Signature Bank (NASDAQ: SBNY), who is based in New York, is doing very well. The stock trades at around $ 250 per share and the company is valued at 243% of tangible book value (equity less intangibles and goodwill).The bank also recently reported a strong first quarter earnings to start the year, generating a profit of $ 190.5 million, which equated to a return on assets (ROA) of 0.97% and a return on assets. equity (ROE) of around 13%. While things are certainly rosy in the bank right now, I think they’re about to get a lot better. Here’s why.

So much cash

Signature Bank was founded in 2001 and has grown extremely rapidly. It started with just $ 50 million in assets and has now grown to $ 85 billion in assets, reaching that level without making a single acquisition. In recent years, the bank, which was once a large multi-family lender, has really become a technology player.

In early 2019, the bank launched its Signet payment platform, which leverages blockchain technology to create a real-time digital payment platform that clears and settles payments 24/7. per year. This allows two business customers on the network to transfer funds between them any day or time for free, although customers are encouraged to maintain balances of $ 250,000 or more in their accounts. This system is especially useful for digital asset traders such as Bitcoin (CRYPTO: BTC) because cryptocurrencies are traded 24 hours a day.

Signet has played a vital role in the bank’s success as it brings in large sums of non-interest bearing deposits. This, coupled with all the excess liquidity in the banking system, has led to a massive influx of deposits at Signature over the past year. The bank increased its deposits from around $ 41 billion at the end of the first quarter of 2020 to more than $ 68 billion in deposits at the end of the first quarter of this year.

This is such a large amount that, despite better loan growth than most in the industry, Signature Bank still has no place to deploy its excess cash. As a result, over $ 19.5 billion in Signature deposits are with the Federal Reserve and earn virtually no interest. This in effect lowered Signature’s return metrics.

Signature’s executive vice president Eric Howell said on the bank’s recent earnings call that the excess cash had lowered the bank’s net interest margin (NIM) by 58 basis points (0 , 58 percentage point). NIM is the difference between what banks pay on interest-bearing liabilities such as deposits and what they do on interest-bearing assets such as loans. With over $ 19.5 billion earning almost no return, that hurts the interest-earning asset part of the equation. It’s also a huge drag on ROA and ROE because you have assets that are barely making any returns, and could make a lot more profit if they were deployed. Imagine if the Fed increased its fed funds rate from virtually zero to 1% or 2%. At 2%, that $ 19.5 billion in Fed liquidity would generate an additional $ 390 million in interest income.

Filing fees are expected to continue to drop

While all of this excess cash has weighed on profitability, the good news is that it should allow Signature Bank to continue lowering funding costs. At the end of the first quarter, the bank paid interest of 0.47% on its total deposits and borrowings and 0.34% on its total deposits. One thing to understand is that as a former multi-family lender, Signature probably didn’t have the best deposit franchise, as most multi-family lending relationships don’t typically attract good deposits.

But now, with so much excess cash and unpaid deposits, funding costs should be allowed to come down further as the bank can in theory continue to replace higher-cost deposits and borrowing with lower-cost, unpaid deposits. . Howell said he doesn’t expect deposit growth to slow down anytime soon. Signature at the end of the first quarter had nearly $ 1.7 billion in term deposits with an average yield of 1.10%, which is a high rate to pay in this low rate environment. The majority of those term deposits will mature in the next year or so, so I think the bank will be able to allow most, if not all, to flow.

Signature also has another loan of nearly $ 3 billion with an average yield of 2.41%. Most of these will mature over the next three years, so I expect most of them to be paid off as well. But in the meantime, Signature’s funding costs are expected to continue to decline as more and more core and interest-free deposits continue to flow. Cheaper financing costs will help the bank expand its NIM and increase profitability.

Many income opportunities

Signature Bank should be able to deploy at least some of its excess cash this year as there are plenty of income opportunities at the bank. Loans rose $ 2.12 billion in the first quarter of the year, and Howell said the bank expects lending growth of $ 1 billion to $ 2 billion per quarter, as well as $ 1 to 2 billion. billion dollars in securities purchases each quarter. Securities don’t offer as high yields as loans, but will be better than having cash in the Fed.

Around the time Signature launched Signet in 2019, the bank also launched its funds and venture banking division, which provides special lines of credit and other loans specifically for private equity and investment communities. capital risk. This segment has performed remarkably well, growing from around $ 5.9 billion in total loan volume at the end of the first quarter of 2020 to over $ 12 billion in volume at the end of the first quarter of this year.

In addition, the bank plans to launch new lines of business, including loans administered with the US Small Business Administration and warehouse mortgages. These new vertical loans, which are not expected to be operational until the end of the year, are not included in the loan growth projections of $ 1 billion to $ 2 billion, so there could start to be growth. even higher lending towards the end of this year.

Finally, I would be remiss if I did not address the earning opportunities of Signet. Bookmark not only brings all of these great deposits, but it will likely start earning income from fee income at some point, as well as lending to customers on the platform. CEO Joseph DePaolo said during the bank’s earnings call that Signature plans to start lending in the crypto space. He didn’t say exactly what that means, but if this sounds like the competition, I suspect it will involve making loans in US dollars backed by a cryptocurrency like Bitcoin – these loans may fetch a higher return than other commercial loans. Signet had grown to 740 customers by the end of the first quarter.

Ready to run

Signature Bank is really pulling all the cylinders when you look at its performance, its stock price and its valuation. But there is much more to come, once the bank is able to better deploy its excess liquidity. This will happen as Signature continues to develop its fund and venture banking businesses and launches other new lines of business. This will also happen as Signet continues to welcome new customers and starts increasing its loans and commissions on its own.

Analysts are already predicting on average that the bank can increase its profits by more than $ 2 per share between 2021 and 2022. This is why I would keep this stock or even consider buying it, because the bank is going to generate some pretty exceptional returns. . .