The end of Signature Bank was five years in the making.

In April 2018, I wrote an article here titled, “Signature Bank earnings down. That may not be so bad.” It was a response to an Aaron Elstein article that appeared in Crain’s New York Business: Signature Bank earnings down $100 million thanks to dud taxi loans. In my article, I went on to explain what I meant by my statement.

It used to be that there were companies, who wanted to make money, and customers, who wanted to spend less (and get more). There was an old saying, “the customer is always right,” or “the customer is king.” Companies did what they could to attract and retain customers. Without the customers, they knew that they had nothing.

Now, enter stockholders. Suddenly these companies have a new source of revenue, and a new set of deliverables, that has nothing to do with whatever it is that they “look like” they do. It’s just a return-on-investment scenario. Companies are favored that are making the most money. Investors naturally think it’s a great thing if companies they have a stake in are making a lot of money. But so too do people who don’t own the stock. They get confused, and all up in the hype. Random people think it’s great for these companies to be making huge profits. They think it’s a sign of healthy economy if companies are making a lot of money.

If a company is making a lot of money, though, the customers are getting less, and paying more. There are no two ways about it. Everybody behaves as if they own shares in X Company, even if they don’t, and they all get super excited when the stock performance numbers are good. But those shareholders, or wannabe-shareholders, are the exact same people who, when wearing their consumer hats instead of their shareholder hats, will complain about the prices, or that they aren’t getting enough for their money…

So yeah, Signature Bank’s earnings are down. This is a bank that said yes to the medallion loans when other said no. This is a bank that said yes to the company I work for (disclosure), and gave the most favorable rates for business expansion. This is the bank that will open a branch office on the 12th floor of an office building at $50 a foot rather than using street-level retail spaces at $250+ per square foot. From a customer’s perspective, this is a great bank (as banks go). Perhaps from a stock-ownership perspective, it’s not.

I can’t help but wonder which of the several factors influencing the course of Signature Bank had the most impact on bringing it down. Many have pointed to its status as one of the “cryptocurrency banks.” More on this in a moment. But in addition, the time that I wrote about them in 2018 also marks the time that the bank started its expansion outside of the New York area, going against the earlier philosophy of Mr. DePaolo.

From a 2011 article in Banking New York, a trade publication (footnoted in Wikipedia as: Goodspeed, Linda (December 29, 2011). “Signature Bank: Relationships Matter”. Banking New York. Archived from the original on June 4, 2016. Retrieved November 15, 2018), some of the key points:

• “Everyone talks about relationship banking,” DePaolo said. “What sets us apart is that we actually do it, not talk about it.”
• “We built the bank for depositors, then lend to clients,” DePaolo said. “We think deposit first, not loan first. We live by that.”
• He said a “deposit first” strategy means keeping higher than required capital ratios, something Signature has done from the beginning.
• The bank targets privately owned businesses, their owners and senior management in the New York metropolitan area, a market DePaolo believed was underserved by the mega banks. Signature goes after this market by going after experienced teams of bankers who serve them.
• We can’t compete with brand,” DePaolo said. “But we believe personal relationships trump brand.”
• “Current cash flow in these sectors is key for us,” DePaolo said. “We lend based on current cash flow. We don’t give credit for what could happen. We also hired expertise in those areas. We look for bankers with experience and deep personal relationships with clients. We lift out those teams. It’s better than buying a bank.”

Some time between that article’s publication and 2018, Mr. DePaolo migrated toward a position where he was ready to consider geographic expansion outside the core NYC market area. In addition, the move toward crypto meant a move toward a less relationship-oriented transaction. Almost by definition, there’s a certain anonymity behind cryptocurrency banking; it’s very transactional, rather than relational.

I think these two factors are two sides of the same coin. The actual thing that happened was that Mr. DePaolo left his gut feelings by the wayside, and followed the “expert advice” of those around him, no doubt looking to make more money. In today’s digital world, relationships are old-fashioned. Transactions rule. And this is the result.

Chogyam Trungpa Rinphoche, Tibetan meditation master and the founder of the Naropa Institute in Boulder, Colorado, believed in the concept of “First thought, best thought.” To put some more meat on these bones, his student, Dr Jeremy Hayward, put it this way: “First thought is best thought because it has not yet got covered over by all our opinions and interpretations, our hopes and fears, our likes and dislikes. It is direct perception of the world as it is.” [https://tricycle.org/magazine/first-thought/] To go with our first thoughts requires trust. In Rinpoche’s words, “To be trusting means you are fundamentally free from doubt about your goodness and about the goodness of others.” It is not something you have to think about.

It seems to me that Mr. DePaolo began to question his first thoughts. Or yielded to the pressure of others, questioning his first thoughts. Perhaps he – or they – thought they had a good thing going. They thought they knew what it was, the secret to their success. They thought it was something that they could package up, take their show on the road.

But the real secret of their success was the relationships. Mr. DePaolo’s first thoughts. Once the questions and the justifications and doubts and discussions and opinions started to insert their color over the pure framework of that first thought, the ending was crafted. It would simply take another five years for that ending to play out.