Signature Bank Price & Performance (SBNY)

Good morning and thank you for joining us today for the Signature Bank 2022 4th quarter results conference call. Before I hand the call over to President and CEO, Joseph 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 Thank you, Susan. I will provide some overview into the quarterly results and then my colleague Eric Howell, our Chief Operating Officer and my colleague, Steve Woremski, our Chief Financial Officer, will review the bank's financial performance in greater detail. Eric, Steve and I will address your questions at the end of our remarks. At the onset of 2022, we set several goals, Including, 1, the hiring of numerous private client banking teams and the colleagues necessary to support our geographic expansion, Which we did with the hiring of 12 teams. This includes 5 in New York and 7 on the West Coast, of which 3 were in Nevada, Marking our entry into that state, we also added hundreds of colleagues across various Where we realized great success as evidenced by earning a record $1,300,000,000 in net income with a record return on common equity of 16.4 4, growing our loan and deposit portfolios substantially.

Although we grew loans by a strong 9,400,000,000 2022 presented deposit challenges. While we expected continued deposit growth, albeit Not at 2020 or 2021 levels, 7 Fed hikes during 2022 totaling 425 basis points, Coupled with quantitative tightening and the proliferation of off balance sheet alternatives resulted in the most difficult deposit environment We have seen in our 23 year history, the arduous rate environment along with the challenges in the digital asset space Budget deposit declined, which we overcame a little difficulty given our robust liquidity position. Please take note, Thus far in 2023, we are already up $1,800,000,000 in total deposit growth. This is driven by an increase of $2,500,000,000 in traditional deposits offset by a decline of $700,000,000 in digital deposits. Now taking a closer look at earnings. Pre tax pre provision earnings The 2022 Q4 were $451,000,000 an increase of $65,000,000 or 17% compared with $385,000,000 for the 2021 Q4. Net income for the 2022 Q4 increased $29,000,000 or 11 percent to $301,000,000 or $4.65 diluted earnings per share compared with $272,000,000 or $4.34 diluted earnings per share for last year. The increase in income was predominantly driven by margin expansion due to rising rates, which led to strong growth in net interest income over the last 12 months.

Now let's take a closer look at deposits. With the frequency and severity of the Fed rate increases, the deposit environment remains challenging. Total deposits decreased $14,200,000,000 or 14 percent to $89,000,000,000 this quarter, while average deposits decreased 4,000,000,000 Now let's discuss the elephant in the room. As a reminder, on December 6, At a conference, we announced our plan to purposely decrease total deposits in the digital asset banking space In this funding source, as part of the plan, we are focused on reducing high cost Excess digital deposits. Our strategy went as expected and resulted in a decline of $7,400,000,000 in digital deposits. Respectively, the bank will further reduce these digital deposits by an additional $3,000,000,000 to $5,000,000,000 by the end of 2023, went to the conference. We saw a large degree of irrational pricing from competitors on traditional deposits. In general, we decided not to increase rates to these levels on deposits that have the highest rate sensitivity. As a result, dollars 2,300,000,000 in high interest rate deposits left. Total contribution from both Digital asset reduction strategy and our decision to not match pricing on these rate sensitive deposits Aggregated $9,700,000,000 of the deposit decline. These are deposits that we intentionally managed out There were several other factors that contributed to the traditional decline.

Our mortgage banking and solutions team experienced this seasonality due to taxes and escrow payments, which contributed $1,900,000,000 to the overall decline. We expect this to build back up over the course of 2023. And 1031 exchange commercial real estate transaction continues to decline industry wide And we saw a reduction to the tune of $1,200,000,000 So there was a lack of CRV transactions and as a result there will be less 1031 deposits available. During the quarter, non interest bearing deposits decreased $6,000,000,000 to $31,500,000,000 which continues to represent a solid 36% of total deposits. The decline in DDA continues to be driven by the challenging rate Before I turn the call over to Eric, I'd like to say that although 2022 was a tough year for deposits, we believe we are a growth story. And as we look On 2023, we firmly believe we will return to growing traditional deposits. Clearly, this is difficult given the current environment, but it remains a focus. It is encouraging to see inflows in traditional deposits of $2,500,000,000 thus far this year through January 13. That's only that's after only 9 business days. Now I'd like to turn the call over to Eric.

All right. Thank you, Joe, and good morning, everyone. I'd like to turn our attention to our lending businesses. Loans during the 2022 Q4 increased $452,000,000 or 1% to $74,300,000,000 For the year, loans increased $9,400,000,000 or 15%. During the Q4, growth continued to come from nearly all of our lending businesses with the exception of capital calls, Which were down $2,100,000,000 as we left passive participations run off as they came up for renewal. Over the next several quarters, we are expecting measured growth out of our newer business lines, Healthcare Banking and Finance and Corporate Mortgage Finance, As these teams are still strengthening their presence within their markets. Given the challenging deposit environment, we anticipate declines from our larger, More established lending businesses. Overall, we plan to manage loan growth to be down in the coming quarters. Turning to credit quality, our portfolio continues to perform well. Non accrual loans were down $1,000,000 at 184,000,000 We're 25 basis points of total loans compared with $185,000,000 for the 2022 Q3 They were down $34,000,000 when compared with $218,000,000 for the 2021 Q4. Our past due loans were within their normal range with 30 to 89 day past due loans at $96,000,000 or 13 basis points And 90 day plus past dues at $55,000,000 or 7 basis points of total loans.

Net charge offs for the 2022 Q4 were $18,200,000 or 10 basis points of average loans compared with $10,200,000 or 6 basis points for the 2022 Q3. The provision for credit losses for the 2022 Q4 increased to $42,800,000 compared with $29,000,000 for the 2022 Q3. The increase was primarily driven by a deteriorating macroeconomic forecast. This brought the bank's allowance for credit losses higher to 66 basis points and the coverage ratio stands at a healthy 266%. I'd like to point out that excluding very well secured fund banking capital call facilities, The allowance for credit loss ratio will be much higher at 105 basis points. Now let's turn to the expanding team front. As we've said before, a core metric for us is the number of teams we onboard And we continue to realize success in this area. During the year, the bank onboarded 12 private client banking teams, The entry into a new geography for Signature Bank. Additionally, our newest national banking practice, the healthcare banking and finance team Was launched in the Q2 of this year. Notably, this is the 3rd highest number of teams hired in any given year in Signature Bank's history, which bodes well for future deposit gathering.

And our pipeline remains strong. 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 Q4 was 639,000,000 A decrease of $35,000,000 or 5 percent from the 2022 Q3 and an increase of $103,000,000 or 19 percent from the 2021 Q4. The decrease in net interest income during the 4th quarter was driven by the outflows of our cash balances in support of our planned reduction in the digital asset banking deposits. This resulted in a smaller balance sheet at the end of the quarter. Going forward, we plan to keep our cash position in the $4,000,000,000 to $6,000,000,000 range, which is dependent upon deposit flows. Net interest margin on a tax equivalent basis decreased 7 basis points to 2.31% compared with 2.38% for the 2022 Q3. The lower margin was the result of the rise in our cost of funds, which was primarily due to the replacement of digital asset banking deposits With more expensive borrowings. Over the near term, the bank plans to pay down these borrowings as we see traditional deposit inflows, resulting in a lower cost of funds, which will ultimately be beneficial for margin. Let's look at asset yields and funding costs for a moment.

Interest earning asset yields for the 2020 Q4 Increased 73 basis points from the linked quarter to 4.18%. The increase in overall asset yields was All of our asset classes and was driven by higher rate. Yields on the securities portfolio increased 45 basis points linked quarter to 2.53 percent given higher replacement rates. Additionally, our portfolio duration decreased slightly to 4.23 years due to interest rates going back at the end of the quarter. Turning to our loan portfolio, Yields on average commercial loans and commercial mortgages increased 69 basis points to 4.82% compared With the 2022 Q3, increasing yields was driven by our portfolio repricing higher. Since approximately 48% Of our loans are floating rate, we expect loan yields to continue to increase as short term rates continue to move higher. In addition, given the longer duration of our fixed rate loan portfolio, we will continue to see these assets repriced higher Even as the Fed ceases increasing rates. Now looking at liabilities. Given the 125 basis points of Fed moves this quarter, Overall deposit costs increased 80 basis points to 1.91%. The pace of the deposit is in line with our expectations given the frequency and magnitude of the rate hikes.

During the quarter, Average borrowing balances increased by $2,300,000,000 to $4,500,000,000 and the cost of borrowings increased to 3.80%. The increase in borrowings was driven by our planned reduction in the digital asset banking deposits, where we added mainly short term borrowings. In the coming quarters, we plan to pay these borrowings down with excess liquidity from deposit flows and manage loan portfolio runoff. In fact, today, borrowings are $4,000,000,000 lower since quarter end given positive deposit flows and other initiatives. The overall cost of funds for the quarter increased 85 basis points to 1.99 percent, driven by the aforementioned increase in deposit costs and the addition of higher priced borrowings. On to non interest income and expense. With our plan to grow non interest income, we achieved growth of $11,800,000 were 35.2 percent to $45,200,000 when compared with the 2021 Q4. 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 Q4 was 233 point $3,000,000 versus $183,900,000 for the same period a year ago. The $49,400,000 Our 26.8% increase was principally due to the addition of new private client banking teams, national business practices and operational personnel as well as client related expenses that are attack activity driven and have increased with the growth in our businesses.

Despite the significant hiring and considerable operational investment, the bank's efficiency ratio remained relatively low At a strong 34.11 percent for the 2022 Q4 versus 32.31 percent for the comparable period last Turning to capital. Overall capital ratios remain well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet as evidenced by a common equity Tier 1 risk based ratio of 10.42% And total risk based ratio of 12.33 percent as of the 2022 Q4. Today, we are also announcing an increase in our common stock dividend by $0.14 per share to $0.70 per share Starting in the Q1 of 2023, our robust earnings profile generates over $1,000,000,000 in earnings a year, This is substantially more compared to when we first set the dividend in 2018. We have long term confidence in the earnings power of our franchise and are happy to increase our dividend. Now I'll turn the call back to Jo. Thank you.

Thanks, Steve. I'd like to point out that this is our 1st year in our 22 year history that we reported an annual decline in deposits. Given Fed actions, Including quantitative tightening, coupled with the 7 rapid Fed rate hikes totaling 4 25 basis points, growing deposits has become very difficult. Growth for the sake of growth while ignoring the economics does not benefit our shareholders. Instead, we firmly believe that our decision not to chase irrationally priced high cost deposits as well as our decision To reposition our digital deposit book by reducing concentration will benefit our shareholders in the long run in the long term. Our focus in this ecosystem was on concentration of deposits, not to leave the ecosystem. Despite the short term Challenges we face today, we continue to put the seeds in place for future growth with our plans for continued investment in our infrastructure as well as our geographic expansion through the hiring of teams. These investments will inevitably lead to growth That within our differentiated operating model will lead to higher returns over time. A growing dividend of $0.70 Should firmly indicate to our shareholders the confidence we have in our ability to generate substantial earnings over the long term.

To conclude, 2022 was a year of many positives. We achieved the following: record net income of 1,300,000,000 And record return on common equity of 16.4%. And as I just mentioned, the earnings is allowing us to increase our 2023 dividend while still maintaining strong capital ratios. We had loan growth of $9,400,000,000 not to mention 12 team hires with the expansion into the state of Nevada. The addition of another national business line, our Healthcare Banking and Finance team. And we continue to perform With a best in class efficiency ratio of 34.11 percent. Finally, yes, we have USD Deposits of digital asset But we do not invest, we do not hold, we do not trade and we do not custody crypto assets. We only have deposits of clients in the crypto ecosystem and we are executing on our plan to reduce these deposits significantly Because for concentration purposes, in the future, our focus will remain on blockchain technology, This is the reason we decided to enter this space in 2018. We have many other traditional businesses whose positive results are being overlooked. Now Steve, Eric and I are happy to answer any questions you might have. Shelby, I'll turn it to you.

The floor is now open for questions. Thank you. Our first question is coming from Dave Rochester with Compass Point.

Hey, good morning guys.

Good morning, Dave. Good morning, Dave.

I wanted to start on deposits. You mentioned you had $2,300,000,000 I believe in High rate deposits left, are you expecting those will flow out here in the next quarter or 2 at this point or have you already seen some of that Flow out that's actually baked into that quarter to date growth you mentioned?

I mean that was in the 4th quarter already, Dave.

Those in the 4th quarter, right. So how much do you have left at this point?

Not a lot.

Yes. Okay. What areas do you see in the deposit growth in at this point quarter to date?

Well, there's a number of areas. We can start with I'll make my Colleen's nauseous, but let's start with EB-five. That's a source of deposits for us. We have about 281,000,000 In deposits of the new E5 program, so we expect another $5,000,000,000 in deposits over a 24 Month period. So it's really over the next 2 years where we expect most of the money coming from China and India. That's We also expect to hire additional teams, both on the East and West Coast. We already had a team start in New York on January 2nd, we hired 1 team thus far. We expect the new teams this year plus the teams that we hired last year to So start bringing over their books of business and their clients that they have. And that goes to all the teams, the 130 teams that we have. We They'll continue to do a better job of growing deposits because a number of them over the last several years were Under the pandemic, that certainly hurt their ability to bring clients over quickly. So the West Coast finished strong. They're probably out of the pandemic, and that should work. Fund Banking is refocusing their growth efforts on deposits.

Eric mentioned the decrease that we had in Fund Banking Loans, they refocused because we wanted them to fund a little bit more than they had been Their own loans. So they're concentrating on deposit gathering. Then we have specialized mortgage banking solutions. They are continuing to grow. We had an outfall because of deposits I'm sorry, because of taxes and escrow payments, but we see growth there. We let go of some deposits Added that institution added that business as we had because they were high priced. But still by letting go some of the hot price that should help on NIM, we'll be able to bring on more deposits at a reasonable interest rate. So we have the West Coast, we have the EB5 Specialized Mortgage Bank Solutions, Fund Banking Division, Refocusing the efforts on deposits and we have the new teams that we have come on board. That's why we feel confident that in 2024 We're looking towards 2024 for that to be a greater growth in deposits than we've seen in the last few years.

Appreciate all the color there. Any are you guys seeing any growth by any chance in non interest bearing or is that all interest bearing right now This quarter.

I think we're seeing a comparable mix from what we traditionally see, Dave, so roughly that 35%, 36%.

Thank you. And we'll take our next question from Ebrahim Poonawala with Bank of America.

Hey, good morning. I guess, maybe just following up on deposits to make sure we got the message right. There's about $5,000,000,000 in crypto deposits that you Expect to exit the balance sheet. Beyond that, is the message that you don't see any other higher cost deposits In any meaningful size left, so net net, you believe you can offset the $5,000,000,000 so we should see net deposit growth as you think about 1Q and beyond?

I think it would be difficult for us given this deposit environment to promise that would be up in traditional deposits, Although we're hopeful that we will be. That's the $3,000,000,000 to $5,000,000,000 in digital, we do think that will be relatively flat And the rest of our deposit base, there we planted the seeds for growth for sure as Joe Talked about, and we do anticipate that we should have growth, but it's difficult to promise.

Understood. And Eric, just Steve's point around 35% to 36% NIB, that's where you ended, I think, 4th quarter, is it safe to say the NIB is kind of leveling off here around $31,000,000,000 give or take?

I think it's back to its normal range. Actually 35%, 36% is probably at the high end Where we traditionally have been, I mean, we're usually in the 32% to 34% range, maybe even a little bit lower.

Yes, we've been We've been as low as 24%. But yes, so I think we'll be in that 30% to 35% range of DDA to overall deposits as we look forward.

Understood. And then on lending, I think you mentioned loan growth balance is How much more of capital call line participations are yet there that could leave exit the balance sheet?

We have a fair amount of passive participations there. So we could I'm going to give Fairly broad range, but we could be down in line anywhere from $5,000,000,000 to $10,000,000,000 I mean essentially if you look at what we've done over the last couple of years we've grown digital deposits and we've grown fund banking loans. So we're shrinking now our digital deposits and we're going to shrink our fund banking loans and get back And right size the balance sheet a bit.

Understood. And one last question. So it seems like the balance sheet is going to be shrinking. Clearly, you feel good about capital based on the dividend hike. Is buyback an option or beyond the dividend any increase in capital? Do you expect just to build capital right now?

Well, we do anticipate that we're going to have growth. We could See growth this quarter, quite frankly. It's going to be tough, right, but it's possible. And we certainly could see growth if we look into the 3rd Q4 of this year. So we've got we continue to put the seeds and plant those seeds for growth. And we'd rather hold on to our capital to support that growth. All that being said, buybacks are certainly we have the ability to buy back and we'll certainly look at that If that growth doesn't materialize.

Noted. Thanks for taking my questions.

Thank you.

We'll take our next question from Manav Gosala with Morgan Stanley.

Hi, good morning. Just given all the moving pieces here between digital outflows and the seasonality of deposits and Some of the nice quarter to date growth you have in deposits. Is annualizing the 4Q EPS a Fair way to think about earnings as we go into 2023 or are there more puts and takes there?

I mean, there's a few things you need to consider there is that, as Eric just talked about, from a deposit standpoint, it's going to be challenging. And if we're Planning on reducing deposits in the digital space $3,000,000,000 to $5,000,000,000 We certainly will then Need to borrow in the short term, which then should lead to NIM and NII compression Given the higher cost deposits as we saw towards the end of the 4th quarter, so continue to expect some short term pressure there. And then as we head Into the end of the year, we should then see some relief is what we're hopeful for and then see NIM expanding and also see some relief from The borrowing standpoint as we see some traditional deposit inflow. So I mean that's the context And then maybe on the expense side, I know you've spoken about expense growth being at around 20% or so as you invest in the business. But do you have some more room there to offset some of the pressure you're seeing on NIM?

So there's a few things to mention on expenses. For the Q1, we do expect to be in the mid 20s again, it's roughly 25%. We would have been lower had the FDIC not increased its assessment rates. We're increasing every institution two basis points, which for us means about $5,000,000 a month In incremental expense sorry, per quarter, in incremental expense. So that's the headwind. Without that, we would have been in the low 20s. So Q1 mid-20s, 25% and then we should trend through the remainder of the year down We'll take our next question from Bernard Bonn Chesky with Deutsche Bank.

Yes. Hi, good morning. Given you're exiting a large amount of your crypto related Just curious how this impacts the Sigma platform. If you're doing less volumes now, I would assume the activity volume driven expenses It should be coming down as well. And just trying to get a sense like we're focused on the funding part. So one is like the expense part. Think the discussion about the lower expenses in the later part of the year might be part of it, but any sort of fee income That could go away as we kind of consider this with these two factors as well?

We're really looking at concentrations in that space. So we're not necessarily exiting client relationships there, but we are lowering concentrations But we are lowering concentrations there. And that's so we're seeing volumes in Cigna. Actually volumes last quarter were the highest Even as we were exiting these later in the year. So we don't really expect much of effect Signet volumes, there's really not much of a cost for us to operate Signet. So we're not going to see any cost benefit there if we hit volumes did Come down in that space. From a fee income perspective, same answer really. We're not exiting client So we're not going to see much of a change in our foreign exchange and other sources of fee income there. So ultimately, all we're doing is limiting the amount The clients can maintain an overall deposits at our institution and looking to have more of a granular deposit base, which will allow us to manage liquidity tighter.

Okay. Thank you. Just to follow-up, I know obviously the digital ecosystem is the largest on the Signet And you guys have alluded to other ecosystems like payroll, trucking, shipping that could be utilized. Just trying to get a sense like as we think of the other like non crypto areas of the bank, are you seeing any sort of Growth in those particular ecosystems, is there any way you can help like size like what the 2nd largest is on Signet just to get a sense of You might have other areas that could grow and could be an area of focus. And if not, what kind of like catalysts Should we kind of like think about in those areas that could be growth, if not this year in our work years?

Well, the digital is The number of transactions on Signet is actually digital is number 2, Not in dollars because they have large dollars, but we have a shipping industry, cargo shipping industry That is number 1 on Signet for a number of transactions. And then we've forgotten payroll, Which is starting to take course and we're getting more payroll companies on. So the key for us is That we find these other ecosystems because we put a payment platform together 24 hours, 365 days a year and the idea being that we want to attract as many ecosystems as we can to make it Beneficial for us and the clients. What we did put together was something that the Digital World embraced blockchain technology and that's why they're Number 1 in terms of dollars that flow in and out. But let's face it, I mentioned that I didn't think that crypto would be in the top 10 once we had other industries embrace blockchain technology. 1 of our We look forward to having more non digital ecosystems and Well, we just proved everybody's prohibition to us.

Thank you. And we'll take our next question from Casey Haire with Jefferies.

Yes, thanks. Good morning, guys.

Good morning. Thank you.

So following up just on the loan growth, I want to make sure I understand this correctly. So Eric, I think you said total loans down $5,000,000,000 to $10,000,000,000 for the year. That's lines, Casey. That's not outstanding.

Just Capital Call?

Just Capital Call lines. Outstanding of roughly Half of that balance.

Okay. All right. So I mean capital call obviously a big part of the loan book. What is the expectation for it sounds like loans are down pretty big in the quarter to date given that you've been able to push Down borrowings $4,000,000,000 I guess just a cadence on the loan growth throughout the year and Where you expect the loan book to land because obviously the Street is expecting some pretty decent growth this year.

Well, given that we're reducing deposits still, right, and we expect to be down $3,000,000,000 to $5,000,000,000 in the digital space And really flattish in traditional, though we're hopeful we'll see some growth. But again, I can't promise there. It would be difficult for us to expand our loans. So we're expecting that capital call facilities and those passive participations to be down and outstandings roughly $2,000,000,000 to 5,000,000,000 And then for our commercial real estate portfolio to decline, although I'll be it's not going to decline much. It will probably flat to down a little bit. And we'll see some growth out of our mortgage Warehouse Finance Business as well as our Healthcare Finance Business, those are 2 newer business lines for us that we Want to continue to see have growth in Garner market share and market favor. So we'll have some growth out of those areas, let's say, 500,000,000 Potentially $1,000,000,000 over the course of the year for each. So ultimately, when you put all that together, I think you're going to see us be Pretty flat on loans to down maybe a little bit.

And Casey, just to add on your borrowing comment, we're down $4,000,000,000 in borrowings. That's being paid down from a combination of cash. We mentioned that cash range of $4,000,000,000 to $6,000,000,000 which is our comfortable range, given Security runoff as well as this small amount of loan runoff that we've seen thus far. So it's a combination of all those different items.

Okay, very good. And then just given all the moving pieces here, can you give us some help on where you The margin settles in the Q1. And I hope you had thoughts on deposit beta.

Sure. So margin in the Q1, we do expect to be down about 10 basis points. And that's a function of what I mentioned earlier in that. In the short term, we do expect to borrow early in the year to replace the digital outflow that we're planning to manage down. And then as you get towards the end of the year, We would expect NIM to then start expanding. From a deposit data standpoint, we're end of period at 46%, Total deposit fall in and our end of period deposit costs are 2 10 basis points approximately.

Okay. And you guys are still expecting low-50s June beta?

I think we'll be in the high 40s at this point given the high cost deposits we pushed out. I mean, we'll see how much non interest bearing pressure we get. But at this point, I would expect it to be in or around where we're at, maybe plus or minus marginally.

Okay, very good. And then just lastly, the release mentions talks about geographic expansion. Just any further color on what you're thinking about and which markets?

It's really just Filling in the expansion that we've had over the last couple of years, we've got teams to hire in the California marketplace, whether it be LA or Sacramento area, as well as Nevada, where we'll continue to hire some teams there. Potential for us to maybe go into Southern California, San Diego market, but there's no actual near term teams in the pipeline right now for that.

Great. Thank you.

Thank you, Casey.

Thank you. And we'll take our next question from Steven Alexopoulos with JPMorgan.

Hey, good morning everyone.

Good morning.

So if we work through the expected decline of the digital deposits and on the capital call loans all in, I'm trying to understand when the balance sheet will stabilize. Do you think most of this is front end loaded? Do we get to the point in the second half where we should expect the balance sheet overall to be fairly flat? Can you just Take us through this year when we should expect to see a bottoming and then eventual growth in the total balance sheet.

Yes. I mean, Steve, we're working hard To get through these digital outflows in the Q1, Q2, we could see of that bleed into the 3rd Q4, but we're really trying to have this done as quickly as we can, right? So we're going to see decline probably in the first and 2nd quarter is in the overall balance sheet. By the time we get to the 3rd, we should see that stabilize. And again, we're hopeful that we can see deposit growth, which We have it thus far this quarter, which is great. And we're hopeful as we get to the second part of half of the year that we'll see some growth from there.

That's helpful. And then on the digital asset deposits, Joe, the original appeal of these deposits was it would be a lower cost funding option, right, which is not Necessarily proving to be the case. I'm curious given the extreme volatility right the drawdown, will you be able to lend those deposits out? Does the original case And how do you think about this from a long term view? Thanks.

Well, long term, I think it helps having time. But in the short term, we clearly don't have any evidence or any past history that gives us a Comfort level that we should do something long term with those deposits. So we're going to keep them short for now.

Okay. But you guys are still committed to the business long term at this stage? It's just going to decline Yes, we're committed to the business. We think that it's not going away. Let's put it this way, it's not going away and we have a number of examples That show that it's not going away. If you think about the government, If we can get the regulators and Congress on the same wavelength, they would give us regulations that we could follow and others could follow. What this ecosystem needs is regulation. We need to be able to function where the economy is confident Having this FTX situation clearly put a lack of Confidence in that ecosystem. Now what we need to do is to get regulation, get confidence Back in the system and we can go from there. It occurs to a lot of people that when you do innovation, You always in the initial part of the innovation, there's always Looked upon initially down upon. And that's what I think is the situation here. There's new financial innovation that's being looked down upon and we believe that somewhere In the next few years, the banking system as it conducts transactions today will not be the way they conduct transactions tomorrow.

So we're very much in tune to wanting to support this ecosystem.

Got it. Okay. And if I could ask one final one. Just on the inflows of traditional deposits you saw which you're calling out in the release, the $2,500,000,000 I might have missed this, but what type of deposits was that that you saw Those low cost deposits, can you give us some context around that? Thanks.

Sure. So we've seen some growth In specialized mortgage banking, they've continued to build up their balances after the year end escrow and tax outflows. Our fund banking Business is up to a couple of 100,000,000 as well. And then our New York private client banking teams, we're also seeing some growth there as well. To your cost question, we're seeing the traditional 30% to 35% of non interest bearing As we add these deposits back.

Okay. Perfect. Thanks for all the color.

Steve?

Yes. I want to just follow-up on the question that you had asked earlier about being in the crypto Space. Every major bank, maybe not every major bank, but many major banks are in the space, Maybe more internationally than domestically, but they're all there. And what really shook the confidence of the markets was, I said, FPX, Almost Bernie Madoff like. And that when Bernie Madoff happened, that shook the markets, this shook the markets. Again, I'll say it again, we need regulations. So we need the regulators and Congress to get on the same page.

Great. Okay. Thanks for the color, Joe.

Thank you, Steve.

Thank you. We'll take our next question from Jared Shaw with Wells Fargo Securities.

Hey, good morning guys. Thanks.

Thank you, Ken. Maybe just a couple of follow-up detail questions. On the borrowings, you said borrowings are down quarter to date, but you're expecting them to go So is that to grow from year end numbers as we see these deposit outflows or just maybe give back some of The flow that we've seen year to date?

Jared, certainly dependent upon what traditional deposit flows are, but All else being equal, that's flat and it would just end up replacing some of what we've paid down thus far. So I wouldn't Deposit flows might end up being.

Okay. And then, can you give us an update on what you're seeing Spot rates on loans, especially the areas that you're growing?

Sure. On the CRE front, we're seeing replacement rates roughly in the high fives, call it 5.75 Range in Fund Banking, certainly they're reducing, but we're in the low 6s there. Signature Financial, we're in the mid to high 6% range. Securities, any replacement there is at the 4.5% to 4.75% range. And then we have some of the folks that were growing, Healthcare Banking and Finance about 7% And as is commercial mortgage finance in the 7% range.

Okay. That's great. And then on the security side, you said that you are using cash flows to pay down borrowings. How should we be About securities as a percentage of assets here, could that should that stay stable? Should it come down? When we look at the absolute dollar level, Can we expect that to be trending down as we go through the year?

Potentially, it could run down depending Tom, we're back to the traditional deposit flows. That's really the key here. Where do traditional deposit flows go compared to our digital runoff And the timing of all that. So yes, in the situation, we could see some reduction there as they run off Roughly in the $750,000,000,000 to $1,000,000,000 a quarter range.

Great. Thank you.

Thank you. We'll take our next question from Chris McGratty with KBW.

Hey, good morning. Joe or Eric, in the release you talked about the bump up in the reserve due to the macro. One of the topics that comes up a lot in investor conversation is the office portfolio. Could you just remind me the size and a few of the relevant stats Where we are at year end?

Yes. The office portfolio is about $4,000,000,000 We had 0 in non accrual As of this point, so it's important to point out. It's also I mean, it's more critical to point out that we're not a CMBS lender. And all the articles and the news that you've seen thus far is all related to CMBS. I don't think there's anything related to balance sheet lenders, Us or any of our competitors. Now when we originated these loans, we were in the low 50% LTV range. We are north of a 140 debt service coverage. So we've got ample cushion there to absorb whatever we do see Come through in that space. I mean, don't get me wrong, we fully expect that there's going to be some problems. But quite frankly, we're just not seeing much right now, Chris. We're dealing with well seasoned veteran operators, multi generational who own many properties It can divert cash flow as necessary to deal with the ones that might be in trouble. And we're just not seeing the demise of New York office Anywhere near what people are predicting. I mean anywhere near.

Okay. Thanks for that, Eric. Is that the portfolio, the number one internally that you guys are stress testing? Is there something else that Might drive the kind of a reserve build narrative over the next couple of quarters.

I mean, it's certainly one of the areas. I mean, we've been focused on retail for a long time, really from the Amazon In fact, well before the pandemic hit, again, our retail is really in the outer boroughs, more strip centers that We feel pretty comfortable with and we're seeing that behave quite well. Also, I mean, we're also focused on the multifamily sector where you have rent Stabilized and predominantly buildings that are mostly rent stabilized where it's really tough for them to improve the cash flows there. That's another area that we're looking at. But in all three of those areas, we're really just not seeing much weakness, if any at all, at this point.

Okay. And can you remind me the size of the retail book here?

The retail book is about $6,000,000,000 Okay. Thanks for that. Just I guess the last question, just trying to square up all the outlook for margin and balance sheet. Would you is it fair to assume that the trajectory of net interest income probably is obviously down first half of the year, but Is stabilization in the back half kind of the goal or just kind of trying to figure out the trough in net interest income?

Yes, 100% accurate on the near term in the first half of the year and second half of the year is stable to Potentially up depending upon what the Fed does.

Okay. Thank you.

Thank you.

We'll take our next question from Matthew Deese with Stephens Inc.

Good morning. I wanted to go back, Stephen, to your NIM commentary. You had mentioned in the Q1, you expect the NIM to be down 10 basis But expansion by year end, could you just give us some sense for NIM performance in the middle of the year? Are we expecting down 10 bps In the Q1 stabilizing and then bouncing back or is there additional downside in the second and third quarters?

I mean, it is difficult to say, given we don't know what the Fed does. I mean, we run-in various different scenarios. Is there There likely will be pressure in the first half given borrowings. As far as Pretty certain on where we're going to be at for the Q1, but then dependent upon where deposit flows come, where borrowings come, That really makes it challenging just going more beyond 1 quarter at this point, but would see stabilization to NIM expansion In the second half with borrowings rolling down, it's just very difficult to project down 1 quarter at this point.

Okay. And then on the expense ramp that falls into these to the other category, it's been up significantly last 2 quarters. I'm assuming that's related Can you give me some examples of what the largest drivers contributing to pretty close to like a $20,000,000 $25,000,000 quarterly increase?

Sure. There's 2 things. First, it's just general activity levels are up, which we have Expenses that are activity based with some of our vendors in addition to the fact that we have ECRs or earnings credits, That's the other component to the driver there.

Could you clarify those earning credits?

So Credits that clients get based upon balances and activity that they have with us. They It might be it's like a rewards program, if you will.

Got it. Okay. And then my last one is just Love your thoughts on the crypto regulatory front and implications to you, particularly on the back of the inter agency guidance Earlier this month, I'm curious in the wake of FTX if there's been any reassessment on the institutional client book or the PSA, AML, KYC Process Front to make sure that there aren't other instances of fraudulent activity. What changes, actions have you taken? And what kind of comfort can you give us on the quality of the remaining client book?

Well, I'll say this with FTX. It wasn't a matter of BSA AML, everyone thought that he was legitimate and he ended up being very Madoff So I don't think anyone could say that they knew that and we catch it. What we're talking about regulation We just want to know which way to go because we had Signet and we try to make enhancements on it And some were okay by the regulators and some were not. It puts us in a difficult position as to what we do next. And not knowing regulation wise what's going to happen puts us really behind everyone else That is in the crypto world. I will tell you this, we've had a number of discussions With the regulators and they seem to be waiting for other regulators. So I The Fed is waiting for the FDIC. The FDIC was ready for the OCC. But I think they have to get together, Meet with Congress because Congress was going to put some before the end of the year, Congress was going to put some bills across to get Some laws put on the books for regulation and they were not things that we thought were good for us or good for the industry.

So we need to get them to get on the same level of field and give us some guidance. There's no I think what happens is when regulations come out that will eliminate a Number of players, I don't know if they're actors, but I would say a number of players couldn't live up to the regulation, whether it's capital related We're just doing AML, DSA. But again, FCX was not a BMA AML. It was a Bernie Madoff like situation that no one really thought that Sam was a bad actor.

Thank you. We'll take our next question from Mark Fitzgibbon with Piper Sandler.

Can you hear me? Yes, we can hear you now.

Okay. Sorry. I guess just following up on Joe's comments, How likely do you think it is that Signature gets sort of ensnared in any kind of congressional hearings on crypto?

It's pretty hard to predict really. I mean, look, we're a highly regulated banking institution. We file a strict BSA, KYC, AML policies and procedures, in this space in particular, we have hands due diligence and monitoring. We're really not aware of any concerns or issues that we have at We haven't been involved in any litigation, any meaningful litigation to date.

So Okay.

Fortunately for us, we were not We had announced that we're integrating the FTX, but we were not integrated yet with FTX. So we didn't have client related transactions Of FPX is happening on our platform. Yes. So that's certainly good.

Okay. And Eric, could you share with us the number of digital deposit clients that you have today and maybe what the actual transaction volume was in the 4th quarter?

Yes. Currently, we have 14 10 active clients and our transfer volumes are 275,500,000,000 Okay, great. And then last question. Steve, you might have mentioned this, but what was the spot deposit rates today? 210 basis points. Great.

Thank you.

Thanks, Matt.

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