Breaking Down Signature’s Q4

Writing at Seeking Alpha, Stephen Simpson has good things to say about Signature Bank‘s (SBNY) fourth quarter.

Signature had a strong-looking fourth quarter report, with revenue 3% better than expected and both pre-provision income and core EPS about 5% better than the sell-side expected. The “but” is that about half of the upside was driven by higher than expected prepayment income. Even so, an earnings beat of 2% – 3% isn’t bad in a quarter where more than a third of banks have missed.

Revenue rose 4% yoy as reported, with net interest income up 5%. As a liability-sensitive bank, Signature Bank has been taking a bruising as rates have headed higher, and the company saw an 18bp yoy/5bp decline in core NIM (adjusted for the pre-payments), partly offsetting the double-digit yoy growth in average earning assets. Fee income declined 27% yoy (and rose 27% qoq), but is presently a trivially small part of the business.

Operating expenses rose 8% yoy and the efficiency ratio worsened on both an annual (140bp) and sequential (70bp) basis, as Signature continues to invest in these growth opportunities and continues to hire private banking teams, including eight teams hired in 2018. Relative to expectations, though, the efficiency ratio was nearly a point better than expected, as these growth-oriented spending plans had been well-communicated to the Street. Pre-provision income growth was modest (up 2%), but still better than expected, and tangible book value per share rose about 9%.

Signature showed some exciting momentum in its lending. Period-end loan balances rose almost 12% yoy and 4% qoq, modestly exceeding expectations and accelerating from the growth rates seen in the last two quarters. Multifamily lending is still far and away the dominant lending line here (Signature has meaningful share in the NYC multifamily market), but C&I lending pipped multifamily and CRE loan growth on a qoq basis by 30bp, the first time C&I lending has outgrown CRE lending in a long time. I believe this reflects Signature’s commitment (and some early progress/success) in diversifying the business away from such an intense real estate focus in the future.

Deposit growth couldn’t keep pace, rising about 9% yoy and 1% qoq, but Signature’s non-interest-bearing deposit balances improved startingly well, with 11% year-over-year growth in average balances, which is far and away better than anything else I’ve seen so far. That helped keep a lid on deposit costs, which rose 40bp yoy and 15bp qoq, and Signature did see its quarterly deposit beta decline to 40%, a level only slightly above mid-cap norms in the mid-30%’s.

Simpson thinks Signature has a fair value of $140 per share.

Posted by on January 27th, 2019 at 12:34 pm


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