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Edited Transcript of SBNY earnings conference call or presentation 18-Jul-19 2:00pm GMT

Q2 2019 Signature Bank Earnings Call

New York Jul 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Signature Bank earnings conference call or presentation Thursday, July 18, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Raymond Howell

Signature Bank - EVP of Corporate & Business Development

* Joseph John DePaolo

Signature Bank - Co-Founder, President, CEO & Director

* Susan Turkell Lewis

Signature Bank - Media Contact

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Conference Call Participants

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* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jared David Wesley Shaw

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

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Matthew M. Breese

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Steven A. Alexopoulos

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

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Presentation

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Operator [1]

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Welcome to Signature Bank's 2019 Second 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.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [2]

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Thank you, Dorothy. Good morning, and thank you for joining us today for the Signature Bank 2019 Second 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 Turkell Lewis, Signature Bank - Media Contact [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 John DePaolo, Signature Bank - Co-Founder, President, CEO & 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.

The 2019 second quarter was another strong quarter of deposit and loan growth, leading to solid earnings. Additionally, we continued the momentum we experienced in prior quarters with commercial and industrial loan production far outpacing commercial real estate loans. Major initiatives have taken place over the last several quarters helping us to continue driving our deposit growth as well as furthering our asset and geographic diversification strategy. This includes the launch of Signet as well as the addition of both the digital banking team and Fund Banking Division, which have already made meaningful contributions.

Moreover, we recently added the Venture Banking Group as well as the Kanno-Wood Team, which is focused on treasury management products and services related to deposit-rich residential and commercial mortgage services, amongst others. All these banking teams, which are national in scope, have helped elevate Signature Bank's profile and offering and will contribute to a more diversified credit and asset/liability position over the short and long-term. Let me sum it up by saying we are incredibly busy.

Now onto the quarter. Signature Bank delivered another quarter of growth and performance led by more than $900 million in deposit growth while maintaining overall strong credit quality and delivering solid earnings. Net income for the 2019 second quarter was $147.9 million or $2.72 diluted earnings per share compared with $154.6 million or $2.83 diluted earnings per share for last year. The decrease in net income was due to a rise in noninterest expense from the significant investment in new product client banking teams, including nearly 50 employees added to the Fund Banking Division, the Venture Banking Group and the Kanno-Wood Team collectively.

Looking at deposits, while confronted by a challenging deposit environment, we increased deposits by $918 million to $37.5 billion this quarter, and average deposits grew $466 million. Since the end of the 2018 second quarter, deposits and average deposits both increased $2.5 billion. Noninterest-bearing deposits increased $546 million to $12.3 billion and still represent a high 33% of total deposits. Deposit and loan growth coupled with earnings retention led to an increase of $3.7 billion or over 8% in total assets from a year ago.

Now let's take a look at our lending businesses. Loans during the 2019 second quarter increased $467 million or 1% to $37.9 billion. For the prior 12 months, loans grew $3.8 billion. The increase in loans this quarter was again driven primarily by our Fund Banking Division. This is the third consecutive quarter where C&I outpaced CRE furthering the transformation of our balance sheet to include more floating-rate assets and diversifying the credit profile. Additionally, during the quarter, we sold $47 million of taxi medallion loans and $91.8 million portfolio of Signature Financial equipment loans.

Turning to credit quality. Our core portfolio continues to perform well. We substantially reduced our credit -- our risk exposure with the sale of medallion loans, and now we have a total of $41.3 million in nonperforming loans or just 11 basis points of total loans. Our past-due loans remained in their normal range with 30 to 89 days past-due loans at $51 million and 90-day-plus past-due loans at a low $4.7 million.

Net recoveries for the 2019 second quarter were $3.7 million compared with net charge-offs of $3 million for the 2018 second quarter. The provision for loan losses for the 2019 second quarter was $5.4 million compared with $8 million for the 2018 second quarter. The allowance for loan losses increased by 1 basis point to 64 basis points of loans. And now that we have substantially lowered our medallion exposure, our coverage ratio has significantly improved over the last few quarters to 593%. Yes, that's nearly 6x coverage.

Now on to the team front. We added 2 private client banking teams in the second quarter, including the large Kanno-Wood Team specializing in mortgage service and banking.

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 Raymond 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 second quarter reached $326 million, up $5 million or 1.6% when compared with the 2018 second quarter and an increase of $7 million from the 2019 first quarter. Net interest margin decreased 20 basis points in the quarter versus the comparable period a year ago and declined 1 basis point on a linked-quarter basis to 2.74%. Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 2 basis points to 2.71%.

Well, let's look at asset yields and funding costs for a moment. Interest-earning asset yields increased 21 basis point from a year ago and 2 basis points from the linked quarter to 4.03%. The increase in overall asset yields was driven by higher reinvestment rates in commercial loans. Yields on the securities portfolio decreased 4 basis points linked quarter to 3.27% due to the dramatic decline in market rates, which also led to our portfolio duration coming in to 2.5 years.

Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 3 basis points to 4.24% compared with the 2019 first quarter. Excluding prepayment penalties from both quarters, yields increased 2 basis points. Prepayment penalties for the 2019 second quarter were only $3.6 million, up slightly when compared with $2.4 million for the 2019 first quarter but down significantly from the $6.1 million in the 2018 second quarter as the slowdown in transaction activity led to a decline in CRE prepayments, which we anticipate will continue.

Now looking at liabilities. Our overall deposit costs this quarter increased by only 3 basis points to 1.19%, which is much less of an increase than the previous several quarters. Due to an increase in noninterest-bearing deposits as well as the leveling off of deposit pricing given that we are 6 months removed from the last Fed increase. Average borrowings, excluding subordinated debt, increased $201 million to $6.3 billion or 12.9% of our average balance sheet. The average borrowing cost increased 5 basis points from the prior quarter to 2.63%. Overall, the cost of funds for the linked quarter increased 3 basis points to 1.42%.

And on to noninterest income and expense. Noninterest income for the 2019 second quarter was $8.6 million, an increase of $3 million when compared with the 2018 second quarter. The increase was due to an increase of $3 million in net gains on sales of loans mostly due to the Signature Financial equipment portfolio sale.

Noninterest expense for the 2019 second quarter was $131.9 million versus $112.6 million for the same period a year ago. The $19.3 million or 17% increase was mostly due to the meaningful addition of private client banking teams. The bank's efficiency ratio was 39.4% for the 2019 second quarter versus 38.5% for the 2019 first quarter. The efficiency ratio has been negatively affected by the declining NIM and our investments in long-term strategic initiatives.

And turning to our capital. In the second quarter of 2019, the bank paid a cash dividend of $0.56 per share. Additionally, during the 2019 second quarter, the bank repurchased approximately 413,000 shares of common stock for a total of $50 million. The dividend and share buybacks had a minor effect on capital ratios, which all remained well in excess of regulatory requirements and augments the relatively low-risk profile of the balance sheet as evidenced by our tangible common equity ratio that increased 17 basis points to 9.46%.

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

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [6]

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Thanks, Eric. This quarter was a return to the original Signature Bank script with earnings driven by solid deposit growth, nearly doubling our loan growth. Additionally, we significantly reduced our medallion portfolio with the sale of $47 million in medallion loans, which now represent just 5 basis points of total loans. We also added the Kanno-Wood Team to spearhead our efforts in the deposit-rich mortgage servicing space.

In the past several quarters, there have been numerous mentions of both the new initiatives and lines of business we've added. I would be remiss if I didn't mention the strength of our 100-plus private client groups, which are the foundation of Signature Bank. These traditional banking teams continue to add to the growth of the bank, and we look forward to their future contributions as well as those of our new initiatives and lines of business.

Now we are happy to answer any questions you might have. Dorothy, 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 Ken Zerbe with Morgan Stanley.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]

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In terms of the new hires, obviously, expenses ticked up. I totally get it. You are hiring talent that's going to help grow the business. But how quickly should those new private banking teams actually start contributing to deposit growth?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [3]

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We anticipate that the Kanno-Wood Team is going to take a couple quarters to ramp up. So we should see them start to add to deposit growth, I'd say, early next year if not late this year. As for the Venture Banking team that started in March, they did close a few transactions in the second quarter, but really, their pipeline for the third quarter is quite robust. They already have 12 accepted term sheets. We expect commitments to be north of $80 million, outstandings to be north of $30 million, and deposits should be well north of $100 million if not close to $200 million.

We've got about another 25 term sheets out, and we'll win our fair share of those. So that could lead to another $200 million to $300 million in deposit growth as well as $200 million in commitments. So they've been very, very active since starting, and they've gained really solid traction early on, so we're very pleased with what they've done.

The fund banking team continues to add. They're over $3 billion now in commitments. They added over $600 million in loans again this quarter, and we anticipate that the deposit flows will really start for them in the next couple quarters.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [4]

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Is there a way to quantify between the fund banking, the Venture Banking and then Kanno-Wood team? Like, who is probably the -- potentially could bring in the most deposits or could be the most successful? Because I know they all have kind of different characteristics.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [5]

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Ken, we really don't break that out for public use. We have the other 100-plus teams that will contribute in various ways, and on deposits, loans, fee income, we just don't break that out.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [6]

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Got it. Okay. And then maybe just one question. In terms of the outlook for margin, I get that this quarter just we didn't have the rate cuts, next quarter, very flat yield curve. It's probably going to be a bit of a headwind. But when you think about, say, 2020, if the Fed does kind of keep cutting rates, do you need the 10-year, the long end of the curve to actually go up before you see NIM expansion? Or is just the nature of the Fed cutting driving a bit of a steeper yield curve, granted at very low levels, but is that enough to drive NIM expansion?

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

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Well, I mean we anticipate NIM is going to be stable at this point. We would need some steepness to the curve, Ken, for us to really see meaningful expansion at this point with an inverted curve. If the Fed continues to cut but the curve remains inverted, that's not a good environment for any bank. So we would be stable in that scenario. If the Fed cuts, but we see the 10-year stay where it is or increase, and we get some steepness to the curve, then we would expect to have some margin expansion. But right now, we are very pleased with the fact that we more or less fit a bottom on our margin, and now, it is just looking to drive net interest income through (inaudible).

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [8]

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Okay. That make sense. And just one more question. In terms of the taxi loans, obviously, saw you sold a chunk. Why didn't you sell the rest of your taxi loans?

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

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We sold all of the loans that were performing for a period of time, Ken. The rest are performing at varying levels. So we sold most of our loans. We have about $16 million remaining in loans. Most of our exposure now is in repossessed assets where we have approximately $37 million in repossessed assets. Our team there is working hard to getting new borrowers to purchase those medallions and to put them back into a performing category. Actually about 70% of those repos we already have payments coming in on them. So we're pretty pleased with that, and as we see those payments being made consistently for a period of time, we think we'll be able to sell those loans as well.

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Operator [10]

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Our 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 & Senior Analyst [11]

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Looking at the national lending platform, is that set -- are you happy with how that's set up now? Or do you think that there is room for incremental hiring in that segment or maybe even expansion to other lines?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [12]

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Yes, I'd say that we've added to the Fund Banking Division this quarter. We don't really anticipate adding there. We really have a powerful team there, and they drove loan growth pretty significantly again this quarter. We'll be building out the Kanno-Wood Team. We hired 8 very experienced professionals there, but we'll build out their staff probably another 3 to 4 hires to come there. The Venture Banking Group is up to about 28 to 30 people. I don't anticipate we will be hiring in the near term, but certainly, as they grow, we will look to add to them as well. I don't think we really anticipate adding any more national businesses at this point, but we will always be opportunistic on that front.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [13]

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Okay. And then, on the borrowing side, given the lower rate environment, does that change your appetite to lower borrowings as a percentage of funding? Or does that take some of the pressure off in the near term?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [14]

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It certainly takes some pressure off, and we're looking to reduce those borrowing costs and hopefully really replace those borrowings with even lower-cost core deposits. That's really our focus.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [15]

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Okay. And then can you just give an update on the multifamily portfolio in light of the law change and how you're viewing the strength of that from, one, a credit point of view? And also, have you seen any change in the competitive dynamics there sort of given the reduced cash flows longer term?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [16]

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Well, we certainly are taking it very serious. We did a super-deep dive into the portfolio, and we cast a pretty wide net. So let me give you some statistics. We have a multifamily portfolio of $17.5 billion, and of that, $14.5 billion is a New York City multifamily. So we carved out what was outside of New York City since the rent stabilization laws affect the New York City area. And of that $14.5 billion, about $10 billion or 70% of the properties have some level of rent stabilization. So we excluded $4.5 billion on buildings that are fully market rent. So now we brought that down to $10 billion.

Additionally, we excluded fully subsidized buildings where we never anticipated having market rents at all. So that brought it down to approximately $5.6 billion, and then we did a deep dive in that $5.6 billion of New York City multifamily loans. We reviewed them all, and we concluded that -- and that included all the renovation loans, and we concluded after reviewing the portfolio that we're not seeing any legal issues relating to the rent-stabilized portfolio. However, we're pretty mindful of the fact that -- of the environment, and we are monitoring it closely. The next step after doing the deep dive is now we're meeting with those owners or borrowers face-to-face to ensure that the properties are in good shape and that the cash flows are there.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [17]

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Great. Does that change the competitive dynamic at all in the space in terms of pricing or -- okay.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [18]

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I don't believe. I just believe that there is less, less activity, and those experienced owners who have a multitude of properties and have been in the business are looking at those individual owners who have 1 or 2 buildings and may not do well under the new rent stabilization laws and, as a result, there may be some activity happening soon.

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Operator [19]

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Our next question comes from the line of Ebrahim Poonawala with Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [20]

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Just first question, I think, Joe, you mentioned a return to sort of deposit-growth given balance sheet growth. So I think just following up to an earlier question, talk to us in terms of with all these teams just in aggregate as you think about deposit growth from here on? We've talked about the $3 billion to $5 billion range, but deposit growth has lagged over the last few years. Just what your expectations are? And should we start seeing a little more of the momentum on the deposit growth side in the back half into 2020?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [21]

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Well, certainly we don't give predictions of numbers as it relates to deposit growth, but certainly, we believe our deposit growth in the second half is going to be greater than that what we've had in the first half. And we're still looking at the $3 billion to $5 billion although at the lower end.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [22]

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Understood. And in terms of just the pricing dynamics in the market, it seems like it's still extremely competitive. If the Fed cuts at the end of July, if you can, Eric, just talk about your ability to sort of flex down deposit costs or start having those negotiations with clients.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [23]

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I believe that we'll have somewhere between 40% to 50% of the decline in Fed funds rate that we'll be able to pass along. It will be over time, like you said, negotiations because a significant portion of the deposits are negotiated on the money market side.

So one thing we will do, we will be a little bit more aggressive than we were last time because I think there's some clients that forget that the last time when we dropped rates, we did it slowly, gradually and the competitors -- as if it was cliff diving. They dropped them more quickly. On the way up, the clients forgot how gradually we were on the way down. But they want it swiftly moved up on the interest rates when rates were going up. At this time, we are going to be a little bit more aggressive in dropping the rates than we were in the past.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [24]

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Understood. And just switching gears to the asset side in terms of the loan growth. So obviously, it dominated by C&I growth over the last few quarters, just the outlook there in terms of the makeup of growth that you expect and the outlook for the CRE book relative to where it ended the second quarter.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [25]

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Well, with the CRE book, we still have a book of $28 billion, and it has to be managed, and we're doing business with our current clientele. What we've been trying to move off is the loans that have no relationship where they have 1 loan, maybe 2, and they never fulfill their promise of bringing over deposits. Those we like to finance -- refinance away. We'll be flexible on the prepayment penalty. We also don't believe we are going to bring on any new clients on CRE, but we have some very sophisticated, significant clientele that we want to keep, and we're going to refinance those loans here.

The one thing I will say on the interest rate side as it relates to loans, there is a wider gap between us and the competitors. And we just don't understand how competitors who can borrow at a certain rate and then lend a multifamily at a spread that is ridiculously low. We're trying not to do anything sub-4%. We will do it for clients, but we have about a 50 basis point spread right now between us and what a client -- I'm sorry, between us and what a competitor is charging, and we just don't understand how their margins are not going to go below 200.

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [26]

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Given the market dynamics that we've seen in the multifamily space, we're very surprised that we have not seen credit spreads widen.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [27]

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And is that because just there hasn't been enough activity to reflect all the changes? Or do you think just there are enough players to keep those spreads tight?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [28]

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I think it's the only business that they are in probably some of the banks. And we've diversified since 2012, and we have more flexibility, and we'll continue to have more flexibility as a result of our more diversified portfolio.

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Operator [29]

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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 [30]

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Just to follow up on that question. So the New York City multifamily, $14.5 billion. You guys are pushing for $3 billion to $5 billion of asset growth per year. You're currently not pricing multifamily to grow. So can you just walk us through how do you see this portfolio evolving over the next couple of years? And what level -- I'm assuming it is going to decline. What level, what pace of decline do you need to have without jeopardizing the $3 billion to $5 billion of asset growth?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [31]

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Well, on the CRE portfolio, we were thinking that, over the next several years, it will remain somewhat flat because we're in the business. It could decline a little bit, but that's why we started in 2012 to bring on different businesses like Signature Financial and then ABL, which we brought on. Now we have 3 or 4 other businesses that we brought on where there is deposit growth and loan growth. And we think -- believe that along with the existing 100 teams, we can maintain a $3 billion to $5 billion level of growth. But the Fund Banking team could do anywhere between $0.5 billion and $0.75 billion in growth on the credit side a quarter.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [32]

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Right. I understand. I like -- I mean, I see the new verticals, C&I verticals, but I mean, multifamily is a 5-year product. '14 and '15 were very pretty big vintage years for you guys. And I mean, I guess, another way, where do you see the multifamily balance a year or 2 from now versus that $14.5 billion today?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [33]

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Slightly down.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [34]

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Slightly down. Okay. I mean, but is that possible, if you're that far above the market in terms of...?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [35]

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Well, we're that far above the market. If somebody new comes on, although we're not taking on new clients, but if there is an opportunity. But for existing clientele, I can tell you we're doing a deal right now at 3 75.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [36]

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Okay. All right. And then just...

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [37]

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(inaudible) a possibility. We can't do everything at -- we can't do everything starting with a 4 handle.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [38]

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Got you. Okay. On the deposit side, apologies if I missed this, in the release, you mentioned it's still a challenging deposit environment. Any color on where average deposits are quarter-to-date?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [39]

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Higher than they were during the second quarter. The average is higher, meaningfully higher. And again probably [18 days].

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [40]

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Great. Understood. And just lastly, on the expense front, tracking a little bit higher here quarter-to-date, obviously -- or year-to-date, obviously another team add, another big team add. Is 15% year-over-year, should we expect that through 2020 until we anniversary these team hires?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [41]

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For 2020, that's reasonable. I think we'll be in a 12% to 16% expense growth starting at 16% probably for next quarter, and it should start to trickle down each quarter as we move forward.

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Operator [42]

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

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [43]

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Just a follow-up on NIM. Eric, the guidance you gave for stable NIM in 3Q, that obviously assumes that the Fed cuts in July, correct?

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

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Correct.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [45]

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And assuming that the intermediate portion of the curve holds, which we don't know if it will or not, but assuming it does, shouldn't the Fed cuts be more beneficial to NIM and really start unwinding some of the NIM pressure you saw over the past year?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [46]

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Yes, it should be.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [47]

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It should be, okay. And then on the new rent regulations, I'm curious, what are you hearing from your customers here? Are volumes just falling of a cliff? Is the practice of building owners taking out cash to make capital improvements, is that just done? And then I have a question on the credit deep dive.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [48]

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Well, it could be done because there is no incentives to take out cash to refurbish buildings and whatnot. That is clear. What we're hearing from our clients is they're upset. They can't understand how this could have happened. They ask us clearly about refinancings, how that's going to be handled. And we said it's based on cash flow, not based on the value so much of the properties because, certainly, the values have dropped. But if a client has been paying and has had no issues with us, and he has a cash flow, we will continue to refinance those clients.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [49]

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Okay. That's helpful. And Joe, on the deep dive you did into the portfolio, are you now even more confident that this is not a credit challenge?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [50]

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Yes, I'm more confident that it is not a credit challenge. It is more of a growth challenge for most.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [51]

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And then just separately, it's good to see another team here with the mortgage servicing segment. Could you give us a sense, what do you see of the size of that deposit opportunity over time?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [52]

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Over time, I would say, it would start with a B instead of an M.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [53]

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Okay, so it's meaningful.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [54]

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It is meaningful.

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Operator [55]

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Our next question comes from the line of Brock Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [56]

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Eric, you mentioned steepness of the curve and just going back to the NIM discussion. For Signature, what part of the curve is most relevant when you think of steepness?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [57]

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I'd say the 5 years is most relevant for us.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [58]

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Okay, that funds to the 5-year, that part of the curve.

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [59]

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That's right, Brock.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [60]

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Add to the extent the forward implied rates show steepening in that segment, that would be favorable for your NIM?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [61]

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Correct.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [62]

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Okay. And I don't know how much repositioning you did in the quarter relative to the static shock analysis that we see in the Q. How much different would that potentially be this quarter?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [63]

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It's improved slightly. So the difference is in our 100, 200, 300 shock have will come in a little bit. It really shows us being more stable, Brock, in our margins.

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Operator [64]

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Our next question comes from the line of Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [65]

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Joe, Eric, I wanted to focus in on the multifamily portfolio just make sure I had it clear. So the $10 billion, the 70% that had some level of rent stabilization, you got that down to $5.6 billion. Again, is that $5.6 billion just the fully rent-stabilized buildings, nothing but?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [66]

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No. What we did is we subtracted from the $10 billion our $4.5 billion with the fully subsidized buildings where we never anticipated any market rents. That's what accounts for the $5.6 billion.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [67]

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Got it. Okay. And so on the $5.6 billion, what is the average LTV of that portfolio? And what cap rates -- what was the average cap rate that you underwrote those loans to?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [68]

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That's not information that we give out.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [69]

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Okay. Did you -- when the market was in the 3.5% to 4% cap rate kind of range, were those loans that you would typically underwrite? Or would you stressing things a little bit higher?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [70]

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Yes, we used a much higher cap rate than the industry level.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [71]

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Okay. And have customers given you any sort of indications at what the valuation impacts to their rent-stabilized properties might be? Is there any sort of range right now that you would think about?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [72]

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What we're talking about is cash flow. That's the conversation we are having with the clients and not so much the valuation of the building.

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [73]

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It's a little too early to tell, Matt. But it is passed and it's working its way through the marketplace. Certainly, we feel that values have been affected, but again, as Joe said, our focus is on cash flow. That's how you get paid back, and LTV is a fallback when the cast flows aren't there. So our primary source of repayment is cash flow, and that's where our focus is, and we feel comfortable with that.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [74]

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I think appraisers are trying to figure out how to appraise.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [75]

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I mean, at the very least, do you expect any of your qualitative factors that go into the allowance because there's such a large change in the industry? Any of those qualitative factors going to have to change and therefore increase your allowance at least?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [76]

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We did change our qualitative factors this quarter, and we added to environmental reserves. With the performance of our portfolio, however, that was offset. So we would have taken back provisions had we not added qualitative factors this quarter.

We're very mindful of the environment, and we are keeping a very close eye on it. We do think that we are dealing with very strong owners and landlords that will be able to fight their way through these changes. But we are keeping a close eye on it, and we are trying to prudently reserve for any anticipated issues. But right now given the deep dive that we've done and what we've seen, we don't really see any issues.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [77]

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Just curious, I think your multifamily CRE reserve was something like 65 -- maybe 68 basis points. How much is that environmental input impact that 68 basis points?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [78]

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Probably, I'd say, 2 to 3 basis points.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [79]

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Okay. And then going back, I think you said that the $5.6 billion included some of the construction loans.

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [80]

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[improvement] loans, renovation loans. For the renovation loans, yes.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [81]

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Renovation loans. How much of that was tied to potentially proforma rents? Or were those all based on current rents?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [82]

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Little of the revenue was based on future rents. Most of it was based on current.

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [83]

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And at least 50% of that portfolio was all market rent to begin with.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [84]

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Right. So it's roughly 50-50 market rate and then based on forward rates. Is that accurate?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [85]

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Some were forward, very little. Most of it was current.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [86]

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Okay. And then, in all the cases -- or how many of the cases were you also underwriting the property itself and therefore had kind of a first lien position on the construction?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [87]

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We really don't do construction financing.

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [88]

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None of it's construction. It's all renovation loans where we always have the first lien.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [89]

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Got it. Okay. And then because of this, are there any changes to the risk weighting or risk ratings of your multifamily loans? And how would that work through?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [90]

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We don't anticipate any changes to our risk weightings. There has been a lot of noise around that in the risk weightings. If we took all of our loans that are in the 50% bucket and move them to 100%, it cost us 100 basis points in our capital. It is a nonevent for us, period. And it is not something that we are concerned about at all.

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Operator [91]

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Our next question comes from the line of Chris McGratty from KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [92]

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Joe, Eric, with the $3 billion to $5 billion of asset growth, I think you said lower and near term. How do you feel about the rest of the buyback and the pace of the buyback. You're a little more aggressive this quarter, but any thoughts on whether you think you can finish it in the next maybe 1.5 years or maybe pace of buybacks?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [93]

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Well, it's going to be dependent upon where the price is, how quickly we're using capital. I mean, none of the factors change that went into last 3 quarters when we were buying back. We saw an opportunity to increase it the second quarter. And if we see the same opportunity in the third quarter, we'll do so. We won't be -- [listen to this], we won't be shy about increasing it in any 1 quarter.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [94]

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Okay. Would this be a quarter that you would say is kind of as aggressive as you'll be? Or if your stock is at these levels next quarter, you could even do more?

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Joseph John DePaolo, Signature Bank - Co-Founder, President, CEO & Director [95]

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Well, it's at, some of the 18 day. So let's see how the market reacts to quarterly earnings. Let's see how the market reacts to the Fed dropping their rate. And I don't mean the stock market, I mean, our clients.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [96]

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Got it. And then one housekeeping item. The tax rate and the offset in the am expense, is that this quarter a fair estimate going forward?

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Eric Raymond Howell, Signature Bank - EVP of Corporate & Business Development [97]

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Yes.

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Operator [98]

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This concludes our allotted time in today's teleconference. If you'd like to listen to a replay of today's conference, please dial (800) 585-8367 and refer to the conference ID #6935767. 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.