Joseph DePaolo is eager to set Signature Bank's naysayers straight.
Early last year, some analysts wondered if the New York company, where DePaolo is chief executive, could maintain its torrid earnings streak, given a reliance on residential mortgage-backed securities. But the $17.5 billion-asset company continued to post strong numbers last year.
Signature (SBNY) did so in part by expanding into equipment financing and pursuing more multifamily loans. Total loans rose 40% in the fourth quarter compared to a year earlier, to $10 billion, more than offsetting securities prepayments that had analysts on alert.
"Some speculated that our record string of quarters would come to a crashing halt, but instead we set … more record quarters," DePaolo says.
Loan growth means less reliance on mortgage-backed securities. At Dec. 31, loans made up 57% of total assets, compared to 49% a year earlier. In comparison, securities available for sale made up 35% of total assets, compared to 44% a year earlier.
DePaolo says the key to Signature's growth is its ability to lure teams of commercial lenders from rival banks. They come with entire client relationships: loans, deposits and investments.
Four teams joined last year, and seven in 2011. "Even teams we hired over five years ago are still bringing clients over from other institutions, when their loans start to mature and they need to refinance," DePaolo says.
Loan growth has padded earnings. Signature's net income in the fourth quarter rose 25% from a year earlier, to $50.1 million.
Signature should add $2.2 billion in loans and $1.4 billion in deposits in 2013, DePaolo said during a Jan. 22 conference call to discuss fourth-quarter results.
"They don't buy whole companies. They buy teams, so there's no goodwill on the books," says Christopher McGratty, an analyst at Keefe, Bruyette & Woods. "They are firing on all cylinders and we expect 30% loan growth in 2013."
Signature is the "brightest earnings momentum opportunity" for Peyton Green, an analyst at Sterne Agee. He says the equipment finance group is one way Signature should be able to keep its growth engine going. True to form, DePaolo entered the business by hiring a team from Capital One Financial (COF). That group booked about $750 million in loans last year.
Signature, like every bank, continues to battle against artificially low interest rates. It yield on interest-earning assets fell 22 basis points in the fourth quarter, compared to a year earlier, to 4.16%. The yield on its securities portfolio was just 3.19% in the fourth quarter, so booking more loans is certainly helpful.
Signature's net interest margin compressed by just 2 basis points in the fourth quarter compared to a year earlier, to 3.53%. And DePaolo said during last month's conference call that Signature still has "a lot of runway" to lower deposit costs.
"In years past they had significant excess deposit growth that went into bonds," Green says. "They still may have excess deposit growth … but now they are funding loans instead of securities and their margins are holding up much better than others."
Signature will continue to emphasize deposits, which rose 20% in the fourth quarter compared to a year earlier, $14.1 billion. "We always have been a deposit-first bank," DePaolo says.
"We also know our shareholders need us to transform the balance sheet," he says. "We still want to make sure what funds those loans are low-cost operating deposits."
Investors have rewarded Signature's efforts. The company's stock has doubled in the last five years, compared with a 50% decline for the overall banking sector.
"Some banks like to focus on loan growth and then they'll find the deposits to fund that growth," says Andy Stapp, senior vice president of research at BGB Securities. Signature "has taken the position that deposits are a sticky, low-cost source of funds that has value within itself."
Signature can keep adding loans mainly by poaching talent in the business-rich New York area, but DePaolo says the pie itself has yet to grow larger. He says October's Hurricane Sandy further challenged an already sputtering economy.
"However, we're running our institution as if it were always cloudy and not sunny," he says.