Signature Bank (SBNY) Q4 2022 Earnings Call Transcript

Signature Bank (NASDAQ:SBNY) Q4 2022 Earnings Call dated Jan. 17, 2023.

 

Corporate Participants:

Susan Turkell Lewis — Corporate Communications

Joseph J. DePaolo — Chief Executive Officer

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Analysts:

David Rochester — Compass Point Research & Trading, LLC — Analyst

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Manan Gosalia — Morgan Stanley — Analyst

Bernard von-Gizycki — Deutsche Bank Securities Inc. — Analyst

Casey Haire — Jefferies & Co. — Analyst

Steven Alexopoulos — JPMorgan — Analyst

Jared Shaw — Wells Fargo Securities LLC — Analyst

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

Matthew Breese — Stephens Inc. — Analyst

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

Presentation:

 

Operator

Welcome to Signature Bank’s 2022 Fourth Quarter and Year-End 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. [Operator Instructions] It is now my pleasure to turn the floor over to Susan Turkell, Corporate Communications for Signature Bank. You may begin.

Susan Turkell Lewis — Corporate Communications

Good morning, and thank you for joining us today for the Signature Bank 2022 Fourth Quarter Results Conference Call. Before I hand the call over to President and CEO, Joseph DePaolo, please note that comments made on this call by the Signature Bank management team may include forward-looking statements that can differ materially from actual results. For a complete discussion, please review the disclaimer in our earnings presentation dealing with forward-looking information. The presentation accompanying management’s remarks can be found on the company’s Investor Relations site at investor.signatureny.com.

Now I’d like to turn the call over to Joe.

Joseph J. DePaolo — Chief Executive Officer

Thank you, Susan. I will provide some overview into the quarterly results, and then my colleague, Eric Howell, our Chief Operating Officer; and my colleague, Stephen 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.

At the onset of 2022, we set several goals, including: One, the hiring of numerous private client banking teams and the colleagues necessary to support our geographic expansion, which we did with the hiring of 12 teams. This includes five in New York and seven on the West Coast, of which three were in Nevada, marking our entry into that state. We also added hundreds of colleagues across various operational and support areas. Two, launching the health care, banking and finance team, which we successfully onboarded during the 2022 second quarter. Three, increasing our annual earnings where we realized great success as evidenced by earning a record $1.3 billion in net income with a record return on common equity of 16.4%. Fourth, growing our loan and deposit portfolios substantially. Although we grew loans by a strong $9.4 billion, 2022 presented deposit challenges. While we expected continued deposit growth, albeit not at 2020 or 2021 levels, seven Fed hikes during 2022 totaling 425 basis points, coupled with quantitative tightening and the proliferation of off-balance sheet alternatives resulted in the most difficult deposit environment we have seen in our 22-year history.

The arduous rate environment along with the challenges in the digital asset space, led to deposit declines, which we overcame with little difficulty given our robust liquidity position. Please take note, thus far in 2023, we are already up $1.8 billion in total deposit growth. This is driven by an increase of $2.5 billion in traditional deposits offset by a decline of $700 million in digital deposits.

Now taking a closer look at earnings. Pretax pre-provision earnings for the 2022 fourth quarter were $451 million, an increase of $65 million or 17% compared with $385 million for the 2021 fourth quarter. Net income for the 2022 fourth quarter increased $29 million or 11% to $301 million or $4.65 diluted earnings per share compared with $272 million or $4.34 diluted earnings per share for last year. The increase in income was predominantly driven by margin expansion due to rising rates, which led to strong growth in net interest income over the last 12 months.

Now let’s take a closer look at deposits. With the frequency and severity of the Fed rate increases, the deposit environment remains challenging. Total deposits decreased $14.2 billion or 14% to $89 billion this quarter, while average deposits decreased $4 billion. Now let’s discuss the elephant in the room. As a reminder, on December 6, at a conference, we announced our plan to purposefully decrease total deposits in the digital asset banking space by reducing the size of relationships. This strategy results in a more granular deposit base, which leads to greater stability in this funding source.

As part of the plan, we are focused on reducing high cost, excess digital deposits. Our strategy when as expected, have resulted in a decline of $7.4 billion in digital deposits. Respectively, the bank will further reduce these digital deposits by an additional $3 billion to $5 billion by the end of 2023, however, most likely much, much sooner. Additionally, with the seventh Fed rate hike on December 15 and subsequent to the conference, we saw a large degree of irrational pricing from competitors on traditional deposits.

In general, we decided not to increase rates to these levels on deposits that have the highest rate sensitivity. As a result, $2.3 billion in high interest rate deposits left. Total contribution from both the digital asset reduction strategy and our decision to not match pricing on these rate-sensitive deposits aggregated to $9.7 billion of the deposit decline. These are deposits that we intentionally managed out or managed lower. There were several other factors that contributed to the traditional decline.

Our mortgage banking and solutions team experienced a seasonality due to taxes and escrow payments, which contributed $1.9 billion to the overall decline. We expect this to build back up over the course of 2023. And 1031 exchange commercial real estate transaction continued to decline industry-wide, and we saw a reduction to the tune of $1.2 billion. So there was a lack of CRE transaction, and as a result, there’ll be less 1031 deposits available. During the quarter, noninterest-bearing deposits decreased $6 billion to $31.5 billion, which continues to represent a solid 36% of total deposits. The decline in DDA continues to be driven by the challenging rate — deposit rate environment.

Before I turn the call over to Eric, I’d like to say that although 2022 was a tough year for deposits, we believe we are a growth story. And as we look beyond 2023, we firmly believe we will be trying to grow traditional deposits. Clearly, this is difficult given the current environment, but it remains a focus. It is encouraging to see inflows in traditional deposits of $2.5 billion thus far this year through January 13, that’s only — that’s after only nine business days.

Now I’d like to turn the call over to Eric.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

All right. Thank you, Joe, and good morning, everyone. I’d like to turn our attention to our lending businesses. Loans during the 2022 fourth quarter increased $452 million or 1% to $74.3 billion. For the year, loans increased $9.4 billion or 15%. During the fourth quarter, growth continued to come from nearly all of our lending businesses with the exception of capital costs, which were down $2.1 billion as we left passive participation to run off as they came up for renewal.

Over the next several quarters, we are expecting measured growth out of our newer business lines; health care, banking and finance, and corporate mortgage finance as these teams are still strengthening their presence within their markets. Given the challenging deposit environment, we anticipate declines from our larger, more established lending businesses. Overall, we plan to manage loan growth to be down in the coming quarters.

Turning to credit quality, our portfolio continues to perform well. Nonaccrual loans were down $1 million at $184 million or 25 basis points of total loans compared with $185 million for the 2022 third quarter, and they were down $34 million when compared with $218 million for the 2021 fourth quarter. Our past due loans were within their normal range with 30- to 89-day past due loans at $96 million or 13 basis points and 90-day plus past dues at $55 million or 7 basis points of total loans.

Net charge-offs for the 2022 fourth quarter were $18.2 million or 10 basis points of average loans compared with $10.2 million or 6 basis points for the 2022 third quarter. The provision for credit losses for the 2022 fourth quarter increased to $42.8 million compared with $29 million for the 2022 third quarter. The increase was primarily driven by a deteriorating macroeconomic forecast. This brought the bank’s allowance for credit losses higher to 66 basis points and the coverage ratio stands at a healthy 266%. I’d like to point out that excluding very well secured fund banking capital call facilities, the allowance for credit loss ratio will be much higher at 105 basis points.

Now let’s turn to the expanding team front. As we’ve said before, our core metric for us is the number of teams we onboard, and we continue to realize success in this area. During the year, the bank onboarded 12 private client banking teams, including five in New York and seven on the West Coast, of which three of those teams were brought on in the state of Nevada. This marks the entry into a new geography for Signature Bank. Additionally, our newest national banking practice, the health care banking and finance team was launched in the second quarter of this year. Notably, this is the third highest number of teams hired in any given year in Signature Bank’s history, which bodes well for future deposit gathering and our pipeline remains strong.

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 — Senior Vice President and Chief Financial Officer

Thank you, Eric, and good morning, everyone. I’ll start by reviewing net interest income and margin. Net interest income for the fourth quarter was $639 million, a decrease of $35 million or 5% from the 2022 third quarter and an increase of $103 million or 19% from the 2021 fourth quarter. The decrease in net interest income during the fourth quarter was driven by the outflows of our cash balances in support of our planned reduction in the digital asset banking deposits. This resulted in a smaller balance sheet at the end of the quarter. Going forward, we plan to keep our cash position in the $4 billion to $6 billion range, which is dependent upon deposit flows.

Net interest margin on a tax equivalent basis decreased 7 basis points to 2.31% compared with 2.38% for the 2022 third quarter. The lower margin was the result of the rise in our cost of funds, which is primarily due to the replacement of digital asset banking deposits with more expensive borrowings. Over the near term, the bank plans to pay down these borrowings as we see traditional deposit inflows, resulting in a lower cost of funds, which will ultimately be beneficial for margin.

Let’s look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2022 fourth quarter increased 73 basis points from the linked quarter to 4.18%. The increase in overall asset yields was across all of our asset classes and was driven by higher rates. Yields on the securities portfolio increased 45 basis points linked quarter to 2.53% given higher replacement rates. Additionally, our portfolio duration decreased slightly to 4.23 years due to interest rates flowing back at the end of the quarter.

Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages increased 69 basis points to 4.82% compared with the 2022 third quarter. Increasing yields was driven by our portfolio repricing higher. Since approximately 48% of our loans are floating rate, we expect loan yields to continue to increase as short-term rates continue to move higher. In addition, given the longer duration of our fixed rate loan portfolio, we will continue to see these assets reprice higher even as the Fed ceases increasing rates.

Now looking at liabilities. Given the 125 basis points of Fed moves this quarter, overall deposit costs increased 80 basis points to 1.91%. The pace of the deposit repricing is in line with our expectations given the frequency and magnitude of the rate hikes.

During the quarter, average borrowing balances increased by $2.3 billion to $4.5 billion, and the cost of borrowings increased to 3.80%. The increase in borrowings was driven by our planned reduction in the digital asset banking deposits, where we added mainly short-term borrowings. In the coming quarters, we plan to pay these borrowings down with excess liquidity from deposit flows and managed loan portfolio runoff. In fact, today, borrowings are $4 billion lower since quarter end given positive deposit flows and other initiatives.

The overall cost of funds for the quarter increased 85 basis points to 1.99% driven by the aforementioned increase in deposit costs and the addition of higher-priced borrowings. On to noninterest income and expense. With our plan to grow noninterest income, we achieved growth of $11.8 million or 35.2% to $45.2 million when compared with the 2021 fourth quarter. The increase was primarily related to FX income and lending fees driven by our newer businesses and geographic expansion.

Noninterest expense for the 2022 fourth quarter was $233.3 million versus $183.9 million for the same period a year ago. The $49.4 million or 26.8% increase was principally due to the addition of new private client banking teams, national business practices and operational personnel as well as client-related expenses that are activity driven and has increased with the growth in our businesses. Despite the significant hiring and considerable operational investment, the bank’s efficiency ratio remained relatively low at a strong 34.11% for the 2022 fourth quarter versus 32.31% for the comparable period last year.

Turning to capital. Overall capital ratios remain well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet as evidenced by a common equity Tier 1 risk-based ratio of 10.42% and total risk-based ratio of 12.33% as of the 2022 fourth quarter. Today, we are also announcing an increase in our common stock dividend by $0.14 per share to $0.70 per share starting in the first quarter of 2023. Our robust earnings profile generates over $1 billion in earnings a year, which is substantially more compared to when we first set the dividend in 2018. We have long-term confidence in the earnings power of our franchise and are happy to increase our dividend.

Now I’ll turn the call back to Joe. Thank you.

Joseph J. DePaolo — Chief Executive Officer

Thanks, Steve. I’d like to point out that this is our first year in our 22-year history that we reported an annual decline in deposits. Given Fed actions, including quantitative tightening, coupled with the seven rapid Fed rate hikes totaling 425 basis points, growing deposits has become very difficult. Growth for the sake of growth while ignoring the economics does not benefit our shareholders. Instead, we firmly believe that our decision not to chase the rationally priced high cost deposits as well as our decision to reposition our digital deposit book by reducing concentration will benefit our shareholders in the long run — in the long term.

Our focus in this ecosystem was on concentration of deposits not to lead the ecosystem. Despite the short-term external challenges we face today, we continue to put the seeds in place for future growth with our plans for continued investment in our infrastructure, as well as our geographic expansion through the hiring of teams. These investments will inevitably lead to growth that within our differentiated operating model will lead to higher returns over time. The growing dividend to $0.70 should firmly indicate to our shareholders the confidence we have in our ability to generate substantial earnings over the long term.

To conclude, 2022 was a year of many positives. We achieved the following: Record net income of $1.3 billion and record return on common equity of 16.4%. And as I just mentioned, the earnings power is allowing us to increase our 2023 dividend while still maintaining strong capital ratios. We had loan growth of $9.4 billion, not to mention 12 team hires with the expansion in the state of Nevada, the addition of another national business line, our health care banking and finance team. And we continue to perform with a best-in-class efficiency ratio of 34.11%.

Finally, yes, we have USD deposits in digital asset clients, but we do not invest, we do not hold, we do not trade and we do not custody crypto assets. We only have deposits of clients in the crypto ecosystem, and we are executing on our plan to reduce these deposits significantly for concentration purposes. In the future, our focus will remain on blockchain technology, which is the reason we decided to enter this space in 2018. We have many other traditional businesses whose positive results are being overlooked.

Now Steve, Eric and I are happy to answer any questions you might have. Shelby, I’ll turn it to you.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] Our first question is coming from Dave Rochester with Compass Point.

David Rochester — Compass Point Research & Trading, LLC — Analyst

Hey. Good morning, guys.

Joseph J. DePaolo — Chief Executive Officer

Good morning, David.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Good morning, David.

David Rochester — Compass Point Research & Trading, LLC — Analyst

I wanted to start on deposits. You mentioned you had $2.3 billion, I believe, in high-rate deposits left. Are you expecting those will flow out here in the next quarter or two at this point? Or have you already seen some of that flow out that’s actually baked into the quarter-to-date growth you mentioned?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

That was in the fourth quarter already, Dave.

David Rochester — Compass Point Research & Trading, LLC — Analyst

That was in the fourth quarter. So how much do you have left at this point?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Not a lot.

David Rochester — Compass Point Research & Trading, LLC — Analyst

Yes. Okay. What areas are you seeing the deposit growth and at this point quarter-to-date?

Joseph J. DePaolo — Chief Executive Officer

Well, there’s a number of areas. We can start with — amid my colleagues noises, but we can start with EB-5, that’s a source of deposits for us. We have about $281 million in deposits to the — of the new EB-5 program. So we expect another $5 billion in deposits over a 24-month period. So it’s really over the next two years, where we expect most of the money coming from China and India. That’s one area. We also expect to hire additional teams, but most on the East and West Coast. We already had a team start in New York on January 2. So we hired one team thus far. We expect the new teams this year plus the teams that we hired last year to start bringing over their books of business and their clients that they have. And that goes to all the teams, the 130 teams that we have. We expect that they’ll continue to do a better job of growing deposits because a number of them over the last several years were under the pandemic, and that certainly hurt their ability to bring clients over quickly. So the West Coast finished strong and probably on the pandemic, and that should work.

Fund Banking is refocusing their growth efforts on deposits. Eric mentioned the decrease that we had in fund banking loans. They refocused because we wanted them to fund a little bit more than they have been on their own loans. So they’re concentrating on deposit gathering. Then we have a specialized mortgage banking solutions. They are continuing to grow. We had an outflow because of deposits — I’m sorry, because of taxes and escrow payments. But we see growth there. We let go off some deposits out of that institution — out of that business as we had because they were high priced. But still, by letting go some of the high price that should help our NIM, but we’ll be able to bring on more deposits at a reasonable interest rate.

So we have the West Coast, we have the EB-5, specialized mortgage bank solutions, fund banking division, refocusing the efforts on deposits, and we have the new teams that we have come on board. That’s why we’re still confident that in 2024 — moving towards 2024 for there to be a greater growth in deposits than we’ve seen in the last few years.

David Rochester — Compass Point Research & Trading, LLC — Analyst

Appreciate all the color there. Any — are you guys seeing any growth by any chance in noninterest bearing? Or is it all interest-bearing right now this quarter?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

We were seeing a comparable mix from what we traditionally see, Dave. So roughly that 35%, 36%.

Operator

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

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

I think it would be difficult for us, given this deposit environment to promise that would be up in traditional deposits, although we’re hopeful that we will be. Ex the $3 billion to $5 billion in digital, we do think that will be relatively flat in the rest of our deposit base. The — we plan to proceed for growth, for sure, as Joe talked about. And we do anticipate that we should have growth, but it’s difficult to promise.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Understood. And Eric, just Steve’s point around 35% to 36% NIB, that’s where you ended, I think, fourth quarter. Is it safe to say the NIB is kind of levelling off here around $31 billion, give or take?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

I think it’s back to its normal range. Actually, 35%, 36% is probably at the high end of where we traditionally have been. I mean, we’re usually in the 32% to 34% range, maybe even a little bit lower. We’ve been as low as 24%, yes. But yes, so I think we’ll be in that 30% to 35% range of DDA to overall deposits as we look forward.

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

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

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

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

Ebrahim Poonawala — Bank of America Merrill Lynch — Analyst

Thanks for taking my questions.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Thank you.

Operator

We’ll take our next question from Manan Gosalia with Morgan Stanley.

Manan Gosalia — Morgan Stanley — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

I mean there’s a few things you need to consider there is that, as Eric just talked about, from a deposit standpoint, it’s going to be challenging. And if we’re planning on reducing deposits in the digital space, $3 billion to $5 billion, we certainly will then need to borrow in the short term, which then should lead to NIM and NII compression given the higher cost of deposits, as we saw toward the end of the fourth quarter. So we continue to expect some short-term pressure there. And then as we head into the end of the year, we should then see some relief is what we’re hopeful for and then see NIM expanding and also see some relief from the borrowing standpoint as we see some traditional deposit inflow. So I mean that’s the context I would give in relation to your question.

Manan Gosalia — Morgan Stanley — Analyst

Got it. That’s helpful. And then maybe on the expense side, I know you’ve spoken about expense growth being at around 20% or so as you invest in the business but do you have some more room there to offset some of the pressure you’re seeing on NIM?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

So there’s a few things to mention on expenses. For the first quarter, we do expect to be in the mid-20s again, roughly 25%. We would have been lower had the FDIC not increased its assessment rates. They’re increasing every institution 2 basis points, which for us means about $5 million a month in incremental expense — sorry, per quarter, in incremental expense. So that, we keep the headwind. Without that, we would have been in the low 20s. So first quarter, mid-20s, 25%, and then we should trend through the remainder of the year down to the high teens.

Manan Gosalia — Morgan Stanley — Analyst

Great. Thank you.

Operator

We’ll take our next question from Bernard Von Gizycki with Deutsche Bank.

Bernard von-Gizycki — Deutsche Bank Securities Inc. — Analyst

Yes. Hi. Good morning.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Good morning.

Bernard von-Gizycki — Deutsche Bank Securities Inc. — Analyst

Given you’re exiting a large amount of your crypto-related deposits. Just curious how this impacts the Signet platform. If you’re doing less volumes now, I would assume the activity volume-driven expenses should be coming down as well? I’m just trying to get a sense, like we’re focused on the funding part. So one is like the expense part, I think the discussion about the lower expenses in the later part of the year might be part of it. But any sort of fee income that could go away as we kind of consider this with these two factors as well?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

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

Bernard von-Gizycki — Deutsche Bank Securities Inc. — Analyst

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

Joseph J. DePaolo — Chief Executive Officer

Well, the digital is actually — the number of transactions on Signet is actually — digital is number two, not in dollars because they have large dollars, but we have the shipping industry — cargo shipping industry that is number one on Signet for a number of transactions. And then we’ve got payroll, which is starting to take course and we’re getting more payroll companies on.

So the key for us is that we find these other ecosystems because we put a payment platform together 24 hours, 365 days a year and the idea being that we want to attract as many ecosystems as we can to make it beneficial for all of us and the clients. What we did put together was something that the digital world embraced, embraced blockchain technology. And that’s why there is number one in terms of dollars that flow in and out. But let’s face it. I mentioned that, I did think that crypto would be in the top 10 once we had other industries embrace blockchain technology. One of our shareholders said it probably would not be in the top 100. So it’s just a matter of educating those out there. We look forward to having more noneco — nondigital ecosystems, and we’ll just prove everybody’s prohibition to it.

Operator

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

Casey Haire — Jefferies & Co. — Analyst

Yes. Thanks. Good morning, guys. So follow-up just on the loan growth. I want to make sure I understand this correctly. So Eric, I think you said total loans down $5 billion to $10 billion for the year. And then…

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

That’s lines, Casey. That’s not outstanding.

Casey Haire — Jefferies & Co. — Analyst

Just capital call?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Just capital call lines. Outstandings would roughly be half of that balance.

Casey Haire — Jefferies & Co. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Well, given that we’re reducing deposit still, right, and we expect to be down $3 billion to $5 billion in the digital space and really flattish in traditional, although we’re hopeful we’ll see some growth. But again, I can’t promise that. It would be difficult for us to expand our loans. So we’re expecting that capital call facilities and those passive participations to be down in outstandings roughly $2 billion to $5 billion and then for our commercial real estate portfolio to decline, although it’s not going to decline much, and it will probably be flat-to-down a little bit. And we’ll see some growth out of our mortgage warehouse finance business as well as our health care finance business. Those are two newer business lines for us that we want to continue to see have growth and garner market share and market favor. So we’ll have some growth out of those areas, let’s say, $500 million to potentially $1 billion over the course of the year for each. So ultimately, when you put all that together, I think you’re going to see us be pretty flat on loans to down maybe a little bit.

Stephen Wyremski — Senior Vice President and Chief Financial Officer

And Casey, just to add on your borrowing comment, we’re down $4 billion in borrowings. That’s being paid down from a combination of cash. We mentioned that cash range of $4 billion to $6 billion, which is our comfortable range dependent upon specific deposit inflows. So deposit inflows, cash, security runoff as well as the small amount of loan runoff that we’ve seen thus far. So it’s a combination of all those different items.

Casey Haire — Jefferies & Co. — Analyst

Okay. Very good. And then just given all the moving pieces here, can you give us some help on where you think the margin settles in the first quarter and thoughts on deposit beta?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Sure. So margin in the first quarter, we do expect to be down about 10 basis points, and that’s a function of what I mentioned earlier in that in the short term, we do expect to borrow early in the year to replace the digital outflow that we’re planning to manage down. And then as you get towards the end of the year, we would expect NIM to then start expanding. From a deposit beta standpoint, we’re end of period at 46%, total deposit fall in. And our end-of-period deposit costs are 210 basis points approximately.

Casey Haire — Jefferies & Co. — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

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

Casey Haire — Jefferies & Co. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

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

Casey Haire — Jefferies & Co. — Analyst

Great. Thank you.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Thank you, Casey.

Operator

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

Steven Alexopoulos — JPMorgan — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Yes. I mean, Steve, we’re working hard to get through these digital outflows in the first quarter, second quarter. We could see some of that bleed into the third and fourth quarter. But we’re really trying to have this done as quickly as we can, right? So we’re going to see decline probably in the first and second quarters in the overall balance sheet. By the time we get to the third, we should see that stabilize. And again, we’re hopeful that we could see deposit growth, which we have thus far this quarter, which is great. And we’re hopeful as we get to the second part — half of the year, that we’ll see some growth from there.

Steven Alexopoulos — JPMorgan — Analyst

That’s helpful. And then on the digital asset deposits, Joe, your original appeal of these deposits was it would be a lower cost funding option, right, which is not necessarily proving to be the case. I’m curious, given the extreme volatility, right, to draw it down, will you be able to lend those deposits out? Is your original case to be in the business still stand? And how do you think about this from a long-term view? Thanks.

Joseph J. DePaolo — Chief Executive Officer

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

Steven Alexopoulos — JPMorgan — Analyst

Okay. But you guys are still committed to the business long term at this stage, just going to decline materially?

Joseph J. DePaolo — Chief Executive Officer

Yes, we’re committed to the business. We think that it’s not going away — let’s put it this way, it’s not going away, and we have a number of examples that show that it’s not going away. If you think about the government, if we could get the regulators and Congress on the same wavelength, they would give us regulations that we could follow and that others could follow. What this ecosystem needs is regulation. We need to be able to function where the economy is confident. Having this FTX situation clearly puts a lack of confidence in that ecosystem. Now what we need to do is to get regulation, get confidence back in the system and we can go from there. It occurs to a lot of people that when you do innovation, you always — in the initial part of the innovation, there’s always looked upon, initially down upon. And that’s what I think is the situation here. As new financial innovation is being looked down upon, and we believe that somewhere in the next few years the banking system as it conducts transactions today will not be the way they conduct transactions tomorrow. So we’re very much in tune to this to wanting to support this ecosystem.

Steven Alexopoulos — JPMorgan — Analyst

Got it. Okay. And if I could ask one final one. Just following up on the inflows of traditional deposits you saw, what you’re calling out in the release, the $2.5 billion. I might have missed this, but what type of deposits was that you saw such strong growth? Are those low-cost deposits? Can you give us some context around that? Thanks.

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Sure. So we’ve seen some growth in specialized mortgage banking. They’ve continued to build up their balances after the year-end escrow and tax outflows. Our fund banking business is up a couple of hundred million as well. And then our New York private client banking teams, we’re also seeing some growth there as well. To your cost question, we’re seeing the traditional 30% to 35% noninterest bearing as we add these deposits back.

Joseph J. DePaolo — Chief Executive Officer

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

Steven Alexopoulos — JPMorgan — Analyst

Great. Okay. Thanks for the color, Joe.

Joseph J. DePaolo — Chief Executive Officer

Thank you, Steve.

Operator

Thank you. And we’ll take our next question from Jared Shaw with Wells Fargo Securities.

Jared Shaw — Wells Fargo Securities LLC — Analyst

Hey. Good morning, guys. Thanks. Maybe just a couple of follow-up detailed questions. On the borrowings, you said borrowings are down quarter-to-date, but you’re expecting them to go back up. So is that to grow from year-end numbers as we see these deposit outflows? Or just maybe give back some of the flow that we’ve seen year-to-date?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Certainly — Jared, certainly dependent upon what traditional deposit flows are, but all else being equal, that’s flat, and it would just end up replacing some of what we’ve paid down thus far. So wouldn’t expect it to be significantly different from where we ended as of year-end. There’s some ebbs and flows dependent upon what traditional deposit flows might end up being.

Jared Shaw — Wells Fargo Securities LLC — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Sure. On the CRE front, we’re seeing replacement rates roughly in the high 5s, call it 5.75% range. In fund banking, and certainly, they’re reducing, but we’re in the low 6s there. At Signature Financial, we’re in the mid- to high 6% range. Securities, any replacement there is at 4.5% to 4.75% range. And then we have some of the folks that we’re growing. Healthcare, banking and finance about 7% and as is commercial mortgage finance in the 7% range.

Jared Shaw — Wells Fargo Securities LLC — Analyst

Okay. That’s great. And then on the security side, you said that you were using cash flows to pay down borrowings. How should we be thinking about securities as a percentage of assets here? Could that — should I say, stable? Should it come down? When you look at the absolute dollar level, can we expect that to be trending down as we go through the year?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

Potentially, it could run down dependent upon where back to the traditional deposit flows. That’s really the key here where the traditional deposit flows go compared to our digital runoff and the timing of all that. So yes, in a situation, we could see some reduction there as they run off roughly in the $750 million to $1 billion a quarter range.

Jared Shaw — Wells Fargo Securities LLC — Analyst

Great. Thank you.

Operator

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

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Yes. The office portfolio is about $4 billion. We have zero in nonaccrual as of this point. So it’s 1 point, 1.5 points [phonetic]. It’s also — I mean, it’s more critical to point out that we’re not a CMBS lender. And all the articles in the news that you’ve seen thus far is all related to CMBS. I don’t think there’s anything related to balance sheet lenders, us or any of our competitors. Now when we originated these loans, we’re in the low 50% LTV range. We were north of a 140 debt service coverage. So we’ve got ample cushion there to absorb whatever we do see, we come through in that space. I mean don’t get me wrong, we fully expect that there’s going to be some problems. But quite frankly, we’re just not seeing much right now, Chris. I mean we’re dealing with well-seasoned veteran operators, multigenerational who own many properties and can divert cash flow as necessary to deal with the ones that might be in trouble. And we’re just not seeing the demise of New York office anywhere near what people have predicted, I mean anywhere near.

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

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

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

The retail book is about $6 billion.

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

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

Christopher McGratty — Keefe, Bruyette & Woods, Inc. — Analyst

Okay. Thank you.

Operator

We’ll take our next question from Matthew Breese with Stephens Inc.

Matthew Breese — Stephens Inc. — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

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

Matthew Breese — Stephens Inc. — Analyst

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

Stephen Wyremski — Senior Vice President and Chief Financial Officer

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

Matthew Breese — Stephens Inc. — Analyst

Could you clarify those earning credits?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

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

Matthew Breese — Stephens Inc. — Analyst

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

Joseph J. DePaolo — Chief Executive Officer

Well, I’ll say this with FTX, it wasn’t a matter of BSA/AML. Everyone thought that he would resume it, and he ended up being Bernie Madoff like. So I don’t think anyone could say that they knew that and we catch it. What we’re talking about regulation is we just want to know which way to go. Because we had Signet and we tried to make enhancements on it, and some of it are okay by the regulators and some were not. It puts us in a difficult position as to what we do — what do we do next, and not knowing regulation-wise what’s going to happen puts us really behind everyone else, that is the crypto world. I will tell you this, we’ve had a number of discussions with the regulators and they seem to be waiting for other regulators. So I don’t know if the Fed is waiting for the FDIC. The FDIC was waiting for the OCC. But I think they have to get together, meet with Congress because Congress was going to put some — before the end of the year, Congress was going to put some bills across to get some laws put out on the books for regulation. And they were not things that we thought were good for us or good for the industry. So we need to get them to get on the same level field and give us some guidance. There’s no — I think what happens is when regulations come out, that will eliminate a number of players. I don’t know if they are fair actors, but I would say a number of players couldn’t live up to the regulation, whether it’s capital related or just doing AML-BSA. But again, FTX was not a BMA-AML. It was a Bernie Madoff like situation that no one really thought that Sam was a bad actor.

Matthew Breese — Stephens Inc. — Analyst

Understood. That’s all I had. Thank you.

Operator

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

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

Can you hear me?

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Yes, we can hear you now.

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

It’s pretty hard to predict really. I mean, look, we’re a highly regulated banking institution. We follow strict BSA-KYC-AML policies and procedures. In the space, in particular, we have had due diligence and monitoring. And we’re really not aware of any concerns or issues that we have at this time. And we haven’t been involved in any litigation, any meaningful litigation to date. Fortunately, for us, we were not — we had announced that we’re integrating the FTX, but we were not integrated yet with FTX. So we didn’t have client-related transactions of FTX happening on our platform. Yes. So that’s certainly good.

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

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

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Yes. Currently, we have 1,410 active clients, and our transfer volumes were $275.5 billion.

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

Okay. Great. And then last question. Steve, you might have mentioned this, but what was the spot deposit rates today?

Stephen Wyremski — Senior Vice President and Chief Financial Officer

210 basis points.

Mark Fitzgibbon — Piper Sandler & Co. — Analyst

Great. Thank you.

Eric R. Howell — Senior Executive Vice President and Chief Operating Officer

Thank you.

Operator

This concludes our allotted time and today’s conference call. If you’d like to listen to a replay of today’s conference, please dial 800-934-4245. 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.