Signature Bank's (SBNY) CEO Joseph DePaolo on Q2 2016 Results - Earnings Call Transcript

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Signature Bank (NASDAQ:SBNY)

Q2 2016 Results Earnings Conference Call

July 20, 2016, 10 AM ET

Executives

Susan Lewis - Investor Relations

Joseph DePaolo - President and Chief Executive Officer

Eric Howell - Executive Vice President, Corporate & Business Development

Analysts

Jared Shaw - Wells Fargo Securities LLC

Dave Rochester - Deutsche Bank Securities, Inc

Christopher McGratty - Keefe, Bruyette & Woods, Inc.

Casey Haire - Jefferies & Co.

Bob Ramsey - Friedman, Billings, Ramsey & Co.

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Operator

Welcome to Signature Bank's 2016 Second Quarter Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Executive Vice President, Corporate and Business Development.

Today's call is being recorded. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]

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

Joseph DePaolo

Thank you, Crystal. Good morning and thank you for joining us today for the Signature Bank's 2016 second quarter results 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 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.

Signature Bank had another exceptional quarter of growth and performance. For the first time in six-and-a-half years, we did not report record net income this quarter. However, we are really quite pleased with the 13% increase. First and foremost, we strengthened our franchise by growing deposits and loans substantially and adding two new banking teams.

Secondly, we increased our allowance for loan losses on Chicago taxi medallion loans to 30%, by providing $24 million more than the previous year's second quarter, while continuing to see the New York taxi medallion market stabilize. We believe this will have less of an impact going forward. Additionally, we saw a decrease of $6 million in loan prepayment penalty income, which alleviates our reliance on this unpredictable revenue stream in future quarters. So just think about that.

Our provision for loan losses was $24 million more than last year and $13.5 million more than the first quarter and we were down $6 million prepayment penalty income. That’s nearly $20 million less in earnings than the first quarter and yet we still earned more than $100 million. Finally, during the second quarter, we successfully issued $260 million in subordinated debt to support our future growth.

Now, let's take a further look into earnings. Net income for the 2016 second quarter reached $102.2 million or $1.90 diluted earnings per share, an increase of $11.8 million or 13% compared with $90.5 million or $1.77 diluted earnings per share reported in the same period last year.

The considerable improvement in net income was mainly the result of an increase in net interest income, primarily driven by strong deposit and loan growth during the quarter. These factors were partially offset by an increase in the provision for loan losses primarily due to Chicago taxi medallion valuations and non-interest expense attributable to our revenue growth initiatives as well as in part regulatory and compliance costs. Additionally, we saw a significant decrease in loan prepayment penalty income this quarter.

Looking at deposits, deposits increased $1.47 billion or 5% to $29.6 billion this quarter and average deposits grew $1.39 billion. Since the end of the 2015 second quarter, deposits increased $5.1 billion and average deposits increased $4.5 billion. Non-interest-bearing deposits of $9.4 billion represented 32% of total deposits and grew $428 million this quarter.

The substantial deposit and loan growth, coupled with earnings retention and our equity and subordinated debt raises, led to an increase of $6.6 billion or 22% to total assets since the second quarter of last year. The ongoing strong deposit growth is attributable to the superior level of service provided by all of our private client banking teams who continue to serve as a single point of contact for their clients.

Now let's take a look at our lending business. Loans during the 2016 second quarter increased $1.67 billion to $26.7 billion. For the prior 12 months, loans grew $6.2 billion and represent 73.1% of total assets compared with 68.5% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate and multifamily loans.

Turning to credit quality, our credit metrics remained strong this quarter. However, as expected, we again saw a deterioration in our Chicago taxi medallion portfolio, which impacted each of the following. Watchlist credit increased by $57.1 million to $416 million, still a low 1.72% of loans compared with $403.3 million or 1.61% of loans in the 2016 first quarter.

During the 2016 second quarter, we saw an increase of $10.6 million in our 30 to 89-day past due loans to $111.7 million, while 90-day plus past due loans increased $6.4 million to $26.2 million. Nonaccrual loans increased to $129.5 million or 48 basis points of total loans compared with $105 million or 42 basis points for the 2016 first quarter and $46.1 million or 20 basis points for the 2015 second quarter.

More than 80% or $105 million of the nonaccrual loans are in taxi medallion. Therefore, for the remaining portfolio of over $26 billion in loans, we have only $25 million in nonaccruals or less than 10 basis points. That’s exceptional credit quality.

The provision for loan losses for the 2016 second quarter was $33.3 million compared with $19.8 million for the 2016 first quarter and $9 million for the 2015 second quarter. Net charge-offs for the 2016 [second quarter] were $15.4 million or an annualized 24 basis points compared with $7.8 million or 13 basis points for the 2016 first quarter and $2.6 million or 5 basis points for the 2015 second quarter. $11.2 million of the charge-offs are for Chicago taxi medallion loans.

The allowance for loan losses increased slightly to 0.84% of loans versus 0.83% in the 2016 first quarter. It was 0.86% in the 2015 second quarter. Additionally, the coverage ratio remained strong at 174%.

Now onto the team front, we added two teams during the second quarter, bringing our total to date this year to three. Additionally, we opened our 30th private client banking office in [indiscernible].

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

Eric 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 $281.6 million, up $45.3 million or 19% when compared with the 2015 second quarter and an increase of 1% or $3.3 million from the 2016 first quarter. Net interest margin decreased 9 basis points in the quarter versus the comparable period a year ago and 14 basis points on the linked quarter basis to 3.18%.

Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 5 basis points to 3.12%. 4 basis points of decline is due to the cost of the subordinated debt issued in April 2016.

Let's look at asset yields and funding costs for a moment. Interest-earning asset yields decreased 4 basis points from a year ago and decreased 10 basis points from the linked quarter to 3.66%. 7 basis points of the linked quarter decrease was due to a decline of $6 million in loan prepayment penalty income.

Yields on the securities portfolio decreased 4 basis points linked quarter to 3.11%, given a pick up in premium amortization on securities from faster CPR speeds and lower reinvestment yields. The duration of the portfolio slightly decreased to 2.6 years.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 14 basis points to 3.92%. 11 basis points of the decrease was due to less prepayment penalty income. Excluding prepayment penalties from both quarters, yields would have declined 3 basis points.

Now looking at liabilities, our overall deposit costs this quarter remained stable at 41 basis points compared to the 2016 first quarter. Average borrowings, excluding subordinated debt, increased $81 million to $3.1 billion or only 8.6% of our average balance sheet. The average borrowing cost increased 1 basis point from the prior quarter to 1.25%.

Overall, the cost of funds for the quarter increased 4 basis points to 53 basis points. The increase is predominantly attributable to the subordinated debt issuance in April 2016.

On to non-interest income and expense, non-interest income for the 2016 second quarter was $13.1 million, an increase of $3.4 million when compared with the 2015 second quarter. The rise was due to an increase in net gains on sales of securities of $4.4 million.

Non-interest expense for the 2016 second quarter was $92.3 million versus $84.9 million for the same period a year ago. The $7.4 million or 8.7% increase was principally due to the addition of new private client banking teams as well as an increase in costs in our risk management and compliance activities. Factoring in the significant hiring since last year and increased regulatory costs, the Bank's efficiency ratio still improved to 31.3% for the 2016 second quarter compared with 34.5% for the 2015 second quarter.

Turning to capital, in the 2016 second quarter, we successfully issued $260 million in subordinated debt to further bolster our capital base in preparation for future growth. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet, as evidenced by a tier 1 leverage ratio of 9.6% and a total risk-based ratio of 13.67% as of the 2016 second quarter.

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

Joseph DePaolo

Thanks, Eric. We further strengthened the franchise in the first half of 2016 with the hiring of three private client banking teams and deposit and loan growth of nearly $3 billion each. Additionally, we successfully raised almost $600 million in capital, motivated by future growth expectations.

Finally, there is little question that banking industry is under heightened regulatory pressure. While we have always managed Signature Bank to maintain the highest level of safety and soundness, we recognize that not everyone in the industry has done so and this leads to industry-wide scrutiny by the regulators.

In our 15-year history, we are proud of our positive relationships with our regulators and we want to assure our investors we will continue to take all necessary actions, including implementing processes, procedures and systems, as well as hiring personnel to maintain sound risk management practices. We believe it is in Signature Bank’s best interest to remain poised to seize the significant opportunities available within our marketplace.

Now, we're happy to answer any questions you might have. Crystal, we’ll turn it over to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Jared Shaw with Wells Fargo Securities.

Jared Shaw

Just following up on your last comment there about implementing processes and potentially hiring personnel, is that something that is beginning now or is that investments that have already been made and if it is something that you are looking to enhance starting to go forward, how should we be thinking about that from an expense point of view?

Joseph DePaolo

We've been hiring all along. We were under a heightened review back in the first quarter of 2010 when we passed 300% in CRE concentration and then we've been preparing for $50 billion for several years now as well. So we have been hiring. But what we're finding is that more hiring is required.

From an expense standpoint, one of the things you can think about is we had a significant amount of consulting and professional fees last year and we're spending less in those areas, in the consulting and professional fee areas, but we’re hiring more personnel at a lower cost which will replace the high-cost consultants.

Jared Shaw

And then is there any limit on the ability to continue to grow multifamily from this point until those hires have been made and those systems are in place or is this a simultaneous growth with growth in the portfolio?

Joseph DePaolo

This is simultaneous. We have the people in place which is supplementing what we’re already doing. So think of it that way that we have a portfolio management practice that was supplemented and that they’re asking for extra safeguards, which we agree with. As you have a highest CRE concentration, we have responsibility to have extra safeguard. We put those in and we now ask to continue to supplement those.

Jared Shaw

And then once that has been supplemented...

Joseph DePaolo

I was just going to say from an expense standpoint, we’re seeing between 10% and 15% increase.

Jared Shaw

10% to 15% increase on overall expenses or on the comp and benefit expense?

Eric Howell

Overall expenses in the third and fourth quarters versus the prior year’s third and fourth quarters.

Jared Shaw

And then once those investments have been made and systems in place, could you see your CRE concentration as a percentage of capital go higher from where we are today?

Joseph DePaolo

Possibly. What we look at is a number of factors. Certainly, we raised a significant amount of capital between equity and debt and that clearly has helped us in terms of the CRE concentration, although we really raised the capital for future growth. So yes, to answer your question, you could see it grow.

But one of the things that we want to point out, the expenses that we’re incurring and not just the CRE supplementing practices, there is BSA, AML, all the things that come with as you grow, $36.5 billion was still several years away, but we’re concentrating – in addition to the concentration, we're concentrating on shortly, shortly being a number of years, being at $50 billion. In order to do that you have to continue to supplement what you’re already doing.

Jared Shaw

Just shifting gears a little onto the Signature Finance and the taxi portion, could you just give an update on where we stand with the New York loan to values and debt service coverage ratios, balances, things like that, and also how much of the portfolio at this point you have gone through and been able to restructure?

Joseph DePaolo

Just a few things.

Eric Howell

If you’re talking New York specifically, we have $590.7 million outstanding in New York. LTV there for an individual is at about 94% and for a corporate side about 84%. We really have seen the marketplace in New York stabilize. We've developed a few cash flow models now that we’re utilizing for New York and for Chicago. Based on those updated models and estimates coming out of the models, we took additional charge-offs in New York of $3.3 million. We also increased our allowance there by $7 million. So we now have 6% on the New York portfolio.

What's really important to look at also in New York is the sales there. In the quarter there were 12 sales at an average price of $538,000. We had three of those 12 for an average price of $595,000. But probably most importantly on July 14 we held an auction where we sold 16 medallions. We had multiple bidders attend the auction and the medallion was awarded to one purchaser for a price of $625,000 each. So demand for the medallions continues to pick up and we believe it's clearly evidences that the market is stabilizing. So very positive trends that we're seeing in New York.

Jared Shaw

And then the balance of Chicago left over?

Eric Howell

In Chicago we have approximately $153.8 million on 739 medallions, which is down about $12 million from the prior quarter. Again, there we engaged a highly reputable third party to develop cash flow models. This model is strictly based on cash flows of the medallions and does not take into account personal guarantees of the borrowers. And utilizing the model, we determined a fair market value per medallion. Based on the updated estimate, we took additional charge-offs of approximately $11.2 million. We also increased the allowance for loan losses in Chicago by $37 million, bringing the total reserve to $46 million or 30% percent on the total Chicago portfolio.

Operator

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

Dave Rochester

On the provisioning credit, can you just talk about why you decided to make this reserve adjustment in the Chicago book this quarter? Was it just going out and getting the new models made? And then secondly, it sounds like you are not at all concerned that you will need to make a material adjustment to the reserve on the New York segment, maybe just some more commentary there.

Eric Howell

We had new models that we put in place as part of our DFAST process for this year. We’re constantly trying to improve our modeling efforts and segmenting our portfolio and getting more granular down to specific asset classes. Given the events around the medallion portfolios in Chicago and New York, we felt it was prudent to develop specific cash flow models for those two markets to help with the DFAST process as well as with the provisioning there.

So out of those new models came these updated values, which again continues to be the tale of two cities. As anticipated we really saw the values in Chicago come out less, but on the positive side the cash flow models in New York were very supportive of the values that we have on our books and then obviously the sales activity was also supportive, especially those sales that have taken place thus far in July. That was really the impetus behind this.

Dave Rochester

So at this point are you thinking the provision drops back down to the level at which it was previously in the first quarter or do you think it could actually improve from that level assuming that the cash flows kind of remain where they are?

Eric Howell

Right now, given everything that we’ve seen, we anticipate it will certainly drop back down to closer to the first quarter level. We don't see it having to be elevated at this level, at the second quarter level. Whether it drops further from there is really based on a number of moving parts and mostly growth in the portfolio.

Dave Rochester

And then any color on the loan pipeline you can share? How does that look compared to the pipeline you had heading into the first quarter?

Joseph DePaolo

I’ll just say that the pipeline is strong, including the C&I pipeline. We've seen a pickup in the C&I pipeline. We actually had about $250 million in growth in the C&I book in the second quarter and we see a pipeline beyond that for the third quarter. So overall when you combine that, C&I including Signature Financial with the CRE, it’s a strong pipeline.

Dave Rochester

And then I guess on the margin, just given the new rate backdrop, how are you thinking about that trend heading into next quarter and what are you baking in for higher securities premium and expense? If you have a sense of that, that would be great.

Eric Howell

We anticipate margins will be down slightly from the current levels, approximately 3 to 5 basis points for next quarter. And then assuming interest rates stay at these levels, we anticipate it will trickle down a couple of basis points per quarter thereafter.

On premium amortization front, we saw premium am up about $1 million in the second quarter. We don't think it will get quite to that level it could in the third quarter, being $1 million more, but it's probably a little bit more contained in that.

Dave Rochester

And then where are you seeing new loan yields come on in multifamily and commercial real estate? Have those come in at all post the Brexit vote and the decline in rates?

Joseph DePaolo

We still – on the five-year multifamily, minimum is 3 3/8 that is to if it is a stellar deal, but we are actually more in the 3.5 than we are in the 3 3/8. We’ll be a little bit more selective and we haven't had any pressure on in the interest rates on the loan book.

Dave Rochester

And then securities or investment rates, are those still in the high 2s?

Eric Howell

Middle to high 2s, little bit down from high 2s, Dave. But we're being ultra-selective, again having that strong loan pipeline allows us to be very selective as to when we enter the market.

Dave Rochester

I know the tax rate was down a little bit this quarter, is that a decent level going forward this year, around maybe 40% or so?

Eric Howell

Yes, you should use 40% going forward.

Dave Rochester

And then I guess just one last one because it sounds like if the provision drops back down to where it was in the first quarter, you had a stronger growth there, the margin guide seems to be fairly reasonable just given what the curve has done, the tax rate is lower. I guess the only differential would be on the prepays that you had this quarter, those were down probably the lowest level you have seen in a while. Are you just expecting those to remain volatile going forward?

Eric Howell

They've always been volatile. We expect them to remain that way. We do think that $6 million is a more reasonable level than the $12 million. We thought that was a little too much.

Dave Rochester

One more on expenses, you talked about 10% to 15%. That sounds a little bit better than the low teens guidance you had last quarter, so it sounds like some of this expense control that you saw kick in this quarter will kind of carry through into future quarters. Is that fair?

Eric Howell

That's fair. I mean we utilized a tremendous amount of high-cost consultants over the last several years in developing a lot of the modeling for stress testing DFAST. As Joe said earlier, we're going to be replacing that with personnel with typically at a lower cost. So we do think that will have a little bit better forward looking expense numbers.

Joseph DePaolo

Dave, you painted a picture that if the provision was down at a level of the first quarter and with the growth that we've had, essentially we would blow the doors off of the quarter.

Operator

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

Christopher McGratty

Eric or Joe, the focus on diversification from the regulators in the industry, you talked about the increased growth in C&I, is there anything you can do to further accelerate that diversification strategy? Obviously acquisitions have never played a role in the Bank's history, but wondering if there is any contemplation to accelerate the diversification in the loan book.

Joseph DePaolo

We have done some things. I mentioned in the first quarter call that we created a position to help the lenders and teams work closely together on the C&I book. That's certainly one area. We also have in the municipal area Signature Financial. That is a line of business that, Signature Financial, when they were at their previous bank, they were very successful at and we started to do that business earlier this year, latter part of last year.

So when you think about Signature Financials, some of those verticals they’ve added on, the new position we created, we’ve added on three teams this year. The three teams are C&I related. We added on some sales people in ABL. So all of that, without getting into too much detail from a competitive standpoint, that's all going to help drive C&I.

Christopher McGratty

And just if I could on expenses next year, Eric, the guide on the back half is a little bit better than last quarter. I'm not sure if you mentioned this in your prepared remarks, but if we think about 2017, the back half of this year year-over-year about what you are kind of modeling for next year, kind of 10% to 15% plus or minus depending on hiring?

Eric Howell

That sounds reasonable, Chris.

Operator

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

Casey Haire

Just want to dig in a little bit on the medallion reserve build. It sounds like you guys are being pretty conservative just given that the 30% reserve mark doesn't account for the personal guarantee. Can you frame if you did have the personal guarantee what that reserve might have been?

Joseph DePaolo

That’s almost impossible to predict how much a guarantee is worth, Casey. Most of our loans in Chicago to fleet owners who have created quite a bit of net worth over the years in that medallion space, so we do anticipate that they have substantial net worth outside of the medallions and we will aggressively pursue that should we need to.

Casey Haire

And then on the New York side, Eric, appreciate the color on the auctions. It sounds like pricing is definitely leveling. You guys have always pointed to sort of the cash flows though. Can you just quantify or give us some color as to what gives you comfort there on the cash flow front and just quarter-to-quarter, year-over-year what’s the trend on the cash flow front in New York?

Eric Howell

The trends – generally, cash flows have dropped about 20% from their peak, Casey, from their total overall peak over the last several years and we've seen it stabilize at those levels. Utilization really is the key and we're seeing more of these taxis on the road, our fleet owners are telling us that they're at near 100% utilization, which is great to hear.

A number of the measures that the New York TLC has taken are attracting drivers back to the second shifts, which is really where we saw the impact. So we’re having those second shift drivers come back and put those cars out on the road to generate more revenues. And that's really the key there that’s helping to stabilize the cash flows. And we anticipate that that will continue.

Casey Haire

If memory serves, utilization was around 90% last year. Is that right, so utilization is up?

Eric Howell

That’s correct. Utilization is up.

Casey Haire

Last one for me, on the expense front, I'm just looking at the comp line being down in a strong loan growth deposit growth quarter. I was just wondering if claw back relating to some of these losses on the medallion book is helping that comp line stay subdued.

Joseph DePaolo

No, the answer is no.

Eric Howell

The first quarter is typically expensive because of all the payroll taxes that run through.

Operator

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

Bob Ramsey

Great to hear about the pricing on the sale in July. I am just curious with that being better than the pricing that you guys saw in the second quarter, is that because it was a bigger transaction and it sort of grew together got better pricing or was there anything different about that versus the sales in the second quarter?

Eric Howell

No. Actually, if anything, right, because we’re selling a block you think we’d give it at a lower level because someone is buying a block. So that's really not it. I think it's just overall there are more participants in the marketplace right now, more willing buyers than we'd seen for the last several quarters, Bob. We’re of course starting to recognize that cash flows have really stabilized and that there is money to be made in operating a medallion, so that's bringing buyers back into the equation which is helping to support the values.

Bob Ramsey

Is there a material amount of charge-offs based on where those sold?

Eric Howell

We took about $11 million in charge-offs in Chicago and we took $3.3 million in New York. So not much that we had to do additionally in New York and a little bit muted there in Chicago.

Bob Ramsey

Sorry, I guess I meant on the sales in July I guess as a third quarter event, I was wondering if there would charge-offs?

Eric Howell

No, there’s no charge-offs.

Joseph DePaolo

No charge-offs, there maybe even a slight recovery.

Bob Ramsey

And then finally, I hate to belabor taxi, but finally, I was wondering if you could just kind of help me understand the provisioning overall. I know in Chicago you guys boosted reserves by $37 million and charged-off $12 million, in New York you boosted reserve by $7 million and charged-off $3 million. I totaled that all up and I get about $59 million of taxi related provision expense this quarter, and yet obviously your consolidated provision was much less than that. Were there releases elsewhere in the portfolio that helped bridge the gap?

Eric Howell

There were, Bob. Based on updated models that we put in place for the DFAST, we reduced the level of provisioning in our CRE and multifamily areas. In CRE space, we were 67 basis points there, we brought that down to 48 basis points. And in multifamily, we’re at 63, and we brought that down to 47 basis points.

I think it was very important to note and what Joe said in our scripted remarks is that outside the taxi space, we have a $26 billion portfolio with $25 million in non-accruals. $25 million in non-accrual. So we have less than 10 basis points in the entire remainder of our portfolio. So we really have pristine asset quality outside that taxi space.

Joseph DePaolo

And when you add the pristine credit quality to the continued growth that we have both on the deposit and loan side, and the fact that we're adding on teams and individual bankers through existing teams, we’re quite pleased.

Operator

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

Steven Alexopoulos

I’d like to start, so on Bank United's call this morning, they indicated they were pulling back on commercial real estate lending and they cited the competitive environment and the regulatory focus on CRE. Could you comment on the competitive environment and do you see any need to pull back here?

Joseph DePaolo

Steve, it's hard for me to quote – to talk about other institutions. I will tell you that here, I'm not sure what you mean or what they mean by competition that they are pulling back. What we’re doing is looking at every deal like we have been in the past and being a little bit more selective because we can be in getting the pricing that we want because we can and we’re continuing to work on all the things I mentioned earlier about maintenance of the portfolio and adding people on so that we can continue to do the things that we’re doing. I'm not sure what some of the other banks are doing, but I can tell you that there is competition out there and there are some new banks that came into the market.

Steven Alexopoulos

But Joe, you’re not seeing competition...

Joseph DePaolo

[indiscernible] but they’re doing things that we don’t do. They’re doing construction and we don't do that. So we're seeing them, but not to the extent that people will believe that we would see them because we don't do the construction piece.

Steven Alexopoulos

So you don't look at the competitive environment today and see a need to pull back on multifamily lending?

Joseph DePaolo

I wouldn’t answer that because the competition would be transparent, but just say we’re doing what we do, we’ll be transparent. There are things that we’d be more selective on. So I don't know if that means we're pulling back or not, but we'd be more selective and I'll tell you we’d be more selective in interest-only – things like, I’ll give you one example, IOs, interest-only, we’ll be more selective.

Does that mean there is a pullback, there may be other good deals that are not IOs that we can do that we’re being presented with because of the efficiency of the team. We’re still closing loans in 45 days. And I will tell you this, we saw one competitor come in – they’ve been in the market and they’ve been quoting rates which swaps. And if you look at that, someone is got to say if I pick Signature I know this is the rate I’m getting. If I pick this other bank, I don’t know the rate until the day after I close because of the swap situation. So we're getting our opportunities.

Steven Alexopoulos

Joe, one other thing that Bank United spoke about on their call was that they are starting to see the FDIC banks getting held to the same standard as OCC banks as it relates to the concentration of commercial real estate. It is something that they cited as an opportunity for them. I mean you are an FDIC bank, are you seeing a higher standard being applied to the company as it relates to the concentration of CRE? Is this what’s driving this increased hiring that you are doing in this area for risk management?

Joseph DePaolo

I love the way others play the game. I will tell you this, the FDIC has always been at the highest level, along with the New York State Bank Department or the New York State Department of Financial Services, I should say. That inter-agency guideline, the FDIC was part of that from day one. I think there was a thought out there that the FDIC wasn't part of it, it was OCC driven with the Fed. The FDIC was part of that inter-agency guidelines CRE concentration and they have always been on top with the highest quality.

So I don't think it's because of them, I think it's because of the banks are getting larger and as you get larger, you have more responsibility to supplement your practices. So it's a mandate. If you want to have a multiple of your capital in CRE, then you have to have extra safeguards place and we don't disagree with that. So I don't think it's any more of an advantage or disadvantage. Everybody should go back and read the inter-agency guidelines and they’ll see that the FDIC is in part of it from day one.

Steven Alexopoulos

Just one final one, given the pretty significant reserve you now have on the Chicago taxi book, is this marked at a point where you think you could ultimately sell it and is that something you would consider doing?

Joseph DePaolo

No, we don't think it’s at a point where we could sell it.

Operator

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

Ken Zerbe

Just one question actually. So I get that this quarter was a true up in taxi with building reserves in Chicago and that’s fine. But when we think about going forward, I think you mentioned, Eric, that let’s call provisioning going back to roughly $20 million and I'm just trying to reconcile like on a go forward basis, the incremental losses that you are going to take in taxi, because presumably the $20 million does include some ongoing provision related to taxi and probably more Chicago than not. But if you ran these new cash flow models to get the incremental reserve build or provision expense, do we need to see those cash flow models be proven wrong such that the values, the cash flows have to incrementally deteriorate from here? Is that the right way to think about that?

Eric Howell

Yes. Look, you have several inputs that go into a model. There's the receipts and revenues on the one side; you have your expenses on the other. So the model is – taking current inputs to determine a value. If we see receipts go down or expenses go up, they were going to come out with a new value or vice versa, we could see values increase, alright, Ken, and that's what we're going to base future charge-offs and reserves upon as well as sales activity because those are things that you need to take into account, however, Chicago is such a dislocated market discount, really any sales happening there and there’s been little to none anyway. So we could see further down draft, we just don’t anticipate going from 5% to 30% to 60% on this portfolio. But we could certainly see it drift lower or like I said improve based on those inputs to the model.

Operator

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