Signature Bank in New York has rapidly expanded its commercial real estate lending over the last several years, but now it is ready to tap the brakes a bit and add more commercial and industrial loans to the mix.
President and CEO Joseph DePaolo told analysts Wednesday that the $40.3 billion-asset bank also wants to start expanding its investment portfolio as part of a broader move to diversify a balance sheet that has become heavily weighted toward multifamily and non-owner-occupied commercial real estate loans.
“We’re looking for a little bit more diversity than we’ve had in the past,” DePaolo said on a conference call discussing Signature’s first-quarter earnings.
To be sure, CRE and multifamily lending has served the bank, and its investors, well. Signature consistently ranks among the industry’s top-performing banks — it posted a record profit of $133.9 million in the first quarter — thanks largely to strong growth in its CRE and multifamily portfolios.
Nonetheless, it has good reasons for wanting to scale back in real estate lending and add more C&I loans on its books. Chief among them is that it would allow the bank to add more variable-rate loans to the mix to take better advantage of rising interest rates, DePaolo said.
Regulators, too, want to see banks with heavy concentrations of CRE and multifamily loans reduce their exposure.
At Dec. 31, CRE and multifamily loans accounted for roughly 80% of Signature’s total loans, according to Federal Deposit Insurance Corp. data. From Jan. 1, 2016, through yearend the bank’s total multifamily loans increased by more than 22% and its CRE loans expanded by nearly 28%, according to the FDIC.
Analysts spoke favorably of Signature’s decision to diversify its loan portfolio.
“I think it makes sense for most banks to pay attention to what their commercial real estate concentration is at this point in the cycle,” especially given increasing regulatory scrutiny of commercial real estate and multifamily concentrations, said Anthony Polini, principal and director of research at American Capital Partners. “You don’t want to be limited to one or two loan categories, especially when for a lot of the industry, commercial real estate concentration could be an issue or an area of weakness going forward.”
Peyton N. Green, a managing director at Piper Jaffray, noted that Signature has been making C&I loans since it was founded 17 years ago.
“The problem is that the multifamily and CRE loan growth engine is just a lot bigger than the C&I loan growth engine over the past seven years now,” he said.
Another area of growth had been in taxi medallion lending, though that business has suffered recently as ride-sharing services have taken market share from traditional taxicabs. Last fall, Signature charged off $95 million worth of Chicago area taxi medallion loans from its portfolio, leaving it with $58 million of those loans at that time. The bank has since reduced its exposure to taxi medallion loans in that market to $42 million.
On Wednesday’s call, DePaolo said the bank would look to expand its C&I lending as it has always done, primarily by attracting veteran bankers with established books of business, but Green said he could see Signature purchasing a specialty portfolio to achieve that diversity.
“That would be different for them because, historically, they’ve done lift-outs of teams,” Green said. “But [a portfolio acquisition] is entirely a possibility for them going forward. That could enhance what mix they want to achieve organically.”