Joseph DePaolo's Signature Bank Is Hard to Copy

Signature Bank is all business.

A visit to its corporate headquarters on Fifth Avenue in New York City makes that point clear. To reach its primary branch, Signature customers have to walk by the Build-A-Bear Workshop at street level (the kind of retail space many banks would put a trophy branch in), use a side entrance on East 46th St. and then ride an elevator to the 12th floor.

Those hoops suit Joseph DePaolo, the cost-conscious president and chief executive, just fine since the $16 billion-asset bank caters to commercial and other nonretail clientele.

"When your branches are in office space, you save money," DePaolo says. "We do no advertising: no radio, no television and no print. We have a tendency to put the dollars into the compensation program where the teams are because they're the ones who are bringing in the money. That's key."

Pilfering dissatisfied commercial loan officers from other banks and paying them well to market Signature (SBNY) are the things that drive its growth. Its approach distinguishes the bank from competitors, who would have a hard time copying it, observers say.

"The model operates more like an asset management or brokerage firm where teams are incented to serve and retain clients," Peyton Green, an analyst at Sterne Agee, says. "It is really an entrepreneurial environment."

Certainly other community banks heavily emphasize wealth management and commercial lending, including City National (CYN) in Los Angeles and UMB Financial (UMBF) in Kansas City, Mo. With 17% loan growth at midyear, Signature has outpaced the 7% growth at City National and UMB, while also maintaining an efficiency ratio below 40%.

Signature has also found ways to grow without acquisitions.

"We don't have acquisitions on our mind," DePaolo says. "By bringing on teams, you don't have goodwill and intangible assets on your books, but you're essentially buying a $2 billion bank each year. And you don't have to worry about changing signs, changing systems or changing cultures."

Signature's model works because of its commercial focus, says Rod Taylor, the president of executive recruiting firm Taylor & Co. "The model certainly makes sense if the bank's strategy is to add quality commercial assets," he says.

"It makes less sense if the bank is focused on retail assets because retail customers are not loyal to an institution's representatives," Taylor adds. Retail customers "are loyal to location, pricing and delivery systems."

Signature's success is also a function of being based in New York, which has a high number of small, privately owned businesses and all of the nation's biggest banking companies. That provides the bank with a client base and a supply of lenders to recruit, Green says.

The bank has taken advantage of hiring opportunities to pursue two key expansions, adding multifamily lending in late 2007 and specialty finance last March. DePaolo has credited the creation of Signature Financial earlier this year, which included the addition of a team from Capital One (COF), for fueling much of the bank's recent loan growth.

Loan growth has helped Signature slowly address one of its biggest perceived weaknesses: a historical overreliance on mortgage-backed securities, which raised concerns that diminished yields on such instruments could stifle earnings growth. Signature has been working to address that issue; loans now make up more than 51% of assets compared with 46% a year earlier and just 35% at the end of 2007.

Signature also has a large capital cushion — its total risk-based capital ratio was 17.6% at June 30 — thanks partly to its aversion to acquisitions and a decision not to pay dividends. The capital is critical for retaining clients who deposit more than what is protected by the Federal Deposit Insurance Corp., DePaolo says.

DePaolo asserts that Signature can continue growing. In fact, the bank seems to have limited options if management decided to sell given its distinctive business model. "Most major U.S. institutions would make a mistake buying Signature," DePaolo says, though he acknowledges that management has considered various exit strategies.

Should Signature choose to sell, executives would do well to brush up on its past. Before its initial public offering, the bank was 60% owned by Bank Hapoalim, Israel's largest bank. Signature's growth eventually placed a strain on the Israeli bank's resources, prompting a decision to cash out.

"A foreign institution that wanted to have a deposit-gathering machine" could possibly make a Signature acquisition work, DePaolo says. Doing so would allow Signature to "replicate" its business model in other markets that resemble New York, such as Boston, Dallas or Los Angeles.

Signature could also look to merge with another "like-minded" bank from another region such as the Midwest or West Coast, DePaolo says. "There a few of those institutions around," he says while declining to name specific institutions. Still, he adds, the bank is not ready to actively pursue such an endgame.

"It is not something that we worry about," DePaolo says. "Our focus is growing the institution."

Signature is intent on growth despite margin pressure and mounting regulatory costs. "We've hired outside third parties to work with us on stress-testing the institution. That's costing us several hundreds of thousands of dollars and a significant amount of senior management and board time."

The Consumer Financial Protection Bureau is conducting an exam of the bank, also. "We're not immune, because we're a bank," DePaolo says. "Regulation keeps me up at night. The issue is what additional regulations are going to come down and were made necessary because of things others have done."

Still, there are some businesses that Signature is reluctant to enter, such as credit cards. "I never say never," he quickly prefaces, "but we're a relationship-based institution and the credit card business is not relationship-based. It is a business that we're so unfamiliar with that we would have to bring expertise in. It would change the dynamic of Signature … almost as if you're going to have two institutions."

Signature would certainly make sense as an acquisition target for a foreign institution, Green says. Still, there is no apparent pressure on the bank to sell itself anytime soon. "The best bank franchises are self-sustaining and built over decades," Green says. "There is no urgency for them to punch their ticket."