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Edited Transcript of SBNY earnings conference call or presentation 19-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Signature Bank Earnings Call

New York May 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Signature Bank earnings conference call or presentation Wednesday, April 19, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric R. Howell

Signature Bank - EVP of Corporate & Business Development

* Joseph J. DePaolo

Signature Bank - Co-Founder, CEO, President and Executive Director

* Susan Lewis

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Conference Call Participants

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* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* David Patrick Rochester

Deutsche Bank AG, Research Division - Director

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Lana Chan

BMO Capital Markets Equity Research - MD and Senior Equity Analyst

* Steven A. Alexopoulos

JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

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Presentation

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Operator [1]

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Welcome to Signature Bank's 2017 First Quarter Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Executive Vice President, Corporate and Business Development. Today's call is being recorded. (Operator Instructions) It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin the conference.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [2]

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Good morning, and thank you for joining us today for the Signature Bank 2017 First Quarter Results Conference Call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

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Susan Lewis, [3]

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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.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [4]

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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 an exceptional quarter of growth and performance, resulting in another quarter of record earnings. We again saw a solid deposit in loan growth, expanded top line revenues, and maintained overall strong credit quality, notwithstanding challenges in our taxi medallion portfolio.

I will start by reviewing earnings. Net income for the 2017 first quarter reached a record $133.9 million or $2.48 diluted earnings per share, an increase of $29.9 million or 29%; compared with $104 million or $1.97 diluted earnings per share reported in the same period last year. Excluding net tax benefits of $14.4 million, net income for the quarter would have been a record $116.6 million or $2.15 diluted earnings per share.

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 as well as reduced taxes. These factors were partially offset by an increase in noninterest expense attributable to our revenue growth initiatives as well as regulatory and compliance costs.

Looking at deposits -- deposits increased $1.1 billion or 3%, to nearly $33 billion this quarter. And average deposits grew $581 million. Since the end of the 2016 first quarter, deposits increased $4.8 billion, and average deposits increased $4.6 billion. Noninterest-bearing deposits of $10.2 billion represented 31.1% of total deposits. The strong deposit and loan growth, coupled with earnings retention, led to an increase of $5.4 billion or 15% in total assets since the first quarter of last year.

Now, let's take a look at our lending businesses. Loans during the 2017 first quarter increased $980 million or 3.4%, to $30 billion. For the prior 12 months, loans grew $5 billion and represent 74.6% of total assets, compared with 71.8% one year ago.

Turning to credit quality -- notwithstanding the taxi medallion portfolio, our credit metrics remained strong this quarter. We saw a decrease of $17.5 million in our 30- to 89-day past-due loans, to $91.4 million, while 90-day-plus past-due loans also decreased $14 million, to $42.8 million. Nonaccrual loans increased to $226 million or 75 basis points of total loans, compared with $157.6 million or 54 basis points in the 2016 fourth quarter and $105 million or 42 basis points for the 2016 first quarter. The increase was driven by restructured New York taxi medallion loans. A decision was made to place these loans on nonaccrual, which allows all payments made to reduce outstanding principal. It is essential to note that approximately $62 million of nonaccruing taxi medallion loans are current.

Excluding taxi medallion loans, nonaccrual loans are just $21 million, or merely 7 basis points of total loans. Pretty astounding.

The provision for loan losses for the 2017 first quarter was $19.6 million, compared to $22.2 million for the 2016 fourth quarter and $19.8 million for the 2016 first quarter. Net charge-offs for the 2017 first quarter were $9.2 million or an annualized 13 basis points, compared with $13.5 million or 19 basis points for the 2016 fourth quarter and $7.8 million or 13 basis points for the 2016 first quarter. The allowance for loan losses was 0.75% of loans, versus 0.74% in the 2016 fourth quarter and 0.83% for the 2016 first quarter. Additionally, the coverage ratio remained supportive at 99 basis points.

Just to review teams for a moment -- we added a private client banking group director to an existing team in the first quarter. And one team thus far joined us in the second quarter. Our team pipeline remains active. And we look forward to the opportunities for attracting talented banking professionals to 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.

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [5]

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Thank you, Joe. And good morning, everyone. I'll start by reviewing net interest income and margin.

Net interest income for the first quarter reached $301.8 million, up $23.4 million or 8.4% when compared with the 2016 first quarter; and an increase of 2% or $4.9 million from the 2016 fourth quarter. Net interest income when compared to the linked quarter was affected by a decrease in prepayment penalty income of $3.2 million and approximately $5 million for 2 less days in the quarter.

Net interest margin decreased 18 basis points in the quarter versus the comparable period a year ago and remains stable on a linked quarter basis at 3.14%. Excluding prepayment penalty income, core net interest margin for the linked quarter increased 3 basis points to 3.09%. The linked quarter increase in core margin is due to an increase on yields in the securities portfolio and 2 less days in the quarter.

Let's look at asset yields and funding costs for a moment. Interest-earning asset yields decreased 12 basis points from a year ago and increased 3 basis points from the linked quarter to 3.64%. The increase in overall asset yields was due to a slowdown in premium amortization on securities and an increase in loans as a percentage of the balance sheet. Yields on the securities portfolio increased 5 basis points linked quarter to 3.04%, given the slowdown in premium amortization on securities from slowing CPR speeds and stronger reinvestment yields. The duration of the portfolio remains stable at 3.69 years.

And turning to our loan portfolio -- yields on average commercial loans and commercial mortgages declined 3 basis points to 3.87%, compared with the 2016 fourth quarter. Excluding prepayment penalties from both quarters, yields would've declined 2 basis points.

Now looking at liabilities. Our overall deposit cost this quarter increased 2 basis points to 44 basis points, mostly due to an increase of 2 basis points in money market costs driven by selective increases to certain deposit clients. Average borrowings increased $738 million to $3.1 billion, or only 7.8% of our average balance sheet. The average borrowing cost decreased 7 basis points from the prior quarter to 1.37%, due to the lower-cost nature of shorter-term borrowings. Overall, the cost of funds for the quarter increased 3 basis points to 56 basis points.

And on to noninterest income and expense. Noninterest income for the 2017 first quarter was $9.9 million, an increase of $1.4 million when compared with the 2016 first quarter. The increase was driven by growth in most noninterest income categories, yet partially offset by an increase in other losses predominantly due to low-income housing tax benefit investments. Noninterest expense for the 2017 first quarter was $103.2 million versus $92.3 million for the same period a year ago. The $10.9 million or 11.8% increase was principally due to the addition of new private client banking teams and our continued investment in the growth of Signature Financial, as well as an increase in costs in our risk management and compliance activities. The bank also incurred increased FDIC assessment fees.

The bank's efficiency ratio slightly increased to 33.1% for the 2017 first quarter, compared with 32.2% for the 2016 first quarter. The increase was mostly due to lower prepayment penalty income as well as increased FDIC assessment fees.

And let's discuss taxes, which had a few moving pieces this quarter. Our tax expense this quarter included a $14.4 million net benefit associated with the reduction from the New York City tax base of net interest earned on qualified affordable housing and low-income community-related loans, in accordance with legislation enacted in 2015 impacting the 2015 and 2016 tax years. This reduction will benefit our effective tax rate in future periods as well.

Also, we received a tax benefit of $2.9 million related to the first quarter adoption of new stock-based compensation guidance. This item does not impact our prospective effective tax rate. However, we will see this impact each year as stock vests primarily in the first quarter.

And turning to capital, our capital ratios all strengthened this quarter. And they remain well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet, as evidence by a Tier 1 leverage ratio of 9.61% and a total risk-based ratio of 13.57% as of the 2017 first quarter.

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

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [6]

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Thanks, Eric.

As we begin 2017, which marks our 16th year in operation, Signature Bank delivered another quarter of solid financial performance. The 2017 first quarter saw record earnings as well as both strong deposit and loan growth. Additionally, this quarter, we appointed a private client banking group director to an existing team. And in April, in fact, just this week, we added one private client banking team.

We remain focused on growing our network by continuing to attract veteran bankers who can flourish at Signature Bank and, in turn, provide the levels of service to which their clients and our clients have grown accustomed.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Rochester with Deutsche Bank.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [2]

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You guys had some nice growth this quarter. Was just wondering how the loan and deposit pipelines looked at quarter end and how those compare to the levels going into 1Q. And then, just on deposit specifically, was just wondering if you think that end-of-period growth is going to stick around and you'll grow that from here.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [3]

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I'll start with deposits first. The flows are always, in and out, rather large. So one quarter doesn't necessarily affect the other all the time. We'll stick with that. We have a lot of opportunity. We have quite a bit of new client onboarding. And the deposits for those onboarded clients or soon-to-be onboarded clients are rather large. Coupled with the new team and the new group director we brought onboard, both deposit gatherers, it bodes well for us on the deposit side. On the loan side, we're looking for a little bit more diversity than what we've had in the past. In the first quarter, we had about $185 million growth ex any activity in taxi. We had $185 million in growth, including Signature Financial. And Signature Financial's first quarter is usually their slowest traditionally. So the second quarter bodes well. What we've said in the past -- recent past, I should say -- is that we're looking for the asset side of the balance sheet to have a little bit more floating rate. That's where the C&I comes in. And we wanted to grow the investment portfolio as well. So that's included in the $4 billion to $6 billion.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [4]

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Okay, great. And in terms of the loan pipeline, just rough size now versus what it was going into last quarter? I mean, it sounds like it might be a little bit stronger, but I don't want to put words in your mouth. What are you guys thinking there?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [5]

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I would say it's about similar.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [6]

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Okay. Great. And just switching to the NIM, I know you guys had talked about deposit pricing pressure recently. But the NIM results ex prepaid this quarter was stronger than you guys predicted. So just wondering, has that deposit pricing pressure intensified at all post the March hike? And how are you guys thinking about the NIM beyond the stronger uptick here?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [7]

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Look, deposit pricing pressures are always there. It's always competitive, but clearly we're able to overcome it, with deposits increasing over $1 billion. And we've seen our deposit costs just go up 3 basis points on average from the prior year. But we anticipated, with each Fed move, that pressures would be greater. And that's certainly the case. But it's in line with what our expectations have been. For the NIM, moving forward, really going to be flattish from this point. In the near term for the second quarter, day count affects us negatively. So probably saw 1.5 basis points positive this quarter for the NIM due to day count; we'll probably a negative basis point for the second quarter due to day count. From there on out, we're really going to be flattish at these levels.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [8]

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Okay. And then, what are you assuming for rate hikes and the 10-year going forward?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [9]

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We're looking at 2 more rate hikes in the 10-year to really kind of bounce around these levels. So that's difficult to predict.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [10]

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Right. Exactly. So in terms of the rate hikes, one like midyear and then one into 3Q-ish?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [11]

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Correct. Yes, 3 to maybe early 4.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Director [12]

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Perfect. And then, one last one, if I could, just on expenses -- are you guys still thinking that 10% to 15% range for year-over-year growth is good? And are you still thinking that you'll be in the bottom half of that range?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [13]

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Well, yes. We're maintaining our expense guidance 10% to 15% given the volatile regulatory environment that we're in. And we're hopeful that we're at the low end of that range.

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Operator [14]

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Our next question comes from the line of Steven Alexopoulos with JP Morgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [15]

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Start on your favorite topic, Joe, taxi. And maybe, Eric, if you could give us the rundown of balance of New York? I know Chicago is small now. Maybe hit on NPLs in each market, reserves? And I don't know if you had any medallion sales in this quarter.

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [16]

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Yes, the balance -- we've done a pretty good job of knocking the balance overall down, down about $36 million this quarter; it was down over $30 million the prior quarter. So we continue to whittle away at it. In New York, the balance is $537 million with an associated reserve of about 9% or $48 million. So the net exposure is down to $489 million. In Chicago, our net exposure of reserves is down to $42 million, and we have $1 million left in Philadelphia net of reserves. So a total of $532 million, which is a pretty sizeable decline from prior quarters.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [17]

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Okay. Were there any medallion sales in the quarter?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [18]

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We did not sell any in the quarter. There were 3 in New York. There were actually 19 medallion sales in Chicago. So we see the market firming up there a bit. Those 19 sales averaged $64,000, which is north of our $58,000 carrying value, so that was good to see. The New York sales averaged -- well, we're really looking at the one foreclosure at $550,000, to place more value on that. The 2 other sales were an estate sale and a driver who retired and left the country. It was all-cash sale, so it was pretty depressed. Our cash flows, which is really what we're utilizing to value the medallions, remained pretty stable. We actually looked at medallion values going back to their peak. The average medallion value or medallion cash flow or revenues was down 14.9% from their peak in 2012. So it certainly doesn't lead to a 50% drop in values that we've seen. So we're really keeping an eye on cash flows more so than anything else. And with a 15% decline from the peak, we're not all that concerned at this point. But we will continue to provide, we will continue to charge off. We receive principal payments every single day. And we will just keep on whittling away at these balances.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [19]

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Okay. And then, Eric, on the increase in the nonperformers this quarter in taxi, what was it that drove that? Were there defaults there that drove that?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [20]

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No, actually, not at all. But cash flows are getting a little bit tighter there. And we just felt that it was more conservative taking accruing TDR. So they're already in our TDR numbers and moving those accruing TDRs to nonaccrual. We just felt it was more conservative. And now, that allows us to take every dollar of repayment and apply it to principal.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [21]

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Okay. That's helpful. Just to circle back to the comments around deposits, I'm really surprised, looking particularly at the money market deposits, that you're not seeing more of an increase there. With several hikes now behind us, are you seeing more pressure building to start raising those rates?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [22]

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Well, you know what, we raised the rates at the very end, almost the last day of the quarter, some of the rates. So you wouldn't see that reflected in the first quarter; you would see that more reflected in the second quarter.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [23]

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Okay, so we'll see it next quarter. And if I could squeeze one more in? Eric, you talked about maybe a lower tax rate going forward. Can you help us think about the effective tax rate, where we should be?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [24]

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Yes, we've had an effective tax rate of about 40%. We think that's going to drop down to 39%. So I'd use 39% going forward.

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Operator [25]

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Our next question comes from the line of Casey Haire with Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [26]

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Eric, wanted to follow up on the medallion. We can all see the fare box on the TLC website. And, to your point, it's under pressure, but it's not cratering. At what point -- are we still good -- are you guys still okay with the $20 million provision per quarter outlook? And at what point would -- what kind of pressure do we have to see on the cash flows worse than that 10% year-over-year before that provision goes up?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [27]

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That level of provisioning really anticipates a 10% to 15% reduction in cash flows year-over-year going forward. As I said, we've only seen cash flows impacted by 15% since 2012 in totality. So it's reflective of fairly significant declines continuing. So we'd need to see something more to 20% before we impact that $20 million provision number.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [28]

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Okay, great. And then, just switching back to, I guess, the NIM and growth outlook. The securities book was -- I think you guys were targeting $10 million for the year approximately, very, very small build this quarter. Obviously, yield curve has not worked in your favor. But any updated thoughts on what the securities book will look like end of year? It looks like, given the strong loan growth, that we're looking at a more favorable mix of loan growth versus securities.

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [29]

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Well, I mean, I wouldn't necessarily say that that's a more favorable mix. I mean, the securities portfolio brings us a significant amount of liquidity, which is very important for our deposit base. So we want to continue to grow that securities portfolio. It brings other aspects to us. It's not all just about the NIM. So we anticipate that we're going to grow that book between $200 million to $400 million per quarter.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [30]

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Okay, great. And just so I'm super clear on the tax rate, Eric, if I had back the $14.4 million, that gets me a 37% tax rate. But it sounds like you expect that to stick?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [31]

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We do. You also have to back out the one-time adjustment, the APIC adjustment, as well. So when you factor that into the equation, I think it gets you back to a 38.3% tax rate. And to be conservative, we're saying use 39% going forward.

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Operator [32]

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Our next question comes from the line of Lana Chan with BMO Capital.

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Lana Chan, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [33]

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Could you give us an update on just the overall CRE multi-family market in New York? Any changes to the competitive environment and demand overall, particularly with the cash-out refi market?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [34]

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The most recent effect has been that we reduced our rate slightly, our interest rate, on the 5-year. Right after the election, or right around the election, I believe 5-year fixed was at 3 3/8. And from that point on through last week, we had raised it a number of times in multiples of 1/8. And it went from 3 3/8 to 3 7/8 to 4%. That was the range, 3 78 to 4%. And this week, we dropped that 3 78 to 4% to 3 3/4 to 3 7/8. And that was just simply the gap between what we were charging and what our competitors were charging. [You didn't hear] about 1/4 to 3/8 higher. And we were a bump -- 1/2 higher. So we brought it down, so that we would be a little bit more competitive in terms of interest rate. In terms of competition, nothing has really changed in the last quarter or so.

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Lana Chan, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [35]

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Okay. And secondly, I think in the past you've given some numbers around classified criticized assets for the quarter. Do you have those for 1Q?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [36]

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No. We'll have to wait for the 10-Q to come out on that flow.

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Operator [37]

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Ebrahim Poonawala, BOA Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [38]

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Just a follow-up in terms of -- I guess, Joe, if you can talk to in terms of the health of the multi-family market in terms of the borrower demand that you're seeing, and defend your desire to change the loan mix? How is sort of the underlying market? Have you seen a slowdown in refi activity and your ability to sort of get as much growth that you want, despite sort of the competitive landscape?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [39]

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The ability -- well, let's put it this way, the market is still very active. We want to have more diversity. But wanting to have more diversity doesn't necessarily mean that there is less or more competition. We see everything being pretty much the same as it has been, with the exception of the interest rates that I just talked about with Lana. And we dropped that rate a range of about 1/8 on either side of the range, although we anticipate less prepayments. And I'll give you an example. This quarter, our prepayment income was actually the lowest it's been in 5 years. So I don't know if that's indicative of the refi market slowing down. But if you think about the refi market, in the last number of years, they've dropped -- in refinancing, been able to drop the rate, [the] client. They've been able to take out more cash. And once you do those 2, the only other thing left is to extend the number of years, which they're trying to do at certain times, go from 5 to 7 years. But there is a little bit of a slowdown on the refi activity. But there's non slowdown in terms of total activity. It's just our desire to have more diversification on the asset side. Like Eric just said, we want to grow the investment portfolio. And there are a number of very strong reasons to do that. And we want to have C&I, because we want to have more floating rate. Particularly if rates are going to rise, we want to have some floating rate. That doesn't mean that we're still not going to have great opportunities to continue to grow CRE portfolio, which is pristine. So in a nutshell, I would say that there's not any more or less competition than there has been in the last several quarters.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [40]

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Understood. And just as a follow-up on deposit pricing, just because it has been quite an issue on the stock recently -- I get your point in terms of [we raise rates] at the end of the -- for the first quarter. And should we expect pricing on deposits to be more a factor of how quickly and how frequently the Fed raises interest rates? Or is the market and the smaller banks within the New York market getting more competitive, which will probably cause you to raise rates? How do both those factors play into your decision?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [41]

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Well, it's clearly a combination of the 2. Our belief is that the frequency of the Fed raising rates has an effect. And what I mean by that is the more frequent the rate increases are by the Fed, the more it's top of mind to our clients. The less frequent the rates rise, you're going to have clients forget in between the rate rises, and there'll be more of a lag. So when we were talking about 2 rate increases, my vote would be not May, not June, but September or October, and then another one in December. Because that gives us a chance to lag the increase even more so. Because when they come back in September from vacation, it won't be a top in their mind. So that's one piece. And then there's the competition. We've seen 3 or 4 banks increase their rates. One or 2 of the banks have been doing teaser rates. And we try to point that out to the bankers, because it's not a rate that we have to compete against. I think what you're seeing [is] smaller institutions, not the too-big-to-fail institutions, but the smaller institutions are the ones that are raising their rates because they want deposits. So it's really a combination of both. But we have a saying here that you get one shot at a client. So if it's going to cost us a couple of basis points on a money market account, if we're getting the DDA to bring in the client, you should bring in the client. You should build franchise value, bring in the deposits, and not worry so much about the effect that it'll have on the NIM. And the reason why we're saying that is because it's far cheaper for Signature Bank to bring on a client than it is for another institution to bring on a client. If you look at our efficiency ratio, [so] (inaudible) that when they pay off 3 or 4 basis points more on an account, on average, the cost to bring that over is far less. Because we don't do cold-calling. We have teams that are efficient because of the relationships that they have. We don't have the costs involved with retail and advertising. So look at it this way -- how much does it cost for Signature Bank to bring on a client and a deposit versus everyone else? And in every instance, you look at net interest income. And forget about the NIM. Look at the net interest income and how much we're building deposits. And we just think that too often, everyone gets caught up in the NIM. And I'll get off my soapbox.

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Operator [42]

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

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [43]

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Just wanted to ask, you mentioned that you wanted more diversity in the asset side of the balance sheet. Obviously, increasing variable-rate loans, probably variable-rate securities as well. How fast can that actually be done? Obviously, if you're cutting your rates on the CRE side, presumably you're still adding a lot of the longer-duration CRE assets. But how should we think about the change in your asset sensitivity or liability sensitivity, I guess, over some short to medium period?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [44]

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Well, look, it's going to take a while, Ken. I mean, we have a substantial amount of 5- and 7-year duration CRE loans. So we are moving a ship here. But we have to start at some point, right? So if we can have a more diversified growth profile, that's what we want to do. And ultimately, it would be great to see securities at least stay stable at that 20% of assets and then grow our variable-rate loans in Signature Financial to be anywhere from 15% to 20% of assets each. But it's going to take a while.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [45]

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It's going to take a while because we're still going to put on commercial real estate. We have a pipeline of commercial real estate, it's a pristine asset. It's something that we believe we're the best at in the market that we're in, in New York. And when you're the best at it, you're going to continue to do it. So I think Eric hit on the right word, the growth profile. We have to move the growth profile.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [46]

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Would you guys consider, I guess, expanding Signature Financial in a meaningful way or making potential acquisitions of more variable-rate lending teams?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [47]

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Absolutely. We've brought on some teams that have more of a lending profile. We've certainly added to Signature Financial over the years with Municipal Finance and Franchise Finance and other lines, and we'll continue to look to do so. We are talking to a couple C&I-related teams now. And as it relates to acquisitions, a portfolio acquisition certainly, in that space, is something that we wouldn't shy away from, Ken.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [48]

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In fact, we'll be sending a press release out in the next day or so about some hires we've made at Signature Financial, which will help with the growth of the institution.

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Operator [49]

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

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [50]

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Could you just give the breakdown on the other categories of loan growth this quarter? I think, Joe, you'd said $185 million. Was that just Signature Financial? I guess, if you could just give us where we are on CRE, Signature Financial and C&I?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [51]

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Sure. CRE grew $484 million in the quarter. Multi-family grew $311 million in the quarter. Traditional C&I grew $112 million in the quarter. Specialty Finance grew $72 million in the quarter. But that's not inclusive of taxi medallion loans declining by $42 million in the quarter. So those are the primary categories. The rest are in consumer and SBA-related activities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [52]

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Okay. And where did the commercial real estate concentration end in the quarter?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [53]

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I don't have that number. But I think it remained fairly stable.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [54]

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Okay, so not a big move?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [55]

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No.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [56]

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No, not at all.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [57]

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Okay. And then, just going back to the deposit side -- and, Joe, you'd said hoping to try to -- you'd rather just see the hikes take place further out the calendar. But at what point do you start seeing that deposit beta sort of hit a trigger where is at the absolute level of rates where customers are pushing for it, as opposed to just the rapidity of rate hikes? Are we getting closer to seeing a higher beta on some of that stuff, especially the money market stuff?

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [58]

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Well, I mean, I would say after we had the third raise, now up 75 basis points, we saw more activity with that than we did in the first 2, clearly. So I think after the third one, that, coupled with some teaser rates out there, it's kind of brought to the client's mind that, hey, wait a minute, rates should be rising. And so we were able to delay it, I thought, pretty well. In July, when we're doing second quarter earnings, you'll see a little bit of that. But I'll go back to what I said earlier. I'm not worried about the increase in the money market rates. Because you get the chance to do a number of things. You get a chance to bring on a quality client, and you get a chance to bring on DDA. So every time you raise the money market, there's also bringing on more DDA. We have over $10 billion of it, which -- I remember, when we were running Republic National Bank, I think the group that we ran, the most DDA we had was $2 billion. So we're 5x that here. So we'll build the franchise value and not worry too much about that. As long as we can keep our costs low, keep our efficiency ratio where it is, we feel pretty comfortable. And the fact that we keep on bringing on new teams. We hope, by the second quarter earnings, we'll be talking about other teams coming onboard.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [59]

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Okay, thanks. And then, just finally, Eric, you'd said that you moved all the TDR, New York City TDR tax loans to NPA. What percentage of the New York City book has now been restructured?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [60]

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TDRs in New York right now are about $135 million of the overall balance, which is right around $500 million.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [61]

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Okay. And then, as you have more restructurings going forward, would the expectation be that those are also immediately just moved to nonperforming?

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [62]

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Most likely. Really, we look at each individual restructuring. But most likely, it'll go to nonaccrual.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [63]

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Okay.

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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [64]

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But it's not by any means a given.

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Operator [65]

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This concludes our allotted time in the Q&A session. I will now turn the conference back to Mr. DePaolo for closing remarks.

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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [66]

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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 developments going forward. And, Crystal, I'll turn it back to you.

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Operator [67]

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Thank you, sir. This concludes today's teleconference. If you would like to listen to a replay of today's conference, please dial 1-800-585-8367, and refer to the conference ID 5412803. A webcast archive of this call can also be found at www.signatureny.com.

Please disconnect your lines at this time.