This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk11: Welcome to Signature Bank's 2020 Fourth Quarter and Fiscal Year End Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DiPaolo, President and Chief Executive Officer, and Eric R. Howell, Senior 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 open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Joseph Jade Apollo, President and Chief Executive Officer. You may begin.
spk04: Thank you, Lori. Good morning and thank you for joining us today for the Signature Bank 2020 fourth quarter.
spk10: With Fundrise, you can invest here, from there, or there, from here. Our platform gives you access to premium real estate that was previously only available to institutions. So you can take your portfolio from here... Join the community of over 150,000 investors that have gone from there to here with Fundrise.
spk07: Editor X presents five steps to win over any client. Step one, sweep them off their feet. Bring your wildest vision from concept to production on an intuitive canvas with precise layouting tools and engaging interactions and show them a site so gorgeous they can't help but stare. Step two, play it smooth. Add custom breakpoints and adjust for any screen size, providing the perfect visual experience with no awkward design breaks. Step three, set boundaries. Bring your clients into the process with customizable roles and permissions. Collaborate seamlessly and exchange feedback without ever putting the site's design at risk. Step four, empower their growth. Don't just give them an outstanding website. Help them grow their business with a powerful suite of e-commerce tools. Step five, seal the deal. Set them up for success with a code-free CMS. They can manage and update on their own, giving them a site that's designed to change and grow as they do. So get out there and show them you're a perfect match. Build your next client website on Editor X. A year-end results conference call.
spk04: Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.
spk01: 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 different to predict and may be beyond our control. Forward-looking statements include information concerning our future results, interest rates in the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings, business strategy, and the impact of the COVID-19 pandemic on each of the foregoing and on our business overall. 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.
spk04: Thank you, Susan. I will provide some overview into the quarterly and annual results, and then Eric Howell, our CEO and VP 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. Finsher Bank continues to experience extraordinary growth during the country's protracted and challenging recovery from the COVID-19 pandemic. Our business philosophy of a client-centric single point of contact model led by experienced group directors continues to distinguish us particularly in times of distress. Additionally, the bank has an accelerating multifaceted growth profile with traditional private client banking teams leading the charge in New York, San Francisco, and Los Angeles. Further fortifying the bank's market position are a multitude of national businesses, including Signature Financial, Asset-Based Lending, Fund Banking, Venture Banking, Digital Banking, including Cignet, and Specialized Mortgage Banking Solutions. The collective strength of our franchise led to an unbelievable quarter of record deposit growth, record loan growth, record pre-tax, pre-provision earnings, and record net income. We look forward to a healthier 2021 as recovery from the COVID-19 pandemic commences. Now let's take a look at earnings. Let's take a close look at earnings. Pre-tax, pre-provision earnings for the 2020 fourth quarter were $261.5 million, an increase of $45 million, or 21%, compared with $216.3 million for the 2019 fourth quarter. Net income for the 2020 fourth quarter was a record $173 million, or $3.26, through earnings per share. compared with $147.6 million, or $2.76 billion of earnings per share, reported in the same period last year. The increase in income was predominantly driven by substantial asset growth of $23.3 billion, offset by the investments we made in new businesses, including our West Coast expansion. Looking at deposits. Deposits increased a record $9 billion or 16.5% to $63.3 billion this quarter, while average deposits grew a record $10.4 billion. For the year, deposits increased a record $22.9 billion and average deposits increased a record $12.5 billion. Non-interest bearing deposits of $18.8 billion represent a high 30% of total deposits. Our deposit and loan growth led to a record increase of $23.3 billion, or 46%, in total assets for the year, which reached nearly $74 billion. Now let's take a look at our lending businesses. Core loans, or loans excluding PPP, during the 2020 fourth quarter increased a record $2.7 billion or 6.2% to 47 billion. For the year, core loans grew a record 7.8 billion or 20%. The increase in loans this quarter was again driven primarily by new fund banking capital core facilities. This is the ninth consecutive quarter where CNI outpaced CRE growth, furthering the rapid transformation of the balance sheet to include more floating rate assets as we continue to diversify our portfolio.
spk08: Small business owners know they've got to be prepared for anything.
spk03: You've got to be prepared.
spk08: And when you use Constant Contact, prepare accordingly. Let's send this. Let's sell this. Let's win this. With email marketing and more to drive your business forward.
spk02: Try it free at ConstantContact.com.
spk00: I wanted to take my nursing career to the next level. I had been in leadership roles before, but I wanted to make sure that I could learn more. I began searching for online schools, and WGU was the one that kept standing out. I received my master's degree in health leadership from WGU, and that afforded me the opportunity to be promoted to the director of patient care services.
spk04: Non-accrual loans were 120 million or 25 basis points of total loans compared with 81 million or 18 basis points for the 2020 third quarter. 30 to 89-day pass-through loans increased to 234.9 million. It is important to note that 88.3 million of the 30 to 89-day pass-throughs were caused by processing and documentation delays given COVID-19 circumstances, and we are now current. But 90-day-plus past due loans remained very low at $5.8 million. Now, charge-offs for the 2024 quarter were $11.4 million, or 10 basis points, compared with $10.5 million for the 2023 quarter. The provision for credit losses for the 2024 quarter was $35.6 million, compared with $52.7 million for the 2023 quarter. This brought the bank's allowance for credit losses to 1.04%, and the coverage ratio stands at a healthy 423%. I would like to point out that if we look at the ACL ratio, excluding very well secured fund banking loans and government guaranteed PPP loans, it would be much higher at 1.41%. Turning to modifications, as of December 31, 2020, the bank has entered into COVID-19 principal and interest modifications of 1.3 billion or 2.7 percent. Of that balance, 107 million remain as short-term modifications. We fully anticipate that we will have increased non-accrual loans in charge of us in the coming quarters due to the effect of COVID, but given the level of our allowance for credit losses, where we prudently doubled the allowance, adding 258 million since the adoption of CECL, We believe we are adequately covered for what may come. Now onto the greatly expanding team front where we had much success. In 2020, we added a total of 20 private client banking teams, two in New York, five in San Francisco, and 13 in the greater Los Angeles area, marking our entry into the Southern California marketplace. The bank now has a total of 116 private client banking teams, of which 23 are located on the West Coast. At this point, I'll turn the call over to Eric, and he will review the quarter's financial results in greater detail.
spk17: Thank you, Jo, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the fourth quarter reached $395 million, an increase of $6.3 million from the 2020 third quarter. Net interest margin for the quarter declined 32 basis points to 2.23% compared with 2.55% for the 2020 third quarter. The entire decrease and then some was due to excess cash balances from significant deposit flows, which impacted margin by 46 basis points. Let's look at asset yields and funding costs for a moment. Interest earning asset yields for the 2020 fourth quarter decreased 41 basis points from the linked quarter to 2.75%. The decrease in overall asset yields was again driven by the excess average cash balances, which grew from 5.6 billion to 12.5 billion during the quarter. Additionally, asset yields continue to be affected by lower reinvestment rates in all of our asset classes. Yields on the securities portfolio decreased 46 basis points linked quarter to 2.13% due to the decline in market rates, as well as the bank investing in floating rate securities. And our portfolio duration remained low at 2.2 years. Turning to our loan portfolio, Yields on average commercial loans and commercial mortgages decreased six basis points to 3.6 percent compared with the 2020 third quarter. This was mostly due to lower origination yields. And excluding prepayment penalties from both quarters, yields decreased by four basis points. Now looking at liabilities, our overall deposit costs this quarter decreased nine basis points to 42 basis points. due to the low interest rate environment. We anticipate this downward trend to continue in 2021. During the quarter, average borrowing balances decreased by $744 million to $3 billion. The overall cost of funds for the quarter decreased nine basis points to 57 basis points, driven by the reduction in deposit costs and decreased average borrowings, which was slightly offset by the addition of subordinated debt with a 4% coupon. On to non-interest income and expense. Non-interest income for the 2020 fourth quarter was $24.2 million, an increase of $8.2 million, or 51%, when compared with the 2019 fourth quarter. The increase is mostly due to a rise of $5.5 million in fees and service charges, as well as an increase of $2.4 million in trading income.
spk09: After saving with customized car insurance from Liberty Mutual, I customize everything. Like Marco's backpack.
spk17: Non-interest expense for the 2020 fourth quarter was $157.7 million versus $138 million for the same period a year ago. The $19.6 million or 14% increase was principally due to the addition of new private client banking teams. And despite our significant team hirings and margin compression from significant cash balances, the banks actually gained operating leverage. And as a result, our efficiency ratio improved to 37.6% for the 2020 fourth quarter versus 39% for the comparable period last year and 38.9% for the 2020 third quarter. In turning to capital, During the quarter, the bank successfully raised $730 million in non-cumulative perpetual Series A preferred stock, which qualifies as Tier 1 capital. Additionally, the bank issued $375 million in subordinated debt, which qualifies as Tier 2 capital. All capital ratios remained well in excess of regulatory requirements that augment the relatively low-risk profile of the balance sheet. as evidenced by a Tier 1 leverage ratio of 8.55% and a total risk-based ratio of 13.54% as of the 2020 fourth quarter. And finally, the bank paid a cash dividend of 56 cents per share of common stock. And now I'll turn the call back to Joe. Thank you.
spk04: Thanks, Eric. I'd like to thank my colleagues, a number who are listening on the call today, who have demonstrated their dedication to our clients and their needs during this pandemic. Times like these, our clients truly value the level of care and advice that my colleagues provide, and our performance for the year reflects their extraordinary efforts and the strength of our franchise as we continue to execute on many, many fronts. 2020 was truly a remarkable year of growth and achievement for Signature Bank. On the deposit front, which is our key metric, we delivered unbelievable record deposit growth of 23 billion or 57%. And we reduced the cost of deposits from a high of 121 basis points in Q3 2019 to 42 basis points at year end, with room for further reductions. Demand deposits increased the record 5.7 million, excuse me, 5.7 billion for the year and remain at a high 30% of total deposits. And most importantly, our deposit growth came across the board from our existing teams to all of our new businesses. There were literally 26 traditional banking teams in New York that grew over $100 million each. Our newly established teams on the West Coast grew over $1 billion. The specialized mortgage banking solutions team grew over $3.5 billion. The venture banking group grew nearly 1 billion, and our digital banking team grew over 8 billion in deposits. We have clearly distinguished ourselves as the predominant bank in the digital space. Turning to loans, we had record core loan growth of nearly 8 billion, driven by another of our new businesses, the fund banking division. which delivered nearly $7 billion in loan growth. Additionally, Signature Financial had another strong year and surpassed $5 billion in outstanding loans and ranks as the 15th largest bank lender in this space, a truly remarkable accomplishment for that team. Congratulations, guys. Furthermore, as planned, we held our commercial real estate loan balances flat over the last two years and made great strides and reducing our CRE concentration to 376% from 551% at year end 2018. Looking at earnings, the bank's pre-tax, pre-provision earnings grew by 136 million or 16% for the year. And we had a strong ROE of 10.75% despite a heavy amount of provisioning and margin compression due to excess cash balances. Fee income, or non-interest income, grew by 22 percent, or $13.5 million for the year, and several of our fee income initiatives are just starting to take hold. Additionally, we improved our already best-in-class efficiency ratio during the year to 37.6 percent. On the capital front, We meaningfully improved our capital position by over $1 billion with the issuance of $375 million in subordinated debt and $730 million in preferred stock. Moreover, we maintained our dividend while turning off our buyback program to support the tremendous level of growth. And most importantly, we set the stage for future growth with the hiring of 20 private client banking teams and the opening of five new offices in the Los Angeles marketplace. Everything we said we would do this year, we did. Everything we said we would do this year, we did. Our growth for 2020 was equivalent to acquiring a top 50 bank, but we did it organically and without expending shareholder value. Signature Bank enters 2020 as a strong financial institution And we very much look forward to years to come. Now we are happy to answer any questions you might have. Laurie, I'll turn it back to you.
spk11: Thank you. The floor is now open for questions. At this time, if you have a question or a comment, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Our first question comes from the line of Ken Zerbe of Morgan Stanley.
spk14: Great. Thanks. Good morning. Good morning, Ken. Fantastic deposit growth this quarter. All right. Stunning. But I guess my question on the deposit growth, are you guys earning a positive spread on the new deposits coming in?
spk06: an all-time classic like capital group's new etfs there's so much behind it like thinking long term can i find an etf with a whole lot behind it with capital group i can no that's that's that's the issue we have to deploy it and we have to deploy it quickly so on the new deposits coming in even though they're coming in uh at a much lower cost
spk04: than we had just recently, we're still not making a spread.
spk17: And that's clearly affecting our net interest margin. But this is a trade-off that we'll take every time. You know, we've been through cycles before. We've been through rising rate environments before. And when rates rise, we will see the deposit growth moderate. But what we'll also see is continued loan growth. And we have the deposits now. to fund the substantial loan growth that we have in the future. So we're loaded for bear. And this is a very high class problem for us to have, Ken.
spk04: Yeah, Ken, we are taking market share, like for instance, with the mortgage servicing specialized mortgage servicing team. They grew by $3.5 billion this year. That's market share that they're taking, and we're getting an opportunity to bring the business in. So we'll take it all day and deploy it later.
spk14: Yeah, I guess, um, I think, like I said, it's your, the quarter was very awesome in my view, but I guess, I guess with the negative spread that you're getting, I mean, it just like, I could see how you would gain share by paying a much higher rate than the market is currently paying. So the question is just like, do you feel that you have to keep paying this elevated yield on your new deposits. It seems like there might be some room to lower your new deposit yields that you're offering and still definitely more than support your loan growth.
spk04: Yes, we had 42 basis points cost in the quarter, for the fourth quarter. The month of December was down to 41 basis points and in January thus far we're at 37 basis points. So we're continuing to bring the rate down We'll be probably in the mid to low 30s by the end of the quarter. So we brought it down nine basis points in the fourth quarter. There's no reason why we can't bring it down nine basis points or more in the first quarter of 2021. Got it. Okay.
spk14: And then maybe just switching gears a little bit. Joe, I think you mentioned that you do expect higher net charge-offs over time, which is a very reasonable expectation. But one of the concerns around signatures has been the potential for significant loss content in the CRE portfolio. Can you guys help quantify when you say higher charge-offs? Like, what exactly are you thinking when you say that? Thank you.
spk04: Well, what we're not seeing, what we're saying and what's happening is not necessarily meeting. I'll tell you what I mean by that. We're not seeing charge-offs right now coming through. We expect it to be more than it had been in the last couple of years, which was pretty negligible. But our clients are just not handing back the keys. We've had some charge-offs in the last two quarters, and they've been some CRE retail. But with the CARES Act, a lot of the clients are saying, I have an opportunity to get by during the pandemic and then start paying again. And that's why we're not seeing a lot of charge-offs. But we expect it to be higher than it had been in 2018, 2019, which I said was pretty negligible.
spk17: In fact, we've challenged our team to get ahead of this, to find the bad credits now, to identify and to deal with them. And quite frankly, we're just not finding them. Our clients see their properties, their businesses as their livelihood in the future. They're not at a point where they want to give up. With the vaccines and the news of the vaccines, more vaccines on the horizon, the potential stimulus that will come from the new administration gives them a lot of positive things to look forward to in the future, and it's just giving them less reason to want to give up. So, you know, as much as we're looking for the charge-offs and we're anticipating we'll have them, they're just not coming to fruition.
spk04: I mean, we've doubled our allowance to over half a billion during this year, so we're certainly well prepared for it.
spk14: All right, that's good to hear. All right, thank you very much. Thank you. Thank you, Kim.
spk11: Our next question comes from the line of Dave Rochester of Compass Point.
spk18: Hey, good morning, guys.
spk04: Morning, Dave.
spk18: On the NIM or the NII outlook, whichever I guess is easier to talk about, was wondering what your thoughts were there just following the curve steepening we've seen recently and then your outlook on the deposit cost there that you mentioned being in the low to mid 30s at some point. And then maybe as a part of that outlook, you guys obviously have a ton of cash in the balance sheet. I was just curious to hear your thoughts on how fast you're willing to deploy that into securities and then how much more in the way of borrowings you can pay down for this year.
spk17: Yeah, there's a little bit more. I'll take the latter part first. There's a little bit more borrowings to pay, but not a substantial amount. So we won't see too much of a savings there, Dave. You know, we do, as Joe pointed out, we hope to get the deposit cost down another nine basis points or so, and we'll be in the mid to low 30s come quarter end. Certainly, we have, you know, ability to deploy on the asset side. We can really put one to two billion dollars per quarter to work in the securities portfolio and another one to two billion per quarter to work on the loan side. So we're going to have two to four billion in asset growth. I mean, that's a little bit easier for us to predict. The hard part is the deposit flows. You know, thus far this quarter it's slowed down a little bit, but we still have growth. We certainly don't anticipate eight billion dollars worth of deposit flows you know, this coming quarter, but we expect it to continue to happen, which is great, you know. So all that being said, the NII will be up, and that much we can predict, you know, and it should be up pretty nicely. The NIM is impossible at this point to predict because of the nature of the deposit flows, and it's hard to say, you know, more are going to come in if we'll be able to make a meaningful impact to all the cash that we're sitting on. we should have some pretty substantial NII growth.
spk18: That makes sense. So when you're talking about $1 to $2 billion in securities growth a quarter and $1 to $2 billion in loan growth a quarter, is that right? So you're getting $2 to $4 billion in asset growth a quarter, or you cap that at $3 billion just for capital concerns, or what are your thoughts?
spk17: No, I mean, we're not concerned about capital. We have ample ability to drive capital generation through earnings. We earn, you know, 13.5%. return on common equity this quarter. So the earnings is there. We get to a normalized provision, and I think we're going to get there relatively soon because it's even more earnings power. Like I said, I don't think the deposit growth has got to be quite as robust as it was last year, so we'll have a little bit less growth there. So earnings should really be supportive of our growth, and we feel very comfortable where we are on the capital front.
spk18: Yeah. Great. And where are you seeing asset pricing today, just on securities? I know you said you're still doing some of those floaters, which are sometimes lower yielding. And then on the capital call lines, where are those pricing these days?
spk04: On the capital call lines, the pricing has become a little tighter. But it's LIBOR based, and where it's become tighter is on the floor. Because we like to have a floor, you know, 50 basis points or thereabouts. And that's becoming tighter. But the pricing is anywhere from LIBOR 150 to LIBOR 225.
spk17: On the security side, you know, the floating rate securities that we're putting on are anywhere from 40 to 60 basis points. And then, you know, other investments are, you know, in the high ones, I'd say. So blended, we're probably coming in a little bit over 1% on security reinvestment. We're still being selective on the long side. As we do anticipate, rates will continue to rise, at least on the longer back end of the curve.
spk04: And for the first quarter, we're going to have the PPP loans. Thus far, for the last two days, we have a little bit more than 2,000 applications and exceeding 600 million. We've deployed a significant number of personnel. be ready to get the applications into the system and have the SBA give us an SBA number so the process is done. And we hope to get up to a billion, if not more.
spk18: Yeah, sounds good. Maybe just one last one real quick on the deposit side. I know you guys bank cryptocurrency firms. I'm just wondering if you could talk about what you do for these guys. And I know you mentioned the strong deposit growth in digital. That's been a nice positive to the story. I was just curious how big of a chunk of that is coming from crypto customers and what your outlook is for growth in that segment.
spk17: Well, you know, there's a number of different types of clients, whether it's stablecoin or OTC desk or digital asset exchanges or blockchain-type tech companies and others that we bank in that space. So, you know, we have approaching... I think we're just crossed over $10 billion in deposits with our digital asset team, so it's been a very solid area of growth. We've clearly become the preeminent player in that space, so we're very excited about what's happening there. It's obvious that digital assets and cryptocurrencies are not going away, and there's something in the future. We're not sure who the winners and losers are gonna be, but we're very happy that the bank for all those various firms.
spk04: And what helps there is the SIGNET platform that we announced on January 1st, 2019. Very exciting. 24 by 7 by 365. The team that handles that does continuous enhancements. And there's a world beyond cryptocurrencies. where we can have other ecosystems using the platform. So it's very exciting. It's one of the areas, one of the few areas where we're staying ahead of the path and not being a follower but being a leader technologically-wise.
spk18: Great. Thanks, guys. Appreciate the call.
spk02: Thank you. Thank you, Derek.
spk11: Our next question comes from the line of Abraham Poonawalla of Bank of America Securities.
spk05: Good morning. Good morning, Abraham. I guess, Eric, just in terms of expense outlook, you previously talked about just expense growth generally in terms of quarterly basis peaking out maybe early part of the year. So give us some color on expense growth and how that translates into operating leverage and efficiency ratio based on what you see for the year.
spk17: Yeah, we anticipate hiring a reasonable number of teams early on in the year, probably 10 to 15 teams, but not the 20 teams that we hired in 2020. So we should see our expenses really start out in that 14, maybe 15% range, but hopefully we keep it to 14% and then trend down slowly over the course of the year. We gained operating leverage this year, even though we had a declining We are sitting on a ton of cash. We hired 20 teams. We have a very powerful model that can really drive net income. We have some leverage yet in our infrastructure. We should see positive operating leverage, especially as we put the cash to work and have more on the earnings side. I think we'll be able to keep expenses in check and gain efficiencies.
spk05: Got it. And on the cash, going back to the negative carry, $12.5 billion in the fourth quarter. From what I have, I think you said previously that you see that number should be maybe about $2 to $3 billion where you feel the cash position should be adequate. So is it fair to assume that there's about $9 to $10 billion that you will redeploy towards loans and securities over the next few quarters? Just how do you think about that?
spk17: I think it's going to take us a little bit more than a few quarters, but yes, absolutely. We should have $10 billion flowing into interest-earning assets over the course of this year at least.
spk04: And that number doesn't stay static because more deposits are going to continue to come in.
spk05: Right, right. And I'm not sure if you're able to disclose, but going back to the earlier question around bringing in deposits at maybe marginally higher rates than what the market offers, Like, I'm assuming the new deposits that are coming in are fairly much lower than the low to mid 30s where you expect the total cost of deposits going through. Any color around that? And just talk to us, Eric, in terms of why it is worth paying up for these deposits in terms of what franchise value these add in the near term and over time for signature.
spk04: Well, an example, the mortgage servicing, specialized mortgage servicing team, they bring in on a daily basis a tremendous number of accounts of DDA non-interest bearing. And then some of the escrows that are big dollars that stay, that flow in and out much less frequently, we're paying right now in the 30 basis point range. But when you combine the two, 30 and then the DDA, you're coming down below 30. I think everyone focuses on NIM, but the real place to focus is on the efficiency because we're a lot more efficient bringing these deposits in than a retail group. A retail group will have much lower deposit costs, but they will have high real estate costs by marketing and high advertising costs, but we don't have that, so that goes well for the efficiency ratio. But we have a lot of room. Like I said earlier, we brought the cost down to 37 basis points from 41 basis points in December to January now. So in one month, we're down four basis points, and we continue to drive it down further. We don't have that retail component, so we don't have the expense, but we also don't have the retail component where we can drop the rates as quickly as you would for the large clients that we have in our portfolio.
spk05: Well, that's helpful. Thank you. And just one quick one, Eric. Just the outlook for tax rate for the year?
spk17: You know, I'd use 28%. We had some one-time, you know, state tax true-ups as we filed those returns. So that brought our rate down. And we're a little bit higher than we probably should have been earlier in the year. we should get back to a 28% effective tax rate for next year, barring any changes, obviously, taxes.
spk06: Got it. Thank you.
spk17: Thank you.
spk06: An iconic shot. Like Capital Group's new ETFs, there's so much behind it. Like navigating ups and downs. Can I find an ETF with a whole lot behind it? With Capital Group, I can.
spk11: Our next question comes from the line of Jared Shaw of Wells Fargo.
spk12: Hi, good morning, guys. Morning, Jared. You know, maybe first going back to Cignet and the growth in digital, and, you know, that's great deposit growth. Can you share with us how else there's – what other ways can you monetize those relationships? And, you know, looking at the fee income line as well, you know, up almost 40% this quarter. Is that a level we can see growth from, and is that dependent upon or – or conditioned upon Cignet as well, or how should we be thinking about other ways of monetizing beyond just deposit balances?
spk04: Well, the digital clients right now are generating very little fee income. We're improving our foreign exchange system to the point that the digital clients will be using foreign exchange quite a bit. So the team that handles that is waiting for the improvements to happen in our FX system, and we could drive some foreign exchange there. But Cygnet drives really deposits. Right now, we're not charging fees and getting the new ecosystems on, and we probably won't start fee income on Cygnet for some time until we get a large amount of ecosystems on there. So the fee income that's being driven right now our institution is non-digital.
spk17: And we certainly, you know, we're pleased with the growth that we've seen in the fee income. A lot of that's coming from the new teams that we brought on board, whether it's, you know, the mortgage banking team, which is pretty fee-intensive, or venture, or the fund banking team, which generates a lot of unutilized fees. You know, Joe talked about foreign exchange, that, you know, we're putting a new system in place that should help us to really bolster profits there. And all the new groups that we've added and in particular the West Coast will really benefit from better foreign exchange capabilities. So that's a way for us to continue to drive fee income. We're working on a new credit card for us to issue. We'll need that for the West Coast as well as our venture team. So that hopefully will come out mid-year and we'll start to see some revenues generated from that. Our trade finance group would continue to build that out and starting to see some nice traction gain there. And really, you know, we're talking to our bankers more and telling them that, you know, we provide an unbelievable level of service to our clients. And we certainly saw that play out in this current environment where other, you know, some of our clients would tell us they couldn't even get a banker on the phone at XYZ Bank, right? Well, we need to be paid for that. The fact that we've got a team that is there all the time for their clients' needs, we need to get paid for that. So we're focusing on that with our banking teams, and that also will hopefully drive revenues.
spk12: Okay, that's great, Keller. Thanks. And then I guess shifting to credit, obviously you sound optimistic when you're talking about the loss content and the potential losses and the loans that you're working with the borrowers on here. Maybe can you share with us, as you've gone through year-end and you did the modifications and the second round of deferrals. I guess, why do you feel that confidence, whether it's in the loan-to-value or debt service coverage ratios or vacancies? Maybe just give us an update on the strength of that underlying portfolio and where you're getting that confidence from.
spk04: It's somewhat everything you said, but added on top of that is that in the commercial real estate world, we deal with these multi-generational high network families that do deals with other partners that are multi-generational, high yield, high earning families. And they want to keep the buildings, particularly the multifamily, in their portfolios. And they've stepped up when they've had to. And that gives us the confidence that the type of clients that we have are not a client that has one building that relies on that one building for their livelihood. We have these large clients that have multiple buildings that some may be hurting, but most are not, and they're able to take care of. What gives us confidence also is that on the deferrals, the fact that they're not paying us on a principal and interest deferral they still have operating costs. They have the cost to operate the building. They're still paying taxes. They're paying insurance. That gives us confidence that when the pandemic starts to subside, that they'll have the cash flow when rents start moving up to pay the interest-only piece and then to pay the principal and interest piece for the third leg of the deferral. They just don't want to give up. on keeping their properties. I think what's different now than any of the cycles in the past is that we have the CARES Act, and the banks can be more flexible for them, and it's more of a timing issue than it is a cycle.
spk12: And then, that's a great color. Thanks. And I guess, you know, when you look at that second round of PPP, are you going to be really able to target it to those borrowers that may need it the most? Or I guess how important is that second round of PPP to the loans that are already in deferral or modification?
spk04: They're really separate. I think the PPP is going to help them, but it's not going to help them pay their loans. It's going to help them pay the employees so that they can survive. while the pandemic is going on. I think it's more of a humanistic piece than it is paying for the rent.
spk09: You know Liberty Mutual customizes your car insurance? So you only pay for what you need? Like how I customized this scarf? Check out this backpack I made for Marco. Only pay for what you need.
spk03: Liberty, Liberty, Liberty, Liberty.
spk02: Great. Thanks a lot. Thank you.
spk11: Our next question comes from the line of Matthew Brees of Stevens Inc.
spk13: Good morning. Good morning, Matt. Hey, Matt. Following up on the credit question, so the 6.6% of loans that weren't, you know, full P&I deferrals, could you just provide us with the composition, the LTVs, and the types of modifications being provided there? And what was that balance last quarter?
spk17: I'm not sure what the balance was last quarter, but, you know, those are predominantly interest-only loans where we modified into an interest-only structure. Mine, you know, what our LTBs were on the entire portfolio, you know, mid-50s on an LTB, 125 to 145 on a debt service coverage. Those loans we're really not concerned about. You know, clients are paying this interest-only or interest-only plus partial principal, so. I'm not overly concerned. Okay.
spk13: And that debt service coverage was, you know, as of most recent or at the time of underwriting? No, at the time of underwriting. Okay. Understood. The second question was just on loan growth for this year. In 2020, fund banking was the primary driver. And, you know, I recognize the team is still fairly new. I'm just curious. How much of the growth this year was driven by the teams recapturing old customers versus general private equity market tailwinds? And then looking ahead, how much do you think the fund banking division will contribute to loan growth in 2021? What other verticals will grow?
spk04: Well, I think the fund banking team will still lead. We'll have a signature financial, which is past $5 billion in outstanding, probably somewhere between $400 million and $500 million. We'll have $400 million, $500 million in growth. The venture group could probably have somewhere upwards of $1 to $400 million. We have then teams in Los Angeles and San Francisco, really purely traditional C&I teams, and we expect several hundred million in growth there. The PPP loans will discount because we don't know how long they'll stay on. One banking division could do probably anywhere between a billion to a billion and a half, a quarter. And then we have two initiatives that we're discussing right now to bring on two verticals that'll be asset generators. We haven't disclosed what they are because we're still in the midst of bringing them on board, but they'll contribute in the second half of the year on the asset side.
spk13: Okay, understood. And just to be clear, the signature financial, 400 to 500, the VC, you know, that's all on a quarterly basis, not for the year, correct?
spk04: No, that's for a year. That's for the year.
spk13: Okay, with fund banking doing a billion to a billion and a half a quarter.
spk04: Right.
spk13: Okay.
spk04: Like signature financial, it's a lot more short term. So they have to overcome a lot of the amortization They could be doing several billion, but it's net $400 million to $500 million.
spk13: Okay.
spk04: Go ahead.
spk13: I'm sorry. The last one was just on digital and Cignet banking deposits. As you wind back the tape and you look at when you first hired the digital banking team, you mentioned catering to the institutional investors playing in that space. It was a different time for crypto back then. I think folks were much more skeptical. Can you just talk a little bit about how sentiment, adoption, investing in crypto, how appetite and interest from the institutional investors changed over the past couple of years, but really over this year, and what the growth opportunity for this line of business could be?
spk04: Well, it's growing by leaps and bounds. We are doing, we were only taking institutional deposits in this space, and in fact, that's pretty much what we're doing. But for the exchanges, the top five exchanges we have as clients, we're allowing for some retail funds flow, and we're doing enhanced compliance. Now, these exchanges have been given licenses by the state, but the regulators are starting to regulate the business and we're only doing it with five, some retail. But for the most part, we're still institutional, and it just keeps on growing by leaps and bounds. I think what drove it, in part, is the pandemic.
spk13: Right, and with that, did you see enhanced or, you know, outside growth on the back half of the year than the first half?
spk04: Yeah, it's likely, yeah. I would agree with that. We would agree with that.
spk13: Okay. I'll stop there. I appreciate it, guys. Thank you. Thank you, Matt.
spk11: Our next question comes from the line of Stephen Alexopoulos of J.P. Morgan.
spk19: Hey, good morning, everybody.
spk04: Alex, I mean Stephen, good morning.
spk19: So just to start, so the 6.6% of loans that are COVID-19 modified, it's still not clear to me what's exactly in that bucket. Are those loans on deferral or are they not on deferral?
spk17: Those are loans that were predominantly modified to an interest-only structure. So there's loans that are on full payment deferral, the P&I full payment deferral. That's the $1.3 billion that we disclosed in the table. And then there's other loans that were modified to an interest-only structure.
spk19: Okay, so essentially they are being deferred, right? I mean, at least principal payments being deferred.
spk17: Right, principal is being deferred.
spk19: That's right. And Eric, what's the term of these? Like how long are you providing these deferrals for?
spk04: Anywhere between six and 12 months. Okay. So what they're doing is the ones that are paying interest only are paying their insurance, they're paying their operating costs, and they're paying their taxes. And we're giving them a little relief. Yep. So it could possibly be, maybe it would be a TDR. So instead of it being a TDR, it's an interest only modification.
spk19: Right. So Joe, if we think about it from a big picture view, the NPLs are relatively low. You still have relatively high deferrals and the CARES Act modifications also seem relatively high. But if you thought either of those two buckets were not going to pay you at the end of this deferral term, They would have to be in NPL today, correct? You're not postponing moving them to NPL.
spk04: We would not postpone them. If we believe someone's not going to pass, they will be moved to non-performing. If we believe somebody's not going to pass, then we'd also take a charge. We put a specific reserve on it. As an example, I won't give the amounts or tell you who the client is, but we have one situation where the client is paying but we don't believe that it's going to end up being good. So that has a specific reserve on it.
spk19: Okay. That's helpful. And then to shift directions to the growth side, so we used to talk not that long ago, I think it was actually 2020, of $3 billion to $5 billion per year was the asset growth target, and you did $23 billion in 2020. What is a reasonable target now as we think about Signature Bank in its current form?
spk17: But what we talked about, Steve, is that the ability to grow securities, one to two billion a quarter, the ability to grow loans, one to two billion a quarter, that basically sets up to two to four billion in asset growth per quarter. So you're looking at anywhere from eight billion to 16 billion in growth. We've put in place some very meaningful businesses over the last couple of years that will really allow us to drive future growth.
spk04: We brought on all these new initiatives, which are now full-fledged businesses. We didn't know how quickly they would come to fruition. So the three to five for the year, we didn't realize it was going to be three to five per quarter.
spk19: Yeah, yep. I guess what I'm trying to drill down to also, so you grew deposits $23 billion, but loans grew by $10 billion in 2020. And when we think about this mix, and I know you said there might be new teams coming on the assets side, but should we expect a loan-to-deposit ratio, which I think was like 77%-ish range? Is there enough on the assets side to absorb the deposit verticals all contributing, or do you think the loan-to-deposit ratio from here just continues to trend lower through the year? Thanks.
spk06: An iconic shot. Like Capital Group's new ETFs, there's so much behind it. Like navigating ups and downs. Can I find an ETF with a whole lot behind it? With Capital Group, I can.
spk04: It'll probably trend a little lower initially because we are going to have, we think, these two new verticals on the back end of the year, the second half of the year. So that will mean that we'll do much more asset generation in the second half than we would in the first half. So, yeah, that ratio could come down slightly. Okay.
spk17: Thanks for that. We've been through cycles, right, and we've seen when rates rise, right, deposits tend to find other uses, whether it's people building their business or investing in an off-balance sheet. you know, investments that can earn them more. And we've seen deposit growth, you know, then slow down, right? And that's when we'll ultimately be able to take the current deposits that we have, really deploy them, and maximize our earnings potential. But the important thing, you know, and I think people are losing sight of this a little bit, we grew by about $10 billion this quarter, and we returned 13.5%. return to common equity shareholders. I mean, what other bank is doing that? So now imagine putting the cash to use and what does that do for earnings? Yeah. Tremendous amount of earnings power in our balance sheet right now.
spk04: And we're continuing to drive down the cost of deposits. Like I said, we went from 42 for the quarter to 41 in December to 37 thus far in January. So we have a little more room to drive that and create more ROE.
spk02: Thanks for all the color guys. Thank you.
spk11: Our next question comes from the line of Chris McGrady of KBW.
spk15: Great morning. Most of the questions have been answered. Just a couple of nitpicky ones. Joe, can you remind us, or Eric, to remind us the remaining PPP fees that are scheduled to come through the next couple quarters?
spk17: We haven't really forgiven that much. So, you know, it's a little bit of a guess, but it's going to be around $50 million still that we have to come through. Okay. Yeah.
spk15: And then on the non-interest income, just going back to that for a moment – A couple quarters back, you used to have an amortization line that ran through it, and there was an offset on the tax line. That seemingly has gone away, maybe to be masked by some other items. But how do we think about that other non-interest income line?
spk17: We reclassified that at the beginning of the year. So, you know, we took that out of the expense, out of the non-interest income line. It was a negative non-interest income component, and we moved that down into taxes. That's why our tax rate, our effective rate, bumped up at the time from 25% to 28%.
spk04: But we also took out the previous years. So when we're saying about the growth, that growth is apples to apples because we reclassed previous years as well.
spk15: Okay. But if I'm just looking at that fee line, let's call it $24 million this quarter, a little over $20 million if you back out the bond gains last quarter. These are kind of a stepped-up run rate that's sustainable is what you're messaging.
spk17: Correct. That's right. Got it. Okay. Thanks. Thank you, Chris.
spk11: Our next question comes from the line of Mark Fitzgibbon of Piper Sandler.
spk16: Hey, guys. Good morning. Good morning, Mark. Just follow-ups to prior questions. I guess I'm curious, do you have any plans for new lending businesses to sort of help sop up some of the liquidity?
spk04: Yes. We actually have two initiatives that just we're in the midst of discussions. but we should have them on board sometime in the next, certainly this quarter. And then we'll start seeing the fruits of their labor in the second half of the year. And they're both initiatives of both asset generators.
spk16: And they're scalable right away?
spk17: It'll take them three to six months to get up and running. for sure. One is a bit more scalable than the other. But, you know, realistically, we'll have some impact to the fourth quarter numbers, I'd expect, but more so really in 2022, where they'll really be able to ratchet it up.
spk04: We're not trying to be coy about it. It's just that we haven't brought them on board yet.
spk16: Fair enough. Just, Joe, correct me if I'm wrong, but I thought you had said in the past that some of the large deposits coming in in the second half of 2020 might not be that sticky, that there were some that maybe were temporarily parked. Do you see sometime during 2021 some of those flowing back out?
spk04: There's some fluff. There's always been some fluff. We had some very large deposits during the year that were class action deposits. Believe it or not, we had 3.7 billion or nearly 4 billion of deposits that you don't see in the end of the third quarter or end of the fourth quarter because it came in the beginning of the fourth and left during the month of December. We had another $3.7 billion in deposits, but it was all VDA. And so we saw about $4 billion flow out. We expect that there'll be some fluff. In fact, we expect that when rates rise, some of that money will go off balance sheet to money market mutual funds. But we're okay with that because we don't use capital and we get a fee for putting it off balance sheet. In fact, it wasn't too long ago when we get $3,250,000 a quarter, and today we're getting less than $200,000 a quarter on fee income for off balance sheet. So we expect some of that to flow out. It won't reverse the growth.
spk02: It just slows it down a little. Thank you. Thank you.
spk11: This concludes our allotted time and today's teleconference. If you would like to listen to a replay of today's conference, please dial 800-585-8367 and refer to conference ID number 407-9502. 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.
Disclaimer