Signature Bank at Bank of America Merrill Lynch Future of Financials Conference
Nov 14, 2017 AM EST
SBNY - Signature Bank
Signature Bank at Bank of America Merrill Lynch Future of Financials Conference
Nov 14, 2017 / 07:05PM GMT
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Corporate Participants
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* Eric R. Howell
Signature Bank - EVP of Corporate & Business Development
* Joseph J. DePaolo
Signature Bank - Co-Founder, CEO, President and Executive Director
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Conference Call Participants
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* Ebrahim Huseini Poonawala
BofA Merrill Lynch, Research Division - Director
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Presentation
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [1]
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For our first session post lunch, I'm delighted to have with us CEO, Joe DePaolo; and EVP for business development, Eric Howell, from Signature Bank. Signature has gone through a bit of a challenging period, I would say, over the last year, as growth has slowed relative to its very own high standards. And we've seen, obviously, some compression on the margin because of the yield curve environment you've been in.
But I guess if you could start off, Joe, just talking about -- I think, the one question, fundamentally, that comes up when I talk to investors who've been in your stock for a long time is it feels like this was a model that's worked terrifically in a low-rate environment to bring on bankers, gather deposits and grow the sort of balance sheet. Will it work as well in an environment where the Fed is increasing interest rates, embarking on QE unwind? Like any thoughts on that in terms of how that model would work? Can it work? Do you need to make a change?
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Questions and Answers
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [1]
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First of all, thank you for having us, and thank you, everybody, for taking an interest. Whether it's a good or bad interest, you're here.
In any rate environment, it works. Our model is basically single point of contact. The team focuses on the client so that the client can just do what it is that their business is, and that allows us to take care of everything that they need in one team. Very different from what the too-big-to-fail banks, as I'd like to call them still. They segment everything. They have different profit centers. We have one profit center, that being the team. So whether rates are going up or rates are going down, they still have to -- they being clients, still have to bank somewhere. They need to have cash management services, lockbox services, and we provide all that. And we provide it in such a fashion that the bankers are considered like a banking practice. So you have your law firms, you have your accounting firms, you have your medical practices. This is a banking practice. And fundamentally, everybody in the entire Signature Bank organization supports these 100 teams, these practices. So I'm not sure why one would think that in an increasing rate environment, the model would be any different than in a decreasing rate environment.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [2]
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So that's fair. And I think you bring up a good point in terms of a single point of contact, because I think, sometimes, it gets lost in investors when they look at sort of CRE banks, and they are like, they're funded by a lot of non-relationship deposits with some of who are. I don't think that's quite applicable to you. And I'd love to spend some time in terms of the relationship aspect of the bank in where we create a franchise value. Clearly, I think it manifests in the percentage mix of noninterest bank deposits for the bank. If you can sort of talk about that?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [3]
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Absolutely. I will tell you that back in 2006, 2007, I didn't understand it. I thought that if you did business, whether it was C&I, commercial real estate, ABL, that the relationship had to be between the bank and the client, and that didn't -- there is no need to have a broker -- there was no need to have a broker involved. Then I found out that many clients in the CRE world that can command great rates, want to keep a great relationship with their banker, and in order to do so, they never want to negotiate. They want somebody to do that negotiation. And I'll use an example of a client who's got a fairly large portfolio in the Bronx, and his name is Michael. Michael probably has 200 buildings, multi-family, keeps balances in excess of $100 million with us, doesn't breathe without his broker. And the broker gets paid by the client, not by the banks. So we insist that if we do business with someone in commercial real estate or in C&I, that we have a deposit relationship with them. And that means having operating accounts. So when I always would say that for every loan, you want to have a face, and for every deposit you want to have a face. That means that you don't do too many syndications because you don't really get deposits with syndicated loans. You don't do broker deposits as much because you're really not having a face there. This is different. This is different because whether it's Larry Silverstein, whether it's any of the big developers or real estate owners in the country or in New York, they all use brokers. And so our franchise is as good as any franchise there is. I won't say in the United States, but I'll say in New York. We have solid clients. We have solid bankers. And the only thing I would say that's different is that we said in the years past, that while rates were going down, we were able to get off-balance sheet money market funds that were treasury funds -- those balances to move on balance sheet, and that there was a little fluff in the numbers. Because off-balance sheet money markets were paying 1 basis point, and we were paying 30 basis points. So I want to remind investors that it wasn't too many years ago that we were saying that at some point, the deposit growth would slow because there would not be any fluff in there. And we're still growing at a rate that -- we're almost like buying a small bank every year.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [4]
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That's fair. I guess, if you talk about sort of the relationship aspect you talked about on CRE lending and having sort of the deposits at the bank, would you say that's different from most sort of New York peers that you'd be -- compete with in that your emphasis on getting that deposit? Or do you see that shared across banks?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [5]
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Some of it is shared but most of it is not because they need someone, a bank, to do the cash management. They need someone to lockbox services, to collect the rents. And you don't need to have multiple banks doing your operating dollars. You want to have one main bank do your operating dollars, and then maybe give excess funds across some banks. We tell banks -- we tell clients today, if you don't give us your operating accounts or you don't give us a bulk of your dollars, we prefer that you not be a client.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [6]
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Would that become a competitive disadvantage at any point, or?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [7]
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No. Because if they don't keep the deposits with us, then we're not going to want to fund their loans. No. In fact, in C&I, you get better deposits than you do on CRE. So if we have a client that has multiple buildings and wants us to finance up to $100 million and wants to keep $1 million in deposits, that's not something that we want to do. That's what's so good about our franchise, because we have clients that have a significant dollars in the bank because they're significant deposits. Another thing we have to remind everybody is we're not a retail bank. We're not a mass-market retail institution. We target privately-owned businesses that have owners and managers that are fairly wealthy. And if you look at our efficiency ratio, it's a lot cheaper for us to bring on a client than it is for others. We don't have the retail rents, we don't have the marketing costs, and we don't have the advertising cost. Let me give you an example, with all due respect to -- that this is a conference of Bank of America. But at 5:45 every morning, that's 5:45 a.m., I go up the escalator at Grand Central and when you come to the top of the escalator, you get hit with 2 bright lights; one is blue, and that almost knocks you down because that's Citibank; and one is bright red because that's Bank of America. I can't imagine the electricity bill and what you pay in rents, right? That's a model. That's a model we don't have. We believe in attracting clients that have large dollars through referrals and they command a higher rate. So if you keep $5 million in checking, and you keep $20 million in balances in money market, you're not going to get 30 basis points or 20 basis points, which a retail customer keeping $20,000 is going to get. You're going to get a higher dollar. But it's a hell of a lot cheaper for us to bring that in if you look at our efficiency ratio. So our efficiency ratio has been the same in higher rate, in lower rate environments. Our model hasn't changed. We don't have retail locations. And we're still bringing in deposits.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [8]
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That's pretty clear. I think before I move on in terms the growth opportunity for the bank going forward, I'd like to pull up one of our first audience polling questions, if we can. And it says, where would you like to see Signature focus its growth efforts? Continue to focus on the New York metro area; look to expand into new markets such as the West Coast, potentially via M&A; or increase focus on C&I lending?
(Voting)
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [9]
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And we have the responses. All right. I guess fairly equally broken down, but the first is 39%, continue to focus on the New York Metro area. Followed by 33% that look to expand in new markets. And then followed third at 28%, focus on C&I lending. I think I'd like to sort of tackle first and third first, and then...
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [10]
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Well, you can combine first and third because we can continue in New York and focus on C&I lending.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [11]
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Fair enough. So like let's talk about New York, right? Because I think, and to me, this is going back 5 years ago when you used to talk about Signature and the growth opportunity. It felt like, yes, we are growing this fast, but we control 1% of the market share. Today, that's going to be 2%. Like as we think about saturating the market, like, can this model be an $80 billion bank and be exactly kind of what you're doing? Or is that -- you need to evolve or change in order to grow significantly from here?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [12]
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I'm going to let Eric get in trouble.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [13]
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Oh, really? Great.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [14]
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You want me to -- I'll start. You can jump in.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [15]
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Sure. Go ahead.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [16]
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We have a lot of runway in New York. There's a tremendous amount of business here. And we constantly think about deposits, and we constantly think about New York, New York, New York. So we're a New York-based bank that wants to continue to grow here because the opportunities are pretty significant, but we'll be opportunistic, geographically, if something comes up. For instance, we have a team that we hired this year that was New York and San Francisco, because they concentrate on a particular line of business, that being private schools. That was an opportunistic thing that we did. Eric was able to find this team through a referral, and it wasn't in our plan to be in San Francisco, but we're in San Francisco because we took advantage of something. But we constantly think about New York first. When I say New York, I say New York, New Jersey and Connecticut. Want to add to that?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [17]
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There's not much to really add to that. I mean, there's -- as you said, Ebrahim, we have 2% market share, right, maybe 4% of the addressable market out there. As we grow, we continue to grow our addressable market. So for us to be an $80 billion bank, I don't see why we couldn't be, right, growing $3 billion to $5 billion a year, we look out 4, 5, 6 years. We're well on our way to that number. So there's opportunity here. But as Joe said, we can be opportunistic now. We are generating excess capital. We can probably put that to use in other marketplaces. But it's a matter of finding the right management team and the right group to run those places for us.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [18]
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You know how many law firms we don't have? You know how many accounting firms we don't have? How many architectural firms we don't have? How many claims administrators we don't have? There's all this middle-market Long Island business that we don't have that we should?
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [19]
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I don't.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [20]
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It's just enormous. It's the largest market in the country for privately-owned businesses. Long Island has a vast amount of middle-market businesses. Greenwich, Connecticut has tremendous opportunities for us through private equity; Hunts Point in the Bronx; food, vegetable, meat and fish markets. We have a decent amount of business, but we don't have all of it. We have to get HSBC and Citibank to close their offices because we're going to continue to take their business and their market share. Long Island City, everyone talks about the growth of Long Island City and how they're building apartments and whatnot. There's still a lot of buildings that are 6 stories that have tremendous businesses in them. Brooklyn, Queens. I mean, it's just goes on and on, and we haven't even -- and I haven't mentioned something that Eric always mentions, and I'm afraid to mention it, New Jersey. There's just -- it's endless.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [21]
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Right. So let me think about that, and I -- sort of delineate. Like, to me, this is always Signature, historically, has been, a deposit-led growth bank. And if we sort of think about in a world where, let's say, extreme, like the CRE market in New York really slows down, what does that translate in terms of your ability to grow deposits? Like does it shut down a major avenue? Or you can more or less continue to be the growth engine you are and grow deposits? Like how linked is that to the health of the New York CRE multi-family market?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [22]
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Our CRE deposits are about $2 billion.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [23]
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That's about 1/10 of the portfolio, if that.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [24]
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Okay. So you could considerably be in a world where you're not growing that portfolio meaningfully, but the rest of the balance sheet is growing relative to sort of your target.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [25]
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As long as we continue to service those clients that are there. Sure.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [26]
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And as you just said, there's a lot of opportunity there to service those clients? So that makes sense. And I think as you sort of take that and move into the other response there in terms of C&I focus, and I think the one thing that often gets asked is, are they -- will they be putting on too much credit risk in order to grow and diversify on the C&I side? Like what would you say to that to sort of allay those concerns that you're not growing that book too fast in what is probably late stages of the cycle and putting on too much credit risk?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [27]
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We separated the position of Chief Credit Officer into Chief Credit Officer and Chief Lending Officer. Chief Lending Officer, in all likelihood, is our best lender in the bank. He was at Fleet. He was in charge of middle-market lending for Fleet in Manhattan. Remember what Fleet -- now, you own it, Bank of America. And he understands, not only is he the best lender, but he understands credit very well, very well. We're not tasking him with growing the portfolio at all or any costs. We're tasking him to look at the hundred teams that we have and change the culture from "it's a no first, and then let's see if we can get there " to "let's see if we can get there". I think the change that we're making from a personnel standpoint is going to help us. We're not doing it to -- or we're not doing it at all costs. We're not doing it because of growth. It's actually more for diversification. We're getting involved in areas that Tom has more of an expertise than what we had before. Let me give an example, capital core loans. When you see the teachers' union and the Ivy League schools being the ones that are going to be making the capital investments and they're borrowing -- the funds they're borrowing from us before they do, we're not doing it to individuals, we're doing it to fairly sophisticated, very wealthy endowments. We don't see that we're taking on more risk at all. Loans have to be made in any stage of the credit cycle. In fact, we believe that in the worst stages, those are the times to make the best loans if you're doing it right. And our teams are motivated to make good loans, not just to make any loans, because our comp model, our compensation model is pretty difficult; I'll use the word difficult, when you have a loss, because we double a loss, and it's going to affect your bonus very much so.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [28]
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So like I guess, as you look to grow more C&I, can you do that with the same team, like the same bankers who are probably, let's say, CRE...
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [29]
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Let me just add -- we've been a C&I lender since day 1, right? That was our bread and butter for many years. We purposefully moved ourselves out of the C&I arena because of pricing. It didn't make sense to us to put a higher risk C&I loan on the books at LIBOR plus 150 when we could put on a well-secured commercial real estate loan at 3.5, right? It just wasn't a good use of our capital. Well, the environments change, and times have changed and interest rate environment turned, and now, it makes more sense to make those C&I loans again. So there's a reason why over the last several years, we haven't been growing that portfolio. The risk-reward just wasn't there. And now, that's come back into the equation.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [30]
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And that 150 that Eric's told about over LIBOR, those loans used to be done at 350 over LIBOR. And that's why way back in 2005, 2006, we realized we had to do another line of lending.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [31]
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So we have the people in place. We have the systems, we have the capabilities. We just chose not to do them, and it was mostly because of pricing, not because of credit, so.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [32]
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Right. But I guess as you look to sort of re-boost that or reignite growth there, do we need to get some talent like from the outside? Or do you still have -- I mean, I'm assuming...
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [33]
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But we have a lot of the people that we've in place, right? I think one of the lessons learned is that it's difficult to move away from a market and price yourself out for a period of time, because now, you're going back to those clients and saying, "Hey. We're here for you." and they found another bank, right? So a little bit of a lesson learned there. But we do have the talented bankers. We do have a number of bankers that came out of middle-market that are going back to their clients or reaching out to new clients that are well-versed in C&I. And we are adding teams in C&I. We've had a couple of teams that we've added this year are more C&I-focused. So that will continue to be a focus of ours, is looking for teams that have deposits, always. That's first and foremost. And then a little bit of a C&I [event]. We wouldn't hire another CRE team. That doesn't make any sense. We have the preeminent team in the marketplace.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [34]
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Got it. I guess, if we can get our second audience polling questions on before we move on. Can we have the question on the screen, please?
So what would you consider to be the biggest catalyst for Signature shares heading into 2018? Consistent balance sheet growth that is at the mid- to higher-end of guidance, the $3 billion to $5 billion per year target; a steepening yield curve; Congress raising the SIFI threshold; or a rebound in New York City multi-family market? Clock starts.
(Voting)
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [35]
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And we've got the responses. So we've got a tie here for 2 and 4. So steepening in the yield curve and a rebound in the New York multi-family market both at 32%, followed by consistent balance sheet growth at second spot to 26%. And third, Congress raising the SIFI threshold. I guess, before I sort of dig into those and have you respond to those, I think it's probably good time, Joe, if you can get an update on the fourth quarter in terms of how relative to this targeted $3 billion to $5 billion growth? How are we doing this quarter so far on loans and deposits?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [36]
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On loans, we're around the $400 million growth level right now, point in time. We have a pipeline of loans that are probably as active as we've had in the last year. Not compared to 2 years ago, but certainly, in the last year. On deposits, we've had wide swings, so I'll tell you that the average growth right now is about $700 million.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [37]
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So okay. So average deposit balances of $700 million. And the loan balances are average or period end?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [38]
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Period end.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [39]
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Period end. Okay. And is -- have you seen like payoffs were big deal on the lending side in the third quarter?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [40]
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Still. We've had about $200 million in payoffs, so the actual growth was $600 million.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [41]
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And do you -- like is there a shift that's happened in the market, why you think the payoffs -- you've talked about competitors who are taking off these loans. Or like do you see this abating as we move into next year? Or like is this here to stay in terms of what looks like elevated payoff activity?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [42]
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It's so hard to tell. Some of it, we pushed, so to speak, because we said if you're a borrower and you're just a borrower, and you don't keep -- or you keep very little deposits, we don't want you as a client. So some of that is forced, and some of it was a combination of things. Nothing surprising.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [43]
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It's elevated, actually. I mean, if you look at our prepayment penalty income last year compared to this year, it's higher last year. So it's just a normal level of prepayment activity.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [44]
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And when you look at the loan pipeline, [it's getting] sort of increasing the mix of C&I. How would it break down C&I versus CRE right now, the $400 million you mentioned, roughly?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [45]
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I would say it was still a considerable amount of CRE, because we just -- we haven't had the new Chief Lending Officer take over yet, that's Monday. And we've had some -- we've had a lot of activity. But with lines, they get paid back, get drawn upon, paid down. We'll see some real growth in 2018.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [46]
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Fair enough. And so when you think about like deposits, clearly, deposits are tracking higher than loan growth, which I think it should. I think, that's kind of how you've talked about asset growth. How do you see -- I mean, the yield curve is a little more steeper at the 10-year around 240? Like -- and based on what you're seeing in terms of deposit pricing and the market, are you feeling better about the margin today versus 3 or 4 weeks ago? Same? Worse?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [47]
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I think it's really the same as it was when we announced to the quarterly earnings coming out of there. We said we'd be down 3 to 6 basis points in the prior quarter. We're down 5, right? We changed our guidance to 2 to 5 basis points, but we're hopeful to be at the low end of that target, and that appears to be where we're tracking to right now, is to the low end of the 2 to 5 basis points. So if we can keep that 10-year north of 230, that's helpful. Hopefully, if we can get -- it goes up to 250, that's where we start to get to NIM neutral. But yes, at this level, it's just a couple of basis points per quarter compression.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [48]
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Right. And I guess the pressure point -- I mean, so let's talk about funding first in terms of I know, the sort of what's really hit in terms of deposit pricing in the first half is the consecutive nature of the rate hikes we had in December, March, June. We've had little bit of a pause. Do you feel that in the market where things have sort of -- like sort of stabilized in the last few months? And do you see another leg higher once the Fed probably raises rates in December?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [49]
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We've seen somewhat of a pause, except for -- there's a few banks out there that have really raised their rates and there would be more of a pause if they didn't raise their rates so high. Not sure how -- why -- I know why they're doing it, I don't know how they're doing it. What we're trying to do now is get ahead of the next raise by having some discussions with clients and saying, let's talk about your rate today, and we'll take into account a rate rise in December, and this is what we'll give you. And try to get ahead of it so that we're not scrambling in the last 2 weeks, trying to negotiate rate rises with everyone. So we've actually started that process.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [50]
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All right. And that's obviously included in your guidance in terms of when you look at -- and the other of sort of, obviously, the pressure on the margin has been from the securities yield. So when we look at with the 10-year at 240, like what are the new securities coming on at?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [51]
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Generally, in the high 2s. So I think what we're reinvesting in is very similar to what the runoff is in that portfolio right now. So it should be pretty neutral at this point.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [52]
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Got it. And I'm assuming there's really no change in pricing on the multi-family loan, 5, 7 years?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [53]
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We're higher about 1/8. We're doing 5 -- I'm sorry, 5-year would be 3 5/8 to 3 3/4. And we're seeing our competition at 3 1/2 to 3 3/8. So I think we're up 1/8 since.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [54]
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Yes, we are at 3 1/2 to 3 5/8 coming out of earnings. So gone up about 1/8.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [55]
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I guess sort of moving into something you mentioned, Joe, in terms of efficiency ratio, right? It has been a hallmark in terms of when you look at Signature. You're probably around 33%, 34% right now. I think as we think about next year, it does feel like the margin, safe to assume, might be in some more incremental pressure if we don't see any steepness in the curve. Expense growth close to 10%, give or take. Where would you see getting closer to in the high-30s as we move through 2018 if nothing else changes from an efficiency ratio perspective?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [56]
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I don't see why it would go up. I think when you take into account the fact that we should have a slowdown in expense because the $50 billion is going to $100 billion. We're not planning for that until it actually happens.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [57]
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And I like the definitiveness with which you said it.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [58]
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Oh, it's going to happen. You can bet your house on it.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [59]
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I know everything I needed now. Go ahead.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [60]
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That will certainly have an effect because we will slow down expense somewhat, right? We won't necessarily eliminate any of the expense we have today, but what's planned will slow. We actually hope that expenses go up significantly because we're going to hire more teams. That's what we always wish for. But there's no reason to believe that we wouldn't keep -- because we're not going to change anything. It's not as if we're going to open up retail locations. There's no plans to expand beyond our means. So I would say that it would be right around where it is.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [61]
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Okay. And so the SIFI threshold, let's assume the more chance that it doesn't happen and it remains, at least. And we just hosted a (inaudible) call earlier. And I think the one thing is in a world where if the Congress is not able to health care, tax reform, it's hard to do anything on Dodd-Frank because it doesn't get you any awards. In that world, like do you think administratively, the new regulators and the new heads who are coming in can make life easy enough where it eases the pressure and expenses for you? Or do you actually need the legislation to pass?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [62]
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I think the legislation to pass helps it, but it's still the tone at the top at each of the agencies. But I think that they'll have, whether it's real or not or perceived, backing by this change being made. So I think it's necessary for the change to be made in order for the regulators to have some cover to be less intrusive.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [63]
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Fair enough. And I guess, I mean, so I don't know how much compliance is adding to it. I think we've talked about low double-digit expense growth with SIFI, if it goes away, it could be high-single digits. Is that still sort of in the ballpark, the right way to think about it?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [64]
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It's probably right.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [65]
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And what sort of hiring is baked into that. So you mentioned in terms of the Chief Lending Officer taking up on Monday, like does that -- will that lead to a lot more new hiring? And like if you can talk about the hiring pipeline?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [66]
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Well, what I told Tom was he has carte blanche to make any changes he wants without increasing headcount. At least, initially. I want him to assess what he has before jumping the gun. And I think he will. He's a pure businessman. I think that our hiring pipeline, as much as I've tried to slow it down, it's necessary in certain areas such as compliance risk and internal audit. But when the SIFI limit is -- SIFI limit $50 billion is raised, I think you have to look at those 3 areas and say, "How are we going to increase headcount because of the $50 billion?" And once you're able to do that, you're able to say that's the number of people I don't have to hire in the future. So baked in our numbers are future hirings related to $50 billion, that may go away. If you ask me how many, I don't have that answer. But it's clearly built in there. There are certain areas that nothing's going to change. BSA/AML, Bank Secrecy Act, Anti-Money Laundering, that's going to continue to happen, and that has no -- nothing to do with Dodd-Frank at all. That's an area that we don't see there being any change, even at the -- in Washington or at the top. The changes that -- cybersecurity. New York State Department of Financial Services has their own rules that has forced us to bringing consultants to make sure that we're compliant with that. That's not going to change. But there are some things that will be pushed out that you have to do at $100 billion or $250 billion, that I think is going to take us a while before we get there.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [67]
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And in terms of like where you're investing, right, you've had a period of very rapid growth on -- both in terms deposit gathering and C&I. Like when you think about areas where you mentioned compliance, BSA/AML, like from a core lending platform, like internally, are we changing things? Or we've heard a lot of banks adopting like Salesforce and some of those systems which make them more efficient to from a client interaction perspective. Are there any of that going on right now or in the future?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [68]
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Yes. We're actually in the process of updating our core lending systems, including the client onboarding piece of that and underwriting part of that systems. So that's certainly going to help. We're looking at our client onboarding experience. That's something that we have to get better at, so we're looking to spend a little bit more there, sure. There's a lot of core systems that we're looking at now that worked for us 10 years ago that we're starting to outgrow and aren't supported anymore by our primary vendors. So having to take a look across the board on our infrastructure and technology. So there's definitely a lot of spending that still has to happen in those areas.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [69]
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And some of that's kind of baked into when you talk about your expense growth...
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [70]
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Oh, it's definitely baked into that.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [71]
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Yes. It's definitely baked in, but what's great about the change to $50 billion is that there were things that we would be forced to do that really have no positive effect on the institution, and that time and that expense can now be on the systems that Eric's talking about; more time, more effort.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [72]
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All right. I guess, I'll ask my next question before opening up to the audience. And hopefully, this is the last year I'm asking this question about the taxi medallion portfolio. And I think you've taken significant actions over the last 18 months to downsize and sort of ring fence risk there. Can you talk about in terms of when we -- because I think that's one of the aspects as we look into 2018, how much of earnings volatility can that book create? Like what are your updated views? Like are we at a point where you don't need to materially provide for that based on what you see in the market?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [73]
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Well, I mean, if you look at October sales, over 20 sales have averaged 377,000, so that's certainly supportive of where we have them valued now. But we'll see. I mean, at these levels, we feel fairly confident that we're not going to see major volatility. We can certainly have any given quarter where we do have a particular write-down. But I think at this point, people recognize it's not core to our model, right? It hasn't stopped us from bringing on a core client ever. It hasn't stopped us from hiring a team, right? So if it's not affecting those 2 things, it's meaningless to our business at this point. So if we have a blip, I'd say throw it out of the numbers and let's move on. But at this point, we feel pretty good about where we have that carried at.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [74]
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And I think earlier in the year, we had talked about, at least I think the TLC opened it up, the financial sponsors would come and acquire medallions. Is that something that you're still thinking about in terms of disposing off those loans? Or is that off the table given where you've written these down?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [75]
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I mean, we're having a lot of success now that we've written these down, refinancing medallion by medallion, bringing owners in. Everyday, we have a refinances going on in our office out in Melville. So that's been a great success. But we'll be opportunistic if someone is looking at it. And we've gotten many parties looking at the portfolio. If they make an appropriate bid, we'll certainly take a look at it. But it has to be a strong one because of the success that we're having in refinancing.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [76]
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All right. I just want to pause and see if there are any questions in the audience. Anyone? I guess, I see a half hand raised there. No. All right, I guess...
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Unidentified Analyst, [77]
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(inaudible) What are we thinking for Fed moves in 2018? 2 moves? 4 moves? In terms of, you were saying talking to clients ahead of time there?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [78]
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Yes. In our business plan that we're just recently [driving], we're anticipating 2 moves to possibly 3.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [79]
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And do you assume any relief on the yield curve, like any steepness? Or do you expect the 10-year...
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [80]
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We actually expect it to flatten a little bit, right. As we see the short end rise, we think the long end won't rise, lockstep with the short end, so we're expecting a little bit of flattening on the curve.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [81]
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I guess, if there's no other questions in the audience, I'd like to follow up on one of the things we touched upon around potential for doing some M&A if the right opportunity came along. Is that incumbent? Like when you think about -- when we talk about SIFI, like will that need to go away before you would actually seriously take a look at acquiring something, which I'm assuming would be large enough that you cross the $50 billion mark with the deal, or not?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [82]
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We rarely talk about M&A, acquiring things, so it's not a matter of would we wait until $50 billion goes away or do we make this acquisition and cross $50 billion 2 years earlier. We seriously don't have those discussions.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [83]
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And how, I guess...
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [84]
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It's too hypothetical. And then if I say anything, I'd get into trouble anyway.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [85]
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And how close are you -- I mean, like, how actively -- like sort of there's a lot of like stuff gets speculated when you talk about M&A or looking at potential sort of opportunities. Like how actively are you actually thinking about looking at deals? Is that sort of a top 5 priority? Or is that something that if something one-off came along, yes, you would take a look, but that's already you're spending your time on?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [86]
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We're not spending our time on it.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [87]
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That's helpful and clear. I guess, we have time for one last question. I think as we think about sort of 2018 in terms of strategic priorities, we talked about C&I lending. I think anything on Signature Financial that we are doing differently, or more or less of going forward?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [88]
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No. I mean, the big thing in Signature Financial is that we really spent the last year building out the team for the taxi medallion portfolio, that's helping us to work out that situation. That's allowed the management team there to focus on growth again. So they've been working with their other verticals now, really focused on growth, focused on hiring salespeople around the country. So whether it's franchise finance, municipal finance, we're really back to solid growth that we've seen over $200 million per quarter over the last couple of quarters growth in that portfolio. So we're really looking to just continue that now.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [89]
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They should surpass $4 billion in outstandings in 2018. And that's terrific because they have a lot of cash coming back because the -- because it's 3 to 5 years fully amortizing paper. So that's exciting that, that'll surpass $4 billion for the year. I mean, for the -- to date.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [90]
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And the $200 million, like when we think about it in terms of capacity or the leverage there, can the $200 million be $400 million a year from now? Or like what's the upside based on the infrastructure you have?
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [91]
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Could it be? Yes. I mean, but that would be really pushing it, because of what Joe said. They've got a tremendous amount of cash flow coming back at them every single month because of the self-amortizing nature of their loans. So it takes a lot to grow that $200 million. I mean, we'd be -- i think we'd be very pleased if they put up $200 million in growth in perpetuity. That would be fine for us.
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [92]
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But one of the most important things that we're doing is we're looking at and trying to come up with, and executing new deposit initiatives, which we don't talk about because we don't want our competitors to know. But that's something we've been talking about quite a bit in the last month or so.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [93]
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And this is on a national scale, not just New York?
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Joseph J. DePaolo, Signature Bank - Co-Founder, CEO, President and Executive Director [94]
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In all likelihood, yes, on a national scale.
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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [95]
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All right. I think we've run out of time. So thank you very much. I appreciate it.
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Eric R. Howell, Signature Bank - EVP of Corporate & Business Development [96]
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Thank you. Thanks, everyone.
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