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spk00: Welcome to Signature Bank's 2021 Third Quarter Results Conference Call. Hosting the call today from Signature Bank are Joe DiPaolo, President and Chief Executive Officer, and Eric Howell, Senior Executive Vice President and Chief Operating Officer. Today's call is being recorded. At this time, all participants have been placed in the 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 one 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 Joe DiPaolo, President and Chief Executive Officer. You may begin.
spk04: Thank you, Emma. Good morning and thank you for joining us today for the Signature Bank 2021 third quarter results conference call. Before I begin my formal remarks, Susan Lewis will read the forward looking disclaimer. Please go ahead, Susan.
spk05: Thank you, Joe. This conference call and oral statements made from time to time by our representatives contained of 1995. 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 expectations regarding 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 and on our business overall. Forward looking statements often includes words such as may, believe, expect, anticipate, intend, potential, opportunity, could, project, seek, target, goal, should, will, would, plan, estimate, or other similar expressions. 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 and can change the results of many possible events or factors, not all of which are known to us or in our control. 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 banks 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 my colleague 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. Signature Bank's dramatic growth, which surpassed a milestone of $100 billion in assets, was driven by the collective success of our legacy banking teams in New York, our blockchain-driven the blockchain-based payments platform, Cigna, and the many low-risk franchises which now comprise our organization. The deposit growth of $10 billion in the third quarter continues to be widespread, with notable contributions from our digital asset banking team, including growth on the Cigna platform, the specialized mortgage banking solutions team, and the New York legacy banking teams. Our core growth, our core loan growth, was driven by our fund banking division, which grew a record $5 billion in outstanding. Although some of these businesses have only recently come to fruition, our approach remains consistent since the day we opened our doors. We've always adhered to our client-centric single point of contact model, which invariably It tracks top bankers from across the industry as well as their clients. Now, let's take a look at earnings. Pre-tax, pre-provision earnings for the 2021 third quarter were a record $331 million, an increase of $78.6 million, or 31% compared with $252.4 million the 2020 third quarter. Net income for the 2021 third quarter increased $102.9 million, or 74.2%, to a record $241.4 million, or $3.88 diluted earnings per share, paired with $138.6 million, or $2.62 diluted earnings per share, for last year. The increase in income was predominantly given by substantial asset growth of 44.1 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 third quarter of 2020. Looking at deposits, deposits increased 10 billion, or 11.7%, to 95.6 billion this quarter, while average deposits also grew $10 billion. This quarter's growth was driven by the digital asset banking team, which grew deposits $5.1 billion, including $2.7 billion of growth on the Cigna platform. Additionally, the specialized mortgage banking solutions team grew $2.3 billion. Our venture banking group increased $200 million. The West Coast banking team grew $235 million, and our New York banking teams grew 1.9 billion. This includes eight New York teams that exceeded 100 million in growth. Since the end of the 2023 quarter, deposits increased a remarkable 41.2 billion, or 76%. And average deposits increased 33.4 billion, furthering the reduction in our loan-to-deposit ratio, which now stands at 61%, down from 85 percent just one year ago. During the quarter, non-interest-bearing deposits increased 5.7 billion. That's worth saying twice. Non-interest-bearing deposits increased 5.7 billion to 34.4 billion, which represents a high 36 percent of total deposits. This tremendous growth in DDA can largely be attributable to the adoption of our Signet platform, which, as I stated earlier, grew by $2.7 billion this quarter. Our substantial organic deposit flow led to an increase of $44.1 billion, or 69.2% in total assets, since the third quarter of last year. That's the equivalent of acquiring a 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 third quarter increased a record 5 billion or 9.6% to 57.2 billion. For the prior 12 months, core loans grew 13 billion or 29.4%. The increase in loans this quarter was again driven primarily by the fund banking capital core facilities. Our existing teams are well positioned to capitalize on opportunities. We also welcome our corporate mortgage finance business, warehouse mortgaging, and our SBA originations platform, which will help to further our growth and diversification. Now 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 year end 2020, they were 1.3 billion. At April 15th, they were 983 million. At July 15th, they were 309 million, and as of October 10th, they're now at 254 billion. So from the end of 2020, when it was 1.3 billion, we're now down to 254 million or 43 basis points of total loans. That's the non-payment modifications. Non-accrual loans, or 165.4 million or 28 basis points of total loans, paired with 136.1 million or 25 basis points for the 2021 second quarter, well within our expectations. Our 30 to 89-day pass-through loans are well within our normal range at $98.1 million. Our 90-day plus pass-through loans were $81.2 million. However, there were two loans that were renewals that were delayed and have subsequently closed. Adjusting for this, our 90-day plus pass-throughs would have been within a normal range of 7.9 million. Net charges for the quarter, net charges for the 2021 third quarter was 17.3 million, or 12 basis points of average loans compared with 15.3 million for the 2021 second quarter. Again, well within our expectations. The provision for credit losses, the 2021 third quarter decreased to 4 million compared with 8.3 million for the 2021 second quarter. This brought the bank's allowance for credit losses to 85 basis points, and the coverage ratio continues to stand at a healthy 303%. I would like to point out that excluding very well-secured fund banking capital call facilities and government-guaranteed PPP loans, the allowance for credit losses would be much higher at 136 points. Now, onto the expanded success. In the 2021 third quarter, the bank onboarded one large private client banking team in New York. This brings the team total hires to eight for the year, two in New York, four on the West Coast, as well as the corporate mortgage finance team and the SBA originations team. At this point in the call, I'll turn it over to Eric and he will review the quarter's financial results in greater detail.
spk03: Thank you, Jo. Good morning, everyone. I'll start by reviewing net interest income and margin. For the third quarter, it reached $480.9 million, an increase of $23.7 million, or 5.2% from the 2021 second quarter, an increase of $220.5 million, or 20% from the 2020 third quarter. Net interest margin declined 14 basis points to 1.88% compared with 2.02% for the 2021 second quarter. The decrease was due to massive excess cash balances from significant impacted margin by 59 basis points. Again, our focus is on net interest income growth. Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2021 third quarter decreased 19 basis points from the linked quarter to 2.18%, a decline driven by the massive excess average cash balances, which grew $5.4 billion in the quarter. Yields on the securities portfolio decreased 23 basis points linked quarter to 1.49%, due to lower reinvestment rates, as well as the bank investing in floating rate securities, which was due to an increase in the rates at the end of the quarter. We anticipated that it was going to be a better environment for investing in securities, and fortunately, however, we were opportunistic throughout the quarter, as we saw limited windows in which to invest. And therefore, we did increase the securities, which includes $1 billion in purchases that settled literally on the last day of the quarter. Turning to our loan portfolio, yields on average commercial loans and commercial mortgages decreased 13 basis points to 3.45% compared to the 2021 second quarter. Excluding prepayment penalties from both quarters, yields decreased by 10 basis points. Now looking at liabilities, our overall deposit cost this quarter is two 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. Borrowing balances decreased by $146 million and the cost of borrowings decreased three basis points to 2.8 percent. The fall cost of funds for the quarter decreased six basis points to 32 basis points, driven by the deduction in deposit costs. And I'd like to point out the dramatic shift in our interest rate risk profile, where our balance sheet has moved to significantly asset sensitive from mildly liability sensitive over this focus on growing floating rate loans, which now comprise 45% up from 10% of our loan portfolio, coupled with our core deposit funding base, makes us extremely well positioned to take advantage of a rising rate environment. And now on to non-interest income and expense. With our plan to grow non-interest income, we achieved growth of $7.2 million or $34 million when compared with the 2020 third quarter. The increase is mostly due to a rise in fees and services mischarges, which was driven by an increase in both unused commitment fees and treasury management fees. Non-interest expense for the 2021 third quarter was $181.2 million versus $160.6 million for the same period a year ago. The $20.7 million, or 12.9% increase, was principally due to the addition of new private client support to meet the bank's growing needs. And despite our significant team hiring and margin compression from substantial cash balances, the bank continued, and as a result, our efficiency ratio improved to 35.4% for the 2021 third quarter versus 38.9% for the comparable period last year. And now quickly turning to taxes, this quarter we benefited from multiple one-time tax items, which totaled $7.4 million and included $4.3 million in solar tax credits. This lowered our interest rate for the quarter. Excluding these benefits, the effected tax rate for the quarter would have been 28.5%. In turning the capital, the bank raised $655 million of common equity through a public offering during the quarter. As a result, all capital ratios strengthened and remain well in excess of regulatory low-risk profile of the balance sheet, as evidenced by common equity Tier 1 risk-based ratio of 10.49% and total risk-based ratio of 12.96% as of the 2021-30. Dr. Joe, thank you.
spk04: Thanks, Eric. The collective strength of our franchise led to yet another quarter of strong deposit growth. record core loan growth, record pre-tax, pre-provisioned earnings. Bottom line, we delivered another strong quarter. We are well positioned for the future given the robust deposit growth from across the board that has led to a significant level of excess cash on our balance sheet. We will continue to prudently put the cash to use in our securities portfolio, as well as our loan portfolio through both our new and existing lending businesses. Our steadfast deployment will ultimately drive earnings higher for our shareholders. Our approach to organic growth, coupled with our industry-leading efficiency, continues to be the best method for capital deployment. Signature Bank's track record confirms that investing in people is paramount, and the optimal path is to avoid all of the cultural and organizational disruptions that stem from M&A, which are often underestimated. Looking ahead, our colleagues whose dedication has brought us to this next chapter, it has always been and will continue to be their efforts that culminate into the time to become Signature Bank. We look forward to a bright future ahead questions you might have. But before I turn before I turn the call over. To enter the operator, I just want to encourage everyone. Please get vaccinated now. I'll turn it over to Emma. Thank you.
spk00: The floor is now open for questions. At this time, if you have a question or comment, please press star one on your touchtone 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. Our first question comes from Ken Zerbe with Morgan Stanley.
spk07: All right, great. Thanks. Good morning, guys. Good morning, Ken. Are you able to provide any data in terms of how much payment volume is flowing through Cignet and how that may have changed over the last couple quarters?
spk03: Yeah, Ken, we can provide some statistics around that. Our transfer volumes for the quarter were 128 million. Billion, sorry, billion. down slightly from the prior quarter of $149 billion.
spk07: Gosh, and where was that maybe, I don't know, say first quarter or a year ago? I'm trying to get a sense of how that's ramped up over time.
spk03: It was not relevant. We're up about four times. If we look at all of 2020, we were $112 billion in volume. Year-to-date, we're at 365, so we'll be four times more this year than we were more than four times.
spk07: Got it. Okay, perfect. And then second question, can you just elaborate just a little bit more? I think, Joe, you mentioned that your non-inspiring deposit growth was really in that platform. I know you have the digital banking team that pays some very small amount of interest on the deposits coming in. But can you just break that out or help us understand, you know, how much, like, how do you delineate where you're paying interest on those crypto deposits versus where you're not paying interest on those, if that makes sense? Thanks.
spk04: Well, we don't pay interest on the operating accounts. So I would say, on average, about 30 deposits a non-interest bearing in the digital team and about 70% of interest bearing. But their cost of funds for that team is about five basis points we have for all the other teams. So they've been driving the cost of digital deposits down.
spk07: Got you, okay. All right, now that's helpful. And then just maybe last question, if I can squeeze one in. Did you do any Bitcoin-backed loans this quarter?
spk04: We did one loan for 25 million. And that's all we've done for the third quarter thus far, for the year. We expect maybe to do one or two others.
spk07: Awesome. Okay, great. Thank you very much.
spk00: Our next question comes from Matthew Breeze with Stevens Inc.
spk13: Hey, good morning. Maybe turn into loan growth. You know, this quarter's performance was well ahead of guidance. You know, just curious what happened throughout the course of the quarter that you weren't expecting and maybe, you know, could you just recalibrate your expectations on loan growth going forward?
spk04: Well, in the fund banking capital call group, they had a number of prior to the third quarter that we had drawdowns on. So another piece is that it was, I'll call it the perfect storm. There were a lot of opportunities, both large and small, and to do direct loans as well. So it wasn't anything, any one thing that drove it, just something that we wouldn't recalibrate the fourth quarter based on the third quarter.
spk03: The fourth quarter tends to be a bit choppier for us and harder to predict. We do tend to see clients pay down lines often. in the quarter, so we're looking at $1.5 billion to $2 billion in loan growth guidance for the fourth quarter.
spk13: Great. Okay. Alan's sheet is through $100 billion. Should we expect any changes on the regulatory front or the stress test front? You guys operate without a holding company. Does that exclude you from any of the Dodd-Frank Act stress test? Could you just maybe talk a little bit about that?
spk03: Most of those would come into play at the $250 billion mark and can be considered systemically important. Between $100 billion and $250 billion, I don't think we're doing anything that would render us to be systemically important. Our banking model is pretty straightforward and simple, so I highly doubt that the regulators would go there. But, you know, the one thing that we'll have to do is submit a resolution plan. We've got some time to do that, you know, so we feel very comfortable about our ability to do that. Again, simple banking model and structure. So, it really shouldn't be difficult for us to put together a resolution plan.
spk04: And that resolution plan will be expected if sooner. than later would be expected in 2023. So, as Eric said, we certainly have time.
spk02: Great. Okay.
spk13: Last one for me is just I was hoping you could talk a little bit about the, you know, there's obviously a ton of cash on the balance sheet, $29 billion. We start to see an inflection. We can actually see cash balances start to turn and go lower. And could you maybe just talk a little bit about what you think the normalized cash position of the bank is? A lot of the stablecoin issuers are mandating that certain, you know, the reserve deposits need to be in certain asset classes. Should we expect a signature as a participant in that just needs to hold on to more cash than your average bank? That's all I have. Thanks.
spk04: The difficulty in answering the first part of the question is because deposit flow. It's hard to determine what the deposit flows will be because we have all these businesses out there. Both new and and and legacy. That are continuing to draw in their client, the West Coast. They've been under a pandemic the whole time that they've been here. So, as they start to bring more deposits in. It's hard to to deploy that. quickly so it really depends on on the deposit deposit flows um but one of the good things that we have going on on the asset side is that we have two new verticals we have the warehouse lending we have the sba lending and we have another vertical that will be coming on board uh either this quarter of 2022 so that deployment will help us. We expect that commercial real estate will start coming on, not like they did in the early part of their tenure here, but certainly in a positive way. So whatever cash we get, we have, we're pretty confident that we can deploy it to levels that were much higher than they've been in the past.
spk03: And we certainly have a securities environment that we can invest in today that's much improved from what it was for most of last quarter. So we'll be able to deploy there as well. You know, a normalized cash balance is tough to predict because, again, we're growing the overall balance sheet, but a billion-dollar cash hold now. So we've got a significant amount of cash that we need to deploy in the future, and we'll be... be able to do so. As Joe said, it's very hard to predict deposit growth for us because of the engine that we have in place to drive that future deposit growth. We have been through a couple rising rate environments now in our history, and although we've only had one quarter of negative deposit growth in all of our history, we did see that deposit growth moderate. So we do anticipate as interest rates rise, we will see the growth moderate. It's near impossible to think that we're going to grow $10 billion a quarter in perpetuity. And when that happens, then that should signal a stronger economy, a steeper yield curve, which will give us plenty of asset classes to deploy into. And that's where we really monetize these cash balances.
spk04: You know, something Eric said earlier on, with deployment is that we have a very bright future for the fourth quarter. Eric had pointed out that we had $1 billion in investment security that settled on the last day. So that didn't contribute to net interest income. And then we had $1.4 billion in loans settled and fund in the last 15 days of the quarter. for us in the fourth quarter.
spk02: Great. Thank you.
spk00: We'll take our next question from Abraham Bunawala with Bank of America.
spk01: Good morning. I guess maybe just a quick follow-up on that statement, Joe and Eric, around the securities book. The three-year to five-year part of the curve is anywhere 30, 40 billion of the year. Just if you could size up, Eric, in terms of the incremental securities you could purchase during the quarter. Is it $3 billion? Is it $5 billion? I would appreciate any color on that.
spk03: It's somewhere in that range. It could be $3 billion. It could be as much as $5 billion. It's probably pushing it a little bit because we do have a lot of payoffs there. But, you know, we have to stay similarly situated as it is now, Ibrahim. So, but if we have, you know, a five-year and a 10-year position where it is now, we can deploy a fair amount of cash into the portfolio.
spk04: It would definitely be a record growth in investment securities in the fourth quarter based on where we are today.
spk01: Understood. And just on capital, so obviously you did the equity raise, and you have a lot of risk-weighted capital. When you look at Tier 1 leverage, you're essentially where you were in the second quarter. Just remind us again how you're thinking about capital management, potential for another growth equity raise. It would be a good thing, but give us some context around how you're thinking about this.
spk03: You know, we're in good position today with the raise that we did early in the last quarter or so. We feel good about where our capital levels are. But, look, if we see an extended period of outsized growth, we're not going to be shy about raising capital. And that's our answer, and that's what's going to continue to be our answer.
spk01: Understood. And just a quick follow-up, Eric, on the transfer volumes you mentioned. They were down quarter over quarter. How should we read into that? It feels like the backdrop, obviously, Bitcoin prices, not totally correlated with that. I get it. But activity is increasing. I'm assuming you're adding clients. Just talk to us in terms of if that's symmetric. We are looking at how we should think about the sequential drop. And if you can give us an update on the circle partnership, where things stand, what's the outlook there?
spk03: Look, you know, we're early on. I don't think one quarter of volume declined. We added near 100 clients in the quarter. So that's positive. positive, and we're up $5 billion in deposits, or over $5 billion in deposits in the quarter. So that's the key driver for us. So as Joe pointed out, this is a lower cost deposit than the rest of the bank on average. Just think of it that we're four times ahead of last year.
spk01: Understood. And any update, Joe, on how that partnership is growing?
spk04: We have a great relationship with Circle. We continue to do business. They opened up many operating accounts and are now doing a tremendous amount of business on SIGNET with their operating accounts. So the partnership has gone well. And we continue to see it flourish.
spk01: Thank you. Thank you.
spk00: We'll take our next question from Brock Vandervlieti with UBS.
spk08: Just going back to Ken's question on the 25 million securities lending relationship. You've been very thoughtful in how you've been approaching the market and building that business. That seems like you're going particularly slowly there. Is there a key regulatory, some regulatory clarity you're awaiting? And if so, what is it?
spk04: We just think it's best to go slowly. We wanted to test it out, which we did. It's not like others where we're going to depend on it for a great deployment. We're going to do it for the best clients. We're going to underwrite the loans, the creditworthiness of the underlying borrower. We're not just going to take Bitcoin and accept it as collateral, which we will accept as collateral, but we also want to underwrite it that the borrower can actually pay back without worrying about the collateral. I just wouldn't depend on it being, if we do $100 million a quarter, let's say, that's not going to drive deployment to any great levels. It's just not something we're going to do for everyone, so I wouldn't depend on it going forward.
spk08: Going over to the digital deposits, how much are stablecoin and could you talk about specific regulatory changes there that may be coming, whether it means a Fed-regulated bank or treating them as money market funds, and how do you think that may shake out?
spk04: Well, first, we have Bitcoin dollars deposits. We have $5.2 billion that are on reserve. And then we have also another billion that are for stablecoin clients but are not in the reserves. They're in their operating accounts. So the strict interest-bearing reserves is $5.2 billion, and the total digital deposits are $22.8. We're calling $23 billion. $23 billion in total deposits in digital, of which stablecoin is 5.2.
spk08: And how do you see regulates playing out there in terms of, is there a risk of a change in the template?
spk04: From what we hear, what we understand is that that they wanted in deposits on by FDIC-insured banks or in treasuries. So if they want to put it in treasuries, they can put it in treasuries or in bank deposits. That's our discussions with the clients that we've had. That is stable coin.
spk03: I mean, you know, Brock, there's a lot that has to be done in the U.S. as it relates to regulations around, you know, finance. I certainly appreciate that and understand that. You know, we are already highly regulated, and we ultimately expect that, you know, fintechs and others will need regulation as well, and we welcome that, right? You know, for us, you know, the DFS, New York DFS, have been really strong supporters of And, you know, they have a team that's well-versed in crypto, and they work really well with us and others as well.
spk04: And our stablecoin clients are actually welcoming the regulation because they're in a position that regulation will actually eliminate a number of competitors, or even small, and eliminate some of the competition because they're ready and willing and able to live under new regulatory guidance.
spk08: Right. Got it. Okay. Appreciate the color. Thank you. Thank you.
spk00: Our next question comes from Casey Hare with Jefferies.
spk10: Yeah, thanks. Good morning, guys. Good morning. I wanted to follow up on the securities billed, specifically the reinvestment rates. What was the rate that you got on that billion at the end of the quarter, and then where is that today? Okay.
spk03: I would say it was probably in the low to mid-ones range, one and a half, 130 to 150, somewhere in there. Now I think we're over the 150 mark and what we're reinvesting in.
spk10: Is there any change, Eric, in the composition? Are you doing a mix of floaters and then regular pass-through type securities?
spk03: Just some color on... We're still... it's the same type of securities that we've been buying for a long time. You know, the defensive buys and agency CMOs, agency MBS pools, callable agency, the ventures, you know, we've got some opportunistic plays that we've done in regional banks of debt and such, but it's more of the same, really.
spk10: Okay, understood. And from a capital management perspective, As you rotate from cash into these types of securities, what is the risk weighting for the risk-weighted ratios?
spk03: I think it's 0% to 20% bucket, most of this.
spk10: Okay, very good. And then on the new loan vertical, any color you can provide in terms of what this can – can add to, you know, the loan growth guide per quarter, you know, yield, expenses, just trying to get a sense of what's coming either this quarter or next year. Yeah, in the mortgage warehouse, Len, you got well over... Actually, I was talking about the other, the team that you're going to add, not mortgage warehouse or SBA.
spk03: Or SBA. Okay. A little early to say. I mean, we're probably looking at when they're fully ramped, you know, $1 billion to $2 billion per year in growth.
spk10: Okay. And a similar type yield as, you know, a capital call mortgage warehouse?
spk03: I'd say similar, you know, hopefully a little higher, probably a little bit more spread in that business.
spk10: Okay. Very good. Thank you.
spk00: We'll take our next question from Jared Shaw with Wells Fargo Securities.
spk12: Hey, good morning. Just circling back on Cignic, what's the average transaction size done? Has that been moving around or what is that sort of looking like this quarter versus what we've seen in the past?
spk03: I don't have actual size transactions. Sorry, Jerry.
spk12: Or magnitude.
spk04: Is it getting bigger or smaller or just a... They're larger than other banks that have because we do institutional only and very little retail. And the retail is high level, so an institutional level is going to be pretty high. Okay.
spk12: And then I guess just shifting to the commercial real estate side, you know, when you look at CRE and multifamily, the balances there have been stable for a while. As you've grown capital and the market has stabilized a little bit, any thoughts on potentially reengaging there and seeing growth, or are you happy keeping balances stable here?
spk04: We're ready for some reengagement. We want to keep the – the balance growing a little on an annual basis. We think it's a strong asset to have. We're still dealing with the multi-generational, multi-year experience, years of experience. And that has helped us through the pandemic. Because in the pandemic, we've been able to deal, that's what you have to bet on. And so right now, we're coming through the pandemic in a very, very favorable way. And that has led us to believe that we should continue, albeit not at what we did in the years past, but to grow it at a level that we're comfortable with to keep it in line, percentage-wise, with the rest of the organization.
spk12: Great. Thanks very much.
spk00: Thank you. We'll go next to Stephen Alex Opelous with J.P. Morgan.
spk11: Hey, good morning, everyone. Good morning, Steve. I wanted to start, so in the digital asset business, we've seen some smaller banks announce that they're either now providing an on-ramp to the exchanges or holding stablecoin deposits. New entrants into the space, and how difficult would it be for one of them to replicate Cignet?
spk04: Well, some of them are entering the space to use a Signet-type product for other ecosystems, not necessarily the digital ecosystem. But let's put it this way. Three years ago, I said banks should be on the blockchain or they would not survive within five years. So that's two years left to go. And we expect that there will be banks coming on the blockchain or they're going to merge. And there have been a number of announcements of mergers, and we think that's because they want to avoid dealing with blockchain technology on their own. So are you talking about any particular bank?
spk11: Well, we've seen, Joe, like Customers Bank Corp said that they're now in the business small, and there's been a couple of other small banks saying they're now holding more customers. deposits from stable coin companies. We're just hearing rumblings. I'm just really wondering how proprietary is Cignet and can these newer entrants use off-the-shelf fintechs to basically replicate what you guys offer today?
spk04: Long, actually. We expected that it would have occurred sooner. Particularly with Customers Bank, we're actually excited to be on board Because we have a piece of ownership, a meaningful piece of ownership in Tacit. And we have a board seat on Tacit. So we want them to do well. But I think with customers, they're looking to do things with other ecosystems. Because it's hard to get into the digital space if you don't have a team. And we have a team that handles the digital clients. We have a team that has nine years of experience. And that bodes well for us. And it's hard for others to do it because they don't have bankers that have experience in this space. With Cignet and with other products, we're continuously making enhancements. And we'll probably announce in the upcoming announcements of some of the new things that we'll be doing. So we're not concerned at all because we were first out there and having the experience goes a long way for us.
spk03: And it's a massive growing ecosystem with room for others to play.
spk11: Eric, to follow up on that, in the earlier commentary, that volume had slowed a bit. Is your growth at this stage more about simply adding more institutions to the platform, or is it more about seeing those volumes accelerate so institutions hold more deposits with you?
spk04: I must say, I'm not sure the volumes drive it. It's really how much they keep in Cignet. And the transactions are pretty large, although I don't have the averages. So we weren't concerned at all. We're actually years and we're on a fourfold rate right now. Okay.
spk11: That's helpful. And just one final one. Joe, I want to shift the credit. Just any color in the link quarter increase in MPLs this quarter? About 29 million. Thanks.
spk03: Yeah. You know, We really fully expect that our non-accruals are going to increase as we're still dealing with the effect of the pandemic rules went up a little bit. Most of the loans that are coming out of non-pay are curing, but clearly some are going to go to non-accrual. I think the bright spot, if you want to call it that, is really that charge-offs are well contained. Under the new CECL, Modeling, we were able to put up some pretty substantial provisions, which appear to be able to easily absorb any losses that we have coming out of it. But it's no surprise to us that we saw not a cruel climb. I think you're going to see that continue for several quarters as we work through the last lingering effects of COVID.
spk11: Thanks for taking my questions. Thank you.
spk03: Thank you, Steve.
spk00: We'll take our next question from David Bishop with Seaport Research.
spk02: Yeah, good morning, General. Hi, David. I think, Eric, you started touching upon it, but remind us in terms of the new verticals, the mortgage warehouse and SBA, maybe what the expectations or targets for growth there is.
spk03: Yeah, we did our first SBA 504 origination in the fourth quarter, so early on in this quarter. That's going to be a much slower growth, more granular type loans, which we love. You know, I think if we can do 10 to 20 million in originations in the fourth quarter, that would be great. And then hopefully, you know, next year it's 20 to 30 and then 30 to 40, 40 to 50. So, you know, you look years out from that. That being a $200 to $500 million, I'm going to give you a fairly wide range there. Let's see how it goes. But, you know, $200 to $500 million a year in growth. In the mortgage warehouse finance business, they've got, I want to say now in the pipeline, you know, we expect to say, you know, anywhere from $200 to $500. maybe even as much as 800 million, but that would really be on the high end of lines to close, you know, and draws will be roughly 50% of that. So we could see a couple hundred million dollars of growth in the fourth quarter, and that should be, you know, a billion to two billion in growth per year going forward.
spk02: Thank you.
spk00: We'll go next to Chris McGrady with KBW.
spk06: Great morning. I wonder, Eric, if you could provide an update on the expense run rate and the fee income trajectory, given the momentum.
spk03: Yeah, on the expense front, we had some one-time items in the fourth quarter of last year that led to a low level of expenses, so we'll probably pop back up to a 14 to 16% growth in the fourth quarter this year compared to then. For next year, I think it's gonna be a higher growth expense number, similar to what we've seen in prior years. It might stay there for a few quarters, though, and then hopefully trend down when we get into the third and fourth quarters. You know, we've brought on some massive business lines and undertaking a number of initiatives, and we need to invest in our people, in our operations, and in our technology. So we're going to still have a hefty level of spend next year for sure. All that being said, the revenue growth is there, and we should continue to see efficiencies be gained. and see our efficiency ratio go down, even with the level of expense that we're talking about putting on.
spk06: That's great. And then maybe just a couple of housekeeping. The remaining PPP fees and what was earned in the third quarter and then also that 20.5 tax rate, is that kind of where you're guiding us?
spk03: Yeah, on the tax end, you know, we are seeing some ongoing benefits. So I'd say effective rate of 28% going forward. In the third quarter on the PPP fees, we recognized 15.6 million, and we've got 32.9 million remaining to be recognized, which should happen over the next two to three quarters.
spk06: Thank you.
spk04: Thank you, Chris.
spk00: We'll go next to David Long with Raymond James.
spk09: Hey, guys. Good morning.
spk01: Good morning, David.
spk09: You know, just, you know, the West Coast, you guys have done some pretty good expansion there, and I know it's late in the year, but just curious what your pipeline is there to add additional bankers out on the West Coast. Is that something that you guys would look to continue to build, and is it more likely to see that, you know, maybe in the first half of next year versus anything the rest of this year? Thanks.
spk03: Yeah. No, I mean, I think we might add a banker here and there to existing teams this year, but, you know, mostly – At this point in the year, we're setting the stage for next year. We do have a number of teams in the pipeline for California. So, you know, anywhere I'd say from four to eight teams in the pipeline. So that's part of the growth guidance and the expenses as well.
spk09: Got it. Thanks. All my questions, other questions have been answered.
spk04: Thank you, David.
spk00: This concludes our allotted time and today's conference. If you'd like to listen to a replay of today's conference, please dial 800-723-0488. A webcast archive of this call can be found at www.signatury.com. Please disconnect your line at this time and have a wonderful day.
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