Apr 22, 2014
Executives
Joseph Depaolo - President and Chief Executive Officer Eric Howell - Executive Vice President, Corporate and Business Development Susan Lewis - Investor Relations
Analysts
Casey Haire - Jefferies Steven Alexopoulos - JPMorgan Dave Rochester - Deutsche Bank Ken Zerbe - Morgan Stanley Matthew Clark - Credit Suisse Bob Ramsey - FBR Chris McGratty - KBW Jason O’Donnell - Merion Capital Group
Operator
Welcome to Signature Bank’s 2014 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. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.
(Operator Instructions) It is now my pleasure to turn the floor over to Joseph J. Depaolo, President and Chief Executive Officer.
You may begin.
Joseph Depaolo
Thank you, Laurie. Good morning and thank you for joining us today for the Signature Bank 2014 first 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 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 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.
Joseph Depaolo
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 kicked off 2014 on a solid note with the first quarter marking our 18th consecutive quarter of record earnings.
We again achieved record deposit growth, small loan growth and expanded top line revenues, while maintaining still credit fall. Moreover, we further invested in the bank’s future with the addition of five private client banking teams.
I will start by reviewing earnings. Net income for the 2014 first quarter reached a record $66 million or $1.37 diluted earnings per share, an increase of $15.4 million or 30% compared with $50.6 million or $1.06 diluted earnings per share reported in the same period last year.
The considerable improvement in net income is mainly the result of an increase in net interest income primarily driven by record deposit growth and strong loan growth. These factors were partially offset by an increase in non-interest expense attributable to our revenue growth initiatives as well as an increase in New York State corporate income tax.
Looking at the deposits that once again played a key role in results. Deposits decreased a record $1.25 billion or 7% to $18.3 billion this quarter, including core deposit growth of $900 million and average deposit growth of $930 million.
For the past 12 months, total deposits have grown $3.5 billion, core deposits grew $2.6 billion, and average deposits increased $3.2 billion. Non-interest bearing deposits of $5.3 billion represented 29.1% of total deposits with the substantial deposit and loan growth as well as earnings retention, total assets reached $23.1 billion, an increase of $4.8 billion by 27% since the first quarter of last year.
The ongoing strong deposit growth is attributable to the superior level of service provided by all of our private client banking teams to continue to serve as the single point of contact to their clients. Now, let’s take a look at our lending business.
Loans during the 2014 first quarter increased $699 million or 5%. For the past 12 months, loans grew $3.85 billion and now represent 61.5% of total assets compared with 56.7% one year ago.
The increase in loans this quarter was primarily driven by growth in commercial real estate, multi-family loans and specialty finance. Non-accrual loans increased $36.2 million or 25 basis points of total loans this quarter compared with $31.3 million or 23 basis points for the 2013 fourth quarter and $35.1 million or 34 basis points for the 2013 first quarter.
The allowance for loan losses is 1.01% of loans versus 1% of loans in the 2013 fourth quarter and 1.09% for the 2013 first quarter. Additionally, the coverage ratio or the ratio of allowance for loan losses to non-accrual loans is a high 396%.
The provisions to loan losses for the 2014 first quarter was $8.2 million compared with $11 million for the 2013 fourth quarter and $9.9 million for the 2013 first quarter. Net recoveries, yes, I said net recovery for the 2014 first quarter was $244,000 or an annualized 1 basis point compared with net charge-offs of $2.8 million or 9 basis points for the 2013 fourth quarter and $4.5 million or 18 basis points for 2013 first quarter.
Now, turning to the watch list and past due loans. Watch list credits decreased $7.5 million this quarter to $122.5 million or a very low 0.86% of loans.
During the quarter, we saw a decrease of $10.3 million in our 30-day to 89-day past due loans of $44.6 million and a decrease of $1.8 million in the 90-day plus past due category to only $689,000. While we are satisfied that all our credit metrics are strong again this quarter, we remain mindful of the prevailing uncertainty in the economic and political environment and continue to conservatively reserve.
Just to review teams for a moment, the 2014 first quarter was strong for (indiscernible). We added four private client banking teams and one thus far in the second quarter for a total of five to-date.
Our pipeline remains relatively active and we look forward to opportunities for attracting talented banking professionals to our network. Additionally, we will be opening three offices later this year and expanding several others.
At this point, I will turn the call over to Eric and he will review the quarter’s financial results in greater detail.
Eric Howell
Thank you, Joe, and good morning, everyone. I will start by reviewing net interest income and margin.
Net interest income for the first quarter reached $186.5 million, up $38.4 million or 25.9% when compared with the 2013 first quarter, an increase of 4.6% or $8.2 million from the 2013 fourth quarter. Net interest margin was down 4 basis points in the quarter versus the comparable period a year ago and increased 7 basis points on a linked quarter basis at 3.39%.
When loan prepayment penalty income is excluded from the 2014 first quarter and the 2013 fourth quarter, core net interest margins for the linked quarter increased four basis points to 3.25%. Three basis points of the linked quarter increase was due to two less days in the first quarter.
Additionally premium amortization on securities slowed further and we generally saw higher yield and recent loan originations and securities purchases. Let’s look at asset yields and funding costs for a moment.
Interest earning asset yields declined 10 basis points from a year ago; however they increased seven basis points from the linked quarter to 3.92%. Given the considerable growth in average loans for the quarter of $1.06 billion the average investment securities portfolio decreased $34 million this quarter.
Yields on the portfolio increased seven basis points to 3.32% this year benefiting from higher reinvestment yield and the slowdown in premium amortization. The duration of the portfolio remains stable at 3.99 years.
Turning to our loan portfolio yields on average commercial loans, mortgages and leases declined two basis points to 4.36% compared with the 2013 fourth quarter excluding prepayment penalties from both quarters, yields would have declined five basis points driven by continued pressure from refinanced activity and lower yields on new loan production. Now, looking at liabilities.
Money market deposit costs this quarter declined two basis points which help drive a decrease of one basis point and our overall deposit cost to 49 basis points. Given our strong average loan growth average borrowings increased $45 million to $2.93 billion or only 12.9% of our average balance sheet.
During the quarter we replaced short-term borrowings with core deposits and modestly extended the duration of our fixed term borrowing. This led to a seven basis point increase in average borrowing cost for the quarter.
On to non-interest income and expense. Non-interest income for the 2014 first quarter was $7.2 million, a decrease of $1.7 million when compared with the 2013 first quarter.
The decrease was driven by a $1.8 million decline in net gains on sales of SBA loans. Non-interest expense for the 2014 first quarter was $70 million versus $58.9 million for the same period a year ago.
The $11.1 million or 19% increase was principally due to the addition of new private client banking teams, the new asset based lending team, and our continued investment in Signature Financial. We anticipate these investments will lead to future growth.
Even with this significant hiring over the last several years, the bank’s efficiency ratio still improved slightly to 36.2% for the 2014 first quarter compared with 37.6% for the 2013 first quarter. Looking at taxes for a moment the 2014 first quarter included a $1.8 million tax charge related to New York State corporate income tax reform enacted on March 31, 2014.
This reform lowered future marginal tax rate and changed the portion and factors resulting in a reduction of the bank’s state deferred tax asset. And turning to capital.
Our capital levels remained strong with a tangible common equity ratio of 8.28%, Tier 1 risk base of 14.05%, total risk-based ratio of 15.1% and leverage capital ratio of 8.51% as of the 2014 first quarter. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet.
And now I’ll turn the call back to Joe. Thank you.
Joseph Depaolo
Thanks, Eric. To summarize, Signature Bank started off the year with 18th consecutive quarter of record earnings, supported by record deposit growth, strong loan growth, solid credit metrics and top line revenue growth.
Notably in 2013 and thus far in 2014, we made significant investments to the future with the addition of 15 private client banking teams as well as an ABL team and increasing personnel in both our commercial real estate banking team and our equipment financing group. Now, we are happy to answer any questions you might have.
Laurie, I will turn it over to you.
Operator
The floor is now opened for questions. (Operator Instructions) Your first question comes from the line of Casey Haire of Jefferies.
Casey Haire - Jefferies
Hi, good morning guys.
Eric Howell
Good morning Casey.
Joseph Depaolo
Good morning Casey.
Casey Haire - Jefferies
Just a couple of questions on the loan growth outlook, number one, can you give us the breakdown of what the growth was by – was this quarter by product. And then also how does the pipeline look as we enter the second quarter versus year end?
Eric Howell
Sure, hey Joe I will take the first part of that. Multifamily was up by $282 million, commercial other forms of CREs were up $194 million, Signature Financial was up about $180 million and then the rest was in personal lines of business.
Joseph Depaolo
And on the loan pipeline it’s fairly robust. We have going into the second quarter, in this quarter it’s fairly robust loan pipeline and not only in commercial real estate but we are also seeing it in Signature Financial.
Casey Haire - Jefferies
Okay. And the multifamily, I mean how is – what’s the outlook there, can we do better – is $280 million a low mark for the year or is that – is a more downside risk?
Joseph Depaolo
The pipeline there is very robust.
Casey Haire - Jefferies
Okay.
Joseph Depaolo
The second quarter traditionally – the first quarter is traditionally the slowest one. We are very happy with the growth in the first quarter because it was $100 million more than our best first quarter we have ever had.
And there is a lot of pull forward into the fourth quarter. So we are very happy with the $700 million when we entered the second quarter.
Casey Haire - Jefferies
Okay, great and pricing up data on the multifamily?
Joseph Depaolo
On the five year fixed, it’s 3% and 3.8%. There is the market risk team at 3% and 3.8% and we are getting our fair share at 3% and 3.8%.
We are making this – we are making this even more comfortable with the fairly robust pipeline that we have going into the second quarter getting our share of deals at the 3% and 3.8% level. And then also that we are getting deals at a much higher level on the high 3s, low 4s primarily high 3s on office mixed use and retail.
Casey Haire - Jefferies
Got it. And just last one from me on the expense growth pretty strong this quarter, obviously some seasonal pressures, but that 19% year-over-year comp is that a good comp going forward, given all the team hires or to maybe some deceleration going forward?
Eric Howell
Well, we hope that this decelerates a little bit from this level Casey, but ultimately we see it being on an elevated level for the rest of the year a bit higher. And number of teams in the fourth quarter which is a little unusual for us, so we got the full expense for them in the first quarter.
We hired four teams in the first quarter and we have already hired 15 at the first day of the second quarter. So we are putting on expense but for all the right reasons.
We also saw payroll taxes kick in. We hired a sales force at Signature Financial.
We brought on the ABL group. So we are investing in the future and we expect to have an elevated expense growth level.
Casey Haire - Jefferies
Thank you.
Joseph Depaolo
Hey Casey, thank you.
Operator
Your next question comes from the line of Steven Alexopoulos of JPMorgan.
Steven Alexopoulos - JPMorgan
Hi, good morning guys.
Eric Howell
Good morning Steve.
Joseph Depaolo
Hey, Steve. Good morning.
Steven Alexopoulos - JPMorgan
I wanted to start given all the comments from Mayer DeBlasio on wanting to freeze rent on the rent controlled units, is that potential causing a reduction that you are seeing in demand, the rent stabilized properties?
Joseph Depaolo
We have not seen a reduction, in fact it may surprisingly an unintended consequences that it’s starting to gain a little bit of a marketplace where those that want to get out knows that want to get in for various reasons. So it’s actually an unintended consequence that maybe creating a marketplace which actually helped us because when the client or a prospect is looking to do a purchase or a scale transaction they usually go to the player that they believe is most efficient.
And we believe that we have the most efficient when it comes to the commercial real estate team and their ability to get things done in a timely fashion. Whether there is a freezing of rents or an increase in real estate taxes, we are continuing to monitor the situation.
We are not getting a sense one way or the other at the moment. Our clients though we feel are in better – are the better operators who have multiple properties and have been doing it for multiple years.
So we believe they can handle whatever situation they are presented including any counterproductive rent freeze.
Steven Alexopoulos - JPMorgan
Joe, could you give us a sense what percent of your multifamily loan book would be for rent stabilized units?
Joseph Depaolo
I don’t have that number, Steve.
Steven Alexopoulos - JPMorgan
Okay. And any impact from the weather in the first quarter on multifamily activity?
Joseph Depaolo
No, we have seen none whatsoever. Any closings that were delayed were done within the quarter.
Steven Alexopoulos - JPMorgan
Okay. And just one final one for Eric, what’s the expected tax rate going forward given the change that you referenced?
Eric Howell
Well, I would stay with 42% Steve. We don’t expect to see a benefit or lowering of that tax rate really until 2016 when the lower rates start to kick in.
Steven Alexopoulos - JPMorgan
Got it, okay. Thanks for the color.
Eric Howell
Thank you.
Joseph Depaolo
Thank you.
Operator
Your next question comes from the line of Dave Rochester of Deutsche Bank.
Dave Rochester - Deutsche Bank
Hey, good morning guys.
Joseph Depaolo
Hey, Dave. Good morning.
Dave Rochester - Deutsche Bank
Eric, you had mentioned you recently saw higher yields on securities purchases, I was just wondering if you could talk about how you expect the margin to trend from here, are you still seeing stability going forward?
Eric Howell
Absolutely, Dave. I think we are going to maintain these relative levels ex-day count.
We really got quite a bit of benefit in the first quarter from the day count, but that will unwind a little bit so that should take a couple of basis points out of margin for the second quarter, ex-day count we really see ourselves being stable for the next several quarters.
Dave Rochester - Deutsche Bank
Great. And what are securities or investment rates today?
Eric Howell
Dave, it’s still in the low 3% range between 3% and (3.75%).
Dave Rochester - Deutsche Bank
And then would you happen to have the securities premium am expense for the quarter?
Eric Howell
It was approximately $1.2 million better than the prior quarter. The overall amount of premium am was $16.2 million.
Dave Rochester - Deutsche Bank
Got it. And I noticed on the deposit costs side, you were able to lower the rate on institutional money markets a little bit.
We are just wondering if you are seeing any change or loosening up of the competition in that market if you are seeing competitors reduce rates at all?
Joseph Depaolo
No, we are not seeing any reduction in competitor rates. What we have been able to do is we have not dropped really the current clients, it’s our ability to bring in new clients, new prospects at lower rates that helped to drive that 2 basis points drop.
Dave Rochester - Deutsche Bank
Great. And just one last one on the expenses, we are just wondering Eric, if you haven’t have that component that was FICA and maybe the more seasonal stuff in the quarter?
Eric Howell
It’s very hard to isolate, Dave. So, we don’t have a breakdown for that.
Dave Rochester - Deutsche Bank
Okay, alright guys. Great, thanks.
I appreciate it.
Joseph Depaolo
Thank you.
Operator
Your next question comes from the line of Ken Zerbe of Morgan Stanley.
Ken Zerbe - Morgan Stanley
Great. Thanks.
A quick question, just some of the expenses again, did three new private client branches that you want to open up or banking offices open up, is that also in your expense I mean should we see a tick up in expenses later this year as those get opened or how are you accounting for those?
Eric Howell
Some of those are in, some are not. So we will see a further pickup in expense Ken.
But it shouldn’t be all that meaningful.
Ken Zerbe - Morgan Stanley
Okay. So alright, just supported with NII growth understood.
Okay that’s actually it for my question. Thank you.
Operator
Your next question comes from the line of Matthew Clark of Credit Suisse.
Matthew Clark - Credit Suisse
Hey, good morning guys.
Joseph Depaolo
Hey Matt. Good morning.
Matthew Clark - Credit Suisse
For these new teams that you have hired I think since the fourth quarter, can you give us a sense for if they have contributed all under loan or deposits side just trying to get a sense for the timing of the traction there and whether or not we might see stronger production as a result maybe later this year?
Joseph Depaolo
I would say their traction will come this year and minimal if at all any traction in the fourth quarter.
Matthew Clark - Credit Suisse
Okay. And in terms of the mix of the teams I guess can you give us the sense for how many of them were current deposit gathering types of teams relative to teams that came with books of business just trying to get a sense for the relative size of each of these and…
Joseph Depaolo
They all came with books of business, but predominantly we deposit gathering.
Matthew Clark - Credit Suisse
Okay. Across the board?
Joseph Depaolo
Across the board.
Matthew Clark - Credit Suisse
Okay, alright. My questions have been answered.
Thanks.
Joseph Depaolo
Thanks.
Operator
Your next question comes from the line of Bob Ramsey of FBR.
Bob Ramsey - FBR
Hey good morning guys.
Joseph Depaolo
Good morning.
Bob Ramsey - FBR
Joe, I know you described the loan pipeline heading into the second quarter as robust and also you guys noted the seasonality that is normal in your business. I was just wondering if you could in any way quantify what the pipeline looks like today versus entering the first quarter?
Joseph Depaolo
The pipeline today versus entering the first quarter is much stronger. So when you do comparative to the first quarter 2014 pipeline going into the second quarter 2014 is much stronger and its much stronger than it was comparatively for the second – going into the second quarter 2013 last year.
Bob Ramsey - FBR
Okay. So then I guess it would be reasonable to expect that loan growth in the second quarter this year should be greater than either last quarter or the second quarter of 2013?
Joseph Depaolo
Yes.
Bob Ramsey - FBR
Great. And then I wanted to ask too about margin, I know you said you guys expect net interest margin give or take a couple of basis points on day count will be stable here.
Just curious what gives you confidence around that given that loan yields are a little bit lower and probably losing ability to make much more progress on the funding side, just how you’re thinking about the different pieces of NIM?
Eric Howell
Well our major headwind to us has been the refinanced activity. We had it again this quarter really due to one large choppy loan at the end of the quarter that refinanced, but we expect that headwind slowdown as we look forward.
So that would be really the primary driver. Securities, premium amortization is also been helpful to us and the run-off in the securities portfolio is at a lower level than it has been in the past.
So it’s really those higher yielding of loans and securities that have been running off are not as high level as they had been in the past. So we’re not having to deploy that headwind.
Bob Ramsey - FBR
Okay. And I guess lower levels of refi activity probably mean a little bit lower prepayment penalty income.
It’s not nearly as big for you guys as some others, but do you think that stays around this quarter, just continues to sort of gradually drift lower or what sort of the - I know you never know quarter-to-quarter but general outlook?
Eric Howell
Right. It’s very difficult to predict, but we expect it to gradually slowdown over the course of this year.
Bob Ramsey - FBR
Alright, great. Thank you guys.
Joseph Depaolo
Thank you.
Operator
Your next question comes from the line of Chris McGratty of KBW.
Chris McGratty - KBW
Hi, good morning guys.
Joseph Depaolo
Hey, Chris. Good morning.
Chris McGratty - KBW
Eric, in terms of the balance sheet if you look back a year ago securities were roughly 40% of earning assets. Today they are, call it 36%.
Can you help us on the near-term outlook in terms of maybe dollars or maybe a percentage basis of where that ratio ultimately normalizes is it 25% to 30% over the next couple years or any color on that would be great?
Eric Howell
Well I think we’re well off from getting to a normal (indiscernible) and a lot of its going to be predicated upon the levels of deposit growth that we have. We – given all the focus from the regulatory side and liquidity these days we wouldn’t mind growing the securities portfolio as our balance sheet grows, but it’s really going to be predicated upon deposits.
If we see deposit growth outpace loan growth and I would expect to see the securities portfolio grow vice versa if loans outpace the deposits we’d probably see the securities portfolio remain relatively flat to where it is today. But ultimately we focus more on loans to assets and we expect to continue to drive that up to the north of where it is today.
But we’ve got long ways to go before we can say what a steady state is for us.
Chris McGratty - KBW
Understood. Just one on the margin, a lot of discussion obviously about when and if the fed moves kind of impact on bank margin, can you help us with a little bit of color on how you guys are modeling kind of longer term the margin dynamic when (fed) rates go up?
Eric Howell
Well, ultimately, we expect that margin will increase, there might be some short term pressure in the low end moves but over time we have a tremendous amount of cash flows that are rolling off the securities portfolio. We expect to have continued deposit growth put to use, we have short duration assets that – when you look at Signature Financial.
So we will be able to put all that cash flow to use at the higher yielding loans, which should be beneficial for the margin. And our core funding base will really should lag the increase in rate, which is what we have seen through earlier cycles.
Although it was quite a while ago, Chris, but we should see our core funding lagged every quarter.
Chris McGratty - KBW
Thanks, Eric.
Operator
Your next question comes from the line of Jason O’Donnell of Merion Capital Group.
Jason O’Donnell - Merion Capital Group
Good morning.
Joseph Depaolo
Hey, Jason. Good morning.
Eric Howell
Good morning, Jason.
Jason O’Donnell - Merion Capital Group
I just had one question. I am wondering if you could comment on the status of the ABL unit at this point, what’s the size of the portfolio, and what opportunities are in front of you at this point to add additional lenders?
Thank you.
Eric Howell
Well, the ABL group had about 37.5 million in commitments outstanding at the end of the quarter and $7 million in outstanding loans. So, we are pleased so far with the progress that they have made.
They are spending most of their time right now working with the teams in prospecting what we have built up in our team pipeline. We brought on one salesperson.
We expect to bring on a couple more over the course of the year. So, we see good prospects on that front.
Jason O’Donnell - Merion Capital Group
Okay, thank you.
Operator
At this time, there are no further questions. I will now return the call to Joseph Depaolo for any additional or closing remarks.
Joseph Depaolo
Thank you for joining us today. We certainly appreciate your interest in Signature Bank.
And as always, we look forward to keeping you apprised of all our recent developments. Laurie, I will turn it back to you.
Operator
If you would like to listen to a replay of today’s conference, please dial 800-585-8367 and refer to conference ID number 29982536. A webcast archive of this call can also be found at www.signatureny.com.
Please disconnect your lines at this time and have a wonderful day.