Earnings Transcript for SBNY - Q2 Fiscal Year 2021

Operator: Welcome to Signature Bank's 2021 Second Quarter Results Conference Call. Hosting the call today for Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Senior Executive Vice President and Chief Operating Officer. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin.

Joseph DePaolo: Thank you, Nicole. Good morning and thank you for joining us today for the Signature Bank's 2021 second quarter results conference call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Susan Lewis: Thank you, Joe. This conference call and all 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 that are subject to risks and uncertainties. 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 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 our business overall. 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. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made. Now, I'd like to turn the call back to Joe.

Joseph DePaolo: Thank you, Susan. I will provide some overview into the quarterly results, and then Eric Howell, our Chief Operating Officer will review the bank's financial performance in greater detail. Eric and I will address your questions at the end of our remarks. The success of Signature Bank's single-point-of-contact service model has resulted in yet another quarter of significant growth. During the past several years, the bank has grown dramatically and transformed organically. We set and achieve specific goals of becoming asset-sensitive, increasing both credit and geographic diversification, while continuing to grow core deposits. As a result, we shifted to asset-sensitive from liability-sensitive, with 38% of our loan portfolio now variable rate. We reduced our CRE concentration from nearly 600% to 345% of capital. Our loan to deposit ratio, which peaked at 104%, has moved to a low of 64%. Additionally, we entered new markets through the hiring of Veteran Bankers for our West Coast Private Client Banking Offices, while continuing to increase deposits across our New York operations. The speed at which we achieve these objectives organically is extraordinary within the banking industry. It clearly demonstrates the power of our founding single-point-of-contact entrepreneurial model. Throughout the second quarter of 2021, we saw the same strong growth trends we witnessed during the past several quarters. Our record deposit growth of $11.6 billion emanates from all our business units and teams within the institution, demonstrating the broad based strength of our franchise. Record core loan growth of $3.6 billion was driven by a well-established fund banking division, and we put more cash to use than ever before to record growth of $2.7 billion in our securities portfolio. A strong growth profile coupled with the expansion of fee income, and contained expenses led to a third consecutive quarter of record net income, and strong return on common equity of more than 13%. We continue to focus on the pure organic growth that has made this institution successful. Now, let's take a look at earnings. Pre-tax pre-provision earnings for the 2021 second quarter were a record $308.6 million, an increase of $60.6 million or 24.5% compared with $247.9 million through 2020 second quarter. Net income for the 2021 second quarter was a record $214.5 million or $3.57 with earnings per share compared with $117.2 million or $2.21 diluted earnings per share reported in the same period last year. The increase in income was predominantly driven by substantial asset growth of $36.5 billion over the last 12 months, as well as a decrease in the provision for credit losses, which was substantially impacted by COVID-19 in the second quarter of 2020. Looking at deposits, deposits increased a record $11.6 billion or 15.7%, $85.6 billion this quarter, our average deposits grew record $11.9 billion. This quarter's growth was driven by the digital asset banking team, which grew deposits $6.3 billion. The Specialized Mortgage Banking Solutions team which grew by $1.2 billion, our Venture Banking Group, which increased nearly $400 million. The West Coast Banking teams grew nearly $200 million and our New York banking teams, which grew over $3.6 billion including 10 teams that each exceeding $100 million for the quarter. Since the end of the 2020 second quarter, deposits increased remarkable $35.3 billion or 70.3%, and average deposits increased $33.4 billion. During the quarter, non-interest deposits increased $6.1 billion to $28.7 billion which represents a high 33.5% of total deposits. Our deposit growth plus capital raises as well as earnings retention led to an increase of $36.5 billion or 60.5% in total assets since the second quarter of last year. That's the equivalent of acquiring the top 50 U.S. bank, but we did it completely organically. We believe this is by far the most efficient use of capital. Now let's take a look at our lending businesses. Core loans or loans excluding PPP during the 2021 second quarter increased to record $3.9 billion or 8% to $52 billion. For the prior 12 months, core loans grew $9 billion or 20.7%. The increase in loans this quarter was again driven primarily by new, and it's a keyword new fund banking capital call facility. We are well-positioned in all our lending businesses to capitalize on opportunities based upon our pipeline and recovering economy. Turning to credit quality, our portfolio continues to perform well. Let me first point out the bank's COVID-19 related non-payment modifications continue to trend positively. As of the year-end 2020, they were $1.3 billion. At April 15, they were $983 million, and as of July 15 they are now at $309 million, or 0.6% of total loans, and that went from year-end at $1.3 billion to slightly above $0.3 billion. We knocked off a billion in non-payment modifications. Non-accrual loans $136.1 million or 25 basis points of total loans compared with $133.7 million or 26 basis points since 2021 first quarter. Our past due loans remained within the normal range, the $30 to $89 past due loans and $94.8 million and our 90-day plus past due loans remained at a very, very low $2.3 million. Net charge-offs for the 2021 second quarter decreased of $15.3 million or 12 basis points with average loss compared with $17.9 million in 2021 first quarter. The provision for credit losses from 2021 second quarter declined to $8.3 million, compared with $30.9 million for the 2021 first quarter. Despite the bank's allowance for credit losses to 0.94%, the coverage ratio stands at a healthy 378%. I would like to point out that excluding very well secured fund banking loans, and government guaranteed PPP loans, the allowance for credit losses ratio, it would be much higher at 1.41%. Now, on to the expanding team front where we continue to realize success, in the 2021 second quarter bank onboarded 2 Private Client Banking teams on the West Coast, as well as the SBA lending team, which is one of our two new lending initiatives we announced earlier in the quarter. At this point, I'll turn the call over to Eric and he'll review the quarter's financial results in greater detail.

Eric Howell: Thank you, Joe, and good morning everyone. I'll start by reviewing net interest income and margin. With our emphasis on growing net interest income for the second quarter reached $457.2 million, an increase of $50.7 million or 12.5% from the 2021 first quarter, that is an annualized growth rate of 50%. Net interest margin declined eight basis points to 2.02% compared with 2.1% for the 2021 first quarter. The entire decrease was due to massive excess cash balances from significant deposit flows, which impacted margin by 55 basis points. Again, we're focused on net interest income growth and not the margin. Let's look at asset yields and funding costs for a moment. Interest earning asset yields for the 2021 second quarter decreased 17 basis points from the length quarter to 2.37%. The decrease in overall asset yields was again driven by the massive excess average cash balances which grew $6.6 billion to $23.7 billion during the quarter. Yields on the securities portfolio decreased 16 basis points linked quarter to 1.72% due to lower reinvestment rates as well as the bank investing in floating rate securities and our portfolio duration decreased to 2.92 years, which was due to a decline in rates at the end of the quarter. We were opportunistic throughout the quarter as we saw windows in which to invest. And therefore we were able to increase the securities portfolio by $2.7 billion. And turning to our loan portfolio yields on average commercial loans and commercial mortgages increased four basis points to 3.58% compared with the 2021 first quarter, excluding prepayment penalties from both quarters, yields increased by 5 basis points. Now looking at liabilities, our overall deposit cost this quarter decreased seven basis points to 27 basis points due to the low interest rate environment as we gradually lower our relationship-based deposit rates. We anticipate this downward trend to continue in the coming quarters albeit at a slower pace. During the quarter, average borrowing balances decreased by $276.4 million and the cost of borrowings increased by 12 basis points to 2.8%. The overall cost of funds for the quarter decreased 9 basis points to 38 basis points, driven by the reduction in deposit costs. And on to non-interest income and expense, with our focus on growing non-interest income, we achieved growth of $10.7 million or 84.5%, the $23.4 million when compared with the 2020 second quarter. The increase is mostly due to a rise in fees and service charges and net gains on sales of loans. Non-interest expense for the 2021 second quarter was $172 million versus $151.9 million for the same period a year ago. The $20.1 million or 13.3% increase was principally due to the addition of new private client banking teams and operational support to meet the bank's growing needs. And despite our significant team hiring and margin compression from substantial cash balances, the Bank continues to gain operating leverage and as a result the efficiency ratio improved to 35.8% for the 2021 second quarter versus 38% for the comparable period last year. And turning to capital; all capital ratios remain well in excess of regulatory requirements and augment the relatively low risk profile of the balance sheet as evidenced by common equity Tier 1 risk-based ratio of 10.03% and total risk-based ratio of 12.72% as of the 2021 second quarter. Given our robust total risk-based ratio, we redeemed $260 million of subordinated debt at a rate of 5.3 percent on April 19, which will further reduce our interest expense in coming quarters. And now I'll turn the call back to Joe. Thank you.

Joseph DePaolo: Thanks, Eric. The collective strength of our franchise led to an unbelievable quarter of record deposit growth, record core long growth, record pretax pre-provision earnings and record net income. Bottom line, we delivered another strong quarter and we are well positioned for the future. We have been bullish on New York City since the onset of the pandemic. Really it is going to take some time to return to pre-pandemic activity levels, but it is encouraging to see the vibrancy returned to this great city and country. It's great to see Broadway shows selling tickets again, restaurants had full capacity, busy streets and most importantly my colleagues in the office. We look forward to a continued recovery and a bright future for Signature Bank. Now, we are happy to answer any questions you might have, but before I turn the call over to Nicole, I just want to encourage everyone listening that please get vaccinated. Now I'll turn the call over to Nicole.

Operator: [Operator Instructions] Thank you. Our first question will come from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos: Good morning, everybody.

Joseph DePaolo: Hey, good morning, Steve.

Steven Alexopoulos: I'll just start in the digital asset side. I know in the past, you guys have said that as the price of crypto assets such as Bitcoin have fallen you've actually seen an increase in volumes, right, as institutional customers step in and buy the dip. When I think about your model, right, you're in on ramp to the crypto economy. So, we think of that like a bridge keeper. Do the prices and fluctuations of the crypto assets matter really at all as it relates to the growth potential of the business?

Eric Howell: We've seen absolutely no correlation to the price in our deposit flows whatsoever. And we've gone back over several years and taking a deeper dive and look at that. And there's just no correlation. There are periods when early on when prices went up, and our deposits actually leveled off or went down. But mostly over the last year-and-a-half, we've seen the prices climb, we've climbed, and with the latest dips that we've seen, we've seen our deposits continue to climb. So, we're just not seeing a correlation between the price of any of these digital currencies and our deposit flows.

Steven Alexopoulos: Okay. That's helpful. Maybe can you give us a sense how many customers are now in the platform and maybe what's the pipeline for new customers?

Eric Howell: We don't have a client total, but the pipeline is certainly robust for new clients.

Steven Alexopoulos: Okay. And maybe a final question is it relates to the prior guidance, right, the full-year $8 billion to $16 billion, I mean, you're multiple quarters in a row of being in that range each quarter; maybe one, from your view, why is it coming in so much stronger than expected, it's like more is going on than just the digital asset team? And realistically, how should we now think about full-year deposit growth expectations? Thanks.

Joseph DePaolo: That's a very hard question to answer, because one of our initiatives that now has turned into a full-fledged businesses are doing very, very well. And to answer the question, there's such a wide range deposits that could come in, we would say that the normal expectation would be $2 billion to $4 billion in deposit growth on a quarterly basis, and we're very proud that we got $10 billion to $11 billion in the last two quarters, but the expectation is still for us between $2 billion and $4 billion.

Steven Alexopoulos: Okay, terrific. Thanks for taking my questions.

Eric Howell: Sure. And Steve, just to circle back on that last question about number of clients, we're 812 clients versus 741 last quarter.

Steven Alexopoulos: Oh, great, 741, great. Thanks for the color.

Operator: The next question will come from the line of Brock Vandervliet with UBS.

Brock Vandervliet: Thank you. If you could just kind of peel away a bit on the total crypto deposit growth, what that is, what that's composed of, whether it's mainly transaction accounts, whether it's reserve accounts, operational deposits from exchanges, what that is?

Joseph DePaolo: The growth in the end of March and the end of June was about $6.3 billion, and it's stable coin reserves, it's OTC desks, and institutional traders, digital asset exchanges and blockchain technology and digital miners. Broken down, stable coin reserves are about $1.9 billion, OTC desks and institutional traders is about $600 million, digital asset exchanges are $3.4 billion, and blockchain technology and digital miners is about $300 million, give or take.

Brock Vandervliet: Got it, okay. And Steve covered the growth rates, just in terms of further monetizing this, could you talk about your securities lending initiative where that stands and any further color you have?

Joseph DePaolo: We expect to do our first loan somewhere the end of July, beginning of August, it could be the end of next week. It's just one loan, we're testing out. The expectations are we want, I said this before we want to crawl before we walk and walk, we just walk, not walk to run, we're going to be very cautious. We're only picking, selecting the very, very best clients. We want this to be normal business.

Brock Vandervliet: Got it. Okay, I'll step back in the queue. Thank you.

Eric Howell: Thank you, Brock.

Operator: The next question will come from the line of Jared Shaw with Wells Fargo securities.

Jared Shaw: Hey guys, good morning.

Eric Howell: Good morning, Jared.

Jared Shaw: Hey, just looking at, you coupled really strong commercial loan growth with a stable commercial loan yield, which has been tough for banks to pull off, I guess can you comment a little bit about what you're seeing in terms of loan pricing on the commercial side? I guess how you're able to be, maybe is it just your customers a little less price sensitive, or you're able to hold up the spreads a little better? Maybe just talk a little bit about your, what you're seeing in commercial loan pricing?

Eric Howell: Well, I mean generally, we're seeing that the runoff in our portfolios is pretty equal to the yields that we're putting on now Jared, we've kind of come close to at least reaching a bottom there, we had a little bit of a pickup in the three and five year, the belly of the curve, and that's helpful to Signature Financial. So they were up about a basis point in the quarter. Generally, we're seeing some better spreads out there during the quarter. But unfortunately, the 10 years pullback down, so we'll see how long that that lasts for. And we also get a little bit of a bump from some PPP fee amortization for the quarter as that starts to accelerate.

Jared Shaw: Okay, thanks. And then on the commercial side, I'm sorry, on the capital side obviously, the strong liquidity is putting some pressure on ratios here apart from the risk base ratio. How comfortable are you with broader capital ratios getting tighter based on just a lot of cash flow coming in or would you like to see them a little stronger than where they're trending here?

Joseph DePaolo: We always like to see stronger ratios, but we have earnings, our current earnings could sustain the growth that we expect. But if we have really some outsized, sustained projections for growth, we would not be shy about raising capital.

Jared Shaw: Okay, great, thanks. And then just finally for me I guess, Eric, what were the yields on new securities purchases in the quarter, sorry if I missed that?

Eric Howell: Probably in the 130 to 150 range, which is inclusive of floating rate securities.

Jared Shaw: Okay, thank you.

Operator: The next question will come from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe: Hi, great. Thanks. Starting off with really quick one, Eric, you mentioned higher PPP fees, what was that amount this quarter?

Eric Howell: About $14 million.

Ken Zerbe: Got it, versus $4 million, I think it was last quarter, right?

Eric Howell: Yes, that sounds right.

Ken Zerbe: Got it, okay. I guess just in terms of growing the securities portfolio from here, obviously, you have a ton of cash. But just given the yields have come in, it feels like so much since last quarter, how are you thinking about investing in additional securities at this point?

Eric Howell: We're going to be ultra selective at this point. I mean, we're hopeful that there's a pickup in rates, we don't really understand can't be given everything that's going on in the world. But where the 10 year is right now, five year, it doesn't make a whole heck of a lot of sense to invest much and will be opportunistic, we do have a very robust treasury function that will search for investments that makes sense, particularly floating rates to the extent we can get our hands on them, but right now it's ultra, ultra selective.

Joseph DePaolo: That's why we're adding on more vertical on the lending side.

Ken Zerbe: Got it, no, no, understood. I would agree with your approach. And then just my last question, it feels like some of the narrative around sort of your digital banking business and the deposit inflows has shifted away from the price of bitcoin and more towards the transaction volumes and honestly, maybe I just don't know enough about crypto transactions, but I've heard they've been coming down and maybe that's because of retail investors possibly, but when you think about -- have you seen a similar trend, maybe a decline possibly in the amount of transactions going through Signet, is there a correlation between -- [technical difficulty]…

Eric Howell:

-- :

Ken Zerbe: Got it. Okay, all right, thank you.

Joseph DePaolo: You're welcome.

Operator: The next question will come from the line of Dave Rochester with Compass Point.

Dave Rochester: Hey, good morning, guys. Nice quarter.

Joseph DePaolo: Thank you, Dave.

Susan Lewis: Hi, Dave. Good morning.

Dave Rochester: Good morning. I definitely appreciated all the detail on the digital deposit side. That's a $6.3 billion you talked about that's all on-balance sheet, right?

Joseph DePaolo: That's right.

Susan Lewis: Yes.

Dave Rochester: And how much do you have off-balance sheet?

Joseph DePaolo: About $2.5 billion.

Dave Rochester: Okay, great. So, you've kind of kept it around that area it sounds like. Can you talk about any benefits you've seen from the expanded Circle relationship you announced last quarter? And then, if I'm just looking at USDC total issuance right now, it's about maybe $27 billion today. In the most recent Circle deck, they estimated circulation of that could go to $35 billion this year, and could grow to $194 billion by 2023. So, just given your expanded relationship there, can you just talk about what that can mean for Signature?

Joseph DePaolo: Well, we're getting our operating accounts. That's over in the process of doing, and that will give us more non-interest-bearing deposits. And then, on the interest-bearing side, we're keeping a cap on it, and with having the excess deposits, if they want to give us any more, go into the off-balance sheet money market, which at some point we'll be paying more than a basis point. So, we're not putting any more -- we're not planning right now putting any more stable coin reserves on other than the operating accounts, which we expect to be pretty substantial.

Dave Rochester: What do you think it would take to get you to -- to change your decision there and add some more of that stable coin piece, the on-balance sheet portfolio?

Joseph DePaolo: With only $25 billion in excess cash, not prudent to take more on-balance sheet deposits, the improvement plus take off-balance sheet where we can collect some fee income.

Dave Rochester: Yes. So, that's something that you could source later on as you bring the cash balances down longer term?

Joseph DePaolo: Yes.

Dave Rochester: Perfect. And then maybe just switching…

Joseph DePaolo: [Indiscernible] the clients that have stable coin with us, their reserves, and they keep them in DDA, but not every stable coin reserve is an interest-bearing account.

Dave Rochester: Okay, appreciate that. And then, maybe just switching to the loan side, how do you guys feel about the loan growth guidance, given you've got these three verticals coming online here in the back-half? It seems like you have all kinds of capacity to sort of blow through that $1 billion to $2 billion that you've talked about at least maybe starting in the fourth quarter? And then, if you could just give any updates on that front, just regarding your expectations for each of those segments on the growth side, that'd be great, I think the more recently you talked about mortgage warehouse contributing $200 million to maybe a $1 billion in growth per quarter. So, any updates on that as you've done some more work on those verticals, it'd be great to hear?

Eric Howell: For the third quarter specifically, well, we'll be in that $1 billion to $2 billion range. We've seen that the -- third quarter is usually our slowest quarter of loan growth and given that people were not able to really take vacations last year due to the pandemic. We expect that there's a lot of people that will be out in the months of July and August, and we'll see that affect our loan growth a bit. So, we're hoping to a $1 billion to $2 billion for the third quarter. For the fourth quarter, we're hoping to be at the high-end of that range. We do anticipate that the mortgage warehouse business will kick in a little bit. There's hope for the third quarter that we can do $200 million to $250 million, in that mortgage warehouse space. And I think that's certainly possible. And then we can do an equal to potentially in the greater amount in the fourth quarter. So, that'll be beneficial to the growth for sure. On the SBA side, we anticipate that they'll start up mostly in the fourth quarter. We're still putting our systems and processes in place. It's very important in that space to really have your systems, your paperwork, and everything in line with the government to ensure that you have that government guarantee on your loans. So, it'll take us a little bit longer to get that up and running, but it should be beneficial to growth in the fourth quarter, albeit, to a much lesser extent in the mortgage warehouse business.

Dave Rochester: All right. Great, thanks, guys.

Susan Lewis: Thank you, Dave.

Joseph DePaolo: Thank you.

Operator: The next question will come from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: Good morning.

Joseph DePaolo: Good morning, Ebrahim.

Ebrahim Poonawala: I guess just the first question, if we could talk a little bit about -- give us an update on the West Coast expansion, where things stand both on the hiring of teams and just growing that portfolio on deposits and loans?

Eric Howell: Well, we hired several teams there in the first quarter, and then we've hired another two teams in the second quarter, and then in addition to the SBA business that we brought on board, that's headquartered in Sacramento. So, we're pretty pleased that there's a few more teams in the pipeline that we anticipate to hire for this year. And then we're really setting the stage for 2022. So, we're -- and something we've also done is we've added a number of improved directors to existing teams, but we're very pleased with the hiring to-date and the pipeline that we have to continue to build that out. We've got about $1.5 billion in deposits on the West Coast. And I want to say our approach about $500 million in loans there.

Joseph DePaolo: Nick had done a terrific job, under the circumstances most of them have never been at Signature Bank when there wasn't a pandemic. And so, they've had to -- especially now they're going back to work in Los Angeles with masks again. So, they've been able to grow the business under not so positive circumstances or environment.

Ebrahim Poonawala: I guess, tied to that, Eric, you always talked about the first billion is going to be very difficult as you get the brand recognition in the market. If we look forward, like, should we expect to PD decent pick-up in terms of what West Coast starts delivering for you both in terms of deposit growth and maybe loan growth?

Eric Howell: Yes.

Joseph DePaolo: Yes.

Ebrahim Poonawala: Got it. And I guess on the other side…

Eric Howell: Especially given what Joe said about the fact that we really started there our LA franchise during a pandemic, right? So, we're in to spending, we'll see pretty good pickup from them over the course of the next several years.

Joseph DePaolo: We've been meeting clients on the West Coast through teleconferencing.

Ebrahim Poonawala: Understood. Thanks for the color. And I guess just back home, any signs of life in the New York multifamily space? Are you seeing any activity pick-up, or how are you thinking about just that book? I know you're targeting for the retaining your relationship-based clients, but give us a sense of the market?

Joseph DePaolo: We're seeing a pick-up in activity, really a pick-up in activity. If the government wasn't involved, it would be better. We had a nice deal, fairly substantial deal, and government gave them a 2.5%, 10 years interest on it.

Eric Howell: Well, so it's very competitive; got it. And one last question, I guess, we've talked previously about the use case for Signet beyond crypto customers, any headway there or is that still in test phase?

Joseph DePaolo: I would say it's soon to come out of test phase, but it was still in the testing phase.

Ebrahim Poonawala: Got it. Thanks for taking my questions.

Joseph DePaolo: Thank you, Ebrahim.

Operator: The next question will come from the line of Casey Haire with Jefferies.

Casey Haire: Yes. Thanks. Good morning, guys. Question, on the crypto deposit franchise, where is that overall today balance-wise? And is there a concentration limit that you guys, you know, where you don't want that to go any higher as a percentage of overall deposits?

Joseph DePaolo: It's about little along to $18 billion, but amongst all the different categories in the digital asset world, and we wouldn't be able to give you the -- if we had one, we wouldn't be able to tell you what the limits are, because now our competitors would know what we're doing.

Casey Haire: Understood, okay, and that $18 billion, how much of that is you -- I think you mentioned earlier, there's $2.5 billion off-balance sheet. How much is off-balance sheet?

Eric Howell: It's $2 billion that's off-balance sheet right now.

Casey Haire: Okay. And what's preventing you from utilizing the off-balance sheet vehicle more, because that certainly would help, and I know your risk weighted ratios are in great shape, but the TCE Tier 1 leverage would certainly benefit from…

Joseph DePaolo: We would certainly use it more, but the returns it's a decimal. So if they can get a little bit more of a return from another institution, they're going to do it, because it's a substantial amount of money. We're talking about on the off-balance sheet money market funds, one basis point, two basis points.

Casey Haire: All right, got you, okay.

Joseph DePaolo: So, as rates rise, whenever that is, whatever millennium it is we will use the off-balance sheet money market, because that'll rise quicker than the on balance sheet interest products that we have. But we'll use that. We're getting less than $200,000 in fee income on a quarterly basis. When years ago, we were getting like $3.25 million a quarter. So we can earn substantial fee income by putting it off-balance sheet, and we certainly would do it under the right circumstance.

Casey Haire: Got you, thanks. And then just last one, on the expense side. I'm assuming the expenses came in very much in line with your guidance. Do we continue to grind in the lower double-digits from here? And does that third quarter '20 included a FHLB charge? I'm assuming that that gets stripped out of the math for the guide?

Eric Howell: Now it's I mean, it's all in with that included. We're probably looking at $12 million and $13 million expense growth in the third quarter, and we'll see it go down to $11 million to $12 million, and then $10 million to $11 million continue to decline.

Casey Haire: Okay, excellent. Thank you.

Joseph DePaolo: Thank you, Casey.

Eric Howell: Thank you, Casey.

Operator: The next question will come from the line of Matthew Breese with Stephens Inc.

Matthew Breese: Good morning. Hey, I appreciate the overall crypto balances at this point. Could you just break it down to the various buckets, perhaps, what's in the operating accounts or the Signet accounts and then the stable coin?

Eric Howell: Yes, we can't -- we've done that already, Matthew, so we are happy to go through it again. We've got about $4.4 billion stable coin $2.4 billion in OTC desk and institutional traders, $9.7 billion in digital asset exchanges, and $1.2 billion overall in blockchain technology and digital miners, with $2.5 billion, almost $2.6 billion of that in Signet.

Matthew Breese: Got it. Okay. And as you think about these various categories, we've never seen them rate tested. What do you expect to be the most kind of sensitive to rate changes deposit betas. What would be the least sensitive?

Joseph DePaolo: Digital asset exchange is probably the least sensitive. But, like the stable coin reserves, we have some five stable coin reserve clients, for them keeping money in non-interest-bearing, and one is keeping money in interest-bearing. So, it's kind of hard right now to determine who will be most sensitive.

Matthew Breese: Understood. Okay. And then, Eric, you mentioned in your prepared remarks, focused on NII growth. And over the last handful of quarters, it's coming to annualize at about 17% or 18%. Can you give us some range or predict estimated outcome or where do you think NII can go. Are there handful of quarters is stable or you expect acceleration?

Eric Howell: Acceleration, tough to say, given the rate environment that we're up against, so -- but we'll see continued growth. It's not something that we get the guidance on in the past.

Matthew Breese: Okay.

Joseph DePaolo: One of the things we've been -- one of the things that will help, which we have more runway than most banks is our ability to continue to drop interest upon interest on deposits. We had a quarter where we were down to 27 bps. And we were 34 for the first quarter. So that's a drop of seven basis points. In the month of June, we were at 25 basis points. And we're trending lower than that in the month of July. So we're at 27 for the quarter, we can get it down to below 25 basis points in the third quarter. And we're hoping to get it down below 20 basis points in the fourth quarter/first quarter 2022. So coupled with our continued growth of interest-bearing, interest-earning assets to say, we'll be able to reduce costs where others have not been able to do so or have already done so.

Matthew Breese: And then last one for me, it feels like the West Coast expansion is successful, it's going well. Does this confidence gives you -- does it give you the confidence to introduce the model to additional markets and we're on the map? Do you feel like your single-point-of-contact model would be most successful?

Joseph DePaolo: It's most successful where the big players are in the cities where the big players are, whether you're talking about Chicago, Dallas, places like that. And we are, California is a very large state. And we're moving around to the next state. As Eric mentioned, Sacramento, Los Angeles and San Francisco, we're already there. We have plans to go to the other states that are and make sense along with California, on the West Coast. And we're not going to really talk about where we're going right now until we're there.

Matthew Breese: Understood.

Eric Howell: But we can certainly at this point be opportunistic, as we've always been right, but more opportunistic geographically. Right, we've proven that we can take this model to different geographies, and that it works, right. So it's densely populated metropolitan areas that the mega banks dominate, right. That's what we built our bank to compete with. So we've done it in California now and we're going to do it again elsewhere.

Matthew Breese: As we think about the $25 billion of cash and the deployment of that cash, does that accelerate the timeframe in which you might deploy it, and go after new markets?

Eric Howell: When we look at new markets, and we've circled a number of them, we'd rather not give away our secret sauce, but there's a number of markets that we're looking at, it really comes down to finding the talent. And if we can find the bankers or group of bankers with a book of business, then that makes sense, then we can go there now. And we've shown, it's not quite frankly difficult for us to do, right, to open up a location to onboard new bankers and to execute our model. We can do it without too much of a strain on our resources.

Matthew Breese: I appreciate it. That's all I had. Thank you.

Joseph DePaolo: Thank you.

Operator: The next question will come from the line of Chris McGratty with KBW.

Chris McGratty: Hey, good morning. Maybe a question on non-interest income, and the tax rate kind of the movement there, can you help us with the other income line and the tax rate? There's some pretty big swings in the quarter. Thanks.

Eric Howell: Yes, the other income line was affected by our March markets on some derivative contracts that we had. So hopefully that'll normalize a bit next quarter. If we look out third quarter, the third quarter of last year, we anticipate will be in a 10% to 20% growth in non-interest income, but there was some noise around some of the derivative contracts that we had, so that should get back to normal. As for the tax rate and use of 28% effective tax rate going forward.

Chris McGratty: And then, just one more on the funding, given the momentum in the deposit growth, you talked about the debt you retired in the quarter. Anything else on the horizon, or is this kind of longer duration stuff that's out there?

Eric Howell: There's some borrowings that we'll be able to repay in the short-term, not a significant amount, but there are some borrowings that that will, that will come to approximately $100 million is coming do the next quarter. Then after that, we've got about a billion coming do three to 12 months out. So, we will probably let them run off, although we are assessing now whether it makes sense for us to prepay some of those.

Chris McGratty: Great, thanks.

Eric Howell: Thank you, Chris.

Joseph DePaolo: Thank you, Chris. This concludes our allotted time in today's teleconference. If you'd like to listen to a replay of today's conference, please dial (800) 585-8367, and refer to conference ID 6246928. A webcast archive of this call can also be found at www.signatureny.com. Please disconnect your lines at this time, and have a wonderful day.