SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Act
of 1934 for the quarterly period ended June 30, 1994 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act for the transition period from _______ to _______.
Commission file number 1-6505
SIGNET BANKING CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-6037910
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 North Eighth Street, Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 804 747-2000
Not Applicable
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Common Shares outstanding as of July 31, 1994 - 56,882,319
Page 1 of 25
<PAGE>
Index
SIGNET BANKING CORPORATION AND SUBSIDIARIES
June 30, 1994
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet 3
Statement of Consolidated Income 4
Statement of Changes in Consolidated
Stockholders' Equity 5
Statement of Consolidated Cash Flows 5
Supplemental Notes to Quarterly Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
(dollars in thousands-except per share) (unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1994 1993 1993
<S> <C> <C> <C>
Assets
Cash and due from banks $ 538,079 $ 453,386 $ 463,358
Interest bearing deposits with other
banks 227,198 295,256 540,312
Federal funds sold and securities
purchased under resale agreements 1,078,429 914,933 1,075,754
Trading account securities 258,547 419,602 379,638
Credit card loans held for securitization 750,000 1,000,000
Loans held for sale 145,299 346,461 421,361
Securities available for sale 1,152,477 303,829 248,163
Investment securities 220,658 1,887,876 1,769,615
Loans:
Commercial 2,173,695 2,172,548 2,299,973
Credit card 1,299,627 1,406,089 1,808,515
Other consumer 1,426,184 1,183,410 1,297,309
Real estate-construction 244,354 446,827 309,842
Real estate-commercial mortgage 566,211 587,784 581,529
Real estate-residential mortgage 73,815 76,820 71,411
Gross loans 5,783,886 5,873,478 6,368,579
Less: Unearned income (56,607) (49,938) (58,267)
Allowance for loan losses (245,764) (258,571) (253,313)
Net loans 5,481,515 5,564,969 6,056,999
Premises and equipment (net) 242,372 200,847 216,524
Interest receivable 75,775 90,698 84,118
Other assets 653,414 566,281 593,380
$10,823,763 $12,044,138 $11,849,222
Liabilities
Non-interest bearing deposits $ 1,543,001 $ 1,440,451 $ 1,544,852
Interest bearing deposits:
Money market and interest checking 996,276 946,129 1,039,215
Money market savings 1,620,924 1,712,292 1,745,066
Savings accounts 1,000,049 763,129 880,072
Savings certificates 1,923,606 2,481,170 2,051,300
Large denomination certificates 318,100 262,249 347,820
Foreign 147,102 222,297 212,288
Total interest bearing deposits 6,006,057 6,387,266 6,275,761
Total deposits 7,549,058 7,827,717 7,820,613
Securities sold under repurchase agreements 1,135,939 1,342,426 1,281,645
Federal funds purchased 350,820 895,160 942,969
Commercial paper 118,928 135,637 168,488
Other short-term borrowings 204,313 449,490 232,024
Long-term borrowings 253,818 297,176 266,152
Interest payable 24,874 34,293 28,205
Other liabilities 149,162 172,016 144,464
Total liabilities 9,786,912 11,153,915 10,884,560
Stockholders' Equity
Common Stock, $5 par value; Authorized
100,000,000 shares, issued and
outstanding 56,866,696, 56,276,370
and 56,608,578 shares, respectively 284,333 281,382 283,043
Capital Surplus 141,446 130,551 133,038
Retained Earnings 611,072 478,290 548,581
Total stockholders' equity 1,036,851 890,223 964,662
$10,823,763 $12,044,138 $11,849,222
</TABLE>
3
<PAGE>
Statement of Consolidated Income
(in thousands-except per share) (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees:
Commercial $ 39,664 $ 38,062 $ 80,319 $ 78,735
Credit card 53,255 62,250 104,031 112,342
Other consumer 26,681 23,517 51,955 47,546
Real estate-construction 5,241 8,421 10,476 17,905
Real estate-commercial mortgage 11,754 11,083 22,162 22,989
Real estate-residential mortgage 1,514 2,054 3,330 4,020
Total loans, including fees 138,109 145,387 272,273 283,537
Interest bearing deposits with other banks 2,952 3,124 5,523 6,390
Federal funds sold and resale agreements 8,674 5,943 13,624 11,110
Trading account securities 4,747 8,499 10,387 17,905
Credit card loans held for securitization 17,848 278 25,723 278
Loans held for sale 3,115 4,089 8,876 6,024
Securities available for sale 16,343 4,506 40,236 9,527
Investment securities-taxable 307 24,208 692 49,574
Investment securities-nontaxable 4,130 5,432 8,526 10,991
Total interest income 196,225 201,466 385,860 395,336
Interest expense:
Money market and interest checking 5,605 5,717 11,157 11,429
Money market savings 11,381 11,401 22,699 23,480
Savings accounts 7,751 5,728 14,699 11,196
Savings certificates 13,993 16,968 27,043 30,671
Large denomination certificates 3,635 2,613 6,859 4,878
Foreign 2,112 1,561 4,293 2,314
Total interest on deposits 44,477 43,988 86,750 83,968
Securities sold under repurchase agreements 10,072 11,157 18,275 23,618
Federal funds purchased 8,438 5,143 13,462 8,318
Other short-term borrowings 4,145 6,952 7,198 10,798
Long-term borrowings 4,183 4,444 8,049 8,972
Total interest expense 71,315 71,684 133,734 135,674
Net interest income 124,910 129,782 252,126 259,662
Provision for loan losses 2,999 9,011 8,498 24,509
Net interest income after provision for loan losses 121,911 120,771 243,628 235,153
Non-interest income:
Credit card servicing income 77,469 30,438 154,006 60,300
Credit card service charges 18,566 15,177 34,014 26,562
Service charges on deposit accounts 18,106 16,135 33,803 32,181
Trust income 4,869 4,577 9,670 9,001
Other 17,147 14,856 33,307 27,905
Non-interest operating income 136,157 81,183 264,800 155,949
Securities available for sale gains 3,265 3,053 1,665
Investment securities gains (losses) 45 46 (23) 149
Total non-interest income 139,467 81,229 267,830 157,763
Non-interest expense:
Salaries 64,345 50,165 124,286 99,799
Employee benefits 17,989 14,857 36,051 30,438
Credit card solicitation 24,250 17,257 45,637 26,510
Travel and communications 13,546 8,351 26,863 16,281
Supplies and equipment 13,095 9,195 25,094 18,832
External data processing services 12,128 7,846 23,407 15,788
Occupancy 10,855 10,090 21,566 18,968
Other 30,417 29,048 55,830 54,250
Total non-interest expense 186,625 146,809 358,734 280,866
Income before income taxes 74,753 55,191 152,724 112,050
Applicable income taxes 24,368 14,751 49,226 33,343
Net income $ 50,385 $ 40,440 $103,498 $ 78,707
Earnings per common share $ 0.88 $ 0.71 $ 1.81 $ 1.39
Cash dividends declared per share 0.25 0.20 0.50 0.35
Average common shares outstanding 57,358 56,871 57,303 56,789
</TABLE>
4
<PAGE>
Statement of Changes in Consolidated Stockholders' Equity
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
<S> <C> <C> <C>
Six Months Ended June 30, 1994
Balance at beginning of period $ 283,043 $ 133,038 $ 548,581
Net income 103,498
Issuance of Common Stock 1,290 8,408
Cash dividends (28,360)
Adjustment to beginning balance for change in accounting method for
net unrealized gain on securities available for sale, net of tax of $16,147 29,987
Change in net unrealized losses on securities
available for sale, net of tax benefit of $22,957 (42,634)
Balance at end of period $ 284,333 $ 141,446 $ 611,072
Six Months Ended June 30, 1993
Balance at beginning of period $ 139,904 $ 126,282 $ 560,446
Net income 78,707
Issuance of Common Stock 787 4,269
Cash dividends (19,643)
Stock split in the form of a dividend declared on June 23, 1993 140,691 (140,691)
Change in valuation allowance-marketable equity securities (529)
Balance at end of period $ 281,382 $ 130,551 $ 478,290
</TABLE>
Statement of Consolidated Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
1994 1993
<S> <C> <C>
Operating Activities
Net income $ 103,498 $ 78,707
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 8,498 24,509
Provision and writedowns on foreclosed property 1,585 4,489
Depreciation and amortization 21,031 13,992
Investment securities losses (gains) 23 (149)
Securities available for sale gains (3,053) (1,665)
Decrease in interest receivable 8,343 10,154
Increase in other assets (66,726) (28,829)
(Decrease) increase in interest payable (3,331) 6,683
Increase in other liabilities 4,698 50,627
Increase in loans held for securitization (750,000)
Proceeds from securitization of credit card loans 1,247,132
Proceeds from sales of loans held for sale 12,104,569 5,775,157
Purchases and originations of loans held for
sale (13,075,639) (6,906,534)
Proceeds from sales of trading account
securities 7,691,160 5,359,053
Purchases of trading account securities (7,570,069) (5,110,344)
Net cash used by operating activities (278,281) (724,150)
Investing Activities
Proceeds from maturities of investment securities 28,918 192,870
Purchases of investment securities (102) (8,313)
Sales and maturities of securities available for sale 2,819,257 50,679
Purchases of securities available for sale (2,213,898) (6,000)
Net decrease (increase) in loans 552,398 (64,675)
Recoveries of loans previously charged-off 14,588 18,283
Purchases of premises and equipment (40,921) (11,902)
Net cash provided by investing activities 1,160,240 170,942
Financing Activities
Net (decrease) increase in deposits (271,555) 4,403
Net decrease in short-term borrowings (815,126) (173,127)
Repayment of long-term debt (12,334) (786)
Issuance of common stock 9,698 5,056
Payment of cash dividends (28,360) (19,643)
Net cash used by financing activities (1,117,677) (184,097)
Decrease in cash and cash equivalents (235,718) (737,305)
Cash and cash equivalents at beginning of period 2,079,424 2,400,880
Cash and cash equivalents at end of period $ 1,843,706 $ 1,663,575
</TABLE>
5
<PAGE>
Supplemental Notes to Quarterly Financial Statements
(dollars in thousands) (unaudited)
General
The accompanying financial statements (unaudited) reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation. All
such adjustments are of a normal recurring nature. The financial statements have
been prepared based on the accounting policies as described in the 1993 annual
report and as noted below, except certain amounts which have been reclassified
for prior periods to conform to the 1994 presentation format.
Statement of Consolidated Cash Flows
Cash and cash equivalents, as presented in this statement, includes cash and
due from banks, interest bearing deposits with other banks and federal funds
sold and securities purchased under resale agreements. Cash paid for interest
during the six months ended June 30, 1994 and 1993 was $137,065 and $96,688,
respectively. Cash paid for income taxes during the six months ended June 30,
1994 and 1993 was $39,214 and $37,195, respectively. During the six months ended
June 30, 1994 and 1993, $7,281 and $22,286, respectively, was transferred from
loans to foreclosed property.
Securities Available for Sale
Effective January 1, 1994, the Company adopted the Financial Accounting
Standard Board's Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investment in Debt and Equity Securities." Under SFAS
No. 115, debt securities classified as investment securities are required to be
carried at amortized cost. Debt and equity securities classified as securities
available for sale are required to be reported at fair value with unrealized
gains and losses reported in a separate component of stockholders' equity, net
of tax. At adoption, securities totaling $1.5 billion were reclassified from
investment securities to securities available for sale.
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993 December 31, 1993
Fair Fair Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations-
Mortgage-backed securities $ 501,934 $ 490,872 $103,544 $111,089 $ 47,672 $ 50,795
Other 560,450 560,425 199,422 201,250 199,641 201,125
State and political subdivisions 14,638 15,064
Other 94,912 86,116 863 863 850 850
Total $1,171,934 $1,152,477 $303,829 $313,202 $248,163 $252,770
</TABLE>
Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1994 June 30, 1993 December 31, 1993
Fair Fair Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations-
Mortgage-backed securities $ 608,485 $ 618,896 $ 461,345 $ 466,151
Other 866,458 907,446 925,225 964,482
State and political subdivisions $200,051 $210,165 275,189 296,521 258,815 277,456
Other 20,607 20,607 137,744 129,587 124,230 121,142
Total $220,658 $230,772 $1,887,876 $1,952,450 $1,769,615 $1,829,231
</TABLE>
See Securities Available for Sale footnote for discussion of SFAS No. 115.
Income Taxes
Differences between the effective rate of income taxes and the statutory
rate arise principally from non-taxable interest on investments and loans.
6
<PAGE>
Supplemental Notes to Quarterly Financial Statements (continued)
(dollars in thousands) (unaudited)
Recent Accounting Statements
The Financial Accounting Standards Board recently issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan." The new statement, which is
effective for financial statements issued for fiscal years beginning after
December 15, 1994, requires impaired loans be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate or
at the loan's observable market value or the fair value of the collateral if the
loan is collateral dependent. The new statement also requires troubled debt
restructurings involving a modification of terms be remeasured in a similar
manner. The Company is currently evaluating the impact that Statement 114 will
have on the Company's future results of operations and financial position.
However, management does not expect that this statement will have a materially
adverse impact on future results of operations or financial position.
Subsequent Events
On July 27, 1994, Signet announced plans to spin-off substantially all of
its credit card business . Under such plans, designated assets and liabilities
of Signet Bank/Virginia's credit card division will be transferred to OakStone
Bank, a newly chartered limited purpose credit card bank. OakStone Bank will, in
conjunction with the transfer, become a wholly-owned subsidiary of OakStone
Financial Corporation, a wholly-owned subsidiary of Signet (the "Separation").
It is anticipated that accounts representing approximately $335 million, or 5%,
of the managed credit card portfolio will be retained by Signet. Concurrently
with the Separation, up to 19.9% of the outstanding shares of common stock of
OakStone Financial Corporation (the "Common Stock") will be offered in an
initial public offering. Signet intends to distribute all of the Common Stock it
holds to its stockholders in a tax-free distribution as early as year-end 1994.
OakStone Financial Corporation will apply for a listing on the New York Stock
Exchange. It is anticipated that the spin-off will enhance shareholder value by
creating two strong and independent financial institutions.
In July 1994, Signet's Board also approved a comprehensive program to
improve the performance of its core banking businesses through initiatives to
reduce costs and enhance revenues. In connection with the cost reduction
measures, Signet anticipates, subject to employee response and other factors,
taking special one-time charges in the third quarter related to an early
retirement plan, employee severance and the termination of certain data
processing contracts, which are estimated to range between $60 million and $70
million in the aggregate. The termination costs of data processing contracts are
associated with the Separation of the credit card business. These charges will
also be reflected in the "stand alone" financial statements of OakStone
Financial Corporation. Signet will contribute additional capital to OakStone
Bank equal to the amount of any such charge.
7
<PAGE>
Signet Banking Corporation
Financial Highlights
(dollars in thousands-except per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 Percent June 30 Percent
1994 1993 Change 1994 1993 Change
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Net interest income
(taxable equivalent) $ 128,279 $ 133,561 (4.0)% $ 258,930 $ 267,463 (3.2)%
Net interest income 124,910 129,782 (3.8) 252,126 259,662 (2.9)
Net income 50,385 40,440 24.6 103,498 78,707 31.5
Per Common Share
Net income $ 0.88 $ 0.71 23.9 $ 1.81 $ 1.39 30.2
Cash dividends declared 0.25 0.20 25.0 .50 0.35 42.9
Book value 18.23 15.82 15.2
Period-end price 40 3/8 30 3/16 33.7
Average Daily Balance
Assets $11,501,436 $11,681,515 (1.5) $11,406,401 $11,413,567 (0.1)
Earning assets 10,267,207 10,643,674 (3.5) 10,189,866 10,394,125 (2.0)
Loans (net of unearned income) 6,344,382 6,511,553 (2.6) 6,290,099 6,271,615 0.3
Deposits 7,768,856 7,757,311 0.1 7,791,992 7,661,990 1.7
Core deposits 7,208,991 7,307,727 (1.4) 7,216,392 7,283,083 (0.9)
Common stockholders' equity 1,017,027 867,888 17.2 1,012,122 854,579 18.4
Managed credit card portfolio* 6,302,980 3,089,630 104.0 5,884,655 2,808,675 109.5
Common shares outstanding 57,357,940 56,871,316 0.9 57,303,052 55,788,538 0.9
Ratios
Return on assets 1.76% 1.39% 26.6 1.83% 1.39% 31.7
Return on common
stockholders' equity 19.87 18.69 6.3 20.62 18.57 11.0
Net yield margin 5.01 5.03 (0.4) 5.12 5.19 (1.3)
Allowance for loan losses to:
Non-performing loans 616.91 410.98 50.1
Non-performing assets 316.48 199.30 58.8
Net loans 4.29 4.44 (3.4)
Non-performing assets to loans
and foreclosed properties 1.35 2.20 (38.6)
Common equity to assets 9.58 7.39 29.6
At Period-end
Assets $10,823,763 $12,044,138 (10.1)
Earning assets 9,559,887 10,991,497 (13.0)
Loans (net of unearned income) 5,727,279 5,823,540 (1.7)
Deposits 7,549,058 7,827,717 (3.6)
Core deposits 7,083,856 7,343,171 (3.5)
Common stockholders' equity 1,036,851 890,223 16.5
Non-performing assets 77,655 129,741 (40.1)
Managed credit card portfolio* 6,589,282 3,406,089 93.5
Number of common stockholders 14,716 14,371 2.4
Full-time employees 6,428 5,161 24.5
Part-time employees 1,550 1,283 20.8
</TABLE>
*The managed credit card portfolio includes credit card loans, credit card
loans held for securitization and securitized credit card loans.
The Common Stock of Signet Banking Corporation is traded on the New York Stock
Exchange under the symbol "SBK."
8
<PAGE>
Table 1
Selected Quarterly Financial Information
<TABLE>
<CAPTION>
2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
1994 1994 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Summary of Operations
(dollars in thousands-except
per share)
Net interest income (taxable
equivalent) $ 128,279 $ 130,650 $ 133,546 $ 144,084 $ 133,561
Taxable equivalent adjustment 3,369 3,434 3,790 4,162 3,779
Net interest income 124,910 127,216 129,756 139,922 129,782
Provision for loan losses 2,999 5,499 10,276 12,501 9,011
Net interest income after
provision for loan losses 121,911 121,717 119,480 127,421 120,771
Non-interest income 139,467 128,363 122,156 85,517 81,229
Non-interest expense(1) 186,625 172,109 169,934 147,516 146,809
Income before income taxes 74,753 77,971 71,702 65,422 55,191
Applicable income taxes 24,368 24,858 21,758 19,659 14,751
Net income $ 50,385 $ 53,113 $ 49,944 $ 45,763 $ 40,440
Per share:
Net income $ 0.88 $ 0.93 $ 0.87 $ 0.80 $ 0.71
Cash dividends declared 0.25 0.25 0.25 0.20 0.20
Average shares outstanding 57,357,940 57,247,462 57,087,297 57,010,088 56,871,316
Selected Average Balances
(dollars in millions)
Assets $ 11,501 $ 11,310 $ 11,601 $ 12,035 $ 11,682
Earning assets 10,267 10,112 10,447 10,970 10,644
Investment securities 226 247 1,790 1,840 1,953
Loans (net of unearned income) 6,344 6,235 6,074 6,210 6,512
Deposits 7,769 7,815 7,782 7,823 7,757
Core deposits 7,209 7,224 7,189 7,283 7,308
Interest bearing liabilities 8,699 8,511 8,945 9,516 9,236
Stockholders' equity 1,017 1,007 939 907 868
Managed credit card
portfolio(2) 6,303 5,462 4,663 3,818 3,090
Ratios
Return on average assets 1.76% 1.90% 1.71% 1.51% 1.39%
Return on average common
stockholders' equity 19.87 21.39 21.09 20.02 18.69
Net loan losses to average
loans 0.38 0.36 0.77 0.93 1.40
Net interest spread 4.51 4.77 4.65 4.81 4.62
Net yield margin 5.01 5.24 5.07 5.21 5.03
At period-end:
Allowance for loan losses to:
Non-performing loans 616.91 521.72 342.63 471.00 410.98
Non-performing
assets 316.48 283.44 217.46 222.41 199.30
Net loans 4.29 4.19 4.01 4.42 4.44
Non-performing assets to
loans and foreclosed
properties 1.35 1.47 1.83 1.97 2.20
Total stockholders' equity
to assets 9.58 8.83 8.14 7.92 7.39
Total stockholders' equity
+ allowance to loans 22.39 21.23 19.30 20.49 19.73
</TABLE>
(1) The second, third and fourth quarters of 1993 included $17.2, $13.7 and
$15.6 million of credit card solicitation expenses, respectively.
The first and second quarters of 1994 included $21.4 and $24.2 million of
credit card solicitation expense, respectively.
(2) The managed credit card portfolio includes credit card loans, credit
card loans held for securitization and securitized credit card loans.
9
<PAGE>
Table 2
Net Interest Income Analysis
Taxable Equivalent Basis (in thousands)
<TABLE>
<CAPTION>
Second Quarter 1994 Compared Second Quarter 1994 Compared YTD June 1994 Compared
with Second Quarter 1993 with First Quarter 1994 with YTD June 1993
Increase Change due to* Increase Change due to* Increase Change due to*
(Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans, including
fees $ (7,217) $ (7,150) $ (67) $ 4,084 $ 297 $ 3,787 $ (11,387) $ (12,225) $ 838
Securities
available for sale 12,023 (787) 12,810 (7,606) (2,382) (5,224) 31,137 (1,300) 32,437
Investment
securities (25,832) 604 (26,436) (492) 40 (532) (52,560) 369 (52,929)
Other earning
assets 15,375 2,425 12,950 10,539 664 9,875 22,337 4,242 18,095
Total interest income (5,651) (5,340) (311) 6,525 2,030 4,495 (10,473) (7,435) (3,038)
Interest expense:
Interest bearing
deposits 489 398 91 2,204 2,502 (298) 2,782 2,070 712
Fed funds and
repurchase
agreements 2,210 3,583 (1,373) 5,283 3,675 1,608 (199) 3,335 (3,534)
Other short-term
borrowings (2,807) (644) (2,163) 1,092 369 723 (3,600) (1,217) (2,383)
Long-term borrowings (261) 427 (688) 317 376 (59) (923) 368 (1,291)
Total interest expense (369) 2,870 (3,239) 8,896 7,362 1,534 (1,940) 4,250 (6,190)
Net interest income $ (5,282) $ (4,950) $ (332) $ (2,371) $(4,758) $ 2,387 $ (8,533) $ (7,818) $ (715)
</TABLE>
*The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amount of the changes in
each. The changes in income and expense are calculated independently for each
line in the schedule. The totals for the volume and rate columns are not the sum
of the individual lines.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Signet Banking Corporation ("Signet" or "the Company"), with headquarters in
Richmond, Virginia, is a registered multi-bank, multi-state holding company
listed on the New York Stock Exchange under the symbol SBK. At June 30, 1994,
Signet had assets of $10.8 billion and operated banking subsidiaries (240 full-
service banking offices and 244 automated teller machines) in Virginia (Signet
Bank/ Virginia), Maryland (Signet Bank/Maryland) and Washington, D.C. (Signet
Bank, N.A.) and several non-banking subsidiaries. The Company has gained
national prominence as an issuer and servicer of credit cards. Signet's primary
market area extends from Baltimore to Washington, south to Richmond, and on to
Hampton Roads/Tidewater Virginia. Signet's credit card business operates
nationally.
On July 27, 1994, Signet announced plans to spin-off substantially all of
its credit card business. Under such plans, designated assets and liabilities of
Signet Bank/ Virginia's credit card division will be transferred to OakStone
Bank, a newly chartered limited purpose credit card bank. OakStone Bank will, in
conjunction with the transfer, become a wholly-owned subsidiary of OakStone
Financial Corporation, a wholly-owned subsidiary of Signet (the "Separation").
It is anticipated that accounts representing approximately $335 million, or 5%,
of the managed credit card portfolio will be retained by Signet. Concurrently
with the Separation, up to 19.9% of the outstanding shares of common stock of
OakStone Financial Corporation (the "Common Stock") will be offered in an
initial public offering. Signet intends to distribute all of the Common Stock it
holds to its stockholders in a tax-free distribution as early as year-end 1994.
OakStone Financial Corporation will apply for a listing on the New York Stock
Exchange. It is anticipated that the spin-off will enhance shareholder value by
creating two strong and independent financial institutions.
Signet also announced a comprehensive program to improve the performance of
its core banking businesses through initiatives to reduce costs and enhance
revenues. In connection with the cost reduction measures, Signet anticipates
taking special one-time charges in the third quarter related to an early
retirement plan, employee severance and the termination of certain data
processing contracts, which are estimated to range between $60 million and $70
million in the aggregate.
The following discussion should be read in conjunction with the accompanying
financial statements, notes and other supplemental information contained in this
document.
Earnings Analysis
For the second quarter of 1994, consolidated net income totaled $50.4
million, or $.88 per share, a substantial increase from net income of $40.4
million, or $.71 per share, for the same quarter last year. Earnings for the six
months periods were $103.5 million, or $1.81 per share, and $78.7 million, or
$1.39 per share, in 1994 and 1993, respectively. The earnings for the 1994
second quarter compared with second quarter 1993 reflected increases in non-
interest sources of revenue (credit card servicing income and credit card
service charges) and a reduction in the loan loss provision due to improvement
in asset quality. In addition, the Company continued its successful credit card
solicitation program, which resulted in solicitation expenses for the
10
<PAGE>
1994 second quarter increasing to $24.2 million from $17.3 million in the
second quarter of 1993. Also, during the quarter, Signet recognized $3.3 million
of net gains on securities available for sale compared with nominal net gains
during the same quarter last year. For the first half of 1994, credit card
solicitation expenses were $45.6 million, compared with $26.5 million in the
same period of 1993. Securities available for sale transactions resulted in net
gains for the first six months of 1994 totaling $3.0 million compared with $1.7
million of net gains for the same period last year.
Key profitability ratios reflected the high level of earnings for the second
quarter of 1994. The return on assets (ROA) was an impressive 1.76% for the
second quarter and 1.83% for the first half of 1994, while the return on common
stockholders' equity (ROE) was also strong at 19.87% and 20.62% for the same
respective periods. This represented a significant improvement over the
comparable ROA and ROE ratios for the 1993 second quarter and first half.
Net Interest Income
Taxable equivalent net interest income, the principal
component of earnings, totaled $128.3 million for the second quarter and $258.9
million for the first half of 1994, slightly lower than the same periods last
year. The net yield margin for the second quarter and first half of 1994 fell 2
and 7 basis points from the same periods in 1993, respectively. The decline in
the net yield margin from 1993 is primarily due to a lower yield on the total
on-balance sheet portfolio of credit card loans. Although the average balance
increased $607.8 million, the overall yield on this portfolio fell to 10.54%
from the 11.97% reported in the second quarter of 1993. The yield on credit card
loans declined due to rapid growth in low introductory rate credit card
products. In most of its recent marketing programs, Signet has offered accounts
with low introductory rates for some initial period which revert to a higher
rate after the initial period expires. For selected introductory rate accounts,
all or part of the
Table 3
Analysis of Net Yield Margin
First Quarter 1994 versus Second Quarter 1994
Net Yield for First Quarter 1994 5.24%
Higher funding costs (0.38)
Decline in average balance of
lower yielding assets 0.11
Securitization of credit card loans in June 1994 (0.04)
Change in on balance sheet credit card
(volume and yield-net) 0.03
Other (net) 0.05
Net Yield for Second Quarter 1994 5.01%
rate increase following the initial period may be waived, leading to
continued downward pressure on yields. Table 3 analyzes the change in the net
yield margin from first quarter 1994 to second quarter 1994. An approximate
basis point impact was calculated for each item noted. The decline in the net
interest spread and the net interest margin from the first quarter of 1994 was
primarily due to an increase in funding rates. The second quarter 1994 net
interest margin benefited somewhat from a decline in the average balance of
lower yielding earning assets, such as securities available for sale.
Signet uses various off-balance sheet interest rate derivatives as an
integral part of its asset and liability management. For Signet's core business,
variable rate assets generally exceed variable rate liabilities. To hedge
against the resulting interest rate risk, Signet has entered into derivative
transactions. At June 30, 1994, the notional values of the Company's derivative
products for the purpose of hedging interest rate risk were $3.3 billion of
interest rate swaps, $650 million of interest rate floors and $425 million of
interest rate caps. Interest rate derivative products contributed 53 basis
points to the second quarter 1994 margin compared with 76 basis points in the
first quarter 1994. The total income from these contracts decreased from $19.4
million in the first quarter of 1994 to $13.6 million in the current quarter.
Credit card securitizations also have an effect on net interest income and
the net yield margin. Adjusting for all securitizations, net interest income in
the second quarter of 1994 would have been $197.9 million, or 19.2 percent
higher than the comparable 1993 figure of $166.0 million. For a detailed
analysis of this effect, see the Credit Card Business section elsewhere in this
report.
Provision and Allowance for Loan Losses
Reflecting the continued positive trends in credit quality, the provision
for loan losses was $3.0 million for the second quarter of 1994 down
significantly from $9.0 million for the same period last year and $5.5 million
for the first quarter of 1994. For the second quarter of 1994, net charge-offs
totaled $6.1 million, also down from $22.7 million in the same quarter of 1993
and up slightly from $5.6 million in the 1994 first quarter. For the six months,
net charge-offs decreased from $30.5 million in 1993 to $11.7 million in 1994.
As a percentage of average loans, second quarter net loan losses declined 102
basis points from the comparable period in 1993 and rose 2 basis points from the
1994 first quarter. The majority of the commercial loan charge-offs in the first
quarter of 1994 related to one large commercial credit which was sold early in
1994, well within the loan's allocated allowance. Real estate-construction and
real estate-mortgage loans experienced net recoveries for the first half of
1994, in contrast to the same period of 1993. Substantial growth of the credit
card portfolio caused the
11
<PAGE>
Table 4
Statement of Changes in Allowance For Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 March 31 June 30
1994 1993 1994 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $250,477 $273,283 $253,313 $253,313 $265,536
Provision for loan losses 2,999 9,011 5,499 8,498 24,509
Transfer to loans held for securitization (1,619) (1,000) (2,750) (4,369) (1,000)
Loans charged off:
Commercial 3,310 3,206 4,750 8,060 8,807
Credit card 7,831 10,397 8,288 16,119 20,536
Other consumer 573 822 640 1,213 1,434
Real estate-construction 13,784 15,329
Real estate-mortgage* 462 2,280 412 874 2,651
Total loans charged off 12,176 30,489 14,090 26,266 48,757
Recoveries of loans previously charged off:
Commercial 1,490 2,665 3,128 4,618 8,213
Credit card 3,328 4,353 3,258 6,586 8,584
Other consumer 289 365 237 526 720
Real estate-construction 884 352 225 1,109 545
Real estate-mortgage* 92 31 1,657 1,749 221
Total recoveries 6,083 7,766 8,505 14,588 18,283
Net loans charges off 6,093 22,723 5,585 11,678 30,474
Balance at end of period $245,764 $258,571 $250,477 $245,764 $258,571
Net loan losses (annualized) as a percentage of average loans:
Commercial .35% .10% .30% .32% .06%
Other consumer .08 .16 .12 .10 .12
Real estate (.23) 5.29 (.62) (.43) 2.84
Subtotal .14 1.51 .05 .10 .83
Credit card .93 1.16 1.10 1.01 1.33
Total .38% 1.40% .36% .37% .97%
Allowance for loan losses to net loans at end of period 4.19% 4.29% 4.44%
</TABLE>
*Real estate-mortgage includes real estate-commercial mortgage and real
estate-residential mortgage. Real estate-residential mortgage charge-offs and
recoveries were not significant for the periods presented.
12
<PAGE>
percentage of net credit card losses to average credit card loans on balance
sheet to decline for the second quarter of 1994 from the same period in 1993
and from the 1994 first quarter. The growth of the credit card portfolio
notwithstanding, Signet believes that the credit quality of the portfolio has
improved as a result of improvements in Signet's information-based strategy, as
well as improved economic conditions. Net losses for the first half of 1994 on
the total managed credit card portfolio, which included securitized
receivables, were 1.58% of total average managed credit card loans, compared
with 2.82% reported for the same period in 1993. The low level of credit card
losses reflects management's attention to the diversification of the portfolio
as well as the quality of Signet's credit card underwriting standards and
collection efforts. The low credit card charge-off ratios are also influenced
by the high growth in new accounts, some of which have not aged sufficiently to
experience any significant charge-offs.
At June 30, 1994, the reserve for foreclosed properties totaled $2.3
million, a decrease of $3.5 million from December 31, 1993, the result of write-
downs on foreclosed properties taken in the first six months of 1994.
The allowance for loan losses at June 30, 1994 was $245.8 million, or 4.29%
of net loans, compared with $258.6 million, or 4.44% of net loans, at June 30,
1993 and $250.5 million, or 4.19%, at March 31, 1994. The decrease from June 30,
1993 primarily reflected charge-offs taken on real estate related loans during
1993. In general, to determine the appropriate level of allowance for loan
losses, management identifies and examines the commercial, real estate and large
consumer loans warranting attention on a monthly basis and reviews factors such
as the credit worthiness of the borrower, the adequacy of underlying collateral
and the impact of business and economic conditions upon the borrower. Based on
this information and action plans provided by the lending units, Signet's Credit
Risk Management Division determines the aggregate level of the allowance
according to the distribution of the loan risk classifications. The credit card
portfolio receives an overall allocation based on such factors as current and
anticipated economic conditions, historical charge-off and recovery rates and
trends in delinquencies, projected charge-offs by loan solicitation tranche,
bankruptcies and loan volume. Management believes that more recent credit card
solicitations have produced higher credit quality accounts than past
solicitations and that, as a result of improved economic conditions, the credit
quality of the more seasoned credit card accounts has also improved. The
remaining loan portfolio (unclassified commercial, real estate and consumer
loans) receives a general allocation deemed to be reasonably necessary to
provide for losses based on risk ratings and the factors listed above. The
allocation shown in Table 5 is a general allowance applicable to the entire
loan portfolio and should not be interpreted as a prediction of future charge-
off trends. Furthermore, the portion allocated to each loan category is not the
total amount available for future losses that might occur within such
categories since the total allowance is a general allowance applicable to the
entire loan portfolio. Management believes that the allowance for loan losses
is adequate to cover anticipated losses in the loan portfolio under current
economic conditions.
Table 5
Allowance for Loan Loss Allocation
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1994
Percentage of
Allowance Allowance to Loans
Amount in Each Category
<S> <C> <C>
Commercial $ 20,380 .96%
Credit Card 63,500 4.89
Other Consumer 3,070 .22
Real Estate 75,242 8.51
Unallocated 83,572
Total $245,764 4.29%
</TABLE>
13
<PAGE>
Table 6
Non-Interest Income and Expense
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 March 31 June 30
1994 1993 1994 1994 1993
<S> <C> <C> <C> <C> <C>
Non-interest income:
Credit card servicing income $ 77,469 $ 30,438 $ 76,537 $154,006 $ 60,300
Credit card service charges 18,566 15,177 15,448 34,014 26,562
Service charges on deposit accounts 18,106 16,135 15,697 33,803 32,181
Trust income 4,869 4,577 4,801 9,670 9,001
Mortgage servicing and origination 4,601 6,761 5,645 10,246 9,888
Trading losses (net) (266) (1,696) (451) (717) (5)
Other service charges and fees 4,064 3,689 3,728 7,792 7,239
Other 8,748 6,102 7,238 15,986 10,783
Non-interest operating income 136,157 81,183 128,643 264,800 155,949
Securities available for sale gains (losses) 3,265 (212) 3,053 1,665
Investment securities gains (losses) 45 46 (68) (23) 149
Total non-interest income $139,467 $ 81,229 $128,363 $267,830 $157,763
Non-interest expense:
Salaries $ 64,345 $ 50,165 $ 59,941 $124,286 $ 99,799
Employee benefits 17,989 14,857 18,062 36,051 30,438
Total staff expense 82,334 65,022 78,003 160,337 130,237
Credit card solicitation 24,250 17,257 21,387 45,637 26,510
Travel and communications 13,546 8,351 13,317 26,863 16,281
Supplies and equipment 13,095 9,195 11,999 25,094 18,832
External data processing services 12,128 7,846 11,279 23,407 15,788
Occupancy 10,855 10,090 10,711 21,566 18,968
Professional services 6,069 3,749 4,280 10,349 6,806
Public relations, sales and advertising 4,824 4,028 4,268 9,092 8,830
FDIC assessment 4,248 4,728 3,891 8,139 9,461
Credit and collection 3,088 2,453 2,653 5,741 4,848
Foreclosed property 810 5,680 (216) 594 7,824
Other 11,378 8,410 10,537 21,915 16,481
Total non-interest expense $186,625 $146,809 $172,109 $358,734 $280,866
</TABLE>
14
<PAGE>
Non-Interest Income
For the second quarter of 1994, non-interest income rose 72% from the same
quarter in 1993 to $139.5 million. The primary sources of growth were
increases in credit card servicing income and credit card service charges.
Credit card servicing income rose $47.0 million from the 1993 second
quarter to $77.5 million primarily as a result of the 1993 and 1994
securitizations. This category houses the income received from servicing the
$4.5 billion of securitized credit card receivables ($500 million in September,
1990, $500 million in March, 1991, $1.2 billion in September, 1993, $1.1 billion
in December, 1993 and $1.2 billion in June, 1994). The $3.4 million increase in
income from credit card service charges for the second quarter of 1994 compared
with the same time period in 1993 was attributable to the large increase in
credit card outstandings resulting from the success of Signet's credit card
solicitation program. Mortgage servicing and origination fee income declined 32%
and 19% from the second quarter of 1993 and first quarter of 1994, respectively,
to $4.6 million as a result of a significant decrease in mortgage loan volume
resulting from rising rates. For the second quarter of 1994, Signet incurred
trading losses of $.3 million, an improvement from $1.7 million of losses in the
1993 second quarter. In the second quarter of 1994, $3.3 million of net gains
were recognized on transactions in the securities available for sale portfolio.
There were no such net gains for the second quarter of 1993. Nominal net gains
were recognized in the second quarter of 1994 and 1993 on investment securities
that were called.
For the first six months of 1994 non-interest income grew $110.1 million or
70% from the same period of 1993 to $267.8 million. A $93.7 million increase in
credit card servicing income due to the 1993 and 1994 securitizations and a $7.5
million increase in credit card service charges due to higher volume were the
primary contributing factors for the growth in non-interest income.
Non-Interest Expense
Total non-interest expense for the second quarter and first half of 1994
was $186.6 million and $358.7 million, respectively, representing increases
of 27% and 28% from the same periods in 1993. When comparing the second
quarter and first half of 1994 to the same periods in 1993, increases
occurred in all the major categories except foreclosed property and FDIC
assessment. The lower amount of foreclosed property expense in 1994 reflected
lower writedowns/provisions and reduced costs to maintain and operate
these properties. Much of the increase in non-interest expense was the result of
the continuation of the credit card solicitation program and the growth in the
credit card business. Excluding direct costs related to credit card, non-
interest expense during the second quarter and first half of 1994 rose 6%
compared to the same periods in 1993. Greater salary expense resulted mainly
from increased staffing to support the significant growth in the credit card
business. The number of full-time equivalent employees rose 24% from second
quarter of 1993. Total salary and employee benefits increased $17.3 million and
$30.1 million from the second quarter and first half of 1993 to the same periods
in 1994. The overall increase in employee benefits reflected the increase in
staff levels and the rising cost of medical insurance and other benefits. For
the 1994 second quarter and first half, expenses associated with the credit card
solicitation program were $24.3 million and $45.6 million, respectively,
representing increases of $7.0 million and $19.1 million from the comparable
periods of 1993. Management expects to incur solicitation expense in the future
as they continue to invest in the credit card business. Subsequent to the
Separation, OakStone Bank will be responsible for solicitation expenses
associated with increasing OakStone Bank's credit card portfolio. Travel and
communication expense for 1994 reflects not only an increase in the credit card
area, but also increases related to student loan, home equity line and home
mortgage solicitations. The other non-interest expense categories reflected the
costs associated with increased business volume, primarily in the credit card
business.
Signet's efficiency ratio (the ratio of non-interest expense to taxable
equivalent operating income) for the first six months of 1994 was 68.1% compared
with 66.1% for the same period 1993. Excluding the amount of foreclosed property
expense from non-interest expense causes the ratio to change to 68.0% and 64.2%
for the respective time periods. Considering that charge-offs on securitized
credit card loans reduce credit card servicing income, operating income, for the
purpose of calculating the efficiency ratio, should exclude the negative impact
of these charge-offs. Making this adjustment to revenue reduces the ratio to
63.9% for 1994 compared with 60.3% for the first half of 1993.
In an effort to lower the efficiency ratio, in July 1994, Signet's Board
approved a plan implementing a comprehensive core bank improvement program that
will focus on cost reductions and revenue initiatives. Signet expects to take
special one-time charges during the third quarter in connection with cost-
reduction measures (an early retirement plan and employee severance) and
termination of certain data processing services related to the separation of the
credit card business. Subject to employee response and other factors, it is
anticipated that these charges in the aggregate may range between $60 million
and $70 million on a pre-tax basis.
Income Taxes
Signet recorded income tax expense of $24.4 million for the
quarter and $49.2 million for the six months ended June 30, 1994 compared with
$14.8 million and $33.3 million for the same periods of 1993. The increase in
tax expense was principally due to the significant increase in taxable income
and the continued decline in the level of tax-exempt income. The effective tax
rate for the second quarter of 1994 was 33% compared with 27% for the same
period of 1993. The effective tax rate for the first half of 1994 was 32%
compared with 30% for the first half of 1993. The lower effective tax rate in
the 1993 second quarter and first half resulted primarily from recording certain
tax-free income relating to company-owned life insurance.
15
<PAGE>
Table 7
Consolidated Average Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30
1994 1993
Average Income/ Yield/ Average Income/
Balance Expense Rate Balance Expense
<S> <C> <C> <C> <C> <C>
Assets
Earning assets (tax equivalent basis):*
Interest bearing deposits with other banks $ 247,936 $ 2,952 4.71% $ 269,593 $ 3,124
Federal funds and resale agreements 856,757 8,674 4.01 795,957 5,943
Trading account securities 272,872 4,747 6.98 560,346 8,499
Loans held for securitization 755,494 17,848 9.45 10,989 278
Loans held for sale 212,378 3,115 5.80 230,060 4,117
Securities available for sale 1,351,368 16,529 4.84 312,240 4,506
Investment securities-taxable 20,942 307 5.86 1,674,535 24,275
Investment securities-nontaxable 205,078 6,231 12.15 278,401 8,095
Loans (net of unearned income):
Commercial 2,108,076 40,103 7.63 2,077,010 38,388
Credit card 1,941,897 53,255 10.97 2,078,630 62,250
Other consumer 1,384,050 26,681 7.70 1,170,053 23,517
Real estate-construction 262,844 5,248 7.90 496,133 8,423
Real estate-commercial mortgage 573,203 12,390 8.67 608,619 11,776
Real estate-residential mortgage 74,312 1,514 8.15 81,108 2,054
Total loans 6,344,382 139,191 8.80 6,511,553 146,408
Total earning assets 10,267,207 $199,594 7.80% 10,643,674 $205,245
Non-rate related assets:
Cash and due from banks 499,712 453,824
Allowance for loan losses (248,846) (267,890)
Premises and equipment (net) 238,529 199,699
Other assets 744,834 652,208
Total assets $11,501,436 $11,681,515
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits:
Money market and interest checking $ 1,022,071 $ 5,605 2.20% $ 949,196 $ 5,717
Money market savings 1,669,819 11,381 2.73 1,757,606 11,401
Savings accounts 981,676 7,751 3.17 744,145 5,728
Savings certificates 1,972,308 13,993 2.85 2,465,002 16,968
Large denomination certificates 344,830 3,635 4.17 257,811 2,613
Foreign 215,035 2,112 3.89 191,773 1,561
Total interest bearing deposits 6,205,739 44,477 2.87 6,365,533 43,988
Federal funds and repurchase agreements 1,905,695 18,510 3.84 2,070,308 16,300
Other short-term borrowings 333,315 4,145 4.92 502,876 6,952
Long-term borrowings 254,007 4,183 6.51 297,415 4,444
Total interest bearing liabilities 8,698,756 $ 71,315 3.29% 9,236,132 $ 71,684
Non-interest bearing liabilities:
Demand deposits 1,563,117 1,391,778
Other liabilities 222,536 185,717
Common stockholders' equity 1,017,027 867,888
Total liabilities and stockholders' equity $11,501,436 $11,681,515
Net interest spread 4.51%
Interest income to average earning assets 7.80%
Interest expense to average earning assets 2.79
Net yield margin 5.01%
</TABLE>
*Includes the effects of taxable equivalent adjustments using a
tax rate of 35%.
16
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
March 31 June 30
1994 1994 1993
Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets (tax equivalent basis):*
Interest bearing deposits with
other banks 4.58% $ 260,623 $ 2,571 3.95% $ 254,244 $ 5,523 4.32% $ 290,456 $ 6,390 4.38%
Federal funds and resale
agreements 2.95 607,287 4,950 3.26 732,711 13,624 3.70 730,908 11,110 3.02
Trading account securities 6.08 286,083 5,640 8.00 279,441 10,387 7.50 603,161 17,905 5.99
Loans held for securitization 10.12 344,445 7,875 9.15 551,105 25,723 9.34 5,525 278 10.06
Loans held for sale 7.08 356,398 5,761 6.47 283,990 8,876 6.22 176,663 6,113 6.88
Securities available for sale 5.71 1,775,042 24,135 5.44 1,562,035 40,664 5.18 321,308 9,527 5.90
Investment securities-taxable 5.80 26,886 385 5.71 23,898 692 5.79 1,711,980 49,740 5.84
Investment securities-
nontaxable 11.63 219,689 6,645 12.10 212,343 12,876 12.13 282,509 16,388 11.60
Loans (net of unearned income):
Commercial 7.41 2,141,690 40,985 7.76 2,124,790 81,089 7.70 2,079,354 79,414 7.70
Credit card 11.98 1,827,581 50,776 11.11 1,885,055 104,031 11.04 1,803,150 112,342 12.46
Other consumer 8.05 1,319,627 25,274 7.70 1,352,016 51,955 7.71 1,175,134 47,546 8.14
Real estate-construction 6.72 293,423 5,241 7.14 278,049 10,490 7.50 512,022 17,911 6.96
Real estate-commercial
mortgage 7.76 580,572 11,015 7.69 576,868 23,404 8.18 622,077 24,453 7.93
Real estate-residential
mortgage 10.13 72,317 1,816 10.04 73,321 3,330 9.08 79,878 4,020 10.07
Total loans 9.02 6,235,210 135,107 8.79 6,290,099 274,299 8.79 6,271,615 285,686 9.19
Total earning assets 7.73% 10,111,663 $193,069 7.74% 10,189,866 $ 392,664 7.77% 10,394,125 $403,137 7.82%
Non-rate related assets:
Cash and due from banks 489,161 494,466 442,225
Allowance for loan losses (252,360) (250,593) (269,216)
Premises and equipment (net) 224,308 231,458 199,492
Other assets 737,538 741,204 646,941
Total assets $11,310,310 $11,406,401 $11,413,567
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Deposits:
Money market and interest
checking 2.42% $ 1,021,613 $ 5,552 2.20% $ 1,021,843 $ 11,157 2.20% $ 939,478 $ 11,429 2.45%
Money market savings 2.60 1,699,044 11,318 2.70 1,684,351 22,699 2.72 1,783,210 23,480 2.66
Savings accounts 3.09 910,572 6,948 3.09 946,321 14,699 3.13 719,343 11,196 3.14
Savings certificates 2.76 2,036,432 13,050 2.60 2,004,193 27,043 2.72 2,464,934 30,671 2.51
Large denomination
certificates 4.01 328,939 3,224 3.92 336,928 6,859 4.05 234,343 4,878 4.14
Foreign 3.22 262,572 2,181 3.32 238,672 4,293 3.58 144,564 2,314 3.18
Total interest
bearing deposits 2.77 6,259,172 42,273 2.74 6,232,308 86,750 2.81 6,285,872 83,968 2.69
Federal funds and repurchase
agreements 3.11 1,718,941 13,227 3.08 1,812,834 31,737 3.48 2,025,539 31,936 3.14
Other short-term borrowings 5.47 275,074 3,053 4.44 304,355 7,198 4.70 400,558 10,798 5.36
Long-term borrowings 5.91 258,266 3,866 5.99 256,125 8,049 6.25 297,588 8,972 6.00
Total interest bearing liabilities 3.11% 8,511,453 $ 62,419 2.97% 8,605,622 $ 133,734 3.13% 9,009,557 $135,674 3.04%
Non-interest bearing liabilities:
Demand deposits 1,556,213 1,559,684 1,376,118
Other liabilities 235,482 228,973 173,313
Common stockholders' equity 1,007,162 1,012,122 854,579
Total liabilities and stockholders'
equity $11,310,310 $11,406,401 $11,413,567
Net interest spread 4.62% 4.77% 4.64% 4.78%
Interest income to average earning
assets 7.73% 7.74% 7.77% 7.82%
Interest expense to average earning
assets 2.70 2.50 2.65 2.63
Net yield margin 5.03% 5.24% 5.12% 5.19%
</TABLE>
17
<PAGE>
Financial Condition
Earning assets averaged $10.3 billion for the second quarter and $10.2
billion for the first half of 1994, a slight decrease from the same periods last
year. Average investment securities declined $1.7 billion, or 88%, and average
securities available for sale rose $1.0 billion from the prior year's second
quarter as approximately $1.5 billion of securities were reclassified from
investment securities to securities available for sale when Signet adopted SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" at
the beginning of 1994. Credit card loans held for securitization averaged $755
million for second quarter 1994, up from $11 million for the previous year.
These assets were reclassified from the credit card loan category in
anticipation of credit card loan securitizations. Total loans averaged $6.3
billion for the quarter, reflecting a 3% decline from the second quarter in
1993. Average credit card loans on the balance sheet, including held for
securitization, increased 24% to $2.7 billion as a result of the success of
Signet's solicitation program. The rise in other consumer loans resulted from a
$229 million growth in student loans. The loan category experiencing the largest
decline from the second quarter of 1993 was real estate-construction, down 47%
to $263 million. Average real estate-commercial mortgage loans declined 6% to
$573 million and real estate-residential mortgages were down 8% to $74 million.
The decline in construction loans was principally the result of management's
continued desire to reduce the level of risk real estate asset exposure. The
yield on earning assets was 7.80% for the quarter and 7.77% for the first half
of 1994, compared with 7.73% and 7.82% in the prior year's respective periods.
Average interest bearing liabilities totaled $8.7 billion, up 2% from the
first quarter of 1994 and down 6% from the corresponding time period in 1993.
Savings certificates decreased $493 million, or 20% and $461 million, or 19%,
from the second quarter and first half of 1993, as depositors responded to lower
interest rates by shortening the maturities of their investments and
transferring their funds into money market and demand products. Additionally,
money market savings declined $88 million, or 5%, and $99 million, or 6%, from
the second quarter and first half of 1993, respectively. Deposit categories
experiencing increases as a result of the factors noted above included money
market and interest checking and savings accounts. Foreign deposits and large
denomination certificates also rose $23 million and $87 million, respectively,
from the second quarter of 1993. Average core deposits remained relatively
stable when comparing second quarter and first half of 1994 with the same
periods of 1993. Purchased funds, which include large denomination certificates,
foreign deposits, federal funds and repurchase agreements and other short-term
and long-term borrowings averaged $3.1 billion for the 1994 second quarter, down
$267 million from the comparable 1993 period and up $209 million from the first
quarter of 1994. The higher level of purchased funds in the second quarter of
1994 compared with the first quarter was to temporarily fund the growth in
credit card receivables prior to securitization. Subsequent to the Separation
and the public offering of the Common Stock, it is anticipated that OakStone
Bank will begin to assume responsibility for its funding needs. The average
rate on interest bearing liabilities rose 18 basis points when compared with
the second quarter of 1993 and increased 32 basis points from the first quarter
of 1994 due to a rise in market rates and lower income from derivative
products.
Credit Card Business
As noted in the introduction to this discussion, designated assets of Signet
Bank/Virginia's credit card division will be transferred to a new limited
purpose bank which is intended to be spun-off. Excluded from such transfer will
be approximately $335 million of credit card receivables located in Signet's
regional market area. The following discussion gives no effect to these proposed
transactions.
The credit card industry is highly competitive and operates in a legal and
regulatory environment increasingly focused on the cost of services charged to
consumers. There is an increasing use of advertising, target marketing, pricing
competition and incentive programs. The Company has responded to competition by
targeting the origination of new accounts through the creation of products for
multiple customer segments using various marketing channels. For example, Signet
offers credit cards nationwide with different finance charge and fee
combinations or other special features such as a balance transfer option. The
Company approves prospective account holders through preapproval in conjunction
with full application underwriting procedures. Using information derived from
proprietary statistical models, Signet matches prospective account holders who
meet the various applicable underwriting criteria with an appropriate credit
card product.
The Company has invested heavily over the past five years in a sophisticated
information-based strategy for originating and managing credit card accounts.
Signet uses this strategy to develop improved credit risk models which
management believes increase the credit quality of new solicitations. Signet's
credit card business continues to benefit significantly from its information-
based strategy. The managed credit card portfolio (which includes securitized
receivables) increased by $3.2 billion, or 93%, from June 30, 1993 and by $699
million, or 12%, from March 31, 1994. Absolute dollars of net loan losses, on a
managed portfolio basis, also rose from $40.3 million for the first six months
of 1993 to $46.8 million for the same time period of 1994. However, the ratio of
charge-offs to average loans fell from 2.82% for the first six months of 1993 to
1.58% for 1994, as a result of the substantial increase in the size of the
portfolio. Many of the new accounts may not have aged sufficiently to experience
significant charge-offs. Signet also believes that the improved charge-off ratio
is evidence of the high credit quality of the accounts obtained through the
solicitation program, the improved credit quality of the more seasoned accounts
in the portfolio as well as improved economic conditions.
18
<PAGE>
Table 8
Managed Credit Card Portfolio Delinquencies*
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 March 31 December 31 September 30 June 30
1994 1994 1993 1993 1993
Number
of Days Delinquent Delinquent Delinquent Delinquent Delinquent
Delinquent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days $ 59,281 .89% $ 50,461 .85% $ 52,099 1.01% $ 44,810 1.02% $ 42,620 1.23%
60-89 days 29,817 .44 27,575 .46 28,236 .55 24,516 .56 24,345 .70
90+ days 52,124 .78 50,278 .84 50,359 .98 48,881 1.12 49,265 1.43
Total $141,222 2.11% $128,314 2.15% $130,694 2.54% $118,207 2.70% $116,230 3.36%
</TABLE>
* The portfolio for this schedule includes the managed credit card
portfolio as well as an immaterial amount of credit line loans
serviced on the bank card system.
The high quality of the credit card portfolio is also reflected in loan
delinquency data. The total managed credit card loans sixty days or more past
due ratio dropped to 1.22% of related loans at June 30, 1994 from 1.30% at March
31, 1994, while the dollar amount rose from $78 million to $82 million at the
same respective dates. Usually new accounts initially exhibit a rising trend of
delinquency and credit losses which peaks and then declines to a more steady
state of delinquency and losses. This steady state is generally reached within
three years. Accordingly, there can be no assurance that Signet's managed loan
portfolio will not experience increased levels of delinquency and losses as the
average age of Signet's accounts increases. However, a large portion of the new
accounts are balance transfer accounts, which, Signet believes, have
characteristics resembling more seasoned accounts. Refer to Table 8 for a
summary of delinquency data related to credit card loans. New account
solicitations represent a diversity of product offerings, largely targeted at
lower risk consumers. Management is committed to continually increasing
sophistication in all areas of risk management.
Signet's managed credit card portfolio is comprised of credit card loans,
credit card loans held for securitization and securitized credit card
receivables. Securitized credit card receivables are not assets of the Company
and, therefore, are not shown on the balance sheet. See Table 9 for a summary of
Signet's managed credit card portfolio.
Securitization is the transformation of a pool of credit card receivables
into marketable securities. Credit card receivables are transferred to a trust
and interests in the trust are sold to investors for cash. The securitization of
credit card receivables is an effective balance sheet management tool for
facilitating the credit card growth. Such securitizations reduce the net yield
margin and provision for loan losses and increase non-interest income, but the
net effect on Signet's earnings is minimal, while increasing the return on
assets. Signet's Credit Card Division services the related credit card accounts
after the receivables are securitized. Because securitization changes Signet's
involvement from that of a lender to that of a loan servicer, there is a change
in how the revenue is reported on the income statement. For securitized
receivables, amounts that would previously have
Table 9
Managed Credit Card Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30 March 31 December 31 September 30 June 30
1994 1994 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Period-end balances:
On balance sheet loans held for securitization $ 750,000 $1,000,000 $ 750,000 $1,000,000
On balance sheet loans 1,299,627 1,600,756 $1,808,515 1,348,928 1,406,089
Securitized loans 4,539,655 3,289,656 3,289,656 2,186,580 1,000,000
Total period-end managed portfolio $6,589,282 $5,890,412 $5,098,171 $4,285,508 $3,406,089
Average balances:
On balance sheet loans held for securitization $ 755,494 $ 344,445 $ 554,348 $ 997,283 $ 11,000
On balance sheet loans 1,941,897 1,827,581 1,631,570 1,820,507 2,078,630
Securitized loans 3,605,589 3,289,656 2,476,613 1,012,898 1,000,000
Total average managed portfolio $6,302,980 $5,461,682 $4,662,531 $3,830,688 $3,089,630
</TABLE>
19
<PAGE>
Table 10
Impact of the Credit Card Securitizations
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30 March 31 December 31 September 30 June 30
1994 1994 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Statement of Consolidated Income
(as reported)
Net interest income $ 124,910 $ 127,216 $ 129,756 $ 139,922 $ 129,782
Provision for loan losses 2,999 5,499 10,276 12,501 9,011
Non-interest income 139,459 128,363 122,156 85,517 81,229
Non-interest expense 186,625 172,109 169,934 147,516 146,809
Income before income taxes $ 74,745 $ 77,971 $ 71,702 $ 65,422 $ 55,191
Adjustments for Securitizations
Net interest income $ 72,943 $ 73,492 $ 61,006 $ 35,431 $ 36,255
Provision for loan losses 17,755 16,116 15,959 13,783 14,507
Non-interest income (55,188) (57,376) (45,047) (21,648) (21,748)
Non-interest expense - - - - -
Income before income taxes $ - $ - $ - $ - $ -
Managed Statement of Income
(adjusted)
Net interest income $ 197,853 $ 200,708 $ 190,762 $ 175,353 $ 166,037
Provision for loan losses 20,754 21,615 26,235 26,284 23,518
Non-interest income 84,271 70,987 77,109 63,869 59,481
Non-interest expense 186,625 172,109 169,934 147,516 146,809
Income before income taxes $ 74,745 $ 77,971 $ 71,702 $ 65,422 $ 55,191
As reported:
Average earning assets $10,267,207 $10,111,663 $10,446,944 $10,970,422 $10,643,674
Return on assets 1.78% 1.90% 1.71% 1.51% 1.39%
Net yield margin 5.01 5.24 5.07 5.21 5.03
Including securitized credit cards:
Average earning assets $13,872,796 $13,401,319 $12,923,557 $11,983,320 $11,643,674
Return on assets 1.35% 1.48% 1.41% 1.39% 1.28%
Net yield margin 5.82 6.18 5.97 5.94 5.85
Yield on managed portfolio 11.97% 12.32% 12.85% 13.24% 14.38%
</TABLE>
been reported as interest income, credit card service charges and provision
for loan losses are instead reported in non-interest income as credit card
servicing income. Because credit losses are absorbed against these cash flows,
Signet's credit card servicing income over the terms of these transactions may
vary depending upon the credit performance of the securitized receivables.
However, Signet's exposure to credit losses on the securitized receivables is
contractually limited to these cash flows.
Customers are attracted to credit card issuers largely on the basis of
price, credit limit and other product features and, once an account is
originated, customer loyalty may be limited. As a result, account attrition
(losing accounts to competing card issuers) and balance attrition (losing
account balances to competing card issuers) are both significant factors in the
credit card industry.
In most of Signet's recent marketing programs, Signet has offered accounts
with introductory rates, which are generally at low levels during an
introductory period (usually 12 to 16 months) and which generally revert to
higher variable rates after the initial period expires; Signet may in its
discretion waive all or part of the rate increase for selected accounts. Much of
the growth in Signet's account origination in recent periods is attributable to
customers who, attracted by Signet's low introductory rates, transferred
balances from competing card issuers. The accounts in Signet's low introductory
rate portfolio that reprice are subject to a significant risk of attrition,
because cardholders who were initially attracted by Signet's low introductory
rates may in turn transfer account balances to lower price products offered by
competing card issuers.
Future growth of the credit card portfolio is highly dependent upon the
success of marketing programs and information-based strategies. Although
management believes that opportunities exist for continued growth in account
origination and balances, Signet's competitors are now attempting to employ many
of the programs and strategies that Signet has utilized to attract accounts and
20
<PAGE>
encourage usage. Many of Signet's competitors have begun offering credit
card products with interest rates and fee levels at or below those currently
charged by Signet.
Signet has securitized a total of $4.5 billion of credit card receivables as
of June 30, 1994. Table 10 indicates the impact of the securitizations on the
statement of consolidated operations, average assets, return on assets and net
yield margin. Signet plans to securitize an additional $750 million of credit
card receivables during the 1994 third quarter; therefore, these receivables
were reclassified from the loan portfolio to credit card loans held for
securitization during the second quarter of 1994. It is anticipated that after
the Separation, OakStone Bank will continue to securitize credit card
receivables. Signet may also utilize securitization with respect to its credit
card receivables and other loan products.
Signet has successfully implemented its information-based strategy to
originate and manage credit card accounts. Signet plans to or has already
started to implement this information-based strategy in other areas of the
Company, such as educational lending, equity line and mortgage banking. While
initial results are promising, it is too early to determine the ultimate success
of this strategy.
Table 11
Non-performing Assets and Past Due Loans
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 March 31 December 31
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Non-accrual loans:
Commercial $ 17,258 $ 20,050 $ 17,191 $ 42,303
Consumer 1,634 2,156 2,591 2,191
Real estate-construction 9,759 30,810 17,258 17,837
Real estate-mortgage* 7,512 8,275 5,895 6,523
Total non-accrual loans 36,163 61,291 42,935 68,854
Restructured loans:
Commercial 2,675 425 1,607 1,609
Real estate-construction 1,000 1,200 3,468 3,470
Total restructured loans 3,675 1,625 5,075 5,079
Total non-performing loans 39,838 62,916 48,010 73,933
Legally foreclosed properties 38,257 55,922 39,227 37,938
In substance foreclosed properties 1,851 20,268 6,786 10,357
Less foreclosed property reserve (2,291) (9,365) (5,653) (5,742)
Total foreclosed properties 37,817 66,825 40,360 42,553
Total non-performing assets $ 77,655 $129,741 $ 88,370 $116,486
Percentage to loans (net of unearned)
and foreclosed properties 1.35% 2.20% 1.47% 3.08%
Allowance for loan losses to:
Non-performing loans 616.91 410.98 521.72 228.25
Non-performing assets 316.48 199.30 283.44 146.61
Accruing loans past due 90 days or more $ 53,679 $ 78,149 $ 52,702 $ 64,835
</TABLE>
*Real estate-mortgage includes real estate-commercial mortgage and real estate-
residential mortgage. Real estate-residential mortgage non-accrual loans were
not significant for the periods presented.
Risk Elements
Non-Performing Assets
Non-performing assets include non-accrual loans, restructured loans and
foreclosed properties. Non-performing assets declined $10.7 million or
12% from March 31, 1994. Non-performing assets represented 1.35% of loans
and foreclosed properties at June 30, 1994, down from 1.47% and 2.20% at
March 31, 1994 and June 30, 1993, respectively. The allowance for loan
losses equaled 617% of non-performing loans at June 30, 1994, an improved
coverage from 522% at March 31, 1994 and 411% at June 30, 1993. The ratio of the
allowance to non-performing assets also improved to 316% at June 30, 1994 from
283% at March 31, 1994 and 199% at June 30, 1993.
Foreclosed properties totaled $37.8 million (net of reserve) at the end of
the second quarter of 1994 and were equal to 49% of total non-performing assets
and 67% of non-performing real estate assets. The gross foreclosed properties
balance reflected an aggregate discount of approximately 49% from prior charge-
offs and write-downs. Signet sold
21
<PAGE>
$3.7 million and $8.2 million of foreclosed properties during the second
quarter 1994 and the first half of 1994, respectively.
Accruing loans which are contractually past due 90 days or more as to
principal or interest payments totaled $53.7 million at June 30, 1994. This is a
slight increase from the $52.7 million 1994 first quarter level, and represents
a 31% improvement from the $78.1 million reported at June 30, 1993. The June 30,
1994 total was comprised of $4.5 million of commercial loans; $13.8 million of
credit card loans; $18.5 million of other consumer loans (of which $14.2 million
are student loan delinquencies which are government guaranteed and do not
represent material loss exposure); $7.7 million of mortgage loans; and $9.2
million of construction loans. Although credit card outstandings have risen
sharply since the end of the second quarter of 1993, the amount of credit card
loans past due 90 days or more has fallen $5.5 million.
Real Estate Lending
Signet's real estate-construction loan exposure at June 30, 1994 totaled
$244.4 million, a 21% decline from the 1993 year-end level and a 45% decline
from the June 30, 1993 level. Of the total construction loan portfolio,
approximately 58% was located in the Metro-Washington area. The largest type of
construction financing was residential at 29%, followed by office buildings at
18%. Commercial mortgage loans totaled $566.2 million at June 30, 1994 and
included $298.5 million of mini-permanent (interim) mortgage loans.
Table 12
Selected Capital Data
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 June 30 December 31
1994 1993 1993
<S> <C> <C> <C>
Qualifying common stockholders' equity $1,047,739 $ 890,223 $ 964,662
Less goodwill and other disallowed intangibles (21,292) (24,475) (23,404)
Total Tier I capital 1,026,447 865,748 941,258
Qualifying debt 167,000 226,327 222,607
Qualifying allowance for loan losses 104,503 113,744 107,646
Total Tier II capital 271,503 340,071 330,253
Total risk-based capital $1,297,950 $1,205,819 $1,271,511
Total risk-adjusted assets $8,218,941 $8,954,733 $8,466,048
Ratios:
Tier I capital 12.49% 9.67% 11.12%
Total risk-based capital 15.79 13.47 15.02
Tier I leverage 8.94 7.43 8.13
Tangible 8.55 7.22 7.88
Total stockholders' equity to assets 9.58 7.39 8.14
Total stockholders' equity + allowance to loans 22.39 19.73 19.30
Common dividend payout ratio (year-to-date) 27.62 25.27 26.14
Book value per share $ 18.23 $ 15.82 $ 17.04
</TABLE>
Stockholders' Equity Data
At June 30, 1994, stockholders' equity totaled $1.0 billion, an increase of
16% from the previous year's level of $890 million. This increase reflects the
strong earnings of the Company over the past year. On June 23, 1993, the Company
declared a two-for-one split of its Common Stock in the form of a 100% stock
dividend. One additional share of stock was issued on July 27, 1993, for each
share held by stockholders of record at the close of business on July 6, 1993.
All per share data in this document has been adjusted to reflect this stock
split.
During the first quarter of 1994, Signet announced an agreement to acquire
Pioneer Financial Corporation, the parent company of Pioneer Federal Savings
Bank, a $400 million financial institution located in Chester, Virginia. The
transaction is expected to close by the end of the 1994 third quarter. According
to the terms of the agreement, the transaction will be a tax-free exchange of
stock. Pioneer's shareholders will receive .6232 shares of Signet common stock
for each Pioneer share held subject to adjustment under certain circumstances.
It is anticipated that the transaction will have little dilutive effect on
Signet's earnings per share.
Effective January 1, 1994, Signet adopted the Financial Accounting Standard
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires that
securities classified as available for sale be reported at
22
<PAGE>
fair value with unrealized gains and losses reported in a separate component
of stockholders' equity, net of tax. During the second quarter of 1994, the
value of Signet's available for sale securities portfolio decreased $21.5
million, primarily from a reduction in the value of mortgage backed securities
and U.S. Treasury obligations. Signet has no plans at present to sell these
securities and recognize a loss.
The Company's equity-to-assets ratio was a strong 9.58% at June 30, 1994,
which is an improvement from 8.83% at March 31, 1994 and 7.39% at June 30, 1993.
Signet's risk-adjusted capital ratios at June 30, 1994 remained strong at 12.49%
and 15.79% for Tier I and Total Capital, respectively. Signet's leverage ratio
at June 30, 1994 was 8.94%, an improvement from 8.74% at March 31, 1994. For
most corporations, including Signet, the minimum leverage ratio is 3% plus an
additional cushion of 100 to 200 basis points depending upon risk profiles and
other factors. At June 30, 1994, all three of Signet's banking subsidiaries met
the criteria established by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") for "well capitalized" institutions.
Management anticipates that after the Separation referred to earlier, all three
of Signet's banking subsidiaries will continue to meet the "well capitalized"
criteria.
Interest Rate Sensitivity and Liquidity
Signet's interest rate sensitivity position is managed by the Asset and
Liability Committee ("ALCO") and monitored through the use of simulations on
rate sensitive pre-tax income. Interest rate sensitivity is the relationship
between changes in market interest rates and changes in rate sensitive income
due to the repricing characteristics of assets and liabilities. For example, in
periods of declining rates, earnings on the investment portfolio improve as
funding costs decline. Improved spreads in the investment portfolio are offset
by narrower spreads in the core banking businesses as changes in consumer
deposit costs lag decreases in market interest rates. ALCO routinely uses
derivatives such as interest rate swaps to insulate the Company against the
possibility of sudden changes in interest rates. ALCO, in managing interest rate
sensitivity, also uses simulations to better identify the impact that market
changes and alternative strategies might have on net interest income. Currently
simulations show that an immediate and sustained 100 basis point change in
interest rates would have less than a 3% impact on rate sensitive income over
the next twelve months.
Asset liquidity is generally provided by interest earning assets other than
investment securities held to maturity and loans. This group of interest-earning
assets (interest bearing deposits with other banks, Federal funds sold and
securities purchased under resale agreements, trading account securities, credit
card loans held for securitization, loans held for sale and securities available
for sale) totaled $3.6 billion, or 38% of earning assets at June 30, 1994. The
loan portfolio is a secondary source of asset liquidity. Liability liquidity is
measured by the Company's ability to obtain funds at favorable rates and in
adequate amounts. Core deposits are the largest and most important funding
source. These deposits totaled 124% of total loans as of June 30, 1994.
Purchased funds consisted primarily of funds from local customers which are
considered to be less volatile than other purchased liabilities and repurchase
agreements. For the first half of 1994, cash and cash equivalents decreased by
$236 million primarily as a result of a sharp decline in interest bearing
deposits with other banks. Cash used by operations was $278 million for this
time period resulting mainly from the reclassification of $750 million of credit
card loans to held for securitization. Cash provided by investing activities
amounted to $1.2 billion principally due to a decrease in loans resulting from
the same reclassification and sales/maturities of securities available for sale
exceeding purchases. Cash used by financing activities amounted to $1.1 billion
as there was a decrease in short-term borrowings and deposits.
23
<PAGE>
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 - Computation of Earnings Per Share
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated
July 26, 1994, which announced plans to spin-off substantially
all of its credit card business. Under such plans, designated
assets and liabilities of Signet Bank/Virginia's credit card
division will be transferred to OakStone Bank, a newly
chartered limited purpose credit card bank. OakStone Bank
will, in conjunction with the transfer, become a wholly-owned
subsidiary of OakStone Financial Corporation, a wholly-owned
subsidiary of Signet (the "Separation"). Concurrently with the
Separation, up to 19.9% of the outstanding shares of common
stock of OakStone Financial Corporation (the "Common Stock")
will be offered in an initial public offering. Signet intends
to distribute all of the Common Stock it holds to its
stockholders in a tax-free distribution as early as year-end
1994. OakStone Financial Corporation will apply for a listing
on the New York Stock Exchange. It is anticipated that the
spin-off will enhance shareholder value by creating two strong
and independent financial institutions.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNET BANKING CORPORATION
(Registrant)
Date: August 11, 1994 /s/ Wallace B. Millner, III
Wallace B. Millner, III
Senior Executive Vice President &
Chief Financial Officer
Date: August 11, 1994 /s/ W . H. Catlett, Jr .
W. H. Catlett, Jr.
Executive Vice President & Controller
(Chief Accounting Officer)
24
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
FORM 10-Q
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(dollar amounts - except per share - in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Common and common equivalent:
Average shares outstanding 56,793,041 56,191,360 56,729,716 56,102,408
Dilutive stock options-based on the treasury stock
method using average market price 564,899 615,278 557,593 620,980
Shares used 57,357,940 56,806,638 57,287,309 56,723,388
Net income applicable to Common Stock $ 50,385 $ 40,440 $ 103,498 $ 78,707
Per share amount $ .88 $ .71 $ 1.81 $ 1.39
Assuming full dilution:
Average shares outstanding 56,793,041 56,191,360 56,729,716 56,102,408
Dilutive stock options-based on the treasury stock
method using the period end market price, if
higher than average market price 564,899 679,956 573,336 686,130
Shares used 57,357,940 56,871,316 57,303,052 56,788,538
Net income applicable to Common Stock $ 50,385 $ 40,440 $ 103,498 $ 78,707
Per share amount $ .88 $ .71 $ 1.81 $ 1.39
</TABLE>
The calculations of common and common equivalent earnings per share and
fully diluted earnings per share are submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083 although both calculations are not
required by footnote 2 to paragraph 14 of APB Opinion No. 15 because there is
dilution of less than 3%. The Registrant has elected to show fully diluted
earnings per share in its financial statements.
25
