SBNY - My Mid-quarter Review
Who is Signature Bank?
Signature Bank was incorporated in 2000 and is headquartered in New York City. It provides business and personal banking products and services. It accepts deposit products, including commercial checking accounts, money market accounts, escrow deposit accounts, cash concentration accounts, interest-bearing and non-interest-bearing checking accounts, certificates of deposits, time deposits, and other cash management products. The company also offers loan products comprising commercial and industrial loans; real estate loans, such as loans secured by commercial and residential properties, and temporary financing for commercial and residential properties; letters of credit; and personal lines of credit and loans to acquire personal assets, as well as…
This goes on and on, and you can look it up if you want all the details.
What does all that mean in English?
SBNY is a commercial bank, which has no retail branches, just offices for its working teams. It services the NY City area. Basically it doesn’t have retail clients, just commercial and real estate clients, exclusively in the New York metropolitan area.
What is your history with them?
I found out about them from Offir Gottlieb’s CML Pro newsletter (which I like and use, but certainly don’t always act on). Offir called it “The World’s Best Bank.” I’ve been a stockholder for a little over a month now. They are my eighth largest position, at about 5.1% of my portfolio.
What’s special about them? Why would you invest in another bank?
What’s special about them is that they have some of the best banking metrics in the country. For example, looking at banks over $4 billion in market cap:
Operating revenue divided by operating expense (dollars of revenue per dollar of operating expense), they have the highest operating margin by a large amount, bringing in $2.85 for every dollar of expense.
Or revenue per employee: SBNY generates $800,000 per employee. No other bank even generates more than $675,000.
Efficiency Ratio. We’re familiar with this from our study of BOFI. SBNY had an efficiency ratio of 35.2, which is really, really, good. It’s by far the lowest overhead costs of all the large banks. For the last quarter it was 31.85!!! down from 34.1 the year before. That’s really incredible!
Level 3 liabilities: These are liabilities in things that haven’t traded in a while, which allows a bank to make a guess at what they are worth, and allows for a lot of fudging. SBNY has zero percent of these.
Net Income Margin Percent This is net income / revenue. SBNY shows the second highest net income margin of all the big banks, at a huge 38%, which is nearly 50% higher than the median value.
What about specific risks?
They have made about 4.5% of their loans as mortgages on taxi medallions. When they made the loans this was an incredibly safe loan, as the value had been constantly rising for decades. However, with competition to taxis from Uber in the past two years, the value of taxi medallions is falling, and some of them may well default. This percent of loans on taxi medallions is rapidly falling as they grow total loans without new medallion loans.
Let’s look at quarterly earnings:
2014: 1.37 1.44 1.52 1.60 = 5.93 2015: 1.64 1.77 1.88 2.01 = 7.30
Notice how each quarter is up sequentially as well as year over year.
How were December quarter results?
Net Income - a record $103 million, or $2.01, up 26.5%. This was primarily the result of an increase in net interest income.
Net Income for the year - a record $373 million, or $7.27, up 25.7%.
Deposits for the year up 18.4%.
Core Deposits up 16.9%.
Average Deposits up 26.9%.
In 2015, five private banking teams joined us.
Also in 2015, We added two new business lines: Municipal and Commercial Vehicle Finance.
Net interest income up $52.6 million, or 24.4%, to $268 million.
Once again, we set records across all of our key metrics, reporting our eighth consecutive year of record earnings…The care, attention and advocacy for the Bank’s clients continue to draw rave client reviews while furthering our business development activities. Once again we have advanced the virtuous culture we carefully created; one where talented, caring colleagues, our real assets, provide clients exceptional service. During our nearly 15 years in operation, we built a strong franchise that boasts some of the highest returns on equity and assets nationwide while growing at a phenomenal rate in both deposits and loans. All without a single acquisition. As we reflect upon another year of records and firsts, we set another first when we were rated among the top most creditworthy US banks by Kroll Bond Rating Agency.
Capital - The Bank’s risk-based capital ratios were well in excess of regulatory requirements. Our strong ratios reflect the relatively low risk profile of our balance sheet.
Net Interest Income up 24.4%, primarily due to growth in interest-earning assets. Average interest-earning assets for the quarter was up 21.9%. The yield on interest-earning assets for the quarter remained stable, at 3.71%.
Average cost of deposits and average cost of funds decreased to 0.39% and 0.46%, respectively. The decreases were predominantly due to the continued effect of the prolonged low interest rate environment.
Net interest margin for the 2015 fourth quarter was 3.30% versus 3.23% a year ago and 3.22% sequentially.
Provision for Loan Losses - Our provision for loan losses was $16.7 million, up $9.1 million, or 119%, from a year ago. This was primarily due to an increase in loan growth and additional reserves for taxi medallion loans.
Net charge offs for the quarter were 0.08% of average loans, versus 0.10% sequentially and 0% a year ago.
Non-interest income for the quarter was $9.3 million.
Non-interest expense for the quarter was $88.4 million, up $12.5 million, or 16.4%, primarily due to new private client banking teams joining and our continued investment in Signature Financial.
Our efficiency ratio improved to 31.85% down from 34.1% The improvement was primarily due to growth in net interest income.
Loans, were up 7.0%, during the quarter to $23.8 billion. Loans were 71% of total assets.
Non-accrual loans represented 0.30% of total loans and 0.21% of total assets, versus 0.27% sequentially, and 0.12% of total loans a year ago. Additionally, the ratio of allowance for loan and lease losses to non-accrual loans, or the coverage ratio, was 271% for this quarter versus 307% for the previous quarter and 783% a year ago. (Watch this! It’s a tiny percent but rising. Probably the taxi loans)
I’ll let Neil’s incredible recent post summarize for us:
The Business - Signature Bank is a regional commercial bank that primarily serves business customers (and their high net-worth owners and senior managers) in the New York metropolitan area. It has carved out a niche for itself going after businesses with 500 or fewer employees, which as a group tend to be small enough to desire a personal relationship, but are big enough to need a bank offering a wide variety of services and expertise.
SBNY was founded in 2000 with the belief that these businesses were being underserved by the big banks. The big banks tend to break up their services into separate silos or departments, with each department providing its own separate marketing, sales, and service to customers. SBNY believes this creates confusion and frustration, with multiple points of contact within the bank who aren’t familiar with other aspects of the client’s business or situation, leading to poorer service, longer turn-around times, and added bureaucracy. As the big banks have consolidated, SBNY believes the situation has worsened.
Signature Bank takes a very different approach, putting tremendous value on a personalized relationship with its business customers. While it has specialized departments for the various business lines it manages (and that underwrite that business), it assigns a small relationship team to each customer, and all products move from the specialized departments through that relationship team. This gives clients a consistent single point of contact that is knowledgeable about everything going on, providing a more seamless and responsive experience.
To reduce red tape, each specialized business team runs its own books, overseen by a Group Director. Group directors report directly to senior management, keeping the hierarchy flat, management informed, and the bank responsive to the needs of clients.
The result has been solid multi-year growth in both loans and deposits, as businesses are attracted to the wholistic, one-on-one relationship offered. The bank was named Best Bank in America by Forbes magazine for 2015. Banking professionals also appreciate the refreshing approach, making it possible for SBNY to grow and diversify its lines of business by attracting experienced teams of bankers that bring their own relationships with them. Consolidation in the banking industry has been to SBNY’s advantage in this respect, as professionals at big banks become disenchanted with ever-increasing bureaucracy, distraction, and uncertainty at combined entities.
As a commercial bank, Signature has offices rather than retail branches, and it doesn’t need to splurge on expensive ground-floor locations. Management believes in disciplined cost control, taking a “build it when they come” approach to investment in expansion, and also works to align compensation expenses with profitable growth for the bank. The result is an enviable efficiency ratio — the ratio of dollars the bank has to spend for each dollar of revenue (lower is better) — of 33.64% for 2015, beating out even branch-less online banks like Bank of Internet (34.57%) and crushing retail banks like Wells Fargo (57.8%). That means a larger part of every dollar earned falls to the bottom line, making its book more profitable. Management is very pleased with the current efficiency ratio and isn’t making efforts to lower it further as they focus on continuing to grow the bank.
In short, the bank has carved out a nice niche for itself and created a competitive advantage through the excellent, consistent, and responsive service it provides to its clients. That service has positive knock-on effects, such as stickiness and the ability to charge higher rates on loans, leading to great business performance, and making it easier to attract top talent to continue growing the bank and diversify into new lines of business — all in a virtuous cycle.
Risks - As a bank, though, SBNY obviously carries risks. Many are specific to its industry: as an investor, it’s impossible to know what’s really lurking on a bank’s books, and it’s very easy for a bank to juice its performance today at the expense of tomorrow by taking on questionable loans. A big part of Signature’s cost control is carefully aligning employee compensation with results that generate profitable growth for the bank, and that can encourage excessive risk-taking. To counteract that, all loans are approved by a different group, and require at least two individuals for approval — and that’s for small loans. Larger loans require approval from a credit committee, and the largest loans require approval by the board of directors. As of Q4 2015, the allowance for loan losses stood at 0.82% of total loans.
SBNY also has risk from geographic concentration, as the bulk of its business is done in the New York metropolitan area. At the moment, this actually seems to be helping, as commercial property, a big driver for the bank, remains far more stable in NY than in other parts of the country. But in 2015 the bank opened its first office outside of New York, and I suspect it won’t be the last. It also continues to diversify into new lines of business, adding 2 additional lines in 2014 and another 2 in 2015. Management has said it will focus in 2016 on bringing on additional deposit-gathering teams to help fuel the bank’s growth.
Valuation - At a price to book ratio of around 2.4, SBNY is certainly trading above major banks. Wells Fargo, for example, currently trades under 1.5. But given SBNY’s better efficiency ratio and growth, it deserves to trade at higher P/B. Furthermore, looking back a few years, this is near the lowest P/B the company has traded at.
From a P/E perspective, it’s trading at 18.7, which again is near lows over the past few years. In fact, the bank has traded at a higher P/E over 90% of market days over the past 3 years.
Ratings - Overall, SBNY looks like a high quality bank with a competitive advantage that continues to grow and diversify while keeping costs enviably low. I wouldn’t call it cheap at current prices, but it does look attractive from both a future growth perspective and on a recent historical valuation basis. My hypothetical real-money portfolio rating: 4 stars (out of 5). My CAPS call: thumbs up (outperforms the market).
Best to you all,
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