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Signature Avoids the "Big Bank Baggage"

03/22/2019 5:00 am EST

Focus: FINANCIALS

Douglas Gerlach

President, ICLUBcentral, Inc.

Signature Bank (SBNY) began operations in 2001 and is now one of the 50 largest banks in the country despite having only 31 banking offices, explains Doug Gerlach, editor of Investor Advisory Services.

It caters to privately-owned business customers in the metropolitan New York City market, including one office in Connecticut. New York has the greatest concentration of both deposit customers and business customers.

Signature provides deposit, lending, and investment services to businesses, their owners, and senior management. It has no retail banking operations. In late February, Signature opened its first office in San Francisco.

What sets the company apart is its customer service model. Customers are served by relationship teams of experienced bankers in a “private client” setting. Signature obtains most of its growth by hiring away experienced banking teams from other banks.

Commercial loans and lines of credit can typically be prepaid with no penalty. It is very easy, therefore, for a commercial customer to move with its banker to the new bank.

Signature continues to hire new teams every year and now employs more than 100 teams. Bankers come to Signature Bank because it doesn’t seem to have the “baggage” that burdens the big banks such as reputational problems, subprime mortgage loans, or the designation as a Systemically Important Financial Institution (SIFI) which brings extra regulatory scrutiny.

Building teams of deposit-gatherers and lenders has allowed Signature Bank to grow much faster than traditional banks. While it costs money to attract and incentivize talented bankers, the cost of doing so appears to be less than the cost of building branches.

We arrive at this conclusion based on the low level of non-interest expenses in relation to Signature’s revenue. Around 77% of its assets consist of loans, and the rest consist of securities, cash, and other assets.

About 30% of Signature’s loans are commercial real estate loans, 42% are loans on apartment buildings, 21% are general corporate loans, and 7% residential home loans, construction loans, and other loans.

Problems related to taxi medallion loans masked the underlying growth of Signature’s business in 2016-2017. With this problem hopefully behind it, we believe the business is returning to growth. We expect long-term EPS growth of 12% annually, below the 20%+ growth of years past when Signature Bank was a much smaller entity.

Five years of such growth could lead to EPS of $16.28 for 2023. A repeat of the 2018’s high P/E ratio of 17.5 might result in a share price approaching $285. Adding in dividends, the potential total return exceeds 17% annually. We see the downside risk as 26% to $99, the multiple of last year’s low P/E and 2018’s EPS of $9.24.

Investors should note that as allowed under regulatory law, Signature Bank does not file quarterly and annual reports with the Security and Exchange Commissions (SEC) but instead with the Federal Deposit Insurance Corporation (FDIC).

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