Signature Bank
Q3 2014 Earnings Call Transcript

Published: 21 Oct 2014

[Operator:]

Welcome to Signature Bank 2014 Third 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 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 2014 third quarter conference call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

[Susan J. 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 2014 third quarter once again reflects our discipline and consistent approach to banking and marked our 20th consecutive quarter of record earnings driven by both record deposit and strong loan growth, resulting in top line revenue growth. We achieved these record results while maintaining stellar credit quality and a healthy capital position. I will start by reviewing earnings. Net income for the 2014 third quarter reached a record $76.8 million, or $1.52 diluted earnings per share, an increase of $16.6 million, or 28% compared with $60.2 million, or $1.25 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 record deposit and strong loan growth, each surpassing $1 billion. These factors were partially offset by a decrease in prepayment penalty income and an increase in non-interest expense attributable to our revenue growth initiatives and in part, regulatory and compliance costs. Looking at deposits, deposits increased a record $1.56 billion or 8%, to $21.3 billion this quarter, including record core deposit growth of $1.22 billion. For the trailing 12-month period, deposits have increased $5.27 billion or nearly 33%. Average deposits for the quarter increased a record $1.57 billion, or 8%. Non-interest-bearing deposits of $6.3 billion represented 29% of total deposits. The substantial deposit and loan growth, coupled with earnings retention and our recent capital raise led to an increase of $4.9 billion or 24% in total assets, which reached $26 billion this quarter versus the third quarter of last year. The ongoing strong core 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 businesses. Loans during the 2014 third quarter increased $1.12 billion or 7.3%. For the past 12 months, loans grew more than $4.4 billion, and represent 63.8% of total assets, compared with 67.6% one year ago. The increase in loans this quarter was primarily driven by growth in commercial real estate, multi-family loans and specialty finance. Our credit quality remained exceptional this quarter, with non-accrual loans decreasing $24.4 million or 15 basis points of total loans this quarter, compared with $32.7 million or 21 basis points for the 2014 second quarter and $40.2 million or 33 basis points for the 2013 third quarter. The provision for loan losses for the 2014 third quarter was $7.7 million compared with $7.6 million for the 2014 second quarter and $11 million for the 2013 third quarter. Net charge-offs for the 2014 third quarter were $1.5 million, or an annualized 4 basis points, compared with $718,000, or 2 basis points for the 2014 second quarter and $3.1 million, or 11 basis points for the 2013 third quarter. Consequently, the allowance for loan losses was 0.95% of loans versus 0.98% in the 2014 second quarter and 1.05% for the 2013 third quarter. Additionally, the coverage ratio continued to be very strong at 642%. Now, turning to the watch list and past due loans, watch list credits decreased slightly by $2 million this quarter to $114.1 million, or a low 0.69% of loans. During the 2014 third quarter, we saw a slight increase of $1.4 million in our 30 day to 89 day past due loans to $31.2 million and 90-day-plus past due loans remained stable at $2.4 million. While we are pleased that our credit metrics are strong again this quarter, we remain mindful of the uncertainty in the economic environment and again, we appropriately reserved. Just to review teams for a moment, to date during 2014, we’ve added five teams. Additionally, this quarter three experienced group directors joined teams. We also added two new business lines to Signature Financial, National Franchise and Commercial Marine Finance which expand our product offerings and further diversify our revenue streams and our asset composition. 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 third quarter reached $205.3 million, up $37.9 million or 22.6% when compared with the 2013 third quarter and an increase of 6%, or $11.6 million from the 2014 second quarter. The linked quarter was positively impacted by a $1.5 million increase of loan prepayment penalty income. Net interest margin was down 7 basis points in the quarter versus the comparable period a year ago and decreased 6 basis points on a linked quarter basis to 3.25%. Excluding prepayment penalty income, core net interest margin for the linked quarter declined 8 basis points to 3.14%. 7 basis points of the linked quarter decreases and overall and core margins are due to an increase in average cash of $444 million from our capital raise in the late second quarter, continued record deposit growth and cautionary deployment for security investment given the challenging market. The excess cash was deployed in September into loans and security investments. In fact, more than 50% of our loan growth was in the month of September and over $250 million of loans and securities were literally funded in the last two days of September which will be beneficial for the fourth quarter margin. Let’s look at asset yields and funding costs for a moment. Due to the prolonged low interest rate environment and heightened competitive landscape, interest earning asset yields declined 12 basis points from a year ago and they were down 8 basis points from the linked quarter to 3.75%. Yields on the securities portfolio declined 5 basis points to 3.25%, given the challenging market for securities reinvestment, and the duration of the portfolio remained stable at 3.6 years. Turning to our loan portfolio, yields on average commercial loans and commercial mortgages declined 1 basis point to 4.22%, compared with 2014 second quarter. Excluding prepayment penalties from both quarters, yields would have declined 3 basis points, again driven by increased refinance activity in commercial real estate. And now looking at liabilities, money market deposit costs this quarter declined 2 basis points to 64 basis points and our overall deposit costs also declined 2 basis points to 46 basis points. With the substantial deposit growth in the quarter and the proceeds of capital raise, average borrowings decreased $408.6 million to $2.18 billion or only 8.6% of our average balance sheet. Given the short term low cost nature of the borrowings we paid off, the average borrowing costs increased 15 basis points from the prior quarter to 1.32%. As a result, the overall cost of funds for the quarter decreased 2 basis points to 54 basis points. And on to non-interest income expense, non-interest income for the 2014 third quarter was $8.1 million, an increase of $200,000 when compared with the 2013 third quarter. The increase is mostly due to a rise in commissions, fees and service charges and net gains on sales of loans, along with the decline in write downs on other than temporary impairment of securities. These improvements were offset by a decrease in net gains on sales of securities. Non-interest expense for the 2014 third quarter was $74.3 million versus $62.3 million for the same period a year ago to $12 million or 19% increase was principally due to the addition of new private client banking teams, our new asset based lending team and the continued investment in the growth of Signature Financial as well as an increase in costs in our risk management and compliance activities. Even with the significant hirings since last year, the bank’s efficiency ratio still improved slightly to 34.8% for the 2014 third quarter compared with 35.6% for the 2013 third quarter. Returning to capital, our capital levels remained strong with a tangible common equity ratio of 9.25%, Tier 1 risk-based of 15.49%, total risk-based ratio of 16.51% and leverage capital ratio of 9.45% as of the 2014 third quarter. Our capital ratios were all well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet. And now I’d like to turn the call back to Joe. Thank you.

[Joseph J. DePaolo:]

Thanks, Eric. As we mentioned the 2014 third quarter was our 20th consecutive quarter of record earnings. This was fuelled by record deposit growth, solid loan growth, top line revenue growth and exception credit metrics, all of which was supported healthy capital levels. Also, this quarter marked fourth consecutive quarter where we posted record deposit growth. The growth was driven by the reputation the bank has earned through our delivery of high quality client care and service which was built on the foundation of our single point of contact banking model. Additionally, we remain focused on the diversification of our loan portfolio through further expansion of Signature Financial and the National Franchise Finance and Commercial Marine Finance arenas. Now we are happy to answer questions you might have. Laurie, I’ll turn it over to you.

[Operator:]

(Operator Instructions) Your first question comes from the line of Casey Haire of Jefferies.

[Casey Haire:]

Hi, good morning, guys.

[Eric R. Howell:]

Good morning, Casey.

[Joseph J. DePaolo:]

Hi, Casey. Good morning.

[Casey Haire:]

Eric, could you expand a little bit on the NIM outlook? It sounds like September was a very good month for you in terms of loan closings. I'm just wondering if that remix in the fourth quarter could see the core NIM up in the fourth quarter?

[Eric R. Howell:]

Well, I mean, the remix and the investments that we made in September certainly should be beneficial, and will be beneficial to the margin, but we are up against a fairly flat and low yield curve, Casey. So we expect core NIM to be relatively stable, say, up or down a few basis points with somewhat of a slight upward bias because of those factors.

[Casey Haire:]

Okay. And is multifamily pricing kind of hanging in at that 3.375% level still?

[Joseph J. DePaolo:]

Yes, it hasn’t changed March. So, it is still 3.375% on the five year.

[Casey Haire:]

Okay. Great. And just a question on the loan growth outlook, obviously, a very strong close to the quarter. How is the pipeline holding up into the end of the year here?

[Joseph J. DePaolo:]

So, the good news is, much as we closed in September, the pipeline has remained robust.

[Casey Haire:]

Excellent. And just lastly, I know you guys have been – multi-family packages have been a good story for you guys in the past. I think you guys have been active recently. I was just wondering any color update on the outlook there?

[Joseph J. DePaolo:]

Well, we did not have any large packages close in the third quarter. We have the potential for one to close in the fourth quarter, I think potential because until it closes, we – you never know, but we had about five loans $25 million or above close during the third quarter and one small package of three loans that a little above $25 million close during the third quarter, but not along the lines of the fourth quarter of last year where we had $200 million packages.

[Casey Haire:]

Understood, thank you.

[Eric R. Howell:]

Thank you, Casey.

[Joseph J. DePaolo:]

Thanks, Casey.

[Operator:]

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

[Dave Rochester:]

Hey, good morning, guys. Nice quarter.

[Joseph J. DePaolo:]

Hey, Dave. Good morning.

[Dave Rochester:]

So, how do you guys expect expenses to trend in 4Q? I mean, given 4Q is generally not a big hiring quarter for you guys, it seems like that growth rate could actually slow next quarter, but I know you guys mentioned some spending on reg and compliance costs, just trying to get a sense for your thoughts are there?

[Eric R. Howell:]

Yes, we think because of those regulatory costs and the hires we made earlier in the year that when you look fourth quarter of 2014 over 2013, we’ll still be in the high teens, Dave. Then when you look out over 2015 versus 2014 for the year, we expect it to trend down into the mid-teen range as we start to leverage those teams we added.

[Dave Rochester:]

Great, thanks. And given that one of your large competitors is going to be hitting that $50 billion threshold soon, I was curious if you are hearing chatter in the market that they might be stepping back and in that case, that could potentially loosen some things up for you guys, just wondering if you heard anything?

[Joseph J. DePaolo:]

The chatter we heard is actually people asking that question, so we have – but we have not seen any evidence of it. We think we would be the beneficiary of it, but we have not seen anything anecdotally or in real dollars.

[Dave Rochester:]

Yes, I would think you would benefit from that as well. All right, great. Thanks, guys.

[Eric R. Howell:]

Thanks, Dave.

[Joseph J. DePaolo:]

Thank you, Dave.

[Operator:]

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

[Chris McGratty:]

Hey, good morning, guys.

[Eric R. Howell:]

Good morning, Chris.

[Joseph J. DePaolo:]

Hey, Chris, good morning.

[Chris McGratty:]

Eric and Joe, the credit situation is obviously very good, can you help us with the reserve ratio, you guys are obviously over providing, but the ratio keeps bleeding forward, what's your comfort level of taking that reserve level kind of low rate adjusting?

[Eric R. Howell:]

Chris, there is really no bright line, and the allowance is based on many factors, it’s based on loan growth, our history of charge-offs and recoveries, our loss experience, the broader economy, so we’ve got to take a look at all those factors. But given the level of charge-offs and recoveries that we’ve had over the last several years, it’s certainly beneficial to our loss experience. And if that continues, I would expect that you would see our allowance to continue to trend downward.

[Chris McGratty:]

Okay. That's great. Just one follow-up on the pipeline of teams, maybe I missed it in your prepared remarks, but you said five year-to-date, could you talk about the conversation you may be having at year-end for additional hires?

[Joseph J. DePaolo:]

I wouldn’t expect that between now and the end of the year we bring on any new teams. We are having discussions now for 2015. During the third quarter, we did bring on three additional group directors, business development that have joined existing teams and we added on to Signature Financial for the two business lines. But in terms of whole team hires, we are talking about 2015.

[Chris McGratty:]

All right. Great, thank you very much.

[Joseph J. DePaolo:]

Thank you.

[Operator:]

Your next question comes from the line of Joe Fenech of Hovde Group.

[Joe Fenech:]

Good morning, guys.

[Joseph J. DePaolo:]

Good morning.

[Joe Fenech:]

Loan yields held in pretty well this morning guys across the board it looks like. I know it's probably too early to say what the impact will be from the most recent drop in rates. But is your sense that we are sort of nearing a bottom here, where unless we get a real meaningful surprise from here that loan pricing in general has stabilized?

[Joseph J. DePaolo:]

I would say hopefully, yes. We looked at when the ten-year some time ago hit 160, we were at 3.5%, you know, at five–year fixed. So even though credit spreads have come in dramatically, we find it hard to believe that you can drop the rate any further and we haven’t really seen any movement over the last week, it’s just too soon to tell.

[Joe Fenech:]

Okay. And I appreciate the margin guidance, Eric. But let's look at maybe a couple of quarters here. We get past sort of the remix benefit. If rates stay where they are, loan growth is still pretty healthy, how do you guys think about, all other things equal of course, I know it might be tough to say, but how do you think about sort of the natural compression in the margin that we're likely to see, once we sort of get past the remix benefit, all other things equal here?

[Eric R. Howell:]

Well, I think we’ll continue to see the remix benefit for quite a long time, so that’ll certainly help to support the margins, but I mean, it’s dependent on so many factors, how much in deposit growth that we have in that, that’s a key contributor to the equation and for us, there is no better reason to miss on margins and to grow core deposits, and that’s certainly what we saw this quarter and really help flatten and lowers the yield curve for how long. But the remix is something that certainly help us to stem the tide on any further margin compression.

[Joseph J. DePaolo:]

You know, Joe it comes down to this, net interest income growth and wherever margins end up being because of the market, our belief is that we’ll be able to continue to grow the institution and grow net interest income.

[Joe Fenech:]

Okay. That's helpful. And then guys, on the deposit side, are the early signals here in the fourth quarter pointing to, would you say, continuation of the deposit trends you've seen so far this year, and if they are, can you talk a little bit more about the different contributors of the deposit growth. I know you talked in the past about the nationwide initiatives and penetrating deeper into your existing markets with the brand recognition, can you just give us an update on the different component drivers of the deposit growth that you are seeing?

[Joseph J. DePaolo:]

Well, on the initiative side, as much as we try not to be quite, we really don’t talk about the initiatives because we don’t want our competitors to know what we’re doing. But I would say the initiatives are pretty big driver of the deposit growth over the trailing 12 months through September 30th. We’re making deeper penetration there and it is nationwide although not – when I say nationwide, it’s the opportunity to do business outside of New York, not necessarily that we’re doing business into deposit growth in all fifty states, but the initiatives are clearly helping us both on the core and on the escrow side. This quarter though, fourth quarter, we would expect that our loan growth would be more than our deposit growth, we have some escrow build up that we expect escrow deposits to have some outflow during the fourth quarter.

[Joe Fenech:]

Okay. And then, last one for me on expenses, in the third quarter of last year, just looking back, your expense growth was roughly about 14% and you had added eight teams, I guess, to that point in 2013. This year, you said you added the five teams and then some incremental pieces and the expense growth is 19%. I know you’ve talked about the regulatory costs somewhat, but is that incremental difference in expense growth from last year to this year, that 5% difference sort of the right way to think about what the regulatory costs have been?

[Eric R. Howell:]

Well, we also added a few teams in the fourth quarter which is something typically we don’t do. So, that added to the expense growth and we also significantly hired in Signature Financial. So that’s another area of expense growth for us. So, factoring those in and then the remainder would certainly be those regulatory costs where we spend several millions more this year than the prior years.

[Joe Fenech:]

Okay, so it’s not entirely that differential, there is other stuff in there. Okay, thank you guys. I appreciate it.

[Joseph J. DePaolo:]

Thanks, Joe.

[Operator:]

Your next question comes from the line of Steven Alexopoulos of J.P. Morgan.

[Steven Alexopoulos:]

Hey, good morning guys.

[Eric R. Howell:]

Good morning, Steve.

[Joseph J. DePaolo:]

Hey, Steven.

[Steven Alexopoulos:]

I want to start, given that July and August activity, we know it was a bit slower than typical and that you mentioned, Joe, the larger loan package didn’t close in the quarter, what drove such a strong September for growth, were you guys active pulling some of the October pipeline in, just trying to understand why growth was so strong, I don’t think you’ve ever done $500 million in a month before?

[Joseph J. DePaolo:]

Well, the August was so slow, Steve, and we had such a – I mean we did say that it was going to be slow during August when we met and we also talked about that we had a robust pipeline, and I think it was just a matter of the pipeline being robust number one and number two, those loans that would have closed in August, but due to vacation, they were pushed into the month of September, they may have been a little bit on our end trying to do some October closings in the month of September, but not nearly as much to drive $500 million in growth. In fact, the pipeline that we had in August going into September is as strong today as it was back then. So, even if we pulled a little bit in, the pipeline is still very strong.

[Steven Alexopoulos:]

And Joe regarding the – go ahead.

[Joseph J. DePaolo:]

One of key was that the month, I know this sounds crazy that we are getting this granular, but Labor Day was September 1, so we were able to have pretty a full month of September to close loans. Whereas if Labor Day was around the fifth or sixth, we would have lost that first week in closing loans. So, I think, the timing of the holiday benefited us as well.

[Steven Alexopoulos:]

Okay. And Joe, regarding that larger loan package, has that closed yet in October?

[Joseph J. DePaolo:]

No, it’s scheduled to close in the month of November.

[Steven Alexopoulos:]

November, okay. And then finally, on People’s call the company talked about pricing on multi-family reaching unattractive levels and they are walking away from opportunities, could you talk about what you are seeing on the competitive side and you guys finding yourself walking away from deals here?

[Joseph J. DePaolo:]

Well, our pricing for five-year fixed multi-family quality clients hasn’t changed since March, and our seven year hasn’t changed since June. So, although there is competition, and with the rates, us holding the rates as is, coupled with the strong pipeline, as much there is competition, we are not seeing – we are not feeling the heat so to speak.

[Steven Alexopoulos:]

Okay. Thanks for the color.

[Joseph J. DePaolo:]

Thank you.

[Eric R. Howell:]

Thanks, Steve.

[Operator:]

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

[Ken Zerbe:]

Okay, thanks. Good morning.

[Eric R. Howell:]

Good morning.

[Joseph J. DePaolo:]

Good morning.

[Ken Zerbe:]

Guys, you guys aren’t necessarily known for being overly asset sensitive. Just given where rates are and your ability to add longer-term borrowings, are you guys taking any actions to help increase the level of asset sensitivity, sort of a multi-year view?

[Eric R. Howell:]

Ken, we are doing a few things there, certainly, the growth of Signature Financial and the emphasis that we are putting on that area helps us out, they predominately have three and five-year self amortizing loans. So that’s beneficial. We are taking opportunities to extend on the borrowing side. And that’s why Joe said we expect deposit growth to be slightly less than what it’s been over the last four quarters in the fourth quarter because of escrow outflows that actually bodes well for us, because we’ll use borrowings to plug the funding gap and we’ll look to extend there. So that helps us well. We are really trying to maintain our five-year fixed loans on the commercial real estate side and not go out much further than five years. We’ll do seven years from time to time when it makes sense, but we will not go out further than seven years. So, that’s also helpful. And really, just our focus on core deposit growth and that ultimately will be most beneficial in a rising rate environment.

[Ken Zerbe:]

All right, great. And then just given the lack of, I guess, new team hires in the quarter, can you just remind us again how much of the growth both loans and deposits really come from in the short term from new teams being added versus like the sort of the existing lenders? I am trying to get a sense of like does – is a potential slowdown in team hires imply anything for near-term growth?

[Joseph J. DePaolo:]

No. We talked about earlier that in addition to team hires, we have added on three group directors this quarter in the third quarter and in fact, both – three of them, all three of them, I should say, they are helping with some of the deposit initiatives that we’ve employed – deployed. So there hasn’t really been a slowdown, it’s just that in fact, we’ve added on to teams instead of hiring some new teams. And on the asset side, with Signature Financial, we are diversifying our revenue streams. We added on two lines of business that we didn’t have, that will incrementally add to loan growth. So we feel like we are adding on both on deposit gathering side and the loan generation side, just not necessarily team focused.

[Ken Zerbe:]

Got it. Understood. Thank you.

[Joseph J. DePaolo:]

Okay, thanks, Ken.

[Eric R. Howell:]

Thanks, Ken.

[Operator:]

Your next question comes from the line of Erika Najarian of Bank of America.

[Erika Najarian:]

Yes, good morning, thank you.

[Joseph J. DePaolo:]

Good morning, Erika.

[Erika Najarian:]

Just following up and putting together everything that you said, specifically to answer Casey and Ken’s questions about the loan pipeline going forward, as we think about your positioning in the market, plus your hires contributing in an accelerated manner, your newer hires, is the $1.1 billion of quarterly loan growth pace that you posted this quarter sustainable not just in 4Q which it sounds like it is, but also as we think about 2015?

[Joseph J. DePaolo:]

I would like to think one quarter at a time, but I can tell you that based on what we are seeing in terms of and what we plan on doing in adding additional lines of business that we are not prepared to talk about today until we add them on, but we are looking at adding on one or two lines of business in Signature Financial coupled with the opportunities we are getting to do larger loan packages and larger loans in the commercial real estate arena and more recently, some of the opportunities we’ve had C&I, sustainability, at least, on average, I can’t say to you, because the first quarter, Erika, is very slow, and we’ve never really had a quarter in the first quarter whereby we’ve had a $1 billion. I think the most we’ve ever done is $699 million or $700 million in the first quarter. But I would say on average $1 billion a quarter when you at it on an annual basis, is close to being sustainable.

[Erika Najarian:]

Got it. And just my second question, I know we chattered about this offline, but could you give us an update on the size of your medallion portfolio, I know in the K it was $596.7 million at the end of last year, and if you could help us think through what a competitor like Uber means in terms of potential growth, the value of medallion versus cash flow if you think about that service and additionally, what the regulatory environment is in New York in terms of taxicabs?

[Eric R. Howell:]

Erika, our medallion business is about $800 in book value currently. When you look at the New York taxi medallion landscape, it is highly regulated, and Uber in New York is really under those regulatory guidelines. So I would say about 95% of the rules and regulations that apply to taxicabs apply to Uber. So, we’ve really seen limited impact in the New York marketplace. Cash flows for the taxis remain strong. The values have leveled off or maybe come down slightly, and we’ve taken all of that into account in our underwriting, where you utilize a three-month average to determine the values of the taxicabs. We’ve lowered our LTVs as to what we are willing to lend against. We are certainly keeping our eyes on the debt service coverage there and we’ve increased our rates. So, we look to get paid for that greater level of risk. But ultimately, in New York, we’ve seen little impact to the medallion business here. In markets outside of New York where it’s not as well regulated, you can see some more issues there. Chicago is an area where we have some exposure, we’ve really taken a step back to wait to see how regulations there play out. But ultimately, we have not seen any delinquencies in our medallion business in New York or out of New York. So, we feel pretty comfortable about the credit quality of those portfolios.

[Joseph J. DePaolo:]

As Eric said about the – the key is the cash flow and as he pointed out earlier, there are more than 45,000 drivers for 13,000 cabs. So, there is no lack of use of the taxis and the cash flow that would be able to pay back our loans.

[Erika Najarian:]

Great. As a New York resident, I can attest to that. Thank you for your complete answers.

[Eric R. Howell:]

Thanks, Erika.

[Operator:]

Your next question comes from the line of Jared Shaw of Wells Fargo Securities.

[Jared Shaw:]

Hi, good morning.

[Joseph J. DePaolo:]

Hi, Jared, good morning.

[Jared Shaw:]

If you could just give us an update on what was the linked quarter growth in the Signature Financial overall and all the specialty finance categories?

[Eric R. Howell:]

It was $320 million.

[Jared Shaw:]

And was there – what areas we are seeing most of the growth in and in terms of the verticals?

[Eric R. Howell:]

It was pretty much across the board. I wouldn’t say any area stuck out.

[Jared Shaw:]

Okay. And then with the new verticals

[Eric R. Howell:]

Excuse me, except for medallion, which we held stable.

[Jared Shaw:]

Okay, okay, great. And then with the new verticals, are those serviced by existing teams, or have there been net new hires as you’ve grown, integrated those newer verticals?

[Joseph J. DePaolo:]

We just had – for those two verticals, we just had added on three new hires, that’s it.

[Jared Shaw:]

For the Marine and the Franchise?

[Joseph J. DePaolo:]

It was mainly those that drive the business, we already had some of the servicing and underwriting in place.

[Jared Shaw:]

And then as you target new verticals going forward, would that be the similar model where you have maybe a business unit head come in but were able to incorporate into the existing operations?

[Joseph J. DePaolo:]

Yes and no. I mean one of the ones we are looking at we require probably six or seven hires for one of the new verticals. Someone can lead the business, but we would also have to – some support staff that would needed to be added on.

[Jared Shaw:]

Okay, great.

[Joseph J. DePaolo:]

2015 Event.

[Jared Shaw:]

Okay. And then, Eric, in terms of the prepayment penalty expectations, do you have any thoughts going forward, what’s your expect given the trends that we are seeing now?

[Eric R. Howell:]

Well, it’s incredibly choppy, and I mean, we think that it’ll continue to slowly decline, but it’s very hard to predict the behavior in that arena, but ultimately we think it is going to continue to decline over the next several quarters.

[Jared Shaw:]

Great. Thanks very much.

[Joseph J. DePaolo:]

Thanks, Jared.

[Eric R. Howell:]

Thanks, Jared.

[Operator:]

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

[Lana Chan:]

Hi, my questions have been answered. Thank you.

[Joseph J. DePaolo:]

Thank you, Lana.

[Eric R. Howell:]

Thank you, Lana.

[Operator:]

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

[Peyton Green:]

Yes, good morning. Eric, Joe, I was wondering if you could comment maybe, I mean, it seems like there is a big obvious catalyst for your deposit growth over the next three to five years that maybe is not as relevant for a lot of players in the market, I am just wondering if you comment on what you think the long run effect of the LCR rules for the too big to fail banks might be for you all today relative to maybe how you were set up even just a few years back?

[Joseph J. DePaolo:]

Well, without getting into too many specifics, you hit the nail on the head, we’ve been able to recognize that some of the big institutions need to get out of some lines of business, when I say big institutions, I mean, the too big to fail institutions and we are trying to take advantage of that, and that certainly helped propel us with deposit growth being record recently and we look forward to that taking us not only, but certainly in part over the next several years.

[Peyton Green:]

Okay. So you do you see it as the long-run opportunity that really has not been in play or driven your deposit growth in the past that could keep at a very high level regardless of loan growth, is that fair?

[Joseph J. DePaolo:]

No, it is fair, but we – we’ve always taken business away, whether it’s because of liquidity or not. It may help to propel us for a little bit more deposit growth, but I would say that even if the liquidity didn’t exist, we would still be taking business away from the bigger institutions.

[Peyton Green:]

Okay, great. Thank you.

[Eric R. Howell:]

Thank you, Peyton.

[Joseph J. DePaolo:]

Thank you, Peyton.

[Operator:]

There appear to be no further questions. I’ll turn now turn the call to Joseph J. DePaolo for any additional or closing remarks. Thank you for joining us today. We appreciate your interest in Signature Bank and as always, we look forward to keeping you apprised of our developments. Laurie, I’ll turn it back to you.

[Operator:]

That does conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial 800-585-8367 and refer to conference ID number 14109061. 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.