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spk03: Welcome to Signature Bank's 2021 Second Quarter Results Conference Call. Hosting the call today for Signature Bank are Joseph J. DiPaolo, President and Chief Executive Officer, and Eric R. Howell, Senior Executive Vice President and Chief Operating 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 open for your questions following the presentation. If you would like to ask a question at that time, 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 the pound key. We ask that 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 Joseph J. DiPaolo, President and Chief Executive Officer. You may begin.
spk04: Thank you, Nicole. Good morning. Thank you for joining us today. the Signature Bank 2021 Second Quarter Results Conference Call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.
spk00: Thank you, Joe. This conference call and oral statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and may be beyond our control. Forward-looking statements include information concerning our future results, interest rates in the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings, business strategy, and the impact of the COVID-19 pandemic on each of the foregoing in our business overall. As you consider forward looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, and assumptions that could cause actual results to differ materially from those in the forward looking statements. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made. Now, I'd like to turn the call back to Joe.
spk04: Thank you, Susan. I will provide some overview into the quarterly results, and then Eric Howell, our Chief Operating Officer, will review the bank's financial performance in greater detail. Eric and I will address your questions at the end of our remarks. The success of Signature Bank's single point of contact service model has resulted in yet another quarter of significant growth. During the past several years, the bank has grown dramatically and transformed organically. We set and achieved specific goals of becoming asset sensitive, increasing both credit and geographic diversification, while continuing to grow core deposits. As a result, we shifted to asset sensitivity sensitive from liability sensitive, with 38% of our loan portfolio now variable rate. We reduced our CRE concentration from nearly 600% to 345% of capital. Our loan-to-deposit ratio, which peaked at 104%, has moved to a low 64%. Additionally, we entered new markets through the hiring of veteran bankers for our West Coast private client banking offices, while continuing to increase deposits across our New York operations. The speed at which we achieved these objectives organically is extraordinary within the banking industry. It clearly demonstrates the power of our founding single point of contact entrepreneurial model. Throughout the second quarter of 2021, we saw the same strong growth trends we witnessed during the past several quarters. Our record deposit growth of $11.6 billion emanates from all our business units and teams within the institution, demonstrating the broad-based strength of our franchise. Record core loan growth of $3.6 billion was driven by a well-established fund banking division, and we put more cash to use than ever before to a record growth of $2.7 billion in our securities portfolio. Our strong growth profile, coupled with the expansion of fee income and contained expenses, led to a third consecutive quarter of record net income and strong return on common equity of more than 13%. We continue to focus on the pure organic growth that has made this institution successful. Now, let's take a look at earnings. Pre-tax, pre-provision earnings for the 2021 second quarter were a record $308.6 million, an increase of $60.6 million, or 24.5%, compared with $247.9 million for the 2020 second quarter. Net income for the 2021 second quarter was a record $214.5 million, or $3.57 per share, compared with $117.2 million, or $2.21 per share, reported in the same period last year. The increase in income was predominantly driven by substantial asset growth of $36.5 billion over the last 12 months, as well as the decrease in the provision for credit losses, which was substantially impacted by COVID-19 in the second quarter of 2020. Looking at deposits, deposits increased a record $11.6 billion, or 15.7%, to $85.6 billion this quarter. Our average deposits grew a record $11.9 billion. This quarter's growth was driven by the digital asset banking team, which grew deposits $6.3 billion. The specialized mortgage banking solutions team, which grew by $1.2 billion. Our venture banking group, which increased nearly $400 million. The West Coast banking teams grew nearly $200 million. And our New York banking teams which grew over $3.6 billion, including 10 teams that each exceeded $100 million for the quarter. Since the end of the 2020 second quarter, deposits increased a remarkable $35.3 billion, or 70.3%, and average deposits increased $33.4 billion. During the quarter, non-interest deposits increased 6.1 billion to 28.7 billion, which represents a high 33.5% of total deposits. Our deposit growth plus capital raises as well as earnings retention led to an increase of 36.5 billion or 60.5% in total assets since the second quarter of last year. That's the equivalent of acquiring the top 50 U.S. bank, but we did it completely organically. We believe this is by far the most efficient use of capital. Now let's take a look at our lending businesses. Core loans or loans excluding PPP during the 2021 second quarter increased the record $3.9 billion by 8% to $52 billion. For the prior 12 months, core loans grew $9 billion or 20.7%. The increase in loans this quarter was again driven primarily by new, and that's a key word, new fund banking capital call facilities. We are well positioned in all our lending businesses to capitalize on opportunities based upon our pipeline and recovering economy. Turning to credit quality, our portfolio continues to perform well. Let me first point out the bank's COVID-19 related non-payment modifications continue to trend positively. As of the year end 2020, they were $1.3 billion. At April 15th, they were $983 million. And as of July 15th, they are now at $309 million or 0.6% of total loans. That went from year end at $1.3 billion slightly above 0.3 billion. We knocked off a billion in non-payment modifications. Non-accrual loans, 136.1 million, or 25 basis points of total loans, compared with 133.7 million, or 26 basis points for the 2021 first quarter. Our past due loans remained within their normal range, with 30 to 89 past due loans, 94.8 million and our 90 day plus past due loans remain at a very very low 2.3 million net charge loss the 2021 second quarter decreased to 15.3 million 12 basis points of average small compared with 17.9 million 2021 first quarter The provision for credit losses from the 2021 second quarter declined to 8.3 million compared with 30.9 million for the 2021 first quarter. This brought the bank's allowance for credit losses to 0.94%, and the coverage ratio stands at a healthy 378%. I would like to point out that excluding very well-secured fund banking loans and government guaranteed PPP loans, the allowance for credit losses ratio would be much higher at 1.41%. Now, on to the expanding team front where we continue to realize success. In the 2021 second quarter, the bank onboarded two private client banking teams on the West Coast, as well as the SBA lending team, which is one of our two new LENDING INITIATIVES WE ANNOUNCED EARLIER IN THE QUARTER. AT THIS POINT, I'LL TURN THE CALL OVER TO ERIC AND HE'LL REVIEW THE QUARTER'S FINANCIAL RESULTS IN GREATER DETAIL.
spk10: THANK YOU, JOE, AND GOOD MORNING, EVERYONE. I'LL START BY REVIEWING NET INTEREST INCOME AND MARGIN. WITH OUR EMPHASIS ON GROWING NET INTEREST INCOME, THE SECOND QUARTER REACHED $457.2 MILLION, AN INCREASE OF $50.7 MILLION or 12.5% from the 2021 first quarter. That is an annualized growth rate of 50%. Net interest margin declined eight basis points to 2.02% compared with 2.1% for the 2021 first quarter. The entire decrease was due to massive excess cash balances from significant deposit flows, which impacted margin by 55 basis points. Again, we are focused on net interest income growth and not the margin. Let's look at asset yields and funding costs for a moment. Interest earning asset yields for the 2021 second quarter decreased 17 basis points from the linked quarter to 2.37%. The decrease in overall asset yields was again driven by the massive excess average cash balances, which grew 6.6 billion to 23.7 billion during the quarter. Yields on the securities portfolio decreased 16 basis points linked quarter, but 1.72% due to lower reinvestment rates as well as the bank investing in floating rate securities. And our portfolio duration decreased to 2.92 years, which was due to a decline in rates at the end of the quarter. We were opportunistic throughout the quarter as we saw windows in which to invest and therefore, we were able to increase the securities portfolio by 2.7 billion. In turning to our loan portfolio, yields on average commercial loans and commercial mortgages increased four basis points to 3.58% compared with the 2021 first quarter. Excluding prepayment penalties from both quarters, yields increased by five basis points. Now looking at liabilities, Our overall deposit costs this quarter decreased seven basis points to 27 basis points due to the low interest rate environment as we gradually lower our relationship-based deposit rates. We anticipate this downward trend to continue in the coming quarters, albeit at a slower pace. During the quarter, average borrowing balances decreased by $276.4 million, and the cost of borrowings decreased by 12 basis points to 2.8%. The overall cost of funds for the quarter decreased nine basis points to 38 basis points, driven by the reduction in deposit costs. And on to non-interest income expense. With our focus on growing non-interest income, we achieved growth of 10.7 million or 84.5% to 23.4 million when compared with the 2020 second quarter. The increase was mostly due to a rise in fees and service charges and net gains on sales of loans. Non-interest expense for the 2021 second quarter was 172 million versus 151.9 million for the same period a year ago. The 20.1 million or 13.3% increase was principally due to the addition of new private client banking teams and operational support to meet the bank's growing needs. And despite our significant team hiring and margin compression from substantial cash balances, the bank continues to gain operating leverage. And as a result, the efficiency ratio improved to 35.8% for the 2021 second quarter versus 38% for the comparable period last year. And now turning to capital, all 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 one risk-based ratio of 10.03% and total risk-based ratio of 12.72% as of the 2021 second quarter. Given our robust total risk-based ratio, we redeemed 260 million of subordinated debt at a rate of 5.3% on April 19th, which will further reduce our interest expense in coming quarters. And now I'll turn the call back to Joe. Thank you.
spk04: Thanks, Eric. The collective strength of our franchise led to an unbelievable quarter of record deposit growth, record core loan growth, record pre-tax pre-provision earnings, and record net income. Bottom line, we delivered another strong quarter We are well positioned for the future. We've been bullish on New York City since the onset of the pandemic. Clearly, it is going to take some time to return to pre-pandemic activity levels. But it is encouraging to see the vibrancy return to this great city and country. It's great to see Broadway shows selling tickets again, restaurants at full capacity, busy streets, and most importantly, my colleagues in the office. We look forward to a continued recovery and a bright future for signature bank. Now, we are happy to answer any questions you might have, but before I turn the call over to Nicole. I just want to encourage everyone listening to please get vaccinated. Now, I'll turn the call over to Nicole.
spk03: The floor is now open for questions at this time. If you have a question or comment, please press star 1 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. 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 will come from the line of Stephen Alexopoulos with JP Morgan.
spk12: Good morning, everybody.
spk03: Hey, good morning, Steve.
spk12: I want to start the digital asset side. I know in the past, you guys have said that as the price of crypto assets, such as Bitcoin have fallen, you've actually seen an increase in volumes, right? As institutional customers step in and buy the dip. When I think about your model, right? You're an on-ramp to the crypto economy. So we think about of that like a bridge keeper. Do the prices and fluctuations of the crypto assets matter really at all as it relates to the growth potential of the business?
spk10: We've seen absolutely no correlation. to the price in our deposit flows whatsoever. And we've gone back over several years and taken a deeper dive and look at that, and there's just no correlation. There were periods when early on when prices went up and our deposits actually leveled off or went down, but mostly over the last year and a half, we've seen the prices climb. We've climbed, and with the latest dips that we've seen, we've seen our deposits continue to climb. So we're just not seeing a correlation between the price of any of these digital currencies in our deposit flows. Okay.
spk12: That's helpful. And maybe, can you give us a sense, how many customers are now on the platform, and maybe what's the pipeline for new customers?
spk10: I don't have, we don't have a client total, but the pipeline is certainly robust for new clients. Okay.
spk12: And maybe a final question, as it relates to to the prior guidance, right? The full year, 8 to 16 billion. I mean, you're multiple quarters in a row of being in that range each quarter. You know, maybe one, from your view, why is it coming in so much stronger than expected? Seems like more is going on than just the digital asset team. And realistically, how should we now think about full year deposit growth expectations? Thanks.
spk04: That's a very hard question to answer because All of our initiatives that now have turned into full-fledged businesses are doing very, very well. And to answer the question, there's such a wide range of deposits that could come in. We would say that the normal expectation would be $2 to $4 billion in deposit growth on a quarterly basis, and we're very proud that we've got $10 billion and $11 billion in the last two quarters, but the expectation is still for us between $2 and $4 billion.
spk10: Terrific. Thanks for taking my questions. Sure. And Steve, just to circle back on that last question about number of clients, we're 812 clients versus 741 last quarter.
spk12: Oh, great. We're 741. Great. Thanks for the color.
spk03: The next question will come from the line of Brock Vander Vliet with UBS.
spk06: Thank you. If you could just kind of peel away a bit on the total crypto deposit growth, what that is, you know, what that's composed of, whether it's mainly transaction accounts, whether it's reserve accounts, you know, operational deposits from exchanges, what that is.
spk04: The growth between the end of March and the end of June was about $6.3 billion. And it's stablecoin reserves, it's OTC desks and institutional traders, digital asset exchanges, and blockchain technology and digital miners. Broken down, stablecoin reserves are about $1.9 billion. OTC desks and institutional traders is about $600 million. Digital asset exchanges, about $3.4 billion. And blockchain technology and digital miners is about $300 million it would take.
spk06: Got it. Okay. And Steve covered the growth rates. Just in terms of further monetizing this, could you talk about your securities lending initiative, where that stands, and any further color you have?
spk04: We expect to do our first loan somewhere at the end of July, beginning of August. Could be the end of next week. It's just one loan we're testing out. The expectations are we want, I said this before, we want to crawl before we walk and walk and just walk, not walk to run. We're going to be very cautious. We're only picking, selecting the very, very best clients. We want this to be a no-loss business.
spk06: Got it. Okay. I'll step back in the queue. Thank you.
spk03: Thank you. The next question will come from the line of Jared Shaw with Wells Fargo Securities.
spk08: Hey, guys. Good morning. Good morning, Jared. Just looking at, you know, you coupled really strong commercial loan growth with a stable commercial loan yield, which, you know, has been tough for banks to pull off, I guess. Can you comment a little bit about what you're seeing in terms of loan pricing on the commercial side? I guess how you're able to be, you know, maybe is it just your customers are a little less price sensitive or you're able to hold up the spreads a little better? Maybe just talk a little bit about what you're seeing in commercial loan pricing.
spk10: Well, I mean, generally we're seeing that the runoff in our portfolios is pretty equal to the yields that we're putting on now, Jared. We've kind of come close to at least reaching the bottom there. We had a little bit of a pickup in the three and five year, you know, the belly of the curve, and that's helpful to Signature Financial. So they were up about basis point in the quarter. You know, generally we're seeing some better spreads out there. During the quarter, but, you know, unfortunately, the 10 years pulled back down. So we'll see how long that that last form. We also did it. Get a little bit of a bump from some PPP fee amortization for the quarter. Because that starts to accelerate.
spk08: Okay, thanks. And then, you know, on the commercial side, I'm sorry on the capital side. Obviously, the strong liquidity is putting some pressure on on ratios here apart from the risk based ratio. How comfortable are you with broader capital ratios getting tighter based on just a lot of cash flow coming in? Or would you like to see them a little stronger than where they're trending here?
spk04: We always like to see stronger ratios. We have earnings. Our current earnings could sustain the growth that we expect. But if we have really some out outsized sustained projections for growth, we would not be shy about raising capital.
spk08: Okay. Great. Thanks. And then just finally for me, I guess, Eric, what were the yields on new securities purchases in the quarter? Sorry if I missed that.
spk10: Probably in the 130 to 150 range. which is inclusive of floating rate securities. Okay. Thank you.
spk03: The next question will come from the line of Ken Zerbe with Morgan Stanley.
spk02: All right. Great. Thanks. Starting off with a really quick one. Eric, you mentioned higher PPP fees. What was that amount this quarter? About $14 million. Versus $4 million, I think it was last quarter, right?
spk10: Yep, that sounds right.
spk02: Got it. Okay. I guess just in terms of growing the securities portfolio from here, obviously you have a ton of cash, but just given yields have come in, it feels like so much since last quarter. How are you thinking about investing in additional securities at this point?
spk10: We're going to be ultra-selective at this point.
spk05: Okay.
spk10: I mean, we're hopeful that there's a pickup in rates. We don't really understand how there can't be, given everything that's going on in the world. But, you know, where the 10-year is right now, the five-year, it doesn't make a whole heck of a lot of sense to invest much. I mean, we'll be opportunistic. We do have a very robust treasury function that will search for investments that make sense, you know, a particular floating rate to the extent we can get our hands on them, but Right now it's ultra, ultra selective.
spk04: That's why we're adding on the more verticals on the lending side.
spk02: Got it. No, no, understood. No, I would agree with the approach. And then just my last question, it feels like some of the narrative around sort of your digital banking business and the deposit inflows has shifted away from the price of Bitcoin and more towards the transaction volumes. And honestly, maybe I just don't know enough about, you know, crypto transactions, but I've heard they've been coming down and maybe that's because of retail investors possibly. But when you think about, you know, have you seen a similar trend, maybe a decline possibly in the amount of transactions going through Cignet? I mean, is there a correlation between sort of broader crypto transaction volumes in Cignet?
spk10: Yes. You know, it's really tough to correlate because it's such a growing ecosystem and we're garnering more and more of our share of that ecosystem. Our year-to-date volumes are more than double what our full year volume was for 2020. So, you know, we've seen significant volume pickup. But again, it's hard to say just because of the acceptance of Signature Bank in that space. Got it.
spk02: Okay. All right. Thank you.
spk03: The next question will come from the line of Dave Rochester with Compass Point.
spk13: Hey, good morning, guys. Nice quarter.
spk03: Thank you, Dave. Good morning.
spk13: Good morning. And definitely appreciated all the detail on the digital deposit side. That's the $6.3 billion you talked about. That's all on balance sheet, right? That's right.
spk04: Yes.
spk13: And how much do you have off balance sheet?
spk04: About $2.5 billion.
spk13: Okay, great. So you've kind of capped it around that area, it sounds like. Can you talk about any benefits you've seen from the expanded circle relationship you announced last quarter? And then if I'm just looking at USDC total issuance right now, it's about maybe $27 billion today. In the most recent circle deck, the estimated circulation of that could go to $35 billion this year, and it could grow to $194 billion by 2023. So just given your expanded relationship there, can you just talk about what that can mean for signature?
spk04: Well, we're getting their operating accounts. That's what we're in the process of doing. And that will give us more non-interest bearing deposits. And then on the interest bearing side, we're keeping a cap on it and we're having the excess deposits if they want to give us any more. go into the off-balance sheet money market, which at some point will be paying more than a basis point. So we're not putting any more, we're not planning right now putting any more stable coin reserves on other than the operating accounts, which we expect to be pretty substantial.
spk13: What do you think it would take to get you to change your decision there and add some more of that stable coin piece, the on-balance sheet?
spk04: But over $25 billion in excess cash, it's not prudent to take more on balance sheet deposits. It would be prudent for us to take off balance sheet where we can collect some fee income.
spk13: Yep. So that's something that you could source later on as you bring the cash balances down longer term.
spk04: Yes.
spk13: Perfect.
spk04: There are other clients that have stable coins with us, their reserves, and they keep them in DDA. Not every stable coin reserve is in an interest-bearing account.
spk13: Okay. Appreciate that. And then maybe just switching to the loan side. How do you guys feel about the loan growth guidance given you've got these three verticals coming online here in the back half? It seems like you have all kinds of capacity to sort of blow through that one to two billion that you've talked about, at least maybe starting in the fourth quarter. And then if you could just give any updates on that front, just regarding your expectations for each of those segments on the growth side, that'd be great. I think the more recently you talked about mortgage warehouse contributing 200 million to maybe a billion in growth per quarter. So, any updates on that as you've done some more work on those verticals would be great to hear.
spk10: And for the 3rd quarter specifically, we'll, we'll be in that 1 to 2Billion dollar. Range, you know, we've seen that the 3rd quarter is usually our slowest quarter of loan growth and. Given that people are not able to really take vacations last year. Due to the pandemic, we expect that there's a lot of people that will be out in the months of July and August and we'll see that. affect our loan growth a bit. So we're holding to the $1 to $2 billion for the third quarter. For the fourth quarter, we're hoping to be at the high end of that range. We do anticipate that the mortgage warehouse business will kick in a little bit. There's hope for the third quarter that we can do $250 million in that mortgage warehouse space, and I think that's certainly possible. And then we can do an equal to potentially even greater amount in the fourth quarter, so that'll be beneficial to the growth for sure. On the SBA side, we anticipate that they'll start up mostly in the fourth quarter. We're still putting our systems and processes in place. It's very important in that space to really have your systems, your paperwork, and everything in line with the government to ensure that you have that government guarantee on your loans. So it'll take us a little bit longer to get that up and running, but it should be beneficial to growth in the fourth quarter, albeit to a much lesser extent in the mortgage warehouse business.
spk13: All right. Great. Thanks, guys.
spk03: Thank you, Dave. The next question will come from the line of Abraham Ponawala with Bank of America.
spk01: Good morning. Good morning, Abraham. I guess just the first question, if we could talk a little bit about Give us an update on the West Coast expansion, where things stand both on the hiring of teams and just growing that portfolio on deposits and loans.
spk10: We hired several teams there in the first quarter, and then we've hired another two teams in the second quarter, and then in addition to the SBA business that we brought on board that's headquartered in Sacramento. We're pretty pleased. There's a few more teams in the pipeline that we anticipate to hire for this year, and then we're really setting the stage for 2022. Something we've also done is we've added a number of group directors to existing teams. We're very pleased with the hiring to date and the pipeline that we have to continue to build that out. We've got about a billion and a half in deposits. On the West Coast and I want to say we're approaching about $500 million in loans there.
spk04: They've done a terrific job. Under the circumstances, most of them have never been at Signature Bank when there wasn't a pandemic. And so they've had to, especially now they're going back to Los Angeles with masks again. So they've been able to grow the business under not so positive circumstances or environment.
spk01: And I guess tied to that, Eric, you always talked about the first billion is going to be very difficult as you get the brand recognition in the market. If we look forward, like should we expect a pretty decent pickup in terms of what West Coast starts delivering for you both in terms of deposit growth and maybe loan growth? Yeah. Yes. Got it.
spk10: And I guess on the other side, what Joe said about the fact that, you know, we really started our LA franchise during a pandemic. Right. So, you know, we're, we're anticipating, we'll see pretty good pickup from them over the course of the next several years.
spk04: We've been meeting clients on the West coast through teleconferencing.
spk01: Understood. Thanks. Thanks for the color. And I guess just back home, any signs of life in the New York multifamily space? Are you seeing activity pickup or, How are you thinking about just that book? I know you're targeting sort of retaining your relationship-based clients, but give us a sense of the market. We're seeing a pickup, an activity, really a pickup, an activity.
spk04: If the government wasn't involved, it would be better. We had a nice deal, very substantial deal, and the government gave them 2.5%, 10 years interest only.
spk01: Got it. So it's very competitive. Got it. And one last question. I guess we've talked previously about the use case for Signet beyond crypto customers. Any headway there, or is that still in test phase?
spk04: I would say it's soon to come out of test phase, but it's still in the testing phase.
spk01: Got it. Thanks for taking my questions.
spk03: Thank you, Ibrahim. The next question will come from the line of Casey Hare with Jefferies.
spk11: Yeah, thanks. Good morning, guys. Question on the crypto deposit franchise. Where is that overall today, balance-wise? And is there a concentration limit that you guys, you know, where you don't want that to go any higher as a percentage of overall deposits?
spk04: It's about a little under $18 billion put out. amongst all the different categories in the digital asset world. And we wouldn't be able to give you the – if we had one, we wouldn't be able to tell you what the limits are because then our competitors would know what we're doing.
spk11: Understood. Okay. And that $18 billion, how much of that is – I think you mentioned earlier there's $2.5 billion off-balance sheet. How much is off-balance sheet?
spk10: It's $2 billion that's off-balance sheet right now.
spk11: Okay. And what's preventing you from utilizing the off-balance sheet vehicle more? Because that certainly would help, you know, I know your risk-weighted ratios are in great shape, but, you know, the TCE Tier 1 leverage would certainly benefit from.
spk04: We would certainly use it more, but the returns are abysmal. So if they can get a little bit more of a return from another institution, they're going to do it because it's a substantial amount of money. We're talking about on the off-balance sheet money market funds, one basis point, two basis points. Right.
spk11: Gotcha. Okay.
spk04: So as rates rise, as rates rise, whenever that is, whatever millennium it is, we will use the off-balance sheet money market because that will rise quicker than the on-balance sheet interest products that we have. So we'll use that. We're getting less than $200,000 in fee income on a quarterly basis, when years ago we were getting like $3.25 million a quarter. So we can earn substantial fee income by putting it off balance sheet, and we certainly would do it under the right circumstance.
spk11: Gotcha. Thanks. And then just last one on the expense side. I'm assuming the expenses came in very much in line with your guidance. Do we continue to grind in the lower double digits from here? And does that third quarter 20 included an FHLB charge? I'm assuming that gets stripped out of the math for the guide.
spk10: No, it's, I mean, it's all in with that included. We're probably looking at a, you know, 12 to 13 expense growth in the third quarter. And we'll see it go down to, you know, 11 to 12, and then 10 to 11, continue to decline. Okay, excellent. Thank you. Thank you, Casey.
spk03: The next question will come from the line of Matthew Brees with Stevens, Inc.
spk07: Morning. Hey, I appreciate the overall crypto balances at this point. Could you just break it out into the various buckets, perhaps? What's in the operating accounts or the Cignet accounts and then the stablecoin?
spk10: We've done that already, Matthew, so I don't know if you missed it, but we're happy to go through it again. We've got about $4.4 billion in stablecoin, $2.4 in OTC, desk and institutional traders, $9.7 in digital asset exchanges, and $1.2 overall in blockchain technology and digital miners with 2.5, almost 2.6 billion of that in CIGNET.
spk07: Got it. Okay. And as you think about these various categories, you know, we've never seen them rate tested. You know, what do you expect to be the most kind of, you know, sensitive to rate changes, you know, deposit betas? What would be the least sensitive?
spk04: Well, the digital asset exchange is probably the least sensitive. But like the stablecoin reserves, we have five stablecoin reserve clients. Four of them are keeping money in non-interest bearing, and one is keeping money in interest bearing. So it's kind of hard right now to determine who will be most sensitive.
spk07: Understood. Okay. And then, Eric, you mentioned in your prepared remarks that you know, focus on NII growth. And over the last handful of quarters, it's come in annualized at about 17% or 18%. Can you give us some, you know, range or predict, you know, estimated outcome or, you know, where do you think NII can go over the next handful of quarters? Is it stable or do you expect acceleration?
spk10: You know, acceleration would be tough to say given the rain environment that we're up against. But, you know, we'll see continued growth. It's not something that we've given guidance on in the past.
spk04: Okay. One of the things that will help, which we have more runway than most banks, is our ability to continue to drop interest on deposits. We had a quarter where we were down to 27 bits, and we were at 34 for the first quarter. So that's a drop of seven basis points. In the month of June, we were at 25 basis points. And we're trending lower than that in the month of July. So we're at 27 for the quarter. We can get it down to below 25 basis points in the third quarter. And we're hoping to get it down below 20 basis points in the fourth quarter slash first quarter of 2022. So coupled with our continued growth of interest-bearing, interest-earning assets, we'll be able to reduce costs where others have not been able to do so or have already done so.
spk07: And then last one for me, you know, it feels like the West Coast expansion is successful. It's going well. Does this confidence give you, does it give you the confidence to introduce the model to additional markets? And where on the map do you feel like, you know, your single point of contact model would be most successful?
spk04: It's most successful where the big players are, in the cities where the big players are, whether you're talking about Chicago, Dallas, places like that. California is a very large state, and we're moving around in that state. As Eric mentioned, Sacramento, Los Angeles, and San Francisco were already there. We have plans to go to other states that make sense along with California on the West Coast. And we're not going to really talk about where we're going right now until we're there.
spk10: We can certainly at this point be opportunistic as we've always been, right? But more opportunistic geographically, right? We've proven that we can take this model to different geographies and then it works, right? So it's densely populated metropolitan areas that the mega banks dominate, right? That's what we built our bank to compete with. So we've done it in California now and we're going to do it again elsewhere.
spk07: As we think about the $25 billion of cash and the deployment of that cash, does that accelerate the timeframe at which you might deploy it and go after new markets?
spk10: I think, you know, when we look at new markets, and we've circled a number of them with rather not give away our secret sauce, but there's a number of markets that we're looking at, it really comes down to finding the talent. If we can find the bankers or a group of bankers with a book of business, then that makes sense, then we can go there now. And we've shown it's not, quite frankly, difficult for us to do, right, to open up a location to onboard new bankers and to execute our model. we can do it without too much of a strain on our resources.
spk07: I appreciate it. That's all I had. Thank you.
spk03: Thank you. The next question will come from the line of Chris McGrady with KBW.
spk09: Hey, good morning. Eric, maybe a question on non-interest income and the tax rate, kind of the movement there. Can you help us with the other income line and the tax rate? There's some pretty big swings in the quarter. Thanks.
spk10: Yeah, the other income line was affected by a marked market on some derivative contracts that we had, so hopefully that will normalize a bit next quarter. If we look out third quarter to third quarter of last year, we anticipate we'll be in a 10% to 20% growth on interest income. but there was some noise around some derivative contracts that we had. So that should get back to normal. As for the tax rate, it used a 28% effective tax rate going forward. Great.
spk09: And then just one more on the funding. Given the momentum in the deposit growth, you talked about the debt you retired in the quarter. Anything else on the horizon, or is this kind of longer duration stuff that's out there?
spk10: There's There's some borrowings that we'll be able to repay in the short term. Not a significant amount, but there are some borrowings that will come due. Approximately $100 million is coming due in the next quarter. Then after that, we've got about $1 billion coming due three to 12 months out. We'll probably let them run off, although we are assessing Now, whether it makes sense for us to prepay some of those.
spk02: Great.
spk10: Thanks. Thank you.
spk03: This concludes our allotted time in today's teleconference. If you'd like to listen to a replay of today's conference, please dial 800-585-8367 and refer to conference ID 6246928. A webcast archive of this call can be found at www.signatureny.com. Please disconnect your line at this time and have a wonderful day.
spk09: Find your Ozempic cell. Ask your health care provider today about Ozempic.
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