Signature Bank (SBNY) Q2 2022 Earnings Call Transcript

Signature Bank (SBNY)
Q2 2022 Earnings Call
Jul 19, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Signature Bank's 2022 second quarter results conference call. Hosting the call today from Signature Bank are Joseph J. DePaolo, president and chief executive officer; Eric R. Howell, senior executive vice president and chief operating officer; and Steve Wyremski, senior vice president and chief financial officer.

Today's call is being recorded. [Operator instructions] It is now my pleasure to turn the floor over to Joseph J. DePaolo, president and chief executive officer. You may begin.

Joe DePaolo -- President and Chief Executive Officer

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 -- Investor Relations

Thank you, Joe. This conference call and oral statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on 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 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.

Joe DePaolo -- President and Chief Executive Officer

Thank you, Susan. I will provide some overview into the quarterly results, and then Eric Howell, our chief operating 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 was a very strong quarter for earnings, and we saw significant increases to pre-tax, pre-provision earnings, and net income, both of which were records.

We funded our substantial loan growth with the significant excess cash balances we maintained from the $66 billion in deposits that we grew over the last two years. This led to our strongest growth ever in pre-tax, pre-provision earnings at 54% versus the prior year. It is not a sprint. It is a marathon.

We are patient, and we drive hard every single day. Let's take a look at earnings. Pretax, pre-provision earnings for the 2022 second quarter were a record $477 million, an increase of $168 million or 54%, compared with $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 with $214 million or $3.57 diluted earnings per share for last year.

The increase in income was predominantly driven by strong growth in net interest income, which was fueled by substantial asset growth of $19 billion over the last 12 months as well as the rise in interest rates and the utilization of the excess cash. Now let's take a closer look at deposits. Given the dramatic rise in interest rates, the deposit environment was particularly challenging. And as fully anticipated, we saw a decrease in most of our deposit-related businesses.

Total deposits decreased $5 billion or 5% to $104 billion this quarter, while average deposits grew $1 billion. This quarter's decline was driven by: one, the New York banking teams, which were down $2.4 billion, which included -- 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, the 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 teams declined $427 million and included one client who purchased $450 million in treasuries; and four, the Fund Banking Division was down $414 million.

Noninterest-bearing deposits decreased $5.3 billion to $41 billion. During the quarter, four large escrow outflows made up $1.6 billion of the decline in DDA and were not related to interest rates. Just these four accounts alone make up 30% of the decrease in DDA. Despite this decline, noninterest-bearing deposits remain at a relatively high 40% of total deposits.

We'll give you color later on in the Q&A. Since the end of the 2021 second quarter, deposits increased $18.6 billion or 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 cryptocurrencies and the latest digital winter, this quarter, our deposits were only down $2.4 billion, which includes the movement of $1.5 billion to off-balance sheet treasuries.

This resulted in a minimal impact of $900 million. Some analysts 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 cryptocurrencies. I'll say that again, to make it clear, we hold no cryptocurrencies.

We are taking U.S. dollar deposits, and our clients use our payments platform, Signet, to transact in real time 24x7x365. For us, it is all about the future of finance, which we believe is the blockchain technology, which other ecosystems will adopt over time. To wrap up on average 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 still excess deposits or, as I like to call it, fluff. Although the deposit environment will remain difficult due to the Fed's recent policy of quantitative tightening, we continue to focus on growth. For example, the EB-5 program, new legislation in Washington, has been passed, which reauthorizes the EB-5 program for a period of five years.

It is an understatement to say that we have a significant pipeline. I'll say that again, it is an understatement to say we have a significant pipeline for EB-5. Our specialized mortgage banking solutions team has many new clients in their pipeline. Our newest division, healthcare banking and finance team, will help to raise deposits.

The fund banking division has firmly established their position as one of the leading lenders in their space and are emphasizing deposit growth prospectively to fund their business. The fund banking division was -- is expected after four years, which is next month, they'll be here four years, was expected to fund themselves 100%. They're below 10%. And so we expect that they'll continue to emphasize deposit growth as they have just started to do so this month.

And we 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 -- Senior Vice President and Chief Operating Officer

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, loans grew $17 billion or 32%.

The power of diversification continues to take hold with our lending businesses with numerous teams contributing to our growth this quarter. The fund banking division once again led the charge with growth of $3.5 billion, followed by $1.3 billion in growth from our CRE banking team. Our newest group, the healthcare banking and finance team, hit the ground running with $80 million in loans in their inaugural quarter. The corporate mortgage finance team had another solid quarter with $271 million of growth.

Additionally, we saw positive contributions from all our other lending businesses, including $591 million out of Signature financial, $34 million from our Venture banking group, $145 million from East Coast C&I, and $93 million from our West Coast C&I businesses. Also important to note, the single $100 million loan exposure is collateralized by digital assets on our books paid off fully, and our loan balances are now at 0 in that space. Turning to credit quality. Our portfolio continues to perform well.

Nonaccrual loans further declined to $168 million or 23 basis points of total loans, compared with $178 million or 27 basis points for the 2022 first quarter. Our 30- to 89-day past due loans increased to $152.4 million or 21 basis points. It is important to note that $91.8 million of the 30- to 89-day past dues were primarily caused by documentation delays and are now current. Excluding these, our 30- to 89-day past dues would have been well within our normal range at $60.6 million or eight basis points of total loans.

Our 90-day-plus past dues were $49.1 million or seven basis points of total loans. Excluding two loans for $23.9 million that had been approved for refinancing but are still in process as well as $15.6 million of loans delayed due to documentation and are now current, 90-day-plus past dues would have been $9.6 million or just one basis point. Net charge-offs for the 2022 second quarter were $19.7 million or 11 basis points of average loans, compared 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-guaranteed PPP loans, the allowance for credit loss ratio will be much higher at 109 basis points. And now on to 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 start of the quarter, and our pipeline for additional teams this year remains strong.

This quarter also marked the launch of our newest national banking practice, the healthcare banking and finance team, with the onboarding of 10 colleagues to provide lending services and garner deposits in this space. In order to support our team expansion, we continue to hire extensively throughout our operations and support infrastructure so that we can best serve our clients' needs. At this point, I'll turn the call over to Steve, and he will review the quarter's financial results in greater detail.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

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 far outpaced the rise in our cost of funds, which led to significant margin expansion during the quarter. We expect this trend to continue in the quarters ahead. Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2022 second quarter increased 44 basis points from the linked quarter to 2.66%.

The increase in overall asset yields was across all of our asset classes and was driven by higher rates as well as the deployment of cash into higher-yielding loans. Yields on the securities portfolio increased 29 basis points 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 increase in yields was 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 cost this quarter increased 22 basis points to 40 basis points. The pace of the deposit repricing is in line with our expectations. During the quarter, average borrowing balances decreased $554 million, and the cost of borrowings decreased by four basis points to 2.81%. The overall cost of funds for the quarter increased 21 basis points to 46 basis points driven by the increase in deposit costs.

As we have pointed out, the bank is significantly asset sensitive. The bank's focus on growing floating rate loans, which now comprise 52% of our loan portfolio, coupled with our core deposit funding, make us extremely well-positioned to continue to take advantage of a rising rate environment. On to noninterest income and expense. With our plan to grow noninterest 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. Noninterest expense for the 2022 second quarter was $210 million versus $172 million for the same period a year ago. The $38 million or 22% increase was principally due to the addition of new private client banking teams, national banking practices, and operational personnel as well as consulting and professional fees related to various new projects, which we've initiated to support the growing needs of our clients. Despite a significant hiring and operational investments, the bank continues to gain operating leverage.

And as a result, our efficiency ratio improved by -- improved to 30.6% for the 2022 second quarter versus 35.8% for the comparable period last year. Turning to capital. Our capital ratios remain well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet as evidenced by a common equity Tier 1 risk-based ratio of 9.96% and total risk-based ratio of 11.85% as of the 2022 second quarter. Now I'll turn the call back to Joe.

Thank you.

Joe DePaolo -- President and Chief Executive Officer

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 spanning all of our lending businesses.

Our revenue growth continues to drive our efficiency ratio lower, which improved to 30.6%, even with higher-than-expected expense growth. We know what many of you are thinking: the efficiency ratio got better. It begs the question, are we investing enough to support our growth? 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.

In fact, we always seem to exceed the budget due to growth. We continue to pave the way for future growth through the onboarding of new teams, such as the healthcare banking and finance team as well as the addition of 11 teams across our New York and West Coast footprints. Today, we continue to be stimulated by the enormity of opportunities to grow our franchise, 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 when 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 -- and as well as the COVID pandemic, we find that clients rely on their banks the more so, and now that Signature Bank has diversified across many different businesses and has 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 drive hard every single day.

Now Steve, Eric, and I are happy to answer any questions you might have. Gretchen, we'll turn it back to you.

Questions & Answers:

Operator

[Operator instructions] Thank you. Our first question is coming from Abraham, Vilas from UBS.

Vilas Abraham -- UBS -- Analyst

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 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?

Joe DePaolo -- President and Chief Executive Officer

A large part of this 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. So that was the large part of the decrease. It took money out of the balance sheet side and put it into off-balance sheet through the purchase of treasuries.

Vilas Abraham -- UBS -- Analyst

OK. OK. 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 still be some volatility for the rest of the year here to the downside?

Joe DePaolo -- President and Chief Executive Officer

There's always choppiness. But we feel really good because we not only have EB-5, we believe we have the best team for EB-5. And it's gotten a little bit more complicated, which may remove some competitors, and we have this incredibly strong pipeline. It's just a matter of when the dollars come in, the third quarter, fourth quarter, or first quarter of next year, 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 lines of whatever they had in the last few years, it's better than it 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 leave and a number of 1031 deposits leave. 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. It was that the transactions they had came to fruition.

Vilas Abraham -- UBS -- Analyst

And any of those escrows come back later in the year? Or are they --

Joe DePaolo -- President and Chief Executive Officer

Well, they do. For instance, one was a class action of $140 million. That one will come back, but the company and more firms that we deal with constantly have transactions that go flow in and out. We had a bankruptcy of $250 million leave.

And again, that happens in and out. It just happened that one large one left. We had a pension distribution under the American Rescue Plan where underfunded pensions were provided money by the government to shore up pension. We had a distribution of $550 million, and then we had a court 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 -- UBS -- Analyst

Got it. OK. 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 great job hiring and executing growth in that way. So just -- I mean, just wondering, just from here, is it going to 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?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

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.

Dave Rochester -- Compass Point Research and Trading -- Analyst

Hey. Good morning, guys.

Joe DePaolo -- President and Chief Executive Officer

Good morning, Dave.

Dave Rochester -- Compass Point Research and Trading -- Analyst

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.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Sure, Dave. So digital asset exchanges, they were down about $1.8 billion. Our stablecoin shares were down $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.

Dave Rochester -- Compass Point Research and Trading -- Analyst

Got it. So that -- the $1.5 billion transfer came out of the exchanges, I guess.

Eric Howell -- Senior Vice President and Chief Operating Officer

That's right. Yep.

Dave Rochester -- Compass Point Research and Trading -- Analyst

Yep. OK. And I was hoping you could just give an update on where deposit levels are today in July in the digital segment and for deposits overall, if you have any of that. And it sounds like you're really positive on 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?

Joe DePaolo -- President and Chief Executive Officer

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-funded, 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 one of the leading fund banking teams in the country in the top five or so.

On the lending side, we want them to be one of the top-performing teams on cost category side. So that bodes well. So all the pieces are in place. We just have to execute.

Dave Rochester -- Compass Point Research and Trading -- Analyst

Got it. And any update on deposit balances at this point in July in 3Q?

Joe DePaolo -- President and Chief Executive Officer

Too early in the quarter.

Dave Rochester -- Compass Point Research and Trading -- Analyst

OK. And would you -- yep. 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.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Sure. So I'll start with securities. We're 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 J.P. Morgan.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey. Good morning, everyone.

Joe DePaolo -- President and Chief Executive Officer

Good morning, Steve.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Good morning, Steve.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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're moving to alternatives? Or are they seeing deposit outflows themselves and because of that, you're seeing deposit outflows? Hoping you could connect what's happening in their business to what's happening in your business.

Eric Howell -- Senior Vice President and Chief Operating Officer

It's kind of tough to answer, Steve. I mean 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 went off-balance sheet, right? The 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 a 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 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, that will still be a headwind.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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're just over 1,200 last quarter.

Eric Howell -- Senior Vice President and Chief Operating Officer

No. Clients -- we're up 121 clients. So we had a very good quarter there. We're 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 are exiting and have exited to a pretty small extent though, when you think about it, Steve, like I said, given the value decline there.

Joe DePaolo -- President and Chief Executive Officer

Those two exchanges that Eric mentioned are 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 29th. So that bodes well for us.

We're adding on those two exchanges. And we're adding on another exchange this third quarter now.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. 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?

Joe DePaolo -- President and Chief Executive Officer

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 slow down the growth on the interest-earning asset side to $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 -- Jefferies -- Analyst

Yeah. Thanks. Good morning, guys. I wanted to touch on deposit pricing.

You guys have talked about a 40% deposit beta through the cycle, calculating in the low 30s after the second quarter here. Do you -- can you just give us some updated thoughts on if you -- whether or not you still feel comfortable with that 40%?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

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 40s.

Casey Haire -- Jefferies -- Analyst

OK. 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?

Joe DePaolo -- President and Chief Executive Officer

That's the plan. That's what we're planning on.

Casey Haire -- Jefferies -- Analyst

OK.

Eric Howell -- Senior Vice President and Chief Operating Officer

We think we're at or near the bottom on deposits. So hopefully, we're -- we have an upward trajectory from here. It's got to be choppy [Inaudible] quantitative tightening is going to be difficult for us to fight through, but we think we will. But that -- the plan is to fund that growth in deposits.

Casey Haire -- Jefferies -- Analyst

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?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

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 -- Jefferies -- Analyst

OK. 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 -- was this at all motivated by regulatory pressure?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

No. Not too much on the regulatory pressure. I mean we certainly have spending in there for resolution planning, etc., 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 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 -- Jefferies -- Analyst

Great. Thank you.

Joe DePaolo -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning.

Joe DePaolo -- President and Chief Executive Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So I guess just following up on some of these questions, Joe and Eric. On deposits, I think the expectation will be, and I heard everything around EB-5 and the cross currents there. But given what we are seeing with industrywide 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 constrain asset growth because of funding? Or are you not seeing as attractive opportunities on the asset side also? Would love to sort of get context to why you're ratcheting down asset growth vis-a-vis funding?

Joe DePaolo -- President and Chief Executive Officer

It's not vis-a-vis funding. It's that, that's part of it. The other part is the ratio of loan to deposits, we don't want to get into a situation where we're above the amount that we're comfortable with, and we don't necessarily divulge 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, the Fed funds 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 billion to $3 billion doesn't mean that we'll stick with $1 billion to $3 billion. We're just saying that we're giving that guidance for the third quarter and fourth quarter.

If we go back to $4 billion to $7 billion, it's just not -- we don't feel comfortable in the short term.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Noted. 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 to bring those deposits into Signature given that it's not happened in the last four years?

Joe DePaolo -- President and Chief Executive Officer

Well, they were concentrating on developing the lending side, and they wanted -- we kind of took our eye off the ball as well. They're at 4% right now. And if they go to 10%, not even have to be 100%, if they go to 10%, that's an extra $2 billion -- $2.3 billion in deposits. So they really weren't 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 -- Bank of America Merrill Lynch -- Analyst

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, consensus about high 700s. Is that realistic? Just how do you see it? Would love any perspective there.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Yes. So, unfortunately, it's really difficult to say and guide specifically given our asset sensitivity. We do expect to continue to see expansion. Just the degree -- based upon impact of quantitative tightening as well as the magnitude and frequency of Fed rate hikes, it's just too difficult, and too many different scenarios to give specific guidance there.

But we do expect meaningful expansion.

Eric Howell -- Senior Vice President and Chief Operating Officer

Right. It should be significantly higher.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

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?

Eric Howell -- Senior Vice President and Chief Operating Officer

That's hard to say. There's a lot that goes into that. We expect that will have a meaningful expansion.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. All right. Thanks for taking the questions.

Joe DePaolo -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Manan Gosalia from Morgan Stanley.

Manan Gosalia -- Morgan Stanley -- Analyst

Hey. 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 same pace, particularly given that -- the headwinds that you mentioned on the deposit side?

Joe DePaolo -- President and Chief Executive Officer

It's all opportunistic growth. The teams present themselves, and we think the good teams, the revenue-producing teams 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 -- 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. 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 -- Morgan Stanley -- Analyst

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?

Joe DePaolo -- President and Chief Executive Officer

Yes. Absolutely.

Manan Gosalia -- Morgan Stanley -- Analyst

OK. And then --

Joe DePaolo -- President and Chief Executive Officer

That's what we've done for 21 years. I mean everyone asked us every 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 or three to five teams. And then we go out and hire 12 or 13. And then there were years that we said three to five, and we ended up hiring three.

It really depends on what opportunities present themselves. That's how we've been running the organization.

Manan Gosalia -- Morgan Stanley -- Analyst

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?

Joe DePaolo -- President and Chief Executive Officer

What we're hearing from them is that -- we hired the No. 1 and No. 2 person in fund banking from four or five organizations, and they're continuing to bring all of their clients health. So if we hire and get bigger, we're still acquiring clients at the same rate that we started in the first year, 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 -- Morgan Stanley -- Analyst

That's great color. And then maybe just a quick clarification question. You mentioned that the $100 million in crypto-backed loans paid off fully. Does that mean you have no exposure at all on the asset side to participants in the crypto industry?

Eric Howell -- Senior Vice President and Chief Operating Officer

We have a very de minimis exposure there, some letters of credit that are fully cash-secured, some ACH line that are -- but it's really de minimis at this point. And we have no loans that are backed by cryptocurrencies.

Operator

And our next question comes from Jared Shaw from Wells Fargo.

Jared Shaw -- Wells Fargo Securities -- Analyst

Yes. Good morning. Thanks. Just a couple of follow-ups.

Maybe first on that Bitcoin loan. Does that mean that you're not interested in that product anymore? That, 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?

Joe DePaolo -- President and Chief Executive Officer

We didn't ask the client to pay it off. The client paid it off on their own. I would say right now, we're paused -- pausing is probably the best word to use, pausing, to see what happens in the near term since we're in the 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 -- Wells Fargo Securities -- Analyst

OK. That's great color. And then Joe, you had earlier said you thought that there was some fluff in the deposit base and weren't surprised to see some of that go. If we look at where we are today with the pull down 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?

Joe DePaolo -- President and Chief Executive Officer

Well, I'll tell you, our feeling is that -- DDA in our history has been between 25% and 35%. And so we expect that -- somewhere along the lines that the DDA will reduce. That could be some fluff or it could be just some shifting from DDA to money market because the interest rate is appealing when it wasn't appealing just a few quarters ago. And so that will allow clients to get interest.

I think that being between 25% and 35% will be fine, but we'll continue to have client growth. The one thing we haven't seen is a reduction in client growth. In fact, we're bringing on 500 more clients a quarter now more than we had in the past. 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 -- it's usually a quarter or two before they fund. So it bodes well that we're picking up 500 new clients more than we had in our growth in the past history.

Jared Shaw -- Wells Fargo Securities -- Analyst

OK. 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?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Yes. 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 last year or so, other institutions were reporting negative provisions.

Certainly, we're utilizing our reserves where we have them set aside against specific loans for charge-offs, but we have continued to provide -- from a macroeconomic standpoint, we actually, this quarter, are using a slightly more pessimistic -- we use Moody's. So 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 builds there, but we feel very good about where we're positioned today from an allowance standpoint.

Jared Shaw -- Wells Fargo Securities -- Analyst

Thank you.

Joe DePaolo -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matthew Breese from Stephens, Inc.

Matthew Breese -- Stephens, Inc. -- Analyst

Good morning. Can you talk a little bit about the outlook for loan yields as Fed fund hikes are fully absorbed? I guess I was a little bit surprised by the relatively similar moves in deposit costs and loan yields this quarter versus the interest rate sensitivity of the 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.

Steve Wyremski -- Senior Vice President and Chief Financial Officer

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, I mean, our asset yields were up 44%. And given that repricing, we would expect continued significant expansion into the third and fourth quarter of the Fed hikes.

I mean, in particular, the short end of the curve is what's driving our fund banking portfolio, which comprise a significant portion of that 45% that's repricing. So we should continue to see expansion there.

Matthew Breese -- Stephens, Inc. -- Analyst

OK. 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 slow down or they're supposed to be or you expect there to be run off?

Joe DePaolo -- President and Chief Executive Officer

The two areas we expect to slow or we're focusing our attention to slow is commercial real estate and fund banking because they're the two largest by far. All the others that have come on board recent, and including the healthcare, we're going to let them grow because they're the newest and they have the clients that they want to bring over. So we're not going to slow them down. We're going to let them do what it is that they do.

And as I said, we'll slow down the two biggest segments. But again, if we get deposit growth of $10 billion, then we will utilize that $10 billion to fund loans. So it depends on where we end up with the growth.

Matthew Breese -- Stephens, Inc. -- Analyst

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 time frame 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 the extent you expect to see, call it, average deposit growth?

Joe DePaolo -- President and Chief Executive Officer

Well, if we feel that it's normal, whatever normal is, if we feel that it's normal, we could probably go back to the $4 billion to $7 billion per quarter. That may be a while. We just don't know.

Eric Howell -- Senior Vice President and Chief Operating Officer

Yes. We've never really given guidance around deposit growth. It's very difficult for us to guide on that. That's why we talk about asset growth.

We 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 deposit growth is near impossible.

Matthew Breese -- Stephens, Inc. -- Analyst

Got it. OK. 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 -- Senior Vice President and Chief Operating Officer

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?

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Yeah, agree.

Eric Howell -- Senior Vice President and Chief Operating Officer

So 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 metals as they call them. 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 nonaccrual 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 put our provisions, in the office and 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 Bernard Von Gizycki from Deutsche Bank.

Bernard Von Gizycki -- Deutsche Bank -- Analyst

Hi. Good morning. So my first question on the crypto deposit portfolio. So currently, I believe most of this funding hasn't been deployed given the uncertainty in the crypto markets.

I know you don't charge fees generally. 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? And I'm wondering, could you just walk us through how you can monetize this positioning like over time?

Eric Howell -- Senior Vice President and Chief Operating Officer

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 current digital winter, as they call it, and we see the deposit behaviors where we've seen a significant decline in the value of cryptocurrencies and our deposit base was not nearly down as much as the decline in the values, I think that's going to help us support having to maintain less cash against those deposits over time and will allow us to lend against them. 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 -- Deutsche Bank -- Analyst

OK. 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 your best transfer volume with, I think, you said over $254 billion.

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 vague for competitive purposes. But 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 No. 2?

Eric Howell -- Senior Vice President and Chief Operating Officer

I don't think we've been able to -- I mean, the 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 the 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.

Joe DePaolo -- President and Chief Executive Officer

My belief is that the digital crypto world will not even be in the top 10 when our digital -- of our clients on the payments platform. I think that once everyone understands what blockchain technology is and what it can do for their environment, that we will be in great shape because we're the first ones out of the gate that have done this. And it's very exciting for us to know that we have blockchain technology that could move payments at a rate far greater than they're moving today.

Bernard Von Gizycki -- Deutsche Bank -- Analyst

Good. Thank you.

Operator

The next question comes from Chris McGratty from KBW.

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

Hey. Good morning. Eric, if I think about just the efficiency comments in your prepared remarks, and I take everything you've disclosed on the call and just take a step back, given the size and the growth profile of the company and 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 -- Senior Vice President and Chief Operating Officer

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 that the efficiency is going down. It's kind of begging the question, are we spending enough? But yes, 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.

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

OK. And then in the past, you've given some comments on just the cadence of the growth in noninterest income given some of the strategies there. How do we think about the outlook for noninterest income from here? I know you called out a derivative mark-to-market in the quarter.

Eric Howell -- Senior Vice President and Chief Operating Officer

Yes. I mean we expect that we'll continue to further drive that north. I think if you looked at the trend over the last couple of quarters, I -- continue that trend. We're up a few million quarter over quarter.

We have a lot of opportunity there you have to tap, 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, among 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 net interest income that growth is.

It's tremendous growth on that front.

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

OK. Thank you.

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 line at this time, and have a wonderful day.

Duration: 0 minutes

Call participants:

Joe DePaolo -- President and Chief Executive Officer

Susan Lewis -- Investor Relations

Eric Howell -- Senior Vice President and Chief Operating Officer

Steve Wyremski -- Senior Vice President and Chief Financial Officer

Vilas Abraham -- UBS -- Analyst

Dave Rochester -- Compass Point Research and Trading -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Casey Haire -- Jefferies -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Manan Gosalia -- Morgan Stanley -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Matthew Breese -- Stephens, Inc. -- Analyst

Bernard Von Gizycki -- Deutsche Bank -- Analyst

Chris McGratty -- Keefe, Bruyette and Woods -- Analyst

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