Welcome to Signature Bank's 2022 second quarter results conference call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer, Eric R. Howell, Senior Executive Vice President and Chief Operating Officer, and Stephen Wyremski, 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 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 Joseph J. DePaolo, President and Chief Executive Officer. You may begin.
Thank you, Gretchen. Good morning. Thank you for joining us today for the Signature Bank 2022 second quarter results conference call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.
Thank you, Joe. This conference call and all 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. You should not place undue reliance on these 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 and 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 include words such as may, believe, expect, anticipate, intent, 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 as a result 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 Bank speak only as of the date on which they were made. Now I'd like to turn the call back to Joe.
Thank you, Susan. I will provide some overview into the quarterly results, and then Eric R. Howell, our Chief Operating Officer, and Stephen Wyremski, our Chief Financial Officer, will review the bank's financial performance in greater detail. Eric R. Howell, Stephen Wyremski, and I will address your questions at the end of our remarks. As we anticipated, this is a very strong quarter for earnings, and we saw significant increases to pre-tax, pre-provision earnings and net income, both of which were records. We funded our substantial loan growth with a significant excess cash balances we maintained from the $66 billion in deposits that we grew over the last two years. This led to our strongest growth ever in pre-tax, pre-provision earnings at 54% versus the prior year. It is not a sprint, it is a marathon. We are patient, and we grind hard every single day.
Let's take a look at earnings. Pre-tax, pre-provision earnings for the 2022 second quarter were a record $477 million, an increase of $168 million or 54% compared to $309 million for the 2021 second quarter. Net income for the 2022 second quarter increased $125 million or 58% to a record $339 million or $5.26 diluted earnings per share compared to $214 million or $3.57 diluted earnings per share for last year.
The increase in income was predominantly driven by strong growth in net interest income, which was fueled by substantial asset growth of $19 billion over the last 12 months, as well as the rise in interest rates and the utilization of the excess cash. Now let's take a closer look at deposits. Given the dramatic rise in interest rates, the deposit environment was particularly challenging. As fully anticipated, we saw a decrease in most of our deposit related businesses. Total deposits decreased $5 billion or 5% to $104 billion this quarter, while average deposits grew $1 billion. This quarter's decline was driven by, one, the New York banking teams, which were down $2.4 billion, which included a $1.3 billion decline in 1031 transaction balances.
That was 1031 transaction balances of $1.3 billion that were included as part of the $2.4. Two, the digital asset banking team, which also declined $2.4 billion. Conversely, all balance sheet treasuries increased $1.5 billion in that space. Three, the West Coast banking team declined $427 million, which includes one client who purchased $450 million in treasuries. Four, the fund banking division was down $414 million. Non-interest bearing deposits decreased $5.3 billion to $41 billion. During the quarter, four large escrow outflows made up $1.6 billion of the decline in DDA and were not related to interest rates. Just these four accounts alone make up 30% of the decrease in DDA.
Despite this decline, non-interest-bearing deposits remained at a relatively high 40% of total deposits. We can give you color later on in the Q&A. Since the end of the 2021 second quarter, deposits increased $18.6 billion or 22%. Now deposits increased $31.5 billion. Our loan-to-deposit ratio now stands at 69%, which is up from 64% one year ago. On the digital front, despite a significant decline in the value of cryptocurrencies in the latest digital winter this quarter, our deposits were only down $2.4 billion, which includes the movement of $1.5 billion to off-balance-sheet treasuries. This resulted in a minimal impact of $900 million. Some analysts that say there is still confusion as to what we do in this space.
To make it clear, we hold no cryptocurrencies. I'll say that again. To make it clear, we hold no cryptocurrencies. We are taking U.S. dollar deposits, and our clients use our payments platform, Signet, to transact in real time 24 by 7 by 365. Plus, we know about the future of finance, which we believe is the blockchain technology, which other ecosystems will adopt over time. To wrap up on our deposits, this was only the second quarter of negative deposit growth in nearly 15 years. We were not surprised at all as we knew there was some excess deposits, or as I like to call it, fluff. Although the deposit environment will remain difficult due to the Fed's recent policy of quantitative tightening, we continue to focus on growth. For example, the EB-5 program.
New legislation in Washington has been passed which reauthorizes the EB-5 program for a period of five years. It is an understatement to say that we have a significant pipeline. I'll say that again. It is an understatement to say we have a significant pipeline for EB-5. Our specialized loans banking solutions team has many new clients in their pipeline. Our newest addition, the healthcare banking and finance team, will help to raise deposits. The fund banking division has firmly established their position as one of the leading lenders in their space and are emphasizing deposit growth respectively to fund their business. The fund banking division, which is expected after four years, which next month they'll be here four years, was expected to fund themselves 100%. They're below 10%.
We expect that they'll continue to emphasize deposit growth as they have to start to do so this month. Lastly, we've hired 11 new teams coupled with the 127 existing teams who are all highly incentivized to grow core deposits. Now I'd like to turn the call over to Eric R. Howell.
Thank you, John. Good morning, everyone. I'd like to turn our attention to our lending businesses, where we had our second strongest quarter ever. Loans during the 2022 second quarter increased $5.6 billion or 8% to $72 billion. For the prior twelve months, loans grew $17 billion or 32%. The power of diversification continues to take hold with our lending businesses, with numerous teams contributing to our growth this quarter. The fund banking division once again led the charge with growth of $3.5 billion, followed by $1.3 billion in growth from our CRE banking team. Our newest group, the healthcare banking and finance team, hit the ground running with $80 million in loans in their inaugural quarter. The corporate mortgage finance team had another solid quarter with $271 million in growth.
Additionally, we saw positive contributions from all our other lending businesses, including $591 million out of Signature Financial, $34 million from our venture banking group, $145 million from East Coast C&I, and $93 million from our West Coast C&I businesses. Also important to note, the single $100 million loan exposure collateralized by digital assets on our books paid off fully, and our loan balances are now zero in that space. Turning to credit quality, our portfolio continues to perform well. Non-accrual loans further declined to $168 million or 23 basis points of total loans, compared with $178 million or 27 basis points for the 2022 first quarter. Our 30- to 89-day past due loans increased to $152.4 million or 21 basis points.
It is important to note that $91.8 million of the 30- to 89-day past dues were primarily caused by documentation delays and are now current. Excluding these, our 30- to 89-day past dues would have been well within our normal range at $60.6 million or 8 basis points of total loans. Our 90-day plus past dues were $49.1 million or 7 basis points of total loans.
Excluding two loans for $23.9 million that have been approved for refinancing but are still in process, as well as $15.6 million in loans delayed due to documentation and are now current, 90-day plus past dues would have been $9.6 million or just one basis point. Net charge-offs for the 2022 second quarter were $19.7 million or 11 basis points of average loans, compared to $17.8 million in the 2022 first quarter. The provision for credit losses for the 2022 second quarter increased to $4 million, compared to $2.7 million for the 2022 first quarter. This brought the bank's allowance for credit losses to 62 basis points, and the coverage ratio stands at a healthy 266%.
I'd like to point out that excluding very well-secured fund-banked and capital call facilities and government-guaranteed PPP loans, the allowance for credit loss ratio would be much higher at 109 basis points. Now onto the expanding team front, where we continue to realize success with one of our strongest quarters of team hiring ever. As mentioned earlier, the bank onboarded 11 private client banking teams, including 5 in New York and 6 on the West Coast during the quarter. Our pipeline for additional teams this year remains strong. This quarter also marked the launch of our newest national banking practice, the Healthcare Banking and Finance Team. We'll be onboarding 10 colleagues to provide lending services and garner deposits in this space.
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. Now, at this point, I'll turn the call over to Steve, and he will review the quarter's financial results in greater detail.
Thank you, Eric, and good morning, everyone. I'll start by reviewing net interest income and margin. With our continued emphasis on cash deployment and higher prevailing market interest rates, our net interest income reached $649 million for the second quarter, an increase of $76 million or 13% from the 2022 first quarter, and an increase of $192 million or 42% from the 2021 second quarter. Net interest margin increased 24 basis points to 2.23% compared with 1.99% for the 2022 first quarter. The increase in asset yields far outpaced the rise in our cost of funds, which led to significant margin expansion during the quarter. We expect this trend to continue in the quarters ahead. Let's look at asset yields and funding costs for a moment.
Interest-earning asset yields for the 2022 second quarter increased 44 basis points from the linked quarter to 2.66%. The increase in overall asset yields was across all of our asset classes and was driven by higher rates as well as the deployment of cash into higher-yielding loans. Yields on the securities portfolio increased 29 basis points quarter-over-quarter to 1.90%, given higher replacement rates and slower CPR speeds on our mortgage-backed securities portfolio. Additionally, our portfolio duration increased to 4.43 years due to the higher interest rate environment. Turning to our loan portfolio, yields on average commercial loans and commercial mortgages increased 20 basis points to 3.53% compared with the 2022 first quarter. Again, the increase in yields was driven by our portfolio repricing higher.
Since over 40% of our loans is re-reset within 90 days or less, we expect loan yields to continue to increase significantly as short-term rates move higher this year. Now looking at liabilities. Given the 150 basis points of Fed moves since March, our overall deposit cost this quarter increased 22 basis points to 40 basis points. The pace of the deposit repricing is in line with our expectations. During the quarter, average borrowing balances decreased $554 million, and the cost of borrowing decreased by 4 basis points to 2.81%. The overall cost of funds for the quarter increased 21 basis points to 46 basis points, driven by the increase in deposit costs. As we have pointed out, the bank is significantly asset sensitive.
The bank's focus on growing floating-rate loans, which now comprise 52% of our loan portfolio, coupled with our core deposit funding, make us extremely well positioned to continue to take advantage of a rising rate environment. On to non-interest income and expense. With our plan to grow non-interest income, we achieved growth of $14.3 million or 61% to $37.7 million when compared with the 2021 second quarter. The increase was generally across the board as many of our fee income initiatives continue to take hold. Non-interest expense for the 2022 second quarter was $210 million versus $172 million for the same period a year ago.
The $38 million or 22% increase was principally due to the addition of new private client banking teams, national banking practices, and operational personnel, as well as consulting and professional fees related to various new projects which we've initiated to support the growing needs of our clients. Despite a significant hiring and operational investments, the bank continues to gain operating leverage. As a result, our efficiency ratio improved to 30.6% for the 2022 second quarter versus 35.8% for the comparable period last year. Turning to capital.
Our capital ratios remain well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet. As evidenced by a common equity Tier 1 risk-based ratio of 9.96% and total risk-based ratio of 11.85% as of the 2022 second quarter. Now I'll turn the call back to Joe. Thank you.
Thanks, Steve. This quarter, we continue to perform at an elevated level despite the uncertainty in the financial markets. We achieved a return on common equity of 17.9%. Very strong quarter for earnings. We saw substantial loan growth of $5.6 billion, which ranked as the second strongest growth quarter in our history. The contribution spanned all of our lending businesses. Our revenue growth continues to drive our efficiency ratio lower, which improved to 30.6%, even with higher than expected expense growth. We know what many of you are thinking. The efficiency ratio got better. It begs the question, are we investing enough to support our growth? We are. For instance, this quarter we spent more than we had budgeted to strengthen our support areas, products and capabilities, which will ultimately drive future net income.
In fact, we always seem to exceed the budget due to growth. We continue to pave the way for future growth through the onboarding of new teams such as the healthcare banking and finance team, as well as the addition of 11 teams across our New York and West Coast footprints. Today, we continue to be stimulated by the enormity of opportunities to grow our franchise, of which we will continue to take advantage and remain focused on the long term. We are not distracted by the uncertainty in the markets in the near term, where we continue to rely on our conservative relationship-based model, which has proven to be durable and tends to thrive in times of stress. During periods such as the Great Recession and now as well as the COVID pandemic, we find clients rely on their banks more so.
Now that Signature Bank has diversified across many different businesses and does not rely on any single one area, we feel we are better positioned than ever before. Like I said earlier, it is not a sprint, it is a marathon. We are patient, and we grind hard every single day. Now Steve, Eric, and I are happy to answer any questions you might have. Gretchen, we'll turn it back to you.
The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing 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 is coming from Ebrahim Poonawala, from UBS.
Hey, everyone. Thanks for the question. You know, at the time of the mid-quarter update, digital asset deposits were you know about flat, I believe. At the end of the quarter, down $2.5 billion. That seems to be the main driver of some of that overall change to deposit balances since then. Can you talk about what changed there? Does it have anything to do with some of the crypto lending platforms and some of the funds that we saw in that space coming under stress over the last several weeks?
A large part of the decrease was $1.5 billion of the $2.4 billion of the total decrease for the quarter. A client in the digital world transferred $1.5 billion into treasuries. That was a large part of the decrease. They took money out of the balance sheet side and put it off balance sheet through the purchase of treasuries.
Just in kind of overall deposit trends, it sounds like there are, you know, opportunities ahead, you know, for you guys with, you know, the pipeline you mentioned around EB-5. From here on out, you know, do you feel like it's gonna be net inflows and deposits growth, or could there still be some volatility for the rest of the year here to the downside?
There's always choppiness, but we feel really good because we not only have EB-5, we believe we have the best team for EB-5. It's gotten a little bit more complicated, which may remove some competitors. We have an incredibly strong pipeline. It's just a matter of when the dollars come in, the third quarter, fourth quarter or first quarter of next year. We're expecting them to come in. Our special mortgage solutions team has a very strong pipeline. They have a very strong pipeline along the lines of whatever they had in the last few years. It's better than it has been. We're confident there.
The 11 teams that we brought on, in addition to the 120-plus teams we have, we expect deposits to come there. We're feeling very good about that. What happened this past quarter was we had a number of escrows leave, a number of 1031 deposits leave. There were a lot of one-offs. For instance, we had in DDA $1.6 billion of the $5.3 billion were in 4 transactions. One point six billion leaving in 4 transactions is pretty significant. The clients didn't leave, except the transactions they had came to fruition.
Any of those escrows come back later in the year or are they-
They do. For instance, one was a class action of $140 million. That one won't come back, but the company and law firms that we deal with, you know, constantly have transactions that flow in and out. We had a bankruptcy of $250 million leave. Again, that happens in and out. It just happened that one large, one less. We had a pension distribution under the American Rescue Plan. The underfunded pensions were provided money by the government to shore up the pension. We had a distribution of $550 million, and then we had a court order distribution of $650 million. Those are things that occur throughout the year. It just so happened that there were four large transactions that occurred all at once.
Got it. Okay. Just on expenses, if I could squeeze one last one in here. I know you guys have been pretty straight down the fairway relative to your guide for several quarters now. You know, Q2 came, you know, a little bit on the high side. You know, obviously done, you know, a great job hiring and, you know, executing growth in that way. Just, you know, just wondering, just from here, you know, you know, is it gonna drop back to, that, you know, mid to high teens, I believe, year-on-year growth rate that you've been talking about. Just what's the trajectory from here?
Sure. I think we'll be in the same range in the next few quarters, which is the low 20% range. Quite frankly, just given the new product initiatives or some new projects that we started entering into this quarter to bring some products and services to our clients that they were demanding as we continue to bring on new teams, we continue to expect to do that over the course of the coming quarters. Quite frankly, given our operating leverage that we continue to gain and the fact that we improved our efficiency ratio, we still expect to maintain this low level efficiency ratio given our asset sensitivity. We feel really good about where we are.
Our next question comes from Dave Rochester from Compass Point.
Hey, good morning, guys.
Morning, Dave.
Just wanted to get a sense for which customer segments drove that decline in the digital asset deposit space. Do you guys have the breakdown of that bucket per customer type for all those segments you talked about before? That'd be great.
Sure, Dave. Digital asset exchanges, they were down about $1.8 billion. Our stablecoin issuers were down 395 million. Our OTC desk and institutional traders were down about $100 million. Then, our blockchain tech and digital miners were down about $40 million.
Got it. That's the $1.5 billion transfer came out of the exchanges I guess.
That's right. Yeah.
Yep. Okay. I was hoping you could just give an update on where deposit levels are, today in July, in that digital segment and for deposits overall, if you have any of that. It sounds like you're really positive on the EB-5 going forward. The mortgage team, it sounds like there's a strong pipeline. Are you guys expecting deposit growth in general for the back half of the year at this point?
Well, we have all the things in place. We mentioned, you know, the EB-5 and special loans banking solutions. We also want to add the fund banking division, we expected that after four years to be self-funding. We're funding about 4% right now. They're gonna make a concentrated effort in the second half of the year. Now that one of the leading fund banking teams in the country, in the top five or so, on the lending side, we want them to be one of the top performing teams on the asset gathering side. That goes well. All the pieces are in place. We just have to execute.
Got it. Any update on, deposit balances at this point in July in 2Q?
Too early in the quarter.
Okay. Yep, no, I got you. Would you be able to give a spot rate on deposits at the end of 2Q?
Sure.
Then what you're seeing in terms of new loans and or new loan yields and securities purchase rates at this point? That'd be great.
Sure. I'll start with securities. We're in 3.75%-4% range on new purchases. CRE is at about 5.25%. I believe you also asked on the deposit spot rate, and that was 67 basis points to start July.
Our next question comes from Steven Alexopoulos from JPMorgan.
Hey, good morning, everyone. Go ahead, Steve.
I wanted to start first. Under the deposits that you just called out from the exchanges, the decline of $1.8 billion, and I hear you on the larger transfer. As we're all starting to learn about this business and how it impacts your company, if we think about crypto prices declining in the quarter, volumes were up a bit. Walk us through how that drove deposit outflows for you guys. Right. Are the exchanges just looking for a higher yield than you're willing to offer, so they're moving to alternatives? Or are they seeing deposit outflows themselves, and because of that, you're seeing deposit outflows? Hoping you could connect what's happening in their business to what's happening in your business.
Yeah. It's kind of tough to answer, Steve. You know, I mean, we saw a 65% decline in the price of Bitcoin, and that we're hardly down not even 10% in terms of deposits in that space. You know, clearly there are people leaving that space, and therefore deposits leaving. That was some of the headwinds, you know, as we talked about $1.5 billion on off balance sheet, right? You know, off balance sheet alternatives for yield are certainly there. That's kind of pressure us a bit. We're seeing, you know, people look for more yield, looking at off balance sheet alternatives coupled with, you know, people exiting the space a little bit.
You know, I think given the dramatic decline in values, we're pretty pleased with the fact that we only saw, you know, a less than 10% outflow in our deposit base there. Look, I mean, we're still. It's still probably gonna be a headwind for a little while. It's very choppy in that space. You know, the crypto winter hasn't quite gone away yet, although we are starting to see the value of Bitcoin firm up a little bit off of the lows. You know, it could be a positive as we look out over the quarter. Right now we anticipate that that'll still be a headwind.
Eric, when you say that people are exiting the space, are you suggesting your own digital asset customers they left the space? Maybe give us an update of where you ended the quarter. I think you were 12-
Yeah.
Just over 1,200 last quarter.
Oh, well, clients, we're up 121 clients. We had a very good quarter. We're at 1,323 in total. I think, you know, it was our best transfer volume ever at $254 billion. It was really a strong quarter from a client acquisition standpoint. We're seeing more and more people come into the space, which will bode well. We onboard a few more exchanges that have yet to move over their relationships. That'll bode well, you know, for us in the future also. You know, clearly deposits are exiting and have exited to a pretty small extent though, when you think about it, Steve, like I said, given the value.
Mm-hmm.
Decline there.
Those are two exchanges that Eric mentioned. Starting on July twenty-ninth. We had acquired them as clients in the first quarter, but it took a while to get them on board. They'll be starting July twenty-ninth. That bodes well for us waiting on those two exchanges. They're waiting on another exchange that is third quarter now.
Mm-hmm. Okay. That's helpful. On the balance sheet growth, we know you funded quite a bit of the growth this quarter with cash, but first from like a gross view, do you still think that $4 billion-$7 billion of loan and security growth is intact? You're getting a lot of questions on deposits. Do you think this quarter is a bottom in deposits, or could we actually trend lower and fund even more of that asset growth from cash as we move into 3Q?
Well, we'd like to fund our growth through deposits. We're guiding now instead of 4-7 on loans and investment securities. The growth would be between $1-$3 billion. The reason why we're doing that is the uncertainty with the Fed actions. We're not sure how much deposit activity is gonna be out there with what the Fed doing with the continued tightening. That's gonna allow us to be cautious. We don't wanna get into a situation where we're not funding with deposits. We're gonna slow down the growth on the interest earning asset side to $2 billion, $1-$3 billion. To ensure that we'll do it with deposit growth, not anything else.
Our next question comes from Casey Haire from Jefferies.
Yeah. Thanks. Good morning, guys. Wanted to touch on deposit pricing. You guys have talked about a 40% deposit beta through the cycle. I'm calculating in the low 30s after the second quarter here. Do you just give us some updated thoughts on whether or not you still feel comfortable with that 40%?
Yeah. I think right now we're at 34% as of the end of the quarter from a beta standpoint, and we continue to expect that. I mean, that's right where we thought we would be at this point, and we continue to expect that to trend upward at this point into the low 40s.
Okay. Very good. Just following up on the new asset guidance of $1-$3 billion. I mean, I'm assuming that, you know, obviously the deposit growth is still choppy, the outlook there. But is that $1-$3 billion, are you comfortable that you can grow that without using borrowings? Meaning it'll be dollar for dollar funded with deposit growth.
That's the plan. That's what we're planning on.
Okay. We think we're at or near the bottom on deposits, and hopefully we're at an upward trajectory from here. It's gotta be choppy though. That's not
Yeah.
Quantitative timing is gonna be difficult for us to fight through, but we think we will. The plan is to fund that growth in deposits.
Just the cash position a little under $15 billion, that's roughly 13% of the balance sheet. Is that kind of a floor for you guys, or is there a little bit more room to fund out of that position as well?
There's a little bit more room where we can run at around 10% of total deposits, so we still have excess cash that we're holding.
Okay, very good. Just last one for me, and apologies if I missed this on the expense side. You know, is there a specific client base that is driving this expense pressure? Was this at all motivated by regulatory pressure?
No, not too much from the regulatory pressure. I mean, certainly have spending in there for resolution planning, et cetera, but relatively manageable. It's really about, you know, client product offerings. Talking about client base, I mean, our some of the new teams and groups that we added, such as commercial mortgage finance team, we've done a little bit to spend there from an API standpoint to improve processing collateral management. From a West Coast standpoint, integrating API and technology for those clients to, you know, continue to growth there has really been the focus of these new projects.
Great. Thank you.
Thank you.
The next question comes from Ebrahim Poonawala from Bank of America.
Good morning.
Good morning, Ebrahim.
I guess just following up on some of these questions, Joe and Eric. On deposits, I think the expectation will be I heard everything around EB-5 and the cross-currents there. Given what we are seeing with industry-wide crypto de-leveraging, I think the sense will be we probably do see deposit outflows at Signature in the near term. Just talk to us when we look at the loan to deposit ratio at 70%, how do you think about this? Like we've seen this in the past be over 90%. I'm just wondering why constrain asset growth because of funding or are you not seeing as attractive opportunities on the asset side also? Would love to sort of get context to why you're ratcheting down asset growth vis-a-vis funding.
It's not vis-a-vis the funding. That's part of it. The other part is the ratio of loans to deposits. We don't want to get into a situation where we are above the amount that we're comfortable with. We don't necessarily know what that amount is, but we don't want to get anywhere near it. We are being cautious because this is unprecedented times, where rates are being increased in Fed funds 75 basis points at a time. Coupled that with the quantitative tightening, it's unprecedented, and it could make it tough on the deposit side. We're just being cautious. 1 to 3 doesn't mean that we'll stick with 1 to 3. We're just saying that we're giving that guidance for the third quarter and fourth quarter.
If you go back to 4-7, we don't feel comfortable in the short term.
Noted. Thanks for that. I think you mentioned, Joe, earlier that fund banking was about 10% deposits for loans. I'm just wondering in a world where deposits are just tight across the system, how do you have those clients bring in more deposits at this stage? I'm just wondering, is it realistic that we see a big contribution from fund banking and what would drive that in to bring those deposits into Signature given that it's not happened in the last four years?
They were concentrating on developing the lending side, and they wanted to. We kind of took our eye off the ball as well. They're at 4% right now, and if they go to 10%, I'm not even asking to be 100%. They go to 10%, that's an extra $2 billion, $2.3 billion in deposits. They really weren't concentrating extensively on deposits, and now they are in the second half. We expect that there'll be some growth there that we didn't have in the past four years.
Got it. I guess one last question maybe for Steve or Eric. You don't give margin guidance, but I think given just the moving pieces when we think about spread revenue, like, where do you see NII moving? Think about third quarter or maybe as we exit fourth quarter of this year. The consensus about high $700. Is that realistic? Just how do you see it? Would love any perspective there.
Unfortunately, it's really difficult to say and guide specifically. Given our asset sensitivity, we do expect to continue to see expansion, just the degree based upon impact of quantitative tightening as well as the magnitude and frequency of said rate hikes. It's just too difficult and too many different scenarios to give specific guidance there. We do expect meaningful expansion.
Right. Should be significantly higher.
Is it safe to assume like we saw NII move up about $75 million sequentially, given Steve, as you mentioned, the rate hikes?
We should see an even greater increase in NII in terms of the third quarter reset and potentially again in the fourth quarter. Is that reasonable?
Oh, that's hard to say. I mean, there's a lot that goes into that. We expect a lot in the fourth quarter.
Got it. All right. Thanks for taking my questions.
Thank you.
Our next question comes from Manan Gosalia from Morgan Stanley.
Hey, good morning. A couple of questions on the loan growth side. You know, you brought on 11 new teams. You know, you said you have a pretty strong pipeline there as well. You know, I think you've done this successfully for several quarters now, but I was wondering, you know, what's your appetite to continue doing that at the same pace, particularly, you know, given that, you know, the headwinds that you mentioned on the deposit side?
It's all opportunistic growth. If the teams present themselves, and we think they're good teams, they're revenue producing teams, we'll bring them on board. It won't affect how we feel about expense. I think I said many times over the last few years, not the last few years, since the beginning, that if our expenses went up to 30%, and they were all based on we brought on a significant number of teams, we would have no problem doing that because the revenue follows quickly, and it's opportunistic. I think that if we did an acquisition, people would be less concerned about the expense because it's an acquisition. Well, we're doing an acquisition utilizing capital better than if we did an acquisition.
We're doing an acquisition of people that generate revenue. If we find the teams, we'll hire them. If we don't find any teams, then we won't have the expense, but we won't have the revenue. Therefore, we don't control the expense based on the number of teams.
It sounds like if the opportunity is there, and presumably there might be more opportunity as the overall environment slows, that you'd be willing to go in and get new teams on board.
Yes, absolutely.
Okay. Then, you know. Sorry, go on.
That's what we've done for 21 years. Everyone asks us every year, how many teams do we project that we're going to have next year? In the first 10 years, I think Eric and I were saying that we would budget for 4 teams or 3-5 teams, and then we go out and hire 12 or 13. There were years that we said 3-5, and we ended up hiring 3. It really depends on what opportunities present themselves. That's how we've been running the organization.
Great, that makes sense. You know, I was just wondering if you could give us an update on fund banking and the impact on demand that you're seeing from, you know, just given higher rates and lower public market valuations. You know, I think you saw some really nice growth there this quarter of about $3.5 billion despite, you know, what the market is looking like. You know, how are fund managers approaching the current market environment and, you know, what are you hearing from them?
What we're hearing from them is that, you know, we hired the number one and number two person in fund banking from four or five organizations, and they're continuing to bring over their clientele. It seems the bigger we get, we're still acquiring clients at the same rate that we started in the first year to now in the fourth year. There's still opportunities. We're just slowing it down a bit so we can make sure that we fund the deposits. The opportunities seem to be as great as they were four years ago.
That's great color. You know, maybe just a quick clarification question. You mentioned that the $100 million in crypto-backed loans paid off fully. Does that mean you have no exposure at all on the asset side to participants in the crypto industry?
We have a very de minimis exposure. Some letters of credit that are fully cash secured, some ACH lines that are. But it's really de minimis at this point. We have no loans that are backed by cryptocurrency.
Our next question comes from Jared Shaw from Wells Fargo.
Yes. Good morning. Thanks. Just a couple follow-ups. Maybe first on that Bitcoin loan, does that mean that you're not interested in that product anymore? That paid off at your encouragement, or is that just it paid off, and you'd still be open to doing lending secured by crypto?
We didn't ask the client to pay it off. The client paid it off on their own. I would say we're right now paused. Pausing is probably the best word to use to see what happens in the near term since we're in the crypto winter. We still have a product and we still have clients that want it, but I would say pausing is the best word to use.
Okay. That's good color. Thanks. Joe, you'd earlier said, you know, you thought that there was some fluff in the deposit base, and you weren't surprised to see some of that go. You know, if we look at where we are today with the, you know, the pull down in DVAs this quarter. Do you think that you could see, you know, more drawdown in DDA if there's more fluff or that it would be more, you know, interest rate sensitive customers have shifted to an interest rate product and the beta will come more from paying up for those deposits versus a deposit remix?
Well, I'll tell you, our feeling is that DDA in our history between 25% and 35%. We expect that somewhere along the lines that the DDA will reduce. That could be some fluff or it could be just some shifting from DDA to money market because the interest rate is appealing when it wasn't appealing just a few quarters ago. That will allow clients to get interest. I think that being between 25% and 35% will be fine, but we'll continue to have client growth. The one thing we haven't seen is a reduction in client growth. In fact, we're bringing on 500 more clients a quarter now more than we had in the past. That's because of all the teams that we have.
It takes a while when those clients open up the account, it takes a while for funding. It's usually a quarter or two before they fund. It bodes well that we're picking up 500 new clients more than we had in our growth in the past history.
Okay, thanks. Just finally for me, you know, if we look at the allowance for credit loss or the allowance for loan loss as a ratio, you know, that keeps coming down. Is this sort of a good floor for this as a ratio? Or, you know, I guess how should we think about CECL modeling and some of the underlying macro weakness versus the strength in your portfolio?
Yeah, sure, Jared. So you know, really our approach over, you know, since the adoption of CECL has really been a prudent approach. I mean, we have always had positive provisions, whereas, you know, last year or so other institutions were reporting negative provisions. Certainly we're utilizing our reserves where we have them set aside against specific loans for charge offs, but we have continued to provide. From a macroeconomic standpoint, we actually this quarter are using a slightly more pessimistic, we use Moody's, and we're using a slightly more pessimistic scenario than the Moody's baseline suggests. We're using one that has a more aggressive interest rate path, slower GDP growth, and it takes information, macroeconomic assumptions from various constituents. Therefore, you know, given our prudent approach to reserving, including this quarter, we're using more pessimistic scenario in combination with our client-based relationship model.
We feel very good about where we're positioned. Now, if we enter into some instance where a macro, deep recession, certainly we'll see builds there, but we feel very good about where we're positioned today from an allowance standpoint.
Okay. Thank you.
Thank you.
Our next question comes from Matthew Breese from Stephens Inc.
Good morning.
Good morning.
Can you talk a little bit about the outlook for loan yields as Fed fund hikes are fully absorbed? I guess I was a little bit surprised by the relatively similar moves in deposit costs and loan yields this quarter versus the interest rate sensitivity of the banks. I was hoping for some more color and near-term expectations for the loan yields in 3Q, 4Q, and what kind of rate assumptions you have in there.
I mean, right now we're, I think 45% of our book reprices within 90 days. As we saw this quarter, I mean, the focus thus far has been on our deposit cost. As we mentioned in prepared remarks, you know, our asset yields were up 44%. Given that repricing, we would expect continued significant expansion into the third and fourth quarter of the Fed hikes. I mean, in particular, the short end of the curve is what's driving our fund banking portfolio, which comprises a significant portion of that 45% that's repricing. We should continue to see expansion there.
Okay. Then back to asset growth. Can you just talk about the pipeline, you know, and where you expect loan growth to come from oppositely? You know, what segments are you looking to slow down or you expect there to be runoff?
The two areas we expect to slow or we're focusing our attention to slow is commercial real estate and fund banking. They're the two largest by far. All the others that have come on board recently and including the healthcare we're going to let them grow because they're the newest and they have the clients that they want to bring over. We're not going to slow them down. We're going to let them do what it is that they do. Like I said, we'll slow down the two biggest segments. Again, if we get deposit growth of $10 billion, then we're going to utilize that $10 billion to fund loans. It depends on where we end up with this growth.
I appreciate, you know, the hesitancy on providing color on deposit growth. I expect that to be more of a near-term issue. If we were to extend the time frame and look out 12-18 months, you know, just given, you know, you noted that all the pieces are in place for deposit growth. Could you give us some idea over the next year or 18 months the extent you expect to see, you know, call it average deposit growth?
Well, if we feel that it's normal, whatever normal is, if we feel that it's normal, then we'd probably go back to the 4-7 per quarter. That may be a while. We just don't know.
It's you know, we've never really given any guidance around deposit growth. It's very difficult for us to guide on that. That's why we talk about asset growth. You know, we can. We see a pipeline on loans, and we know that we can ratchet up the securities purchases if we see deposits coming in. For us to predict deposit growth is very impossible.
Got it. Okay. Just as credit for the entire, you know, banking universe becomes more of a forefront issue, I was hoping you could just give us an update on two portfolio segments. You know, the first one is the specialty finance book. Just curious, you know, what types of equipment are in there and based on the written historical loss content, any recent updates you'd provide on health of the book or signs of erosion? The second one is the New York City office book. Just again, you know, would appreciate the size, LTVs, and any notable changes you've seen in performance there.
The specialty finance book is really made up of revenue-producing collateral. It's fared extremely well through all cycles. We've been through a number of cycles now in that portfolio. I think peak losses prior to that peak coming to Signature Bank was at, like, 1.25%. Through the financial recession, through the pandemic, we've seen losses significantly muted from that higher level. I don't think we've reached anywhere near 1%. Is that right, Steve?
Yeah.
It's a very low level of losses because of our focus there of really lending on revenue-producing collateral. It's a lot of trucks, trailers, buses, heavy metals, you know, yellow metals as they call them. We haven't seen any degradation there in credit quality. We feel very comfortable about how that'll perform if we head into a recession or you know a prolonged recession. As for the office space, again, we're not really seeing any issues in our office portfolio either. At this point, we have no non-accrual office loans. We do anticipate that it's gonna be tough over the next several years.
Given the relationship-based nature of our lending in that space, we think again that, you know, any level of losses will be pretty muted. If you look at our provisioning, that's where we really put our provisions in the office and the retail space. We've got about 2% in provisions, you know, in those two sectors. That's where we do think that we'll see some pressures. As of now, we're not seeing any at all.
Our next question comes from Brock Vandervliet from Deutsche Bank.
Hi, good morning. My first question on the crypto deposit portfolio. Currently, I believe most of this funding hasn't been deployed, given the uncertainty in the crypto markets. I know you don't charge fees generally. You know, we just saw that you reduced the overall cash levels down to about $15 billion. I'm not sure if I missed this, but how much cash are you holding against these deposits now? I'm wondering, could you just walk us through how you can monetize this positioning, like, over time?
We really haven't disclosed what level of cash that we hold against those positions. Certainly more cash that we hold against those than we do against other types of deposits. You know, over time as we see and have a greater history, certainly, you know, going through this most current crypto winter, as they call it. We see the deposit behaviors where we're seeing a significant decline in the value of cryptocurrencies on our deposit base is not nearly down as much as the decline in the values. I think that's going to help us support having to maintain less cash against those deposits over time and will allow us to lend against them.
You know, we need a longer history, and we need to go through more varying cycles before we can start to utilize it more for lending.
Okay. I was just wondering, just as a follow-up. I know you provided some stats on Signet. I believe the clients are up 121, Q2. You had your best transfer volume with, I think you said over $254 billion. You know, I know in the past you noted a number of ecosystems that could utilize Signet over time. You know, I understand you want to keep certain details on that vague for competitive purposes. You know, just in light of the crypto collapse, could you possibly size what the second biggest ecosystem is on Signet? And then just how these volumes may compare between crypto and whatever one is number two?
I don't think we'd be able to sign. I mean, the opportunities outside of the digital space are pretty enormous. Right. Whether it be payroll, which is a massive part of the economy, to trucking, shipping, trading, energy trading. I mean, these are massive ecosystems that we've barely scratched the surface on. You know, as we've said before, you know, Signet is really capturing the power of the blockchain and blockchain technology moving forward. We think that more and more ecosystems are going to embrace the blockchain technology. As they do, we've got the platform that can run parallel to the various blockchains that they'll be putting in place.
My belief is that the digital world, the digital crypto world, we're not even getting the top ten of our digital clients on the payments platform. I think that once everyone understands what blockchain technology is and what it can do for their environment, that we will be in great shape because we're the first ones out of the gate that have done this. It's very exciting for us to know that we have a blockchain technology that could move payments at a rate far greater than they're moving today.
Okay, thank you.
Our next question comes from Christopher McGratty from KBW.
Hey, good morning.
Good morning.
Eric, if I think about just the efficiency comments in your prepared remarks, and I take everything you've disclosed on the call and just take a step back. Given the size and the growth profile of the company in the regulatory world, how do we think about that 30%-31% efficiency ratio, like, cadence from here? Is there pressure on it because of the investments? Is it you kind of hold serve because of the revenue growth? Like how do we think about that broadly?
I mean, it's a great question. I mean, we're certainly, you know, investing significantly as we saw a 22% increase in our expenses and we expect that that'll continue for quite some time. You know, fortunately, we've got a really powerful earnings story here. You know, still have significant asset sensitivity, and we expect that that'll play out over the next, you know, several quarters. You know, so there's gonna be tremendous revenue expansion that we believe will more than offset, you know, the additional expenses that we're putting on. It'll lead to further efficiencies. As Joe said in our prepared remarks, you know, we get that the efficiency going down. It's kind of begging the question, are we spending enough?
You know, we're spending enough. We're spending a tremendous amount to ensure that we've got the appropriate systems and platforms and products and services in place to meet our clients' needs. You know, the revenue power here is tremendous, which should really further drive down that efficiency ratio.
Okay. Thank you. In the past you've given some comments on just the cadence of the growth in non-interest income given some of the strategies there. How do we think about the outlook for non-interest income from here? I know you called out a derivative mark-to-market in the quarter.
Yeah. I mean, we expect that we'll continue to further drive that north. You know, I think if you look at the trend over the last couple quarters, you know, I continue that trend. We're up $a few million quarter-over-quarter. You know, we have a lot of opportunity there yet to tap, whether it's, you know, foreign exchange, credit cards. You know, some of these projects that we've been talking about for a while. A number of the new business lines and initiatives that we've gone out for, you know, tend to generate more fee income, especially with the mortgage banking, you know, team, amongst others. You know, we've got some positive fee income movement there.
You know, meaningfully moving that higher as a percentage of overall revenues is gonna be tough just because of how much in that interest income backlog is. It's tremendous growth on that front.
Great. Thank you.
Thank you, Chris.
This concludes our allotted time for today's conference call. If you'd like to listen to a replay of today's conference, please dial 800-839-5128. 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.