Q3 2022 Signature Bank Earnings Call
[music].
Please standby your program is about to begin.
Welcome to signature Bank's 2022 third quarter results conference call hosting the call today from signature Bank are Joseph J, Depaolo, President and Chief Executive Officer.
Eric Our hollow senior Executive Vice President and Chief operating Officer, and Stephen Why room Ski Senior Vice President and Chief Financial Officer. 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. If you would like to ask a question.
At that time, Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star too we.
Ask that while you pose your question you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to Susan Inter Cal corporate communications for signature Bank you may begin.
Good morning, and thank you for joining us today for the signature Bank 2022 third quarter results conference call before I hand, the call over to President and CEO . Joseph Depaolo. Please note that comments made on this call by the signature Bank management team May include forward looking statements that can differ materially from actual.
Results for a complete discussion. Please review the disclaimer in our earnings presentation dealing with forward looking information the presentation accompanying management's remarks can be found on the company's investor Relations site at Investor That's even trend why dot com now I would like to turn the call over to Joe.
Thank you Susan I will provide some overview into the quarterly results and then my colleague, Eric and Steve will review the bank's financial performance in greater detail.
Steve and I will address your questions at the end of our remarks.
Signature bank's success over the years has been our focus on what we can control.
Hiring banking teams and expanding our relationships with our clients.
What continues to set us apart from our competitors is our ability to identify and without experience teams and national banking practices that exhibit superior talent and the proof of this lies with the somewhat strong relationships that our bankers sports with their clients over time.
Although this is the most challenging deposit environment in our careers, because we stay true to our core discipline signature bank often emerges as a stronger institution in the wake of challenging macroeconomic backdrops.
Since we cannot control external forces such as both driven by monetary policy.
Judge our performance by the metrics, we can control.
Such as growth in client relationships in banking teams. This quarter, we expanded our franchise with the addition of more than 1000, new client business relationships across the institution.
We are excited about the momentum we have and cultivating new relationships today.
Because we know that they are the ones that will continue to bear fruit tomorrow.
Warren Buffett once said someone is sitting in the shape today, because somewhat flat with the tree a long time ago. This is the basis on which we operate and maintain.
<unk> committed to the long term clients in our franchise, we will not be distracted by the short term.
This is not a sprint.
It is a marathon.
Now, let's take a look at earnings.
Pre tax pre provision earnings through 2022 third quarter were a record $492 million, an increase of 161 million or 49% compared with the 331% turning to $31 million for 2021 third quarter, that's a good quarter.
Net income for the 2022 third quarter increased 117 million or 48%.
Uh huh.
Okay, 8% $358 million or $5 or.
1050, 7 billion earnings per share compared with $241 million or $3 98.
Earnings per share of <unk>.
Very good core.
40%, 49% at 48%.
I do want to make a note that in fact, we have passed the $1 billion Mark in net income in the first three quarters of 2022, and we believe that that's something that should be recognized by those that work we did on institution.
So that's a good quarter.
The increase in net income.
It was predominantly driven by the strong growth in net interest income, which was fueled by solid asset growth of $7 billion over the last 12 months as well as the rise in interest rates and the utilization of the excess cash.
All of these factors combined as well as us.
Execution across all of our businesses led to a record return on common equity of 18, 4% and a strong return on average assets of $1 two 4%.
Good quarter.
Now, let's take a look at deposits.
With the frequency and severity of the rate increases.
Collagen environment remains challenging.
Total deposits decreased $1 3 billion or 1% to 103 billion this quarter.
This is meaningful.
Many of you expected us to have decreases beyond $1 3 billion.
This decline was predominantly driven by.
Deposit outflows of $3 billion of digital.
<unk>.
As expected the rest of our franchise was positive this quarter without these costs of $1 7 billion.
We could ship with contributions coming from specialized mortgage banking solutions.
The fund banking division, the West Coast and adventure.
<unk> group.
Remember it is a sprint not a marathon.
There is not a sprint it's a marathon excuse me.
During the quarter noninterest bearing deposits decreased $4 million.
37 billion decline in DDA was mostly driven by the decrease in digital trading.
Which is noninterest bearing.
Clients.
Take the balances office with net.
Please go ahead.
Let's trading and put it into interest bearing accounts that lesser decline. Despite the decline noninterest bearing deposits remain at a relatively high 36% of total deposits.
Since the end of 2021 third quarter deposits increased seven 2 billion or 8% and average deposits increased $24 9 billion.
Our loan to deposit ratio now stands at 72%, which is up from 61% one year ago now I'd like to turn the call over to Eric.
Thank you Joe and good morning, everyone.
I'd like to turn our attention to our lending businesses, where we had another solid quarter.
Loans during the 2022 third quarter increased $1 8 billion or 3% to 74 billion for the prior 12 months loans grew $15 billion or 26%.
This quarter, we continued our diversification strategy, where we saw meaningful growth from nearly all our lending businesses.
The commercial real estate team led the way with growth of $2 1 billion.
I can assure financial increased $406 million.
Our new healthcare banking and finance team grew by $274 million the mortgage warehouse lending team increased by $236 million.
All other C&I grew by $139 million in venture grew by $48 million.
Additionally, this quarter, we purposefully and I want it.
Emphasized that we purposely slowed our capital call lending and we successfully reduced our portfolio by $1 3 billion.
We are employing this strategy in order to further diversify and to allow for the newer lending businesses to grow.
We would like to thank Tom Byrne and his team for successfully deploying the strategy Steve is going to go into that integrated detail later in the call.
Turning to credit quality.
Our portfolio continues to perform very well.
Non accrual loans increased mildly to $185 million or 25 basis points of total loans compared with $168 million or 23 basis points for the 2022 second quarter or.
Our past due loans were within our normal range with 30 to 89 day past due loans at $69 million or nine basis points, and 90, plus past dues at $33 7 million or five basis points of total loans.
Net charge offs for the 2022 third quarter were lower at $10 2 million or six basis points of average loans compared with $19 7 million for the 2022 second quarter.
The provision for credit losses for the 2023rd quarter increased to $29 million compared with $4 $2 million for the 2020 through second quarter the.
The increase was primarily driven by a deteriorating macroeconomic forecast. This brought the bank's allowance for credit losses to 63 basis points and the coverage ratio stands at a healthy 251% I'd.
I'd like to point out that excluding very well secured fund banking capital call facilities. The allowance for credit loss ratio would be much higher at 105 basis points.
And now on to the extent the.
The expanded team front.
As Joe stated earlier, a core metric for us as the number of teams, we onboard and we continue to realize success in this area.
This quarter the bank Onboarding, two private client banking teams, including one in New York and one on the West Coast and our pipeline for future teams remained strong for the year. The bank has added a total of 12 teams, including five in New York and seven on the West Coast. Additionally, our newest national banking pre.
Just the healthcare banking finance team was launched in the second quarter of this year.
In order to support our team expansion, we continued to hire extensively throughout our operations and support infrastructure. So that we can best serve our clients' needs at this point I'll turn the call over to Steve and he will review the quarter's financial results in greater detail.
Thank you Eric and good morning, everyone I'll start by reviewing net interest income and margin.
Net interest income for the third quarter reached $674 million, an increase of $25 million or 4% from the 2022 second quarter, and an increase of $193 million or 40% from the 2021 third quarter.
Net interest margin increased 15 basis points to 238%.
Paired with two 3% for the 2022 second quarter.
The increase in asset yields outpaced the rise in our cost of funds, which led to significant margin expansion during the quarter.
We expect this trend to continue in the quarters ahead, albeit at a slower pace.
Let's look at asset yields and funding costs for a moment.
Interest, earning asset yields for the 2022 third quarter increased 78 basis points from the linked quarter to 345%.
The increase in overall asset yields was across all of our asset classes and was driven by higher rates as well as the deployment of cash into higher yielding loans.
Yields on the securities portfolio increased 18 basis points linked quarter to 2.08% given higher replacement rates and slower CPR speeds on our mortgage backed securities portfolio. Additionally.
Additionally, our portfolio duration increased four five increased to 455 years due to the higher interest rate environment.
Turning to our loan portfolio yields on average commercial loans and commercial mortgages increased 61 basis points to four 3% compared with the 2022 second quarter.
The increase in yields was again driven by our portfolio repricing higher.
Since approximately 50% of our loans are floating rate, we expect loan yields to continue to increase significantly as short term rates continue to move higher.
Now looking at liabilities.
Given the 150 basis points of set moves this quarter.
Overall deposit cost increased 71 basis points to 111%.
Peso deposit cost re pricing is in line with our expectations, given the frequency and magnitude of the rate hikes.
During the quarter average borrowing balances decreased by $539 million and the cost of borrowings decreased by 15 basis points.
296%.
The overall cost of funds for the quarter increased 68 basis points to one <unk>.
Third 14 basis points, driven by the increase in deposit costs.
In order to prepare for the potential decline in interest rates. The bank has started to slowly.
Kris it's asset sensitivity with the goal of achieving an asset liability neutral profile.
We will accomplish this organically in two ways.
First.
As Eric mentioned, we're purposefully, reducing our fund banking exposure, particularly where there are syndicated transactions without deposit opportunities. This will drive our floating rate loan mix lower second we will continue to add fixed rate exposure exposure through our many lending businesses.
Which will help to add duration to our assets.
This strategy will lead to a net interest margin that is stable and less sensitive to the movement in interest rates.
Turning to noninterest income and expense, but they are planned to grow noninterest income, we achieved growth of $12 4 million or 39% to $43 8 million when compared with the 2021 third quarter.
The increase was primarily related to FX income and lending fees, driven by our newer businesses and geographic expansion.
Noninterest expense for the 2022 third quarter was $225 million versus 181 million for the same period a year ago.
The $44 million or 24% increase was principally due to the addition of new private client banking teams national banking practices.
And operational personnel as.
As well as client related expenses that are activity, driven and have increased with the growth of our businesses.
Despite the significant hiring the launch of that healthcare banking and finance team.
<unk> operational investment the banks efficiency ratio improved to 31, 4% for 2022 third quarter versus 35, 4% for the comparable period last year.
Looking at taxes.
This quarter, we benefited from additional tax credits associated with sustainable finance lending.
This lowered our tax rate to 22, 6% for the quarter.
While we expect to see continued benefits from these tax credits due to the strategic.
Our initiative of sustainable finance lending these additional benefit without these additional benefits our tax rate would have been 26%.
Turning to capital our capital ratios remain well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet as evidenced by our common equity tier one risk based ratio of $10 one 1%.
Total risk based ratio of 11, 99% as of the 2022 third quarter now I will turn the call back to Joe. Thank you.
Steve signature bank's strong performance as reflected by our return on common equity of 18, 4% as a result of one of our main objectives greenlawn talented banking teams and businesses and support them to a service oriented platform.
Banking professionals have a proven track record that illustrates what they do best bringing on relationships and service clients for the long term.
This fundamental concept is more effective today than ever before and here's why.
Q2 hiring opportunities right now we are in the middle of one of the better environments with team hiring junior to disruption caused by M&A within our marketplace. This is evidenced by a total of 12 teams as well as to Nashville banking practices onboard over the last 12 months. Some examples of this.
On the East coast, and the MMC and peoples Sterling is whats the dnb enzyme.
And then out west.
That's coming from bank of the West Union Bank and city National RPC City National RPC was five years ago, but they did a good job keeping it together to disruption is occurring there later than that.
Later than usual.
Number two a record earnings allows us to invest in our service offering this helps us to expand our.
Existing relationships, while also attracting new sophisticated clients in the future.
We're investing more than ever before as evidenced by our increase in noninterest expense and finally, many of you have already already know by now and since I'm always saying in any chance I get differentiated model is still highly profitable that despite the current massive investment in our infrastructure, we consistently operate on.
<unk> that is notably lower than the rest of the industry as mentioned earlier this quarter. It was an astonishing 31, 4%.
Just remember we have no retail.
And we.
We don't have the expense related to the retail and you shouldn't just look at margins you should look at the efficiency ratio.
Electively all of these factors.
The growth in the number of clients that choose to bank with us I'd like to thank all of our teams and businesses that work hard for our clients.
And all colleagues that helping support them all of your major signature bank well positioned.
With continued success.
We are doing all the right things to build a better future for the bank now Steve Eric and I are happy to answer any questions you might have.
Yes.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star too again, we do asset while you pose your questions that you pick up your handset to provide optimal sound quality.
Our first question is coming from Ebrahim <unk> from Bank of America.
Hey, good morning.
Good morning, I guess, just first wanted to start in terms of how you're managing.
Thinking about deposits, one maybe acres, Steve talked to us in terms of visibility on deposit outlook entirely industrial using deposits.
Given the client acquisition, how do you think about deposit growth overall and for digital deposit taking.
Secondarily.
How low do you think the cash balances declined over 10% of lending assets used to be about focus and pre pandemic like how low do you think the cash balances get and do we get that in the next quarter.
Ebrahim, it's Joe good morning.
One we have a number of deposit initiatives, which makes us feel very good and positive about the future.
We have the fund banking division, which is refocusing growth efforts on deposits for the second half of this year and they did a good job.
In the third quarter to continue in the fourth quarter to drive deposits in and we're going to be clients that don't give us deposits because we want to have a relationship.
Specialized mortgage banking solutions group is continuing to grow.
And big numbers, and we see that continuing on for the next several years.
One of the other things that we haven't talked about in a while is five <unk>.
<unk> five at one point had grown to $2 billion on our balance sheet.
About $100 million.
Lasalle and we.
We have a new legislation that was passed several months ago that <unk> is now.
Back in working order and it's not going to be on an annual basis approved by the Congress is going to be on a five year basis. So theyre going to have five years business. We right now have a pipeline of nearly $4 billion.
With a pipeline that's 4 billion in deposits, we expect to happen.
This next several years, so it's not going to be all at once we may see a little bit of it in the fourth quarter.
Looking at it.
The next several years, so we have a number of things going on including the 12 teams we hired.
We have both on the West coast to the East Coast. So we have that going for US and then you have digital.
I don't know what the bottom is.
I do know that they've been disappointed.
Yes.
Periods of time.
For a while and it's only going to go up instead.
Instead of going down so close to the.
The things that are good.
Happening that are allowing us to feel positive and confident in the future with deposits.
Got it and then I guess, yes.
Yes go ahead.
Right now we've been monitoring it.
As we should.
Minute by minute basis, and we feel comfortable that we'll see about that we want.
At any point in time, we haven't had any issues.
The liquidity at all.
Understood and I guess, maybe just Steve I think you mentioned about like neutralizing asset sensitivity.
Just give us a sense of like when do you fully get there or is it based on.
Over the next few quarters, the fed funds need to get to some point and in that World, where do you think.
Our signature is auto.
18% to 19% totally defensible once you get to that point, because the stocks, obviously, not reflecting reflecting that had one <unk> book, we would love to hear how you're thinking about neutralizing that and we were just out of <unk>.
In network.
Sure. So on your NIM question.
As far as where we see the asset sensitivity going we do see margin expansion and continuing to occur into the next quarter and then once the fed does ultimately stock quite gain we would expect to continue to see our assets reprice.
Ongoing.
As our deposit pricing that is locked in at that point. So we continue to expect margin expansion, both near and long term as we look over the next year or so.
In regards to your ROE comment.
Would we expect 18% ROE going forward.
I don't know that we will achieve this level, but we continue to expect.
ROE at or around maybe slightly below just given where we're operating the asset sensitivity that we have and the continued expansion that we expect going forward.
Yes, we had a little bit of tax benefit and they are affecting the near term but.
But we should be operating at the high end of.
ROA range for quite some time, and we will see expense growth moderate probably not for several quarters, but.
As we look out into the second half of next year.
<unk> growth.
Start to moderate.
And we will continue to have the fee income and margin expansion kicking in so we feel very good about forward looking earnings.
And just so we have just like you do expect margin to continue to expand even after the fed stops because the lagged repricing and assets. So you don't expect margin to actually be negatively hit when the fed stops correct absolutely.
Absolutely.
Through it right.
We have which we have an increasing margin rate maybe not as much as people had hoped for but it was pretty substantial in our minds right.
And that's up against a fed backdrop and activities at the fed is taking on that we've never seen before and our banking careers right. We're seeing a rapidly rising interest rate environment, coupled with quantitative tightening which is something thats never occurred.
That's really difficult to overcome in the near term, but we have been able to do it and we think we'll be able to continue to do that because our assets will reprice higher we have a lot of floating rate, but once the fed stops hiking, alright, thats going to lock in our liability costs and then we're going to slowly continue to see the longer term assets that we have on our books.
Reprice higher as well so we have margin expansion as we look forward for quite some time, but what we're trying to do is be protective of interest rates. If we look two years out going down right because the curbs the feds essentially telling us that we're headed into a recession, if we're not there already.
So we want to get to an asset liability neutral state, we're not looking to do it overnight. We can do it over the course of the next year or two and start to lock in some duration on our assets to be protected when interest rates finally do come back down which is typical when we hit a recession.
Got it thank you.
Thank you. Thank you.
Okay.
Our next question comes from mainly constantly Ed from Morgan Stanley .
Hi, good morning.
Good morning.
Hey, I was I was wondering I.
I appreciate the comments on adding more fixed rate lending exposure to protect against the decline in rates and eventually get to neutral.
I wanted to ask about the liability side are there any plans to match funding given that <unk> and all the headwinds that you mentioned for deposit growth across the industry.
See that this quarter, but would you be willing to put on more longer dated Cds at some stages.
<unk> funding.
And maybe as a follow up to that.
I know you mentioned that the NIM should continue to expand but can you talk a little bit about how you expect.
The funding cost on the on the deposit side the trend once if that stops raising rates.
Sure just on your question about terming things out I mean, we've done it to a very small extent something.
We look at it but its not something thats a material driver at this point I think we're comfortable with.
Our deposit funding.
Some of the opportunities that Joe mentioned earlier to funding through that channel certainly our preference would be to fund our growth through deposits as opposed to.
Long term borrowings as well.
Got it and would you expect.
Cost of deposits to continue to rise after the fed stops raising rates.
After the funding stops raising rates I mean, I think after the fed stops raising that Scott.
Yes, I think we might see a little bit, but it will it will tail off and as Eric was just talking about that is when our assets and the longer duration assets will continue to reprice and we will see a pick up there on an ongoing basis.
Okay, Great and last quarter, I think you updated your earning asset growth to about $1 billion to $3 billion quarter, mainly driven by launch.
About the lower end of that range this quarter is.
Is that still a good way to think about it as we get into 2023, especially given the headwinds on the on the deposit side for the industry.
Well I can tell you that the 1% to $3 billion is definitely for the fourth quarter and then we'll see what happens.
The remainder of the year.
Because if we get.
More deposits.
Accelerate the growth of the deposits.
At a rapid pace.
Be able to increase the asset side and different guidance for right now we'll go to $3 billion.
Perfect. Thank you thank.
Thank you.
Our next question comes from Casey Haire from Jefferies.
Yes, thanks, good morning, guys.
I guess following up on the.
Yes.
Neutral strategy Youre getting the balance sheet neutral.
So youre at 50% floating rate loan.
What level of floating rate loans is the balance sheet neutral Im just trying to get a sense of.
How much downside, we have on capital call. It sounds like it's going be gradual, but just wanted to get a job.
I mean, Casey I would say not necessarily all about fund banking reduction, but more so our growth being focused on some of the fixed rate component that will drive us then towards being more asset neutral, even if the fund banking or to maintain their book.
<unk> continued to.
Maintain that if our mix growth as more fixed rate, we're going to continue.
More neutral so that's really the strategy.
Okay, So hold capital call and just grow more fixed rate correct, alright gotcha. Okay.
And then.
Cumulative deposit beta.
You guys talked about 40% last quarter I know you guys have been.
And so when that was going to be higher or any updated thoughts as to where that might end up.
And across what.
The forward curve.
Sure. So right now we're looking at somewhere in the low fifties.
We do continue to see pressure on pricing, but as we've spoken about.
Last few remarks.
That pressure does ensue, we certainly expect our assets to continue to reprice and see accretion there as well. So we do continue to see some pressure into the low <unk> is what we're currently forecasting.
Gotcha.
And then Eric.
Can I just ask you to put a finer point on the expense cadence it sounds like.
It's going to run.
It's going to moderate a little bit from that this mid twenty's level towards the lower twenties.
And then moderate even lower.
In the back half of 'twenty three.
Is that right and is that moderating pace in the back half of 'twenty three more in line with that mid teens that we have.
So we are accustomed to with signature.
So I think it's going to stay in the mid <unk> for the next several quarters.
And then we'll see it start to moderate.
Back half of next year, probably coming down.
Gradually into the low twenty's and <unk> into <unk>.
Look out.
Into 2024, I think we'll get back into the to the teams that we've got we've got a lot of expense build.
Is infrastructure spend in product spend take thomasville.
So it's going to be elevated for several for a couple of quarters, and then start to trend down slowly from there.
Got you.
It won't stop us from hiring any additional teams and businesses.
Understood. Thank you.
Yes.
And as Joe said, we've got to we've got a unique opportunity right now given the M&A and disruption in the marketplace and typically recessionary times or good times for signature bank as it relates to hiring.
Key key personnel, especially on banking teams.
The next question comes from Mark Fitzgibbon.
Gibbons from Piper Sandler.
Thank you and good morning.
Mark.
I was wondering if you guys could share with us what the spot cost of deposits today looks like do you have a sense for that versus what it was the average for the quarter I think it was 111.
Yes, it's about 150 150 basis points at spot.
Okay.
Secondly.
Could you share with US also the number of digital clients that you have today.
Yes, we're up to <unk> hundred 39 digital clients, we added 116 during the quarter.
Okay, and then lastly, I was wondering if you could help us think about the relationship that you just are the partnership you just entered with Coinbase, how you think that will track over time.
How big of an opportunity it is and.
Maybe how much is floating thus far thank you.
Okay.
The partnership is not really a partnership.
They're coming onboard.
Are you signaling to you.
As I said is there an exchange.
And as you said net and signature bank.
Most of the operating.
And which is B exchange.
The activity there will be moving from other banks onto us.
It allows us not only to service them, but he has they have to have.
To be honest to goodness their clients, who trade with them has to be on signet as well.
So.
It's a win win win for them because that means that clients will go on signet and get the service.
They get.
And they will also.
Benefit us because what we're going to be doing is getting.
The clients that we didn't have the trade on that exchange so.
It's not unusual to send something out like that.
The press release, we've had.
Foreign exchanges join us in the last several months and.
Happens to be the biggest by far and the other exchanges will do the same thing there'll be bringing their clients on so that they can do the exchange.
On signet as opposed to someone else's.
Thanks.
Paul.
Thank you.
Thank you Mark Thanks, Mark.
Our next question comes from Matthew Breese from Stephens, Inc.
Good morning, everybody.
Good morning, Matthew.
Wanted to touch on commercial loan yields. So the book is now roughly 50% floating rates and I guess I've been a little bit surprised by.
By the move in commercial loan yields relative to fed funds up 300 bps, but we've only seen a 73 basis point move in commercial loan yields so.
Curious as to why it's been a slower moving.
Slower moving on to commercial commercial loan yields what is your expected loan data over the next 12 months and then on the fixed rate side could you just give us some update on what incremental commercial real estate and multifamily loan yields are.
Yes.
Sure I'll start start from the latter the incremental yields were at 600 a quarter.
Commercial real estate.
John .
Our fund banking, we're in the low 5% range signature financial were in the high fives low 6% range.
And then to hit on.
You're at your loan yield question.
What's really happening there is just it's driven by pipeline right. So we have pipeline that are and given how fast the fed hiking theres just some catch up that needs to ultimately come through there. So we should see that continue to roll through.
As the fed hikes in everyone's face certainly slow then we should see that moderate and hit the levels that.
Youre, suggesting I'm expecting.
If I look at total interest earning assets over the next quarter.
I think we'd be in the four in a quarter.
The fourth quarter range, roughly based upon where things have been repricing and considering pipeline.
And thats for overall interest, earning assets that's correct.
Okay.
And then I wanted to talk about the digital assets deposits. So it seems to me the deposit balances here have proven to be on the higher beta side and it seems that theres pretty good movement from demand to interest bearing.
Categories as rates have gone higher you're also providing cigna for free. So I guess my question is as time has evolved <unk> seen some of the underlying characteristics of.
Of the deposits here are the economics, what you'd hope for when you entered this business and thought about a higher rate environment and do you have to start thinking about charging for signet and some of the other offerings, you're providing given what we're what we're seeing on the deposit beta front.
Yeah.
I think the economics are very much in line with what we anticipated here Fortunately.
It.
But similar to all of our businesses on a high expense business as we as we look at operating expenses the size of the team that we have that supports that and the needs. There. So it's highly efficient. So you combine that with the efficiency ratio you bring that into the equation and it makes for to be a pretty profitable business Matt.
Interest rates are or more or less in line with what we anticipated.
We said for a while now that our DDA was at an all time high and we really didn't anticipate it staying at that level.
We've seen a decline in activity in that space and with that decline in activity people need to maintain less on the cigna platform because quite frankly, they are not trading as much and if you look at the stable comment.
Side of the equation.
Traders now instead of sitting in stable corn are putting their money in treasuries right because they are trading less frequently and treasuries have become an alternative to a stable point just like they've become.
I'll now turn it over to bank balance sheet deposits. So so that's where we're seeing some of the declines in that space. Fortunately declines were a little bit less so this quarter the last.
We're kind of hoping that were near at or near the bottom.
Go back to clients in that space, but.
It's still very choppy.
Hard to predict.
But I think it's I think it's very much in line with what.
We thought.
The economics would be and we really don't see a need to charge. There just as we don't charge in the remainder of our bank right. Our strategy has never been to nickel and dime, our clients and quite frankly, that's worked out incredibly well for us over the last 22 years of existence and we see no reason to change that now.
Okay. Okay.
D D.
The exchanges.
Our biggest deposits and debt.
Does it include the clients that are coming onboard that wanted to deal with those <unk>.
What happens is we get a benefit of the exchange joining us and then all of the clients. Following following then to.
To signet and so.
We certainly don't want to.
Charge a fee for.
The exchanges because they were actually bringing this business I'm moving on to the platform.
Understood Okay.
Last one from me just understanding nonperforming assets charge offs are still incredibly low I wanted to get some insight as to how youre thinking about credit provisioning going forward. It just seems like theres plenty of headwinds.
Particularly as it relates to loan resets and debt service coverage ratios for your commercial real estate properties, and then with higher interest rates, you can kind of pencil out higher cap rates I'm curious what you're seeing on these fronts.
Well, we're definitely not seeing higher cap rates. So it's just not putting it through.
Fortunately for us, we're not a consumer bank right and we expect that you're really going to see credit hit the consumer side quarter.
And at the end of day.
We're a relationship based bank.
<unk> two largest asset classes of commercial real estate fund banking.
Pretty pristine.
How many crises do we have to go through in New York, How many times over the last 20, and then you take the history of that team 20 years prior to that so the last 40 years, we've been through lots of economic cycles, and we haven't had much in charge offs at all right. So we're just not worried about our commercial real estate portfolio.
We're doing business with the right people.
Thats shown improved out time and time and time again.
And then if we look at signature financial.
Three secured lender there we've seen a history of strong performance through cycles in that space were not a meaningful player in the C&I market. Although we are increasing that exposure again with very experienced teams and players in that space. So we feel that it's going to be quite contain and control their credit met.
The metrics.
We're always.
Been mindful for quite some time about retail.
In Nevada office, we're not seeing really any issues there at all right. We don't have a single office loan that's in non accrual.
Today, and but we have built our reserves in those two areas specifically to be ready should issues arise, but we feel like we're pretty well protected at this point because of the relationship based banking model that we have.
As for future reserves, it's got to really be based on the macroeconomic.
Forecast that we get in as many of you know we utilized the Moody's forecasting.
Most banks do in the industry.
Let me add one other thing.
The allowance when.
Thanks for taking back reserves.
Over the last several quarters, we would not.
Got you look provisioning.
And so that.
Makes us feel even more secure because of the fact that we were predicting what it would take.
Pat.
I appreciate it that's all I had thanks for taking my questions.
Thank you.
The next question comes from Jared Shaw from Wells Fargo Securities.
Hey, guys good morning.
Going back to the digital deposit so it sounds like what that maybe we're at a stable level here, given the volume and volatility and broader crypto.
Potential growth in the future will come from some of these new initiatives like the foreign exchanges.
And the potential for volume and volatility to increase in crypto is that the way to think of it or theres still could be incremental downside to balances right now.
We said at the beginning of your question I would agree with that.
Seems like it's somewhat stabilizing.
They have been in this winter crypto winter.
On a year now and.
So sooner or later, it's time to get out.
We are currently seeing positive.
Things are going on for us so that when when it does.
Dissipate, we'll have we'll be ready.
Just like we are with all of our other businesses.
We did.
Digital like like Eric said.
Commercial real estate, we deal with the best.
The best digital we turned down more climb.
Clients will.
<unk> clients and we bring on clients because of all the due diligence that we do because we want to deal with the best of the best.
Put us in an advantage.
It'll side was that we had a team that has been doing it for five years before they came to join US we'll use ago.
No.
Feeling pretty good about it.
I'm not making any predictions.
Okay, and then when you look at the.
The growth in deposits, especially with the mortgage business as some of these others.
How are you winning that is that really just all a price game right now with the with the rate environment or.
Is it you are.
We're actually bringing on good DDA with those relationships as well or is it all all interest bearing at this point.
Clearly that we're bringing on more and more DDA relationships.
<unk>.
We internally, we talk about the large depositors to 100 million more.
The once that are up to $5 million level, and 4 million level and $3 million level.
That.
Makeup the strength.
Well that institution and so we have quite a bit of those and that does that will continue not everyone is going to be digital player that $100 million.
And we do that and we do that because.
You need to have a mixture and you need to help the small businesses.
Good luck.
There will be small.
You need to have that business.
Coupled with the.
Large depositors.
Great. Thank you.
Thank you Jeremy.
Our next question comes from David Rochester from Conference claim.
Hey, good morning, guys good morning.
David.
I just wanted to go back to your NIM commentary because it sounded pretty positive. If you guys are expecting expansion over the next call.
Call it several quarters, while moving to that low fifty's deposit beta that you talked about so I was just wondering just given your expectation for the curve and hikes and I know nobody has a crystal ball, but how are you thinking about the range of that NIM could settle into over the next year and changed.
You hit a $2 50 level do you hit $2 60 like.
Can you go higher than that how are you guys thinking about it.
It's really tough to say from a timing standpoint, just given.
How unpredictable the fed has been how unpredictable the quantitative tightening has been.
<unk> us for some of the alternatives Eric spoke about earlier with treasuries against deposits or just I mean, we run so many different scenarios that it's tough to specifically.
<unk> here, but we do expect to.
To be up just at a slower level than we were for a lower level than we were this past quarter.
Single digits.
Yes.
Okay.
On a quarterly basis production per quarter, correct correct, yes, Okay Thats right Alright, that's helpful.
And then just on the fund banking teams efforts to pull on deposits I know you did a good job in getting them much more focused on pulling deposits.
By sort of shutting off the credit side.
Just curious where they are today.
Of the deposits.
So that team and then I know back when you bought these guys on several years ago. They were self funded team.
But I know since then their customers aren't necessarily hold as much cash as they used to and how should we think about the deposit potential from that segment going forward.
I mean, do you think youre, making get halfway funded third funded how are you guys thinking about that.
Okay.
We don't we.
We prefer not to give out balances by team Dave. So we don't want to break that out they had a great quarter, where they were up $470 million in deposit growth. So we're very.
With the.
What they've done on that front and how they pivoted to deposits.
Sure.
It's going to be really hard for them to be even a third funded alright, then the nature of that business has just changed over the last three or four years, where these private equity funds are just not sitting on cash.
Any meaningful way.
They used to so let's get to the 10% first alright, I think their management up 5% right now so let's get them to 10%.
Can kind of tell you where it goes from there.
Sounds good and then maybe one last one on the <unk> program I know, Joe you've talked about this for a number of quarters now and it sounds like the pipeline continues to grow I think he said, there's almost 4 billion now, but it is a multi year type of program or are you thinking that that's like a 1 billion dollar contributor per year to deposit growth. How are you thinking about that.
I'll take that.
But in the year.
We certainly is going to be over years.
The pipeline is continuing to grow because one of the things we have going for us is that the team we have.
He is very good.
The move of the EB five has changed accordingly.
Congress and it's a little harder to do than it was in the past in fact, we had two banks such as <unk>, two very small banks and <unk> five in the past and actually asked us to take over the <unk> for their clients because of the knowledge base that we.
We were able to garner.
That we have so we're looking at.
Probably not in a major effect, it's all likelihood.
There will be no major effect for 2022.
In the fourth quarter.
But we're going to see something in 2023.
No right now we've signed up and we have the projects so with a bank, but now they have to go out and get the investors.
Yes.
Okay.
Alright, thanks, guys.
Thanks, Thank you.
Our next question comes from Steven Alexopoulos from Jpmorgan.
Hey, good morning, everyone.
Good morning, Steve.
I want to start.
You gave us the total for the digital asset deposits 23 to 1 billion could you give us the breakdown.
Sure we have.
Let's see $3 9 million billion, sorry from stable coin issuers.
Four four from OTC desk and institutional traders.
At $12 three from digital asset exchanges, and we have two eight from blockchain technology and digital miners.
That's a total of 23, 5%.
Thank you.
I'm curious given the comments for NIM expectations and expansion going forward with javelin.
The most difficult job, we're having now is bigger kind of weird noninterest bearing deposits are going right.
Pre Q2 1 billion.
37, now, but youre, making some assumption for those Eric to say youre going to expand what are you assuming at least.
You have to assume some level right. If your comment Dan NIM expansion, just where are you assuming those bottom.
Yes, well.
Assuming that over the course of the next year or two years that we're going to see that slowly come down right.
Traditionally operated in it.
As low as 24% DDA that was probably over a decade ago.
Two as high as where we were last quarter right. Our normal range I'd say has been in a 28% to 34% really more 28 to 32.
So we're expecting that we're going to slowly see that DDA percentage come down into the low 30% range.
Alright, okay.
That's helpful.
Eric from our side.
I wanted to ask about the conversations you're having with customers behind the scenes and how much pressure is there on the bank now to raise the rates you're paying on deposits I imagine, it's pretty tough conversations right now.
It is very very tough.
Okay.
It's a situation that.
We've come we've come across before but not as intensive so what we've done is we split it up between senior management talking to various clients.
You have to understand Mark.
And we don't have retail.
So we're going to have very.
Very sophisticated clients and then the severity and the frequency of these increases.
We'll open up those that are not as sophisticated but they have great business is going on and that's what's made it that's what's made it tough.
The number of basis points between 75.
And in the frequency of loss.
But we've been we've been handling it.
Okay.
I feel pretty good about it.
Maybe we we always said we could pay more.
Because we don't have all the expenses associated with retail.
And I know I get on my Soapbox about this but.
I truly feel that we're not given enough credit everyone's looking at the margin.
And we think with the cost of putting on a client is not included in the logic.
<unk> expenses.
Todd.
S&P base yields in the country. So we will pay a little bit more on the interest bearing because they keep a lot on the noninterest bearing and we can afford to do that because.
The efficiency ratio.
Thanks, Joe maybe just one final question at.
All I appreciate the willingness to give us where you think NIM will move next year right. Most banks are afraid to do that here.
What do you assume for the fed though do you assume that we move up 150, and then the fed pause is just what's the backdrop that.
You are assuming to get that expansion. Thanks.
Yes, we're assuming $4 50, and then a pause yes.
Okay. Thanks for taking my questions.
Please.
Hum.
Our next question comes from Chris Mcgratty from K B W.
Hey, good morning, Eric.
Eric maybe a question on net interest income away from the margin.
This quarter grew by about $25 million could you help just ring.
A ring fence the cadence of growth in NII for the next couple of quarters.
I mean, it's a bit hard to predict right given all the variables there, but certainly expect that we're going to have NII expansion, but not not at a level that we saw this quarter. As you said, we had about 15 basis points of margin expansion, we think thats going to drop down into like the mid single digits. So that'll.
And that will moderate our NII growth a bit Chris.
Got it okay.
Okay, and then just a couple of modeling questions do you have the level of prepay income and also on the tax rate.
I think you said 26, but whats.
Putting in for the tax rate.
So tax rate.
Looking at 26% to 27%, we expect to still get a lift from <unk>.
Solar tax credits going forward.
Yes.
And prepayment penalty income.
<unk> came in at $2 3 million. So it was down pretty meaningfully so something that we had to overcome this quarter that we probably haven't talked about that in a while Chris So I'm happy that you raised that question.
So we're down $5 4 million from the prior quarter.
And we think that thats going to really stay at these lower levels right people don't have much of an incentive to prepay right. Now so that is something that we had to overcome a little bit, but there's not much more to overcome alright. So we're at a pretty low level of 2.2 dollars $3 million is really I'm just looking at my schedule amount of low.
As we have been since like 2019.
Great and then last one you called out in the release to the Mark to market gain in the derivatives like what was that.
And I presume that won't recur how much was it.
That won't recur in $2 4 million.
Okay.
Okay.
Thanks.
Yeah.
This concludes our allotted time and today's conference call, if you'd like to listen to a replay of today's conference. Please.
Please dial 870, 23052 tier a webcast archive of this call can be found at www dot signature and why Dot com. Please disconnect. Your line at this time and have a wonderful day.
[music].
Okay.
Yes.
Okay.
You bet.
Thank you.
Okay.
Okay.
Thank you.
[music].
Okay.
Okay.
[music].