Signature Bank in New York is riding quite a winning streak.
The $28.6 billion-asset company has posted 22 straight quarters of record earnings, including an $83 million profit for the first quarter of this year.
Joseph DePaolo, Signature's president and chief executive, largely generates returns by keeping costs low, carefully watching credit and by aggressively poaching talent from larger competitors.
Still, DePaolo knows that all streaks eventually end.
"Even Kentucky lost a game," he said in a recent interview, referring to the NCAA men's basketball team that reeled off 38 consecutive wins in the 2014-15 season before getting knocked off in the Final Four by Wisconsin.
For DePaolo, the challenge is extending his team's streak in the face of tight margins and hypercompetition. In a wide-ranging interview, he discussed his interest in municipal finance, snagging assets and employees from GE Capital and his approach to capital, risk and hiring. Here is an edited transcript.
Signature had a strong first quarter. How much momentum does the company have?
JOSEPH DEPAOLO: There is still more runway at least in the short to intermediate term. What we try to tell everybody is don't look at a percentage. We're not going to tell you we're going to grow 'x' percent. We say we're going to grow between $3 billion to $5 billion each year. We dare say that's like buying a bank.
So our growth equates to buying a bank every year. We also look at what we do every rolling 12 months.
The last two full years and one quarter, we grew $9.94 billion in deposits and $9.53 billion in loans. You want to fund your loans with deposits. There are two things we really think about: balance and the quality of the asset. It doesn't matter how much you grow if you don't have the quality.
What do you worry about?
I worry about regulations. Not that we have too many, but we just don't know as we're doing more stress testing and going through more regulation, not everyone can think about what is the next best practice. The regulators are not teaching you what to do and are not giving you advice. We're spending quite a bit on consultants. We've made no secret that part of our expense growth has been for stress testing, regulations and best practices because we've brought on our own people or we've brought on consultants.
I used to be at KPMG, and one of the things you do is you try to give advice to your clients but you also see things and learn from your clients. If you see your clients doing different things, now you're a consultant. It's not just what they teach us, but it is also what we teach them. And they get paid a lot of money from learning. We pay them a lot of money but they don't pay us. They're very absorbent.
But we need consultant because they're out there seeing different ways of doing things and they can tell us the best practices to put into play.
Signature raised capital last year. How much can you grow with existing capital?
There's not a straight answer. In the past we used to always say that we are competing against $2 trillion, "too big to fail" megabanks. We need our clients to have head on pillow sleep at night comfort and the way to do that was to have high levels of capital. With Basel III we're seeing that those institutions need to keep more capital and buffers because they have a riskier balance sheet or riskier assets.
So we're sitting back and trying to say is it better to actually not to have so much capital because you can at least tell the Street, clients and shareholders that you don't have those assets that have risk and require excess buffers of capital. So we're not quite sure how we want to handle that.
With our earnings rate, we can continue to grow substantially without having to think about capital. It wasn't too long ago we were in the $60 million range and now we're in the $80 million range. Before you know it we'll be at $100 million.
Are there particular loan categories you're targeting right now?
We have a significant amount of commercial real estate, which has been a pristine portfolio for us, particularly multifamily. But we also think about diversity on the asset side. In March of 2012 we started Signature Financial and now we have about $2.7 billion in outstandings.
We are adding on lines of business for differentiation beyond commercial real estate. In 2014 we added on franchise financing and commercial marine called brown-water lending. Rather than lending for yachts, we're lending for tugboats.
We're looking at other verticals, including municipal financing. That's essential equipment. That's the fire truck. That's the police car. That's the street cleaner. We'll be doing that on a nationwide basis to municipalities.
That team is getting itself together. Some are on board and some will be coming on board. That is exciting because we're losing another competitor in GE Capital. Hopefully we'll be able to buy some assets from them, and hopefully we'll be able to hire some quality people.
It's exciting for us that a competitor is no longer there, and we were getting into that business before their announcement because our Signature Finance team did so much of that at Capital One.
What types of assets and personnel do you want from GE Capital?
Some of the salespeople they have around the country. We like to cover the NBA cities. We're looking at portfolios that include things like ambulances, bus companies and other revenue-generating assets.
When will you get into municipal finance?
We'll start doing it this quarter but it will really start kicking in during the third quarter.
Municipal finance also provides chances to snag deposits.
We already have some good deposits in the municipal sense. We have clients on Long Island, some in New York City and Westchester. We'll be going to those municipal clients.
How do you assess risk as you add business lines?
It's not so much the risk of growth as it is the risk of different types of businesses. It starts at the business level where our teams present their thoughts on whether they think it be profitable and on the credit metrics. We use the credit metrics as much as use the capital. For example, I will ask the head of Signature Capital about the expected losses. If the numbers are higher than what we're comfortable with, even if the return makes sense from an income basis, we will, in all likelihood, decline to go into that business.
Volume is not as important as credit metrics. We tell every team we bring on that we're patient and that they shouldn't feel compelled to bring on business that could be approved, but is border line. We would feel better if they had less volume and better credits. I'm supposed to be the sales-type person, and I'm telling them to slow down on sales. The combined result is better from a P&L standpoint.
Signature's stock price has held up well in recent years.
We have investment bankers knocking on our doors noting that our multiple is such that we could go out and buy something with our stock. We feel much better about bringing on the people to join us and pay them a little bit more. With an acquisition comes changing signs, giving severance packages, converting systems and learning about different cultures. We would rather spend our time picking off the people.
How fertile is it now for hiring compared to prior years?
We've hired three teams this year, and we're about to bring on our fourth team. And we're in various stages with teams five, six, seven and so on. We have typically gone out to speak to teams we're interested in.
I won't say we've been inundated, but lately we've been asked by more teams to join Signature. We really have to do our due diligence vetting because they may out so badly where they are that it may overshadow whatever business they may bring.
When I interview a team, I tell them that they are taking a bigger risk than we are. I ask them a bunch of questions, but I'm not trying to sell them. I'm almost trying to discourage them. We've learned that, if a team wants out so badly, they will convince us that they have a book of business. That's what is different. I think our pipeline is quite active.
What is a deal breaker when you interview a team? What ends discussions for you?
Desperation. I like someone who says they're doing well where they are but they can see difficulties holding clients because of changes being made at their current employer. That shows me somebody with confidence. That compares to someone who says they need to get out at all costs. We want someone who is doing well.