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spk06: Signature Bank's 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, and Stephen Wieromski, Senior Vice President and Chief Financial Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be 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 star 2. We ask that while you pose your question, you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Susan Turkel, Corporate Communications for Signature Bank. You may begin.
spk01: 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. 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. Now, I'd like to turn the call over to Joe.
spk11: 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 Wieremski, 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. 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. This includes five in New York and seven on the West Coast, of which three were in Nevada, marking our entry into that state. We also added hundreds of colleagues across various operational and support areas. Launching the healthcare banking and finance team, which we successfully onboarded during the 2022 second quarter. Three. Increasing our annual earnings, where we realized great success is evidenced by earning a record $1.3 billion in net income with a record return on common equity of 16.4%. Four. growing our loan and deposit portfolios substantially. Although we grew loans by a strong $9.4 billion, 2022 presented deposit challenges. While we expected continued deposit growth, albeit not at 2020 or 2021 levels, seven Fed hikes 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. 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. Please take note. Thus far in 2023, we are already up $1.8 billion in total deposit growth. 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 deposits. 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 billion. 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 the digital asset banking space by reducing the size of relationships. This strategy results in a more granular deposit base, which leads to greater stability in this funding source. As part of the plan, we are focused on reducing high-cost excess digital deposits. Our strategy went as expected and resulted in a decline of $7.4 billion in digital deposits. Respectively, the bank will further reduce these digital deposits by an additional $3 to $5 billion by the end of 2023, however, most likely much, much sooner. Additionally, with the seventh Fed rate hike on December 15th and subsequent to the conference, we saw a large degree of irrational 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, $2.3 billion 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 or managed low. There were several other factors that contributed to the traditional decline. Our mortgage banking and solutions team experienced this seasonality due to taxes and escrow payments, which contributed $1.9 billion to the overall decline. We expect this to build back up over the course of 2023. And 1031 exchange commercial real estate transactions continued to decline industry-wide, and we saw a reduction to the tune of $1.2 billion. So there was a lack of for CRE transactions, and as a result, there will be less 1031 deposits available. During the quarter, noninterest-bearing deposits decreased $6 billion to $31.5 billion, which continues to represent a solid 36% of total deposits. The decline in DDA continues to be driven by the challenging deposit rate environment. Before I turn the call over to Eric, I'd like to say that although 2022 was a tough year for the deposit, 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 13th. That's after only nine business days. Now I'd like to turn the call over to Eric.
spk04: 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%. 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 are 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 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 to 89-day pass-through loans at 96 million or 13 basis points, and 90-day plus pass-throughs at 55 million or seven 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 six basis points for the 2022 third quarter. The provision for credit losses for the 2022 fourth quarter increased to $42.8 million, compared 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 for 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.
spk05: 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 $130 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 billion to $6 billion range, which is dependent upon deposit flows. Net interest margin on a tax equivalent basis decreased seven 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 bank plans to pay down these borrowings as we see traditional deposit inflows, resulting in 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%. The increase in overall asset yields was across all of our asset classes and was driven by higher rates. Yields on the securities portfolio increased 45 basis points, one 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. Turning to our loan 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 repricing 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 repriced higher, even as the Fed ceases increasing rates. Now looking at liabilities. Given the 125 basis points of Fed moves this quarter, overall deposit costs increased 80 basis points to 1.91%. The pace of the deposit repricing 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 borrowings 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 deposit 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-priced 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. 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% 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.
spk11: now i'll turn the call back to joe thank you thanks steve i'd like to point out that this is our first year in our 22-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 growing deposits 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 the long term. 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 through 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 loan 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 deposits of clients in the crypto ecosystem, and we are executing on our plan to reduce these deposits significantly for concentration purposes. 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.
spk06: 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.
spk08: Hey, good morning, guys.
spk00: Good morning, Dave.
spk08: 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, or have you already seen some of that flow out that's actually baked into that quarter-to-date growth you mentioned?
spk04: I mean, that was in the fourth quarter already, Dave.
spk08: Oh, it was in the fourth quarter. So how much do you have left at this point?
spk13: Not a lot.
spk08: Yeah, okay. What areas are you seeing the deposit growth in at this point, quarter to date?
spk11: Well, there's a number of areas. We can start with, I make my colleagues nauseous, but we can 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 truly 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 do a better job growing deposits because a number of them over the last several years were under the pandemic. And that certainly hurt their ability to bring clients over quickly. So the West Coast has been a strong, and finally out of the pandemic, and that should work. Fund banking is refocusing their growth efforts on deposits. Eric mentioned the decrease that we had in fund banking deposits 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 specialized mortgage banking solutions. They are continuing to grow. We had an outflow because of taxes and ESCO payments. But we see growth there. We let go of some deposits out of that institution, out of that business, as we have, because they were high priced. But still, by letting go of some of the high price, that should help on them. But 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 Mortgage Bank Solutions Fund Banking Division. We're focusing the efforts on deposits, and we have a new team that we have come on board. That's why we feel confident that in 2024, we're looking towards 2024 for there to be a greater growth in deposits than we've seen in the last few years.
spk08: 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?
spk05: I think we're seeing a comparable mix from what we traditionally see, Dave, so roughly that 35%, 36%.
spk06: Thank you. And we'll take our next question from Ibrahim Poonawalla with Bank of America.
spk09: Hey, good morning. I guess maybe 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?
spk04: 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. You know, X the $3 to $5 billion in digital, we do think that will be relatively flat in the rest of our deposit base. We've 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.
spk09: 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, give or take?
spk04: I think it's, you know, it's back to its normal range. Actually, 35, 36 percent is probably at the high end. where we traditionally have been. I mean, we're usually in the 32% to 34% range, maybe even a little bit lower.
spk11: We've been as low as 24%.
spk04: So I think we'll be in that 30% to 35% range of DDA to overall deposits as we look forward.
spk09: Understood. And then on lending, I think you mentioned loan growth balance was probably going to be negative. How much more of capital call-in participations are yet there that could leave, exit the balance sheet?
spk04: Yeah, we have a fair amount of passive participations there. So we could, I'm going to give a fairly broad range, but we could be down in lines anywhere from $5 to $10 billion. Okay. I mean, essentially, if you look at what we've done over the last couple of 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.
spk09: Understood. And then 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?
spk04: Well, we do anticipate that we're going to have growth. We could see growth this quarter, quite frankly. It's going to be tough, but it's possible. We certainly could see growth if we look into the third and fourth quarter of this year. We continue to put the you know, seeds and plant those seeds for growth. And we'd rather, you know, hold on to our capital to support that growth. 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.
spk09: Noted. Thanks for taking my questions.
spk04: Thank you.
spk06: We'll take our next question from Manan Gosala with Morgan Stanley.
spk07: Hi, good morning. Good morning. Just given all the moving pieces here between digital outflows and the seasonality of deposits and, you know, 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, you know, are there more push and takes there?
spk05: I mean, there's a few things you need to consider there is that, as Eric just talked about, from a deposit standpoint, it's going to be challenging. And if we're planning on reducing deposits in the digital space, $3 billion to $5 billion, 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 I would continue to expect some short-term pressure there. And then as we head 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 I would give in relation to your question there.
spk07: Got it. That's helpful. And then maybe on the expense side, I know you've spoken about expense growth being at around 20% or so as you invest in the business, but do you have some more room there to offset some of the pressure you're seeing on NIMH?
spk05: So there's a few things to mention on expenses. For the first quarter, we do expect to be 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 $5 million a month. in incremental expense, sorry, per quarter in incremental expense. So that gives a headwind. 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 teens.
spk07: Great. Thank you.
spk06: We'll take our next question from Bernard Von Gezicki with Deutsche Bank. Hi, good morning.
spk10: Good morning. Oh, good morning. So given you're exiting a large amount of your crypto-related deposits, I'm just curious how this impacts the signal platform. You know, if you're 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?
spk04: We're really looking at the concentrations in that space. So we're not necessarily exiting client relationships there, but we are lowering concentrations there. So we're seeing volumes in Cigna. Actually, volumes last quarter were the highest we've seen, even as we were exiting these later in the year. So we don't really expect much of an effect in Cignet volumes. There's really not much of a cost for us to operate Cignet, so we're not going to see any cost benefit there if we hit volumes that come down to 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 and looking to have more of a granular deposit base, which will allow us to manage liquidity tighter.
spk10: Okay, thank you. Just to follow up, you know, I know obviously the digital ecosystem is the largest on the SIGMET, and you guys have alluded to, you know, other – other ecosystems like payroll, trucking, shipping that could be utilized. Just trying to get a sense, like, you know, as we think of the other like non-crypto areas of the bank, you know, are you seeing any sort of growth in those particular ecosystems? Is there any way you can help like size like what the second largest is on Cigna just to get a sense of, you know, you might have other areas that could grow? and could be an area of focus? And if not, what kind of, like, catalyst should we kind of, like, think about in those areas that could be growth if not this year and not work years?
spk11: Well, the digital is actually the number of transactions on Cignet 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 Cignet for a number of transactions. And then we've gotten 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 wanted to attract as many ecosystems as we can to make it beneficial for us and the clients. What we did put together was something that the digital world embraced, embraced 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 other 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 – We'll just prove everybody's prohibition to it.
spk06: Thank you. And we'll take our next question from Casey Hare with Jeffries.
spk12: Yeah, thanks. Good morning, guys. Thank you. So, following up just on the loan growth, I want to make sure I understand this correctly. So, Eric, I think you said total loans down $5 to $10 billion for the year, and then... That's lines, Casey. That's not outstanding.
spk04: Just capital call? Just capital call lines. Outstandings would roughly be half of that balance.
spk12: Okay. All right. So, I mean... Capital call, obviously, a big part of the loan book. What is, you know, what is the expectation for loan? It sounds like loans are down pretty big in the, you know, quarter to eight, given that you've been able to push down borrowings $4 billion. You know, I guess just a cadence on the loan growth throughout the year and where you expect the loan book to land, because obviously the street is expecting, you know, some pretty decent growth this year.
spk04: But, you know, given that we're reducing deposits still, right, and we expect to be down $3 billion to $5 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 roughly $2 billion to $5 billion. And then for our commercial real estate portfolio to decline, although it's not going to decline much, it'll probably be flattened 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 be pretty flat on loans to down maybe a little bit.
spk05: And Casey, 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. So 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.
spk12: 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? You know, it's on deposit beta.
spk05: 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 NIM to then start expanding. From a deposit data standpoint, we're end of period at 46% total deposit all in, and our end-of-period deposit costs are 210 basis points approximately.
spk12: Okay. And you guys are still expecting low 50s QM beta?
spk05: I think we'll be in the high 40s at this point, given the high-cost deposits we've pushed out. I mean, 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.
spk12: Okay, very good. And then just lastly, the release mentions, talks about geographic expansion. Just any further color on what you're thinking about and which markets?
spk04: 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 L.A. or the Sacramento area, as well as Nevada, where we'll continue to hire some teams there. Potential for us to maybe go into Southern California, San Diego market, but there's no actual near-term teams in the pipeline right now for that.
spk12: Great.
spk04: Thank you.
spk06: Thank you, Casey. Thank you. And we'll take our next question from Stephen Alexopoulos with JP Morgan.
spk13: Hey, good morning, everyone.
spk06: Good morning.
spk13: So if we work through the expected decline of the digital deposits and 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, can you just take us through this year when we should expect to see a bottoming and then eventual growth in the total balance sheet?
spk04: Yeah, I mean, Steve, we're working hard to get through, you know, these digital outflows, you know, in the first quarter or second quarter. You know, we could see some of that bleed into the third and fourth quarter, but we're really trying to have this done as quickly as we can, right? So we're going to see a 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. Again, we're hopeful that we could see deposit growth. We haven't 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.
spk13: 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 today. 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.
spk11: 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.
spk13: Okay. But you guys are still committed to the business long-term at this stage? It's just going to be fine?
spk11: 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 number of examples that show that it's not going away. If you think about the government, if we could get the regulators and 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 where the economy is 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. It's 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.
spk13: Got it. Okay. And if I could ask one final one. Just following up on the inflows of traditional deposits, you saw what you're calling out of the release, the $2.5 billion. I might have missed this, but what type of deposits was that you saw such strong growth, those low-cost deposits? Can you give us some context around that? Thanks.
spk05: 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 Business is up 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 bearing as we add these deposits back. Okay. Perfect.
spk13: Thanks for all the time.
spk11: Steve. Yeah.
spk13: Uh-huh.
spk11: 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 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. Agreed.
spk13: Okay. Thanks for the call, Joe.
spk06: Thank you, Steve. Thank you. And we'll take our next question from Jared Shaw with Wells Fargo Securities.
spk13: Hey, good morning, guys. Thanks. Maybe just a couple of follow-up detail questions. On the borrowings, you said borrowings are down a quarter today, but you're expecting them to go back up. 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?
spk05: 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 I wouldn't expect it to be significantly different from where we ended as of year end. There's some ebbs and flows dependent upon what traditional deposit flows might end up being.
spk13: Okay. And then can you give us an update on what you're seeing on spot rates
spk05: on loans especially the areas that you're that you're growing sure on the theory front we're seeing uh replacement rates roughly in the high fives call it 575 range um in fund banking and certainly they're reducing but we're in the low sixes there um That's at the signature financial. We're in the mid to high 6% range. Securities, any replacement there is at the 4.5 to 4.75 range. And then we have some of the folks that we're growing, healthcare, banking, and finance, about 7%, and as is commercial mortgage finance in the 7% range. Okay.
spk13: Okay. That's great. And then on the security side, you said that you were using cash flows to pay down borrowings. How should we be thinking about securities as a percentage of assets here? Should that stay stable? Should it come down? When we look at the absolute dollar level, can we expect that to be trending down as we go through the year?
spk05: Potentially. It could run down depending upon where back to the traditional deposit flows. That's really the key here. Where do traditional deposit flows go compared to our digital runoff and the timing of all that? So, yes, in a situation we could see some reduction there as they run off roughly in the $750 to $1 billion a quarter range.
spk13: Great. Thank you.
spk06: Thank you. We'll take our next question from Chris McGrady with KBW.
spk03: 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?
spk04: 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 any of our competitors. When we originated these loans, we were in the low 50% LTV range. We were north of a 140 debt service coverage. So we've got ample cushion there to absorb whatever we do see come through in that space. 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, multigenerational, 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 not seeing the demise of New York office anywhere near what people are predicting. I mean, anywhere near.
spk03: 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 drive kind of a reserve bill narrative over the next couple quarters?
spk04: I mean, that's certainly one of the areas. I mean, we've been focused on retail for a long time, you know, really from the Amazon, you know, effect. well before the pandemic hit. You know, again, our retail is really in the outer burrs, more strip centers that, you know, we feel pretty comfortable with, and we're seeing that behave quite well. 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 In all three of those areas, we're really just not seeing much weakness, if any at all, at this point.
spk03: Can you remind me the size of the retail book, Eric?
spk04: The retail book is about $6 billion.
spk03: Okay. Thanks for that. I guess the last question, just trying to square up all the outlook for margin and balance sheet. Is it fair to assume that the trajectory of net interest and income is 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?
spk05: Yeah, 100% accurate on a near term in the first half of the year and second half of the year is stable to potentially up depending upon what the Fed does. Okay.
spk03: Thank you.
spk06: We'll take our next question from Matthew East with Stephen Zink.
spk13: Good morning. I wanted to go back, Stephen, to your NIM commentary. You had 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 BIPs in the first quarter, stabilizing and then bouncing back, or is there additional downside in the second and third quarters?
spk05: I mean, it is difficult to say, given we don't know what the Fed does. I mean, we've run various different scenarios. 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 would see stabilization to NIM expansion in the second half with barns rolling down, which is very difficult to project down one quarter at this point.
spk13: Okay. And then on the expense ramp that falls into the other category, it's been up significantly the last two quarters. I'm assuming that's related to some of the client costs. Can you give me some examples of what the largest driver is? contributing to, you know, pretty close to like a $20, $25 million quarterly increase?
spk05: 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.
spk13: Could you clarify those earning credits? Yes.
spk05: So credits that clients get based upon balances and activity that they have with us. They might be – it's like a rewards program, if you will.
spk13: 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?
spk11: Well, I'll say this. With FTX, it wasn't a matter of BSA, AML. Everyone thought that he was legitimate. and he ended up being very Madoff-like. So I don't think anyone would say that they knew that and would catch it. What we're talking about regulation is we just want to know which way to go because we have CIGNET 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 tell you this. 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 was 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, before the end of the year, Congress was going to put some bills across to get some laws put 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. There's no – I think what happens is when the regulations come out, that will 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 regulation, whether it's capital-related or – or just doing AML, BSA. But, again, STX was not a BMA AML. It was a Bernie Madoff-like situation that no one really thought that Sam was a bad actor.
spk13: Understood. That's all I had. Thank you.
spk06: Thank you. We'll take our next question from Mark Fitzgibbon with Piper Sandler.
spk02: Sorry. Yeah, 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?
spk04: It's pretty hard to predict, really. I mean, look, 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 hands-to-do 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 litigation, any meaningful litigation to date, so... Okay. Fortunately for us, 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 FTXs happening on our platform yet. So that's certainly good.
spk02: 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 the fourth quarter?
spk04: Yeah. Currently, we have 1,410 active clients, and our transfer volumes are $275.5 billion.
spk02: Okay, great. And then last question, Steve, you might have mentioned this, but what was the spot deposit rates today?
spk05: 210 basis points.
spk02: Great. Thank you. Thank you.
spk06: 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 800-934-4245. 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.
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