Signature Bank of NY (SBNY) – Jan 2017 Post Earnings Review
I still believe that Signature Bank remains one of the best banks in the world! I’m not exaggerating about this:
Forbes rates the largest 100 banks in America on a series of metrics, weights them mathematically, explains explicitly how they rated them, and publishes the results as “The Best Banks in America” or something like that. SBNY has been in the top ten for six years running. In 2014 they scored 2nd in the Americas, in 2015 they were first (actually #1), and in 2016, they scored 6th out of the hundred on Forbes’ metrics.
In addition, in 2016 the New York Law Journal, in its annual reader survey, named them 1st Best Business Bank. They also ranked 2nd in the Best Private Bank and Best Attorney Escrow Services categories. Since the Law Journal introduced its reader survey in 2010, Signature has always ranked in the top three in each category in which it was rated. This is the third consecutive year that it was voted the Best Business Bank. Now, none of that gives you any guarantee about the stock price, but it’s a lot better than being rated “worst”.
In the March quarter they had very good, but not outstanding, earnings (up 23%), great growth in book value, and an incredible efficiency ratio of 32.2%. In the June quarter they took a small precautionary write-off in case of losses on their Chicago taxi medallion loans. In September they decided to basically write off almost their entire loan portfolio of Chicago taxi medallion loans, and put it behind them. This reduced their EPS but they continued to have great growth in book value (up 18% yoy to $65 per share), and an even more incredible efficiency ratio of 31.9%.
By the way, if you don’t know the significance of the efficiency ratio, it represents how well the bank is being run. It’s the non-interest expenses as a percent of revenue (sort of the reverse of operating margin, which refers to what’s left AFTER those expenses). A 32% efficiency ratio is like operating margin of 68%! Most big banks have efficiency ratios of 65% to 80% - which means that their expenses are much greater relative to revenue, and are equivalent to operating margins of just 20% to 35%.
After the election the stock price rose from $118 to $150 in a few days, which I thought might have been a bit of irrational exuberance and I trimmed my position a little, but they are still my 3rd biggest position at 12% of my portfolio, with a PE of 19.9 at the current price of $160 (I’ve been in this stock since last January and I have bought from $144 to $116 and back).
This is one of my highest confidence stocks. Look: medallions make up just 2% of their total loans, and that 2% shrinks every quarter as their loan portfolio grows. The rest of their loan portfolio is over $28 BILLION (!) And they have less than 0.1% of that remaining $28 billion in non-accrual! (That’s less than one tenth of one percent! Most banks would kill for a loan portfolio like that!) They are growing loans, book value, etc, incredibly. Their efficiency ratio is like a branchless bank. In fact, it’s even much lower than Bofi’s. I’ll be happy with adding again if it pulls back again. Just my way of seeing it.
Here are my thoughts about the taxi medallions:
For about the past 70 years New York taxi medallions were about the safest investment in the world. The value of medallions only went up as there were a strictly limited number of New York cabs (about 11,000-12,000), and demand for cabs kept going up and up. The price for a medallion was well over a million dollars a couple of years ago. For one medallion! The right to have one cab!
Signature Bank, as a New York business bank, made what were VERY conservative loans, loaning money on taxi medallions, mostly in NYC, but some in Chicago as well, for a few percent of their total loans. This was NOT a risky set of loans!
Then a black swan event came along! It was called Uber, which put what are essentially unlicensed cab drivers on the street with no entry fee at all. The value of New York medallions dropped from over a $1,000,000 to about $600,000, almost overnight.
The New York market has stabilized and SBNY sells their foreclosed medallions for $600,000 or more in auctions. Chicago, which was less regulated, has fallen off a cliff. SBNY has said, Okay, we’ll write down our Chicago loans to just $60,000 a medallion, which is all they are currently worth. They did that this quarter.
The remaining exposure on Chicago medallions is just over 0.1% of their total loans. NY medallions are 2.0% of total loans, and this percent is constantly falling as their loan book increases. Outside that 2% in medallion loans, as I said above, they have over $28 billion out on loans and less than 0.1% of that $28 billion is in non-accrual! (That’s just one-tenth of one percent.) Loans and deposits are growing rapidly, their efficiency ratio is even lower than branchless banks like Bofi, book value is growing very fast (up about 18% from a year ago). I’d say they have weathered the black swan event very well.
And here are the recently announced December results with my commentaries in parentheses.
• Net Income a record $114 million, or $2.11 per share, up 10.6% from $103 million, or $2.01 a year ago. (No more big charge-offs this quarter!)
• Total Deposits up $466 million to $31.9 billion sequentially, and up $5.1 billion or a huge 19%, for the year.
• Average deposits up 3.8% sequentially and 17.6% for the year.
• Loans up 4.6% sequentially and up 22.1% for the year. (For organic results, those are huge).
• Total Non-Accrual Loans were $158 million, or just 0.54% of total loans, down from $163 million, or 0.59% sequentially. (That’s great!). Only 14% of non-accrual loans were non-taxi loans. (That’s also great! Means the rest of their business, which is $28 billion, has only a tiny 0.08% of loans in non-accrual).
• Net Interest Margin was 3.14% flat with 3.14% sequentially and down from 3.30% a year ago…
• For 2016, three private client banking teams joined. We also added several new private client bankers to existing teams.
Net interest income up 10.6%, to $297 million, primarily due to growth in interest-earning assets.
Total assets reached $39 billion, up 16.7% annually.
We again delivered record earnings – our 9th consecutive year – and also another where we reported strong performance across all key metrics. The expansion of our franchise continues, driven by substantial growth in deposits of $5.1 billion and in loans of $5.25 billion. This was all achieved despite challenges in our taxi medallion portfolio. Moreover, we bolstered our capital position with two successful offerings; a common stock offering of nearly $320 million and our first debt offering of $260 million. These capital raises, along with solid earnings retention, well position us for future expansion.
New provision for loan losses for the quarter was $22.2 million, $5.5 million more than the quarter a year ago. The increase was primarily due to additional reserves for taxi medallion loans.
Net charge offs for the quarter were $13.5 million, or 0.19% of average loans, (a great improvement from $100.5 million, or 1.46% sequentially, and not too bad compared to $4.6 million, or 0.08% for the year ago quarter quarter).
Our efficiency ratio improved to 31.25% compared with 31.85% for the year ago quarter.
Book Value per share increased 16.5% to $66.15
Conference Call - The biggest thing that that happened in Chicago is that one of the three fleet owners that we put on non-accrual last quarter actually brought us full current, and continues to pay us. (Good news). Two out of the three large fleet owners are current on their payments (good news), but we kept them all on non-accrual. We’re not about to put them back on accrual status. There were two taxi sales in the quarter, and our carrying value is well below the sales prices (Also good news).
The New York market remains barely stable. We reduced our overall balance by $24 million in the quarter, to $568 million. We also increased our put-aside allowance on the portfolio by $12 million, bringing our allowance ratio to 7.8% on that portfolio. It takes our exposure on the overall New York portfolio down to $524 million, so it’s down $36 million for the quarter.
My take: I think it’s a great company, with a unique business model: they are a business bank and have banking teams which are free-standing. The same team interfaces with a client for everything the client needs. This produces great client loyalty. Signature also doesn’t need ANY big, street level, branches. Their branch can be in an upper floor somewhere, which helps account for the low efficiency ratio.
Saul
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