Signature Bank: Showing Strength And Value Despite Bumpy Quarter (NASDAQ:SBNY)

Signature Bank’s Fourth Quarter

Signature Bank (NASDAQ:SBNY) earned about $4.65/share up from $4.34/share in last year’s fourth quarter. While these earnings were slightly below street expectations, they were significantly better than feared given the company’s stated intent to reduce its crypto banking deposit business. I believe there was a major concern that reducing these deposits would not only severely crimp NIM (net interest margin) thanks to lower NIB (non-interest bearing) deposits, but that the bank would incur severe losses funding those outflows with securities sales that would impair tier 1 capital. I also believe these fears are the major factor that dropped the stock to ~6x earnings and close to book value (now ~$115/share) from the $175-$185 range near the end of Q3. This quarter’s results and the bank raising its dividend should firmly put those fears to bed.

Beyond the earnings numbers and raised dividend, the rest of the numbers are fine if reflective of a difficult macro environment for both deposits and loan growth. Deposits declined by ~$14 billion about half of which was caused by the planned reduction in digital asset banking. The company also lost deposits from some highly-interest rate sensitive customers as well as a seasonal outflows in mortgage servicing and lower 1031 exchange activity.

Loans increased by 14.5% while non-accruals were basically flat with Q3 at $184 billion or 0.25%. Tier 1 Leverage, Common Equity Tier 1 Risk-Based, Tier 1 Risk-Based, and Total Risk-Based Capital Ratios were 8.79%, 10.42%, 11.21%, and 12.33%, respectively at year end. These are all extremely solid numbers as is the 34.11% efficiency ratio for Q4 and the NIM of 2.31%.

Going Forward

The conference call was fairly subdued in my opinion. Many of the questions centered around the trajectory of deposits and loans. The company took in over $2 billion of deposits in the first two weeks of the year but expect a difficult backdrop for overall deposits this year. It also expects a difficult environment for loan growth, particularly in its capital call and commercial real estate lending lines. In all, it sounds like growth this year might be subdued if it occurs at all.

I find it somewhat amusing how many of the sell side analysts’ questions centered around growth of the deposit and loan books when the stock has been driven down to less than 6x trailing earnings close to book value despite a very healthy ROE above 16%. I believe that hit was mostly caused by the fears around the digital asset business and the aforementioned fears of capital impacts caused by the planned decrease in the business. In my opinion, those fears should be firmly dispelled. So while this year might not be a great growth year, I believe the stock is pricing in massive earnings declines and possible capital problems.

Risks

Now that the company has proven it can handle a managed decline in the digital asset deposit base, the main risk shifts to declines in the company’s core banking business, i.e. declining core deposits and loans, loan losses, NIM compression, etc. Again, this bank has shown it is very adept at managing even the most difficult environments such as post 9/11 slowdown in the NYC area and the global financial crisis. As I wrote in my previous write up on the company, while earnings declined slightly from ’08 to ’09, the fact that they were still profitable in that period says a lot.

Conclusion

I believe SBNY offers an extremely compelling risk/reward at these levels. This stock was over $157 after Q3 earnings when crypto fears were already bubbling. The stock is up decently post-earnings to the $125/share range as of this writing (Tuesday morning January 17th), but has over 30% upside to get back to those post Q3 earnings levels. Given the bank’s history of steadily growing book value with mid-teens ROE’s, I don’t see why it should continue to trade at such a low multiple.