Q2 2016 Signature Bank Earnings Call
Jul 20, 2016 AM EDT
SBNY - Signature Bank
Q2 2016 Signature Bank Earnings Call
Jul 20, 2016 / 02:00PM GMT
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Corporate Participants
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* Joseph DePaolo
Signature Bank - President and CEO
* Susan Lewis
Signature Bank - IR
* Eric Howell
Signature Bank - EVP, Corporate & Business Development
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Conference Call Participants
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* Jared Shaw
Wells Fargo Securities - Analyst
* Dave Rochester
Deutsche Bank - Analyst
* Chris McGratty
Keefe, Bruyette & Woods - Analyst
* Casey Haire
Jefferies LLC - Analyst
* Bob Ramsey
FBR & Co. - Analyst
* Steven Alexopoulos
JPMorgan - Analyst
* Ken Zerbe
Morgan Stanley - Analyst
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Presentation
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Operator [1]
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Welcome to Signature Bank's 2016 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 & 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. (Operator Instructions).
It is now my pleasure to turn the floor over to Mr. Joseph DePaolo, President and Chief Executive Officer. You may begin, sir.
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Joseph DePaolo, Signature Bank - President and CEO [2]
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Thank you, Crystal. Good morning and thank you for joining us today for the Signature Bank 2016 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 Lewis, Signature Bank - IR [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 would like to turn the call back to Joe.
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Joseph DePaolo, Signature Bank - President and CEO [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 & Business Development, will review the Bank's financial performance in greater detail. Eric and I will address your questions at the end of our remarks.
Signature Bank had another exceptional quarter of growth and performance. For the first time in 6.5 years, we did not report record net income this quarter. However, we are really quite pleased with the 13% increase.
First and foremost, we strengthened our franchise by growing deposits and loans substantially and adding two new banking teams. Secondly, we increased our allowance for loan losses on Chicago taxi medallion loans to 30% by providing $24 million more than the previous year's second quarter while continuing to see the New York taxi medallion market stabilize. We believe this will have less of an impact going forward.
Additionally, we saw a decrease of $6 million in loan prepayment penalty income which alleviates our reliance on this unpredictable revenue stream in future quarters. So just think about that. Our provision for loan losses was $24 million more than last year and $13.5 million more than the first quarter and we were down $6 million in prepayment penalties. That is nearly $20 million less in earnings than the first quarter yet we still earned more than $100 million.
Finally, during the second quarter, we successfully issued $260 million in subordinated debt to support our future growth.
Now let's take a further look into earnings. Net income for the 2016 second quarter reached $102.2 million or $1.90 per diluted earnings per share, an increase $11.8 million or 13% compared with $90.5 million or $1.77 diluted earnings per share reported in the same period last year. The considerable improvement in net income is mainly the result of an increase in net interest income primarily driven by strong deposit and loan growth during the quarter. These factors are partially offset by an increase in provision for loan losses primarily due to Chicago taxi medallion valuations and noninterest expense attributable to our revenue growth initiatives as well as in part regulatory and compliance costs.
Additionally we saw a significant decrease in loan prepayment penalty income this quarter.
Looking at deposits, deposits increased $1.47 billion or 5% to $29.6 billion this quarter and average deposits grew $1.39 billion. Since the end of the 2015 second quarter, deposits increased $5.1 billion and average deposits increased 4.5%.
Non-interest-bearing deposits of $9.4 billion represented 32% of total deposits and grew $428 million this quarter. The substantial deposit and loan growth coupled with earnings retention and our equity in subordinated debt raises led to an increase of $6.6 billion or 22% in total assets since the second quarter of last year.
The ongoing strong deposit growth is attributable to the superior level of service provided by all of our private client banking teams who continue to serve as the single point of contact for their clients.
Now let's take a look at our lending businesses. Loans during the 2016 second quarter increased $1.67 billion to $26.7 billion. For the prior 12 months, loans grew $6.2 billion and represented 73.1% of total assets compared with 68.5% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate and multifamily loans.
Turning to credit quality, our credit metrics remained strong this quarter. However as expected, we again saw a deterioration in our Chicago taxi medallion portfolio which impacted each of the following; watchlist credits [decreased] by $57.1 million to $460 million, still a low 1.72% of loans compared with $403.3 million or 1.61% of loans for the 2016 first quarter.
During the 2016 second quarter we saw an increase of $10.6 million in our 30 to 89 past-due loans to $111.7 million. Our 90-day plus past-due loans increased $6.4 million to $26.2 million. Nonaccrual loans increased to $129.5 million or 48 basis points of total loans compared with $105 million or 42 basis points for the 2016 first quarter and $46.1 million or 20 basis points for the 2015 second quarter. More than 80% or $105 million of the nonaccrual loans are impacting medallion. Therefore for the remaining portfolio of over $26 billion in loans we have only $25 million in nonaccruals or less than 10 basis points. That is exceptional credit quality.
Provisions for loan losses for the 2016 second quarter was $33.3 million compared with $19.8 million for the 2016 first quarter and $9 million for the 2015 second quarter. Net charge-offs for the 2016 first quarter were $15.4 million or an annualized 24 basis points compared with $7.8 million or 13 basis points for the 2016 first quarter and $2.6 million or 5 basis points for the 2015 second quarter. $11.2 million of the charge-offs are for Chicago taxi medallion loans.
The allowance for loan losses increased slightly to 0.84% of loans versus 0.83% in the 2016 first quarter. It was 0.86% for the 2015 second quarter. Additionally, the coverage ratio remained strong at 174%.
Now onto the team front. We added two teams during the second quarter bringing our total to date this year to three. Additionally, we opened our 30th private client banking office in Bay Ridge, Brooklyn.
At this point I will turn the call over to Eric and he will review the quarter's financial results in greater detail.
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [5]
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Thank you, Joe, and good morning, everyone. I will start by reviewing net interest income and margin.
Net interest income for the second quarter reached $281.6 million, up $45.3 million or 19% when compared with the 2015 second quarter and an increase of 1% or $3.3 million from the 2016 first quarter.
Net interest margin decreased 9 basis points in the quarter versus the comparable period a year ago and 14 basis points on a linked quarter basis to 3.18%. Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 5 basis points to 3.12%. Four basis points of the decline is due to the cost of subordinated debt issued in April 2016.
Let's look at asset yields and funding costs for a moment. Interest-earning assets yields decreased 4 basis points from a year ago and decreased 10 basis points from the linked quarter to 3.66%. Seven basis points of the linked quarter decrease was due to a decline of $6 million in loan prepayment penalty income. Yields on the securities portfolio decreased 4 basis points linked quarter to 3.11% given a pickup in premium amortization on securities from faster CPR speeds and lower reinvestment yields. The duration of the portfolio has slightly decreased to 2.6 years.
And turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 14 basis points to 3.92%. 11 basis points of the decrease was due to less prepayment penalty income. Excluding prepayment penalties from both quarters, yields would have declined 3 basis points.
Now looking at liabilities. Our overall deposit cost this quarter remained stable at 41 basis points compared to the 2016 first quarter. Average borrowings excluding subordinated debt increased $81 million to $3.1 billion or only 8.6% of our average balance sheet. The average borrowing cost increased 1 basis point from the prior quarter to 1.25%. Overall, the cost of funds for the quarter increased 4 basis points to 53 basis points. The increase is predominantly attributable to the subordinated debt issuance in April 2016.
And onto noninterest income expense. Non-income interest from the 2016 second quarter was $13.1 million, an increase of $3.4 million when compared with the 2015 second quarter. The rise was due to an increase in net gains on sales of securities of $4.4 million. Noninterest expense for the 2016 second quarter was $92.3 million versus $84.9 million for the same period a year ago. The $7.4 million or 8.7% increase was principally due to the addition of new private client banking teams as well as an increase in cost in our risk management and compliance activities.
Factoring in the significant hiring since last year and increased regulatory costs, the Bank's efficiency ratio still improved to 31.3% for the 2016 second quarter compared with 34.5% for the 2015 second quarter.
Turning to capital, in the 2016 second quarter, we successfully issued $260 million in subordinated debt to further bolster our capital base in preparation for future growth. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet as evidenced by a Tier 1 leverage ratio of 9.6% and a total risk-based ratio of 13.67% as of the 2016 second quarter.
Now I will turn the call back to Joe. Thank you.
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Joseph DePaolo, Signature Bank - President and CEO [6]
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Thanks, Eric. We further strengthened the franchise in the first half of 2016 with the hiring of three private client banking teams and deposit and loan growth of nearly $3 billion each. Additionally, we successfully raised almost $600 million in capital motivated by future growth expectations.
Finally, there is little question the banking industry is under heightened regulatory pressure. While we have always managed Signature Bank to maintain the highest level of safety and soundness, we recognize that not everyone in the industry has done so and this leads to industrywide scrutiny by the regulators.
In our 15-year history, we are proud of our positive relationships with our regulators and we want to assure our investors we will continue to take all necessary actions including implementing processes, procedures and systems as well as hiring personnel to maintain sound risk management practices. We believe it is in Signature Bank's best interest to remain poised to seize the significant opportunities available within our marketplace.
Now we are happy to answer any questions you might have. Crystal, we will turn it over to you.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Jared Shaw, Wells Fargo Securities.
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Jared Shaw, Wells Fargo Securities - Analyst [2]
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Good morning. Just following up on your last comment there about implementing processes and potentially hiring personnel. Is that something that is beginning now or is that investments that have already been made? And if it is something that you are looking to enhance starting to go forward, how should we be thinking about that from an expense point of view?
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Joseph DePaolo, Signature Bank - President and CEO [3]
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We have been hiring all along. We were under a heightened review back in the first quarter of 2010 when we passed 300% in CRE concentration and then we have been preparing for $50 billion for several years now as well. So we have been hiring. But what we are finding is that more hiring is required. From an expense standpoint, one of the things you can think about is we had a significant amount of consulting and professional fees last year and we are spending less in those areas in the consulting and professional fee areas but we are hiring more personnel at a lower cost which will be replace the high-cost consultants.
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Jared Shaw, Wells Fargo Securities - Analyst [4]
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And then is there any limit on the ability to continue to grow multifamily from this point until those hires have been made and those systems are in place or is this a simultaneous growth in the portfolio?
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Joseph DePaolo, Signature Bank - President and CEO [5]
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This is simultaneous. We have the people in place; we are just supplementing what we are already doing. Think of it that way, that we have a portfolio management practice that was supplemented and that they are asking for extra safeguards which we agree with as you have a higher CRA concentration, you have a responsibility to have extra safeguards. We've put those in and we are now asked to supplement those.
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Jared Shaw, Wells Fargo Securities - Analyst [6]
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And then once that has been supplemented --.
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Joseph DePaolo, Signature Bank - President and CEO [7]
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I was just going to say from an expense standpoint, we are seeing between 10% and 15% increase.
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Jared Shaw, Wells Fargo Securities - Analyst [8]
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10% to 15% increase on overall expenses or on the comp and benefit expense?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [9]
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Overall expenses, the third and fourth quarters versus the prior year's third and fourth quarters.
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Jared Shaw, Wells Fargo Securities - Analyst [10]
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Okay, thanks. And then once those investments have been made and systems in place could you see your CRE concentration as a percentage of capital go higher from where we are today?
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Joseph DePaolo, Signature Bank - President and CEO [11]
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Possibly. I mean what we look at is a number of factors. Certainly we raised a significant amount of capital between equity and debt and that clearly has helped us in terms of the CRE concentration although we really raised the capital for future growth. So yes, to answer your question, we could see it grow. But one of the things that we want to point out, the expenses that we are incurring are not just CRE supplementing our practices. There's BSA, AML, all the things that come with as you grow.
At $36.5 billion, we are still several years away but we are concentrating in addition to the concentration, we are concentrating on shortly -- shortly being a number of years -- being at $50 billion. In order to do that you have to continue to supplement what you are already doing.
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Jared Shaw, Wells Fargo Securities - Analyst [12]
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Okay, great. That is good color. Thanks. Just shifting gears a little onto the Signature Finance and the taxi portion, could you just give an update on where we stand with the New York loan to values and debt service coverage ratios, balances, things like that? And also how much of the portfolio at this point you have gone through and been able to restructure?
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Joseph DePaolo, Signature Bank - President and CEO [13]
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Just a few things, huh?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [14]
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If you are talking New York specifically, we have $590.7 million outstanding in New York. The LTV there for an individual is at about 94% and for a corporate is at about 84%. We really have seen the marketplace in New York stabilize. We have developed a few cash flow models now that we are utilizing for New York and for Chicago based on those updated models and estimates coming out of the models, we took additional charge-offs in New York of $3.3 million. We also increased our allowance there by $7 million so we now have 6% on the New York portfolio.
What is really important to look at also in New York is the sales during the quarter. There were 12 sales at an average price of $538,000. We had three of those 12 for an average price of $595,000. But probably most importantly on July 14, we held an auction where we sold 16 medallions, we had multiple bidders attended the auction and the medallions were awarded to one purchaser for a price of $625,000 each. So demand for the medallions continues to pick up and we believe this clearly evidences that the market is stabilizing. So very positive trends that we are seeing in New York.
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Jared Shaw, Wells Fargo Securities - Analyst [15]
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Okay, great. And then the balance of Chicago left over?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [16]
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In Chicago we have approximately $153.8 million on 739 medallions which is down about $12 million from the prior quarter. Again there we engaged a highly reputable third-party to develop cash flow models. This model was strictly based on cash flows of the medallions and does not take into account personal guarantees of the borrowers and utilizing the model, we determined the fair market value per medallion.
Based on the updated estimate we took additional charge-offs of approximately $11.2 million. We also increase the allowance for loan losses in Chicago by $37 million bringing the total reserve to $46 million or 30% on the total Chicago portfolio.
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Jared Shaw, Wells Fargo Securities - Analyst [17]
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Great, thank you.
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Operator [18]
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Dave Rochester, Deutsche Bank.
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Dave Rochester, Deutsche Bank - Analyst [19]
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Good morning, guys. On the provisioning credit, can you just talk about why you decided to make this reserve adjustment in the Chicago book this quarter? Was it just going out and getting the new models made?
And then secondly, it sounds like you are not at all concerned that you will need to make a material adjustment to the reserve on the New York segment. Maybe just some more commentary there.
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [20]
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Sure, we had new models that we put in place as part of our DFAST process for this year. We are constantly trying to improve our modeling efforts and segmenting our portfolio and getting more granular down at the specific asset classes. Given the advance around the medallion portfolios in Chicago and New York, we felt it was prudent to develop specific cash flow models for those two markets to help with the DFAST process as well as with the provisioning there.
So out of those new models came these updated values which again, it continues to be the tale of two cities. As anticipated we really saw the values in Chicago come out less but on the positive side, the cash flow models in New York were very supportive, very supportive of the values that we have on our books. And then obviously the sales activity was also supportive, especially those sales that have taken place thus far in July. That was really the impetus behind this.
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Dave Rochester, Deutsche Bank - Analyst [21]
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So at this point are you thinking the provision drops back down to the level at which it was previously in the first quarter or do you think it could actually improve from that level assuming that the cash flows kind of remain where they are?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [22]
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Right now given everything that we see, we anticipate it will certainly drop back down to closer to the first quarter level. We don't see it having to be elevated at this level, at the second quarter level. Whether it drops further from there is really based on a number of moving parts, mostly growth in the portfolio.
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Dave Rochester, Deutsche Bank - Analyst [23]
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Okay. And then any color on the loan pipeline you can share? How does that look compared to the pipeline you had heading into the first quarter?
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Joseph DePaolo, Signature Bank - President and CEO [24]
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I will just say that the pipeline is strong including the C&I pipeline. We have seen a pickup in the C&I pipeline. We actually had about $250 million in growth in the C&I book in the second quarter and we see a pipeline beyond that for the third quarter. So overall when you combine the C&I including Signature Financial with the CRE, it is a strong pipeline.
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Dave Rochester, Deutsche Bank - Analyst [25]
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Okay, great. And then I guess on the margin just given the new rate backdrop, how are you thinking about that trend heading into next quarter and what are you baking in for higher securities premium and expense? If you have a sense of that, that would be great.
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [26]
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Yes, we anticipate margins will be down slightly from the current levels, approximately 3 to 5 basis points for next quarter and then assuming interest rates stay at these levels, we anticipate it will trickle down a couple of basis points per quarter thereafter.
On the premium amortization front, we saw premium am up about $1 million in the second quarter. We don't think it will get quite to that level, it could in the third quarter be $1 million more but it is probably a little bit more contained than that.
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Dave Rochester, Deutsche Bank - Analyst [27]
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And where are you seeing new loan yields come on in multifamily and commercial real estate? Have those come in at all post the Brexit vote and the decline in rates?
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Joseph DePaolo, Signature Bank - President and CEO [28]
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We still, on the five-year multifamily, the minimum is 3 3/8 that is to if it is a stellar deal but we are actually more in the 3.5 than we are on the 3 3/8. We are being a little bit more selective and we haven't had any pressure on the interest rates on the loan book.
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Dave Rochester, Deutsche Bank - Analyst [29]
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Great. And then securities or investment rates, are those still in the high 2s?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [30]
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Middle to high 2s, a little bit down from the high 2s but we are being ultra-selective. Again having that strong loan pipeline allows us to be very selective as to when we enter the market.
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Dave Rochester, Deutsche Bank - Analyst [31]
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Great. I know the tax rate was down a little bit this quarter, is that a decent level going forward this year around maybe 40% or so?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [32]
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Yes, you should use 40% going forward.
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Dave Rochester, Deutsche Bank - Analyst [33]
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Okay, great. Just one last one because it sounds like if the provision drops back down to where it was in the first quarter, you had the stronger growth there, the margin guide is -- seems to be fairly reasonable just given what the curve has done and the rate is lower. I guess the only differential would be on the prepays that you had this quarter, those were down probably the lowest level you have seen in a while. Are you just expecting those to remain volatile going forward?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [34]
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They have always been volatile. We expect them to remain that way. We do think that $6 million is a more reasonable level than the [12]. We thought that was a little too much.
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Dave Rochester, Deutsche Bank - Analyst [35]
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One more on expenses, you talked about 10% to 15%. That sounds a little bit better than the low teens guidance we had last quarter so it sounds like some of this expense control that you saw kick in this quarter will kind of carry through into future quarters. Is that fair?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [36]
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That is fair. We utilized a tremendous amount of high cost consultants over the last several years in developing a lot of the modeling for our stress testing in DFAST. As Joe said earlier, we are going to be replacing that with personnel, but typically that is at a lower cost. So we do think that will have a little bit better forward-looking expense numbers.
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Joseph DePaolo, Signature Bank - President and CEO [37]
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Dave, you painted a picture that if the provision was down at a level of the first quarter and with the growth that we have had, essentially we would blow the doors off of the quarter.
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Dave Rochester, Deutsche Bank - Analyst [38]
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That is right. Thanks, guys.
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Operator [39]
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Chris McGratty, KBW.
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Chris McGratty, Keefe, Bruyette & Woods - Analyst [40]
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Thanks for taking the question. Eric or Joe, the focus on diversification from the regulators in the industry, you talked about the increased growth in C&I. Is there anything you can do to further accelerate that diversification strategy? Obviously acquisitions have never played a role in the Bank's history but wondering if there is any contemplation to accelerate the diversification in the loan book?
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Joseph DePaolo, Signature Bank - President and CEO [41]
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We have done some things. I mentioned in the first quarter call that we created a position to help the lenders and teams work closer together on the C&I book. That is certainly one area. We also have in the municipal area of Signature Financial. That is a line of business that Signature Financial when they were at their previous bank, they were very successful at and we started that business earlier this year, the latter part of last year.
So when you think about the Signature Financial, some of the verticals they have added on, the new position we created, we have added on three teams this year. The three teams are C&I related. We added on some salespeople in ABL. So all of that without getting into too much detail from a competitive standpoint, that is all going to help drive the C&I.
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Chris McGratty, Keefe, Bruyette & Woods - Analyst [42]
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Okay, that is helpful. Thanks, Joe. And just if I could on expenses next year, Eric, the guide on the back half is a little bit better than last quarter. I'm not sure if you mentioned this in your prepared remarks but if we think about 2017, the back half of this year year-over-year about what you are kind of modeling for next year, kind of 10% to 15% plus or minus depending on hiring?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [43]
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Yes, that sounds reasonable, Chris.
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Chris McGratty, Keefe, Bruyette & Woods - Analyst [44]
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Thank you.
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Operator [45]
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Casey Haire, Jefferies.
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Casey Haire, Jefferies LLC - Analyst [46]
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Thanks, good morning guys. Just want to dig in a little bit on the medallion reserve build. It sounds like you guys are being pretty conservative just given that the 30% reserve mark doesn't account for the personal guarantee. Can you frame if you did have the personal guarantee, what that reserve might have been?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [47]
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That is almost impossible to predict how much a guarantee is worth, Casey. Most of our loans in Chicago to fleet owners who have created quite a bit of net worth over the years in that medallion space so we do anticipate that they have substantial net worth outside of the medallions and we will aggressively pursue that should we need to.
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Casey Haire, Jefferies LLC - Analyst [48]
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Okay, understood. And then on the New York side, Eric, appreciate the color on the auctions. It sounds like pricing is definitely leveling. You guys have always pointed to sort of the cash flows though. Can you just quantify or give us some color as to what gives you comfort there on the cash flow front and just quarter-to-quarter, year-over-year what is the trend on the cash flow front in New York?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [49]
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The trend, generally cash flows have dropped about 20% from their peak, from there, total overall peak over the last several years and we have seen it stabilize at those levels. Utilization really is the key and we are seeing more of these taxis on the road. Our fleet owners are telling us that they are at near 100% utilization which is great to hear. A number of the measures that New York TLC has taken are attracting drivers back to the second shifts which is really where we saw the impact. So we are having those second shift drivers come back and put those cars out on the road to generate more revenues. And that is really the key there that is helping to stabilize the cash flows and we anticipate that that will continue.
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Casey Haire, Jefferies LLC - Analyst [50]
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Okay. If memory serves, utilization was around 90% last year. Is that right? So utilization is up?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [51]
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That is correct. Utilization is up.
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Casey Haire, Jefferies LLC - Analyst [52]
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Last one for me, on the expense front I'm just looking at the comp line being down in a strong loan growth deposit growth quarter. I was just wondering if claw back relating to some of these losses on the medallion book is helping that comp line stay subdued?
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Joseph DePaolo, Signature Bank - President and CEO [53]
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No, the answer is no.
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [54]
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Typically the first (multiple speakers) -- the first quarter is typically expensed because of all of the payroll taxes that run through.
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Operator [55]
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Bob Ramsey, FBR.
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Bob Ramsey, FBR & Co. - Analyst [56]
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Great to hear about the pricing on the sale in July. I am just curious with that being better than the pricing that you guys saw in the second quarter, is that because it was a bigger transaction and it sort of grew together got better pricing or was there anything different about that versus the sales in the second quarter?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [57]
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No, actually if anything because we are selling a block you would think we would give it a lower level because someone is buying a block. So that is really not it. I think it is just overall there are more participants in the marketplace right now, more willing buyers than we had seen for the last several quarters, Bob. People are starting to recognize that cash flows have really stabilized and that there is money to be made in operating a medallion so that is bringing buyers back into the equation which is helping to support the values.
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Bob Ramsey, FBR & Co. - Analyst [58]
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Great. Is there a material amount of charge-offs based on where those sold?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [59]
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Well, we took about $11 million in charge-offs in Chicago. We took $3.3 million in New York so not much that we had to do additionally in New York and a little bit we did there in Chicago.
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Bob Ramsey, FBR & Co. - Analyst [60]
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Sorry, I guess I meant on the sales in July I guess as a third-quarter event, I was wondering if there would charge-offs?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [61]
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There are no charge-offs
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Joseph DePaolo, Signature Bank - President and CEO [62]
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There may be even a slight recovery.
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Bob Ramsey, FBR & Co. - Analyst [63]
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Got it. That is great. And then finally, I hate to belabor taxi, but finally, I was wondering if you could just kind of help me understand the provisioning overall. I know in Chicago you guys boosted reserves by $37 million and charged off $12 million, in New York you boosted reserve by $7 million and charged off $3 million. I totaled that all up and I get about $59 million of taxi related provision expense this quarter. Yet obviously your consolidated provision was much less than that. Were there releases elsewhere in the portfolio that helped bridge the gap?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [64]
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There were, Bob. Based on the updated models that we put in place for the DFAST, we reduced the level of provisioning in our CRE and multifamily areas. In the CRE space, we are 67 basis points there, we brought that down to 48 basis points and then in multifamily, we are 63 and we brought that down to 47 basis points.
I think what is very important to know and what Joe said in our scripted remarks is that outside the taxi space, we have a $26 billion portfolio with $25 million in nonaccruals. $25 million in nonaccruals, so we have less than 10 basis points in the entire remainder of our portfolio. So we really have pristine asset quality outside that taxi space.
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Joseph DePaolo, Signature Bank - President and CEO [65]
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And when you add the pristine credit quality to the continued growth that we have both on the deposit and loan side and in fact that we are adding on teams and individuals, individual bankers to existing teams, we are quite pleased.
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Bob Ramsey, FBR & Co. - Analyst [66]
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Great. Okay, thank you. That is helpful.
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Operator [67]
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Steven Alexopoulos, JPMorgan.
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Steven Alexopoulos, JPMorgan - Analyst [68]
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Good morning, everybody. I would like to start, so on Bank United's call this morning, they indicated they were pulling back on commercial real estate lending and they cited the competitive environment and the regulatory focus on CRE. Could you comment on the competitive environment and do you see any need to pull back here?
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Joseph DePaolo, Signature Bank - President and CEO [69]
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Steve, it is hard for me to talk about other institutions. I will tell you that here, I am not sure what they mean by because of competition that they are pulling back. What we are doing is looking at every deal like we have been in the past and being a little bit more selective because we can be and getting the pricing that we want because we can and we are continuing to work on all the things I mentioned earlier about maintenance of the portfolio and adding people on so that we can continue to do the things that we are doing. I am not sure what some of the other banks are doing but I can tell you that there is a competition out there and there are some new banks that came into the market.
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Steven Alexopoulos, JPMorgan - Analyst [70]
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Okay. Right, but Joe, you don't see (multiple speakers)
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Joseph DePaolo, Signature Bank - President and CEO [71]
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I was just going to say, Bank of the Ozarks is in but they are doing things that we don't do. They are doing construction and we don't do that. So we are seeing them but that not to the extent that we believe that we would see them because we don't do the construction piece.
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Steven Alexopoulos, JPMorgan - Analyst [72]
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So you don't look at the competitive environment today and see a need to pull back on multifamily lending?
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Joseph DePaolo, Signature Bank - President and CEO [73]
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I wouldn't answer that because the competition will read the transcript. Let's just say we are doing -- they do -- just as we read the transcript. There are things that we would be more selective on. So I don't know if that means we are pulling back or not but we are being more selective. I will tell you we are being more selective in interest-only, things like I will give you one example, I/Os, interest-only, we are being more selective.
Does that mean there is a pullback? There may be other good deals that are not I/Os that we can do that we are being presented with because of the efficiency of the team. We are still closing loans in 45 days and I will tell you this, we saw one competitor come in into -- they'd been in the market and they have been quoting rates with swaps and if you look at that, someone is going to say if I picked Signature, I know this is the rate I am getting but at this other bank I don't know the rate until the day after I close because of the swap situation. So we are getting our opportunities.
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Steven Alexopoulos, JPMorgan - Analyst [74]
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Okay, that is helpful. Joe, one other thing that Bank United spoke about on their call was that they are starting to see the FDIC banks getting held to the same standard as OCC banks as it relates to the concentration of commercial real estate. It is something that they cited as an opportunity for them. I mean you are in FDIC bank, are you seeing a higher standard being applied to the Company as it relates to the concentration of CRE? Is this what is driving this increased hiring that you are doing in this area for risk management?
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Joseph DePaolo, Signature Bank - President and CEO [75]
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I love the way -- I will just play a game. I will tell you this, the FDIC has always been at the highest level along with the New York State Bank Department or the New York State Department of Financial Services I should say. That inter-agency guideline, the FDIC was part of that from day one. I think there was a thought out there that the FDIC wasn't part of it and it was the OCC with the Fed. The FDIC was part of that inter-agency guidelines CRE concentration and they have always been on top of us with the highest quality.
So I don't think it is because of them, I think it is because the banks are getting larger and as you get larger, you have more of a responsibility to supplement your practices. It is a mandate. If you want to have a multiple of your capital in CRE, then you have to have extra safeguards in place and we don't disagree with that. I don't think it is any more of an advantage or disadvantage. Everybody should go back and read the interagency guidelines and they will see that the FDIC has been part of it from day one.
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Steven Alexopoulos, JPMorgan - Analyst [76]
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That is helpful, Joe. Just one final one, given the pretty significant reserve you now have on the Chicago taxi book, is this marked at a point where you think you could ultimately sell it and is that something you would consider doing? Thanks.
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Joseph DePaolo, Signature Bank - President and CEO [77]
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No, we don't think it is at a point where we could sell it.
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Steven Alexopoulos, JPMorgan - Analyst [78]
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Okay. Thanks for all of the color.
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Operator [79]
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Ken Zerbe, Morgan Stanley.
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Ken Zerbe, Morgan Stanley - Analyst [80]
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Thanks. Just one question actually. So I get that this quarter was a true up in taxi with building reserves in Chicago and that is fine. But when we think about going forward, I think you mentioned, Eric, that what is called provisioning going back to roughly $20 million and I'm just trying to reconcile like on a go forward basis, the incremental losses that you are going to take in taxi, because presumably the $20 million does include some ongoing provision related to taxi and probably more Chicago than not. But if you ran these new cash flow models to get the incremental reserve build or provision expense, do we need to see those cash flow models be proven wrong such that the values the cash flows have to incrementally deteriorate from here? Is that the right way to think about that?
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Eric Howell, Signature Bank - EVP, Corporate & Business Development [81]
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Look, you have several inputs that go into a model. There is the receipts and revenues on the one side. You have your expenses on the other so the model is taking current inputs to determine a value. If we see receipts go down or expenses go up, then we are going to come out with a new value or vice versa, we could see values increase. That is what we are going to base future charge-offs and reserves upon as well as sales activity because those are things that you need to take into account. However, Chicago is such a dislocated market and discount really no sales happening there and there has been little to none anyway.
So we could see a further downdraft. We just don't anticipate going from 5% to 30% to 60% on this portfolio but we can certainly see it drift lower or like I said improve based on those inputs to the model.
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Ken Zerbe, Morgan Stanley - Analyst [82]
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All right, thank you.
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Operator [83]
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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 43493373. A webcast archive of this call can also be found at www.signaturereny.com.
Please disconnect your lines at this time and have a wonderful day.
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