Signature Bank (SBNY) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.23.13 | About: Signature Bank (SBNY)

Signature Bank (NASDAQ:SBNY)

Q2 2013 Earnings Call

July 23, 2013 10:00 am ET

Executives

Joseph J. Depaolo - Chief Executive Officer, President, Executive Director and Member of Risk Committee

Susan Lewis

Eric R. Howell - Executive Vice President of Corporate & Business Development

Analysts

Erika Penala - BofA Merrill Lynch, Research Division

Casey Haire - Jefferies LLC, Research Division

Casey Haire

Matthew T. Clark - Crédit Suisse AG, Research Division

David Rochester - Deutsche Bank AG, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Herman Chan - Wells Fargo Securities, LLC, Research Division

Lana Chan - BMO Capital Markets U.S.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Operator

Welcome to Signature Bank's 2013 Second Quarter Results Conference Call. Hosting the call today from Signature Bank are Joseph J. Depaolo, President and Chief Executive Officer; and Eric R. Howell, Executive Vice President, Corporate and Business Development. Today's call is being recorded.

[Operator Instructions]

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

Joseph J. Depaolo

Good morning, and thank you for joining us today for the Signature Bank 2013 Second Quarter Conference Call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Susan Lewis

Thank you, Joe. This conference call and oral statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and may be beyond our control.

Forward-looking statements include information concerning our future results, interest rates and the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings and business strategy. As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions that could cause actual results to differ materially from those in the forward-looking statements. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made.

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

Joseph J. Depaolo

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

The second quarter of 2013 continued our string of record quarters with strong performances exhibited across the entire organization. This resulted in solid core deposit and loan growth while maintaining sound credit quality, leading to another quarter of top line revenue growth and our 15th consecutive quarter of record earnings.

Furthermore, we are excited for our new banking teams joined during the second quarter. I will start by reviewing earnings. Net income for the 2013 second quarter reached a record $53.6 million or $1.12 diluted earnings per share, an increase of $8.3 million or 18% compared with $45.3 million or $0.96 diluted earnings per share reported in the same period last year. The considerable improvement in net income is mainly the result of an increase in net interest income, primarily driven by continued core deposit and loan growth. These factors were partially offset by an increase in noninterest expense.

Looking at deposits. Deposits increased $472 million or 3.2% to $15.3 billion this quarter, including core deposit growth of $612 million. For the first half of 2013, deposits have increased $1.2 billion, exceeding 8%, and for the trailing 12-month period, deposits have increased $2.3 billion or nearly 18%. Average deposits for the quarter increased $526 million or 3.6%. Noninterest-bearing deposits of $4.7 billion represented 30.7% of total deposits. Our deposit growth, loan growth and securities purchases this quarter pushed total assets to $19.7 billion, an increase of $3.8 billion or 24% since the second quarter of last year. The ongoing strong core deposit growth is attributable to the superior level of service provided by all of our product line banking teams who continue to serve as a single point of contact to their clients.

Now let's take a look at our lending businesses. Loans during the 2013 second quarter increased $701 million or 6.8%. For the past 12 months, loans increased more than $3 billion and represent 56.1% of total assets compared with 50.6% 1 year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate, multifamily loans and specialty finance. Nonaccrual loans remained stable at $35.9 million or 32 basis points of total loans this quarter compared with $35.1 million or 34 basis points for the 2013 first quarter and $31.9 million or 40 basis points for the 2012 second quarter. The allowance for loan losses was 1.08% of loans versus 1.09% of loans in the 2013 first quarter and 1.21% for the 2012 second quarter.

Additionally, the coverage ratio or the ratio of allowance for loan losses to nonaccrual loans continued to be a very healthy 332%. The provision for loan losses for the 2013 second quarter was $9.7 million compared with $9.9 million for the 2013 first quarter and $10.3 million for the 2012 second quarter. Net charge-offs for the 2013 second quarter were at $3.5 million or an annualized 13 basis points compared with $4.5 million or 18 basis points for the 2013 first quarter and $4.7 million or 25 basis points for the 2012 second quarter.

Now turning to the watchlist and past due loans. Watchlist credit decreased by $14 million this quarter to $139 million or a low 1.26% of loans. During the 2013 second quarter, we saw a decrease of $1.7 million in our 30- to 89-day past due loans to $40 million. And we also saw a decline of $11.6 million in our 90-day-plus past due category to $5.1 million. While we are pleased that our credit metrics remained strong this quarter, we remain mindful of the uncertainty in the economic environment and again, we conservatively reserved.

Just to review teams for a moment, 4 product line banking teams joined during the 2013 second quarter, bringing our total added for the year to 7. Also 2 book directors joined existing teams. Additionally this quarter, we opened our 27th office, our second in Staten Island.

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

Eric R. Howell

Thank you, Joe, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the second quarter reached $154.5 million, up $20.3 million or 15.2% when compared with 2012 second quarter, and an increase of 4.3% or $6.4 million from the 2013 first quarter. The linked quarter increase was positively impacted by an additional $1.4 million of loan prepayment penalty income. The net interest margin was down 18 basis points in the quarter versus the comparable period 1 year ago and decreased 7 basis points on a linked quarter basis to 3.36%. When prepayment penalty income is excluded from the 2013 first and second quarters, core net interest margin for the linked quarter declined 9 basis points to 3.21%. The linked quarter decrease's overall and core margins are predominantly due to the reinvestment of cash flows from investments and commercial mortgages including refinance activity and to lower yielding investments and loans.

Now let's look at asset yields and funding cost for a moment. Due to the prolonged low interest-rate environment, interest earning asset yields declined 36 basis points to 3.92% from a year ago. Given the bank's abundant capital base and advantageous market conditions at the very end of the second quarter, we capitalized from the steeper yield curve by pre-investing future cash flows in our securities portfolio. As a result, our average investment portfolio increased 207 million. Yields on the portfolio declined 10 basis points to 3.01% this quarter, mostly due to the reinvestment of higher-yielding security cash flows into lower yielding securities. With our higher interest rates at quarter end, that the ratio of the portfolio extended to 3.7 years, this will benefit yields in future periods.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 7 basis points to 4.7% compared with the 2013 first quarter. Excluding prepayment penalties from both quarters, yields would have declined 12 basis points.

Now looking at liabilities. Money market deposit cost this quarter further declined 3 basis points to 71 basis points as we again decreased deposit costs given the low interest-rate environment. This decrease led to a decline of 3 basis points in our overall deposit cost to 51 basis points. With the strong loan growth and advantageous market for securities investment, average borrowings increased $370 million to $1.84 billion. Given the short-term nature of these incremental borrowings, the average cost of borrowings is down 27 basis points from the prior quarter to 1.41%.

Onto [ph] noninterest income and expense. Noninterest income for the 2013 second quarter was $9.3 million, a decrease of $600,000 when compared with the 2012 second quarter. The decrease was driven by a $3.2 million decline in net gains on sale of securities. And just to remind everyone, in the 2012 second quarter, we recorded a $2.6 million pretax gain on the sale of SBA interest-only strip security. This quarter's decline in noninterest income was partially offset by improvements in commissions, fees and service charges, trading income and other income. Noninterest expense for the 2013 second quarter was $61.4 million versus $54.9 million for the same period a year ago. The $6.6 million or 12% increase was principally due to the addition of new private client banking teams and our continued investment in growth of Signature Financial.

Even with a significant hiring since last year, the bank's efficiency ratio improved slightly to 37.5% for the 2013 second quarter compared with 38.1% for the 2012 second quarter.

Now turning to capital. Our capital levels remained strong with intangible common equity ratio of 8.65%, Tier 1 risk-base of 14.9%, total risk-based ratio of 15.94%, and leverage capital ratio of 9.14% as of the 2013 second quarter. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet.

And lastly, I'd like to point out that during the latter part of the quarter, we moved select securities of approximately 845 million from available-for-sale to held to maturity, given market volatility and potential changes in Basel III capital requirements. Although we have abundance of capital and a decline in other comprehensive income, it's a temporary issue as we expect to hold the vast majority of our AFS portfolio to maturity anyway. We felt this was a prudent action to take.

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

Joseph J. Depaolo

Thanks, Eric. The second quarter of 2013 marked our 15th consecutive quarter of record earnings supported by strong core deposit growth, excellent loan growth, solid credit metrics and top line revenue growth. We're pleased to achieve these results while continuing to invest in the future to further private client banking team additions and the ongoing expansion of Signature Financial.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Erika Penala of Bank of America.

Erika Penala - BofA Merrill Lynch, Research Division

My first question is a follow-up to your prepared remarks, Eric, and how should we think about the relative size of the securities book going forward. On one hand, I hear you loud and clear that you are managing AOCI risk by transferring some securities to available-for-sale or to house maturity from available-for-sale. But how should we think about -- should this continue to shrink as a percent of earning assets? Or do you expect some deposit growth to catch up in the second half of the year as some of your new hires and new teams come on board?

Eric R. Howell

Well, it's certainly -- a lot of it's going to be predicated upon deposit growth. If we have continued strong deposit growth, we'll continue to invest in the securities portfolio as well as into loans. We really saw an opportunity at the end of the second quarter to invest in securities, an opportunity that we haven't seen throughout the quarter. We started off the quarter with a low tenure at 160, and we really held off for making any securities purchases until we saw a pickup in the tenure to the mid to high 2s. If we continue to see strong deposit growth and if we continue to have a market to invest in, then I would think we would still be increasing the size of that securities portfolio. But it's really predicated upon those 2 things.

Erika Penala - BofA Merrill Lynch, Research Division

And could you remind us or tell us where you're reinvesting in terms of the rates and duration?

Eric R. Howell

Well, duration is in the, 3 to 4 year range. Generally, the levels repurchased anywhere from the low 3s to the mid-3s. We've been investing in agency CMOs as well as some CMBS and select corporates.

Erika Penala - BofA Merrill Lynch, Research Division

And just one last question. Loan growth accelerated quarter-over-quarter in terms of sequentially. Should we expect this to continue at the same pace for the second half of the year or should we be wary of a seasonal slowdown in the third quarter?

Joseph J. Depaolo

Well, I would say that usually, there will be a seasonal slowdown because of the summer and then the holiday -- Labor Day and then some of the Jewish holidays. However, our pipeline at the end of the second quarter leading into the third quarter was much more active than it was going into the first -- ending the first quarter leading into the second quarter. So it does bode well for continued growth, the pipeline.

Operator

Your next question comes from the line of Casey Haire of Jefferies.

Casey Haire - Jefferies LLC, Research Division

Digging a little bit deeper on the NIM. How much was premium amortization this quarter and how much is left?

Eric R. Howell

So we haven't really disclosed what's left, Casey. I don't have that. Premium amortization this quarter to last was relatively flat.

Casey Haire

Okay. And just the loan pricing update, how -- I know last quarter you guys talked about losing a little bit of your cushion, how has that held up and where are we quarter-to-date?

Joseph J. Depaolo

Well, on the commercial real estate side, we were -- last time we spoke, we were at 3.5, although we were doing a number of loans between 3.25 and 3.5 for 5 year fixed. Now, our pricing is 3.75, with some exceptions being made at 3 5/8. Again, for 5 year fixed.

Casey Haire - Jefferies LLC, Research Division

Okay, great. And then just longer-term, so if I got this right, it sounds like you guys used some short-term borrowings and obviously the duration is going out. So longer-term, how do you manage interest rate risk? I mean, what kind of limits are there on duration and your appetite for shorter-term borrowings?

Eric R. Howell

Casey, we have such a large amount of core deposits still that we were at a real low in our borrowings and we still have a tremendous amount of borrowing capacity left, and we have a tremendous amount of cash flow still coming off that portfolio of roughly between $125 million to $150 million per month for us to put to use. So we're very well positioned for the current interest rate environment that we're in and for rates if they were to rise further.

Operator

Your next question comes from the line of Matthew Clark of Credit Suisse.

Matthew T. Clark - Crédit Suisse AG, Research Division

Can you update us on the expense front? You guys are hiring at a faster clip, I think, from previously expected, so the year-over-year increase is 12% versus maybe 10% expected. Can you talk toward the second half and what you might expect? Is there more hiring to do on the Signature Financial or are we done there?

Eric R. Howell

Well, there is more hiring to do there. They're still rounding out their capabilities, their sales force, their product offerings. So we do expect to continue to add there. And I think with all the hiring we've done in the beginning of this year, which was a bit more, as you pointed out, than we had anticipated, that we expect expenses to be up in the 10% to 12% range as opposed to what we're saying earlier which was 10%. So it's not too much for change, Matthew, but maybe a little bit of a pickup in expenses.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And on the core margin front, are you willing to offer some guidance there? I mean, it sounds like you've got some relief in pricing. You invested late in the quarter better yields. And I would assume there might be some slowdown in premium amortization in the upcoming quarter but...

Eric R. Howell

That's right. We had said that we would be down 5 to 10 basis points in the second quarter and then 3 to 7 basis points looking out a couple of quarters. So that 3 to 7 basis points now looks like it's more to stable to down, possibly, 5 basis points. We expect the yields on new assets will still continue to price below prepaying assets. So we're still going to have some pressures there, but it's definitely mitigated by the steepness of the yield curve assuming that space in place for a while.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay, great. And then on the team hiring front, is that still fairly active? Could we see more in the second half here?

Joseph J. Depaolo

It is. It's actually fairly active but we're really scented [ph] on 2014, most of the teams that we are talking to. But that doesn't mean there's opportunities comes along, we wouldn't seize upon it and hire. But right now, the pipeline is very active with 2014 discussions.

Operator

Your next question comes from the line of Dave Rochester of Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

So just give me your commentary on the securities rate front. I mean, it sounds like reinvestment rates are above the book yield. Do you expect to see premium M-on-Y [ph] unwind? Should we start to see the securities yields move higher in terms of the book yield?

Eric R. Howell

They should start to move higher. It might take a quarter or so for that to work through but it start to go up.

David Rochester - Deutsche Bank AG, Research Division

Can you also update us on the pricing for the equipment finance loans that you're doing right now?

Eric R. Howell

They're generally in the mid 3s but at 4% range even low 4s. That's on the vertical, Dave.

David Rochester - Deutsche Bank AG, Research Division

Okay. And on the institutional money market deposit fronts, do you think you can continue to bring those down at maybe 2 to 3 basis points a quarter in the next few quarters?

Joseph J. Depaolo

It's going to be much tougher than it has been. I know we brought them down 3 basis points this quarter and then for the past several quarters prior to this quarter was 4 basis points. But we're actually seeing some movement in the private banking/middle market arena where money market interest rates to be held steady and stop moving up a little bit so it's going to be difficult. We're trying to bring in some of the newer money that's coming in from the big -- too-big-to-fail banks at lower than what we are today at 71, but it's going to be much tougher.

David Rochester - Deutsche Bank AG, Research Division

Great. Just one last one on just the pure C&I growth side. When do you expect to see some are that front? I know a lot of your growth in the commercial bucket at this point has been the equipment finance side. Any thoughts there would be great.

Eric R. Howell

I think we need to see some clarity out of Washington. Our clients still seem very concerned about their healthcare costs as well as the increased tax rate. So until we see more clarity on those fronts -- they are starting to hire a little bit more, things seem to be headed in the right direction. But they're really not ratcheting up their businesses in a meaningful way.

Joseph J. Depaolo

There's just too much uncertainty.

Operator

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Just in terms of the revised NIM guidance of the flat to down 5 basis points each in the next couple of quarters, what's the biggest area of volatility there? What do you have to see in the market or in pricing to get to the 0 versus what you have to get or see to get to the down 5 basis points?

Eric R. Howell

I think we just need to see the yield curves stay in the position that it's in now. That'll be helpful, but we've seen this before. We saw it pop up in the second quarter and one write-back down, but one event away from having that 10-year to go back down. So it's -- if we operate in this yield environment for a quarter or 2, we should be more on a stable front as opposed to being down 5 basis points. Competition is also a pretty big factor there, too.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Are you seeing any -- I guess, with this quick recent pullback in the 10-year or 5-year just from the peak that it was at, have you seen any re-acceleration of the competition or people have stabilized with a higher yields?

Joseph J. Depaolo

I would say they stabilized in a higher yields.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, perfect. And then just one quick question on the pipeline. You obviously talked about it was attractive than it was a quarter or 2 ago. Are you able to quantify that just the kind of got a sense of magnitude of the increased pipeline?

Joseph J. Depaolo

Tough to quantify, but I will tell you this. Some of the things leading to why it's more active, and speaking to our commercial real estate banking team, what they're seeing is, for the first time in a while, actually some sales and purchases of properties. So that may be stemming from owners believing that now is the time to sell because rates may be moving up and not moving down. So we're still seeing some of that. We're also seeing, as a result of rates going up, an increase in the activity of refi. And again maybe because they believe rates are going to be moving up and staying there that this is their best time to refinance. So without quantifying exactly, I will say it's probably as it's ever been.

Operator

Your next question comes from the line of Bob Ramsey of FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

You gave a lot of color last quarter about competition and sort of how concerning it was. Obviously, it's positive that with a moving up in the rates, you've been able to bring multifamily commercial real estate loan rates up as well. Just curious, can you give a little more color what you're seeing in the marketplace from competitors today.

Joseph J. Depaolo

Well, it seems to get me a little bit of trouble last time when I talked about competition. And everyone's thinking that we were going to slow down. We were just trying to point out some overly aggressive pricing. It hasn't changed. Look at it this way. There were some 5 year -- 6 being done, at 2 7/8% and 3%. So today, it's being done at 3.25%. So it doesn't necessarily mean there, but what's interesting is they haven't come up to the market. And what I mean by that is a number of our competitors fund not through core deposits. And their expense for funding has gone up maybe 60 to 70 basis points, but yet, they're not passing that along. So as to believe that we still see overly aggressive pricing. The fortunate thing for us is we have some terrific people, our colleagues, who were able to get out earn [ph] sheets, close loans in 45 days and satisfy the clients through the servicing and they know that they are still going to be here when they want to refinance. So servicing is trumping pricing and that's what happened in the second quarter, and that's what will continue to happen in the third quarter.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. That's helpful. And then, did you just have the balance of specialty finance loans at the end of the quarter?

Eric R. Howell

It's approximately $1.2 billion.

Operator

Your next question comes from the line of Steve Alexopoulos as of JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Can we restart -- can you give more color on why pre-fund the securities book with borrowings? Seems a bit outside the core business? And then maybe talk about the cost of the funds that you borrowed and the yield on the securities you got with those borrowings?

Joseph J. Depaolo

Well, look at this way, we had loan growth of $700 million and on the deposit side, at June 18, we were -- had deposit growth of $740 million. But the total deposit growth ended up being 12 days later, $470 million. That's because in the last 2 weeks of the quarter, we had outflow of deposits that were escrows, which happens all the time. But we saw an opportunity because of the rates going up to buy securities. Though we couldn't find it with deposits because we only -- we had all the deposit growth funding the loan growth. So therefore, we funded it with short-term borrowings. Did that give you a perspective of why?

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

That makes sense in terms of why, Joe, but if you could follow up, maybe what was the cause of the borrowed funds and then you talk about the yields on the new securities that were purchased?

Eric R. Howell

Sure, the costs were approximately 40 basis points and the securities yield at anywhere from the low 3s to the mid-3s.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

And Eric, how do we think about duration extension risk of the entire portfolio this point?

Eric R. Howell

Well, with rates rising up, we actually like the duration extension, right? That means that we slow down the premium amortization on the securities that we have. This was really what we had anticipated happening and what we wanted to have happen. Even with the extension, we still have well in excess of $100 million a month. It's probably closer to $150 million a month and cash flow is coming off the securities portfolio. So we don't mind the extension at all. It's really what we had planned for.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Then just the final question. You guys have grown from a $10 billion asset bank to $20 billion over the past 3 years. Can you continue to grow at these rates without a major investment in infrastructure and systems, et cetera?

Joseph J. Depaolo

Well, we have been making the appropriate investments that we need to make. Most of our systems are third-party and we get the opportunity of the research and development that's done by a third-party to service a number of banks at the same time. So it's not a lot of in-house systems that we use. It's a lot of external systems that stay on top of the development that needs to be for innovation. So we're pretty comfortable there. I think more so, is -- and the answer is, yes, are the people that are our colleagues ready. And I think one thing you should know is that most of -- it's not all the people that come on board are usually coming from the places that are far bigger. And it's not necessarily just those that we're hiring in the teams dealing with clients and developing business. It's in the support areas where they usually come and usually have responsibilities for people and systems far greater than what they're coming into a Signature. They are just coming into a better environment. So that helps the system grow into it. So we've had no issues in terms of the growth and in fact, the amount of growth in such as a short period of time.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. And then just final one. Eric, I think last quarter you spoke of we should anticipate 10% or so year-over-year growth. Given all the new hires, is that still a reasonable level or should we be bumping that up here in terms of expectation?

Eric R. Howell

Yes. I think we should bump it up slightly to 10% to 12%.

Operator

Your next question comes from the line of Herman Chan of Wells Fargo Securities.

Herman Chan - Wells Fargo Securities, LLC, Research Division

I was wondering how you're thinking about the TCE ratio, especially with the balance sheet growth and some AOCI fluctuations. I recall the bank bolstered its equity base in 2011 as the TCE ratio was hovering around the 8% mark. Can you give us some color on your thought process there and how you view potential capital rates down the road as you continue to expect stronger loan growth as you just articulated?

Joseph J. Depaolo

We don't -- well, let me start off by saying we don't expect to continue second quarter growth to happen in the near or intermediate quarters. This is almost having 2 quarters of growth in 1 quarter. So we may be going back to our normal $500 million, $800 million growth as opposed to what we had this quarter. But in terms of TCE, we actually look at the leverage ratio more so where we're above 9%. I know in the past, people had asked, and we were talking about TCE being at 8% and that was kind of our bright line. But that was when we were less than half the size we are today. We're around now more than 12 years. We're nearly a $20 billion institution and there's some uncertainty as to what levels are needed by our competitors because of what's happening with Basel III. So we're going to take a wait-and-see type of approach. Let me say, we don't believe we need to do a capital raise because our earnings are fairly strong and our earnings allows us to grow at a fairly significant amount each quarter. Having said that, we always said we wouldn't be shy to do so if needed, but I think we want to wait and see what happens over the next 60 days when comments are coming out about Basel III and what the regulators have said in their suggestions about what they should be. And then we'll have a better thought process as to where we want to be. But I think if I was giving you guidance, I would look into leverage ratio more so than TCE.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Great. And Eric, on the prepayment fees, I was wondering if you could give your view on how that should trend going forward given the higher rate environment?

Eric R. Howell

It's very, very difficult to predict human behavior. We do think that it'll pick up maybe slightly, given that clients might want lock in rates now with the pickup in the 10-year. And we'll probably have elevated prepayments for the next couple of quarters, and then eventually all this prepayment has to come to an end.

Operator

Your next question comes from the line of Lana Chan of BMO Capital Markets.

Lana Chan - BMO Capital Markets U.S.

Most of my questions have been answered but did you give an estimate for the Tier 1 common ratio into Basel III?

Joseph J. Depaolo

No. We did not give an estimate. We basically said that we would be in a wait-and-see, but we would -- telling everyone that they should look more towards the leverage ratio.

Operator

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

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick one on the loan growth, I think for the year, you're up about $1.3 billion. And if my memory's correct, in January, you talked about $2.2 billion for the year. Did I miss any change in official guidance for the year?

Joseph J. Depaolo

Well, as you know Chris, we're much better in executing than giving guidance. But no, we didn't change any guidance. We think -- we did say that the loan pipeline was actually very active and more active than it has been in a while.

Operator

Your next question comes from the line of Terry McAvoy of Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Looks like specialty finance grew from $1 billion to $1.2 billion in the second quarter. Are you still on pace for about $1 billion of growth in 2013? And any way you could provide maybe a snapshot or some sort of breakdown in terms of what's in that portfolio, the last time that you've done that in the K, the Taxi Medallion business was a little over $400 million.

Eric R. Howell

The Taxi Medallion business is around $480 million of that overall portfolio, and then the rest is predominantly made up of direct equipment, indirect equipment and indirect vehicle, as well as about $90 million in capital markets.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And Joe, just a question for you. You're probably $20 billion, as we speak, or very close to it. How do you think about just general size, greater regulatory oversight as you get larger, the cost associated with that? And not to say it's going to slow down your growth, but is it something you're pretty much thought into today? And how does that relate to kind of expenses and building up that larger, larger bank?

Joseph J. Depaolo

Well, we've actually had the expense built in. We've been, over the last year, treating ourselves -- I guess the way you do -- think about this is, if you're over $10 billion, anything between over $10 billion and up to $50 billion, you treat yourself similarly. I know we're trying to get that -- we would like to get that changed, but we're doing our stress testing, we're spending considerable dollars using third-party firms to help us formulate our stress testing. We're beefing up compliance and some of the operational areas because of the growth. So we look at it as an expense to do business. But it's not any different if we were $10 billion, $20 billion or $30 billion. So we're not looking at it any differently.

Operator

Your next question comes from the line of Peyton Green of Sterne Agee.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

A question on the securities, Eric. I mean, how close were these bonds bought to par in terms of the late 2Q purchases versus maybe for the past year, 1.5 years, you probably had to buy bonds that had a little bit of a premium, which I know you don't like to do but just naturally, premium amortizations are going to go down because you're closer to par on the new purchases?

Eric R. Howell

Yes, they're a little bit closer to par, about 4 points closer to par, but there's still a better premium that we're paying for this.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

But far less there would've been in the purchases made over the past year?

Eric R. Howell

Correct.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay, great. And then just thinking about what's next over the next 2 or 3 years, rather than maybe the next quarter or 2. Are there any opportunities that are emerging? Or is the marketplace still big and you all are still so small on a relative basis that market share mining is going to be the soup of the day for a long time?

Joseph J. Depaolo

Well, I would say it's the soup of the next couple of months, at least. We still have significant opportunities. Just think about the fact that we, in the New York area, hired 7 more teams. We believe on the commercial real estate front, it's just such a large, large market in your New York City and because of the teams we have, we'll be able to continue to reap the benefits there. And with Signature Financial, we have opportunities because we've told everyone that you have to be in the so-called NBA cities and we're probably in less than half of the NBA cities right now. So there's opportunity there for us to grow. So over the next -- and then, adding another leg to this tool, I wouldn't be surprised if any of you on the call if we don't add another leg of the stool in lending. Along the line, there's something like an ABL, asset-based lending, somewhere in a very, very near future, which would bode well for us for a continued diversity in our assets side. So when you put all that together, it looks like the future is very bright for us.

Operator

Your next question is a follow-up from Casey Haire of Jefferies.

Casey Haire - Jefferies LLC, Research Division

I'm all set.

Operator

There appear to be no further questions at this time. I would now like to hand the floor back over to Joe Depaolo for any closing remarks.

Joseph J. Depaolo

Thank you for joining us today. We certainly appreciate your interest in Signature Bank, and we're certainly very excited about the near-term and long-term future for us. As always, we look forward to keeping you apprised of any of our developments as they arise and Lorie, I'll turn it back to you.

Operator

This does conclude today's teleconference. If you'd like to listen to a replay of today's conference, please dial (800) 585-8367 and refer to conference ID number 21194339. 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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