Earnings Transcript for SBNY - Q3 Fiscal Year 2021

Operator: Welcome to Signature Bank's 2021 Third Quarter Results Conference Call. Hosting the call today from Signature Bank are Joe DePaolo, President and Chief Executive Officer; and Eric 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 Joe DePaolo, President and Chief Executive Officer. You may begin.

Joseph DePaolo: Thank you, Emma. Good morning, and thank you for joining us today for the Signature Bank 2021 third 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. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and may be beyond our control. Forward-looking statements include information concerning our expectations regarding future results, interest rates and the interest rate environment, loan and deposit growth, loan performance, operations, new private client team hires, new office openings, business strategy and the impact of the COVID-19 pandemic on each of the foregoing and on our business overall. Forward-looking statements often include words such as may, believe, expect, anticipate, intend, potential, opportunity could, project, seek, target, goals, should, will, would, plan, estimate or other similar expressions. As you consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions that could cause actual results to differ materially from those in the forward-looking statements and can change as a result of many possible events or factors, not all of which are known to us or in our control. These factors include those described in our quarterly and annual reports filed with the FDIC, which you should review carefully for further information. You should keep in mind that any forward-looking statements made by Signature Bank speak only as of the date on which they were made. Now I'd like to turn the call back to Joe.

Joseph DePaolo: Thank you, Susan. I will provide some overview into the quarterly results; and then my colleague, 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. Signature Bank's dramatic growth, which surpassed a milestone of $100 billion in assets was driven by the collective success of our legacy banking teams in New York, our blockchain-driven -- our blockchain-based payments platform, Signet, and the many old risk franchises, which now comprise our organization. The deposit growth of $10 billion in the third quarter continued to be widespread with notable contributions from our Digital Asset Banking team, including growth on the Signet platform, the Specialized Mortgage Banking Solutions team and the New York legacy banking teams. Our core growth -- our core loan growth was driven by our Fund Banking Division, which grew a record $5 billion in outstanding. Although some of these businesses have only recently come to fruition, our approach remains consistent since the day we opened our doors. We've always adhered to our client-centric single point-of-contact model, which invariably attracts top bankers from across the industry as well as their clients. Now let's take a look at earnings. Pre-tax pre-provision earnings for the 2021 third quarter were a record $331 million, an increase of $78.6 million or 31% compared with $252.4 million for the 2020 third quarter. Net income for the 2021 third quarter increased $102.9 million or 74.2% to a record $241.4 million or $3.88 diluted earnings per share compared with $138.6 million or $2.62 diluted earnings per share for last year. The increase in income was predominantly driven by substantial asset growth of $44.1 billion over the last 12 months as well as the decrease in the provision for credit losses, which was substantially impacted by COVID-19 in the third quarter of 2020. Looking at deposits. Deposits increased $10 billion or 11.7% to $95.6 billion this quarter, while average deposits also grew $10 billion. This quarter's growth was driven by the Digital Asset Banking team, which grew deposits $5.1 billion, including $2.7 billion of growth on the Signet platform. Additionally, the Specialized Mortgage Banking Solutions team grew $2.3 billion. Our Venture Banking Group increased $200 million. The West Coast banking teams grew $235 million and our New York banking teams grew $1.9 billion. This includes 8 New York teams that exceeded $100 million in growth. Since the end of the 2020 third quarter, deposits increased a remarkable $41.2 billion or 76% and average deposits increased $33.4 billion, furthering the reduction in our loan-to-deposit ratio, which now stands at 61%, down from 85% just 1 year ago. During the quarter, noninterest-bearing deposits increased $5.7 billion. That's worth saying twice. Noninterest-bearing deposits increased $5.7 billion to $34.4 billion, which represents a high 36% of total deposits. This tremendous growth in DDA can largely be attributable to the adoption of our Signet platform, which, as I stated earlier, grew by $2.7 billion this quarter. Our substantial organic deposit growth led to an increase of $44.1 billion or 69.2% in total assets since the third quarter of last year. That's the equivalent of acquiring a 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 third quarter increased a record $5 billion or 9.6% to $57.2 billion. For the prior 12 months, core loans grew $13 billion or 29.4%. The increase in loans this quarter was again driven primarily by the fund banking capital call facilities. Our existing teams are well positioned to capitalize on opportunities. We also welcome our corporate mortgage finance business, warehouse mortgaging and our SBA originations platform, which will help to further our growth and diversification. Now 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 year-end 2020, they were $1.3 billion; at April 15, they were $983 million; at July 15, there were $309 million; and as of October 10, they are now at $254 million. So from the end of 2020, when it was $1.3 billion, we're now down to $254 million or 43 basis points of total loans. That's for non-payment modifications. Non-accrual loans were $165.4 million or 28 basis points of total loans compared with $136.1 million or 25 basis points for the 2021 second quarter, well within our expectations. Our 30 to 89-day past due loans are well within our normal range of $98.1 million. Our 90-day plus past due loans were at $81.2 million. However, there were 2 loans that were renewals that were delayed and have subsequently closed. Adjusted for this, our 90-day plus past dues would have been within the normal range of $7.9 million. Net charge-offs for the quarter -- net charge-offs for the 2021 third quarter were $17.3 million or 12 basis points of average loans compared with $15.3 million for the 2021 second quarter, again well within our expectations. The provision for credit losses for the 2021 third quarter decreased to $4 million compared with $8.3 million for the 2021 second quarter. This brought the bank's allowance for credit losses to 85 basis points and the coverage ratio continues to stand at a healthy 303%. I would like to point out that excluding very well secured fund banking capital call facilities and government-guaranteed PPP loans, the allowance for credit losses will be much higher at 136% or 136 basis points. Now on to the expanding team front where we continue to realize success. In the 2021 third quarter, the bank onboarded 1 large private client banking team in New York. This brings key total hires to 8 for the year, 2 in New York, 4 on the West Coast as well as the corporate mortgage finance team and the SBA originations team. At this point in the call, I'll turn it over to Eric, and he will 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 third quarter, it reached $480.9 million, an increase of $23.7 million or 5.2% from the 2021 second quarter, an increase of $220.5 million or 20% from the 2020 third quarter. Net interest margin declined 14 basis points to 1.88% compared with 2.02% for the 2021 second quarter. The decrease was due to massive excess cash balances from significant deposit flows, which impacted margin by 59 basis points. Again, our focus is on net interest income growth. Let's look at asset yields and funding costs for a moment. Interest-earning asset yields for the 2021 third quarter decreased 19 basis points from the linked quarter to 2.18%. The decrease in overall asset yields was again driven by the massive excess average cash balances, which grew $5.4 billion to $29.2 billion during the quarter. Yields on the securities portfolio decreased 23 basis points linked quarter to 1.49% due to lower reinvestment rates as well as the bank investment in floating rate securities. Additionally, our portfolio duration increased to 3.01 years, which was due to an increase in the rates at the end of the quarter. We anticipated that it was going to be a better environment for investing in securities, and fortunately, interest rates were lower for most of the quarter. However, we were opportunistic throughout the quarter as we saw limited windows in which to invest. And therefore, we did increase the securities portfolio by $2.2 billion, which includes $1 billion in purchases that settled literally on the last day of the quarter. And turning to our loan portfolio. Yields on average commercial loans and commercial mortgages decreased 13 basis points to 3.45% compared with 2021 second quarter. Excluding prepayment penalties from both quarters, yields decreased by 10 basis points. Now looking at liabilities. Our overall deposit cost this quarter decreased 5 basis points to 22 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 $146 million, and the cost of borrowings decreased 3 basis points to 2.8%. The overall cost of funds for the quarter decreased 6 basis points to 32 basis points, driven by the reduction in deposit costs. And I'd like to point out the dramatic shift in our interest rate risk profile, where our balance sheet has moved to significantly asset-sensitive from mildly liability-sensitive over the last several years. The bank's focus on growing floating rate loans, which now comprise 45%, up from 10% of our loan portfolio, coupled with our core deposit funding base, makes us extremely well positioned to take advantage of a rising rate environment. And now on to our noninterest income and expense. With our plan to grow noninterest income, we achieved growth of $7.2 million or 30% to $31.4 million when compared with the 2020 third quarter. The increase is mostly due to a rise in fees and service charges which was driven by an increase in both unused commitment fees and treasury management fees. Noninterest expense for the 2021 third quarter was $181.2 million versus $160.6 million for the same period a year ago. The $20.7 million or 12.9% 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, our efficiency ratio improved to 35.4% for the 2021 third quarter versus 38.9% for the comparable period last year. Now quickly turning to taxes. This quarter, we benefited from multiple one-time tax items, which totaled $7.4 million and included $4.3 million in solar tax credits. This lowered our tax rate to 26.2% for the quarter. Excluding these benefits, the effective tax rate for the quarter would have been 28.5%. And turning to capital. The bank raised $655 million of common equity through a public offering during the quarter. As a result, all capital ratios strengthened and 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 10.49% and total risk-based ratio of 12.96% as of the 2021 third quarter. And now, I'll turn the call back to Joe. Thank you.

Joseph DePaolo: Thanks, Eric. The collective strength of our franchise led to yet another quarter of strong deposit growth, record core loan growth, record pre-tax pre-provision earnings and record net income. Bottom line, we delivered another strong quarter. We are well positioned for the future given the robust deposit growth from across the board that has led to a significant level of excess cash on our balance sheet. We will continue to prudently put the cash to use in our securities portfolio as well as our loan portfolio through both our new and existing lending businesses. Our steadfast deployment will ultimately drive earnings higher for our shareholders. Our approach to organic growth coupled with our industry-leading efficiency continues to be the best method for capital deployment. Signature Bank's track record confirms that investing in people is paramount and the optimal path is to avoid all of the cultural and organizational disruptions that stem from M&A, which are often underestimated. Looking ahead, we will continue to invest in our colleagues, and dedication has brought us to this next chapter. It has always been and will continue to be their efforts that culminate into the driving institution that has become Signature Bank. We look forward to a bright future ahead. Now, we are happy to answer any questions you might have. But before I turn the call over to Emma, the operator, I just want to encourage everyone, please get vaccinated. Now, I'll turn it over to Emma. Thank you.

Operator: [Operator Instructions]. Our first question comes from Ken Zerbe with Morgan Stanley.

Kenneth Zerbe: Are you able to provide any data in terms of how much payment volume is flowing through Signet, and how that may have changed over the last couple of quarters?

Eric Howell: Yes, Ken, we can provide some statistics around that. Our transfer volumes for the quarter were 128 million -- billion, sorry, down slightly from the prior quarter of 149 billion.

Kenneth Zerbe: Got you. And where was that maybe, I don't know, say, first quarter or a year ago? I'm just trying to get a sense of how that's ramped up over time.

Eric Howell: It was not relevant, so. We're up about 4x. If we look at all of 2020, we were 112 billion in volume. Year-to-date, we're at 365. So we'll be 4x more this year that we were -- more than 4x this year than we were last year.

Kenneth Zerbe: Got it. Okay. Perfect. And then second question. Can you just elaborate just a little bit more? I think, Joe, you mentioned that your noninterest-bearing deposit growth was really driven by the adoption of the Signet platform. I know you have the digital banking team that pays some very small amount of interest on the deposits coming in. But can you just break that out or help us understand how much -- like, how do you delineate where you're paying interest on those crypto deposits versus where you're not paying interest on those, if that makes sense?

Joseph DePaolo: Well, we don't pay interest on the operating accounts. So I would say, on average, about 30% of the deposits are noninterest-bearing in the digital team and about 70% of interest-bearing. But their cost of funds for that team is about 5 basis points less than the cost of funds we have for all the other teams. So they've been driving the cost of digital deposits down.

Kenneth Zerbe: Got you. Okay. All right. That's helpful. And then just maybe last question if I can squeeze one in. Did you do any Bitcoin backed loans this quarter?

Joseph DePaolo: We did 1 loan, which I think $25 million. And that's all we've done for the third quarter thus far for the year. We expect maybe to do 1 or 2 others.

Operator: Our next question comes from Matthew Breese with Stephens Inc.

Matthew Breese: Maybe turning to loan growth. This quarter's performance was well ahead of guidance. Just curious what happened throughout the course of the quarter that you weren't expecting? And maybe could you just recalibrate your expectations on loan growth going forward?

Joseph DePaolo: Well, in the fund banking capital call group, they had a number of commitments that they made prior to the third quarter that we had drawn down on. So the -- that was one piece. Another piece is that, it was -- I'll call it the perfect storm. There were a lot of opportunities, both large and small for them to participate and to do direct loans as well. So it wasn't anything -- any one thing that drove it, just something that we wouldn't recalibrate the fourth quarter based on the third quarter because so many good things happened.

Eric Howell: And the fourth quarter tends to be a bit choppier for us and hard to predict. We do kind of see clients pay down lines often in the quarter. So we're looking at $1.5 billion to $2 billion in loan growth guidance for the fourth quarter.

Matthew Breese: Great. Okay. And then now that the balance sheet is through $100 billion, should we expect any changes on the regulatory front or the stress test front? Or you guys operate without a holding company, does that excludes you from any of the Dodd-Frank Act stress test. Could you just maybe talk a little bit about that?

Eric Howell: Most of those would come into play at the $250 billion mark and can be considered systemically important, between $100 billion and $250 billion. I don't think we're doing anything that would render us to be systemically important. Our banking model is pretty straightforward and simple. So I highly doubt that the regulators would go there. But the 1 thing that we'll have to do is submit a resolution plan. We've got some time to do that. So we feel very comfortable about our ability to do that. Again, we're pretty straightforward a simple banking model and a structure. So it really shouldn't be difficult for us to put together a resolution plan.

Joseph DePaolo: And that resolution plan will be expected if we get notified sooner than later, will be expected in 2023. So as Eric said, we certainly have time.

Matthew Breese: Great. Okay. Last one for me is just I was hoping you could talk a little bit about the -- there's obviously a ton of cash on the balance sheet, $29 billion. At what point do you think we start to see an inflection. We can actually see cash balances start to turn and go lower. And could you maybe just talk a little bit about what you think the normalized cash position of the bank is. A lot of the stablecoin issuers are mandating that certain -- the reserve deposit need to be in certain asset classes. Should we expect the Signature as a participant in that just needs to hold on to more cash than your average bank? That's all I had.

Joseph DePaolo: It's difficult in answering the first part of the question is because deposit flows. It's hard to determine what the deposit flows will be because we have all these businesses out there, both new and legacy that are continuing to draw in their clients. Particularly if you think about the West Coast, they've been under a pandemic the whole time that they've been here. So as they start to bring more of the deposits in, it's hard to deploy that quickly. So it really depends on the deposit flows. But one of the good things that we had going on, on the asset side is that we have 2 new verticals, we have the warehouse lending and we have the SBA lending, and we have another vertical that will be coming on board either this quarter or next first quarter of 2022. So that deployment will help us. We expect that commercial real estate will start coming on, not like they did in the early part of their tenure here, but certainly in a positive way. So whatever cash we get -- we have, we're pretty confident that we can deploy it to levels that were much higher than they've been in the past.

Eric Howell: Well -- and we certainly have a securities environment that we can invest in today, that's much improved from what it was for most of last quarter. So we'll be able to deploy there as well. Normalized cash balance is tough to predict because, again, we're growing the overall balance sheet. But I'd say we're probably in a $10 billion to $15 billion cash hold now. So we've got a significant amount of cash that we need to deploy in the future, and we'll be able to do so. We've seen -- it's hard to say, as Joe said, it's very hard to predict deposit growth for us because of the engine that we have in place to drive that future deposit growth. We have been through a couple of rising rate environments now in our history. And although we've only had 1 quarter of negative deposit growth in all of our history, we did see that deposit growth moderate, right? So we do anticipate, as interest rates rise, we will see the growth moderates near impossible to think that we're going to grow $10 billion a quarter in perpetuity. And when that happens, then that should signal a stronger economy and steeper yield curve, which will give us plenty of asset classes to deploy into, and that's where we really monetize these cash balances.

Joseph DePaolo: Something Eric said early on with deployment is that we have a very bright future for the fourth quarter. Eric had pointed out that we had $1 billion in investment securities that settled on the last day. So that didn't contribute to net interest income and that we had $1.4 billion in loans settle and fund in the last 15 days of the quarter. So net interest income looks very bright for us in the fourth quarter.

Operator: We'll take our next question from Ebrahim Poonawala with Bank of America

Ebrahim Poonawala: I guess maybe just a quick follow-up on that statement Joe, and Eric, around the securities book. The 3-year to 5-year part of the curve is anywhere 30 basis points, 40 basis points above your start of the year. Just if you could size up, Eric, in terms of the incremental securities you could purchase during the quarter is $3 billion? Is it $5 billion? Would appreciate any color on that.

Eric Howell: It's somewhere in that range. It could be $3 billion, it could be as much as $5 billion. It's probably pushing it a little bit because we do have a lot of payoffs there. But we have to see how long the yield curve stays similarly situated as it is now, Ebrahim. So -- but if we have a 5-year and a 10-year position where it is now, we can deploy a fair amount of cash into the portfolio.

Joseph DePaolo: It would definitely be a record growth in investment securities in the fourth quarter based on where we are today.

Ebrahim Poonawala: Understood. And just on capital, so obviously you did the equity raise and you have a lot of risk-weighted capital. When you look at Tier 1 leverage, you're essentially where you were in the second quarter. Just remind us again how you're thinking about capital management, potential for another growth equity raise, I mean it would be a good thing, but give us some context around how you're thinking about this?

Eric Howell: We're in a good position today with the raise that we did early in the last quarter. So we feel good about where our capital levels are. But look, if we see an extended period of outsized growth, we're not going to be shy about raising capital, and that's our answer, and that's what's going to continue to be our answer.

Ebrahim Poonawala: Understood. And then just a quick follow-up, Eric, on the transfer volumes you mentioned. They were down quarter-over-quarter. How should we read into that? It feels like the backdrop, obviously, Bitcoin price is not totally correlated with that, I get it. But activity is increasing. I'm assuming you're adding clients. Just talk to us in terms of if that's the metric we are looking at, how we should think about the sequential drop? And if you can give us an update on the Circle partnership, where things stand, what's the outlook there?

Eric Howell: Look, we're early on still in this ecosystem. I don't think 1 quarter of volume decline is a trend by any means. We added near 100 clients in the quarter. So that's positive, and we're up $5 billion in deposits or over $5 billion in deposits in the quarter. So that's the key driver for us. So as Joe pointed out, this is a lower cost deposit play for us than we have at the rest of the bank, so -- on average. So we're in the early innings, and we've got a ways to go yet.

Joseph DePaolo: Just think of it that we're 4x ahead of the last year.

Ebrahim Poonawala: Okay. No understood. And any update, Joe, on the Circle and like how that partnership is growing?

Joseph DePaolo: We have a great relationship with Circle. We continue to do business. They opened up many operating accounts and are now doing a tremendous amount of business on Signet with their operating accounts. So the partnership is going well, and we continue to see it flourish.

Operator: We'll take our next question from Brock Vandervliet with UBS.

Brock Vandervliet: Just going back to Ken's question on the -- that 25 million securities lending relationship. You've been very thoughtful on how you've been approaching the market and building that business. That seems like you're going particularly slowly there. Is there a key regulatory -- some regulatory clarity you're awaiting? And if so, what is it?

Joseph DePaolo: We just think it's best to go slowly. We wanted to test it out, which we did. It's not going to be a vertical like others where we're going to depend on it for a great deployment. We're going to do it for the best clients. We're going to underwrite the loans as we state the credit readiness of the underlying borrower. We're not just going to take a Bitcoin and accept it as collateral, which we will accept as collateral, but we also want to underwrite that the borrower can actually pay back without worrying about the collateral. Where I just wouldn't depend on it being, if we do $100 million a quarter, let's say, that's not going to drive deployment to any great levels. It's just not something we're going to do for everyone. So I wouldn’t depend on it going forward.

Brock Vandervliet : And shifting over to the digital deposits, how much are stablecoin? And could you talk about specific regulatory changes there that may be coming, whether it means a Fed-regulated bank or treating them as money market funds? And how do you think that may shake out?

Joseph DePaolo: Well. First, we have stablecoin dollar deposits, we have $5.2 billion that are on reserve. And then we have also another $1 billion that are for stablecoin clients, but are not in the reserves, they're in their operating accounts. So the strict interest-bearing reserves is $5.2 billion and the total digital deposits is -- call it $23 billion. $23 billion in total deposits in digital, of which stablecoin is 5.2 billion.

Brock Vandervliet: And how do you see regulatory issues playing out there in terms of -- is there a risk of a change in the template?

Joseph DePaolo: From what we hear -- what we understand is that they wanted in deposits on by FDIC-insured banks and/or in treasuries. So if they want to put in treasuries, they could put in treasuries or in bank deposits, money market deposits. That's our discussions with the clients that we’ve had at the stablecoin.

Eric Howell: I mean, Brock, there's a lot that has to be done in the U.S. as it relates to regulations around financial technology, and we certainly appreciate that and understand that, where we are already highly regulated, and we ultimately expect that fintechs and others will need regulation as well, and we welcome that, right? For us, the DFS -- the New York DFS have been really strong supporters. And they have a team that's well versed in crypto and they work really well with us, and hopefully, they'll continue to do that with others as well

Joseph DePaolo: And our stablecoin clients are actually welcoming the regulation because they're in a position that regulation will actually eliminate a number of competitors, or be even small. It eliminates some of the competition because they're ready and willing and able to live under new regulatory guidance.

Operator: Our next question comes from Casey Haire with Jefferies.

Casey Haire: Wanted to follow up on the securities build, specifically the reinvestment rates. What was the rate that you got on that $1 billion at the end of the quarter? And then where is that today?

Eric Howell: I'm going to say it's probably in the low to mid 1s range, 1.5, 1.30 to 1.50, somewhere in there. Now I think we're over the 150 mark and what we're investing in.

Casey Haire: Okay. And is there any change, Eric, in the composition? Are you doing a mix of floaters and then regular pass-through type securities? Just some color on what you're buying today?

Eric Howell: I mean we're still -- it's the same type of securities that we've been buying for a long time. The defensive buys and agency CMOs, agency MBS pools, callable agency debentures, we've got some opportunistic plays that we've done in regional banks on debt and such. But it's more of the same really.

Casey Haire: Okay. Understood. And from a capital management perspective, what -- as you rotate from cash into these types of securities, what is the risk weighting for the risk-weighted ratios?

Eric Howell: I think it's 0% to 20%, right? I think it's in the 20% bucket, most of this.

Casey Haire: Okay. Very good. And then on the new loan vertical, any color you can provide in terms of what this can add to the loan growth guide per quarter, yield expenses? Just trying to get a sense of what's coming either this quarter or next year.

Eric Howell: Yes. In the mortgage warehouse lending team, they've got well over...

Casey Haire: Actually, I was talking about the other -- the new -- the team that you're going with, not mortgage warehouse or SBA?

Eric Howell: Or SBA. A little early to say. I mean, we're probably looking at when they're fully ramped 1 billion to 2 billion per year in growth.

Casey Haire: Okay. And a similar type yield as capital call mortgage warehouse?

Eric Howell: I'd say similar, hopefully, a little higher, probably a little bit more spread in that business.

Operator: We'll take our next question from Jared Shaw with Wells Fargo Securities.

Jared Shaw: Just circling back on Signet. What's the average transaction size done? Has that been moving around? Or is that sort of looking like this quarter versus what we've seen in the past?

Eric Howell: I don't have actual size of transactions. Sorry, Jared.

Jared Shaw: Order of magnitude. Is it getting bigger or smaller or just...?

Joseph DePaolo: They're larger than other banks that have because we do institutional only and very little retail, and the retail is high level. So at institutional level it’s going to be pretty high.

Jared Shaw: Okay. And then, I guess, just shifting to the commercial real estate side, when you look at CRE and multifamily, the balances there have been stable for a while, as you've grown capital and the market has stabilized a little bit. Any thoughts on potentially reengaging there and seeing growth? Or are you happy keeping balances stable here?

Joseph DePaolo: We're ready for some reengagement. We want to keep the balance growing a little on an annual basis. We think it's a strong asset to have. We were still dealing with the multigenerational, multi-year experience -- years of experience, and that has helped us through the pandemic. Because in the pandemic, we've been able to deal with the [jockey] and that's what you have to bet on. And so right now, we're coming through the pandemic in a very, very favorable way. And that has led us to believe that we should continue to grow the portfolio, albeit not what we did in the years past, but to grow it at a level that we're comfortable with, to keep it in line percentage-wise with the rest of the organization.

Operator: We'll next to Steven Alexopoulos with JPMorgan.

Steven Alexopoulos: I wanted to start on the digital asset business, we've seen some smaller banks announce that they are either now providing an on-ramp to the exchanges or holding stablecoin deposits. Are you guys seeing many new entrants into the space? And how difficult would it be for one of them to replicate Signet?

Joseph DePaolo: Well, some of them are entering the space to use a Signet type product for other ecosystems, not necessarily the digital ecosystem. But -- let's put it this way. 3 years ago, I said banks should be on the blockchain, where they would not survive within 5 years. So that's 2 years left to go. And we expect that there will be banks coming on the blockchain or they're going to merge. And there have been a number of announcements of mergers, and we think that's because they want to avoid on the blockchain technology on their own. So are you talking about any particular bank?

Steven Alexopoulos: Well, we've seen like Customers Bancorp said that they're now in the business, small. And there's been a couple of other small banks saying they're now holding more deposits from stablecoin companies. So we're just hearing rumblings. So I'm just really wondering how proprietary is Signet and can these newer entrants use off-the-shelf fintechs to basically replicate what you guys offer today?

Joseph DePaolo: Well, we were surprised that it took this long actually. We expected that it would have occurred sooner. Particularly with Customers Bank, we're actually excited that they are on board because we have a piece of ownership -- a meaningful piece of ownership in Tassat. And we have a board seat on Tassat. So we want them to do well. But I think with customers, they're looking to do things with other ecosystems because it's hard to get into the digital space if you don't have a team like we have a team that handles Signet, and we have a team that handles the digital clients, and we have a team that has years of experience. And that bodes well for us and for all us to do it because they don't have bankers that have experience in this space. With Signet and with other products, we're continuously making enhancements and we'll probably announce in the upcoming quarters, into the fourth or first quarter, announcements of some of the new things that we'll be doing. So we're not concerned at all because we were first out there. And I think being first out there and having -- coupled with having the experience goes a long way for us.

Eric Howell: And it's a massive growing ecosystem with room for others to play.

Steven Alexopoulos: Eric, to follow up on that and in the earlier commentary that volume has slowed a bit on Signet in the third quarter. Is your growth at this stage more about simply adding more institutions to the platform? Or is it more about seeing those volumes accelerate, so institutions hold more deposits with you, like which is the bigger driver here?

Joseph DePaolo: I must say, I'm not sure if the volumes drive it. It's really how much they keep in Signet and the transactions are pretty large, I -- although I don’t have the averages. So we are not concerned at all. We're actually looking at it compared to what we've done in the past years, and we're on a fourfold rate right now.

Steven Alexopoulos: That's helpful. And just 1 final one. Joe, want to shift to credit. Just any color on the linked quarter increase in NPLs this quarter, about $29 million.

Eric Howell: Yes. We really fully expect that our nonaccruals are going to increase as we're still dealing with the effect of pandemic, Steve. So it's not a surprise that our nonaccruals went up a little bit. Most of the loans that are coming out of non-pay are curing. But clearly, some are going to go into nonaccrual. I think the bright spot, if you want to call it that, is really that charge-offs are well contained. And under new CECL modeling, we were able to put up some pretty substantial provisions, which appear to be able to easily absorb any losses that we have coming out of it. But it's no surprise to us that we saw our nonaccruals climb. I think you're going to see that continue for several quarters as we work through the last lingering effects of COVID.

Operator: We'll take our next question from David Bishop with Seaport Research.

David Bishop: Most of my questions have been asked and answered. But I think, Eric, you started touching upon it. But the -- remind us in terms the new verticals, the mortgage warehouse and SBA, maybe what the expectations or targets for growth there?

Eric Howell: Yes. We did our first SBA 504 origination in the fourth quarter, so early on in this quarter. That's going to be a much slower growth, more granular type loans, which we love. I think if we can do $10 million to $20 million in originations in the fourth quarter, that would be great. And hopefully, next year, it's 20 to 30, and then 30 to 40, 40 to 50. So you're looking when that business is mature several years out from now. That being a $200 million to $500 million. I'm going to give you a fairly wide range there. Let's see how it goes. But $200 million to $500 million a year in growth. In the mortgage warehouse finance business, they've got almost $2 billion, I want to say, now in the pipeline. We expect, let's say, anywhere from $200 million to maybe even as much as $800 million, but that would really be on the high end of lines to close and draws will be roughly 50% of that. So we could see a couple of hundred million dollars of growth out of that vertical in the fourth quarter, and that should be $1 billion to $2 billion in growth per year going forward.

Operator: We'll go next to Chris McGratty with KBW.

Chris McGratty: Wondering, Eric, if you could provide an update on the expense run rate and the fee income trajectory given the momentum?

Eric Howell: Yes. On the expense front, we had some one-time items in the fourth quarter of last year that led to a low level of expenses. So we're probably pop back up to 14% to 16% growth in the fourth quarter this year compared to last year. And then for next year, we're really -- Chris, I think it's going to be a higher growth expense number. Similar to what we've seen in prior years, we'll start out in that 14 to 16 range. Might stay there for a few quarters, though, and then hopefully trend down when we get into the third and fourth quarters. We've brought on some massive business lines and undertaking a number of initiatives. And we need to invest in our people, in our operations and in our technology. So we're going to still have a hefty level of spend next year for sure. All that being said, the revenue growth is there, and we should continue to see efficiencies be gained and see our efficiency ratio go down even with the level of expense that we're talking about putting on.

Chris McGratty : That's great. And then maybe just a couple of housekeeping. The remaining PPP fees, and what was earned in the third quarter? And then also that 28.5% tax rate, is that kind of where you're guiding us?

Eric Howell: Yes. On the taxes, it's probably going to be closer to 28%. We are seeing some ongoing benefits. So I'd say, effective rate of 28% going forward. In the third quarter on the PPP fees, we recognized $15.6 million. And we've got $32.9 million remaining to be recognized, which should happen over the next 2 to 3 quarters.

Operator: We'll go next to David Long with Raymond James

David Long: Just the West Coast, you guys have done some pretty good expansion there, and I know it's late in the year. But just curious what your pipeline is there to add additional bankers on the West Coast. Is that something that you guys would look to continue to build? And is that more likely to see that maybe in the first half of next year versus anything in the rest of this year?

Eric Howell: No. I mean I think we might add a banker here and there to existing teams this year, but mostly at this point in the year we're setting the stage for next year. We do have a number of teams in the pipeline for California. So anywhere, I'd say, from 4 to 8 teams in the pipeline. So that's part of the growth guidance in the expenses as well.

Operator: This concludes our allotted time and today's conference. If you'd like to listen to a replay of today's conference, please dial 800-723-0488. A webcast archive of this call can be found at www.signatureny.com. Please disconnect your line at this time, and have a wonderful day.