My worry about SBNY

Investment Analysis Clubs Saul’s Investing Discussions
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In a neighborhood where I stay at times in midtown Manhattan I’ve been seeing a lot of empty storefronts. On one stretch of a few blocks on 1st and 2nd Ave in the 50’s I saw two closed supermarkets (Food Emporium). They have now been sitting empty for more than a year. Also a large closed Duane Reade Pharmacy, and a closed Citibank Branch, both also sitting empty for over a year. And another Walgreen’s just closed. This is A LOT of empty space. And several closed restaurants and small shop fronts that have not re-opened.

I think that the Internet is really taking a toll on brick-and-mortar retail (and on retail bank branches). It’s hard to imagine what will ever fill up all that space. 1st and 2nd Ave in the 50’s are middle class at least, have lots of foot traffic going by, and they are areas that would have been great for retail ten years ago.

I in no way see this as a sign of a recession starting, but rather a structural change in how people buy things, order food on the internet, and use banks. “It’s the internet, Stupid!”

Since SBNY primarily loans out money for commercial real estate, I emailed their investor relations to ask whether they had much exposure in this area. They couldn’t be bothered to answer. (It’s the second time I emailed them a question, and they didn’t respond that time either. I also once stopped by their offices in NY, and no-one could bother to see me then either).

I decided to get out, which I did during the last two weeks at $158 to $162. I may be wrong, and they may not be affected at all, but I kept seeing all that empty space which wasn’t getting re-rented, and was sitting empty, and it made me very nervous, especially as I saw it not as a temporary phenomenon which would blow over, but as a real structural change in the economy.

I hope that this is of use,

Saul

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Saul,

In this investment “war”, it is truly helpful to have so many on the ground foot “solders”. Your observation about SBNY is greatly appreciated.

Thanks for sharing.

Jim

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Hello Saul,

Thanks for letting us know what you are doing with your investment. Of course that opens it up to, not criticism, but a guy like me, being inquisitive, to a few questions.

I am not aware of any change in the numbers for this bank in the news or other sources that I can find.

This situation in Manhattan has to make anyone nervous. But I would be surprised if this bank would be invested there.

It truly has to be ‘The internet, stupid’.

So, evidently this must be quite shocking, but would it be enough to make you sell SBNY? Obviously it is.

Do you think, ok, I made some money here, any uneasiness and I will look elsewhere. Moving on. I guess you do.

Also, why doesn’t investor relations take care of my questions? Evidently more uneasiness.

Thank you for letting me ramble on and answer my own questions.

‘Don’t lose money, stupid.’

Jim

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Happy balloon day drillerjim!

Saul,

Greatly appreciate your thought process on SBNY.

You are the reason I got into this stock, and I’ve learned over the past couple years that you have a pretty good track record on when to get OUT of a stock (much better than I). So I am going to heed your “advice” (although I realize it’s not advice, just what you did) and exit my SBNY position after a great short term run.

I’ve still got banking exposure with BOFI and INBK, so if the rising interest rate environment helps the banking community going forward, I’ve still got some exposure there (much smaller positions than I had in SBNY). Although I won’t be putting my SBNY proceeds into those stocks, as I’ve wanted to pare down my banking holdings anyway.

Thanks again for all you do.

Mike

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… you have a pretty good track record on when to get OUT of a stock (much better than I. So I am going to heed your “advice” (although I realize it’s not advice, just what you did) and exit my SBNY position after a great short term run.

Hi Mike, Please remember it’s just what I did and I could be totally wrong about this, and they could be all in apartment houses and businesses and none in street level storefronts. (My worry though was that with all that empty space sitting there rents will come down, not just for the empty properties but for the occupied ones too, and store level values will come down. But they may not have street-level exposure? I don’t know.)

Saul

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Please remember it’s just what I did and I could be totally wrong…

I do understand that completely, Saul. I had other reasons, too, as I have 3 banking stocks (really more than I want), so I’ve been looking for an excuse to exit one, or even two, of these positions. I realize you could be wrong with your analysis, but being wrong still ended up with a 30-40% gain on my positions in this stock, and there’s nothing wrong with that!

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Me too Saul. I got out a couple of weeks ago at $156
Frank

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I am not aware of any change in the numbers for this bank in the news or other sources that I can find.

Hi Jim,
Me neither. I guess it’s because I saw it all myself. If I read it somewhere or someone else posted about it I’d have been skeptical. But when I say to myself: “Jeez, that Food Emporium on 1st Ave that closed a year ago is still empty… and the one on 2nd Ave too, that’s odd. I wonder why no one else is renting those spaces? And that old Citibank branch on 2nd is still vacant, with the same sign directing customers to the closest branch. And now two vacant pharmacies. And the restaurant where they had lobster and corn specials, which closed suddenly a year ago to our sorrow, there’s nothing there either, nor in the space next to it… And the space that that frame shop moved from last year when they raised the rent, it’s still vacant too…” And I realized that people are plain and simple reluctant to open new brick and mortar businesses.

This situation in Manhattan has to make anyone nervous. But I would be surprised if this bank would be invested there.

Actually it’s a “local” New York City bank, and I believe that probably the vast majority of the properties it has loaned money on are in Manhattan. (I say “probably” because I don’t have an exact run down).

Best,

Saul

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…a lot of empty storefronts.

Since SBNY primarily loans out money for commercial real estate…

I wonder if ground-floor retail space is a fair basis for judging commercial real estate in that sort of Manhattan neighborhood. How many of those buildings have another three, or five, or fifteen floors of offices and apartments? Perhaps the ground floor is priced too high to sustain retail in this day and age, but I wonder if low occupancy extends beyond the ground floor? If residential prices tell us anything a quick check of Zillow looked like a strong market around there.

(I may be making a mistake by thinking of entire buildings as a single investment unit. Perhaps it is all broken up as condos and such, and the “commercial” real estate really is just street level.)

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"Jeez, that Food Emporium on 1st Ave that closed a year ago is still empty… and the one on 2nd Ave too, that’s odd.

The closed Food Emporium at 974 2nd Ave sits under 15 or more floors of coop… The Gaylord at 251 East 51st Street is a well established 21 story, 198 unit, full service postwar coop, built in 1960 and converted in 1980.

Which argues against looking at a building as a single unit.

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The closed Food Emporium at 974 2nd Ave sits under 15 or more floors of coop…

You are probably correct and I was being too cautious…but that’s what I did.

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Saul, might I suggest that in addition to the concerns you stated, perhaps at least subconsciously if not consciously there are other reasons you sold? To propose two:

  1. It’s not growing fabulously, just well.
  2. When you found it it was cheap, now it’s reasonably priced.

I think knowing when to declare victory and move on is an extremely useful a trait for an investor. I think there’s a big difference between a good solid company and a rapidly growing company (like SHOP, PAYC or TLND) that I hope to hold for years as they outpace 99% of the companies around and the share price does the same. But a bank, even “one of the best banks in the world,” just isn’t likely to be that. In my opinion, you found a great company when it was cheap and knew when to sell and redistribute the $$. So with tongue in cheek, I think you made a great value investment whether you admit it or not! :wink:

But seriously, I think we need to spend a LOT more time on the Fool figuring out when to declare victory. Don’t look now, but nobody’s made any money holding TSLA in three years. Or in nearly 2 years with SBUX. These multibaggers of yore are incredible companies, but I think there is a time to take the money and run. By way of cautionary tale, the story with CMG or UA over the last couple years is much worse. These were high flying before their fall, and in my opinion it was pretty clear that the risks outweighed the reward potential. Even the Fool CMG/UA permabulls were calling these favorites “a little pricey.” But even if it’s not flagrantly obvious that risk outweighs potential, opportunity cost alone is enough reason to sell. Doesn’t matter how good a company is – if I feel worse about it than all the other stuff in my portfolio, it’s on the chopping block.

Saul, I think it’s one of your strengths that you don’t get too attached, even to a very good company like SBNY. Sometimes even with the great businesses of the world, the easy money to be made with the stock comes to an end.

Bear

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Saul thanks for keeping us informed in SBNY.

As I look at the sector most banks should get a nice bump if the Fed follows through with a rate hike in the near future. It might not be a bad idea to hold on until we find out what is happening there. The next SBNY quarterly report is not until April 18th so there should be some time before any big changes are announced.

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Saul,

It seems to me that just the phrase, “being worried” is a good reason to sell a stock. In a company like LGIH you have to have conviction to buy when it is dropping in price and not get shaken out by systematic distribution. If you “worried” you will not have the conviction to hold and buy low. (I know I don’t)

When you look at a company that has a really good business, and you see the majority owner and think, “I wish I had his shares, and can have my old mop.” That is a stock you will not get shaken out of.

I feel that way about AT&T, I keep hoping the CFO moves to a non extradition country to pursue other interests, I would sell my furniture, put the grand babies in sweat shops and load the boat.

Cheers
Qazulight

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Thanks, Mike, for your well wishes!

Jim

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These are some really good points Paul. You are correct about not being too attached to ones stocks. I know I struggle with this as I’m still holding some such as SBUX that I’ve had for years and it feels weird to sell them. I know this is missed opportunity but I sometimes wonder if it’ll ever pick up growth again. Sometimes it’s nice to have a solid company in the portfolio that has a lower risk profile and still beat the market. This board is challenging the way I think about stocks and I have started moving slowly to the higher growth companies. I appreciate yours, Saul’s and other’s thoughts and comments throughout these boards.

Chad

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Saul, might I suggest that in addition to the concerns you stated, perhaps at least subconsciously if not consciously there are other reasons you sold? To propose two:

1) It’s not growing fabulously, just well.
2) When you found it it was cheap, now it’s reasonably priced.

I think knowing when to declare victory and move on is an extremely useful a trait for an investor. I think there’s a big difference between a good solid company and a rapidly growing company (like SHOP, PAYC or TLND) that I hope to hold for years as they outpace 99% of the companies around and the share price does the same. But a bank, even “one of the best banks in the world,” just isn’t likely to be that. In my opinion, you found a great company when it was cheap and knew when to sell and redistribute the $$.

Bear, that’s an excellent observation. That is almost exactly how I was thinking about it. I guess that the empty storefronts were just the straw that broke the camel’s back. Other factors that I was feeling were

  1. Growth seems to have flattened out. It will always do reasonably well, but it’s not growing the way it was.

  2. Its growth strategy has been to lure excellent teams of bankers (with their customer books) away from other, larger banks, with promises of more autonomy and a flatter management set-up. If, when they were smaller they needed to lure three teams to join them in a year, to grow 25%, and now it takes six teams per year, it becomes harder and harder and approaches impossibility, to grow at the same rate. Leveling off becomes inevitable.

  3. It has jumped from $119 to $159 very quickly since the election, without a corresponding rapid growth of earnings

  4. I don’t have new funds coming in and I wanted to add to other companies that were growing much faster, and when I saw all the empty store fronts it probably just triggered me. I certainly don’t dislike SBNY as an investment, I just started to be concerned about it.

Thanks for your observation,

Saul

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After a quick look-see at the 10Ks for FY 2015 and 2016, I found perhaps a far more significant tangible concern in Signature Bank’s Commercial & Industrial (C&I) loan portfolio, i.e., loans to finance taxi medallions primarily in New York City and also in Chicago. As soon as I read taxi medallions, I muttered, “Oh, oh” as Uber immediately came to mind. The arrival and presence of Uber and Lyft have wreaked havoc and gutted the taxi industry in many cities of the U.S.

For FY 2015, Taxi Medallions was the No. 1 industry in the C&I loan portfolio representing 17% or over $815 million of the total $4.78 billion, followed by Transportation Services 16%, and Real Estate and Real Estate Management 13%. For FY 2016, Taxi Medallions was in the top 3 representing 11.45% or over $627 million of the Total $5.48 billion, after Transportation Services 15.8% and Real Estate and Real Estate Management 14.3%.

For SBNY investors, here are specific excerpts from the 10K Annual Report ending 12/31/2016:
http://files.shareholder.com/downloads/SBNY/4046920709x0x930…

Page 14:
As of December 31, 2016, one of the largest components of our C&I [Commercial & Industrial] portfolio consisted of loans to finance taxi medallions, which are the licenses required to operate taxicabs. We conduct most of this business in New York City, which is a well-regulated market. The recent development of car-service applications has increased competition within the taxi industry and we have seen an increase in the nonperformance of loans made to finance taxi medallions. Moreover, the increase in competition in the taxi industry has affected the value of medallions that serve as our primary collateral for our taxi medallion loans.

Page 32:
We are vulnerable to illiquid market conditions, resulting in the potential for significant declines in the fair value of our investment portfolio and taxi medallions.
(snip)
Additionally, taxi medallions have experienced, and are likely to continue to experience, periods of illiquidity, caused by, among other things, increased competition from Transportation Network Companies and the recent failure of a credit union with a significant portfolio of loans secured by taxi medallions. Continued adverse conditions could result in a significant decline in the fair value of these medallions. We have in the past, and depending on the probability of a near-term market recovery, may in the future be required to recognize additional charge-offs, increase related reserves, or recognize negative fair value adjustments to repossessed assets as a result of the decline in the fair value of these assets.

Page 60:
Provision and Allowance for Loan and Lease Losses (ALLL)
Our provision for loan and lease losses was $155.8 million for the year ended December 31, 2016, compared to $44.9 million for the prior year, an increase of $110.9 million, or over 100%. Our ALLL increased $18.5 million to $213.5 million at December 31, 2016 from $195.0 million at December 31, 2015. The increases in both the provision for loan and lease losses and ALLL were primarily driven by an increase in reserves for taxi medallion loans due to a decrease in the value of Chicago and New York City taxi medallions.

Page 64:
Under “Specialty Finance”
The provision for loan and lease losses increased $146.8 million, or over 100%, to $175.9 million for the year ended December 31, 2016 from $29.1 million for the year ended December 31, 2015. The increase was primarily due to the Chicago taxi medallion portfolio. The increase was primarily due to a decrease in the value of Chicago and New York City taxi medallions, which impacted specific reserves and charge-offs related to the portfolio.

Page 83 under Allowance for Loan and Lease Losses (ALLL):
Our net charge-offs during 2016 increased to $137.3 million compared to $14.3 million for the prior year. Significant charge-offs during 2016 consisted of 383 taxi medallion loans, related to 288 taxi medallion relationships, totaling $129.2 million. These charge-offs principally related to the Chicago taxi medallion portfolio. Other significant charge-offs include six commercial and industrial loans totaling $5.9 million.

————————————————

Here’s more relevant info about NYC taxi medallions and the impact caused by Uber, according to a Bloomberg Businessweek article in August 2015:
“To own a cab in New York, you need a medallion—a metal shield displayed on the vehicle’s hood—and there are a fixed number issued by the New York City Taxi & Limousine Commission (TLC). Until very recently, medallions were a good thing to have a lot of. In 1947, you could buy one for $2,500. In 2013, after a half-century of steady appreciation, including a near-exponential period in the 2000s, they were going for $1.32 million.
Then came Uber. Since the arrival of the car-by-app service, valued at about $50 billion, taxi ridership is down, daily receipts have declined, and drivers are idling—or going to work for Uber. Add it up, and desperate medallion sellers are trying to fob off their little tin ornaments for as little as $650,000.”
https://www.bloomberg.com/features/2015-taxi-medallion-king/…

Also services like Lyft have caused the prices of New York City’s medallions to plummet.

This has had a profound impact on lenders like Signature Bank that stated above: the increase in competition in the taxi industry has affected the value of medallions that serve as our primary collateral for our taxi medallion loans. Big boys like Citibank have also been affected. In March 2015, Citibank moved to foreclose on 90 of medallions held by NYC Taxi King Gene Freidman, claiming it was owed $31.5 million in unpaid loans. Later, Friedman settled with Citibank on half of the medallions, but 22 of Freidman’s companies owning the other half filed for bankruptcy.

SBNY investors need to decide for themselves how significant these taxi medallion loans factor in their overall assessment/due diligence about this company.

I have never invested in SBNY. Kudos to those investors who to date have realized handsome stock price gains.

Regards,
Ray

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Hi Ray,

I have talked about the taxi situation every time I do a monthly review or a brief review of my stocks. They also discuss the medallions extensively in their quarterly reports and conference calls. That’s pretty old news and taxi loans are down to less than 2% of their outstanding loans.

Saul

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