Signature Bank (
) has written the playbook to outrun its "too big to fail" rivals
in a modern-day David vs. Goliath story set on Wall Street.
Since opening its doors in May 2001, the bank has grown from
$50 million to $22.4 billion in assets, ranking in the top 1% of
all commercial U.S. banks by assets. It runs 27 branches
throughout the metropolitan New York area with plans to open
three more by year's end.
Signature Bank's business exploded through word of mouth. The
company spends no money on traditional advertising, marketing or
recruiting. It hires teams of bankers with an established book of
clients away from competitors and treats each of its 90 teams as
a little bank within a larger bank.
"That's why this model is so different -- because we do
everything on a team basis," said Joseph DePaolo, Signature's
founder and CEO. "The client identifies with the team. The client
doesn't identify with the bank, very different thanHSBC (
),Capital One (
),Bank of America (BAC) andWells Fargo (WFC).
"Our clients don't make decisions based on ads or marketing
schemes. They make decisions based upon the relationship that
In a highly commoditized industry with more than 7,000
competitors, Signature ranks as the 61st largest. It has recorded
at least double-digit percentage profit growth for 16 straight
quarters, including during the financial crisis.
Signature Bank stock has rallied 21% for the year to date,
outpacing both the
and regional banks industry groups, which have appreciated only
3% to 4% each. During the 2008 bear market, Signature's stock
fell only 15% while banks dropped 23% and the S&P 500 crashed
Signature currently tallies $17.1 billion in deposits and
$13.5 billion in loans, which appears like pocket change against
its so-called "too-big-to-fail" competitors with trillions in
assets. It targets a niche clientele of privately owned
businesses, their owners and staff, and high-net-worth
individuals. It provides highly personalized service in which
clients deal with one team for all of their banking needs rather
than representatives in different departments at traditional
While many other banks focus on generating revenue from loans
and trade complicated financial products such as credit default
swaps, DePaolo keeps business simple. His bank lends very
conservatively, stays away from sophisticated products and
focuses on getting clients to stash their cash at Signature.
"We're a deposit-generating institution first and foremost,"
said DePaolo, an Italian-American born and raised in the Bronx
who speaks with a New York accent. "In order to convince clients
to keep dollars with your institution, you have to maintain a
solid balance sheet with high levels of capital and the only way
to do that is to be conservative in the lending."
"I like to tell people if you are teaching Banking 101, use
Signature Bank's balance sheet," DePaolo added.
Customer deposits have grown at an annual compounded rate of
23% since 2008.
"Signature has had tremendous growth over the last 10 plus
years but they only have deposit share in metro New York of about
1%," said Bob Ramsey, equity analyst for FBR Capital Markets in
Arlington, Va. "So they have a lot of runway to continue to
Signature's ability to post well-above average loan growth
will be the key driver of the stock's valuation and investor
returns, Ken Zerbe and Jonathan Katz, analysts at Morgan Stanley,
wrote in a research note Feb. 20.
They forecast loan growth of 20% to 22% in each of the next
two years, nearly triple the industry average of about 7%. Loans
grew 38% year over year in 2013. Loan defaults are very rare.
Nonperforming assets amounted to merely 0.23% of total loans in
Signature is growing profits faster than its peers thanks to
its strong credit quality and low efficiency ratio of 35% vs. 62%
for its peers. The ratio measures the bank's overhead as a
percentage of revenue.
Zerbe and Katz forecast 19% and 15% year-over-year
net-interest income growth in 2014 and 2015, respectively, vs.
increases of 3% and 7% for the bank's competitors. Signature has
superior return on equity of 14.4% for 2014 vs. the 9% mid-cap
Outlook And Investment Risks
Banks need stronger economic growth to enjoy a meaningful
increase in loan demand, although Signature will continue to
enjoy higher loan growth relative to the industry as it adds more
banking teams and grows its portfolio of multifamily housing
investments in New York, said Ramsey.
"Signature has the best growth prospects since we took them
public in 2004," said Ramsey.
New York Story
All of the buildings, or collateral, in Signature's real
estate loan portfolio are located within the New York
metropolitan area, which subjects its financial health to changes
in New York's economy and its real estate market, analyst Jason
Goldberg and his colleagues at Barclays wrote in a client
research note March 3.
"A prolonged period of economic recession or other adverse
economic conditions in the New York metropolitan area, such as
the one it is experiencing now, may result in an increase in
nonpayment of loans, a decrease in collateral value, and an
increase in its allowance for loan losses," Goldberg and his
Richard Bove, who leads financials services equity research at
Rafferty Capital Markets, headquartered in Garden City, N.Y.,
sees a boom in corporate capital spending, driving earnings
growth for commercial banks.
"In 2013, the banking industry earned more money than any time
in its history and, in 2014, it will top that amount with an
all-time new record," said Bove.