Signature Bank President and CEO Joseph DePaolo called 2022 "a tough year for deposits."
Was it ever.
The $110.4 billion-asset bank on Tuesday reported a 17% year-over-year drop-off in deposits — the first annual decline in its 21-year history.
DePaolo attributed the lion's share of the shrinkage, approximately $9.7 billion, to a previously announced strategy to scale back the bank's concentration of crypto-related deposits, as well as a decision to allow other rate-sensitive deposits to run off, rather than match what he termed "irrational" pricing by competitors.
Signature reported total deposits of $88.6 billion on Dec. 31, down from $106.1 billion a year earlier.
During a conference call with investor analysts, DePaolo and Chief Operating Officer Eric Howell said that deposit totals will likely decline further during the first half of 2023, as Signature works to offload an additional $3 billion to $5 billion in crypto-linked deposits.
New York-based Signature is "executing on a strategy" to reduce its concentration of crypto-related deposits in the wake of the turbulence that has rocked the digital-currency sector, DePaolo said. The CEO has stressed that Signature has no exposure to cryptocurrencies beyond deposits, a point he reiterated Tuesday.
"We have many other businesses whose positive characteristics are being overlooked" because of the spotlight on cryptocurrencies, DePaolo said.
To date, Signature has made up for the sharp drop in deposits
Howell, however, said he is hopeful the drain on deposits will cease by midyear, and Signature disclosed some hopeful news Tuesday on that front. It reported that deposits have grown by a net $1.8 billion during the first few weeks of 2023, with inflows of $2.5 billion offset by an additional $700 million of digital currency-related runoff.
Cryptocurrency clients were quick to embrace Signet, the blockchain-based digital payments platform that Signature unveiled in June 2020. Signature is not seeking to terminate those relationships, just "limit the amount of deposits [cryptocurrency] clients can hold," DePaolo said. He added that cargo shippers conduct more transactions on Signet than cryptocurrency firms and said that Signature "looks forward to having more nondigital ecosystems" join the platform.
David Smith, who covers Signature for Autonomous Research, wrote Tuesday in a research note that the decline in deposits, though "much sharper than expected," may work to the bank's advantage by assuaging concerns about cryptocurrency exposure that have acted as an "overhang" on shares.
In a similar vein, Janney Montgomery Scott analyst Jake Civiello called the pickup in first-quarter deposits "reassuring," adding that healthy capital ratios and the bank's announcement of a 25% dividend increase "should give investors confidence" that uncertainty surrounding deposits will abate as 2023 progresses.
Signature "should experience valuation improvement in 2023 as the balance sheet reset drives more sustainable, better forward performance," Civiello wrote in a research note.
Signature shares closed up more than 2% at $121.18 on Tuesday.
Signature reported fourth-quarter net income of $300.8 million, up 11% year over year. Strong earnings prompted the bank to announce a 14-cent increase in its dividend, pushing it to 70 cents per share.
"We have long-term confidence in the earnings power of our franchise and are happy to increase our dividend," DePaolo said.
Signature reported strong asset quality for the fourth quarter, with nonaccrual loans declining on both a linked-quarter and year-over-year basis, and quarterly net charge-offs amounting to 10 basis points of average loans on an annualized basis. At the same time, the company did demonstrate some concern going forward, reporting a $42.8 million provision for credit losses for the fourth quarter, up from $6.9 million a year earlier.
"The increase was primarily driven by a deteriorating macroeconomic forecast," Howell said.
