SBNY (2020 - Q3)

Welcome to Signature Bank's 2020 Third Quarter Results Conference Call. Hosting the call today from Signature Bank are Joseph J. DePaolo, President and Chief Executive Officer; and Eric R. Howell, Senior Executive Vice President, Corporate and Business development. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Joseph J. DePaolo, President and Chief Executive Officer. You may begin. Joseph D

Thank you, Stephanie. Good morning, and thank you for joining us today for the Signature Bank 2020 Third Quarter Results Conference Call. Before I begin my formal remarks, Susan Lewis will read the forward-looking disclaimer. Please go ahead, Susan.

Thank you, Joe. This conference call and oral statements made from time to time by our representatives contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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 on 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.

Thank you, Susan. I will provide some overview into the quarterly results and then Eric Howell, our Senior Executive Vice President of Corporate and Business development, 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 continues to experience extraordinary growth during the country's protracted and challenging recovery from the COVID-19 pandemic. Our business philosophy of a client-centric single-point-of-contact model, led by experienced group directors continues to distinguish us, particularly in times of distress. We've been through many challenging times, including the Great Recession, and more challenges were expected to come. We did not know when or in what form, but we knew it was important to be better diversified. As expected, the performance of our established teams, coupled with our new initiatives, are performing remarkably well and will enable us to continue to deliver solid results during these unsettling times. Deposit growth which was up $4.1 billion in the quarter was again robust and driven by all our deposit gathering initiatives. Also, we had another quarter of strong loan growth, which increased by $1 billion, and the bank's pretax, pre-provision earnings grew by $44 million or 21% compared with the 2019 3rd quarter. Additionally, we were able to dramatically reduce loans in deferral from a peak of $11.1 billion or 25% of total loans to $2.3 billion or 5% of total loans. So now let's take a look at earnings. Pretax, pre-provision earnings for the 2020 third quarter were $252.4 million compared with $208.4 million to the 2013 -- 2019 third quarter, excuse me. The increase of $44 million or 21% was predominantly driven by substantial asset growth of $14.4 billion, offset by the investments we made in business initiatives, including our West Coast expansion. Net income for the 2020 third quarter was $138.6 million or $2.62 diluted earnings per share compared with $148.1 million or $2.74 diluted earnings per share for last year's third quarter. The decrease in net income was driven by a third quarter provisions for credit losses of $52.7 million which was predominantly attributable to COVID-19. Looking at deposits, the core of our philosophy. This was the second best quarter of deposit growth we ever reported, following last quarter's record performance. Deposits increased $4.1 billion or 8.2% to $54.3 billion this quarter, while average deposits grew by $4.2 billion. Moreover, this is now the fifth consecutive quarter, exceeding $1 billion in both total and average deposit growth. Noninterest-bearing deposits of $16.3 billion still represent a high 30% of total deposits. Since the third quarter of last year, deposit and loan growth, coupled with earnings retention, increased total assets by $14.4 billion or over 29%. Now let's take a look at our lending businesses. Loans during the 2020 third quarter increased $1 billion to $46.2 billion. For the prior 12 months, core loans or loans excluding PPP, grew $6.3 billion. The increase in loans this quarter was again driven primarily by new fund banking capital call facilities. This is the eighth consecutive quarter where C&I outpaced CRE growth, furthering the rapid transformation of the balance sheet to include more floating rate assets as we continue to diversify our portfolio. Nonaccrual loans are $81 million or 18 basis points compared with $47 million or 10 basis points for the second -- 2020 second quarter. Our 30- to 89-day past due loans decreased to $148.8 million. It is important to note, $80 million of the 30- to 89-day past dues were caused by processing and documentation delays given COVID-19 circumstances and are now current. Adjusting for this 30- to 89-day past dues were well within the normal range of $68.5 million. Our 90-day plus past due loans remained low at $10.6 million. Net charge-offs for the 2020 third quarter were $10.5 million or 9 basis points compared with $4.6 million for the 2020 second quarter. The provision for credit losses 2020 third quarter was $52.7 million compared with $93 million for the 2020 second quarter. This brought the bank's allowance for credit losses to 1.05%. And the coverage ratio stands at a healthy 596%, nearly 6x. As I mentioned earlier, the increase in the provision was predominantly attributable to COVID-19. Turning to loan deferrals. Loan deferrals peaked at $11.1 billion. As of October 15, we had $2.3 billion in deferrals or 5% of loan book. So we've made a dramatic improvement on this front. We fully anticipate that we will have increased nonaccrual loans and charge-offs in the coming quarters due to the effect of COVID. But given the level of our allowance for loan losses, where we have added $235 million since the adoption of CECL, and our strong earnings power we are adequately covered for what may come. Now on to the team front. In the 2020 third quarter, the bank onboarded three private client banking teams: one team in New York and two in the Greater Los Angeles Marketplace. Together with our San Francisco office, the bank now has a total of 22 private client banking teams on the West Coast. At this point, I'll turn the call over to Eric, and he will review the quarter's financial results in greater detail.

Thank you, Joe, and good morning, everyone. I'll start by reviewing net interest income and margin. Net interest income for the third quarter reached $389 million, up $61 million or 19% when compared with the 2019 third quarter, an increase of $1.6 million from the 2020 second quarter. Net interest margin for the quarter was 2.55% compared to 2.77% for the 2020 second quarter. The net interest margin for this quarter was primarily affected by 2 items: First, prepayment penalty income was down $5.9 million, causing 4 basis points of margin compression; and second, excess cash from the significant deposit flows impacted margin by 21 basis points. Now let's look at asset yields and funding costs for a moment. Interest-earning asset yields decreased 78 basis points from a year ago and 28 basis points from the linked quarter to 3.16%. The decrease in overall asset yields was driven by lower reinvestment rates in all of our asset classes. Additionally, excess cash and PPP loans continue to significantly affect average yields. Yields on the securities portfolio decreased 19 basis points linked quarter to 2.59%, given a much lower market for reinvestment, compressed spreads and elevated CPR speeds. The portfolio duration remained low at 2.4 years, given market pressures. Turning to our loan portfolio. Yields on average commercial loans and commercial mortgages declined 25 basis points to 3.66% compared with the 2020 second quarter. Excluding prepayment penalties from both quarters, yields decreased 18 basis points. Prepayment penalties for the 2020 third quarter were $5.8 million, down $5.9 million compared to the 2020 second quarter as the decline in the level of transactions in the market led to lower prepayment activity. And now looking at liabilities. Our overall deposit cost this quarter decreased by 5 basis points from 56 to 51 basis points due to the low interest rate environment. We anticipate that we will continue to meaningfully reduce our deposit costs in coming quarters. During the quarter, borrowings decreased $1 billion to $3 billion or 4.7% of our balance sheet. The entire decrease was due to prepayment of borrowings, which resulted in a penalty expense of $6.8 million. The average borrowing cost increased 5 basis points from the prior quarter to 2.22%. The increase was due to the paydown of lower cost borrowings. And overall, the cost of funds for the linked quarter decreased 7 basis points to 66 basis points. And now we'll turn to noninterest income and expense. Noninterest income for the 2020 third quarter was $24.2 million, an increase of $9.5 million or 64.5% when compared with the 2019 third quarter. The growth was primarily due to increases in fees and service charges, and gains on sales of securities and loans. Noninterest expense for the 2020 third quarter was $160.6 million versus $134.3 million for the same period a year ago. The $26 million or 19.6% increase was due to the significant hiring of private client banking teams on the West Coast, where we have hired 17 teams thus far in the year. Additionally, we incurred $6.8 million in prepayment penalty fees on the $1 billion in borrowings that we prepay. Excluding the penalty fees, the expense increase would have been 14.5% and when compared with the same period a year ago. And despite the significant hiring for the West Coast and the drag on margin from excess cash, the bank's efficiency ratio remained low at 38.9% for the 2020 third quarter versus 38% for the 2020 second quarter and 39.2% for the 2019 third quarter. And turning to capital, in the third quarter of 2020, the bank paid a cash dividend of $0.56 per share. The dividend had a minor effect on capital ratios, which all remained well in excess of regulatory requirements and augment the relatively low-risk profile of the balance sheet, as evidenced by a Tier 1 leverage ratio of 8.56% and total risk-based ratio of 11.98% as of the 2020 third quarter. And on October 6, 2020, the bank completed a public offering of $375 million in subordinated debt, which qualifies as Tier 2 capital. And now I'll turn the call back to Joe. Thank you.

Thanks, Eric. I'd like to thank my colleagues who have demonstrated their dedication to our clients and their needs during this pandemic. Times like these, our clients truly value the level of care and advice that my colleagues provide and our year-to-date performance reflects their extraordinary efforts and the strength of our franchise as we continue to execute on many fronts. Thus far, in 2020: one, we've added 18 teams, including 17 teams as part of our West Coast expansion; two, we delivered unbelievable deposit growth of $14 billion; three, robust core loan growth of $5.1 billion; four, the bank's pretax, pre-provision earnings grew by $91 million or 15% in the first 9 months of the year; five, we had a strong ROE of 10% in spite of the heavy amount of provisioning; lastly, number six, we have been able to dramatically reduce loans in deferral from a high of $11.1 billion or 25% of total loans to $2.3 billion or 5% as of October 15. During the fourth quarter, we're deploying the excess cash in securities and loans, and we're continuing to decrease deposit interest rates, we should be in the low 40 basis points or high 30 basis points by the end of the year. Now we are happy to answer any questions you might have. Stephanie, I'll turn it back to you.

[Operator Instructions]. Our first question comes from Mark Fitzgibbon with Piper Sandler.

I was wondering if you could share with us what the split of the $4 billion of deposits that you had this quarter between sort of the East Coast and West Coast, what was the mix of that? And also, if you could share with us total loan and deposit balances out West?

Well, I could tell you where the deposits were broken down somewhat. The teams in New York, we had 9 teams, these are the teams that have been around for quite a bit. Nine teams grew more than $75 million. And of the 9, 7 of the 9 teams grew more than $110 million. We had the more specialized mortgage servicing team that grew about $500 million. We had venture capital nearly, $200 million; fund banking, nearly $100 million; the West Coast, nearly $100 million; and digital was over $1 billion. So it's really across the board.

Fair enough. And then secondly, I guess, I'm curious, I know that you've mentioned you have quite a few teams in the pipeline, mostly out West. From a practical standpoint, how many of those do you think you could bring on maybe in the fourth quarter and all of next year?

It's unlikely we'll bring on any teams in the fourth quarter because of when the timing of when they'll get their bonuses. But we're actually planning right now for 2021. So it's hard to say how many teams we can bring on, but it could be a wide range of teams in terms of numbers.

Okay. And then I wondered if you could help us think about your outlook for the net interest margin in 4Q?

I want Eric take the lengthy question.

Yes. Thanks, Joe. Appreciate that. I mean, at this point, the NIM is pretty impossible to predict, Mark. We feel unbelievably comfortable that we're going to drive net interest income significantly higher this quarter. We had a lot of loan growth that came on at the end of the third quarter. In fact, most of our loan growth came on at the end of the third quarter. So that will flow in nicely into the fourth quarter. We have some nice loan growth already in the fourth quarter, which will be beneficial. We are investing in the securities portfolio, although we continue to be selective given the elections that are coming up and the potential for a spike in rates there. So we're being a little selective until after the elections on the securities portfolio. But we're putting a lot of cash to use right now. So we feel very comfortable about driving NII up. As it relates to the NIM, it's really hard to predict because we continue to have very robust deposit flows. And we've had some significant DDA deposits coming in that we know will leave in short order. But the normal deposit growth continues already into this quarter. So we've got even more cash to put to use. But we feel very good about NII growth.

Okay. Great. And then last question, based on the growth that you see, do you anticipate needing to raise equity capital over, say, the next several quarters?

God know. We our earnings power plus the more normalized provision, our balance sheet could grow with the earnings $6 billion to $8 billion annually. We don't expect a $14 billion growth that we've had the first 9 months of this year, although the fourth quarter, as Eric mentioned, has been pretty substantial. So with our earnings power, we could go $6 billion to $8 billion. We don't anticipate that the flood of deposits that we have will continue. Our earnings are going to be accretive to growth. We're comfortable with the capital ratios. We don't plan on anytime soon doing any equity capital raise at all.

Your next question comes from David Rochester with Compass Point.

It was good to see those deferrals continue to move lower, and the credit metrics there were a nice add to the release as well. I was just wondering if you could give an update on how you're thinking about the loss content in those buckets at this point given you've had more time to work with these guys? And then if you have any updated trends on collections for any of those buckets, that would be great.

Sure, David. I mean, in talking to our clients, very broadly, they are continuing to work with us, right? We're trying to find solutions for them to meet the challenges that they have. Our conversations have been positive. They want to hold on to their properties. They want to run their properties. They want to run their businesses. They want to own their pieces of equipment that generate revenues. So given all of that, we feel quite comfortable that we are more than adequately reserved for what's to come, right? And as Joe talked about, our earnings power is significant, and we feel that between our provisions and our earnings power, that we're -- we'll be able to fight through this environment. We do not see a significant loss content coming out of these loans, but there will be losses, let's not hit ourselves. And we will have non-accruals go up. But we feel it will be at a level that we can easily fight through. So as for collections, we continue to see, I'd say, broadly positive trends there. The ranges on the collections are still in the same range that we've seen before, but most are coming in at the higher end of the range. We feel good that our clients -- now they've been many months into this, they have been able to work with their tenants in getting the collections up. So that continues to trend positively.

And if I may add, utilizing the CARES Act. We're taking appropriate actions to keep clients in their businesses. That is the main goal. That was the goal of the CARES Act, and that's the goal of us to keep clients in the businesses that they're in. And hopefully, the timing issue of more stimulus and vaccine will let them survive.

All right. Great. And then just switching to the NIM. I appreciated the color on where the deposit costs can go and how soon. I was just wondering how much more flexibility you have to retire more of those borrowings near-term given you've got a lot of deposit growth continuing to come in to your -- if you can just keep shipping away those, like you did this quarter?

Yes. We'll continue to do that. We're looking at about $250 million in borrowings now to see if it makes sense for us to prepay those and probably we'll give the amount of cash that we're sitting on. It will most likely cost us a similar amount to what we saw this quarter, that's $6 million to $7 million range in prepayment expense.

We have a pretty substantial deposit -- I'm sorry, a pretty substantial long pipeline, particularly in fund banking. The fourth quarter is usually their best quarter, so we could see well over $1 billion in growth there. Signature Financial, equipment financing and leasing, their best quarter is usually the fourth quarter. So the pipeline is pretty significant. And we'll be buying -- we'll step up the buying of securities once the election is over and we get a sense of where the yield curve will be.

Yes. Yes. No, they could definitely change at that point. I was just curious where you're seeing those yields today if they're still like in the low 1s range for what you're buying?

Correct. They're in the low 1s.

And then what was securities premium amortization expense this quarter versus last quarter? I was just trying to figure out what the impact was there.

It was up pretty significantly. It was up $2.4 million this quarter compared to the prior quarter.

Okay. And then maybe just switching to new loan yields. I think you were at sort of mid-2s on capital call lines previously. And then if we just get an update on the multifamily and commercial real estate, for which you guys are refinancing there, that would be great.

Multifamily, the five year fix is about 3.5. That's what we've been sticking with. And the capital call loans mid-2s. So some low 3s, but primarily mid-2s.

Your next question is from Matthew Breese with Stephens Inc.

You mentioned a normalized or getting to a more normalized provision. You also mentioned that you feel like you're pretty adequately reserved. With these comments in mind, could you just talk a little bit about the provision outlook over the next few quarters or the cadence of provision, perhaps provide a range?

It's really hard to predict with CECL modeling these days, Matt, where it's going to go. I don't think we're going to get back to a truly normalized provision level where it's $5 million to $10 million. So it will probably be elevated from there for a little while. But we have to see what the Moody's model has come out with over the next few quarters, and that's difficult for us to predict.

Okay. And then just thinking about total asset growth over the last year has been way beyond what any of us thought a year ago. As you think about the next 12 months, is that $6 billion to $8 billion, is that a good range of what you expect the balance sheet to grow by? Or could you provide some outlook there?

Well, we're trying to stay with the $3 billion to $5 billion. We had $13 billion thus far in 9 months. I'm almost afraid to tell you how much the growth has been so far in the fourth quarter. It's been robust. Although half of the growth is due to escrow accounts from class actions that we'll be leaving over a period of a few weeks. We don't see that happening in 2021. All the initiatives are kicking in, but there's some of the clients we tell them that we cap them at a certain dollar level where they're pretty substantial, and some of them will go off balance sheet.

And we have to see where the yield curve goes and that could bring alternative investments back into the mix. I mean, let's face it. Everybody has been moving from off-balance sheet on to the balance sheets of banks. We've certainly been benefiting from that. No question. So if we see rates rise, we could certainly see the opposite happen where the deposits will move to off-balance sheet investments.

Could you just give us some sense for the kind of liquidity you might hold on the balance sheet over the next 6 months? And how much of that 21 basis point drag is recoverable back to the top line NIM?

Well, we'll probably going to keep liquidity under normal circumstances at about $2 billion. And I don't see us going below that as we've gotten large.

So is that to say, the $6 billion in cash you had this quarter can go to $2 million next quarter, and you can get the majority of that 21 basis points right back?

Actually that's what we would hope, but we doubt it. We have -- although the loan pipeline is very strong. Our Treasurer is already tied to his seat for 24 hours. We don't let him out to buy investments, but he's holding off somewhat because of the election.

Yes. But realistically, it will take us several quarters to deploy that amount of cash, Matt.

Matt, to give you an idea, this quarter, we're up $7 billion. And we're only into the 20th day. Now $3.5 billion of that is going to leave rather quickly, it's in DDA. So let's call it $3.5 billion. That's $3.5 billion more in cash that we have to deploy. So it is going to take us several quarters.

Your next question is from Casey Haire with Jefferies.

Okay. So a question on the timing of charge-offs as well as the deferral strategy into 2021. With the deferrals of 5% right now, you -- the CARES Act does allow you to take those into 2021, if you so choose. Can you just talk us through how you guys are thinking about that? And how that might impact charge-offs and the trajectory there?

Well, we've identified a series of loans, first of all, the loans that are part of the deferrals. We're now between -- now and the end of the year, there's just a few options. One, they come off the deferrals and start paying that P&I. They come off the deferrals and they start just paying interest-only or they come off the deferrals for -- no, then they go on to -- then there's the ones that stay on deferrals. They would be on deferrals for 6 months and then 12 months interest only. So there's a few different options that we can do. But the one thing I will tell you is they have to have a sense of collection that was -- the loan, after it comes off deferral and interest-only, that is a collectible loan that it could start paying principal and interest. If that's not the case we will try do off a piece of it and try to negotiate from there to sell the loan. We will do that immediately in the fourth quarter for those loans that under the CARES Act will not make it. If we believe that the cash flow is back for the loan to make it, then we will extend it anywhere from 6 to really 12 to 18 months, if not longer. The goal is to take the actions to keep the clients in their businesses. A good example would be Broadway. Broadway they said is not opening up until the first weekend in June. That's incredibly optimistic, more likely after Labor Day than after Memorial Day. And then we still don't know in New York state, they still haven't given an idea of what number of seats that they could allow people to sit in. A good example is the Beacon Theatre has 2,800 seats. They can't sign a contract because they can't tell you whether you will have 2,100, 2,800 or 1,400. So that's an example of this. The Beacon Theatre -- they're not a client. But if they were a client of ours, we would have to give them a long period of time. So again, the goal is to keep the clients in their businesses. There will be charge-offs in the fourth quarter. There will be charge-offs probably from the first quarter to the fourth quarter of 2021. But I think the key aspect is that we feel very comfortable with our provisioning and our allowance where we are today for the portfolio that we have.

Given all the discussions that we're having with our clients as well, we just don't see a meaningful high level of charge-offs at this point.

Okay. And in the release, you guys put out the conservative underwriting, a lot of LTVs under 60%. And I know it's tough given the lack of transactions to see where that is today. But given your confidence in the reserve build, where it is today, what kind of price degradation are you guys baking into your forecast? And then on the debt service coverage ratio front, presumably, you should have some visibility into that. Where are those -- where is the debt service coverage on multifamily, office, retail at these collection rates?

I'd say on the multifamily, it's a little north of 1x that service coverage now, right? But it's really property dependent and all over the board. As we get into retail, it probably slipped under 1x. But again, it's a broad range there as well and same for the office.

The operators of the properties, the multigenerational, multi-million dollar families, I'm not saying that they're going to rescue any of the properties that ultimately have to be charged off. But they are stepping up on the properties where there's some decent cash flow, and they have to fill the differential because they want to keep the properties, we're certainly seeing that. As long as we make a -- negotiate fairly and they negotiate fairly they can get an interest-only for a period of time that will allow them to get through this pandemic.

Your next question is from Ken Zerbe with Morgan Stanley.

Just in terms of loan yields, obviously, we did see a really big drop. I think it was down 25 basis points sequentially. Is that all due to the capital calls coming on at much lower yields? Or is there sort of -- I know you said there wasn't really a lot of acceleration or prepays on the multifamily side. I'm just trying to get my head around why loan yields fell as much as they did? And is that something we should continue to expect?

Yes. I mean, some of it's certainly -- we're seeing credits come on at lower yields, right, given the interest rate environment. We also have PPP in there for a full quarter, right? So on average, it was $2 billion for the third quarter, it was $1.2 billion for the second quarter. So that was about 8 basis points of the compression as well. But generally, we are seeing all of our asset classes come in at lower yields today.

I just want to add, with the capital call loans, we made a decision a couple of years ago that we needed to transform the balance sheet to have floating rate. And it was important for us to have a floating rate generation of loans. And that's what's happening with the capital call facilities. Another thing is that the reserve is such that if we didn't count the capital call facilities in the reserve it would be what, 1.34?

Yes.

It would be 1.34 as opposed to 1.05. And that's pretty significant because they're fairly stable and fairly highly credit rated loans. So we're sacrificing a little bit to have fully rate loans in the era of LIBOR being 15 basis points. But it does transform our balance sheet to something that's a little bit more neutral than where we were with fixed rate loans dominating the whole balance sheet several years ago.

Got it. Understood. And then in terms of the 5% loans that are still on deferral, how many of those were actually six month deferrals to start with versus basically asking for a second round deferral?

They're all 90 days second around deferrals.

Got it. Okay. And then I guess just last question. In terms of the debt repayment that you guys did, how much of the benefit is in this quarter versus anything that may come in fourth quarter that's not being recognized yet?

I'd be guessing at that number. I want to say it's about a $1.5 million per quarter. No, no, it's about $1 million per month, actually. So it's about $3 million per quarter will be paid back in 5 to 6 months.

Your next question is from Ebrahim Poonawala with Bank of America.

Just all the follow-up on credit. I mean the stock is where it is, it's because of credit, right? I don't think growth in NII is the issue here. Like when we think about the deferrals of the overall CRE book, added to your point, I understand the CECL challenge in terms of forecasting provisioning. But is it safe to assume that unless something drastically goes wrong in -- from a macro perspective, you would expect provisions to be at or below 3Q levels if we look forward based on the analysis you've done on this loan book?

That seems reasonable.

Got it. And when we think about the next update on this deferred book, the $2.3 billion, maybe it's December, maybe it's Jan. What is your expectation around the percentage of this book that actually goes into the 12-month extended deferral versus that comes back to paying? I'm assuming you have a good sense of which borrowers, like Joe mentioned, some of the Broadway customers may need that additional time. What's your expectation? And just the level of confidence around knowing what percentage of this book needs that extra help?

Yes. I mean it's still a little early to predict that. Certainly, there will be a percentage that will go back to paying. We think the majority will go to paying interest only. And then we'll have a smaller amount that will need 6 months further P&I deferral and then go to interest only. And when we do that, we're looking to get enhancements to the credit. Ultimately, though, we think that the vast majority will get back to a position where they're paying us something.

Eric said something very key there when he said credit enhancement. Because for the longer-term situations, we're trying to get 12 months of cash, 12 months of interest, I mean, put into account of a personal guarantee something that we should get for giving them a longer period of time to get back to where they need to be.

Got it. And just one last question to that, Joe. How worried are you about the New York City economy, right? A lot of this is just driven on people's perspective of what New York City will look like 3, 6, 9 months or 12 months out. Given your sense of talking to business owners, landlords, what is your expectation where the New York City economy will be 3, 6 months out as we look into next year?

Well, not only is our portfolio resilient, New York City and the metropolitan area is incredibly resilient. If you take the population of the area and take the economy of the area, there is a country, it being top -- it'd be more than 50% bigger than all the countries in the world. It's that Broadway. Chicago, London, Los Angeles, they are placed, but they're not Broadway. You want to see Broadway, you come to New York. You want to see museums, you come to New York. You want to see Central Park, you have to come to New York. St. Patrick's Cathedral, I mean, there's just so many things here. It's very resilient. The fact that people temporarily have moved away. If they owned an apartment, they haven't given up their apartments. Maybe they found out that the suburbs were nice, but there's nothing that compares to New York City. So we're very, very bullish on the New York City. We really do believe it's a timing issue. Whether it's January of 2020 -- January of 2021, there's going to be a vaccine, or whether the Democrats or Republicans run the government there's going to be a stimulus. We're very bullish on the city, and we're very bullish on our portfolio.

Your next question is from Steven Alexopoulos with JPMorgan.

So first, regarding the commentary that you expect to see increased nonaccruals and net charge-offs in coming quarters. Which portfolio do you see driving near-term charge-offs?

Yes. I'd say the area that we're mostly focused on is the retail. It's really the destination of retail where we really need the New York City, Manhattan, in particular, to open up. So we've got about $250 million that we've circled that we're keeping a closed eye on that's in those destination areas of Manhattan that I'd say would be the focal point, Steve.

Okay. That's helpful. And then you both said actually a couple of times that you felt adequately covered for the credit challenge ahead. But do you mean from an existing reserve standpoint or do you mean from a pretax pre-provision, you can add more to the reserve standpoint?

We mean both, really. I mean, from existing, we obviously feel adequately reserved. But what gives us a higher level of comfort is the fact that we generated a significant amount of earnings. We had an 11% ROE while providing $50 million in provisions, right? There's not many banks that have that level of earnings power that we have. And we talked about our net interest income, we expect it to go up significantly this quarter. So we've got a lot of earnings power in front of us, and that should allow us to overcome any of the challenges that we have coming ahead, any of the, let's say, unforeseen challenges.

A large part of what gives us the confidence is we have both -- we can work both as a liability and the asset side. We can bring down liability costs from where they are today at 51% to low-4s, low-40s, high-30s. And then Eric talked about all the cash we have that we can deploy. So we're fairly -- I shouldn't say fairly confident, we're very confident on the increase that will happen in the fourth quarter.

Okay. That's helpful. And then, I mean, outside of maybe some NIM pressure this quarter, clearly, the biggest overhang on the stock is the New York City commercial real estate exposure. And most investors I talked to, they're pretty comfortable with the multifamily. It's the remaining $10 billion that investors are concerned with. You guys talk about what stress testing have you done in that $10 billion? And what segments do you see as most risk of seeing losses?

I mean we talked about it. It's really the retail, the destination retail in Soho, Times Square, that's mostly what we're focused on right now. I mean what's good about the retail portfolio, what we've seen from it is the neighborhood retail. As the outer boroughs have opened up and the economies have opened up in Westchester, Long Island and elsewhere. We've seen that neighborhood retail really spring back pretty rapidly. So we need New York to open up. We need Manhattan to open up, and I think we'll be in good shape there. But that's really the area that we're most focused on is destination retail.

Yes, which I would assume would be in mixed-use, the $1.1 billion. So Eric, what are the specific reserves now in that portfolio?

Give me one second here, Steve, sorry. So on the CRE, we have 1.75% in reserves with another 6% on our ADC loans and 76 basis points on our multifamily.

Okay. You don't have the retail. The part you're most concerned about, you don't have that by chance do you?

I don't have it broken out of the CRE, but that's retail and office.

Your next question is from Brocker Vandervliet with UBS.

Just kind of a variant on some of the other thematic questions since most of the stuff has been asked. It seems like we get one day of pretty positive credit results and outlook from you guys. And this endless stream of negative news on New York and New York Real Estate from various news and wire services. And it's very hard to separate the fundamentals from that overhang, which may also be fundamental. When you think about New York and you think about your portfolio, what is it that makes you more confident than some of these more macro stories, which make good points about how potentially severe the situation is just to try to give investors more comfort?

Well, they wouldn't write the story if it wasn't -- if they couldn't say something terribly wrong with the situation. They're not writing any good stories because people are not attracted to that. But having said that, we're not on the Madison Avenue. We're not on 57th street. We're in the B-type buildings and on the Street 9 Avenues. We have some destination retail, but most of the retail is neighborhood retail, where -- whether it's on Fordham Road in the Bronx or Westchester Avenue in the Bronx or Northern Boulevard in Queens, those are the places that we have, some of the retail. And we're very confident having worked and lived in the city about it's -- how robust it is. And we're also confident in the clients themselves. I think that's important. We always say, one of our former colleagues used to say, bet on the jockey, not on the horse. And we've bet on the jockey here. And we've had clients step up because they're multigenerational, multimillionaire, well experienced handlers of real estate and that gives us a lot of comfort. We believe it's a timing issue. When I say timing issue, if we can keep some of these clients in their businesses, New York will come back. I don't think it's a death sentence what's going on. I think if the mayor and the Governor cooperated with each other, we'd be in a better situation. We're very much looking forward in this institution that I'm sitting in right now at Signature Bank for there to be a change in administration of New York City. So that's -- these are the positives. I know there are a number of negatives, but we believe the positives outweigh the negatives. And I think one of the things that drives us is the fact that the type of clients that we have.

Your next question comes from Chris McGratty with KBW.

Eric, I want to make sure I heard the expense comment. You talked about, I think, 14.5% year-on-year, excluding the charge this quarter. Could you just repeat kind of expectations for Q4? And then I think on prior calls, you've said, "Hey, that number is going to glide down to low double digits." I just want to see if that's still the case depending on the pace of investment.

Yes. Well, I would have expected that we'd see expense growth in the fourth quarter to be around 14%, but we did, again, talk about the potential for prepaying some borrowings. So that might pop that back up to 18%, 19% range. So ex the prepayment borrowings, we should be around 14%. But as Joe alluded to earlier, we have significant opportunities on the West Coast still. We're not sure which opportunities we're going to capture, but there's a lot of them out there. So we could see expenses pop back up in the first quarter, but it's a little too early to tell, Chris.

Okay. Okay. And last one. Obviously, there's a lot with the stimulus being proposed with tax increases. I know you guys have a little bit of noise with the fee income and the tax line. Anything differently structurally with your tax strategies that the similar math from after the 16 election wouldn't be the opposite into similar magnitude this time around if we get tax increases?

Yes. We believe that if there is a change in administration, our taxes are going to go up, banks taxes, clearly.

But in terms of the sensitivity, I think, what's being proposed is going to 28% from 21%, I mean, is the math -- is the proportional math the same as though -- when you guys receive the benefit after 16, if taxes got cut.

It should be. It should be, Chris. I mean there's a lot of moving pieces when calculating that. It should be similar. In this quarter we had a lot of actuals, we file our actual taxes in September. So we had tax to accrual differences that we had the true up. So ex any change in administration and change in the tax rates and tax code, we should be at that 24% -- 28%, sorry, tax rate moving forward.

And we're pretty confident, new administration says that they're filing it in January, the day after the inauguration.

Your next question comes from Jared Shaw with Wells Fargo.

Maybe just asking the credit on a different level. It sounds like we should then expect maybe this quarter is the high watermark for the ACL as a percentage of loans, just given future growth coming from that capital call business and the comfort that you reserved for the worst of the credit. Is that a good way to look at it?

For any macroeconomic change, that's a fair way to look at it.

Okay. Great. And then Joe, you had mentioned $1 billion of digital deposit growth. Can you give a little color on that? And is that tied in at all to Signet at all? Or any update there?

Yes. I would say, in part, it's because of Signet and some of the enhancements we've made to Signet. And some of the clients that we're bringing on board were probably hesitant a couple of years ago. They wanted to see that we were in the business. We were going to stay in the business, and now we have the capabilities. And as a result, we're doing quite a good business now. The OCC is talking about banks holding the dollars, support stablecoins and let's just say we're starting to do that. And that's going to drive some of the deposit growth in the digital world.

Your next question is from Christopher Keith with D.A. Davidson.

So I was just looking at the average yield on loans. The commercial loans was 3.66%. You're putting multi-family loans on at 3.50%. Can you just give me a sense of the amount of CRE and multifamily loans that are set to reprice maybe in 4Q '20 and then maybe over the course of '21?

Yes. We have approximately $1 billion per quarter, that's repricing.

Okay. And then just, I guess, assuming a modestly steepening curve getting to maybe the 90 basis point range by 2021. Can you just talk a bit on the impact on both your commercial and then residential mortgage yields with that assumption?

I don't think that will meaningfully change our commercial mortgage yields. We'll still be in that mid- 3.50%, 3.75% range. We're not a resi lender at all. So there's no -- nothing there.

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