Signature Bank is betting big on crypto — and now has to reckon with the crash

Signature Bank, the 30th largest bank in America by assets, does not advertise and operates only seven official bank branches. It was also one of the best performing banks in the country last year, driven by a decision to justify the growing deposits from the cryptocurrency industry.

However, as crypto has crashed, so has Signature Bank’s share price, leaving it struggling to address concerns that its rapid growth is being thrown into reverse.

Before the stock price fell another 10 percent after the results last week, Signature Bank CEO Joe DePaolo had tried to put some distance between the unusual institution he has nurtured for two decades and its newest and most controversial clients.

“We are actually much more than a crypto bank,” he told the Financial Times last month.

Crypto financing

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In some ways, one of the most successful American banks, sailing through the Great Financial Crisis without a loss, is also one of the least known. The flagship Manhattan branch is tucked 12 stories up in a midtown office tower, and the average American is more likely to have seen the logo flash on the screen of the company’s bank statements. Bad vegan protagonist Sarma Melngailis than meeting the group.

The secret to Signature’s success, DePaolo said, is a relentless focus on deposit growth. He and Chairman Scott Shay founded the bank 20 years ago in New York and grew it to $109 billion in deposits without a single acquisition, focusing for much of its history on attracting successful private businesses and their owners as customers.

Operating much like a wealth manager, Signature grew by hiring away teams of bankers from rivals, expanding beyond New York and then adding offices on the West Coast to target the venture capital and private equity scene. “Unlike just about every bank in the country, everyone who worked at Signature Bank has decided to come here,” Shay said.

What helped make it last year’s best-performing stock in the KBW Bank Index was a decision four years ago to accept crypto exchanges, stablecoin issuers and bitcoin miners as clients, as well as the launch of a blockchain-based payment system called Signet that allows bank customers to transfer dollars between each other at any time of the day.

From a peak market cap of $23 billion, however, Signature’s value has halved, dragging it to the bottom of the index it recently topped.

“Between 2018 and today you had one [digital assets] business that started at zero and there are now 29 billion dollars in deposits. Crypto tends to grab the most attention these days. It has been like a lightning rod, says Matt Breese, an analyst at Stephens.

Collapsing coin prices and a string of bankruptcies at crypto-related companies, including lender Celsius Network, broker Voyager and hedge fund Three Arrows Capital, have sparked fears of a financial crisis for the 13-year-old digital asset industry.

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Sparks flew again for Signature this month after the group said deposits fell by $5 billion in the second quarter – half of it from outflows from clients of its New York banking teams and half from digital assets. Casey Haire, an analyst at Jefferies, wrote that the decline “will heighten investors’ anxiety about funding future loan growth with [the] excess cash position now exhausted”.

Signature has also faced speculation that its rapid growth and embrace of a controversial industry may have attracted the attention of regulators.

The Federal Deposit Insurance Corporation maintains a confidential watch list of problem institutions. Every quarter, it publishes the number and total assets of “problem banks,” prompting questions for Signature on the earnings call from JPMorgan analyst Steven Alexopoulos in April: “assets went up by $120 billion, which is about your size. I’ve said publicly, I don’t think it’s you. But based on my conversations with investors throughout the quarter, there’s still a concern out there.”

DePaolo responded to the call that the banks are not allowed to comment on the list, but that if Signature was on it, “I would know, and I don’t know anything.”

He told the FT that Signature does not hold any crypto, only the dollar deposits of its customers. DePaolo said, “it happens to be an ecosystem that we serve, but we have no exposure to the digital world or the crypto world. We had one loan that we’ve done so far, and it was paid back. So we have no loans outstanding. We have no digital assets on our books.”

Asked about the area where Signature has rapidly grown the size of its loan book since 2018, so-called “fund lending,” DePaolo characterized it as a remarkably safe niche in the private equity industry. Signature funds capital calls for investment funds when investors such as pension funds, endowments and sovereign wealth funds lack immediate money to make investments. “It’s a zero loss business,” he said.

Morgan Stanley analyst Daniella Cohen flagged concerns about crypto volatility and rising interest rates in a note to clients: “We expect higher interest rates to continue to weigh on deposit growth going forward as clients seek more attractive yields, and now expect deposit balances to fall further. $2.8 billion in the second half of 2022.”

A shrinking institution can be a less attractive destination for the teams it hires from rivals, and some of the concerns raised privately by investors relate to liquidity: as Signature banks eight of the 12 biggest crypto brokers, for example, an industry implosion in a credit crunch could watch their deposits quickly evaporate.

Signature is not yet big enough to publish the liquidity coverage required by its larger rivals, but DePaolo said the bank could weather the death of Bitcoin and the like. “Every month we model with the assumption that every single crypto deposit is withdrawn,” he said, pointing to Signature’s $20 billion in marketable securities, available lines of credit and a cash position that stood at $14.6 billion at the end of June.

“The first thing on our mind when we wake up in the morning and the last thing when my head hits the pillow at night is making sure we have plenty of liquidity and safe assets,” DePaolo said.