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Signature Bank (NASDAQ:SBNY)
Q2 2019 Earnings Call
Jul 18, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Signature Banks 2019 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. [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 -- President and Chief Executive Officer

Thank you, Dorothy. Good morning and thank you for joining us today for the Signature Bank 2019 Second Quarter Results Conference Call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Susan J. Lewis -- Media Contact

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 -- President and Chief Executive Officer

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 2019 second quarter was another strong quarter of deposit and loan growth leading to solid earning. Additionally, we continued the momentum we experienced in prior quarters with commercial and industrial loan production far outpacing commercial real estate loans. Major initiatives have taken place over the last several quarters, helping us to continue driving out -- driving our deposit growth as well as furthering our asset and geographic diversification strategy. This include the launch of Signet, as well as the addition of both the Digital Banking Team and Fund Banking Division, which have already made meaningful contributions. Moreover, we recently added the Venture Banking Group as well as the Kanno-Wood Team, which is focused on treasury management products and services related to deposit rich residential and commercial mortgage services, among others.

All these banking teams, which are national in scope, have helped elevate Signature Bank's profile and offering and will contribute to a more diversified credit and asset liability position over the short and long term.

Let me sum it up by saying, we are incredibly busy.

Now onto the quarter. Signature Bank delivered another quarter of growth and performance led by more than $900 million in deposit growth, while maintaining overall strong credit and credit quality and delivering solid earnings. Net income for the 2019 second quarter was $147.9 million or $2.72 diluted earnings per share compared with $154.6 million or $2.83 diluted earnings per share to last year. The decrease in net income was due to a rise in non interest expense from the significant investment in new private client banking team, including nearly 50 employees added for the Fund Banking Division, the Venture Banking Group and the Kanno-Wood Team collectively. Looking at deposits, while confronted by a challenging deposit environment. We increased deposits by $918 million to $37.5 billion this quarter and average deposits grew $466 million. Since the end of the 2018 second quarter, deposits and average deposits both increased $2.5 billion. Non interest bearing deposits increased $546 million to $12.3 billion and still represent a high 33% of total deposits. The positive loan growth coupled with earnings retention led to an increase of $3.7 billion, or over 8% in total assets from a year ago.

Now, let's take a look at our lending businesses. Loans during the 2019 second quarter increased $467 million or 1% to $37.9 billion. For the prior 12 months, loans grew $3.8 billion. The increase in loans this quarter was again driven primarily by our Fund Banking Division. This is the third consecutive quarter where C&I outpaced CRE, furthering the transformation of our balance sheet to include more floating rate assets and diversifying the credit profile. Additionally, during the quarter, we sold $47 million of Taxi Medallion Loans and $91.8 million portfolio of Signature Financial Equipment Loans.

Turning to credit quality. Our core portfolio continues to perform well, actually reduced our credit, our risk exposure. With the sale of medallion loans, now we have a total of $41.3 million in non-performing loans or just 11 basis points of total loans. Our past due loans remained in their normal range with 30-to-89 day past due loans at $51 million, 90-day-plus past due loans at a low $4.7 million.

Net recoveries for the 2019 second quarter were $3.7 million compared with net charge offs of $3 million for the 2018 second quarter. The provision for loan losses for the 2019 second quarter was $5.4 million, compared with $8 million through 2018 second quarter. The allowance for loan losses increased by 1 basis point to 64 basis points of loan. And now that we are substantially lowered on medallion exposure, our coverage ratio has significantly improved over the last few quarters to 593%, yes, that's nearly 6 times coverage.

Now onto the team front. We added two private client banking teams in the second quarter, including the large Kanno-Wood Team, specializing in mortgage service and banking.

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 -- Executive Vice President, Corporate and Business Development

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 $326 million, up $5 million or 1.6%, when compared with the 2018 second quarter and an increase of $7 million from the 2019 first quarter.

Net interest margin decreased 20 basis points in the quarter versus the comparable period a year ago and declined 1 basis point on a linked quarter basis to 2.74% . Excluding prepayment penalty income, core net interest margin for the linked quarter decreased 2 basis points to 2.71%. Let's look at asset yields and funding costs for a moment. Interest earning asset yields increased 21 basis points from a year ago and 2 basis points from the linked quarter to 4.03%. The increase in overall asset yields was driven by higher reinvestment rates in commercial loans. Yields on the securities portfolio decreased 4 basis points, linked quarter to 3.27% due to the dramatic decline in market rates, which also led to our portfolio duration coming into 2.5 years.

Turning to our loan portfolio, yields on average commercial loans and commercial mortgages increased 3 basis points to 4.24% compared with the 2019 first quarter, excluding prepayment penalties from both quarters. Yields increased 2 basis points. Prepayment penalties for the 2019 second quarter were only $3.6 million, up slightly when compared with $2.4 million for the 2019 first quarter, but down significantly from the $6.1 million in the 2018 second quarter, as the slowdown in transaction activity led to a decline in CRE prepayments, which we anticipate will continue.

Now, looking at liabilities, our overall deposit cost this quarter increased by only 3 basis points to 1.19% , which is much less of an increase than the previous several quarters due to an increase in non-interest bearing deposits as well as the leveling off of deposit pricing. Given that we are six months removed from the last Fed increase.

Average borrowings excluding subordinated debt increased $201 million to $6.3 billion or 12.9% of our average balance sheet. The average borrowing costs increased 5 basis points from the prior quarter to 2.63%. Overall, the cost of funds for the linked quarter increased 3 basis points to 1.42%. And on to non-interest income and expense, non-interest income for the 2019 second quarter was $8.6 million, an increase of $3 million when compared with the 2018 second quarter. The increase was due to an increase of $3 million in net gains on sales of loans, mostly due to the Signature Financial equipment portfolio sale. Non-interest expense for the 2019 second quarter was $131.9 million versus $112.6 million for the same period a year ago. The $19.3 million or 17% increase was mostly due to the meaningful addition of private client banking teams.

The bank's efficiency ratio was 39.4% for the 2019 second quarter versus 38.5% for the 2019 first quarter. The efficiency ratio has been negatively affected by the declining NIM and our investments in long-term strategic initiatives.

And turning to our capital. In the second quarter of 2019, the bank paid a cash dividend of $0.56 per share. Additionally, during the 2019 second quarter, the bank repurchased approximately 413,000 shares of common stock for a total of $59. The dividend and share buybacks had a minor effect on capital ratios, which all remained well in excess of regulatory requirements and augments the relatively low-risk profile of the balance sheet. As evidenced by our tangible common equity ratio that increased 17 basis points to 9.46%.

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

Joseph J. DePaolo -- President and Chief Executive Officer

Thanks, Eric. This quarter was a return to the original Signature Bank script, with earnings driven by solid deposit growth nearly doubling our loan growth. Additionally, we significantly reduced our medallion portfolio with the sale of $47 million in medallion loans, which now represent just 5 basis points of total loan.

We also added the Kanno-Wood Team to spearhead our efforts in the deposit-rich mortgage servicing space. In the past several quarters, there have been numerous mentions of both the new initiatives and lines of business we've added. I would be remiss, if I didn't mention the strength of our 100-plus private client groups, which are the foundation of Signature Bank. These traditional banking teams continue to add to the growth of the bank and we look forward to their future contribution as well as those of our new initiatives and lines of business.

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

Questions and Answers:

Operator

The floor is now open for questions. [Operator Instructions] Thank you. Our first question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, good morning.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Good Morning.

Joseph J. DePaolo -- President and Chief Executive Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

[Indecipherable] in terms of the new hires. Obviously expenses ticked up. I totally get it, you're hiring talents, it kind of help grow the business. But how quickly should those new private banking teams actually start contributing to deposit growth?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

We anticipate that the Kanno-Wood Team is going to take a couple of quarters to ramp up. So we should see them start to add to deposit growth. I'd say early next year, if not late this year. As for the Venture Banking team that started in March, they did close a few transactions in the second quarter, but really their pipeline for the third quarter is quite robust. They already have 12 accepted term sheets. We expect commitments to be north of $80 million outstandings, to be north of $30 million and deposits should be well north of $100 million, if not close to $200 million. They've got about another 25 term sheets out and we'll win our fair share of those. So that could lead to another $200 million to $300 million in deposit growth as well as $200 million in commitments. So they've been very, very active since starting and they've gained really solid traction early on. So we're very pleased with what they've done. The Fund Banking team continues to add -- there over $3 billion now in commitments. They added over $600 million in loans again this quarter. And we anticipate that the deposit flows really start for them in the next couple of quarters.

Ken Zerbe -- Morgan Stanley -- Analyst

Is there a way to quantify between the Fund Banking, the Venture Banking, and then the Kanno-Wood Team. Like who is probably the -- potentially could bring in the most deposits or could be the most successful? Because I know they all have kind of different characteristics.

Joseph J. DePaolo -- President and Chief Executive Officer

Ken, we really, don't break that out into public use. We have the other 100-plus teams that all contribute in various ways and on deposit loans, fee income. We just don't break that out.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Okay. And then maybe just one question, in terms of the outlook for margin, I get that, you know, this quarter just we didn't have the rate cuts, next quarter. You know, very flat yield curve is probably going to be a bit of a headwind. But when you think about, say, 2020, if the Fed does kind of keep cutting rates, is -- do you need the tenure [Phonetic], the long end of the curve to actually go up before you see NIM expansion? Or is just the nature of the Fed cutting -- driving a bit of a steeper yield curve granted at very low levels, but is that enough to drive NIM expansion? Thanks.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Well, I mean, we anticipate NIM is going to be stable at this point. We would need some steepness to the curve, Ken, for us to really see meaningful expansion at this point. With an inverted curve. If the Fed continues to cut, but the curve remains inverted. That's not a good environment for any banks. So we would be stable in that scenario if the Fed cuts. But we see the -- the tenure stay where it is or increase and we get some steepness to the curve, then we would expect to have some margin expansion. But right now, we're very pleased with the fact that we more or less hit a bottom on our margin and now, it's just looking to drive net interest income through [Speech Overlap].

Ken Zerbe -- Morgan Stanley -- Analyst

Okay that makes sense. And then I have -- just one more question. In terms of the taxi loans, [Indecipherable] sold the chunk. Why didn't you sell the rest of your taxi loans?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

We sold all of the loans that were performing for a period of time, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Oh, I see.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

The rest are -- the rest are performing at varying levels. So we sold most of our loans. We have about $16 million remaining in loans, most of our exposure now is in repossessed assets, or we have approximately $37 million in repossessed assets. Our team there is working hard to getting new borrowers to purchase those medallions and to put them back into a performing category. Actually, about 70% of those repossessed already have payments coming in on them. So we're pretty pleased with that. And as we see, those payments being made consistently for a period of time, we think, we'll be able to sell those loans as well.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, great. Thank you very much.

Joseph J. DePaolo -- President and Chief Executive Officer

Thank you, Ken.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Joseph J. DePaolo -- President and Chief Executive Officer

Hey, good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Looking at the national lending platform, is that set? Are you happy with how that's set up now? Or do you think that there is room for incremental hiring in that -- in that segment or maybe even expansion to other lines?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yeah, I'd say that we've added to the Fund Banking Division this quarter. We don't really anticipate adding there. You know, we really have a powerful team there. And as would -- as -- they drove loan growth pretty significantly again this quarter. We'll be building out the Kanno-Wood Team. We hired eight -- very experienced professionals there. But we'll build out their staff, probably another three to four hires to come -- to come there. The Venture Banking Group is up to about 28, 30 people. I don't anticipate, we'll be hiring in the near term, but certainly as they grow, we'll look to add to them as well.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

I don't think, we really anticipate adding any more national businesses at this point, but we'll always be opportunistic on that front.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. Thanks and then on the borrowing side, given the lower rate environment, does that change your appetite to lower borrowings as a percentage of funding? Or does that take some of the pressure off in the near term?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

It certainly take some pressure off and we're looking to reduce those borrowing costs and hopefully, really replace those borrowings with even lower cost core deposits. That's really our focus.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then can you just give an update on the multi-family portfolio in light of the law change and how -- how you're viewing the strength of that from one, a credit point of view? And also, have you seen any change in the competitive dynamics there given the reduced cash flows longer term?

Joseph J. DePaolo -- President and Chief Executive Officer

Well, we certainly are taking it very seriously. We did a super deep dive into the portfolio and we cast a pretty wide net. So let me give you some statistics. We have a multi-family portfolio of $17.5 billion and of that $14.5 billion is in New York City multi-family. So we carved out what was outside of New York City since the rent stabilization laws affect New York City area. And of that $14.5 billion about $10 billion or 70% of the properties have some level of rent stabilization. So we excluded $4.5 billion of buildings that are fully market rent. So now, we brought that down to $10 million [Phonetic]. Additionally, we excluded fully subsidized buildings, where we never anticipated having market rents at all. So that brought it down to approximately $5.6 billion. And then we did a deep dive in that $5.6 billion of New York City multi-family loans.

We review them all and we concluded that -- and we -- and that included all the renovation loans. And we concluded after reviewing the portfolio that we're not seeing any real issues relating to the rent stabilized portfolio. However, you know, we're pretty mindful of the fact that of the environment and we're monitoring it closely. The next step is to doing the deep diving. Now we're meeting with those -- those owners or borrowers face to face to ensure that the properties are in good shape and that the cash flows are there.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks. And has it changed the competitive dynamic at all in the space?

Joseph J. DePaolo -- President and Chief Executive Officer

I don't believe...

Jared Shaw -- Wells Fargo Securities -- Analyst

In terms of pricing or -- OK.

Joseph J. DePaolo -- President and Chief Executive Officer

I just believe it is less, less activity and those experienced owners, who have a multitude of properties and have been in the business are looking at those individual owners who have one or two building and may not do well under the new rent stabilization laws. And as a result, there may be some activity happening soon.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks for the color.

Operator

Our next question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala -- Bank of America -- Analyst

Good morning, guys.

Joseph J. DePaolo -- President and Chief Executive Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America -- Analyst

Just first question, I think, Joe, you mentioned a return to sort of deposit growth driven balance sheet growth. So I think just following up, to an earlier question. Talk to us in terms of with -- all these teams just in aggregate as you think about deposit growth from year on. We've talked about the $3 billion to $5 billion range, but deposit growth has lagged over the last few years. Just what your expectations are and should we start seeing a little more of a momentum on the deposit growth side in the back half into 2020?

Joseph J. DePaolo -- President and Chief Executive Officer

Well, certainly, we don't give prediction on numbers as it relates to deposit growth, but certainly we believe our deposit growth in the second half is going to be greater than that what we've had in the first half. And we're still looking at the $3 billion to $5 billion, although at the lower end.

Ebrahim Poonawala -- Bank of America -- Analyst

Understood. And in terms of just the pricing dynamics in the market, I mean, it seems like it's still extremely competitive. If the Fed cuts at the end of July, could -- if you can, Eric, just talk about your ability to sort of flex down deposit costs or start having those negotiations with clients?

Joseph J. DePaolo -- President and Chief Executive Officer

I believe that we'll have somewhere between 40% to 50% of the decline in Fed funds rate that we'll be able to pass along. It will be over time, like you said, negotiations because a significant portion of the deposits are negotiated on the money market side. So one thing we will do, we will be a little bit more aggressive than we were last time, because I think there is some clients that forget that the last time when we dropped rates, we did it slowly, gradually. And the competitors did it as if it was pushed on them. We dropped them more -- more quickly. On the way up. The clients forgot how gradual we were on the way down, they wanted swiftly moved up on the interest rates when rates were going up.

This time, we're going to be a little bit more aggressive in dropping the rates than we were in the past.

Ebrahim Poonawala -- Bank of America -- Analyst

Understood. And just switching gears to the asset side in terms of the loan growth. So obviously dominated by C&I growth over the last few quarters. Does the outlook there in terms of the makeup of growth that you expect in the outlook for the CRE book relative to where it ended the second quarter?

Joseph J. DePaolo -- President and Chief Executive Officer

Well with the CRE book, we still have the book of $28 billion and it has to be managed and we're doing business with our current clientele. What we've been trying to move off is the loans that have no relationship, where they have one loan, maybe two, and they never fulfill their promise of bringing over deposits. Those we like to finance -- refinance away. And will be flexible in the prepayment penalty. We also don't believe we're going to bring on any new clients on CRE. But we have some very sophisticated, significant clientele that we want to keep and we're going to refinance those loans here.

The one thing I will say on the interest rate side as it relates to loan, that there is a wider gap between us and the competitors. And we just don't understand how competitors, who can borrow at a certain rate and then lend on multi-family at a spread that is ridiculously low. We're trying not to do anything sub 4%, we will do it for clients. But we have about a 50 basis point spread right now between us and what a client -- I'm sorry, between us and what our competitor is charging. And we just don't understand how their margins are not going to go below 200 [Phonetic].

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yeah, given the market dynamics that we've seen in the multi-family space, we're very surprised that we have not seen credit spreads widen.

Ebrahim Poonawala -- Bank of America -- Analyst

And is that because just there hasn't been enough activity to reflect all the changes or do you think just there are enough players to keep those spreads tight?

Joseph J. DePaolo -- President and Chief Executive Officer

I think, it's the only business that they're in, probably with some of the banks. And we diversified since 2012 and we have more flexibility and we'll continue to have more flexibility as a result of our more diversified portfolio.

Ebrahim Poonawala -- Bank of America -- Analyst

Understood. Thanks for taking my questions.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Thank you.

Joseph J. DePaolo -- President and Chief Executive Officer

Thank you, Ebrahim.

Operator

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

Casey Haire -- Jefferies -- Analyst

Thanks, good morning, guys.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Good morning, Casey.

Joseph J. DePaolo -- President and Chief Executive Officer

Good morning.

Casey Haire -- Jefferies -- Analyst

Just -- just to follow up on that question. So the multi -- the New York City multi-family $14.5 billion. You guys are pushing for $3 billion to $5 billion of asset growth per year. You're currently not pricing multi-family to grow. So can you just walk us through, how do you see this -- these balance -- this portfolio evolving over the next couple of years. And what level -- I'm assuming, it's going to decline. What level, what pace of decline do you need to have without jeopardizing the $3 billion to $5 billion of asset growth.

Joseph J. DePaolo -- President and Chief Executive Officer

Well, on the CRE portfolio, we were thinking that over the next several years, we remain somewhat flat because you are in the business. It could decline a little bit, but that's why we started in 2012 to bring on different businesses like Signature Financial and then ABL, which we bought on. Now we have three or four other businesses that we bought on where there is deposit growth and loan growth. And we -- we believe that along with the existing hunter team, we can maintain a $3 billion to $5 billion level of growth.

Like the Fund Banking team, could do anywhere between $0.5 billion and three quarters of a billion [Phonetic] in growth on the credit side a quarter.

Casey Haire -- Jefferies -- Analyst

Right. I understand. -- I like. I see the new verticals -- C&I verticals. But -- I mean, multi-family is a five year product, '14 and '15 were pretty big vintage years for you guys. And, I guess another way. Where do you see the multi-family balance a year or two from now versus that $14.5 billion today?

Joseph J. DePaolo -- President and Chief Executive Officer

Slightly down.

Casey Haire -- Jefferies -- Analyst

Slightly down. Okay. But is that possible if you're that far above the market in terms of...

Joseph J. DePaolo -- President and Chief Executive Officer

Well we are that far from the market if somebody new comes on, although we're not taking on new clients, but if there's an opportunity or through existing clientele, I can tell you, we're doing a deal right now on 375 .

Casey Haire -- Jefferies -- Analyst

Okay. All right. And then just...

Joseph J. DePaolo -- President and Chief Executive Officer

There is going to be some flexibility. We can't do everything at sub -- we can't do everything starting with a fore-handle.

Casey Haire -- Jefferies -- Analyst

Got you .Okay . On the deposit side. Apologies if I missed this. In the release, you mentioned, it's still a challenging deposit environment. Any color on where average deposits are quarter to date?

Joseph J. DePaolo -- President and Chief Executive Officer

Yes, they are higher than they were during the second quarter. The average is higher.

Casey Haire -- Jefferies -- Analyst

Okay. And then just...

Joseph J. DePaolo -- President and Chief Executive Officer

Which is meaningfully high -- meaningfully higher.

Casey Haire -- Jefferies -- Analyst

Great.

Joseph J. DePaolo -- President and Chief Executive Officer

And again, it's only 80 days.

Casey Haire -- Jefferies -- Analyst

Yeah. Understood. And just lastly on the expense front -- tracking a little bit higher here quarter to date, obviously, or year to date, obviously another team add -- another big team add. Is 15% year-over-year, should we expect that through 2020 is until we anniversary these team hires?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

For 2020, that's reasonable. Yeah, I think we'll be in a 12% to 16% expense growth starting at 16% probably for next quarter and then it should start to trickle down each quarter as we move forward.

Casey Haire -- Jefferies -- Analyst

Okay, great. Thank you.

Joseph J. DePaolo -- President and Chief Executive Officer

Thank you

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Thank you, Casey.

Operator

Our next question comes from the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos -- JP Morgan -- Analyst

Hi, everybody. Good morning.

Joseph J. DePaolo -- President and Chief Executive Officer

Good morning, Steve.

Steven Alexopoulos -- JP Morgan -- Analyst

Just to follow up on NIM. Eric, the guidance you gave for stable NIM in 3Q, that obviously assumes that the Fed cuts in July, correct?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Correct.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. And assuming that the intermediate portion of the curve holds, which we don't know if it will or not, but assuming it does. Shouldn't the Fed cuts be more beneficial to NIM and really start unwinding some of the NIM pressure you saw over the past year?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yes, it should be.

Steven Alexopoulos -- JP Morgan -- Analyst

It should be, OK. Thanks. And then on the new rent regulations, I'm curious, what are you hearing from your customers here? You know, are volumes just falling off a cliff? Is the practice of building owners taking out cash to make capital improvements. Is that just done? And then, I have a question on the credit deep dive.

Joseph J. DePaolo -- President and Chief Executive Officer

Well, it could be done because there's no incentive to take out cash to refurbish buildings and what not. That is clear. What we're hearing from our clients is they are upset. They can't understand how this could have happened. They ask us clearly about refinancing, how that's going to be handled. And we said, it's based on cash flow, not based on the value so much of the property. Because certainly the values have dropped. But if a client has been paying and has had no issues with us and he has a cash flow, we'll continue to refinance those clients.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, that's helpful. And Joe, on the deep dive you did into the portfolio, are you now even more confident that this is not a credit challenge?

Joseph J. DePaolo -- President and Chief Executive Officer

Yes. I'm more confident that's it's not a credit challenge.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay.

Joseph J. DePaolo -- President and Chief Executive Officer

It's more of challenge for most.

Steven Alexopoulos -- JP Morgan -- Analyst

Yeah. And then just separately. It's good to see another team here at the mortgage servicing segment. Could you give us a sense what -- what do you see is the size of that deposit opportunity over time?

Joseph J. DePaolo -- President and Chief Executive Officer

Over time, I would say, it was thought would it be, instead of a NIM.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay, so it's meaningful. Okay, thanks for taking my questions.

Joseph J. DePaolo -- President and Chief Executive Officer

Okay, Steve. Thank you.

Operator

Our next question comes from the line of Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Thanks. Eric, you mentioned steepness of the curve and just going back to the NIM discussion now for Signature, what part of the curve is most relevant when you think of steepness?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

I'd say the five years is most relevant for us.

Brock Vandervliet -- UBS -- Analyst

Okay. Like Fed funds to the five year that part of the curve.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Exactly, that's right, Brock.

Brock Vandervliet -- UBS -- Analyst

Okay, and to the extent the -- the forward implied rates show steepening in that segment, that would be favorable for your NIM?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Correct.

Brock Vandervliet -- UBS -- Analyst

Okay and I don't know how much repositioning you did in the quarter relative to the that static stock analysis that we see in the Q, how much different would that potentially be this quarter?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

It's improved slightly, so the differences in 100, 200, 300 shock of all -- will come in a little bit.

Brock Vandervliet -- UBS -- Analyst

Okay.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

It really shows us being more stable, Brock in our margins.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay, thank you.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Thank you.

Joseph J. DePaolo -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Matthew Breese with Piper Jaffray.

Matthew Breese -- Piper Jaffray. -- Analyst

Good morning, everybody.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Good morning, Matt.

Joseph J. DePaolo -- President and Chief Executive Officer

Good morning.

Matthew Breese -- Piper Jaffray. -- Analyst

Joe, Eric, I wanted to focus in on the multi-family portfolio. Just make sure I had it clear, so the $10 billion, the 70% at hand some level of rent stabilization. You got that down to $5.6 billion. Is that $5.6 billion -- again is that $5.6 billion just the fully rent stabilized buildings, nothing, but?

Joseph J. DePaolo -- President and Chief Executive Officer

No, what we did is we subtracted from the $10 billion, about $4.5 billion which were fully subsidized buildings, where we never anticipated any market rents. So that brought it down to the $5.6 billion.

Matthew Breese -- Piper Jaffray. -- Analyst

Got it, OK. And so on the $5.6 billion. What is the average LTV of that portfolio and what cap rates? What was the average cap rate that you underwrote those loans to?

Joseph J. DePaolo -- President and Chief Executive Officer

Well, that's not information we give out.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay, did you -- when the market was in the 3.5% to 4% cap rate kind of range for those loans that you would typically underwrite or would you stressing things a little bit higher?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yes. We used a much higher cap rate than the industry, so.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay. And have customers given you any sort of indications of what devaluation impacts to their rent stabilized properties might be? Is there any sort of range right now that you would -- you would think about?

Joseph J. DePaolo -- President and Chief Executive Officer

Well, what we're talking about is cash flow. That's the conversation we're having with client, not so much devaluation of the building.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

And it's a little too early to tell, Matt.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

And it is just past and it's working its way through the marketplace. Certainly, we feel that values have been affected. But again as Joe said, our focus is on cash flow, that's how you get paid back and LTV is a fallback when the cash flows aren't there. So our primary source of repayment is cash flow and that's where our focus is, and we feel comfortable with that.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay.

Joseph J. DePaolo -- President and Chief Executive Officer

I think the phrase is, we're trying to figure out how to appraise.

Matthew Breese -- Piper Jaffray. -- Analyst

I mean at the very least, do you expect any -- your qualitative factors that go into the allowance because of such a large change in the industry? I mean, those qualitative factors kind of have to change and therefore increase your allowance at least?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

We did change our qualitative factors this quarter and we added to environmental reserves with the performance of our portfolio, however, that was offset. So we would have taken back provisions, had we not added qualitative factors this quarter.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay. So I...

Eric R. Howell -- Executive Vice President, Corporate and Business Development

We're very mindful of the environment and we're keeping a very close eye on it. We do think that we are dealing with very strong owners and landlords that will be able to fight their way through this -- these changes. But we're keeping a close eye on it and we are trying to prudently reserve for any anticipated issues.

But right now, given the deep dive that we've done and what we've seen, we don't really see any issues.

Matthew Breese -- Piper Jaffray. -- Analyst

Just curious. I think your multi-family CRE reserve was something like 65 basis points, maybe 68 basis points? How much of that environmental input impact that 68 basis points?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Probably, I'd say, 2 basis points to 3 basis points.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay. And then going back, I think you said that the $5.6 billion included some of the construction loans..

Joseph J. DePaolo -- President and Chief Executive Officer

We increased the loan on renovation loans, was the renovation loans, yeah.

Matthew Breese -- Piper Jaffray. -- Analyst

Renovation loans. How much of that was tied to potentially pro forma rents or those all based on current rents?

Joseph J. DePaolo -- President and Chief Executive Officer

Very little was based on future rents. Most of it was based on current.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

And at least 50% of that portfolio was all market rent, to begin with.

Matthew Breese -- Piper Jaffray. -- Analyst

Right. So is roughly 50/50 market rate and then based on forward rates, is that accurate?

Joseph J. DePaolo -- President and Chief Executive Officer

Some forward, very little. Most of it was current.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay, OK. And then in all the cases or how many of the cases were you also underwriting the property itself and therefore had kind of a first lien position on the construction?

Joseph J. DePaolo -- President and Chief Executive Officer

We really don't do construction financing.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yeah, none of it's construction, it's all renovation loans where we always have a first lien.

Matthew Breese -- Piper Jaffray. -- Analyst

Got it. Okay. Okay, and then because of this, are there any changes to the risk weighting or risk ratings of your multi-family loans and how would that work through?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

We don't anticipate any changes to our risk weightings.

Matthew Breese -- Piper Jaffray. -- Analyst

Okay.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

And there's been a lot of -- Matt, there's been a lot of noise around that in the risk weightings, if we took all -- all of our loans that are in the 50% bucket and move them to 100%, it costs us 100 basis points in our capital. It is a non event for us, period. And it's not something that we're concerned about at all.

Matthew Breese -- Piper Jaffray. -- Analyst

That's all I had. Thank you very much.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Thank you.

Joseph J. DePaolo -- President and Chief Executive Officer

Thank you, Matt.

Operator

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

Christopher McGratty -- KBW -- Analyst

Hi, good morning.

Joseph J. DePaolo -- President and Chief Executive Officer

Hi.

Christopher McGratty -- KBW -- Analyst

Joe, Eric. With the $3 billion to $5 billion of asset growth. I think you said, lower and near term. How do you feel about the rest of the buyback? The pace of the buyback, you're a little more aggressive this quarter, but any thoughts on whether you think you can finish it in the next maybe year and a half or new pace of buyback?

Joseph J. DePaolo -- President and Chief Executive Officer

Well, you know, it's going to be dependent upon where the price is, how quickly we're using capital. I mean, none of the factors change that went in to last three quarters when we were buying back. We saw an opportunity to increase it this -- the second quarter. And if we see the same opportunity in the third quarter, we'll do so.

We won't be stressed with -- we won't be shy about increasing it in any one quarter.

Christopher McGratty -- KBW -- Analyst

Okay. Would this be a quarter that you would say is kind of as aggressive as you be or if your stock is at these levels? Next quarter, you could even do more.

Joseph J. DePaolo -- President and Chief Executive Officer

Well, it's at some of the 18 day. So let's see how the market reacts to our quarterly earnings. Let's see how the market reacts to the Fed dropping their rate. And I don't mean the stock market, I mean our clients.

Christopher McGratty -- KBW -- Analyst

Got it. And then one housekeeping item that the tax rate and the offset and the AIM expense, is that this quarter a fair estimate going forward?

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Yes.

Christopher McGratty -- KBW -- Analyst

Great. Thank you.

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Thank you, Chris.

Operator

This concludes our allotted time and today's teleconference. If you'd like to listen to a replay of today's conference, please dial (800) 585-8367 and refer to the conference ID #6935767. 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.

Duration: 45 minutes

Call participants:

Joseph J. DePaolo -- President and Chief Executive Officer

Susan J. Lewis -- Media Contact

Eric R. Howell -- Executive Vice President, Corporate and Business Development

Ken Zerbe -- Morgan Stanley -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Ebrahim Poonawala -- Bank of America -- Analyst

Casey Haire -- Jefferies -- Analyst

Steven Alexopoulos -- JP Morgan -- Analyst

Brock Vandervliet -- UBS -- Analyst

Matthew Breese -- Piper Jaffray. -- Analyst

Christopher McGratty -- KBW -- Analyst

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