposits rose 171 million, now totally 693 million. Average deposits in the third quarter were 8.7 billion, an increase of 2.18 billion, or 33% versus 6.61 billion for the 2009 third quarter.

Please keep in mind, this is a key deposit metric we closely monitor due to fluctuations in relationship-based short-term escrow deposits.

Non-interest bearing deposits of 2.12 billion represent a 23.5% of total deposits. With the considerable deposit growth, total assets reached 10.9 billion, an increase of 2.3 billion or 27% since the third quarter of last year.

Taking a look at loans now, loans during the 2010 third quarter reached 4.90 billion, up 208 million or 4.4%, representing nearly 45% of total assets at quarter end. The increase in loans was primarily driven by growth in commercial real estate and multi-family loans with continued conservative underwriting standards.

Non-performing loans decreased 24% this quarter to 33.8 million or 0.69% of total loans. This compares with 44.6 million at the end of the 2010 second quarter and 51.2 million for the 2009 third quarter.

The provision for loan losses for 2010 third quarter was 10.4 million, compared with 11.1 million for the 2010 second quarter and 11.9 million for the 2009 third quarter. This is now the 12th consecutive quarter where our provisions significantly exceeded charge offs. The continued elevated level of provision was driven by the effect of the current economic environment. This provisioning led to a further increase in our allowance for loan loss, which was 1.40% of loans versus 1.38% in the 2010 second quarter and 1.20 percent for the 2009 third quarter.

Additionally, the coverage ratio, or the ratio of allowance for loan losses in non-performing loans improved again to 203%.

Net Charge Offs for the 2010 third quarter was 6.8 million for an annualized 56 basis points, compared with 6.3 million or 55 basis points for the 2010 second quarter and 6.6 million, or 66 basis points for the 2009 third quarter.

Also on a positive note, our watch list credits decreased this quarter by 9.4 million to 131.1 million.

During the 2010 third quarter, we show an increase on our 30-to-89 day past due loans of 28 million to 63.2 million and a slight increase of 2.8 million in the 90-day-plus past due category to 16.3 million. The 90-day-plus category was 16.4 million at the end of 2009, so this is not a concerning low for us.

The increase in the 30-to-89 day category was due to two client relationships. One that we are in the process of renewing and the other client is selling properties to pay us off. We do not anticipate a problem with either relationship as we are well secured with both.

Although our credit metrics further improved and we see credit is manageable, we remain mindful of the uncertainty in the economic environment, therefore we continue to prudently build our reserves.

Just to review teams for a moment, we currently have 72 teams headed by 92 group directors. Our pipeline is more active now than any other time this year. As we approach year end, in all likelihood, this active pipeline will be a good start for 2011. We continue to pinpoint opportunities for attracting new-talented banking professionals in our network.

At this point, I’ll turn the call over to Eric and he will review the quarter’s financial results in greater detail.

Eric Howell

Thank you, Joe. Good morning, everyone. I’ll start by reviewing Net Interest Income and Margin. Net Interest Income for the third quarter reached 89.1 million, up 20.5 million or nearly 30 percent when compared with the 2009 third quarter, and an increase of 10% or 8 million from the 2010 second quarter.

Net Interest Margin was up 2 basis points in the quarter versus the comparable period a year ago and increased 3 basis points on a linked-quarter basis to 3.41%. The linked-quarter increase is mostly due to the deployment of cash on hand during the quarter, continued loan growth, a further decrease in our [inaudible] and the runoff of higher cost of borrowing.

Let’s look at Asset Yields and Funding Costs for a moment. Overall interest earning asset yields declined 10 basis points this quarter to 4.59 percent due to the continued low interest rate environment and slightly higher levels of cash.

In keeping with our conservative investment philosophy, we are selectively deploying cash while maintaining our high-quality, stable-duration investment portfolio. As a result, yields on investment securities decreased 13 basis points to 3.96% this quarter versus the second quarter of 2010.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages remain the same as the second quarter of 2010 at 5.62%. We continue to selectively identify quality lending opportunities at appropriate pricing.

Now, looking at liabilities, cost of deposits for the quarter further decreased 8 basis points from 1.02% as we again decreased deposit costs given the abnormally low interest rate environment.

Our borrowing costs substantially declined by 40 basis points this quarter as 122 million in long-term borrowing is at an average rate of 4.73% rolled off in August. There is another 50 million in borrowings at an average rate of approximately 4.4% that will roll off early in the fourth quarter.

Non-Interest Income and Expense. Non-Interest Income for the 2010 third quarter was 11.3 million, an increase of 4 million when compared with the 2009 third quarter. Given the volital market conditions, we again capitalized on the opportunity to sell securities resulting in gains of 4.9 million. Conversely during the quarter, we recognized OTTI of 2.1 million primarily on CDOs and bank-pool trust preferred securities. Additionally, net gains on sales of loans increased 1.1 million this quarter in our SBA growing activities.

Non-Interest Expense for the third quarter of 2010 was 42.5 million versus 38.6 million for the same period a year ago. The 3.9 million, or 10.1% increase was principally due to the addition of new private-client banking teams and growth in client activity.

The bank’s efficiency ratio improved to 42.3% for the 2010 third quarter compared with 50.8% for the same quarter of last year. The improvement was primarily due to growth in net interest income coupled with expense containment.

Concerning Capital, our capital levels remained strong with a tangible common equity ratio of 8.41%; Tier 1 risk-based of 13.5; total risk based ratio of 14.51%; and leveraged capital ratio of 8.66% as of September 30, 2010. Our regulatory capital ratios were all well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet.

Now, I’ll turn the call back to Joe. Thank you.

Joseph DePaolo

Thank, Eric. In conclusion, this was yet another quarter where Signature Bank delivered on all fronts; our relentless adherence to our proven business model, again reached substantial core deposit growth, solid loan growth, improved net interest margins, improved credit quality and record net income.

We continue to stay focused on catering to our clients to our single point of contact approach, putting their safety, needs and interest first and foremost.

Clearly, this bodes well for the success and reputation of our growing institution.

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

Question-and-Answer Session

Operator

Thank you, sir. Ladies and Gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

Our first question come from the line of Matthew Clark with KBW. Please go ahead.

Matthew Clark – KBW

Hey, good morning, guys.

Joseph DePaolo

Hey Matt, good morning.

Matthew Clark – KBW

On the margin outlook, can you give us – is it fair to assume that the mix of earning assets will start to shift more towards loans going forward? And also, what do you have in the way of variable-rate loans that don’t have floors that might be refreshing here in the fourth quarter as well as what new rates that you – at what rate might you be adding new securities?

Joseph DePaolo

I’ll start off on the loan side. I already stated, we’ve already gone through the cycle and most of our loans have floors already because we started that probably six quarters or more ago. So in the loan side, we certainly have floors.

I think what’s going to depend with the margin is what happens with cash flow. If we have robust deposit growth, which we would consider 250 to 300 million in deposit growth, most of that can go into loans, and that will help on the margin and then we won’t have a lot of extra cash flow. But what I like to say is, we’ve had beyond robust deposit growth, because we’ve been able to bring in just a plethora of clients, and it continues to happen quarter after quarter after quarter. So if that occurs, that cash flow will then have – a large part of the cash flow will have to be put into security, and that could have some pressure on the margin.

But we want to point out, on the liability side, we continue to drop client interest rates. And you’ll see with the money market accounts, we’ve been doing that. And on October 15 we dropped some client interest rates, and we’re going to do so again on November 1 with clients that we haven't touched on October 15. And as Eric mentioned, we had on the borrowing, 50 million rolling off at 444. So on the liability side, there are things that are going to help us. I think the key is going to be what we can get on the asset, but I’ll let Eric comment on the security piece.

Eric Howell

Certainly, like Joe said, it’s going to be really based on the level of deposit flows. If we get a about normal level of 200 to 300 million in deposited growth, we’ll be able to deploy most of that into the loan portfolio, that will certainly be beneficial to the margins. If we continue to at 500 to 600 million clip, we’re going to have to invest back into securities portfolio. We’re not really focused on one strategy right now, we’re out there looking at multiple strategies.

Ultimately, we’re investing in the mid 3% range, and roll offs, in the low to high 3s. So we will see some pressure from the security portfolio but we ultimately expect to be able to offset that by bringing that down to the deposit growth as Joe said; lower borrowing cost and obviously longer.

Matthew Clark – KBW

Okay, and then just on the expense growth this quarter, it looked like you were able to contain it a little bit better than expected. Any change as to your expectation for your, call it 17 to 20% expense growth.

Eric Howell

I think we’ve been growing in the 15 to 18% band. I mean, this is obviously a very good quarter for us on the expense front. You know, could that continue as a 10% level we’re at this quarter versus a year ago, yes it could. But I think to be conservative and safe that we’ll probably be in more of that 15% arena on expense growth year over year. If we continue to see 10% for another three quarters, then I guess we can change it back.

Matthew Clark – KBW

Okay, that’s it from me, thanks.

Operator

Thank you, our next question comes from the line of Bob Ramsey with FBR Capital Market, please go ahead.

Bob Ramsey – FBR Capital Markets

Hey, thanks for taking the question. Could you just give a little bit of color on the loan portfolio growth, and sort of which portfolio, was it mostly multi-family or where or what have you seen, and kind of how are you thinking about the outlook?

Eric Howell

The growth continues to come from the multi-family sector as well as other CRE. That’s where we expect growth to continue for a while. C&Is been flattish now for a few quarters, and we’ve seen utilization on the lines of C&I really trend down now over the course of this year from a high of about 49% utilization, and down to about 43% in September. So our client on the C&I front continue to tighten down and not look to ramp up their businesses in this current economic environment. So we expect to see loan growth to continue to come from this CRE space.

Bob Ramsey – FBR Capital Markets

Okay, thank you. And can you give me just a total dollar amount of non-performing assets, you’ve got MPLs on the release but it does not have the REO with the security piece.

Eric Howell

The total amount of non-performing is 41.7 million that’s down from 51.1 million at the end of the second quarter of 2010. There was not a meaningful pickup in non-accrual investment securities or other real estate owned. REO went from a balance of almost 600,000 to 1.7 million. We took over one more property that we placed in REO. So we managed to keep all those balances in check.

Bob Ramsey – FBR Capital Markets

Great, thank you very much.

Operator

Thank you, our next question comes from the line of Lana Chan with BMO Capital Markets, please go ahead.

Lana Chan – BMO Capital Markets

Hi, good morning. Just a follow-up, if I could, on the margin. Could you talk about what kind of yields you’re getting on the newly-originating commercial real estate and multi-family? And then on the flipside, if you could give more color how much you’re repricing down those deposits recently.

Joseph DePaolo

Sure, on the loan side, as much as it pains me to say, we’ve crossed the threshold on the five-year fixed multi-family to below 5%, we’re at about 4 7/8. I know others have been out there a little bit lower, but we’ve been able to keep it at about 4 7/8. That’s on the multi-family. I would say on the commercial side, the office building side, probably mid 5% range, 5 ½. And with both, the multi-family and the office buildings were – that also includes bringing in the operating account, the tax escrow, the rent security accounts, it’s a positive for us because we also bring on some lower cost deposits.

On the liability side, the money market accounts for the third quarter average 1.33. That’s down from 1.41 in the second quarter. That’s just on the money market side, the interest-bearing money market. We expect that will be somewhere in the mid-120s in the fourth quarter. We reduced some rates, as I said, October 15 we decreased a number of money market accounts, and on November 1, we’re increasing -- decreasing those, excuse me that we hadn’t touched on October 15. So our overall cost of deposited was 102 for the third quarter. We’re focusing clearly on bringing that down below 1%, but that total, on how much non-interest bearing demand that we had, so that’s why we focus on the money market because we certainly can bring that down further. So we do expect that to be down to about the mid-120s.

Lana Chan – BMO Capital Markets

Great, thanks, Joe, very helpful.

Operator

Thank you, our next question comes from the line of Christopher Nolan with CRT Capital, please go ahead.

Christopher Nolan – CRT Capital

Hey, guys. What’s the remaining exposure on the CDOs?

Eric Howell

We have approximately 13 ½ million remaining in CDOs, and 29 million remaining in the pool trust.

Christopher Nolan – CRT Capital

And Eric, what is the current investor security portfolio duration?

Eric Howell

2.53 years.

Christopher Nolan – CRT Capital

Okay, that’s pretty much flat the last few months. Okay, great, that’s it. Thank you.

Operator

Thank you. Our next question comes from the line of Peyton Green with Sterne, Agee. Please go ahead.

Peyton Green – Sterne, Agee

Yes, I was just wondering will there be any bonus-accrual catch up by in the fourth quarter or does the third quarter reflect that level?

Eric Howell

Obviously, we’re still going through that process now, Peyton, so it’s difficult to say being this early on in the quarter, but at the end, I would expect a little bit of a catch up in the fourth quarter.

Peyton Green – Sterne, Agee

Okay, so there was not any run rate for that necessarily in the second or third quarter…

Eric Howell

Let me clarify when you say catch up. Typically what we’ve seen in the fourth quarter is that we’ll – we tend to want to be in an over-accrued position. So I would expect, if anything, that we would be over accrued again for this year. You would see some bonus reversal of that accrual in the fourth quarter as we’ve seen the last several years.

Peyton Green – Sterne, Agee

Okay, and then thinking about ‘11, in terms of the expense growth, Joe, you characterized that the pipeline had been filled back up again in terms of the talent that’s available. Certainly’ 09 was a huge year for you, and certainly ‘08 was also a big year. How would you characterize it --deposit gatherers versus lenders, and just in terms of the quality?

Joseph DePaolo

I would say that the teams that we’re talking to on bringing over a more deposit gatherers and loan generators, although they do have an element of loans in their portfolio. Their coming across from three different banks, at least, three different financial institutions.

The differences we met in ‘08 and ‘09, and even – I’m sorry, --‘10, and this year, we really haven’t had to expand our office capacity and we were able to fill up 15, fill up our offices with that -- if we had empty space with be teams that we brought on.

However, with the teams that we’re talking to today, they will require us to open up offices. I had mentioned that we were going to open up an office in the fourth quarter and right now, if I had to bet, I would say it would be January, when we would open up the office because if it gets too late in December, it doesn’t make sense to bring on the team during the holidays because it’s not going to be useful to bring clients over.

And then, we’re talking to a number of other people, as I mentioned the pipeline was [inaudible], that’s probably going to require us opening up a second office. So we would be going from 23 offices to 25 offices in 2011 just in respond to the teams that we’re talking to. And like I said, they do have a mix, but if you had to pick one over the other, it would be more deposits than loans.

Peyton Green – Sterne, Agee

Okay, great. And then, just in terms of the loan pipeline, how did it look towards the end of the quarter. I know you’ve had some pretty good success in growing the volume at the end of the second quarter, how did it look at the end of the third?

Joseph DePaolo

Yeah, it looked pretty good. I will tell you this, I was looking at loan growth, we had 208 million in the third quarter growth, 195 in the second quarter, and 115 in the first quarter. And I’d probably say that the growth is going to be somewhere between the 115 and the 208. But by qualified ,it’s the end of the year. And when you have a crossover going from 2010 to 2011, we have some that [inaudible] if they’re doing a sale or a refi, worried about what’s going to happen with tax rates in 2011. And you have some clients that are pushing it out to 2011, so it’s hard to predict. Fourth quarter is most hard to predict, not only on loans, but also on deposit flows because we have so many clients, and they have to make a decision if they want to do distributions now or in the future, and sometimes they hold back on making deposits and just put the checks on their debt. So it’s a hard question to answer but we’ll say somewhere between the 115 and the 208, if your projecting now.

Peyton Green – Sterne, Agee

Okay, great. And in terms of the watch list, I think your reference of the 30 day pass due has increased to 63 million, what was the look and feel of the watch list?

Eric Howell

The watch list actually declined from 141 to 131 million. We’ve had some good success in knocking that watch list now a bit.

Peyton Green – Sterne, Agee

Okay, great, thank you very much.

Operator

Thank you, our next question comes from the line of Andy Stapp with B. Riley and Company. Please go ahead.

Andy Stapp – B. Riley and Company

All my questions have been answered, thank you.

Operator

Thank you. I see no further questions in the queue at this time. I’d like to turn the conference back to Mr. DePaolo for closing remarks.

Joseph DePaolo

Thank you for joining us today. We appreciate your interest in Signature Bank, and as always, we look forward to keeping you apprised of our development. Alisha, back to you.

Operator

Ladies and gentlemen, this concludes the Signature Bank Fiscal 2010 Third Quarter Results Conference Call. If you would like to listen to a replay of today’s conference, you may do so by dialing 1-800-406-7325, or 1-303-590-30 [inaudible] and entering the access code of 437-4779, followed by the pound sign. Thank you for your participation, you may now disconnect.

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