Q4 2017 Signature Bank Earnings Call

Jan 18, 2018 AM EST
SBNY - Signature Bank
Q4 2017 Signature Bank Earnings Call
Jan 18, 2018 / 03:00PM GMT 

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Corporate Participants
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   *  Eric Raymond Howell
      Signature Bank - EVP of Corporate & Business Development
   *  Joseph J. DePaolo
      Signature Bank - Co-Founder, CEO, President and Executive Director
   *  Susan Lewis

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Conference Call Participants
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   *  Casey Haire
      Jefferies LLC, Research Division - VP and Equity Analyst 
   *  Christopher Edward McGratty
      Keefe, Bruyette, & Woods, Inc., Research Division - MD
   *  David Patrick Rochester
      Deutsche Bank AG, Research Division - Equity Research Analyst
   *  Ebrahim Huseini Poonawala
      BofA Merrill Lynch, Research Division - Director
   *  Jared David Wesley Shaw
      Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst
   *  Kenneth Allen Zerbe
      Morgan Stanley, Research Division - Executive Director
   *  Lana Chan
      BMO Capital Markets Equity Research - MD & Senior Equity Analyst
   *  Steven A. Alexopoulos
      JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

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Presentation
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Operator   [1]
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 Welcome to Signature Bank's 2017 Fourth Quarter and Year-end Results Conference Call.

 Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Executive Vice President, Corporate and Business Development.

 Today's call is being recorded. (Operator Instructions)

 It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [2]
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 Good morning, and thank you for joining us today for the Signature Bank 2017 Fourth Quarter and Year-end 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,    [3]
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 Thank you, Joe.

 This conference call and all 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 operation 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 statement made by Signature Bank speak only as of the date on which they were made.

 Now I'd like to turn the call back to Joe.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [4]
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 Thank you, Susan.

 I will provide some overview into the quarterly and annual results and then Eric Howell, our EVP of Corporate and Business Development, will review the bank's financial performance in greater detail. Eric and I will address your questions at the end of our remarks.

 Signature Bank delivered another year of solid growth and performance, notwithstanding challenges in our taxi medallion portfolio. Additionally, for the fourth quarter, we again delivered strong average deposit growth and robust loan growth. We expanded top line revenues and maintained credit quality leading to a healthy quarter of earnings. I will start by reviewing earnings.

 Net income for the 2017 fourth quarter was $114.9 million or $2.11 diluted earnings per share compared with $113.9 million or $2.11 diluted earnings per share reported in the same period last year. The modest improvement in net income is mainly the result of an increase in net interest income, primarily driven by strong average deposit and loan growth. These factors were largely offset by increases in the provision for loan losses attributable to taxi medallion loans and noninterest expenses resulting from hiring new private client teams as well as increased regulatory and compliance costs. Now, excluding the taxi medallion charge loss of $36.8 million and the net tax benefit of $2 million, 2017 fourth quarter net income would have been $132 million or $2.43 diluted earnings per share.

 Looking at deposits. Deposits decreased $238 million or 0.7% to $33.4 billion this quarter while average deposits grew by $647 million. For the year, deposits increased $1.6 billion and average deposits increased $3.4 billion. Noninterest-bearing deposits of $11.4 billion represented 34% of total deposits and grew $833 million or 8% for the year. Our deposit and loan growth, coupled with earnings retention, led to an increase of $4.1 billion or 10.4% in total assets for the year, which cost $43 billion.

 Now let's take a look at our lending business. Loans during the 2017 fourth quarter increased $1.4 billion or 4.6%. For the year, loans grew $3.6 billion and represent 75.6% of total assets compared with 74.4% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate and multifamily loans as well as strong showings in both commercial and industrial loans and specialty finance.

 Turning to credit quality. Our portfolio continues to perform well notwithstanding the taxi medallion loans. However, we did make some progress in the medallion portfolio this quarter. We continue to work with our borrowers to refinance their debt. In fact, in 2017, we financed -- we refinanced over 400 medallions or more than 40% of these loans. All payments, including interest, are now applied towards paying down principal.

 As such, nonaccrual loans decreased this quarter by $50 million to $327 million or 100 basis points of total loans compared with $377 million or 121 basis points for the 2017 third quarter. Taxi medallion loans comprised 95% or $310 million of the nonaccrual loans. Therefore, for the remaining portfolio of over $32 billion in loans, there are only $17 million in nonaccrual loans or just 5 basis points, demonstrating again the pristine quality of our portfolio.

 Our past due loans remained stable with 30-day to 90-day past due loans decreasing $3 million to $42 million while 90-day-plus increased slightly by $1 million to $6 million. The provision for loan losses for the 2017 fourth quarter were 40 -- was $41.7 million compared with $14.3 million for the 2017 third quarter. Net charge-offs for the 2017 fourth quarter were $38.8 million or an annualized 48 basis points compared with net charge-offs of $3.8 million from 2017 third quarter and the allowance for loan losses was 60 basis points of loans versus 62 basis points in the 2017 third quarter.

 Now onto the team front. In 2017, we added 4 teams. We also appointed several veteran bankers to existing teams. Looking ahead to 2018, the pipeline for teams is solid. In fact, very solid and we look forward to the ongoing opportunities to attract talented banking professionals to our network.

 At this point, I'll turn the call over to Eric and he will review the quarter's financial results in greater detail.

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [5]
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 Thank you, Joe, and good morning, everyone.

 I'll start by reviewing net interest income and margin. Net interest income for the fourth quarter reached $319.8 million, up $23 million or 7.7% when compared with the 2016 fourth quarter, an increase of 3.5% or $11 million from the 2017 third quarter. Net interest margin on a linked quarter basis improved 2 basis points and, compared with last year's fourth quarter, decreased 7 basis points to 3.07%. Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 1 basis point to 2.98%.

 And let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2017 fourth quarter increased 5 basis points linked quarter and 10 basis points when compared to the 2016 fourth quarter to 3.71%. The increase was predominantly driven by a rise in loan prepayment penalty income and higher reinvestment rates. Yields on the securities portfolio increased 2 basis points linked quarter to 2.99% due to a slowdown in premium amortization from reduced CPR speeds and higher reinvestment yields. Also, the duration of portfolio remains stable at 3.3 years notwithstanding the rising rates.

 Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 6 basis points to 3.97% compared with the 2017 third quarter. This is mostly due to a rise in prepayment penalty income. Excluding prepayment penalties from both quarters, yields remained stable.

 Now looking at liabilities. Our overall deposit cost this quarter increased 3 basis points to 58 basis points. Average borrowings, excluding subordinated debt, increased $395 million to $3.5 billion or 8% of our average balance sheet. The average borrowing cost increased 6 basis points from a linked quarter to 1.54% given the higher interest rate environment. The overall cost of funds for the quarter increased 4 basis points to 71 basis points.

 And on to noninterest income expense. Noninterest income for the 2017 fourth quarter was $8.5 million, a decrease of $1.6 million when compared with the 2016 fourth quarter. The decrease was predominantly due to an increase of $1.9 million in other losses from additional amortization of low income housing tax credit investments. Noninterest expense for the 2017 fourth quarter was $110 million versus $95.9 million from the same period a year ago. The $14 million or 14.6% increase was principally due to the addition of new private client banking teams as well as further costs in our risk management and compliance activities. The bank also incurred increased FDIC assessment fees.

 The bank's efficiency ratio remained stable at 33.5% for the 2017 fourth quarter versus 31.3% for the comparable period last year and 33.3% for the 2017 third quarter.

 And turning to capital. 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 9.72% and total risk-based ratio of 13.3% as of the 2017 fourth quarter.

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

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [6]
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 Thanks, Eric.

 In summary, in 2017, our Chief Credit Officer retired and we created 2 positions in his place: Chief Lending Officer and Chief Credit Officer. Two positions better reflects the proper credit structure for a bank our size as well as our commitment to expand C&I lending to further diversify revenue streams and increase asset sensitivity. C&I loans increased $1.2 billion or over 25% this year alone. We increased total loans by $3.6 billion or 12%. Loans now account for 75.6% of total assets. We grew average deposits $3.4 billion or 11.5%. We significantly reduced our exposure in taxi medallion loans while maintaining exceptional credit quality in the remainder of our loan portfolio. To this end, nonaccrual loans, excluding all medallions, are only 5 basis points of total assets. We expanded net interest income by $90 million or 8%, truly top line revenue growth. We added 4 private client banking teams and several seasoned bankers to existing teams and established an accommodation office in San Francisco. We maintained our already superb efficiency ratio at 34.2% for the year while continuing to invest in our risk management and compliance functions. We maintained a robust capital position. And finally, focusing on the power of our franchise and setting aside the episodic issues of taxi medallions and tax reform, we delivered an outstanding $485 million in core earnings.

 With tax legislation becoming law and our effective tax rate declining to approximately 27%, we now look forward to the $50 billion SIFI threshold potentially moving higher to at least $100 billion. This will allow the bank to slow down the pace of non-revenue-related expense growth. Realistically, Signature Bank, with its uncomplicated and straightforward balance sheet, should not be held to the same standards as a truly complex, systemically important trillion-dollar financial institution.

 We welcome 2018 as we plan to strengthen our foundation by making major investments in our loan systems, payments, architecture structure -- platform and new foreign exchange systems. We also look to expand our geographic presence in areas where we have significant client synergies such as the West Coast. We successfully tested the waters in San Francisco in 2017 with the appointment of a team and the opening of our new accommodation office.

 Now, we are happy to answer any questions you might have. Paula, I'll turn it over to you.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Our first question comes from Chris McGratty of KBW.

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 Christopher Edward McGratty,  Keefe, Bruyette, & Woods, Inc., Research Division - MD   [2]
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 Joe, just on expenses, I think in the past you've been optimistic about the $50 billion moving higher. I think this is the first quarter you've really stressed it in the earnings release. In the past, I think you talked about potentially high single-digit expense growth if these synergies come through. I'm interested in kind of your updated thoughts, especially considering the buildout not only of the growth operations but also the West Coast.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [3]
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 It's the $50 billion -- Chris, by the way, happy new year. The $50 million -- I'm sorry, the $50 billion SIFI threshold moves up and we -- even with the investments that we're having in -- on the West Coast and the investments in systems, we should be in the high single digits for expenses. Nothing has changed.

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 Christopher Edward McGratty,  Keefe, Bruyette, & Woods, Inc., Research Division - MD   [4]
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 Okay. That's great. And I know there were some adjustments earlier in the year with the taxi sale, but what's the, Eric, maybe the starting point that we should lift off that high single-digit number? Any adjustments that you made to your full year expense? Or is that just recorded expenses in '17?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [5]
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 It's just reported expenses, Chris.

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 Christopher Edward McGratty,  Keefe, Bruyette, & Woods, Inc., Research Division - MD   [6]
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 Okay. Great. And maybe if I can sneak one in on the securities portfolio. With the tenure of up to 60, Eric, I guess, any thoughts of changing the strategy in the investment book, maybe where new money is being put to work and kind of how you're thinking about how it all contributes to the near term margins?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [7]
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 No. I think, I mean, we're going to continue with our strategy on the securities side. We're getting reinvestment yields in the low-3s, so that's really beneficial to the overall NIM.

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Operator   [8]
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 Your next question comes from Ebrahim Poonawala of Bank of America.

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 Ebrahim Huseini Poonawala,  BofA Merrill Lynch, Research Division - Director   [9]
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 Just a very quick follow-up on the margin, Eric. Is it fair to assume that when we look at the core margin at 2.98% in the fourth quarter, given the steepening in the curve, is your sense that margin still feels some compression quarter-by-quarter as we move through '18? Or should we see relative stability given that asset yields are now beginning to reprice higher? Just would love some color there and also in terms of what you're seeing on the deposit pricing front.

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [10]
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 Sure. Certainly, the asset yields being up this quarter was helpful, as first quarter we've seen asset yields increasing quite some time, so the asset side is starting to catch up to the liabilities. If looking at the first quarter, because of the day count, we should certainly be stable and maybe even possibly up 1 basis point or 2.

 In future quarters, we're looking at a stable margin, big assumption there being that the yield curve stays similarly shaped to where it is today. If we see a flattening of the yield curve, that will obviously put pressure on the margins.

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 Ebrahim Huseini Poonawala,  BofA Merrill Lynch, Research Division - Director   [11]
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 Got it. And just in terms of -- yes?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [12]
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 I was just going to get to the deposit front. Deposit costs are typically most pressured depending on the frequency and the severity of the rate increases. If we see 2 to 3 rate increases next year, we'll have deposit pressures but nothing that we can't overcome. If we see 3 to 4 and if they happen to be -- any of those are larger than 25 basis points, that could put undue pressure on the deposit front.

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 Ebrahim Huseini Poonawala,  BofA Merrill Lynch, Research Division - Director   [13]
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 Got it. And just moving -- I guess, when we think about the capital ratios today, obviously includes earnings from the tax rate. Any change in terms of how you're thinking about capital, be it initiation of a dividend or using capital in -- for inorganic reasons? Any sort of more color there?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [14]
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 We're thinking both for our employees and the shareholders. So although we have not solidified any of the plans, the first thing we're going to do is we have this saying, long-term health and wealth. With the tax -- effective tax rate going to be 27% from around 37.5%, there's going to be a lot more earnings. And with long-term health and wealth is, in all likelihood, we would -- we have a component of our 401(k) for the employees that is profit-sharing and we'll probably activate that profit-sharing component and put some extra dollars for our employees into the 401(k) through the profit-sharing component. And at the same time, that's the wealth part. The health part is that we're thinking also of -- at the same time, we do see medical expenses and having Signature Bank take on more of the expense for the employees. So that's the health and wealth.

 And seriously, for the first time, also we're going to consider instituting either/or a buyback program or paying dividend. And, of course, it's going to depend upon the growth of the institution, but we are going to take that up seriously and make some decisions later on in the year.

 And lastly, we'll make further investments by growing our business and establishing a full banking -- a full-service banking presence on the West Coast. We don't want to give too much information at this time for competitive purposes, but we expect to be fully operating at least one West Coast office by year-end.

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 Ebrahim Huseini Poonawala,  BofA Merrill Lynch, Research Division - Director   [15]
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 Understood. And if I could sneak in one last one, just, Joe, in terms of the health of the CRE market. A lot of headlines around how the tax reform could have an impact and what we've seen in terms of foreign investments coming into New York. Any color in terms of how you look at sort of your core multifamily market activity levels there and just the competitive pricing environment?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [16]
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 Okay. The pipeline remains pretty solid. It's not as large as the fourth quarter. We do anticipate there being less activity or less growth in CRE compared to last few years because -- but we're happy that we'll have a more diversified balance sheet. The changes we made in the fourth quarter by adding on a Chief Lending Officer allows us to really concentrate on an area that we hadn't been for the past several years and that's the C&I world. So between -- the C&I and Signature Financial would be able to make up any shortfall that we would have in the CRE market.

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Operator   [17]
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 Your next question comes from Dave Rochester of Deutsche Bank.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [18]
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 Just to go back on the NIM. I was just curious where you're seeing 5 1 multifamily pricing and CRE pricing as well and how does that compare to where the traditional C&I and Signature Financial loans coming on?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [19]
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 Rates for our traditional 5-year fixed is 3.75% to 3.875%. We'd like to ultimately push that to 4%, but we're clearly seeing credit compression there. For other forms of CRE, it's at least 25, 50 basis points wider. When you look at other asset classes, C&I is coming in, in the high-4s to 5% range, traditional C&I. Signature Financial is in the low 4% range. And in our securities, reinvestment rates are in the low-3s.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [20]
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 So you really are seeing a nice upward repricing in terms of new loan yields, it sounds like?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [21]
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 Correct.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [22]
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 That's the CRE where we think the rates should be higher, but we can't be 50 basis points. Where we logically think the rates should be would be 50 basis points or more above where the competitors are and we would not be doing business. So we have to stay within that 25 to 3/8s range above our competitors.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [23]
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 Right. That make sense. Are you guys factoring any rate hikes into your NIM guides for stability at this point? Was the 2 to 3 hikes you mentioned are more like a base case scenario?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [24]
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 Yes. We're factoring at least 2 hikes and one happening in March.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [25]
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 Great. And what was your assumption for securities premium going forward? I know you said it dipped a little bit this quarter. Are you expecting further declines to help support that?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [26]
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 Further declines, but at a slow pace.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [27]
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 Great. And then, can you just give an update on the deposit front? I know occasionally you throw out balances and whatnot, I'm sorry if I missed that, but can you just give us an update on where we are right now and how you're thinking about deposit growth overall for the year, if you're still good in that $3 billion to $5 billion range?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [28]
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 Sure. We -- I'll tell you where we are as of the 16th of January, Tuesday. We were up $778 million in total deposits, of which more than 50% were DDA.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [29]
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 That's great.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [30]
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 Yes. What happened is we...

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [31]
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 Good start.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [32]
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 Good start. What actually happened at the end of 2017, in the last 2 weeks, we had net outflows of $760 million. That's why our averages were so high because we did have throughout the quarter a high amount of deposits, but the tax legislation had an effect and I'll give you an example on a cash basis paying on taxpayers. We had -- one example as a client, on a cash basis, you want high tax rates to push as much as you can because the rates are going lower in 2018 into 2017. So not only did some of our clients pay out all their profits in 2017 -- and sometimes they would defer it to the following year, but they didn't. They paid out most of it, if not all of their profits in 2017. And then, they, in some instances, they paid every expense they could possibly pay. And then, in one instance we know of, one of our clients paid out the first quarter profits, estimated the first quarter profits of '18 and paid that out to his partners in 2017. And that was all tax-related and so we saw quite a few net outflows in the last 2 weeks of the year.

 Having said that, we have a pipeline of deposits that are fairly strong throughout at least the first couple of months of the year, but what happened in some of our initiatives during 2017, we were -- what used to be tailwinds became headwinds. For instance, without getting in too much detail, we have one initiative that we've been working on for 5 or 6 years. We have a great flow of deposits for the first 5 years of the 6 and then due to some government inaction in one of our national business lines, and it's -- again, they're kicking the can down the road in Washington, but until they finalize their move, there's a slowdown in one of our initiatives, which we had a reduction of $360 million during the year. So the good news is that if Washington gets their act together on one of our initiatives, that spigot will turn on big time.

 We have some new initiatives that we're working on. And if you look at our growth throughout the year, it's significant in DDA. So what that means is we're still bringing in the core clients. I'll remind you that in the last couple of years, we've talked about some fluff that we had because we moved some deposits from off balance sheet to on balance sheet and now we're up against the off balance sheet rates being higher. So we're fighting some headwinds that used to be tailwinds, but it all looks good for 2018 for deposit flows.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [33]
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 Great. That's great color. Are you still thinking that $3 billion to $5 billion range holds for this year?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [34]
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 There's not a minute that goes by that I don't think about it.

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 David Patrick Rochester,  Deutsche Bank AG, Research Division - Equity Research Analyst   [35]
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 All right. Great. And just one last one, if I could. Just on the tax side, with the tax reform now in place, how should we think about your tax credit strategy from here? Should we still expect to see that $3 million plus hit in other income or is that going to change over time?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [36]
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 No. We don't really see that meaningfully changing over time. We're still going to make those investments for CRA purposes and we'll continue to do that.

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Operator   [37]
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 Your next question comes from Casey Haire of Jefferies.

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 Casey Haire,  Jefferies LLC, Research Division - VP and Equity Analyst    [38]
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 Joe, I wanted to follow-up on the fluff deposit issue that you just mentioned. Is there a way -- I'm assuming that that's mostly coming out of the money market as that was down quarter-to-quarter. The DDA trends were very good. Is there a way to quantify how much of this fluff there is to work through and then the DDA can sort of -- while the deposit trends overall can show better once you work through the fluff?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [39]
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 We really don't know. You look client by client, we don't want to sit down and ask each client what that says. Some of it is [set] for future investment and we think that, that we have a better handle on, but what's over and above that is hard to determine.

 What we're looking at from a value standpoint is that if we continue to bring in DDA, even if deposits slowed from where -- we had -- in 2014, '15 and '16, we grew deposits $15 billion in that 3-year period. It's going to be hard to grow $15 billion in a 3-year period ever again in at least the foreseeable future, but we're bringing in quality deposits as evidenced by the DDA that's being brought in. So sorry if we really can't give you what that fluff number is.

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 Casey Haire,  Jefferies LLC, Research Division - VP and Equity Analyst    [40]
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 Okay. Understood. And then, just on the funding strategy, the loan and deposit ratio ticked up. Is there -- are we at a sort of ceiling here? And then, similarly on the borrowing side, how much appetite is there to take that up from that $4.5 billion level from where we are today?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [41]
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 We're at a -- we're not at a ceiling, but we're close to a ceiling on the loan-to-deposit ratio. On the borrowing side, we're still below our peers, but we really like to do everything -- every loan -- we like to make and every investment security we buy, we'd like to do it in a deposit. So we're pushing some of our initiatives even further and quicker than we had in the past to bring in deposits, but one of the things we don't want to do is to pay up. There's about 3 banks out there that are offering rates that just don't make sense to us and we won't pay up for them now.

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 Casey Haire,  Jefferies LLC, Research Division - VP and Equity Analyst    [42]
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 Okay. Last one for me, just on the capital management. It's good to hear that you guys are entertaining capital return. Can you give us a sense on how much excess capital you think you have? And are you thinking -- I would think you would be more inclined to pursue the buyback than the dividend given where you are from a valuation perspective. Just some thoughts about how you're thinking about capital return later in the year.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [43]
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 The only thing I'm prepared to say right now is I think that the stock is ridiculously priced low and there's a lot more value there. That will certainly weigh in, but other than that, it's too early to give you more color.

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Operator   [44]
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 Your next question comes from Steven Alexopoulos of JPMorgan.

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 Steven A. Alexopoulos,  JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks   [45]
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 So I'd like to start on expenses. Could you give us more color? You talked about some major investments being made in loan payment FX systems. Can you talk about what you're doing and maybe quantify those in terms of dollars being spent?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [46]
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 Yes. We're putting in a new front-end loan system and approval system. Certainly, it's going to cost us several millions to implement as well as a new core operating system on the loan side. Again, that's north of $5 million to implement that system as well, but the billings cost would be amortized over the life of those systems when we do put them into place. The foreign exchange system is also going to cost us a few million dollars as well. All 3 systems, we anticipate will go in, in the latter half of this year to potentially even early 2019.

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [47]
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 Any expenses associated with that -- with them being installed and the amortization has been baked into our numbers already.

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [48]
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 That's all contemplating our high single-digit expense growth if the $50 billion markets moved.

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 Steven A. Alexopoulos,  JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks   [49]
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 Right. Just to follow-up on that. If the $50 billion level did not move -- I agree, I think it would move -- how much would that impact that high single-digit? Where would we be?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [50]
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 Probably we'll get a low double digits at 10% to the 14% range. Just a little wider hopefully at the low end of that range.

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 Steven A. Alexopoulos,  JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks   [51]
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 Okay. And then, on the taxi, can you guys talk about -- you took the additional write-down this quarter. What was it exactly that drove that? And where are the medallions now written down to post the most recent write-down?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [52]
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 The most recent write-down was really driven by sales in the marketplace combined with the increasing cash flows starting as the values on our cash flow models came down. Overall, we've got a net exposure of $310 million and the average per medallion value in New York is at $305,000 and $45,000 in Chicago.

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 Steven A. Alexopoulos,  JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks   [53]
------------------------------
 Okay. And, Eric, maybe if I could ask you one more. On your margin guidance, which is calling for relatively stable, you talked about the 2 rate hikes, but do you assume that the 5-year moves up around 50 bps also? It sounded like you needed the curve to maintain its shape for stable.

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [54]
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 No. I mean, we assume some degree of flattening in that. We don't expect the 10-year to move lockstep with the front end of the curve.

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 Steven A. Alexopoulos,  JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks   [55]
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 Okay. So you would be maybe following the forward curve in terms of the 5-year?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [56]
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 That's right.

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Operator   [57]
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 Your next question comes from Jared Shaw of Wells Fargo.

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 Jared David Wesley Shaw,  Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst   [58]
------------------------------
 Looking at the deposit size, it's great growth on the DDA side and hopefully that continues through and drives that mix shift, but when we look at the interest-bearing deposit side, if we do get those 2 rate hikes this quarter -- I'm sorry, this year -- where should we assume beta is on the interest-bearing deposit side?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [59]
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 I think we're still approximating a 50% beta given a 1-year, 1% ramp scenario, which we managed to be under thus far, but we do anticipate betas to pick up with each rate increase.

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 Jared David Wesley Shaw,  Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst   [60]
------------------------------
 Okay. Great. And then, on the asset side, if we sort of look at that $3 billion to $5 billion balance sheet growth and the incrementally higher growth coming from C&I and Signature Financial, should we see that drive a higher level of provisioning? Or is it, the basis, it's low enough that it shouldn't necessarily flow through to a higher provision level?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [61]
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 I mean, that would flow through a little bit, but it's not going to be incredibly meaningful.

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 Jared David Wesley Shaw,  Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst   [62]
------------------------------
 Do we think that -- do you think that 2018 is the year where you see some big jumps on the C&I? Or is it more a building year that flows through into 2019?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [63]
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 I think you have a decent amount of -- it's not going to be a -- shoot like a rocket ship, but we have a situation where we have a very experienced person running the side of the lending to grow it and his experience level will allow us to do things quickly. So it's not a new initiative. It's just taking what we have and making it better. And I think there's a renewed interest in our bankers to go out and do business on the lending side on the asset side that wasn't there last year.

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Operator   [64]
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 Your next question comes from Ken Zerbe of Morgan Stanley.

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 Kenneth Allen Zerbe,  Morgan Stanley, Research Division - Executive Director   [65]
------------------------------
 Just going back to the capital return piece, the dividend buyback piece that you're now considering or will consider, just more fundamentally, right? The way I understood it was you didn't do a buyback or dividend because you were growing so fast, you needed the capital. And what I've generally heard on the call is that C&I especially will kind of replace some of the slower CRE. So you're still broadly talking about that $3 billion to $5 billion of asset growth, but isn't there -- help me address the disconnect between the fact that you're still or presumably still a fast growth company versus doing this, I'm going to say, slower growth company type capital return, if that all made sense?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [66]
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 Well, with the earnings that we anticipate, with our effective tax rate being 27%, it would be enough capital just internally generated to grow the bank $7 billion to $8 billion on an annual basis, which we don't expect to do. So if we have capital growing at $7 billion to $8 billion, allowing the bank to grow $7 billion to $8 billion and we grow $3 billion to $5 billion, it's an opportunity to return -- either return it to a dividend or increase the price through a buyback.

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 Kenneth Allen Zerbe,  Morgan Stanley, Research Division - Executive Director   [67]
------------------------------
 Got it. Okay. And so just to be really, really clear on the $3 billion to $5 billion, I've heard a bunch of analysts that say $3 billion to $5 million, is that your explicit guidance, $3 billion to $5 billion of asset growth next year?

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 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [68]
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 Yes.

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 Kenneth Allen Zerbe,  Morgan Stanley, Research Division - Executive Director   [69]
------------------------------
 Okay. Got it. And then, just last question. In terms of the West Coast, you mentioned like the full service office out there. I guess, what's ultimately the plan? Is that much more a C&I kind of reg -- I'm going to say regular bank, a regular bank branch and office? Or is that -- or you're doing more of the sort of the New York City CRE rent multifamily type business out there?

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 Eric Raymond Howell,  Signature Bank - EVP of Corporate & Business Development   [70]
------------------------------
 It would be a traditional deposit-taking and C&I facility where we could also entertain doing some level of CRE, but it's predominantly for deposit-taking, Ken.

------------------------------
Operator   [71]
------------------------------
 Your next question comes from Lana Chan of BMO Capital Markets.

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 Lana Chan,  BMO Capital Markets Equity Research - MD & Senior Equity Analyst   [72]
------------------------------
 On the loan side, given how strong the loan growth was this quarter -- I know you had previously expected some prepayment activity that seem like it didn't happen. Can you talk about, going to the first quarter, if you still expect some of that prepayment activity to flow through?

------------------------------
 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [73]
------------------------------
 We do. We expect -- there were several loans or packages that we expected to be paid in 2017 that were not, but the largest one out of all of them was actually, on the last day of the year, we had $111 million, 3-loan package paid back. So the biggest one did. And although we are going to have some paybacks -- prepayments in the first quarter, the large one was largely taken care of in the last day of the year.

------------------------------
 Lana Chan,  BMO Capital Markets Equity Research - MD & Senior Equity Analyst   [74]
------------------------------
 Okay, but as you said, I think that the pipeline heading into the first quarter was still pretty strong?

------------------------------
 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [75]
------------------------------
 Yes. Not a strong as it was in the fourth quarter, but certainly it is strong.

------------------------------
 Lana Chan,  BMO Capital Markets Equity Research - MD & Senior Equity Analyst   [76]
------------------------------
 Okay. And second part of the question on deposits. Some of these national deposit initiatives that you're talking about, is that already built out with teams and the systems in place? Or does -- is there incremental hiring and buildout that needs to be done?

------------------------------
 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [77]
------------------------------
 No. On the initiatives that we've had for a number of years, we're all set with the people. On the new initiatives, we'll be hiring teams in 2018. And so the ones that we've already been in, we're kind of set where we are with the number of teams that we have.

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 Lana Chan,  BMO Capital Markets Equity Research - MD & Senior Equity Analyst   [78]
------------------------------
 And any color in terms of how much the national deposit platform, what the opportunity could be in terms of dollar amount?

------------------------------
 Joseph J. DePaolo,  Signature Bank - Co-Founder, CEO, President and Executive Director   [79]
------------------------------
 We'd love to give what the dollar amounts are if I knew them, but they're vastly -- well, look at it this way, maybe not big enough for multitrillion-dollar institution, but certainly significant to a $43 billion institution.

------------------------------
Operator   [80]
------------------------------
 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 the conference ID number 2874578. A webcast archive of this call can also be found at www.signatureny.com.

 Please disconnect your lines at this time and have a wonderful day.




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