Q4 2022 Signature Bank Earnings Call
Speaker 2: Thanks for watching!
Speaker 3: I.
Speaker 4: 2022 Fourth Quarter and Year End Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DiPaolo, President and Chief Executive Officer, Eric R. Howell, Senior Executive Vice President and Chief Operating Officer,
Speaker 5: And Steven Warimsky, Senior Vice President and Chief Financial Officer.
Speaker 6: Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation.
Speaker 7: If you would like to ask a question at that time, please press star 1 on your telephone keypad.
Speaker 8: If at any point your question has been answered, you may remove yourself from the queue by pressing star 2.
Speaker 9: We ask that while you pose your question, you please pick up your handset to allow optimal sound quality.
Speaker 10: Lastly, if you should require operator assistance, please press star zero.
Speaker 11: It is now my pleasure to turn the floor over to Susan Turkel, Corporate Communications for Signature Bank. You may begin. The promotion begins sure.
Speaker 12: Good morning and thank you for joining us today for the Signature Bank 2022 fourth quarter results conference call. Before I hand the call over to President and CEO Joseph DiPaolo, 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.
Speaker 13: 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.signatureny.com.
Speaker 14: Now, I'd like to turn the call over to Joe.
Speaker 15: Thank you, Susan. I will provide some overview into the quarterly results, and then my colleague, Eric Howell, our Chief Operating Officer, and my colleague, Steve Orensky, our Chief Financial Officer, will review the bank's financial performance in greater detail. Eric, Steve, and I will address your questions at the end of our remarks.
Speaker 16: At the onset of 2022, we set several goals, including one, the hiring of numerous private client banking teams and the colleagues necessary to support our geographic expansion, which we did with the hiring of 12 teams.
Speaker 17: This includes five in New York and seven on the West Coast, of which three were in Nevada.
Speaker 18: marking our entry into that state.
Speaker 19: We also added hundreds of colleagues across various operational and support areas.
Speaker 20: 2, launching the Healthcare, Banking, and Finance team, which we successfully onboarded during the 2022 COVID-19 pandemic.
Speaker 21: Second quarter.
Speaker 22: 3. Increasing our annual earnings.
Speaker 23: where we realize great success is evidenced by earning a record 1.3 billion in net income with a record return on common equity of 16.4%
Speaker 24: 4. Growing our loans and deposit portfolios substantially. Although we grew loans by a $9.4 billion.
Speaker 25: 2022 presented deposit challenges.
Speaker 26: While we expected continued deposit growth, albeit not at 2020 or 2021 levels,
Speaker 27: 7th bed heights
Speaker 28: during 2022 totaling 425 basis points, coupled with quantitative tightening and the proliferation of off balance sheet alternatives resulted in the most difficult deposit environment we have seen in our 22 year history.
Speaker 29: The arduous rate environment, along with the challenges in the digital asset space, led to deposit declines, which we overcame with little difficulty given our robust liquidity position.
Speaker 30: Please take note.
Speaker 31: Thus far in 2023, we are already up $1.8 billion in total deposit growth.
Speaker 32: This is driven by an increase of 2.5 billion in traditional deposits, offset by a decline of $700 million in digital deposits.
Now taking a closer look at earnings
Pre-tax pre-provision earnings for the 2022 fourth quarter were $451 million, an increase of $65 million or 17%.
compared with 385 million for the 2021 fourth quarter.
Net income for the 2022 fourth quarter increased 29 million or 11% to 301 million or $4.65 through the earnings per share, compared with 272 million or $4.34 through the earnings per share for last year.
The increase in income was predominantly driven by margin expansion due to rising rates, which led to strong growth in net interest income over the last 12 months.
Now, let's take a closer look at the positive.
with the frequency and severity of the fed rate increases.
The deposit environment remains challenging.
Total deposits decreased 14.2 billion or 14% to 89 billion this quarter, while average deposits decreased 4.3 billion.
Thank you.
Now, let's discuss the elephant in the room.
As a reminder, on December 6th,
At a conference, we announced our plan to purposefully decrease total deposits in a digital asset banking space by reducing the size of relationships.
This strategy results in a more granular deposit base, which meets the greatest stability in this funding source. As part of the plan, we are focused on reducing high-cost excess digital deposits.
Our strategy, when as expected, will be helping in the decline of $7.4 billion in digital deposit.
Respectively, the bank will further reduce these visual deposits by an additional three to five billion by the end of 2023. However, most likely much, much sooner.
Additionally, with the seventh Fed Great Hike on December 15 and subsequent to the conference,
We saw a large degree of a rational pricing from competitors on traditional deposits.
In general, we decided not to increase rates to these levels on deposits that have the highest rate sensitivity.
As a result, two points would be in high interest rate deposits left.
Total contribution from both the digital asset reduction strategy and our decision to not match pricing on these rate-sensitive deposits aggregated to $9.7 billion of the deposit decline. These are deposits that we intentionally managed out.
We're managed slow.
There were several other factors that contributed to the traditional decline. Our mortgage banking and solutions team experiences seasonality due to taxes and escrow payments, which contributed 1.9 billion to the overall decline. We expect this to build that up over the course of 2023.
And 1031 exchange commercial real estate transactions continue to decline industry-wide. And we saw a reduction to the tune of 1.2 billion. So there was a lack of CRB transactions. And as a result, there'll be less 1031 deposits available.
During the quarter, non-interest bearing deposits decreased $6 billion to $31.5 billion, which continues to represent a solid
36% are total deposits.
The declining DDA continues to be driven by the challenging rate, the positive rate environment.
Before I turn the call over to Eric, I'd like to say that although 2022 was a tough year for deposits, we believe we are a growth story. And as we look beyond 2023, we firmly believe we will return to growing traditional deposits.
Clearly this is difficult given the current environment, but it remains in focus. It is encouraging to see inflows in traditional deposits of $2.5 billion thus far this year through January 13. That's after only nine business days.
Now I'd like to turn the call over to Eric.
All right, thank you, Joe, and good morning, everyone. I'd like to turn our attention to our lending businesses.
Loans during the 2022 fourth quarter increased 452 million, or 1%, to $74.3 billion.
For the year, loans increased $9.4 billion or 15 percent.
During the fourth quarter, growth continued to come from nearly all of our lending businesses, with the exception of capital calls, which were down $2.1 billion as we let passive participations run off as they came up for renewal.
Over the next several quarters, we're expecting measured growth out of our newer business lines, healthcare, banking, and finance, and corporate mortgage finance, as these teams are still strengthening their presence within their markets.
Given the challenging deposit environment, we anticipate declines from our larger, more established lending businesses.
Overall, we plan to manage loan growth to be down in the coming quarters.
Turning to the credit quality, our portfolio continues to perform well. Non-accrual loans were down $1 million at $184 million, or 25 basis points of total loans, compared with $185 million for the 2022 third quarter, and they were down $34 million.
when compared with $218 million for the 2021 fourth quarter.
Our pass-through loans were within their normal range with 30-89 day pass-through loans at 96 million or 13 basis points and 90 day plus pass-throughs at 55 million or 7 basis points of total loans.
Net charge-offs for the 2022 fourth quarter were 18.2 million, or 10 basis points of average loans, compared with 10.2 million, or 6 basis points for the 2022 third quarter.
The provision for credit losses for the 2022 fourth quarter increased to $42.8 million, paired with $29 million for the 2022 third quarter.
The increase was primarily driven by a deteriorating macroeconomic forecast.
This brought the bank's allowance for credit losses higher to 66 basis points, and the coverage ratio stands at a healthy 266%.
I'd like to point out that excluding very well-secured fund banking capital call facilities, the allowance for credit loss ratio will be much higher at 105 basis points.
Now let's turn to the expanding team front.
As we've said before, a core metric for us is the number of teams we onboard, and we continue to realize success in this area. During the year, the bank onboarded 12 private client banking teams, including five in New York and seven on the West Coast, of which three of those teams were brought on in the state of Nevada.
This marks the entry into a new geography per signature bank.
Additionally, our newest national banking practice, the Healthcare Banking and Finance team, was launched in the second quarter of this year.
Notably, this is the third highest number of teams hired in any given year in Signature Bank's history, which bodes well for future deposit gathering, and our pipeline remains strong.
In order to support our team expansion, we continue 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 revealing net interest income and margin. Net interest income for the fourth quarter was $639 million, a decrease of $35 million, or 5% from the 2022 third quarter.
and an increase of $103 million, or 19%, from the 2021 fourth quarter.
The decrease in net interest income during the fourth quarter was driven by the outflows of our cash balances in support of our planned reduction in the digital asset banking deposits.
This resulted in a smaller balance sheet at the end of the quarter.
Going forward, we plan to keep our cash position in the $4 to $6 billion range, which is dependent upon deposit flows.
Net interest margin on a tax equivalent basis decreased 7 basis points to 2.31%, compared with 2.38% for the 2022 third quarter.
The lower margin was the result of the rise in our cost of funds, which is primarily due to the replacement of digital asset banking deposits with more expensive borrowings.
Over the near term, the
The bank plans to pay down these borrowings as you see traditional deposit inflows, resulting at a lower cost of funds which will ultimately be beneficial for margin.
Let's look at asset yields and funding costs for a moment.
Interest-earning asset yields for the 2022 fourth quarter increased 73 basis points from the link quarter to 4.18 percent.
The increase in overall asset yields was across all of our asset classes and was driven by higher rates. Our goal is to Isn't the median cost hurting the bear?
Yields on a securities portfolio increased 45 basis points, going quarter to 2.53% given higher replacement rates.
Additionally, our portfolio duration decreased slightly to 4.23 years due to interest rates going back at the end of the quarter.
Thank you.
Turning to our long portfolio.
Yields on average commercial loans and commercial mortgages increased 69 basis points to 4.82% compared with the 2022 third quarter.
Increasing yields was driven by our portfolio re-pricing higher.
Since approximately 48% of our loans are floating rate, we expect loan yields to continue to increase as short-term rates continue to move higher. In addition, given the longer duration of our fixed rate loan portfolio, we will continue to see these assets were priced higher.
even as the Fed ceases increasing rates.
Now looking at liabilities. Given the 125 basis points of FedMoves this quarter, overall deposit costs increased 80 basis points to 1.91%.
The pace of the deposit we're pricing is in line with our expectations given the frequency and magnitude of the rate hikes.
During the quarter, average borrowing balances increased by $2.3 billion to $4.5 billion, and the cost of borrowing increased to 3.80%.
The increase in borrowings was driven by our planned reduction in the digital asset banking deposits where we added mainly short-term borrowings.
In the coming quarters, we plan to pay these borrowings down with excess liquidity from the poverty flows and managed loan portfolio runoff.
In fact, today, borrowings are $4 billion lower since quarter-end given positive deposit flows and other initiatives.
The overall cost of funds for the quarter increased 85 basis points to 1.99% driven by the aforementioned increase in deposit costs and the addition of higher price borrowings.
On to non-interest income and expense.
With our plan to grow non-interest income, we achieved growth of $11.8 million, or 35.2%
to $45.2 million when compared with the 2021 fourth quarter.
The increase was primarily related to FX income and lending fees driven by our newer businesses and geographic expansion.
The non-interest expense for the 2022 fourth quarter was $233.3 million versus $183.9 million for the same period a year ago.
The 49.4 million, or 26.8 percent increase, was principally due to the addition of new private client banking teams, national business practices, and operational personnel, as well as client-related expenses that are activity-driven and have increased with the growth in our businesses.
Despite the significant hiring and considerable operational investment, the bank's efficiency ratio remained relatively low at a strong 34.11% for the 2022 fourth quarter versus 32.31% for the comparable period last year.
Turning to capital, overall capital ratios remain well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet as evidenced by a common equity tier 1 risk based ratio of 10.42%
and total risk-based ratio of 12.33% as of the 2022 fourth quarter.
Today, we are also announcing an increase in our common stock dividend by 14 cents per share to 70 cents per share starting in the first quarter of 2023.
Our robust earnings profile generates over $1 billion in earnings a year, which is substantially more compared to when we first set the dividend in 2018.
We have long-term confidence in the earnings power of our franchise and are happy to increase our dividend.
Now, we'll turn the call back to Jo. Thank you. Thanks, Steve.
I'd like to point out that this is our first year in our 23-year history that we reported an annual decline in deposits.
Given Fed actions, including quantitative tightening, coupled with the seven rapid Fed rate hikes totaling 425 basis points, going to parlors has become very difficult.
Growth for the sake of growth while ignoring the economics does not benefit our shareholders.
Instead, we firmly believe that our decision not to chase irrationally priced high-cost deposits as well as our decision to reposition our digital deposit book by reducing concentrations will benefit our shareholders in the long run, in a long time.
Our focus in this ecosystem was on concentration of deposits, not to leave the ecosystem.
Despite the short-term external challenges we face today, we continue to put the seeds in place for future growth.
with our plans for continued investment in our infrastructure, as well as our geographic expansion to the hiring of teams.
These investments will inevitably lead to growth that within our differentiated operating model will lead to higher returns over time.
A growing dividend to $0.70 should firmly indicate to our shareholders the confidence we have in our ability to generate substantial earnings over the long term.
To conclude, 2022 was a year of many positives. We achieved the following, record net income of 1.3 billion and record return on common equity of 16.4%.
And as I just mentioned, the earnings power is allowing us to increase our 2023 dividend while still maintaining strong capital ratios.
We had long growth of 9.4 billion, not to mention 12 team hires with the expansion into the state of Nevada.
the addition of another national business line, our healthcare banking and finance team.
And we continue to perform.
with a best-in-class efficiency ratio of 34.11%.
Finally, yes, we have USD deposits of digital asset clients, but we do not invest
We do not hold, we do not trade, and we do not custody crypto-assets.
We only have the positive clients in the crypto ecosystem.
And we are executing on our plan to reduce these deposits significantly.
because of her concentration purpose.
In the future, our focus will remain on blockchain technology, which is the reason we decided to enter this space in 2018. We have many other traditional businesses whose positive results are being overlooked. Now Steve, Eric, and I are happy to answer any questions you might have.
Shelby, I'll turn it to you.
turn it to you. The floor is now open for questions.
At this time, if you have a question or comment, please press star 1 on your telephone keypad.
If at any point your question has been answered, you may remove yourself from the queue by pressing star 2.
Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality.
Thank you. Our first question is coming from Dave Rochester with Compass Point.
Hey, good morning guys
Good morning, Dave.
I wanted to start on deposits. You mentioned you had 2.3 billion, I believe, in high rate deposits left. Are you expecting those will flow out here in the next quarter or two at this point? Have you already seen some of that flow out that's actually baked into the quarter to date growth you mentioned?
I mean that that was in the fourth quarter already Dave.
Other than the fourth quarter, how much do you have left at this point?
Not a lot.
Yeah, okay. What areas are you seeing the deposit growth in at this point quarter date?
Well, it is.
There's a number of areas we can start with, make my colleagues nauseous, but we'll start with EB-5. That's a source of deposits for us.
We have about 281 million in deposits of the new E5 program. So we expect another 5 billion in deposits over a 24-month period, so it's really over the next two years where we expect most of the money coming from China and India.
That's one area. We also expect to hire additional teams, both on the east and west coast. We already had a team start in New York on January 2nd, so we hired one team thus far.
We expect the new teams this year plus the teams that we hired last year to start bringing over their books of business and their clients that they have. And that goes to all the teams, the 130 teams that we have. We expect that they'll continue to.
to a second job growing deposits, because a number of them over the last several years were under the pandemic. And that's certainly a...
heard their ability to incline so frequently.
So the West Coast finished strong and finally out of the pandemic, that should work. Fund banking is refocusing their growth efforts on deposits. Eric mentioned the decrease that we had in fund banking loans.
They refocused because we wanted them to fund a little bit more than they had been of their own loans. So they're concentrating on deposit gathering.
Then we have a specialized move in banking solutions.
They are continuing to grow. We had an outfall because of taxes.
and that's for payments, but we see growth there. We let go of some deposits out of that institution, out of that business, as we had, because they were high priced.
But still, by letting go of some of the hot price that should help on NIM, we'll be able to bring on more deposits at a reasonable interest rate.
So we have the West Coast we have the EB-5 specialized moving bank solutions fund banking division We focusing the efforts on deposits and we have the new teams that we have come on board
That's why we feel confident that.
in 2024. I'm looking towards 2024 for there to be a...
greater growth in deposits than we've seen in the last few years.
Appreciate all the color there. Are you guys seeing any growth by any chance in non-interest bearing or is it all interest bearing right now?
I think we're seeing a comparable mix from what we traditionally see, Dave, so roughly that 35-36%.
Thank you.
And we'll take our next question from Ebayem Punawala with Bank of America.
Hey, good morning.
I guess, just following up on deposits to make sure we got the message right. There's about $5 billion in crypto deposits that you expect to exit the balance sheet. Beyond that, is the message that you don't see any other higher cost deposits in any meaningful size left, so net net.
You believe you can offset the $5 billion. So we should see net deposit growth as you think about 1Q and beyond.
I think it would be difficult for us, given this deposit environment, to promise that would be up in traditional deposits, Ibrahim, although we're hopeful that we will be.
the three to five billion in digital we do think that will be relatively flat in the rest of our deposit base. We planted the seeds for growth for sure as Joe talked about and we do anticipate that we should have growth but it's difficult to promise.
Understood. And Eric, just Steve's point around 35 to 36 percent NIB, that's where you ended, I think, fourth quarter. Is it safe to say the NIB is kind of leveling off here around 31 billion dollars, give or take?
I think it's you know it's back to its normal range actually 35-36 percent is probably the highest you know where we traditionally have have been I mean usually in the 32 to 34 percent range maybe even a little bit lower. We've been we've been as low as 24 percent.
But yeah, so I think I think we'll be in that 30 to 35 percent range of DDA to overall deposits as we look forward.
understood. And then on lending, I think you mentioned loan growth balance is probably going to be negative. How much more of capital call line participation is there that could leave exit the balance sheet.
We have a fair amount of passive participation there, so we could.
I'm going to give a fairly broad range, but we could be down in lines anywhere from five to ten billion dollars.
And essentially if you look at what we've done over the last couple years, we've grown digital deposits and we've grown fund banking loans.
So we're shrinking now our digital deposits and we're going to shrink our fund banking loans and get back and right-size the balance sheet a bit.
Understood. And one last question. So it seems like the balance sheet is going to be shrinking. Clearly you feel good about capital based on the dividend hike. Is buyback an option or beyond the dividend any increase in capital? Do you expect just to build capital right now?
Well, you know, we do anticipate that we're going to have growth. You know, we could see growth this quarter, quite frankly. It's going to be tough, right, but it's possible. And we certainly, you know, could see growth if we look into the third and fourth quarter of this year. So, we've got – we continue to put the –
the seeds and plant those seeds for growth and we'd rather hold on to our capital to support that growth. With all that being said, buybacks are certainly, you know, we have the ability to buy back and we'll certainly look at that if that growth doesn't materialize.
No, thanks for taking my questions.
Thank you.
We'll take our next question from Manan Ghazala with Morgan Stanley .
We'll take our next question from Manan Ghazala with Morgan Stanley .
Hi, good morning.
Just given all the moving pieces here between digital outflows and the seasonality of deposits and some of the nice quarter-to-date growth you have in deposits, is annualizing the 4Q EPS a fair way to think about earnings as we go into 2023 or are there more push and But no the
we certainly will then need to borrow in the short term, which then should lead to NIM and NII compression, given the higher cost deposits, as we saw, towards the end of the fourth quarter. So we'll continue to expect some short-term pressure there. And then as we head into the next quarter, we'll continue to see some short-term pressure
into the end of the year, we should then see some relief is what we're hopeful for and then see NIM expanding and also see some relief from the borrowing standpoint as we see some traditional deposit inflow. So I mean that's the context that would give in relation to the question there. Got it. That's how.
in the mid-20s again, roughly 25%. You know, we would have been lower had the FDIC not increased its assessment rates. They're increasing every institution to basis points, which for us means about five million a month in incremental expense.
sorry, per quarter, an incremental expense. So that's the kids ahead. Without that we would have been in the low 20s. So first quarter, mid-20s, 25%, and then we should trend through the remainder of the year down to the high high teens.
Great, thank you.
Weíll take our next question from Bernard Vongizicki with Deutsche Bank. Hello, everyone. Iím Bernard Vongizicki with Deutsche Bank.
Hi, good morning. Given you are exiting a large amount of crypto related deposits, I'm just curious how this impacts the Sigma platform. If you are doing less volumes now, I would assume the activity volume driven expenses should be coming down as well.
And just trying to get a sense like, you know, we're focused on the funding part. So one is like the expense part. I think, you know, the discussion about the lower expenses in the later part of the year might be part of it. But any sort of fee income that could go away as we kind of consider this with these two factors as well. So, moving forward for the summer time of June is the die Barb 3rd, which unfortunately
We're really looking at concentrations in that space, so we're not necessarily exiting client relationships there, but we are lowering concentrations.
There and that's so we're seeing volumes on in Cigna actually volumes last quarter were the highest we've seen Even as we were exiting these you know later in the year, so we don't really expect much of effect in Cigna volumes There's really not much of a cost for us to operate Cigna, so we're not going to see any cost benefit there if we hit volumes did
come down in that space. From a fee income perspective, same answer really. We're not exiting client relationships really, so we're not going to see much of a change in our foreign exchange and other sources of fee income there.
So ultimately all we're doing is limiting the amount that clients can maintain in overall deposits at our institution.
looking to have more of a granular deposit base which allows us to manage liquidity tighter.
Okay, thank you. Just to follow up, I know obviously the digital ecosystem is the largest on the SIGNET and you guys have alluded to other ecosystems like payroll, trucking, shipping that could be utilized. Just trying to get a sense, as you think of the other non-crypto.
that could grow and could be an area of focus? And if not, what kind of like catalysts should we kind of like think about in those areas that could be growth if not this year and not in our ears?
Well, the digital is actually the number of transactions.
on Cigna is actually digital is number two.
Not in dollars because they have large dollars, but we have a shipping.
industry.
cargo shipping industry that is number one on Cigna for a number of transactions.
And then we've got payroll, which is starting to
take course and we're getting more payroll companies on. So the key for us is
that we find these other ecosystems.
because we put a payment platform together.
24 hours, 365 days a year.
And the idea being that we want to attract.
as many ecosystems as we can to make it beneficial for us and the clients.
Well, we did.
put together was something that the digital world embrace.
embrace blockchain technology. And that's why they're there as number one in terms of dollars that flow in and out. But let's face it, I mentioned that I didn't think that crypto would be in the top 10 once we had all the industries embrace.
blockchain technology. One of our shareholders said it probably would not be in the top 100.
So it's just a matter of educating those out there. We look forward to having more non-digital ecosystems.
And we'll...
I hope this proves everybody's...
prohibition to it.
Thank you.
And we'll take our next question from Casey Hare with Jefferies.
Yeah, thanks. Good morning, guys.
So follow up just on the loan growth, want to make sure I understand this correctly. So Eric, I think you said total loans down five to ten billion for the year and then that's that's lines. Just capital just cap just capital call.
just capital call lines.
Outstanding to abruptly behalf of that balance.
Okay, all right.
Capital call obviously a big part of the loan book.
what is the expectation for loan? It sounds like loans are down pretty big in the in the you know quarter of the day given that you've you've been able to push down borrowings four billion. You know I guess just a cadence on on the loan growth throughout the year and where you expect the loan.
the lone book to land because obviously the street is expecting you know some some pretty decent growth this year.
But, you know, given that we're reducing deposit to spill, right, and we expect to be down three to five billion in the digital space, and really flattish and traditional, although we're hopeful we'll see some growth, but again, I can't promise that, you know, it would be difficult for us to expand our loans.
So we're expecting that capital call facilities and those passive participations.
to be down in outstanding's roughly $2 to $5 billion.
Say and then for our commercial real estate portfolio to decline Although I'll be you know, it's not going to decline pretty much. It'll probably flat it down a little bit And we'll see
some growth out of our mortgage warehouse finance business as well as our healthcare finance business.
Those are two newer business lines for us that we want to continue to see have growth and garner market share and market favor. So we'll have some growth out of those areas, let's say 500 million to potentially a billion over the course of the year for each. So ultimately when you put all that together, I think you're going to see us beat.
pretty flat on loans to down maybe a little bit.
And just to add on your borrowing comment, we're down $4 billion in borrowings. That's being paid down from a combination of cash. We mentioned that cash range of $4 to $6 billion, which is our comfortable range, depending upon specific deposit inflows.
deposit inflows, cash, security runoff, as well as this small amount of loan runoff that we've seen thus far. So it's a combination of all those different items.
Okay, very good. And then just given all the moving pieces here, can you give us some help on where you think the margin settles in the first quarter? Any thoughts on deposit beta?
Sure. So, margin in the first quarter, we do expect to be down about 10 basis points. And that's a function of what I mentioned earlier in that in the short term, we do expect to borrow early in the year to replace the digital outflow that we're planning to manage down. And then as you get towards the end of the year, we would expect them to then…
start expanding. From a deposit data standpoint, we're end of period at 46%, total deposit fall in and our end of period deposit costs are 210 basis points approximately.
Okay. And you guys are still expecting low 50s Q and beta?
I think we'll be in the high 40s at this point given the high cost deposits we've pushed out and then we'll see how much non-interest bearing pressure we get. But at this point I would expect it to be in or around where we're at maybe plus or minus marginally. But we'll see how many times we have.
Okay, very good. Lastly, the release mentions, talks about geographic expansion. Just any further color on what you're thinking about and which markets?
It's really just filling in the expansion that we've had over the last couple of years. We've got teams to hire in the California marketplace, whether it be LA or the Sacramento area as well as Nevada, where we'll continue to hire some teams there. It's really a real thrust to maybe go into Southern California.
San Diego market, but there's no actual near term teams in the pipeline right now for that.
Great, thank you.
Thank you. Thank you, Casey. Thank you, Casey.
Thank you. And we'll take our next question from Steven Alexopoulos with JP Morgan.
Hey, good morning everyone.
Thank you.
So if we work through the expected decline of the digital deposits and then the capital call loans all in, I'm trying to understand when the balance sheet will stabilize, do you think most of this is front-end loaded? Do we get to the point in the second half where we should expect the balance sheet overall to be fairly flat?
take us through this year when we should expect to see a bottoming and then eventual growth.
when we should expect to see a bottoming and then eventual growth in the total balance sheet.
Yes, I mean Steve we're working hard to get through these digital outflows you know in the first quarter, second quarter, you know we could see some of that bleed into the third and fourth quarter but we're really trying to to have this done as quickly as we can.
Right, so we're going to see decline probably in the first and second quarters in the overall balance sheet. By the time we get to the third, we should see that stabilize.
And again, we're hopeful that we could see deposit growth. We have it thus far this quarter, which is great. We're hopeful as we get to the second part of half of the year that we'll see some growth from there.
That's helpful. And then on the digital asset deposits, Joe, the original appeal of these deposits was it would be a lower cost funding option, right, which is not necessarily proving to be the case. I'm curious, given the extreme volatility, right, the drawdown, will you be able to lend those deposits out? Does the original case to be in the business still stand?
And how do you think about this from a long-term view? Thanks. Well, long-term, I think it helps having time.
But in the short term, we clearly don't have any evidence or any past history that gives us a comfort level that we should
Do something long-term with those deposits, so we're going to keep them short
For now.
But you guys are still committed to the business long term at this stage? It's just going to be fine materially? Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes.
We're committed to the business. We think that it's not going away.
Let's put it this way. It's not going away. And we have a.
a number of examples that show that it's not going away. If you think about the government, if we could get the regulators
Congress on the same wavelength.
They would give us regulations that we could follow and that others could follow. What this ecosystem needs is regulation.
We need to be able to function with the...
The economy is confident having this FTX situation clearly put a lack of confidence in that ecosystem.
Now what we need to do
is to get regulation.
Get confidence back in the system and we can go from there. You know, it occurs to a lot of people that when you do innovation...
You always, in the initial part of the innovation, there's always,
looked upon, initially down upon.
And that's what I think is the situation here. There's new financial innovation is being looked down upon. And we believe that somewhere in the next few years, the banking system as it conducts transactions today will not be the way they conduct transactions tomorrow.
So we're very much in tune to wanting to support this ecosystem.
Got it. Okay, and if I could ask one final one, just following up on the inflows of traditional deposits you saw, which you're calling out of the release, the $2.5 billion, I might have missed this, but what type of deposits was that? Do you saw such strong growth? Those low-cost deposits? Can you give us some context around that? Thanks.
Sure. So we've seen some growth in specialized mortgage banking. They've continued to build up their balances after the year-end escrow and tax outflows. Our fund banking has integral role in
Business is up to a couple hundred million as well. And then our New York private client banking teams, we're also seeing some growth there as well. To your cost question, you know, we're seeing the traditional 30 to 35% of non-interest parents as a little whenever they feel they do?
as we add these deposits back. Okay, perfect. Thanks for all the time. Thanks for being with us today.
I want to just follow up on the question that you had asked earlier about being in the crypto space. Every major bank, well maybe not every major bank, but many major banks are in the space.
maybe more internationally than domestically, but they're all there. And what really shook the confidence of the markets was, I said, FTX, almost Bernie Madoff-like.
And that's that when Bernie Madoff happened, that shook the markets, this shook the markets.
Again, I'll say it again, we need regulations, so we need the regulators and Congress to get on the same page.
Thanks for the call, Joe.
Thank you, Steve.
Thank you. And we'll take our next question from Jared Shaw with Wells Fargo Securities.
Hey, good morning guys. Thanks.
You know, just a couple of follow-up detail questions. You know on the borrowing, so you said borrowings are down quarter today, but you're expecting them to go back up. So is that to grow from year-end numbers as we see these deposit outflows, or just maybe give back some of the...
So just a couple of follow-up detail questions. You know, on the borrowings, you said borrowings are down a quarter today, but you're expecting them to go back up. So is that to grow from year-end numbers as we see these deposit outflows, or just maybe give back some of the...
flow that we've seen year-to-date? Certainly Jared, certainly dependent upon what traditional deposit flows are, but all else being equal, that's flat and it would just end up replacing some of what we've paid down thus far. So wouldn't expect it to be significantly different from where we ended as of year-end.
that you're growing.
Sure. On the CRE front, we're seeing...
Uh, replacement rates roughly in the high fives, call it five, seven, five range, um, in fun banking and certainly they're reducing, but we're in a low six is there. Um, um,
That's that the signature financial we're in the mid to high 6% range Securities any replacement there is that the
four and a half to four seven five range and then we have Some of the folks that were growing
Healthcare, banking and finance about 7% and as is commercial mortgage finance in the 7% bridgepl WayneBI
Okay, that's great. And then on the security side, you said that you were using cash flows to pay down borings. How should we be thinking about securities as a percentage of assets here? Could that...
Should that stay stable? Should it come down? You know, when we look at the absolute dollar level, can we expect that to be trending down as we go through the year?
Potentially. It could run down depending upon where back to the traditional deposit flows. That's really the key here. Where did traditional deposit flows go?
Compared to our digital runoff and the timing of all that. So yes in a situation we could see some some Reduction there as they run off roughly in the 750 to 1 billion a quarter range
Great, thank you. Thank you.
We'll take our next question from Chris McGrady with KBW. Hey, good morning. Joe or Eric, in the release you talked about the bump up in the reserve due to the macro. One of the topics that comes up a lot in investor conversation is the office portfolio.
Could you just remind me the size and a few of the relevant stats where we are at your end?
Yeah, the office portfolio is about $4 billion. We have zero in non-accrual as of this point, so it's important to point out. It's also, I mean, it's more critical to point out that we're not a CMBS lender. And all the articles and the news that you've seen thus far is all related to CMBS. I don't think there's anything related to balance sheet lenders, us or
Now when we originated these loans, we're in the low 50% LTV range. We were north of a 140 debt service coverage. So we've got you know ample cushion there to absorb whatever you know we do see come through in that space. I mean don't get me wrong we fully expect that there's going to be some problems.
But quite frankly, we're just not seeing much right now Chris. I mean we're dealing with well seasoned veteran operators, multi-generational who own many properties and can divert cash flow as necessary to deal with the ones that might be in trouble. And we're just we're just not seeing the demise of New York office anywhere near what people are predicted.
I mean anywhere near.
Okay, thanks for that, Eric. Is that the portfolio, the number one internally that you guys are stress testing? Is there something else that might?
might drive the kind of a reserve bill narrative over the next couple quarters.
I mean, that's certainly one of the areas. I mean, we've been focused on retail for a long time, really from the Amazon effect, well before the pandemic hit. Again, our retail is really in the outer burs, more strip centers that we feel pretty comfortable with. And we're seeing that behave quite well. Thanks for watching.
Also, I mean, we're also focused on the multifamily sector where you have rent stabilized and predominantly buildings that are mostly rent stabilized where it's really tough for them to improve the cash flows there. That's another area that we're looking at, but, you know, in all three of those areas, we're really just not seeing much weakness, if any at all, at this point.
Okay, can you remind me of the size of the retail book here?
The retail book is about $6 billion.
The retail book is about $6 billion. Okay.
Thanks for that. I guess the last question, just trying to square up all the outlook for margin and balance sheet. So can we give that a try? Sure.
Is it fair to assume that the trajectory of net interest income probably is obviously down first half of the year, but is stabilization in the back half kind of the goal or...
Would you, is it fair to assume that the trajectory of net interest income probably is obviously down first half of the year, but is stabilization in the back half kind of the goal or just kind of trying to figure out the trough in net interest income?
Yeah, 100% accurate on a near term in the first half the year and second half the year is stable to potentially up depending upon what the Fed does.
Okay.
Okay, thank you
Thank you. We'll take our next question from Matthew, please, with Steven Zink.
Good morning
I wanted to go back, Stephen, to your NIM commentary. You mentioned in the first quarter you expect the NIM to be down 10 basis points.
but expansion by year-end. Could you just give us some sense for NIM performance in the middle of the year? Are we expecting down 10 bps in the first quarter, stabilizing and then bouncing back, or is there additional downside?
by year end, could you just give us some sense for NIM performance in the middle of the year? Are we expecting down 10 bps in the first quarter, stabilizing and then bouncing back, or is there additional downside in the second and third quarters?
I mean, it is difficult to say given we don't know what the Fed does. I mean, we run in various different scenarios. But there are a few trialsocks ahead of me that you can go and think out how many decision
there likely will be
pressure in the first half given borrowings. As far as pretty certain on where we're going to be after the first quarter, but then depending upon where deposit flows come, where borrowings come, that really makes it challenging just going more beyond one quarter at this point.
But wood seed stabilization to NIM expansion in the second half with barns rolling down. It's just very difficult to project beyond one quarter at this point.
Okay, and then on the expense ramp that falls into these, you know, to the other category, it's been up significantly last two quarters. So I'm assuming that's related to some of the client costs. Can you give me some examples of what the largest drivers contributing to, you know, pretty close to like a 20, 25 million dollar quarterly increase?
Sure, there's two things. First, it's just general activity levels are up, which we have.
Expenses that are activity based with some of our vendors.
In addition to the fact that we have ECRs or earnings credits, that's the other component to the driver there.
to the fact that we have ECRs or earnings credits. That's the other component to the driver there. Could you clarify those earning credits?
So, credit that client gets based upon balances and activities that they have with us.
It's like a rewards program if you will.
Got it. Okay. And then my last one is just, you know…
Love your thoughts on the crypto regulatory front and implications to you particularly on the back of the interagency guidance earlier this month You know I'm curious in the wake of FTX if there's been any reassessment on the institutional client book or the BSA AML KYC process front to make sure that there aren't other instances
of fraudulent activity? What changes, actions have you taken, and what kind of comfort can you give us on the quality of the remaining client book?
Well, I'll say this with FTX, it wasn't a matter of BSA AML. One thought that he was
legitimate and he ended up being Bernie Madoff-like.
So I don't think anyone could say that they knew that and we catch it. What we're talking about regulation is we just want to know which way to go because we had SIGNET and we try to make enhancements on it and some were okay by the regulators and some were not.
It puts us in a difficult position as to what do we do next.
And not knowing regulation wise what's going to happen puts us really behind everyone else.
That is in the crypto world. I will I will tell you this we've had
We've had a number of discussions with the regulators and they seem to be waiting for other regulators.
So I don't know if the Fed is waiting for the FDIC, the FDIC was waiting for the OCC, but I think they have to get together, meet with Congress, because Congress was going to put some bills across.
to get some laws put out on the books for regulation. And they were not things that we thought were good for us or good for the industry.
So we need to get them to get on the same level field and give us some guidance.
We need to get them to get on the same level field and give us some guidance.
I think what happens is when the regulations come out, that'll eliminate a number of players. I don't know if they're bad actors, but I would say a number of players couldn't live up to the regulations, whether it's capital related or just doing AML, DSA.
But again, FTX was not a BMA AML. It was a Bernie Madoff like a.
situation that no one really thought that Sam was a dead after.
Understood. That's all I had. Thank you.
Understood. That's all I had. Thank you.
Thank you. We'll take our next question from Mark Fitzgibbon with Piper Sandler.
Here in any congrats.
Sorry, we can hear you now. Okay, sorry. I guess just following up on Joe's comments, how likely do you think it is that Signature gets sort of ensnared in any kind of congressional hearings on crypto? It's pretty hard to predict really. I mean, um.
Okay, you know, we're a highly regulated banking institution. We follow strict BSA, KYC, AML policies and procedures. You know, in this space in particular, we have enhanced due diligence and monitoring. We're really not aware of any concerns or issues that we have at this time and we haven't been involved in any meaningful litigation to date.
Okay. Fortunately for us, we were not, we had announced that we were integrating to FTX, but we were not integrated yet with FTX, so we didn't have client-related transactions of FTX happening on our platform yet. So that's certainly good.
Okay, and Eric could you share with us the number of digital deposit clients that you have today and maybe what the actual transaction volume was in thesn Okay what you do after Blacks
Yeah, currently we have 1410 active clients and our transfer volumes are $275.5 billion.
Okay great and then last question and Steve you might have mentioned this but what was the spot deposit rates today?
210 basis points.
210 basis points. Great. Thank you.
Thank you. Thank you. This concludes our allotted time and today's conference call. If you'd like to listen to a replay of today's conference, please dial 800-9
Thank you. This concludes our allotted time and today's conference call. If you'd like to listen to a replay of today's conference, please dial 800-934-7
A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your line at this time and have a wonderful day.
How can we make an against the Mad Mon forbidden land?