Signature Bank (NASDAQ:SBNY) Q2 2022 Earnings Conference Call July 19, 2022 9:00 AM ET
Company Participants
Joseph DePaolo – President and Chief Executive Officer
Susan Lewis – Media Relations
Eric Howell – Senior Executive Vice President and Chief Operating Officer
Stephen Wyremski – Senior Vice President and Chief Financial Officer
Conference Call Participants
Vilas Abraham – UBS
David Rochester – Compass Point
Steven Alexopoulos – JP Morgan
Casey Haire – Jefferies
Ebrahim Poonawala – Bank of America
Manan Gosalia – Morgan Stanley
Jared Shaw – Wells Fargo
Matthew Breese – Stephens Inc.
Bernie Von Gizycki – Deutsche Bank
Christopher McGratty – KBW
Operator
Welcome to the Signature Bank 2022 Second Quarter Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; Eric R. Howell, Senior Executive Vice President and Chief Operating Officer; and Stephen Wyremski, Senior Vice President and Chief Financial Officer.
Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]
It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin.
Joseph DePaolo
Thank you, Gretchen. Good morning and thank you for joining us today for the Signature Bank 2022 second quarter results conference call.
Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.
Susan Lewis
Thank you, Joe. This conference call and oral statements made from time to time by our representative contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and may be beyond our control.
Forward-looking statements include information concerning our expectations regarding future results, interest rates and the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings, business strategy, and the impact of the COVID-19 pandemic on each of the foregoing and on our business overall.
Forward-looking statements often include words such as may, believe, expect, anticipate, intend, potential, opportunity, could, project, seek, target, goal, should, will, would, plan, estimate, or other similar expressions. As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties, and assumptions that could cause actual results to differ materially from those in the forward-looking statements and can change as a result of the many possible events or factors, not all of which are known to us or in our control. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made.
Now, I’d like to turn the call back to Joe.
Joseph DePaolo
Thank you, Susan. I will provide some overview into the quarterly results, and then Eric Howell, our Chief Operative Officer and Steve Wyremski, 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.
As we anticipated, this is a very strong quarter for earnings, and we saw significant increases to pretax, pre-provision earnings and net income, both of which were records. We funded our substantial loan growth with the significant excess cash balances we maintained from the $66 million deposits that we grew over the last two years. This led to our strongest growth ever in pretax, pre-provision earnings as 54% versus prior year.
It is not a sprint. It is a marathon. We are patient and we grind hard every single day. Let’s take a look at earnings. Pretax pre-provision earnings in 2022 second quarter were a record $477 million, an increase of $168 million or 54% comparing the $309 million for the 2021 second quarter. Net income for the 2022 second quarter increased $125 million or 58% to a record $339 million or $5.26 diluted earnings per share compared to $214 million or $3.57 diluted earnings per share for last year. The increase in income was predominantly driven by strong growth in net interest income, which was fueled by substantial asset growth of $19 billion on last 12 months, as well as the rise in interest rate and the utilization of the excess cash.
Now let’s take a closer look at deposits. Given the dramatic rise in interest rates, the deposit environment was particularly challenging and as fully anticipated we still have decreased in most of our deposit related businesses. Total deposits decreased $5 billion or 5% to $104 billion this quarter, while average deposit grew $1 billion. This quarter’s decline was driven by one, the New York Banking Teams, which put down $2.4 billion, which included — that included $1.3 billion decline in 1031 transaction balances. So that was 1031 transaction balances of $1.3 billion that were included as part of the $2.4 billion.
Two, Digital Asset Banking Team, which also declined $2.4 billion. Conversely, off balance sheet treasuries increased $1.5 billion in that space. Three, the West Coast Banking Team declined $427 million, includes one client who purchased $450 million in treasuries. And four, the Fund Banking Division was down $414 million.
Non-interest bearing deposit decreased $5.3 billion to $41 billion. During the quarter four large escrow outflows made of $1.6 billion of the decline in DDA and were not related to interest rates. Just these four accounts alone make 30% of the decrease in DDA. Despite this decline, non-interest bearing deposit stood at a relatively high 40% of total deposits. We can give you a color later on in the Q&A.
Since the end of the 2021 second quarter deposits increased $18.6 billion to 22% and average deposits increased $31.5 billion. Our loan to deposit ratio now stands at 69%, which is up from 64% one year ago. On the digital front, despite the significant decline in the value of crypto currencies and the latest digital winter it’s quarter, our deposits were only down $2.4 billion, which includes the movement of $1.5 billion to off balance sheet treasuries. This resulted in minimal impact of $900 million. So analyst say there is still confusion as to what to do in this — to what we do in this space. To make it clear, we hold no crypto currencies. I’ll say that again, to make it clear we hold no crypto currencies. We are taking U.S. dollar deposits. Our clients use our payments platform, Signet to transact in real-time, 24×7 by 365. Trust is all about the future of finance if you believe is the blockchain technology, which other ecosystems will adopt over time.
To wrap up our narrative on deposits. This was only the second quarter of negative deposit growth in nearly 15 years. We were not surprised at all as we knew there were so excess deposits, or I like to call it a fluff. Although, the deposit environment will remain difficult through the State’s recent policy of quantitative tightening, we continue to focus on growth. For example, the EB-5 probes, new legislation in Washington has been passed, which reauthorizes the EB-5 program for a period of five years. It is an understatement to say we have a significant pipeline. I’ll say that again, it is an understatement to say we have a significant pipeline for EB-5. Our special mortgage banking solutions team has many new clients in their pipeline. A newest addition, the Healthcare Banking and Finance Team will help to raise deposits.
The Fund Banking Division has firmly established their position as one of the leading lenders in their space and our emphasizing deposit growth respectively the funded business. The Fund Banking Division is expected after four years, which next month they’ll be here four years, was expected to fund themselves a 100%. They’re below 10%. And so, we expect that they’ll continue to emphasize the deposit growth as they have to start to do so this month. And we’re actually hired 11 new teams coupled with the 127 existing teams who are all highly incentivized to grow core deposits.
Now, I’d like to turn the call over to Eric.
Eric Howell
Thank you, Joe and good morning, everyone. I’d like to turn our attention to our lending businesses, where we had our second strongest quarter ever. Loans during the 2022 second quarter increased $5.6 billion or 8% to $72 billion. For the prior 12 months loan grew $17 billion or 32%. The power of diversification continues to take hold with our lending businesses, with numerous teams contributing to our growth this quarter. The Fund Banking Division, once again, led the charge with growth of $3.5 billion, followed by $1.3 billion in growth from our CRE banking team.
Our newest group, the Healthcare Banking and Finance Team hit the ground running with $80 million in loans in their inaugural quarter. The corporate mortgage finance team had another solid quarter with $271 million in growth. Additionally, we saw deposit contributions from all our other lending businesses, including $591 million out of Signature Financial, $34 million from our Venture Banking Group, $145 million from East Coast C&I and $93 million from our West Coast C&I businesses. Also important to note the single $100 million loan exposure collateralized by Digital Asset at our books paid off fully, and our loan balances are now zero in that space.
Turning to credit quality. Our portfolio continues to perform well. Non-accrual loans further declined to $168 million or 23 basis points total loans compared to $178 million or 27 basis points for the 2022 first quarter.
Our 30 to 89-day past due loans increased to $152.4 million or 21 basis points. It is important to note that $91.8 million of the 30 to 89-day past due were primarily caused by documentation delays and are now current. Excluding these, our 30 to 89-day past dues would’ve been well within our normal range at $60.6 million or 8 basis points of total loans. Our 90-day plus past dues were $49.1 million or 7 basis points of total loans. Excluding two loans for $23.9 million that have been approved for refinancing, but are still in process, as well as $15.6 million alone delayed due to documentation and are now current, 90-day plus past dues would’ve been $9.6 million or just 1 basis point.
Net charge-offs for the 2022 second quarter were $19.7 million or 11 basis points of average loans compared with $17.8 million for the 2022 first quarter. The provision for credit losses for the 2022 second quarter increased to $4 million compared with $2.7 million for the 2022 first quarter. This brought the Bank’s allowance for credit losses to 62 basis points, and the coverage ratio stands at a healthy 266%.
I’d like to point out that excluding very well secured fund banking capital call facilities and government guarantee PPP loans, the allowance for credit loss ratio would be much higher at 109 basis points.
And now onto the expanding team front where we continue to realize success with one of our strongest quarters of team hiring ever. As mentioned earlier, the Bank onboarded 11 private client banking teams, including five in New York and six on the West Coast second quarter. And our pipeline for additional teams this year remained strong. This quarter also marked the launch for our newest National Banking Practice, the Healthcare Banking and Finance Teams with the onboarding of 10 colleagues to provide lending services and garnered deposits in this space. In order to support our team expansion, we continue to hire extensively throughout our operations and support infrastructure so that we can best serve our clients’ needs.
At this point, I’ll turn the call over to Steve and he will review the quarter’s financial results in greater detail.
Stephen Wyremski
Thank you, Eric and good morning, everyone. I’ll start by reviewing net interest income and margin. With our continued emphasis on cash deployment and higher prevailing market interest rates, our net interest income reached $649 million for the second quarter, an increase of $76 million or 13% in the 2022 first quarter and an increase of $192 million or 42% from the 2021 second quarter.
Net interest margin increased 24 basis points to 2.23% compared with 1.99% for the 2022 first quarter. The increase in asset yields are outpaced the rise in our cost of funds, which led to significant margin expansion during the quarter. We expect this trend to continue in the quarters ahead.
Let’s look at asset yields and funding costs for a moment. Interest earning asset yields for the 2022 second quarter increased 44 basis points from the linked quarter to 2.66%. The increase in overall asset yields was crossed all of our asset classes and was driven by higher rates as well as the deployment of cash into higher yielding loans.
Yields on the securities portfolio increased 29 basis points linked quarter to 1.90%, given higher replacement rates and slower CPR speeds on our mortgage-backed securities portfolio. Additionally, our portfolio duration increased to 4.43 years due to the higher interest rate environment.
Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 20 basis points to 3.53% compared with the 2022 first quarter. Again, the increasing yield is driven by our portfolio repricing higher. Since over 40% of our loans are reset within 90 days or less, we expect loan yields to continue to increase significantly as short-term rates move higher this year.
Now looking at liabilities. Given the 150 basis points of Fed moves since March, our overall deposit costs this quarter increased 22 basis points to 40 basis points. The pace of the deposit repricing is in line with our expectations. During the quarter, average borrowing balances decreased $554 million, and the cost of borrowing is decreased by four basis points to 2.81%. The overall cost of funds for the quarter increase 21 basis points — 46 basis points driven by the increasing deposit costs.
As we have pointed out the Bank is significantly asset sensitive. The Bank’s focused on growing floating rate loans, which now comprised 52% of our loan portfolio, coupled with our core deposit funding, make us extremely well-positioned to continue to take advantage of a rising rate environment.
Onto non-interest income and expense. With our plan to grow non-interest income, we achieved growth of $14.3 million or 61% to $37.7 million when compared with the 2021 second quarter. The increase was generally across the board, as many of our fee income initiatives continue to take hold.
Non-interest expense for the 2022 second quarter was $210 million versus $172 million for the same period a year ago. The $38 million or 22% increase was principally due to the addition of new private client banking teams, national banking practices and operational personnel, as well as consulting and professional fees related to various new projects, which we’ve initiated to support the growing needs of our clients. Despite a significant staff hiring and operational investments, the Bank continues to gain operating leverage, and as a result, our efficiency ratio improved by 30.6 — improved to 30.6% for the 2022 second quarter versus 35.8% for the comparable period last year.
Turning to capital. Our capital ratios remain well in excess to regulatory requirements and augment the relatively low risk profile of the balance sheet, as evidenced by a common equity Tier 1 risk-based ratio of 9.96% and total risk-based ratio of 11.85% as of the 2022 second quarter.
Now, I’ll turn the call back to Joe. Thank you.
Joseph DePaolo
Thanks Steve. This quarter, we continue to perform at an elevated level despite the uncertainty in the financial markets. We achieved a return on common equity of 17.9%, very strong quarter for earnings. We saw substantial loan growth of $5.6 billion, which ranks as the second strongest growth quarter in our history and contribution spend all of our lending businesses.
Our revenue growth continues to drive our efficiency ratio lower, which improved to 30.6%, even with higher than expected expense growth. We know that many of you are thinking, the efficiency ratio got better. It begs the question, are we investing enough to support our growth? And we are. For instance, this quarter we spent more than we had budgeted to strengthen our support areas, products and capabilities, which will ultimately drive future net income. The fact, we always seem to exceed the budget due to growth.
We continue to pave the way for future growth through the onboarding of new teams, such as the Healthcare Banking and Finance Teams as well as the addition of 11 teams across our New York and West Coast footprint.
Today, we continue to be stimulated by the enormity of opportunities to grow our franchise, for which we will continue to take advantage and remain focused on the long-term. We are not distracted by the uncertainty in the markets in the near-term because we continue to rely on a conservative relationship based model, which has proven to be durable and tends to thrive in times of stress.
During periods such as the Great Recession and now — as well as the COVID pandemic, we find clients rely on their bank is more so and now that Signature Bank has diversified across many different businesses and is not relied on any single one area, we feel we are better positioned than ever before. And like I said earlier, it is not a sprint. It is a marathon. We are patient and we grind on every single day.
Now Steve, Eric and I are happy to answer any questions you might have. Gretchen, we’ll turn it back to you.
Question-and-Answer Session
Operator
The floor is now open for questions. [Operator Instructions] Our first question is coming from Abraham Vilas from UBS.
Vilas Abraham
Hey, everyone. Thanks for the question. So, at the time of the mid quarter update, digital asset deposits were about flat, I believe. But they ended the quarter down $2.5 billion and that seems to be the main driver of some of that overall change to deposit balances since then. Can you anything talk about what changed there? And does it have anything to do with some of the crypto lending platforms and some of the funds that we saw in that space coming under stress over the last several weeks?
Joseph Depaolo
A large part of this is — the decrease was $1.5 billion of the $2.4 billion of the total decrease for the quarter, a client in the digital world transferred $1.5 billion into treasuries. That was a large part of the decrease. It took money out of the balance sheet side and put out balance sheet through the purchase of treasuries.
Vilas Abraham
Okay. Okay. And then, just kind of overall deposit trends. It sounds like there are opportunities ahead for you guys with the pipeline you mentioned around EB-5. So, from here on out, do you feel like it’s going to be net inflows and deposit growth? Or could there — could there still be some volatility for the rest of the year here to the downside?
Joseph Depaolo
There is always — there is always choppiness, but we feel really good, because we not only have EB-5, we believe we have the best team for EB-5. And it’s gotten a little bit more complicated, which may remove some competitors. And we have an incredibly strong pipeline, just in a manner [indiscernible] in the third quarter, fourth quarter or first quarter of next year, but we’re expecting them to come in. And then our special mortgage solutions team has a very strong pipeline. They have a very strong pipeline. Along the loan lines of whatever they had in the last few years, it’s better than has been. So, we’re confident there. And then the 11 teams that we brought on, in addition to the 120 plus teams we have, we expect deposits to come there. So, we’re feeling very good about that.
And then what happened this past quarter was we had a number of escrows needs and the number of 1031 deposits needs. So there were a lot of one-offs. For instance, we had in DDA, $1.6 billion of the $5.3 billion were in four transactions. And so, $1.6 billion leaving in four transactions is pretty significant. And the clients didn’t leave, we set the transactions they had came to fruition.
Vilas Abraham
And any of those escrows come back later in the year? Or are they–?
Joseph Depaolo
For instance, one was a transaction of $140 million that one will come back, but the company and more firms that we deal with constantly have the transactions that flow in and out. We have a bankruptcy of $250 million need. And again, that happened in and out. It just happened that one large one left. We had a pension distribution under the American Rescue Plan where under-funded pensions were provided money by the government to shore up pension. We had a distribution of $550 million. And then we had a quarter order distribution of $650 million. So, those are things that occur throughout the year. It just so happened that there were four large transactions that occurred all at once.
Vilas Abraham
Got it. Okay. And then just on expenses, if I could squeeze one last one in here. You guys have been pretty straight down the fairway relative to your guide for several quarters now. Q2 came a little bit on the high side, obviously, done a great job hiring and executing growth in that way. So, just — I mean, just wondering just from here, drop back to that mid to high teens, I believe, year-on-year, growth rate that you’ve been talking about? Just what’s the trajectory from here?
Stephen Wyremski
Sure. So, I think we’ll be in the same range in the next few quarters, which is the low 20% range. Quite frankly, just given the new product initiatives that we — or some new projects that we started, entering into this quarter to bring some products and services to our clients that they were demanding as we continue to bring on new teams, we continue to expect to do that over the course of the coming quarters. But quite frankly, given our operating leverage that we continue to gain and the fact that we improved our efficiency ratio, we still expect to maintain this low level efficiency ratio given our asset sensitivity. So, we feel really good about where we are.
Operator
And our next question comes from Dave Rochester from Compass Point.
David Rochester
Hey, good morning guys.
Joseph Depaolo
Good morning, Dave.
David Rochester
Just wanted to get a sense for which customer segments drove that decline in the digital asset deposit space. Do you guys have the breakdown of that bucket per customer type for all those segments you talked about before? That’d be great.
Stephen Wyremski
Sure, Dave. So, digital asset exchanges, they were down about $1.8 billion. Our stablecoin shares were down some $395 million. Our OTC debts and institutional traders were down about $100 million, and then our blockchain tech and digital miners were down about $40 million.
David Rochester
Got it. So, that — the $1.5 billion transfer came out of the exchanges, I guess.
Stephen Wyremski
That’s right. Yeah.
David Rochester
Okay. And I was hoping you could just give an update on where deposit levels are today in July in that Digital segment and for deposits overall, if you have any of that. It sounds like you’re really positive on the EB-5 going forward. The mortgage team, it sounds like it has a strong pipeline. Are you guys expecting deposit growth in general for the back half of the year at this point?
Joseph Depaolo
Well, we have — all the things in place. We mentioned the EB-5 and special mortgage banking solutions. And we — also to add the Fund Banking Division, we expect that after four years to be self funding and they’re funding about 4% right now. They’re going to make a concentrated effort in the second half of the year. Now that they are one of the leading Fund Banking teams in the country in the top five or so. On the lending side, we want them to be more on the top performing teams on cost sides. So that goes up. So, all the pieces are in place. We just have to execute.
David Rochester
Got it. And any update on deposit balances at this point in July, in 3Q?
Joseph Depaolo
Too early in the quarter.
David Rochester
Okay. And would you — yeah. No, I got you. And would you be able to give the spot rate on deposits at the end of 2Q? And then what you’re seeing in terms of new loans and — or new loan yields and securities purchase rates at this point? That would be great.
Stephen Wyremski
Sure. So, I’ll start with securities. We are in 3.75% to 4% range on new purchases. CRE is at about 5.25%. And I believe you also asked on the deposit spot rate and that was 67 basis points to start July.
Operator
And our next question comes from Steven Alexopoulos from JP Morgan.
Steven Alexopoulos
Hey, good morning everyone.
Joseph Depaolo
Good morning, Steve.
Steven Alexopoulos
I wanted to start first so, on the deposits that you just called out from the exchanges, the decline of $1.8 billion, and I hear you on the larger transfer. But as we’re all starting to learn about this business and how it impacts your company. So, if we think about crypto prices declined in the quarter. Volumes were up a bit. Walk us through how that drove deposit outflows for you guys, right? Are the exchanges just looking for a higher yield than you’re willing to offer, so they are moving to alternatives? Or are they seeing deposit outflows themselves. And because of that, you’re seeing deposit outflows, hoping you could connect what’s happening in their business to what’s happening in your business.
Eric Howell
It’s kind of tough to answer, Steve. Certain — we saw a 65% decline in the price of Bitcoin and that we were hardly down, not even 10% in deposits in that space. So, clearly, there are people leaving that space and therefore, deposits leaving. That was some of the headwinds. As we talked about $1.5 billion in off balance sheet, right? Off balance sheet alternatives for yields are certainly there. So that’s going to pressure us a bit. So, we’re seeing people look for more yields, looking at off balance sheet alternatives, coupled with people exiting the space a little bit. But I think given the dramatic decline in values, we’re pretty pleased with the fact that we only saw less than 10% outflow in our deposit base there.
But look, I mean, we’re still — it’s still probably going to be a headwind for a little while. It’s very choppy in that space. Digital winter hasn’t quite gone away yet. Although, we are starting to see the value of Bitcoin to firm up a little bit off of the close. So, it could be a positive as we look out over the quarter. But right now, we anticipate that will still be a headwind.
Steven Alexopoulos
And Eric, when you say that people are exiting the space, are you suggesting your own digital asset customers, they left the space. And maybe you can give us an update of where you ended the quarter? I think you recall you are just over 1,200 last quarter.
Eric Howell
Well, clients were up 121 clients. So, we had a very good quarter there. We are at 1,323 in total. I think, we’ve got strong — it was our best transfer volume over $254 billion. So, it was a really strong quarter from a client acquisition standpoint. So, we’re seeing more and more people come into the space, which will bode well. We onboarded a few more exchanges that have met to move over their relationships, so that will bode well for us in the future also. But, clearly, people — deposits have exited and have exited to a pretty small extent though when you think about it, Steve, like I said, given the value decline there.
Joseph Depaolo
There were two exchanges, as Eric mentioned, was starting on July 29. We had acquired then these clients in the first quarter, but it took a while to get them on board and they’ll be starting July 29. So that bodes well for us. We’re adding on those two exchanges. And we’re adding another exchange this third quarter now.
Steven Alexopoulos
Okay. That’s helpful. And on the balance sheet growth, we know you funded quite a bit of the growth this quarter with cash. But first, from like a gross view, do you still think that $4 billion to $7 billion of loan and security growth, is that intact? And you’re getting a lot of question on deposits. Do you think this quarter is a bottom in deposits? Or could we actually trend lower and fund even more of that asset growth from cash as we move into 3Q?
Joseph Depaolo
Well, we’d like to fund our growth through deposits. We’re guiding now instead of $4 billion to $7 billion on loans and investment securities, the growth would be between $1 billion to $3 billion. The reason why we’re doing that is the uncertainty with the Fed actions. We’re not sure how much deposit activity is going to be out there with what the Fed doing to continue tightening. And so that’s going to ask us — that’s going to allow us to be cautious. We don’t want to get into a situation where we’re not funding with deposits. So, we’re going to slowdown the growth on the interest ending asset size of $3 billion — $1 billion to $3 billion. And to assure that we’ll do it with deposit growth, not anything else.
Operator
Our next question comes from Casey Haire from Jefferies.
Casey Haire
Yeah. Thanks. Good morning, guys. I wanted to touch on deposit pricing. You guys have talked about a 40% deposit beta through the cycle. I’m calculating in the low 30%s after the second quarter here. Do you — just give us some updated thoughts on if you — whether or not you still feel comfortable with that 40%?
Stephen Wyremski
Yes. I think, right now, we’re at 34% as of the end of the quarter from a beta standpoint, and we continue to expect that. I mean, that’s right where we thought we would be at this point. And we continue to expect that to trend upward at this point into the low 40%s.
Casey Haire
Okay. Very good. And just following up on the new asset guide of $1 billion to $3 billion. What will be — I mean, I’m assuming that, obviously, the deposit growth is still choppy. The outlook there. But is that $1 billion to $3 billion — are you comfortable that you can grow that without using borrowings, meaning it will be dollar for dollar funded with deposit growth?
Joseph Depaolo
That’s the plan. That’s what we’re planning on.
Casey Haire
Okay.
Eric Howell
We think we’re at or near on deposit. Hopefully, we have an onboard trajectory for there. It’s got to be choppy [technical difficulty] quantitative tightening, it’s going to be difficult for us to fight through, but we think to well. But that — the plan is to fund that growth in deposits.
Casey Haire
Okay. And just the cash position at — down to a little under $15 billion. Is that — that’s roughly 13% of the balance sheet. Is that kind of a floor for you guys? Or is there a little bit more room to fund out of that position as well?
Stephen Wyremski
There’s a little bit more room where we can run at or around 10% of total deposits. So, we still have excess cash that we’re holding.
Casey Haire
Okay. Very good. And just last one for me and apologies if I missed this on the expense side. What specific — is there a specific client base that is driving this expense pressure? And then, is there any — was this at all motivated by regulatory pressure?
Stephen Wyremski
No, not too much on the regulatory pressure. I mean, we certainly have spending in there for resolution planning, et cetera, but relatively manageable. It’s really about client product offerings and talking about client base, I mean, some of the new teams and groups that we’ve added such as commercial mortgage finance team, we’ve done a little bit to spend there from an API standpoint to improve processing, collateral management. And from a West Coast standpoint, integrating API and technology for those clients to continue the growth there has really been the focus of these new projects.
Casey Haire
Great. Thank you.
Joseph Depaolo
Thank you.
Operator
The next question comes from Ebrahim Poonawala from Bank of America.
Ebrahim Poonawala
Hey, good morning.
Joseph Depaolo
Good morning, Ebrahim.
Ebrahim Poonawala
So, I guess, just following up on some of these questions on you and Eric. On deposits, I think the expectation will be — and I heard everything on EB-5 and the cross currents there. But given what we are seeing with industry-wide crypto deleveraging, I think the sense will be we probably do see deposit outflows at Signature for the — in the near-term. Just talk to us when we look at the loan to deposit ratio at 70%, how do you think about this? Like we’ve seen this in the past, be over 90%.
I’m just wondering why constrained asset growth because of funding. Or are you not seeing as attractive opportunities on the asset side also? Would love to sort of get context to why you’re ratcheting down asset growth vis-a-vis funding?
Joseph Depaolo
It’s not vis-a-vis funding. That’s part of it. The other part is the ratio of loan to deposit. We don’t want to get into a situation where we — above the amount that we’re comfortable with. And we don’t necessarily devote what that amount is, but we don’t want to get anywhere near it. So, we are being cautious, because this is unprecedented times where rates are being increased, defense fund 75 basis points at a time. And couple that with the quantitative tightening, it’s unprecedented and it could make it tough on the deposit side. So, we’re just being cautious. 1% to 3% doesn’t mean that we’ll stick with 1% to 3%. We’re just saying that we give that guidance for the third quarter and fourth quarter. If you go back to 4% to 7%, it’s just not — we don’t feel comfortable in the short-term.
Ebrahim Poonawala
Okay. Thanks for that. And I think you mentioned, Joe, earlier that Fund Banking was about 10% deposit for loans. I’m just wondering in a world where deposits are just tight across the system, how do you have those clients bring in more deposits at this stage? I’m just wondering, is it realistic that we see a big contribution from Fund Banking. And what would drive that and to bring those deposits into Signature given that it’s not happened in the last four years?
Joseph Depaolo
Well, they were concentrating on developing the lending side. They wanted to — we kind of took our eye off the ball as well. They are at 4% right now. And if they go to 10%, not even having to be 100, you go to 10%, that’s an extra $2 billion — $2.3 billion in deposits. So, you really — we’re concentrating extensively on deposits. And now they are in the second half. So, we expect that there will be some growth there that we didn’t have in the past four years.
Ebrahim Poonawala
Got it. And I guess, one last question maybe for Steve or Eric. You don’t give margin guidance, but I think given just the moving pieces when we think about spread revenue, like — where do you see NII moving — think about third quarter or maybe as we exit fourth quarter of this year, it consensus about high 700s, is that realistic? Just how do you see it? Would love any perspective there?
Stephen Wyremski
Yeah. So, unfortunately, it’s really difficult to say and guide specifically given our asset sensitivity. We do expect to continue to see expansion, just a degree based upon impact of quantitative tightening, as well as the magnitude and frequency of Fed rate hikes, it’s just too difficult and too many different scenarios to give specific guidance there. We do expect meaningful expansion. It should be significantly tighter.
Ebrahim Poonawala
So — and is it safe to assume like we saw NII move up about $75 million sequentially given — Steve, as you mentioned, the rate hikes, we should see an even greater increase in NII in terms of the third quarter reset and potentially again in the fourth quarter, is that reasonable?
Stephen Wyremski
Sorry, that’s hard to say. There’s a lot that goes into that. We expect that we will have a meaningful expansion.
Ebrahim Poonawala
Got it. Alright. Thanks for taking my questions.
Joseph Depaolo
Thank you.
Operator
Our next question comes from Manan Gosalia from Morgan Stanley.
Manan Gosalia
Hi. Good morning. A couple of questions on the loan growth side. So, you brought on 11 new teams. You said you have a pretty strong pipeline there as well. And I think you’ve done this successfully for several quarters now. But I was wondering what’s your appetite to continue doing that at the pace, particularly given that the headwinds that you mentioned on the deposit side?
Joseph Depaolo
It’s all opportunistic growth. The teams present themselves. And we think they are good teams. The revenue producing teams will bring teams we will bring them on board. It won’t affect how we feel about expense. I think, I’ve said many times over the last few years — not the last few years, since the beginning, that if our expenses went up to 30% and they were all based on — we brought on a significant number of teams, we would have no problem doing that because the revenue follows quickly and it’s opportunistic.
I think that if we did an acquisition, people would be less concerned about the expense for this acquisition. While we’re doing an acquisition, utilizing capital better than if we did an acquisition, we’re doing an acquisition of people that generate revenue. So, if we find the teams, we’ll hire them. If we don’t find any teams, then we won’t have the expense, but we don’t have the revenue. So, therefore, we don’t control the expense based on the number of teams.
Manan Gosalia
But it sounds like if the opportunity is there and presumably there might be more opportunity as the overall environment slows that you’d be willing to go in and get new teams on board?
Joseph Depaolo
Yeah. Absolutely.
Manan Gosalia
Again — and then — sorry, go ahead.
Joseph Depaolo
That’s what we’ve done for 21 years. Everyone has this three-year, how much did we — how many teams do we project that we’re going to have next year. In the first 10 years, I think Eric and I would say that we would budget for four teams with three to five teams. And then, we go out and hire 12 or 13. And then, the year that we said three to five, we end up hiring three. It really depends on what opportunities present themselves. That’s how we’ve been running the organization.
Manan Gosalia
Great. That makes sense. And then, I was just wondering if you could give us an update on Fund Banking and the impact on demand that you’re seeing from — just given higher rates and lower public market valuations. I think, you saw some really nice growth there this quarter of about $3.5 billion, despite what the market is looking like. How are fund managers approaching the current market environment? And what are you hearing from them?
Joseph Depaolo
What we’re hearing from them is that — we hired the number one and the number two the person in Fund Banking from four or five organizations, and they are continuing to bring all of their clients’ health. So, if we hires, we get bigger. We’re still acquiring clients at the same rate that we started in the first year, since now in the fourth year. So, there’s still opportunities. We’re just slowing it down a bit, so we can make sure that we fund new deposits, but the opportunities seem to be as great as they were four years ago.
Manan Gosalia
That’s great color. And then, maybe just a quick clarification question. You mentioned that the $100 million in crypto back loans paid off fully. Does that mean you have no exposure at all on the asset side to participants in the crypto industry?
Stephen Wyremski
We have a very de minimis exposure there. Some letters of credit that are fully cash secured ACH line, but it’s really de minimis at this point. And we have no loans that are backed by crypto currency.
Operator
And our next question comes from Jared Shaw from Wells Fargo.
Jared Shaw
Yeah. Thanks.
Joseph Depaolo
Hi, Jared.
Jared Shaw
Just a couple of follow-ups. Maybe first on that Bitcoin loan. Does that mean that you’re not interested in that product anymore at that paid-off at your encouragement? Or is that just a paid-off, and you’d still be open to doing lending secured by crypto?
Joseph Depaolo
We didn’t ask the client to pay-off. The client paid-off it their own. I would say — right now, we’re paused. It’s probably the best word to use, pausing, but to see what happens in the near-term since we’re in the year crypto winter. We still have a product, and we saw clients that want it, but I would say pausing is the best word to use.
Jared Shaw
Okay. That’s great color. Thanks. And then, Joe, you had earlier said you thought that there was some fluff in the deposit base and weren’t expect — weren’t surprised to see some of that go. If we look at where we are today with the pulldown in DDAs this quarter, do you think that you could see more drawdown in DDA if there’s more fluff? Or that it would be more interest rate sensitive customers have shifted to an interest rate product, and the beta will come more from paying up for those deposits versus a deposit remix?
Joseph Depaolo
Well, I’ll tell you our feeling is that DDA — our history is between 25% and 35%. And so, we expect that somewhere on the line that the DDA will reduce, that could be some fluff, or it could be just some shifting from DDA to money market, because the interest rate is appealing when it wasn’t appealing just a few quarters ago. And so, that will allow clients to get interest. I think that being between 25% and 35%, this will be fine, but we’ll continue to have client growth. The one thing we haven’t seen is a reduction in client growth. In fact, we’re bringing on 500 more clients a quarter now, more than we had in the past. And that’s because of all the teams that we have. But it takes a while when those clients open up the account, it takes a while for funding –excuse me — a quarter or two before they fund. So, it bodes well that we’re taking 500 new clients more than we had in our growth in the past history.
Jared Shaw
Okay. Thanks. And then just finally for me. As we look at the allowance for credit loss or the allowance for loan loss as a ratio, that keeps coming down, are we — is this sort of a good floor for this as a ratio? Or I guess — how should we think about the CECL modeling and some of the underlying macro weakness versus the strength in your portfolio?
Stephen Wyremski
Yeah. Sure, Jared. So, really, our approach over — since the adoption of CECL has really been a prudent approach. I mean, we have always had positive provisions whereas in the last year or so other institutions were reporting negative provisions. Certainly, we’re utilizing our reserves where we have them set aside against specific loans for charge-offs. We have continued to provide from a macroeconomic standpoint, we actually, this quarter, are using a slightly more pessimistic — we use Moody’s, and we’re using a slightly more pessimistic scenario than the Moody’s baseline suggests.
We’re using one that has a more aggressive interest rate path, slower GDP growth and it takes information — macroeconomic assumptions from various constituents. And therefore, given our prudent approach to reserving, including this quarter we’re using more pessimistic scenario in combination with our client base relationship model. We feel very good about where we’re positioned. Though, if we enter into some instance where macro deep recession, certainly, we’ll see build there, but we feel very good about where we are positioned today from an allowance standpoint.
Jared Shaw
Thanks. Thank you.
Joseph Depaolo
Thank you.
Operator
Our next question comes from Matthew Breese from Stephens Inc.
Matthew Breese
Good morning.
Joseph Depaolo
Good morning.
Matthew Breese
Can you talk a little bit about the outlook for loan yields as Fed fund hikes are fully absorbed? I guess, I was a little bit surprised by the relatively similar moves in deposit costs and loan yields this quarter versus the interest rate sensitivity of the bank. So, I was hoping for some more color and near-term expectations for the loan yields in 3Q, 4Q, and what kind of rate assumptions you have in there?
Stephen Wyremski
I mean, right now, we’re — I think 45% of our book reprices within 90 days. So, as we saw this quarter, I mean, the focus thus far has been on our deposit cost. But as we mentioned in the prepared remarks, our asset yields were up 44%. And given that repricing, we would expect continued significant expansion into the third quarter — third and fourth quarter of the Fed hikes. I mean, in particular, the short end of the curve is what’s driving our Fund Banking portfolio, which comprise a significant portion of that 45% that’s repricing, so we should continue to see expansion there.
Matthew Breese
Okay. And then, back to asset growth, can you just talk about the pipeline and where you expect loan growth to come from? Obviously, what segments are you looking to slowdown or they are supposed to be or you expect there to be runoff?
Joseph Depaolo
Two areas we expect to slow, but we’re focusing our attention to slow is commercial real estate in Fund Banking, because they are the two largest by far. All the others that have come onboard recent and including the Healthcare way on to — let them grow because they’re the newest and they have the clients that they want to bring over. So, we’re not going to slowdown there. We’re going to let them do what that they do. And as I said, we’ll slowdown the two biggest segments. But again, if we get deposit growth of $10 billion — and we utilize that $10 billion to fund — to fund loans. So, it depends on where we end up with the growth.
Matthew Breese
And I appreciate the hesitancy on providing color on deposit growth. I expect that to be more of a near-term issue. If we were to extend the timeframe and look out 12 to 18 months, just given you noted that all the pieces are in place for deposit growth, could you give us some idea over the next year or 18 months to the extent you expect to see, call it, average deposit growth?
Joseph Depaolo
Well, if we feel that it’s a normal, whatever normal is, we feel insurable. We could probably go back to the 4 to 7 per quarter. That [indiscernible]. We just don’t know.
Eric Howell
We’ve never really given any guidance around deposit growth. It’s very difficult for us to guide on that. That’s why we talk about asset growth — can we see a pipeline on loans we know that we can ratchet up the securities purchases if we see the deposits come in. But for us to predict the positive growth is near or possible.
Matthew Breese
Got it. Okay. And then just as credit for the entire banking universe becomes more of a forefront issue. I was hoping you could just give us an update on two portfolio segments. The first one is the specialty finance book. Just curious what types of equipment are in there and being underwritten, historical loss content? Any recent updates you provide on health of the book, or signs of erosion. And the second one is the New York City office book. Just again, I would appreciate the size, LTVs and any notable changes you’ve seen in performance there?
Eric Howell
So, the specialty finance book is really made up of revenue producing collateral. It’s fair to extremely low through all cycles, that we’ve been through a number of cycles now in that portfolio. I think peak losses — prior to that team coming to Signature Bank was at like 1.25%. Through the financial recession through the pandemic, we’ve seen losses significantly muted from that higher level. So, I don’t think we’ve reached anywhere near 1%, even right, Steve?
Stephen Wyremski
Yeah.
Eric Howell
So, I have to say. It’s a very low level of losses because of our focus there of really lending on revenue producing collateral. So, it’s a lot of trucks, trailers, buses, heavy metals, yellow names as they call. And we really don’t — we haven’t seen any degradation there in credit quality. And we feel very comfortable about how that will perform if we do head into a recession or a prolonged recession.
As for the office space, again, we’re not really seeing any issues in our office portfolio either. At this point, we have no non-accrual office loans. We do anticipate that it’s going to be tough over the next several years. But given the relationship based nature of our lending in that space, we think again that any level of losses will be pretty muted. And if you look at our provisioning, that’s where we really have put our provisions in the office and in the retail space. We’ve got about 2% in provisions in those two sectors. So that’s where we do think that we’ll see some pressures. But as of now, we’re not seeing any at all.
Operator
Our next question comes from Bernie Von Gizycki from Deutsche Bank.
Bernard Von Gizycki
Hi. Good morning. So, my first question on the crypto deposit portfolio. So, currently, I believe most of this funding has been deployed, given the uncertainty in the crypto markets. I know you don’t charge fees, generally. And we just saw that you reduced the overall cash levels down to about $15 billion. I’m not sure if I missed this, but how much cash are you holding against these deposits now? I’m wondering, could you just walk us through how you can monetize this positioning like over time?
Eric Howell
We really haven’t disclosed what level of cash that we hold against those positions. Certainly, more cash that we hold against those than we do against other types of deposits. But over time, as we see and have a greater history, certainly, going through this most hard digital winter, as they call it, and we see the deposit behaviors where we’ve seen a significant decline in the value of the crypto currencies on our deposit base was not nearly down as much as the decline in the value. I think that’s going to help us support having to maintain less cash against those deposits over time and will allow us to lend against them. But we need a longer history. And we need to go through more varying cycles before we can start to utilize it more for lending.
Bernard Von Gizycki
Okay. And I was just wondering — this is a follow-up. I know you provided some stats on Signet. I believe the clients are up 121 2Q. And you had the best transfer volume — I think you said over $254 million. I know in the past, you noted a number of ecosystems that could utilize Signet over time. And I understand you want to keep certain details on that for competitive purposes. When you’re just in light of the crypto collapse, could you possibly size what the second biggest ecosystem is on Signet? And then, just how these volumes may compare between crypto and whatever one — is number two?
Eric Howell
I don’t think we’ve sighting these opportunities outside of the digital space are pretty enormous, whether it be payroll, which is a massive part of the economy to trucking, shipping, trading, energy trading. I mean, these are massive ecosystems that we barely, barely scratch the surface on. So, as we’ve said before, Signet is really capturing the power of the blockchain and blockchain technology moving forward. We think that more and more ecosystems are going to embrace blockchain technology. And as they do, we’ve got the platform that can run parallel to the various blockchains that they’ll be putting in place.
Joseph Depaolo
My belief is that the digital world — the digital world crystal, we’re not even being in the top 10 and we will continue — our clients on the payments platform. I think that once everyone understands what blockchain technology is, we want to do for their payment environment that we will be in great shape, because we’re the first ones out of the gate that have done this. And it’s very exciting for us to know that we have blockchain technology that could move payments at a rate far greater and then moving today.
Bernard Von Gizycki
Okay. Thank you.
Operator
The next question comes from Chris McGratty from KBW.
Christopher McGratty
Hey, good morning.
Eric Howell
Good morning, Chris.
Christopher McGratty
Eric, if I think about just the efficiency comments in your prepared remarks — and I take everything you’ve disclosed on the call and just take a step back. Given the size and the growth profile of the company in the regulatory world, how do we think about that 30% and 31% efficiency ratio like cadence from here? Is there pressure on it, because of the investments? Is it you kind of hold serve because of the revenue growth? Like how do we think about that broadly?
Eric Howell
I mean, it’s a great question. I mean, we’re certainly investing significantly, and we saw a 22% increase in our expenses and we expect that, that will continue for quite some time. But fortunately, we’ve got a really powerful earnings story here. We still have significant asset sensitivity, and we expect that, that will play out over the next several quarters. So, there’s going to be tremendous revenue expansion that we believe will more than offset the additional expenses that we’re putting on — and will lead to further efficiencies.
But as Joe said in our prepared remarks, we get the efficiency going down. It’s kind of a big question, are we spending enough — we’re spending enough — we’re spending a tremendous amount to ensure that we’ve got the appropriate systems and platforms and products and services in place to meet our clients’ needs. But the revenue power here is tremendous. It should really further drive down that efficiency ratio.
Christopher McGratty
Okay. Thank you. And then, in the past, you’ve given some comments on — just the cadence of the growth in non-interest income given some of the strategies there. How do we think about the outlook for non-interest income from here? I know you called out a derivative mark-to-market in the quarter.
Eric Howell
Yeah. I mean, we expect that we’ll continue to further drive that north. I think if you look at the trend over the last couple of quarters, I continue — that trend were up a few million quarter-over-quarter. We have a lot of opportunity. There you have [indiscernible] whether it’s foreign exchange, credit cards, some of these projects that we’ve been talking about for a while. A number of the new business lines and initiatives that we brought on board tend to generate more fee income, especially the mortgage banking team amongst others. So, we’ve got some positive fee income movement there. But meaningfully moving that higher as a percentage of overall, revenues has got to be tough just because of how much in net interest income. That growth is a tremendous growth on that front.
Christopher McGratty
Great. Thank you.
Eric Howell
Thank you, Chris.
Operator
This concludes our allotted time for today’s conference call. If you’d like to listen to a replay of today’s conference, please dial 800-839-5128. A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your lines at this time and have a wonderful day.
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