Welcome to Signature Bank's 2022 third 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 star two. 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 Turkell Lewis, Corporate Communications for Signature Bank. You may begin.
Good morning, and thank you for joining us today for the Signature Bank 2022 third quarter results conference call. Before I hand the call over to President and CEO Joseph J. DePaolo, 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.
Thank you, Susan. I will provide some overview into the quarterly results, and then my colleagues, Eric and Steve, will review the bank's financial performance in greater detail. Eric, Steve, and I will address your questions at the end of our remarks. An important part of Signature Bank's success over the years has been our focus on what we can control, hiring banking teams and expanding our relationships with our clients. What continues to set us apart from our competitors is our ability to identify and list out experienced teams and national banking practices that exhibit superior talent. The proof of this lies with the number of strong relationships that our bankers forge with their clients over time.
Although this is the most challenging deposit environment in our careers, because we stay true to our core discipline, Signature Bank often emerges as a stronger institution in the wake of challenging macroeconomic backdrops. Since we cannot control external forces such as those driven by monetary policy, we prefer to judge our performance by the metrics we can control, such as growth in client relationships and banking teams. This quarter, we expanded our franchise with the addition of more than 1,000 new client business relationships across the institution. We are excited about the momentum we have in cultivating new relationships today because we know that they are the ones that will continue to bear fruit tomorrow.
As Warren Buffett once said, "Someone is sitting in the shade today because someone planted a tree a long time ago." This is the basis on which we operate and remain committed to the long term of our clients and our franchise. We will not be distracted by the short term. This is not a sprint, it is a marathon. Now let's take a look at earnings. Pre-tax, pre-provision earnings for the 2022 third quarter were a record $492 million, an increase of $161 million or 49% compared with the $331 million for the 2021 third quarter. Now that's a good quarter. Net income for the 2022 third quarter increased $117 million or 48%.
$358 million or $5.05 to earnings per share, compared with $241 million or $3.88 to earnings per share. Now that's a very good quarter. 49% and 48%. I do want to make a note that in fact, we have passed the $1 billion mark in net income in the first three quarters of 2022, and we believe that that's something that should be recognized by those that work within our institution. Now that's a good quarter.
The increase in net income was predominantly driven by the strong growth in net interest income, which was fueled by solid asset growth of $7 billion over the last 12 months, as well as the rise in interest rates and the utilization of the excess cash. All of these factors combined, as well as our steadfast execution across all of our businesses, led to a record return on common equity of 18.4% and a strong return on average assets of 1.24%. Now that's a good quarter. Now let's take a look at deposits. With the frequency and severity of the rate increases, deposit environment remains challenging. Total deposits decreased $1.3 billion or 1% to $103 billion this quarter. This is meaningful, as many expected us to have decreases beyond $1.3 billion.
This decline was predominantly driven by a deposit outflows of $3 billion of digital deposits. As expected, the rest of our franchise was positive this quarter, with net inflows of $1.7 billion. With contributions coming from specialized mortgage banking solutions, the fund banking division, the West Coast, and our venture banking group. Remember, it is a marathon. Excuse me. During the quarter, non-interest-bearing deposits decreased $4 billion to 37 million. The decline in DDA was mostly driven by the decrease in digital trading, which is non-interest-bearing. This lets clients to take the balances off of Signet because there was less trading and to put it in interest-bearing accounts. That led to the decline. Despite the decline, non-interest-bearing deposits remain at a relatively high 36% of total deposits.
Since the end of the 2021 third quarter, deposits increased $7.2 billion or 8%, and average deposits increased $24.9 billion. Our loan to deposit ratio now stands at 72%, which is up from 61% one year ago. Now I'd like to turn the call over to Eric.
Thank you, Joe. Good morning, everyone. I'd like to turn our attention to our lending businesses, where we had another solid quarter. Loans during the 2022 third quarter increased $1.8 billion or 3% to $74 billion. For the prior twelve months, loans grew $15 billion or 26%. This quarter, we continued our diversification strategy, where we saw meaningful growth from nearly all our lending businesses. The commercial real estate team led the way with growth of $2.1 billion. Signature Financial increased $406 million. Our new healthcare banking and finance team grew by $274 million. The mortgage warehouse lending team increased by $236 million. All other C&I grew by $139 million, and venture grew by $48 million.
Additionally, this quarter, we purposefully, and I want to re-emphasize that, we purposefully slowed our capital call lending, and we successfully reduced our portfolio by $1.3 billion. We're employing this strategy in order to further diversify and to allow for the newer lending businesses to grow. We would like to thank Tom Byrne and his team for successfully deploying the strategy, and Steve's going to go into that greater detail later in the call. Turning to credit quality, our portfolio continues to perform very well. Non-accrual loans increased mildly to $185 million or 25 basis points of total loans, compared with $168 million or 23 basis points for the 2022 second quarter.
Our past due loans were within their normal range, with 30-89 day past due loans at $69 million or 9 basis points, and 90+ past dues at $33.7 million or 5 basis points of total loans. Net charge-offs for the 2022 third quarter were lower at $10.2 million or 6 basis points of average loans, compared with $19.7 million for the 2022 second quarter. The provision for credit losses for the 2022 third quarter increased to $29 million, compared with $4.2 million for the 2022 second quarter. The increase was primarily driven by a deteriorating macroeconomic forecast. This brought the bank's allowance for credit losses to 63 basis points, and the coverage ratio stands at a healthy 251%.
I'd like to point out that excluding very well-secured fund banking capital call facilities, the allowance for credit loss ratio would be much higher at 105 basis points. Now on to the expanding team front. As Joe stated earlier, a core metric for us is the number of teams we onboard, and we continue to realize success in this area. This quarter, the bank onboarded two private client banking teams, including one in New York and one on the West Coast, and our pipeline for future teams remains strong. For the year, the bank has added a total of 12 teams, including five in New York and seven on the West Coast. Additionally, our newest national banking practice, the Healthcare Banking and Finance Team, was launched in the second quarter of this year.
In order to support our team expansion, we continue to hire extensively throughout our operations and support infrastructure so that we can best serve our clients' needs. At this point, I'll turn the call over to Steve, and he will review the quarter's financial results in greater detail.
Thank you, Eric, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the third quarter reached $674 million, an increase of $25 million or 4% from the 2022 second quarter and an increase of $193 million or 40% from the 2021 third quarter. Net interest margin increased 15 basis points to 2.38% compared with 2.23% for the 2022 second quarter. The increase in asset yields 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, albeit at a slower pace. Let's look at asset yields and funding costs for a moment.
Interest earning asset yields for the 2022 third quarter increased 78 basis points from the linked quarter to 3.45%. 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 18 basis points linked quarter to 2.08%, given higher replacement rates and slower CPR speeds on our mortgage-backed security portfolio. Additionally, our portfolio duration increased to 4.55 years due to the higher interest rate environment. Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 61 basis points to 4.13% compared with the 2022 second quarter. The increase in yields was again driven by our portfolio repricing higher.
Since approximately 50% of our loans are floating rate, we expect loan yields to continue to increase significantly as short term rates continue to move higher. Now looking at liabilities. Given the 150 basis points of Fed moves this quarter, overall deposit costs increased 71 basis points to 1.11%. Pace of deposit cost repricing is in line with our expectations given the frequency and magnitude of the rate hikes. During the quarter, average borrowing balances decreased by $539 million, and the cost of borrowing has decreased by 15 basis points to 2.96%. The overall cost of funds for the quarter increased 68 basis points to 114 basis points, driven by the increase in deposit costs.
In order to prepare for the potential decline in interest rates, the bank has started to slowly decrease its asset sensitivity with the goal of achieving an asset liability neutral profile. We will accomplish this organically in two ways. First, as Eric mentioned, we're purposefully reducing our fund banking exposure, particularly where there are syndicated transactions without deposit opportunities. This will drive our floating rate loan mix lower. Second, we will continue to add fixed rate exposure through our many lending businesses, which will help to add duration to our assets. This strategy will lead to a net interest margin that is stable and less sensitive to the movement in interest rates. On to non-interest income and expense. With our plan to grow non-interest income, we achieved growth of $12.4 million, or 39% to $43.8 million when compared with the 2021 third 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 third quarter was $225 million versus $181 million for the same period a year ago. The $44 million or 24% increase was principally due to the addition of new private client banking teams, national banking practices and operational personnel, as well as client related expenses that are activity driven and have increased with the growth of our businesses. Despite the significant hiring, the launch of the healthcare banking and finance team and considerable operational investment, the bank's efficiency ratio improved to 31.4% for the 2022 third quarter versus 35.4% for the comparable period last year. Looking at taxes. This quarter we benefited from additional tax credits associated with sustainable finance lending.
This lowered our tax rate to 22.6% for the quarter. While we expect to see continued benefits from these tax credits due to the strategic initiative of the sustainable finance lending, these additional benefits, without these additional benefits, our tax rate would have been 26%. 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 one risk-based ratio of 10.11% and total risk-based ratio of 11.99% as of the 2022 third quarter. Now I'll turn the call back to Joe. Thank you.
Thanks, Stephen. Signature Bank's strong performance, as reflected by a return on common equity of 18.4%, is the result of one of our main objectives, bring on talented banking teams and businesses and support them through our service oriented platform. These banking professionals have a proven track record that illustrates what they do best, bring on relationships and service clients for the long term. This fundamental concept is more effective today than ever before, and here's why. Team hiring opportunities. Right now we are in the middle of one of the better environments for team hiring due to the disruption caused by M&A within our marketplace. This is evidenced by a total of 12 teams as well as two national banking practices onboarded over the last 12 months.
Some examples of the disruption on the East Coast are M&T and People's, Sterling and Webster, NYCB and Dime. Out west, the disruption is coming from Bank of the West, Union Bank and City National RBC. Now, I know City National RBC was five years ago, but they did a good job keeping it together. The disruption is occurring there later than usual. Number two, our record earnings allows us to invest in our service offering. This helps us to expand our existing relationships while also attracting new sophisticated clients in the future. We are investing more than ever before, as evidenced by our increase in non-interest expense.
Finally, many of you have already know by now, and since I'm always saying it any chance I get, but our differentiated model is so highly profitable. That despite the current massive investment in our infrastructure, we consistently operate at an efficiency ratio that is notably lower than the rest of the industry. As mentioned earlier, this quarter, it was an astonishing 31.4%. Just remember, we have no retail, and we don't have the expense related to the retail. You shouldn't just look at margins, you should look at the efficiency ratio. Collectively, all of these factors are driving the growth in the number of clients that choose to bank with us. I'd like to thank all of our teams and businesses that work hard for our clients and our colleagues that help and support them.
All of you make Signature Bank well-positioned for continued success. We're doing all the right things to build a better future for the bank. Now, Steve, Eric, and I are happy to answer any questions you might have.
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 star two. 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 Bank of America.
Good morning.
Good morning.
I guess maybe just first wanted to start in terms of how you're managing or thinking about deposits. One, maybe Eric or Steve, talk to us in terms of visibility on deposit outlook. Entire industry is losing deposits, but given the client acquisition, how do you think about deposit growth overall and for digital asset deposits? Secondarily, how low do you think the cash balances get? They declined to about 10% of earning assets, used to be about 4% pre-pandemic. Like, how low do you think the cash balances get, and do we get there in the next quarter?
Ebrahim, it's Joseph. Good morning.
Thank you.
We have a number of deposit initiatives which makes us feel very good and positive about the future. We have the fund banking division, which is refocusing growth efforts on deposits for the second half of this year. They did a good job in the third quarter and it's continuing in the fourth quarter to drive deposits in. We're going to release clients that don't give us deposits because we want to have a relationship. The specialized mortgage banking solutions group is continuing to grow and in big numbers. We see that continuing on for the next several years. One of the other things that we haven't talked about in a while is EB-5. EB-5 at one point had grown to $2 billion on our balance sheet.
Now it's around $100 million or so. We have a new legislation that was passed several months ago that EB-5 is now back in working order. It's not going to be on an annual basis approved by the Congress. It's going to be on a five-year basis. They're going to have five years of this. We right now have a pipeline of nearly $4 billion. That's a pipeline of $4 billion in deposits we expect to happen over this next several years. It's not going to be all at once. We may see a little bit of it in the fourth quarter, but we're looking at it toward the next several years.
We have a number of things going on, including the 12 teams we hired, we have both on the West Coast and the East Coast. We have that going for us. Then you have digital. Digital, I don't know what the bottom is, but I do know that they've been in this winter period of time for a while, and it's only going to go up instead of going down. Those are the things that are happening that are allowing us to feel positive and confident in the future for deposits.
I guess.
On the cash.
Yep, go ahead.
On the cash, right now we've been monitoring it as we should on a minute-by-minute basis. We feel comfortable that we'll be at the amount that we want at any point in time. We haven't had any issues for liquidity at all.
Understood. I guess maybe just Steve, I think you mentioned about like neutralizing asset sensitivity. Just give us a sense of like when do you fully get there? Is it based on over the next few quarters? Does the Fed funds need to get to some point? In that world, where do you think Signature's ROE, like is this 18%-19% ROE defensible once you get to that point? Because the stock's obviously not reflecting that at 1.3 times book. Would love to hear how you're thinking about neutralizing that and where this ROE lands in that world.
Sure. On your NIM question, as far as where we see the asset sensitivity going, we do see margin expansion continuing to occur into the next quarter. Then once the Fed does ultimately stop hiking, we would expect to continue to see our assets reprice ongoing as our deposit pricing then is locked in at that point. We continue to expect margin expansion both near and long term as we look over the next year or so. In regards to your ROE comment, would we expect 18% ROE going forward? I mean, I don't know that we will achieve this level, but we continue to expect ROE in and around this, maybe slightly below, just given where we're operating, the asset sensitivity that we have and the continued expansion that we expect going forward.
Yeah, we had a little bit of tax benefit in there affecting the near term.
Great.
I believe we should be operating at the high end of our ROE range for quite some time. We'll see expense growth moderate, probably not, you know, for several quarters. As we look out into the second half of next year, the expense growth will, you know, start to moderate. We'll continue to have the fee income and margin expansion kicking in. We feel very good about forward-looking earnings.
Just, Eric, so we have this right. You do expect margin to continue to expand even after the Fed stops because the lag repricing in assets. You don't expect margin to actually be negatively hit when the Fed stops. Correct?
Absolutely. I mean, if you think through it, right, we had an increasing margin, right? Maybe not as much as people had hoped for, but it was pretty substantial in our minds, right? You know, that's up against a Fed backdrop and activities that the Fed's taking on that we've never seen before in our banking careers. All right. We've seen a rapidly rising interest rate environment coupled with quantitative tightening, which is something that's never occurred. You know, that's really difficult to overcome in the near term, but we've been able to do it. We think we'll be able to continue to do that, because our assets will reprice higher. We have a lot of floating rate. Once the Fed stops hiking, right, that's going to lock in our liability costs.
Then we're going to slowly continue to see the longer-term assets that we have on the books reprice higher as well. We have margin expansion as we look forward for quite some time, right? What we're trying to do is be protective of interest rates if we look two years out going down, right? The curves are essentially telling us that we're headed into a recession if we're not there already, right? We want to get to an asset liability neutral state, but we're not looking to do it overnight. We're going to do it over the course of the next year or two and start to lock in some duration on our assets to be protected when interest rates finally do come back down, which is typical when we hit a recession.
Got it. Thank you.
Thank you.
Thank you.
Our next question comes from Manan Gosalia from Morgan Stanley.
Hi, good morning.
Good morning.
Hey, I was wondering, you know, I appreciate the comments on, you know, adding more fixed-rate lending exposure to protect against decline in rates and eventually get to neutral. You know, I wanted to ask about the liability side. You know, are there any plans to term out funding, given, you know, Fed QT and all the headwinds that you mentioned for deposit growth across the industry? You know, I didn't see that this quarter, but would you be willing to put on more longer-dated CDs at some stage just to term out funding?
You know, maybe as a follow-up to that, you know, I know you mentioned that the NIM should continue to expand, but can you talk a little bit about how you expect the funding costs on the deposit side to trend once the Fed stops raising rates?
Just on your question about terming things out. I mean, we've done it to a very small extent. It's something, you know, we look at, but it's not something that's a material driver at this point. I think we're comfortable with our deposit funding and, you know, some of the opportunities that Joe mentioned earlier to fund through that channel. Certainly our preference would be to fund our growth through deposits as opposed to long-term borrowing as well.
Got it. Would you expect the cost of deposits to continue to rise after the Fed stops raising rates?
After the Fed stops raising rates? I mean, I think.
After the Fed stops raising rates. Yep.
Yeah. I think, you know, we might see a little bit, but it will tail off. As Eric was just talking about, that's when, you know, our assets and the longer duration assets will continue to reprice, and we'll see a pickup there on an ongoing basis.
Okay, great. Last quarter, I think you updated your earning asset growth to about $1-3 billion a quarter, mainly driven by loans. You know, you hit about the lower end of that range this quarter. Is that still a good way to think about it as we get into 2023, especially given the headwinds on the deposit side for the industry?
Well, I can tell you that the $1 -3 billion is definitely for the fourth quarter, and then we'll see what happens the remainder of the year. Because if we get more deposits and if we accelerate the growth of deposits at a rapid pace, we may be able to increase the asset side and give different guidance. Right now, we'll go $1 -3 billion.
Perfect. Thank you.
Thank you.
Our next question comes from Casey Haire from Jefferies.
Yeah, thanks. Good morning, guys. I guess following up on the neutral strategy, getting the balance sheet neutral. So you're at 50% floating rate loans. How, you know, at what level of floating rate loans is the balance sheet neutral? Just trying to get a sense of, you know, how much downside we have on capital calls. Sounds like it's going to be gradual, but just wanted to get a sense.
I mean, Casey, I would say it's not necessarily all about fund banking reduction, but more so our growth being focused on some of the fixed rate component that will drive us then towards being more asset neutral. Even if fund banking were to maintain their book and continue to maintain that, if our mixed growth is more fixed rate, we're going to continue then to be more neutral. That's really the strategy.
Okay. Hold capital call and just grow more fixed rate?
Correct. That's right.
Got you. Okay. cumulative deposit data. you know, you guys talked about 40%, last quarter. I know you guys have been, you know, hinting that it's going to be higher. Well, you know, any updated thoughts as to where that might end up and across what, you know, forward curve?
Sure. Right now we're looking at somewhere in the low 50s%. I mean, we do continue to see pressure on pricing. As we've spoken about with the last few remarks, as that pressure does ensue, we certainly expect our assets to continue to reprice and see accretion there as well. We do continue to see some pressure and into the low 50s% is what we're currently forecasting.
Got you. Eric, can I just ask you to put a finer point on the expense cadence? It sounds like it's going to moderate a little bit from this mid-20s% level towards the lower 20s%, and then moderate even lower in the back half of 2023. Is that right? Is that moderating pace in the back half of 2023 more in line with that mid-teens% that we're accustomed to with Signature?
I think, you know, Keith, it's going to stay in the mid-20s% for the next several quarters. We'll see it start to moderate in the back half of next year, you know, probably coming down gradually into the low 20s% and 20s% and then, if we look out into 2024, I think we'll get back into the teens% then. We've got a lot of expense build and infrastructure spend and product spend to take on still. It's going to be elevated for a couple quarters and then start to trend down slowly from there.
Got you.
It won't stop us from hiring any additional teams and businesses.
Understood. Thank you.
Yeah. As Joe said, we've got a unique opportunity right now, given the M&A disruption in the marketplace. Typically, recessionary times are good times for Signature Bank as it relates to hiring key personnel, especially on the banking teams.
The next question comes from Mark Fitzgibbon from Piper Sandler.
Thank you and good morning.
Good morning, Mark.
I wonder if you guys could share with us what the spot cost of deposits today looks like. Do you have a sense for that versus what it was for the average for the quarter? I think it was 1.11%.
Yeah, it's about 150 basis points at spot.
Okay. Secondly, could you share with us also the number of digital clients that you have today?
Yeah. We're up to 1,439 digital clients. We added 116 during the quarter.
Okay. Lastly, I wondered if you could help us think about the partnership you just entered with Coinbase, how you think that will track over time, you know, how big of an opportunity it is and, maybe how much has flowed in thus far. Thank you.
It the partnership is not really a partnership. It's just that they're coming on board to use Signet to use us they're an exchange, and they're wanting to use Signet and Signature Bank for most of their operating businesses and which is the exchange. The activity there will be moving from other banks onto us, and it allows us not only to service them, but they have to be on Signet, their clients who trade with them have to be on Signet as well. It's a win-win for them because that means their clients will go on Signet and get the service that they get.
They will also benefit us because what we're going to be doing is getting the clients that we didn't have that trade on that exchange. It's not unusual to send something out like that press release. We've had four exchanges join us in the last several months. This happens to be the biggest by far. The other exchanges will do the same thing. They'll be bringing their clients on so that they can do the exchange on Signet as opposed to someone else's other bank's platform.
Thank you.
Thank you, Mark.
Thanks, Mark.
Our next question comes from Matthew Breese from Stephens Inc.
Good morning, everybody.
Good morning.
Good morning, Matthew.
I wanted to touch on commercial loan yields. The book is now roughly 50% floating rates. I guess I've been a little bit surprised by the move in commercial loan yields relative to Fed funds of 300 basis points, but we've only seen a 73 basis point move in commercial loan yields. Curious as to why it's been a slower moving on commercial loan yields. What is the expected loan beta over the next 12 months? On the fixed rate side, could you just give us some update on what incremental commercial real estate and multifamily loan yields are?
Sure. I'll start from the latter. The incremental yields were at 6.25% on commercial real estate.
Our fund banking, we're in the low 5% range. Signature Financial, we're in the high 5-s%, low 6% range. To hit on your loan yield question. I think that what's really happening there is just it's driven by pipeline, right? We have pipeline and given how fast the Fed is hiking, there's just some catch up that needs to ultimately come through there. We should see that continue to roll through as the Fed hikes. Once they certainly slow, then we should see that then moderate and hit the levels that you're suggesting and expecting.
If I look at total interest earning assets over the next quarter, I mean, I think we'd be in the 4.25%-4.25% range roughly, based upon where things have been repricing when considering pipeline.
That's for overall interest earning assets?
That's correct.
Okay. I wanted to talk about the digital assets deposits. It seems to me that the deposit balances here have proven to be on the higher beta side, and it seems that there's pretty good movement from demand to interest-bearing categories as rates have gone higher. You're also providing Signet for free. My question is, as time has evolved, you've seen some of the underlying characteristics of the deposits here. Are the economics what you'd hoped for when you entered this business and thought about a higher rate environment? Do you have to start thinking about, you know, charging for Signet and some of the other offerings you're providing given what we're seeing on the deposit beta front?
You know, I think the economics are very much in line with what we anticipated here. You know, fortunately, it's similar to all of our businesses. It's not a high expense business as we look at operating expenses. You know, the size of the team that we have that supports that and the needs there. It's highly efficient. You combine the efficiency ratio, you bring that into the equation, and it makes for it to be a pretty profitable business bet. Interest rates are more or less in line with what we anticipated. Now, we said for a while now that our DDA was at an all-time high, and we really didn't anticipate it staying at that level. We've seen a decline in activity in that space.
With that decline in activity, people need to maintain less on the Signet platform, because quite frankly, they're not trading as much. If we look at the stablecoin side of the equation, you know, traders now, instead of sitting in stablecoin, you know, are putting their money in Treasuries, right? Because they're trading less frequently. Treasuries have become an alternative to a stablecoin, just like they've become an alternative to bank balance sheet deposits. That's where we're seeing some of the declines in that space. You know, fortunately, the declines were a little bit less so this quarter than last. We're kind of hoping that we're at or near the bottom of that decline in that space.
You know, there's, it's still very choppy and that's hard to predict. I think it's very much in line with what we thought the economics would be. We really don't see a need to charge there just as we don't charge in the remainder of our bank, right? Our strategy has never been to nickel and dime our clients, and quite frankly, that's worked out incredibly well for us over the last 22 years of existence, and we see no reason to change that now.
Okay.
The exchanges are our biggest deposit, and that doesn't include the clients that are coming on board that want to deal with those exchanges. What happens is we get a benefit of the exchange joining us and then all their clients following them to Signet. You certainly don't want to charge a fee for the exchanges because they're actually bringing us business by moving on to the platform.
Understood. Okay. Last one for me is just understanding non-performing assets. Charge-offs are still incredibly low. I wanted to get some, you know, insight as to how you're thinking about credit provisioning going forward. It just seems like there's plenty of headwinds, particularly as it relates to loan resets and debt service coverage ratios for your commercial real estate properties. With higher interest rates, you can kind of pencil out higher cap rates. I'm curious what you're seeing on these fronts.
Well, we're definitely not seeing higher cap rates. That's just not playing it through. You know, fortunately for us, we're not a consumer bank, right? We expect that you're really going to see credit hit the consumer side harder. At the end of the day, Matt, you know, we're a relationship-based bank, right? Our two largest asset classes of commercial real estate and fund banking, you know, are pretty pristine, right? I mean, how many crises do we have to go through in New York? How many times over the last 20, and then you take the history of that time 20 years prior to that, so the last 40 years. We've been through lots of economic cycles, and we haven't had much in charge-offs at all, right? We're just not worried about our commercial real estate portfolio.
I mean, we're doing business with the right people, and that's shown and proved out time and time again, right? If we look at Signature Financial, we're a very secured lender there, and we've seen a history of strong performance through cycles in that space. We're not a meaningful player in the C&I market, although we're increasing that exposure, again with very experienced teams and players in that space. We feel that, you know, it's going to be quite contained and controlled, their credit metrics. You know, we've been mindful for quite some time about retail in the back office, right? We're not seeing really any issues there at all, right?
We don't have a single office loan that's in nonaccrual today, but we have built our reserves in those two areas, you know, specifically to be ready should issues arise. We feel like we're pretty well protected at this point because of the relationship based banking model that we have. As for future reserves, it's gonna really be based on the macroeconomic forecast that we're getting. You know, as many of you know, we utilize Moody's forecasting as most banks do in the industry.
If I may add one other thing. With the allowance, when banks were taking back reserves over the last several quarters, we were not. We were provisioning. That makes us feel even more secure because of the fact that we were provisioning while they were taking reserves back.
I appreciate it. That's all I had. Thanks for taking my questions.
Thank you.
The next question comes from Jared Shaw from Wells Fargo Securities.
Hey, guys. Good morning. It's just, you know, going back to the digital deposits. It sounds like what? That maybe we're at a stable level here given the volume and volatility in broader crypto, and that potential growth in the future will come from some of these new initiatives like the four exchanges and the potential for volume and volatility to increase in crypto. Is that the way to think of it? Or, you know, there still could be incremental downside to balances right now?
I think what you said in the beginning of your question, I would agree with that. It seems like it's somewhat stabilizing. You know, they've been in this crypto winter for over a year now. So sooner or later it's time to get out. But we're seeing positive things that are going on for us so that when it does dissipate, we'll be ready, just like we are with all our other businesses. We in digital, like Eric said, you know, in commercial real estate, we deal with the best of the best.
In digital, we turn down more clients or potential clients than we bring on clients because of all the due diligence that we do, because we want to deal with the best of the best. What put us in an advantage on the digital side was that we had a team that had been doing it for five years before they came to join us four years ago. We're feeling pretty good about it, but I'm not making any predictions.
Okay. When you look at the growth in deposits, you know, especially with the mortgage business and some of these others, you know, how are you winning that? Is that really just all a price game right now with the rate environment? You know, is it you know, you're actually you know, bringing on good DDA with those relationships as well, or is it all interest earning at this point?
It's clear that we're bringing on more DDA relationships. I think we internally talk about the large depositors, $100 million and more, but it's the ones that are at the $5 million level and $4 million level and $3 million level that make up the strength of any institution. We have quite a bit of those, and that will continue. Not everyone's going to be a digital player at $100 million. We do that because you need to have a mixture. You need to have the small businesses. Although our business is not very small. You need to have that business coupled with the large depositors.
Great. Thank you.
Thank you, Jared.
Our next question comes from David Rochester from Compass Point.
Hey, good morning, guys.
Good morning, David.
I just want to go back to your NIM commentary because that sounded pretty positive if you guys are expecting expansion over the next, you know, call it several quarters while moving to that low 50s deposit beta that you talked about. I was just wondering, given your expectations for the curve and hikes, and I know nobody has a crystal ball, but how are you thinking about the range that that NIM could settle into, you know, over the next, you know, year and change? Can you hit a 2.50% level? Do you hit 2.60%? Like, can you go higher than that? How are you guys thinking about it?
I mean, Dave, it's really tough to say from a timing standpoint, just given how unpredictable the Fed has been, how unpredictable the quantitative tightening has been to impact us with some of the alternatives Eric spoke about earlier with treasuries against deposits are just, I mean, we run so many different scenarios that it's tough to specifically guide here. We do expect to be up just at a slower level than we were or a lower level than we were this past quarter.
Think single digits.
Yeah. Okay.
Yes.
Single digits on a quarterly basis going forward.
Per quarter. Correct.
Yeah. Okay.
That's right.
All right. No, that's helpful. Just on the fund banking team's efforts to pull in deposits. I know, you know, you did a good job in getting them much more focused on pulling deposits in by sort of shutting off the credit side. Was just curious where they are today in terms of the deposits for that team. I know back when you brought these guys on several years ago, they were a self-funded team. I know, you know, since then, their customers aren't necessarily holding as much cash as they used to. How should we think about the deposit potential from that segment going forward? I mean, you think you're making it halfway funded, a third funded? How are you guys thinking about that?
You know, I mean, we don't— We prefer not to give out balances by team, Dave, so we don't want to break that up. They had a great quarter where they're up $470 million in deposit growth. We're very pleased with what they've done on that front and how they pivoted to deposits. You know, it's got to be really hard for them to be even a third funded, right? The nature of that business has just changed over the last three, four years, where these private equity funds are just not sitting on cash.
Yeah.
in any meaningful way, like they used to. Let's get them to 10% first. All right. I think they're not even at 5% right now, so let's get them to 10%.
Yeah.
We can kind of tell you where it goes from there.
Yeah. Sounds good. Maybe one last one on the EB-5 program. I know you, Joe, you talked about this for a number of quarters now, and it sounds like the pipeline continues to grow. I think you said it's almost $4 billion now, but it's a multi-year type of program. Are you thinking that that's like a billion-dollar contributor per year to deposit growth? How are you thinking about that?
I'll take that for $1 billion a year. It certainly is going to be over years. The pipeline is continuing to grow because one of the things we have going for us is that the team we have is very good. The rules of the EB-5 have changed according to the Congress. It's a little harder to do than it was in the past. In fact, we had two banks that did EB-5, two very small banks that did EB-5 in the past. They actually asked us to take over the EB-5 for their clients because of the knowledge base that we were able to garner with the team that we have. We're looking at probably not a major effect.
In all likelihood there will be no major effect for 2022, meaning the fourth quarter. We're going to see something in 2023. You know, right now we've signed up, and we have the projects, so we're the bank. Now they have to go out and get the investors.
Yeah. Okay. All right. Thanks, guys.
Thanks.
Thank you.
Our next question comes from Steven Alexopoulos from JPMorgan.
Hey, good morning, everyone.
Good morning, Steve.
I want to start. You gave us the total for the digital asset deposits, $23.5 billion. Could you give us the breakdown?
Sure. We have $3.9 billion from stable coin issuers. We've $4.4 billion from OTC desks and institutional traders. We have $12.3 billion from digital asset exchanges, and we have $2.8 billion from blockchain technology and digital miners. That's a total of $23.5 billion.
Thank you. I'm curious, given the comment for NIM expectations and expansion going forward, which you outlined, the most difficult job we're having now is figuring out where non-interest-bearing deposits are going, right? Pre-QE-
Excuse me.
$37 billion. You're at $37 billion now, but you're making some assumption for those, Eric, to say your NIM is going to expand. What are you assuming at least? You have to assume some level, right? If you're commenting on NIM expansion, just where are you assuming the bottom?
Yeah. Well, you know, we're assuming that over the course of the next year and two years that we're going to see that slowly come down, right? We've traditionally operated in as low as a 24% DDA. That was probably over a decade ago, you know, to as high as where we were last quarter, right? Our normal range, I'd say, has been in a 28%-34%, really more 28%-32%. So we're expecting that we're going to slowly see that DDA percentage come down into the low 30% range.
All right. Okay. That's helpful. Eric, from our side, I want to ask about the conversations you're having with customers behind the scenes, and how much pressure is there on the bank now to raise the rates you're paying on deposits? I imagine it's pretty tough conversations right now.
It is very, very tough. It's a situation that we've come across before, but not as intensive. What we've done is we've split it up between senior management talking to various clients. You got to understand, we're on margin. We don't have retail, so we're going to have they're very sophisticated clients. Then the severity and the frequency of these increases have woken up those that are not as sophisticated, but they have great businesses going on. That's what's made it tough. The number of basis points being 75 and the frequency of it. We've been handling it okay. I feel pretty good about it.
Maybe we you know always said we could pay more because we don't have all the expenses associated with retail. I know I get on my soapbox about this, but I truly feel that we're not given enough credit. Everyone's looking at the margin and we say, but the cost to bring on a client is not included in the margin. It's included in expenses. We have the top efficiency ratio in the country. We'll pay a little bit more on the interest bearing because they keep a lot on the non-interest bearing, and we can afford to do that because of the efficiency ratio.
Thanks, Joe. Maybe just one final question. We all appreciate the willingness to give us where you think NIM will move next year, right? Most banks are afraid to do that here. What do you assume for the Fed, though? Do you assume that we move up 150 and then the Fed pauses? Just what's the backdrop that you're assuming to get that expansion? Thanks.
Yeah, we're assuming 450 and then a pause, yes.
Okay. Thanks for taking my questions.
Thank you.
Thank you.
Our next question comes from Chris McGratty from KBW.
Hey, good morning. Eric, maybe a question on net interest income away from the margin. This quarter grew by about $25 million. Could you help just ring-fence the cadence of growth in NII for the next couple quarters?
I mean, it's a bit hard to predict, right, given all the variables there. You know, I'd certainly expect that we're going to have NII expansion, but not to the level that we saw this quarter. As you said, we had about 15 basis points of margin expansion. You know, we think that's going to drop down into, like, mid-single digits. That'll moderate our NII growth a bit, Chris.
Got it. Okay. Just a couple modeling questions. Do you have the level of prepay income? On the tax rate, I think you said 26%, but what are you putting in for the tax rate?
Tax rate, we're looking at 26%-27%. We expect to still get a lift from these solar tax credits going forward.
Yeah.
Prepayment penalty income came in at $2.3 million, so it was down pretty meaningfully. It is something that we had to overcome this quarter that we probably haven't talked about that in a while, Chris, so I'm happy that you raised that question. We're down $5.4 million from the prior quarter. You know, we think that that's gonna really stay at these lower levels, right? People don't have much of an incentive to prepay right now. That is something that we had to overcome a little bit, but there's not much more to overcome, right? We're at a pretty low level at $2.3 million is really, I'm just looking at my schedule now, the lowest we've been since, like, 2019.
Great. Last, you called out in the release the mark-to-market gain in the derivatives. Like, what was that? I presume that won't recur. How much was it?
That won't recur, $2.4 million.
Okay. Thanks.
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