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 September 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 October 31, 1994 - 58,494,653
Page 1 of 27
<PAGE>
Index
SIGNET BANKING CORPORATION AND SUBSIDIARIES
September 30, 1994
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<C> <S> <C>
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 6
Supplemental Notes to Quarterly Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 26
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
(dollars in thousands-except per share) (unaudited)
</TABLE>
<TABLE>
<CAPTION>
September [ZW]
30 December 31
[ZW]
1994 1993 1993
<S> <C> [ZW]
<C> <C>
Assets
Cash and due from banks $ 453,020 [ZW]
$ 485,052 $ 463,358
Interest bearing deposits with other banks [ZW]
239,274 259,183 540,312
Federal funds sold and securities purchased under resale
agreements 1,090,348 [ZW]
1,004,196 1,075,754
Trading account securities [ZW]
279,245 302,439 379,638
Credit card loans held for securitization [ZW]
151,198 750,000
Loans held for sale [ZW]
128,613 260,972 421,361
Securities available for sale [ZW]
1,113,371 290,937 248,163
Investment securities 203,021 [ZW]
1,892,681 1,769,615
Loans:
Commercial 2,282,334 [ZW]
2,177,796 2,299,973
Credit card 1,742,622 [ZW]
1,348,928 1,808,515
Other consumer 1,667,110 [ZW]
1,258,463 1,297,309
Real estate-construction [ZW]
218,500 370,695 309,842
Real estate-commercial mortgage [ZW]
532,391 584,505 581,529
Real estate-residential mortgage [ZW]
133,084 71,252 71,411
Gross loans 6,576,041 [ZW]
5,811,639 6,368,579
Less: Unearned income [ZW]
(64,886) (49,787) (58,267)
Allowance for loan losses (225,359) [ZW]
(254,706) (253,313)
Net loans 6,285,796 [ZW]
5,507,146 6,056,999
Premises and equipment (net) [ZW]
253,791 201,164 216,524
Interest receivable [ZW]
80,491 106,101 84,118
Other assets [ZW]
767,065 630,574 593,380
Total assets (Credit Card Business amounted to $
2,246,106,
$2,233,168 and $1,991,207, respectively) $11,045,233 [ZW]
$11,690,445 $11,849,222
Liabilities
Non-interest bearing deposits $ 1,592,825 $ [ZW]
1,464,676 $ 1,544,852
Interest bearing deposits:
Money market and interest checking [ZW]
1,011,484 988,042 1,039,215
Money market savings 1,500,611 [ZW]
1,679,387 1,745,066
Savings accounts [ZW]
1,095,370 818,748 880,072
Savings certificates 2,039,352 [ZW]
2,316,182 2,051,300
Large denomination certificates [ZW]
216,428 303,696 347,820
Foreign [ZW]
195,010 199,815 212,288
Total interest bearing deposits 6,058,255 [ZW]
6,305,870 6,275,761
Total deposits 7,651,080 [ZW]
7,770,546 7,820,613
Securities sold under repurchase agreements 904,723 [ZW]
1,074,448 1,281,645
Federal funds purchased [ZW]
610,081 770,339 942,969
Commercial paper [ZW]
118,928 135,637 168,488
Other short-term borrowings [ZW]
160,221 471,299 232,024
Long-term borrowings [ZW]
253,729 280,008 266,152
Interest payable [ZW]
28,036 39,430 28,205
Other liabilities [ZW]
235,349 222,708 144,464
Total liabilities 9,962,147 [ZW]
10,764,415 10,884,560
Stockholders' Equity
Common Stock, $5 par value; Authorized 100,000,000 shares,
issued and
outstanding 58,477,850, 56,504,131 and 56,608,578
shares, respectively [ZW]
292,389 282,521 283,043
Capital Surplus [ZW]
195,704 130,872 133,038
Retained Earnings [ZW]
594,993 512,637 548,581
Total stockholders' equity [ZW]
1,083,086 926,030 964,662
$11,045,233 [ZW]
$11,690,445 $11,849,222
</TABLE>
3
<PAGE>
Statement of Consolidated Income
(in thousands-except per share) (unaudited)
<TABLE>
<CAPTION>
Three Months [ZW]
Ended Nine Months Ended
September [ZW]
30 September 30
1994 [ZW]
1993 1994 1993
<S> <C> [ZW]
<C> <C> <C>
Loans, including fees:
Commercial $ 40,539 $ [ZW]
38,069 $120,858 $116,804
Credit card 46,952 [ZW]
55,103 150,983 167,445
Other consumer 35,825 [ZW]
24,407 87,780 71,953
Real estate-construction 5,298 [ZW]
7,190 15,774 25,095
Real estate-commercial mortgage 12,707 [ZW]
10,952 34,869 33,941
Real estate-residential mortgage 1,917 [ZW]
1,878 5,247 5,898
Total loans, including fees 143,238 [ZW]
137,599 415,511 421,136
Interest bearing deposits with other banks 2,851 [ZW]
2,709 8,374 9,099
Federal funds sold and resale agreements 11,602 [ZW]
5,753 25,226 16,863
Trading account securities 5,062 [ZW]
6,800 15,449 24,705
Credit card loans held for securitization 13,181 [ZW]
22,992 38,904 23,270
Loans held for sale 2,270 [ZW]
4,766 11,146 10,790
Securities available for sale 15,949 [ZW]
4,188 56,185 13,715
Investment securities-taxable 311 [ZW]
22,451 1,003 72,025
Investment securities-nontaxable 3,758 [ZW]
5,278 12,284 16,269
Total interest income 198,222 [ZW]
212,536 584,082 607,872
Interest expense:
Money market and interest checking 5,842 [ZW]
5,607 16,999 17,036
Money market savings 10,918 [ZW]
10,957 33,617 34,437
Savings accounts 8,656 [ZW]
6,262 23,355 17,458
Savings certificates 14,820 [ZW]
14,991 41,863 45,662
Large denomination certificates 3,115 [ZW]
2,897 9,974 7,775
Foreign 2,385 [ZW]
2,014 6,678 4,328
Total interest on deposits 45,736 [ZW]
42,728 132,486 126,696
Securities sold under repurchase agreements 9,342 [ZW]
9,431 27,617 33,049
Federal funds purchased 5,540 [ZW]
7,924 19,002 16,242
Other short-term borrowings 3,751 [ZW]
8,364 10,949 19,162
Long-term borrowings 4,131 [ZW]
4,167 12,180 13,139
Total interest expense 68,500 [ZW]
72,614 202,234 208,288
Net interest income 129,722 [ZW]
139,922 381,848 399,584
Provision for loan losses 3,000 [ZW]
12,501 11,498 37,010
Net interest income after provision for loan losses 126,722 [ZW]
127,421 370,350 362,574
Non-interest income:
Credit card servicing income 91,883 [ZW]
30,319 245,889 90,619
Credit card service charges 16,802 [ZW]
20,275 50,816 46,837
Service charges on deposit accounts 16,234 [ZW]
16,222 50,037 48,403
Trust income 4,747 [ZW]
4,452 14,417 13,453
Other 21,992 [ZW]
14,247 55,299 42,152
Non-interest operating income 151,658 [ZW]
85,515 416,458 241,464
Securities available for sale gains [ZW]
140 3,193 1,665
Investment securities gains (losses) [ZW]
22 2 (1) 151
Total non-interest operating income 151,820 [ZW]
85,517 419,650 243,280
Non-interest expense:
Salaries 68,028 [ZW]
53,811 192,314 153,610
Employee benefits 17,354 [ZW]
13,909 53,405 44,347
Credit card solicitation 24,200 [ZW]
13,727 69,837 40,237
Travel and communications 14,499 [ZW]
8,866 41,362 25,147
Supplies and equipment 13,502 [ZW]
10,863 38,596 29,695
External data processing services 13,049 [ZW]
9,547 36,456 25,335
Occupancy 13,038 [ZW]
10,760 34,604 29,728
Contract termination [ZW]
49,000 49,000
Restructuring charge [ZW]
33,619 33,619
Other 30,525 [ZW]
26,033 86,355 80,283
Total non-interest expense 276,814 [ZW]
147,516 635,548 428,382
Income before income taxes (benefit) (Credit Card Business
amounted
to $(1,529), $49,235 and $105,751 and $108,467,
respectively) 1,728 [ZW]
65,422 154,452 177,472
Applicable income taxes (benefit) (1,734) [ZW]
19,659 47,492 53,002
Net income $ 3,462 $ [ZW]
45,763 $106,960 $124,470
Earnings per common share $ 0.05 $ [ZW]
0.80 $ 1.86 $ 2.19
Cash dividends declared per share 0.25 [ZW]
0.20 0.75 0.55
Average common shares outstanding 57,898 [ZW]
57,010 57,504 56,864
</TABLE>
4
<PAGE>
Statement of Changes in Consolidated Stockholders' Equity
(in thousands) (unaudited)
<TABLE>
<CAPTION>
[ZW]
Common Capital Retained
[ZW]
Stock Surplus Earnings
<S> [ZW]
<C> <C> <C>
Nine Months Ended September 30, 1994
Balance at beginning of [ZW]
period $283,043 [ZW]
$133,038 $ 548,581
Net [ZW]
income [ZW]
106,960
Issuance of Common Stock
Related to [ZW]
acquisition [ZW]
7,571 51,714
[ZW]
Other [ZW]
1,775 10,952
Cash [ZW]
dividends [ZW]
(42,582)
Adjustment to beginning balance for change in accounting method for
net unrealized gain on securities available for sale, net of tax of [ZW]
$16,147 29,987
Change in net unrealized losses on securities
available for sale, net of tax benefit of [ZW]
$25,821 (47,953)
Balance at end of [ZW]
period $292,389 [ZW]
$195,704 $ 594,993
Nine Months Ended September 30, 1993
Balance at beginning of [ZW]
period $139,904 [ZW]
$126,282 $ 560,446
Net [ZW]
income [ZW]
124,470
Issuance of Common [ZW]
Stock 1,925 [ZW]
4,590
Cash [ZW]
dividends [ZW]
(30,933)
Stock split in the form of a dividend declared June 23,
[ZW]
1993 [ZW]
140,692 (140,692)
Change in valuation allowance-marketable equity [ZW]
securities (654)
Balance at end of [ZW]
period $282,521 [ZW]
$130,872 $ 512,637
</TABLE>
5
<PAGE>
Statement of Consolidated Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended [ZW]
September 30
[ZW]
1994 1993
<S> <C> <C>
Operating Activities
Net income $ 106,960 [ZW]
$ 124,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses [ZW]
11,498 37,010
Provision and writedowns on foreclosed property [ZW]
1,414 4,524
Depreciation and amortization [ZW]
32,328 27,340
Investment securities losses (gains) [ZW]
1 (151)
Securities available for sale gains [ZW]
(3,193) (1,665)
Decrease (increase) in interest receivable [ZW]
3,627 (5,249)
Increase in other assets [ZW]
(183,179) (95,404)
(Decrease) increase in interest payable [ZW]
(169) 11,820
Increase in other liabilities [ZW]
90,886 101,319
Increase in loans held for securitization [ZW]
(151,198) (750,000)
Proceeds from securitization of credit card
loans 1,843,936 [ZW]
1,186,580
Proceeds from sales of loans held for sale 18,438,000 [ZW]
7,927,870
Purchases and originations of loans held for
sale (19,989,188) [ZW]
(9,160,338)
Proceeds from sales of trading account
securities 11,306,019 [ZW]
8,934,766
Purchases of trading account securities (11,205,626) [ZW]
(8,568,894)
Net cash provided (used) by operating
activities [ZW]
302,116 (226,002)
Investing Activities
Proceeds from maturities of investment securities [ZW]
50,137 321,559
Purchases of investment securities [ZW]
(102) (142,848)
Proceeds from sales of securities available for sale [ZW]
1,361,970 31,982
Proceeds from maturities of securities available for
sale [ZW]
2,241,243 31,589
Purchases of securities available for sale [ZW]
(2,967,120) (6,000)
Net increase in loans [ZW]
(264,492) (27,109)
Recoveries of loans previously charged-off [ZW]
24,196 26,039
Purchases of premises and equipment [ZW]
(61,031) (22,402)
Net cash provided by investing activities [ZW]
384,801 212,810
Financing Activities
Net decrease in deposits [ZW]
(169,533) (52,768)
Net decrease in short-term borrowings [ZW]
(831,175) (544,117)
Repayment of long-term debt [ZW]
(12,422) (17,954)
Issuance of common stock [ZW]
72,012 6,515
Payment of cash dividends [ZW]
(42,582) (30,933)
Net cash used by financing activities [ZW]
(983,700) (639,257)
Decrease in cash and cash equivalents [ZW]
(269,783) (652,449)
Cash and cash equivalents at beginning of period 2,079,424 [ZW]
2,400,880
Cash and cash equivalents at end of period $ 1,782,641 $ [ZW]
1,748,431
</TABLE>
6
<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 agree-ments. Cash paid for interest
during the nine months ended September 30, 1994 and 1993 was $202,404 and
$196,468, respectively. Cash paid for income taxes for the same time periods
was $46,754 and $37,413, respectively. During the nine months ended September
30, 1994 and 1993, $7,950 and $32,721, 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 Investments 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>
September 30, 1994 September 30, [ZW]
1993 December 31, 1993
Fair [ZW]
Fair Fair
Cost Value Cost [ZW]
Value Cost Value
<S> <C> <C> <C> [ZW]
<C> <C> <C>
U.S. Government and
agency obligations-
Mortgage-backed securities $ 608,709 $ 590,488 $ 90,556 $ [ZW]
96,640 $ 47,672 $ 50,795
Other 398,264 397,174 199,531 [ZW]
201,250 199,641 201,125
State and political subdivisions 14,242 14,618
Other 119,796 111,091 850 [ZW]
850 850 850
Total $1,141,011 $1,113,371 $290,937 [ZW]
$298,740 $248,163 $252,770
</TABLE>
Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1994 September 30, [ZW]
1993 December 31, 1993
Fair [ZW]
Fair Fair
Cost Value Cost [ZW]
Value Cost Value
<S> <C> <C> <C> [ZW]
<C> <C> <C>
U.S. Government and
agency obligations-
Mortgage-backed securities $ 566,621 $ [ZW]
573,556 $ 461,345 $ 466,151
Other 925,592 [ZW]
923,993 925,225 964,482
State and political subdivisions $182,951 $190,923 269,952 [ZW]
290,527 258,815 277,456
Other 20,070 20,070 130,516 [ZW]
128,626 124,230 121,142
Total $203,021 $210,993 $1,892,681 [ZW]
$1,916,702 $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.
7
<PAGE>
Supplemental Notes to Quarterly Financial Statements (continued)
(dollars in thousands) (unaudited)
Securitizations
The Company has securitized $1,848,801 of credit card receivables in the
first nine months of 1994. These transactions were recorded as sales in
accordance with SFAS No. 77, "Reporting by Transferors for Transfers of
Receivables with Recourse." At September 30, 1994, $5,138,457 of receivables
were outstanding under all securitizations. Proceeds from the sales in 1994
totaled $1,843,936. Recourse obligations related to these transactions are not
material. Excess servicing fees related to the securitizations are recorded
over the life of each sale transaction. The excess servicing fee is based upon
the difference between finance charges received from the cardholders less the
yield paid to investors, credit losses and a normal servicing fee, which is also
retained by the Company. In accordance with the sale agreements, a fixed amount
of excess servicing fees are set aside to absorb credit losses. The amount
available to absorb credit losses is included in other assets and was $147,410
at September 30, 1994.
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 market 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 No. 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.
Signet Credit Card Business (A Division of Signet Bank/Virginia)
Signet Banking Corporation ("Signet") conducts its credit card business
through a division (the "Division") of a wholly owned subsidiary, Signet
Bank/Virginia ("SBV"). Application has been made to regulatory authorities to
establish a separate limited purpose credit card bank ("Capital One Bank").
Subsequent to regulatory approvals SBV will transfer its credit card business
(exclusive of a SBV retained credit card portfolio of approximately $335
million) to this newly formed Capital One Bank and Signet will establish Capital
One Financial Corporation (the "Company"), a separate holding company. The
stock in Capital One Bank will be distributed by SBV to Signet and then
contributed by Signet to the Company. It is anticipated that the Company will
undertake an initial public offering of its shares of common stock. Subsequent
to the initial public offering, Signet intends, subject to the satisfaction of
certain conditions set forth in the Separation Agreement to be entered into
between Signet, SBV and the Company, to distribute the remaining shares in the
Company to the shareholders of Signet in the first quarter of 1995.
The accompanying historical financial statements reflect Signet's credit
card business assets and liabilities to be transferred (except the Due to
Parent) and results of its operations. SBV will contribute to Capital One Bank
up to $360 million of equity capital. The amount so contributed by SBV will be
reduced below $360 million to the extent the net proceeds of the initial public
offering exceed $100 million.The accompanying historical financial statements
reflect neither the establishment of Capital One Bank, the contribution of the
credit card business by SBV to Capital One Bank, the establishment of the
Company, nor the distribution of Capital One Bank by SBV to Signet and the
contribution to the Company all of which are planned to take place subsequent to
the date of these financial statements.
The following further describes the basis of preparation of the
accompanying financial statements: (1) The statements include interest expense
paid on borrowings from SBV. For purposes of constructing the accompanying
financial statements, three funding pools (short-term, medium-term and long-term
pools) were assumed, each with costs based on the average relevant historical
rates paid by Signet. (2) The accompanying historical financial statements also
include an allocation of expenses for data processing, accounting, audit, human
resources, corporate secretary, treasury, legal and other administrative support
provided by Signet. Such expenses were allocated based on actual usage or using
other allocation methods which, in the opinion of management, approximate actual
usage. Management believes the allocation methods are reasonable. Certain
services currently provided by affiliates are expected to continue on a
transitional basis. (3) Additionally, SBV retained a credit card portfolio of
approximately $335 million for all periods presented that is associated with its
deposit customer base. The financial statements assume the Division assessed
SBV a normal servicing fee for servicing this retained portfolio for all periods
presented.
8
<PAGE>
Supplemental Notes to Quarterly Financial Statements
(dollars in thousands) (unaudited)
Signet Credit Card Business (A Division of Signet Bank/Virginia) (continued)
Assets and Liabilities to be Transferred
<TABLE>
<CAPTION>
[ZW]
September 30 December 31
[ZW]
1994 1993 1993
- -<S> <C> [ZW]
<C> <C>
Assets
Cash and due from banks $ 1,941 [ZW]
$ 180 $ 955
Credit card loans held for securitization [ZW]
151,198 750,000
Credit card loans [ZW]
1,790,737 1,404,403 1,862,744
Less: Allowance for loan losses [ZW]
(68,516) (63,516) (63,516)
Net loans [ZW]
1,722,221 1,340,887 1,799,228
Premises and equipment (net) [ZW]
51,078 24,333 32,679
Interest receivable [ZW]
10,007 14,224 8,293
Accounts receivable from securitizations [ZW]
263,884 65,050 107,048
Other assets [ZW]
45,777 38,494 43,004
Total assets $2,246,106 [ZW]
$2,233,168 $1,991,207
Liabilities
Due to Parent (will not be transferred) $1,903,721 [ZW]
$2,059,881 $1,791,464
Other liabilities [ZW]
102,190 33,895 30,864
Total liabilities $2,005,911 [ZW]
$2,093,776 $1,822,328
Statement of Operations
</TABLE>
<TABLE>
<CAPTION>
Three Months [ZW]
Ended Nine Months Ended
September [ZW]
30 September 30
1994 [ZW]
1993 1994 1993
<S>
<C> [ZW]
<C> <C> <C>
Interest income $ 61,905 [ZW]
$79,986 $195,352 $196,770
Interest expense 21,350 [ZW]
23,251 62,977 52,023
Net interest income 40,555 [ZW]
56,735 132,375 144,747
Provision for loan losses 8,162 [ZW]
7,216 24,594 28,154
Net interest income after provision for loan losses 32,393 [ZW]
49,519 107,781 116,593
Non-interest income:
Credit card servicing income 84,505 [ZW]
23,362 225,888 67,749
Credit card fees 16,661 [ZW]
20,275 50,422 46,837
Other 3,362 [ZW]
2,053 8,542 5,310
Total non-interest income 104,528 [ZW]
45,690 284,852 119,896
Non-interest expense:
Salaries and employee benefits 26,710 [ZW]
13,242 68,589 37,591
Credit card solicitation 24,200 [ZW]
13,727 69,837 40,237
Contract termination [ZW]
49,000 49,000
Other 38,540 [ZW]
19,005 99,456 50,194
Total non-interest expense 138,450 [ZW]
45,974 286,882 128,022
Income (loss) before income taxes (benefit) (1,529) [ZW]
49,235 105,751 108,467
Applicable income taxes (benefit) (535) [ZW]
17,370 37,013 38,533
Net income (loss) $ (994) [ZW]
$31,865 $ 68,738 $ 69,934
</TABLE>
9
<PAGE>
Signet Banking Corporation
Financial Highlights
(dollars in thousands-except per share)
<TABLE>
<CAPTION>
Three Months [ZW]
Ended Nine Months Ended
September 30 [ZW]
Percent September 30 Percent
1994 1993 [ZW]
Change 1994 1993 Change
<S> <C> <C> [ZW]
<C> <C> <C> <C>
Earnings
Net interest income
(taxable equivalent) $133,177 $144,084 [ZW]
(7.6)% $ 392,106 $ 411,547 (4.7)%
Net interest income 129,722 139,922 [ZW]
(7.3) 381,848 399,584 (4.4)
Net income 3,462 45,763 [ZW]
(92.4) 106,960 124,470 (14.1)
Per Common Share
Net income $.05 $ .80 [ZW]
(93.7) $ 1.86 $ 2.19 (15.1)
Cash dividends declared .25 .20 [ZW]
25.0 .75 .55 36.4
Book value 18.52 16.39 13.0
Period-end price 34.50 34.50 --
Average Balance
Assets $10,971,450 $12,034,558 [ZW]
(8.8) $11,259,824 $11,622,840 (3.1)
Earning assets 9,632,783 10,970,422 [ZW]
(12.2) 10,002,131 10,588,336 (5.5)
Loans (net of unearned income) 6,080,017 6,210,335 [ZW]
(2.1) 6,219,301 6,250,964 (.5)
Deposits 7,635,425 7,822,546 [ZW]
(2.4) 7,739,229 7,716,097 .3
Core deposits 7,154,496 7,283,376 [ZW]
(1.8) 7,195,533 7,283,181 (1.2)
Common stockholders' equity 1,064,431 906,956 [ZW]
17.4 1,029,750 872,230 18.1
Managed credit card portfolio* 6,823,748 3,830,688 [ZW]
78.1 6,201,125 3,153,093 96.7
Common shares outstanding 57,898,078 57,010,088 [ZW]
1.6 57,503,856 56,863,540 1.1
Ratios
Return on assets .13% 1.51% [ZW]
(91.4) 1.27% 1.43% (11.2)
Return on common
stockholders' equity 1.29 20.02 [ZW]
(93.6) 13.89 19.08 (27.2)
Net yield margin 5.49 5.21 [ZW]
5.4 5.24 5.20 .8
Allowance for loan losses to:
Non-performing loans 589.84 471.00 25.2
Non-performing assets 342.19 222.41 53.9
Net loans 3.46 4.42 (21.7)
Non-performing assets to loans
and foreclosed properties 1.01 1.97 (48.7)
Common equity to assets 9.81 7.92 23.9
At Period-end
Assets $11,045,233 $11,690,445 (5.5)
Earning assets 9,716,225 10,522,260 (7.7)
Loans (net of unearned income) 6,511,155 5,761,852 13.0
Deposits 7,651,080 7,770,546 (1.5)
Core deposits 7,239,642 7,267,035 (.4)
Common stockholders' equity 1,083,086 926,030 17.0
Non-performing assets 65,857 114,520 (42.5)
Managed credit card portfolio * 7,032,277 4,285,508 64.1
Number of common stockholders 15,462 14,543 6.3
Full-time employees 6,284 5,442 15.5
Part-time employees 1,288 1,196 7.7
</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".
10
<PAGE>
Table 1
Selected Quarterly Financial Information
<TABLE>
<CAPTION>
3rd Qtr 2nd [ZW]
Qtr 1st Qtr 4th Qtr 3rd Qtr
1994 [ZW]
1994 1994 1993 1993
<S> <C> <C> [ZW]
<C> <C> <C>
Summary of Operations
(dollars in thousands-except per share)
Net interest income (taxable equivalent) $ 133,177 $ [ZW]
128,279 $ 130,650 $ 133,546 $ 144,084
Taxable equivalent adjustment 3,455 [ZW]
3,369 3,434 3,790 4,162
Net interest income 129,722 [ZW]
124,910 127,216 129,756 139,922
Provision for loan losses 3,000 [ZW]
2,999 5,499 10,276 12,501
Net interest income after provision
for loan losses 126,722 [ZW]
121,911 121,717 119,480 127,421
Non-interest income 151,820 [ZW]
139,467 128,363 122,156 85,517
Non-interest expense(1) 276,814 [ZW]
186,625 172,109 169,934 147,516
Income before income taxes(benefit) 1,728 [ZW]
74,753 77,971 71,702 65,422
Applicable income taxes(benefit) (1,734) [ZW]
24,368 24,858 21,758 19,659
Net income $ 3,462 $ [ZW]
50,385 $ 53,113 $ 49,944 $ 45,763
Per share: (2)
Net income $ 0.05 $ [ZW]
0.88 $ 0.93 $ 0.87 $ 0.80
Cash dividends declared 0.25 [ZW]
0.25 0.25 0.25 0.20
Average shares outstanding 57,898,078 [ZW]
57,357,940 57,247,462 57,087,297 57,010,088
Selected Average Balances
(dollars in millions)
Assets $ 10,971 $ [ZW]
11,501 $ 11,310 $ 11,601 $ 12,035
Earning assets 9,633 [ZW]
10,267 10,112 10,447 10,970
Investment securities 208 [ZW]
226 247 1,790 1,840
Loans (net of unearned income) 6,080 [ZW]
6,344 6,235 6,074 6,210
Deposits 7,635 [ZW]
7,769 7,815 7,782 7,823
Core deposits 7,154 [ZW]
7,209 7,224 7,189 7,283
Interest bearing liabilities 8,121 [ZW]
8,699 8,511 8,945 9,516
Stockholders' equity 1,064 [ZW]
1,017 1,007 939 907
Managed credit card portfolio(2) 6,824 [ZW]
6,303 5,462 4,663 3,831
Ratios
Return on average assets 0.13% [ZW]
1.76% 1.90% 1.71% 1.51%
Return on average common stockholders' equity 1.29 [ZW]
19.87 21.39 21.09 20.02
Net loan losses to average loans 1.74 [ZW]
0.38 0.36 0.77 0.93
Net interest spread 4.96 [ZW]
4.51 4.77 4.65 4.81
Net yield margin 5.49 [ZW]
5.01 5.24 5.07 5.21
At period-end:
Allowance for loan losses to:
Non-performing loans 589.84 [ZW]
616.91 521.72 342.63 471.00
Non-performing assets 342.19 [ZW]
316.48 283.44 217.46 222.41
Net loans 3.46 [ZW]
4.29 4.19 4.01 4.42
Non-performing assets to loans and
foreclosed properties 1.01 [ZW]
1.35 1.47 1.83 1.97
Total stockholders' equity to assets 9.81 [ZW]
9.58 8.83 8.14 7.92
Total stockholders; equity + allowance to loans 20.10 [ZW]
22.39 21.23 19.30 20.49
</TABLE>
(1) The third and fourth quarters of 1993 included $13.7and $15.6 million of
credit card solicitation expenses, respectively. The first, second, and
third quarters of 1994 included $21.4, $24.2, 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.
11
<PAGE>
Table 2
Net Interest Income Analysis
Taxable Equivalent Basis(in thousands)
<TABLE>
<CAPTION>
Third Quarter 1994 Compared Third Quarter [ZW]
1994 Compared YTD September 1994 Compared
with Third Quarter 1993 with Second [ZW]
Quarter 1994 with YTD September 1993
Increase Change due to* Increase [ZW]
Change due to* Increase Change due to*
(Decrease) Rate Volume (Decrease) [ZW]
Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> [ZW]
<C> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 5,876 $3,883 $ 1,993 $ 5,418 [ZW]
$10,878 $ (5,460) $ (5,513) $ (3,366) $ (2,147)
Securities available for sale 11,936 (53) 11,989 (405) [ZW]
2,045 (2,450) 43,073 (1,402) 44,475
Investment securities (24,754) 448 (25,202) (560) [ZW]
(28) (532) (77,314) 730 (78,044)
Other earning assets (8,079) 4,388 (12,467) (2,370) [ZW]
2,380 (4,750) 14,259 5,758 8,501
Total interest income (15,021) 9,599 (24,620) 2,083 [ZW]
13,881 (11,798) (25,495) 8,499 (33,994)
Interest expense:
Interest bearing deposits 3,008 2,814 194 1,259 [ZW]
1,928 (669) 5,790 12,182 (6,392)
Fed funds and repurchase
agreements (2,473) 4,258 (6,731) (3,628) [ZW]
579 (4,207) (2,672) 7,370 (10,042)
Other short-term borrowings (4,613) (596) (4,017) (394) [ZW]
(80) (314) (8,213) (1,843) (6,370)
- -Long-term borrowings (36) 460 (496) (52) [ZW]
(50) (2) (959) 832 (1,791)
Total interest expense (4,114) 5,790 (9,904) (2,815) [ZW]
1,417 (4,232) (6,054) 11,216 (17,270)
Net interest income $ (10,907) $5,550 $ (16,457) $ 4,898 [ZW]
$12,654 $ (7,756) $ (19,441) $ 3,241 $(22,682)
</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 NewYork Stock Exchange under the symbol SBK. At September 30,
1994, Signet had assets of $11.0 billion and operated banking subsidiaries (250
full-service banking offices and 252 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 October 25, 1994, Signet filed an amended registration statement with the
Securities and Exchange Commission which describes 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 Capital One Bank, a newly chartered limited purpose credit card
bank. Capital One Bank will, in conjunction with the transfer, become a wholly-
owned subsidiary of Capital One 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. Concurrent with the Separation, up to approximately 13% of
the outstanding shares of common stock of Capital One 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 in the first quarter of 1995 subject to the satisfaction of certain
conditions. The Common Stock of Capital One Financial Corporation has been
authorized for listing on the New York Stock Exchange, subject to official
notice of issuance. It is anticipated that the spin-off will enhance shareholder
value by creating two strong and independent financial institutions.
During the third quarter of 1994, Signet completed the acquisition of
Pioneer Financial Corporation, the parent company of Pioneer Federal Savings
Bank, a $400 million financial institution located in Chester, Virginia. The
transaction had an immaterial dilutive effect on Signet's earnings per share.
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 and the spin-off,
Signet recorded special pre-tax charges of $82.6 million for restructuring
($33.6 million) and for terminating certain data processing contracts ($49.0
million) in the third quarter.
The following discussion should be read in conjunction with the accompanying
financial statements, notes and other supplemental information contained in this
document.
12
<PAGE>
Earnings Analysis
For the third quarter of 1994, consolidated net income totaled $3.5 million,
or $.05 per share, after special pre-tax charges of $82.6 million for
restructuring and for terminating certain data processing contracts. Included in
the restructuring charges are costs related to an early retirement plan and
employee severance. Year-to-date net income amounted to $107.0 million, or $1.86
per share. Adjusting for these charges, earnings for the quarter and the nine
months would have been $57.2 million, or $.98 per share, and $160.7 million, or
$2.79 per share, respectively. In 1993, Signet earned $45.8 million, or $.80 per
share, for the third quarter, and $124.5 million, or $2.19 per share, for the
nine months ended September 30. Excluding the special charges, net income for
the 1994 quarter and nine months ended September 30 was up 25 percent and 29
percent respectively, over the same periods in 1993. The earnings for the 1994
third quarter compared with third quarter 1993 reflect growth in the consumer
loan portfolio, an increase in non-interest income from credit card servicing
income 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 1994 third
quarter of $24.2 million, increasing from $13.7 million in the third quarter of
1993. Also, during the quarter, Signet recognized nominal net gains on
securities available for sale compared with no gains or losses during the same
quarter last year. For the first nine months of 1994, credit card solicitation
expenses were $69.8 million, compared with $40.2 million in the same period of
1993. Securities available for sale transactions resulted in net gains for the
first nine months of 1994 totaling $3.2 million compared with $1.7 million of
net gains for the same period last year.
Key profitability ratios reflected the special pre-tax charges of $82.6
million for restructuring and for terminating certain data processing contracts
in the third quarter of 1994. The return on assets (ROA) was .13% for the third
quarter and 1.27% for the first nine months of 1994, while the return on common
stockholders' equity (ROE) was 1.29% and 13.89% for the same respective periods.
Considering
Table 3
Analysis of Net Yield Margin
Second Quarter 1994 versus Third Quarter 1994
- -
Net Yield for Second Quarter 1994 5.01%
Growth and higher yield of other consumer loans 0.26
Change in on balance sheet credit card
(volume and yield-net) 0.16
Improved yield on earning assets and
other factors 0.10
Higher funding costs (0.04)
Net Yield for Third Quarter 1994 5.49%
Signet's "normalized" performance excluding the special charges, the ROA
was an impressive 2.07% in the third quarter and 1.91% for the first nine months
of 1994 compared with 1.51% and 1.43% for the same periods in 1993. The
"normalized" ROE was also strong at 21.13% for the third quarter and 20.80% for
the first nine months of 1994 compared with 20.02% and 19.08% for the same
periods in the prior year. These "normalized" profitability ratios represent a
significant improvement over the comparable ROA and ROE ratios for the 1993
third quarter and first nine months.
Net Interest Income
Taxable equivalent net interest income, a principal component of earnings,
totaled $133.2 million for the third quarter and $392.1 million for the first
nine months of 1994, slightly lower than the same periods last year. The net
yield margin for the third quarter and first nine months of 1994 increased 28
and 4 basis points from the same periods in 1993, respectively. The increase in
the net yield margin from 1993 is primarily due to higher yields and growth in
consumer loans other than credit card. The yield on the total on-balance sheet
portfolio of credit card loans declined for the third quarter and first nine
months of 1994 compared with the same periods of 1993. The decrease was 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 generally increase to a higher rate after
the initial period expires. For selected introductory rate accounts, all or
part of the 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 second quarter 1994 to third quarter 1994. An approximate
basis point impact was calculated for each item noted. The increase in net
interest spread and net interest margin from the second quarter of 1994 was
primarily due to an increase in the outstanding balance and yield in other
consumer loans and a higher yield on the total on-balance sheet portfolio of
credit card loans. The on-balance sheet yield on credit card loans improved
from 10.54% for the second quarter to 11.51% for the third quarter. The higher
yield of the credit card portfolio was attributable to Signet securitizing
lower yielding credit card loans and to repricing a portion of the portfolio
as their introductory rate period expired.
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 September 30, 1994, the notional values of the Company's
derivative products for the purpose of hedging interest rate risk were $3.4
billion of interest rate swaps, $650 million of interest rate floors and $100
million of interest rate caps. Also, the Company has entered into a forward
13
<PAGE>
Table 4
Statement of Changes in Allowance For Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months [ZW]
Ended Nine Months Ended
September 30 June [ZW]
30 September 30
1994 1993 [ZW]
1994 1994 1993
<S> <C> <C> <C> [ZW]
<C> <C>
Balance at beginning of period $245,764 $258,571 $250,477 [ZW]
$253,313 $265,536
Provision for loan losses 3,000 12,501 [ZW]
2,999 11,498 37,010
Transfer to loans held for
securitization (350) (1,902) [ZW]
(1,619) (4,719) (2,902)
Addition arising from acquisition [ZW]
3,327 3,327
Loans charged off:
Commercial 626 5,455 [ZW]
3,310 8,686 14,262
Credit card 6,764 9,515 [ZW]
7,831 22,883 30,051
Other consumer 434 805 [ZW]
573 1,647 2,239
Real estate-construction 8,831 [ZW]
6,383 8,831 21,712
Real estate-mortgage * 19,335 62 [ZW]
462 20,209 2,713
Total loans charged off 35,990 22,220 [ZW]
12,176 62,256 70,977
Recoveries of loans previously charged
off:
Commercial 737 1,084 [ZW]
1,490 5,355 9,297
Credit card 2,156 4,451 [ZW]
3,328 8,742 13,035
Other consumer 402 344 [ZW]
289 928 1,064
Real estate-construction 3,637 1,786 [ZW]
884 4,746 2,331
Real estate-mortgage * 2,676 91 [ZW]
92 4,425 312
Total recoveries 9,608 7,756 [ZW]
6,083 24,196 26,039
Net loans charged off 26,382 14,464 [ZW]
6,093 38,060 44,938
Balance at end of period $225,359 $254,706 $245,764 [ZW]
$225,359 $254,706
Net loan losses (annualized) as a
percentage of average loans:
Commercial (0.02)% 0.83% [ZW]
0.35% 0.21% 0.32%
Other consumer 0.01 0.15 [ZW]
0.08 0.07 0.13
Real estate 9.89 1.68 [ZW]
(0.23) 2.90 2.48
Subtotal 1.92 0.86 [ZW]
0.14 0.72 0.84
Credit card 1.20 1.11 [ZW]
0.93 1.07 1.25
Total 1.74% 0.93% [ZW]
0.38% 0.82% 0.96%
Allowance for loan losses to net loans
at end of period [ZW]
4.29% 3.46% 4.42%
</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.
14
<PAGE>
starting interest rate swap for a variable notional amount ranging from $4.8
billion to $0.6 billion from January 3, 1995 to April 13, 1995 which will be
transferred to Capital One Bank in connection with the Separation. As a result
of this transaction, the Company has mitigated the interest rate risk associated
with funding credit card assets. Interest rate derivative products contributed
57 basis points to the third quarter 1994 margin compared with 53 basis points
in the second quarter 1994. The total income from these contracts rose slightly
from $13.6 million in the second quarter of 1994 to $13.8 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 third quarter of 1994 would have been $211.7 million, or 21% higher than the
comparable 1993 figure of $175.4 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 third quarter of 1994 down
significantly from $12.5 million for the same period last year and level with
the approximately $3.0 million for the second quarter of 1994. For the third
quarter of 1994, net charge-offs totaled $26.4 million, up from $14.5 million in
the same quarter of 1993 and $6.1 million in the 1994 second quarter. In the
third quarter of 1994, Signet sold $102 million of real estate related loans at
a discount for which there was sufficient allocated reserve. The sale of these
loans accounted for approximately $21 million of the third quarter net charge-
offs. For the nine months, net charge-offs decreased from $44.9 million in 1993
to $38.1 million in 1994. As a percentage of average loans, third quarter net
loan losses increased 81 basis points from the comparable period in 1993 and
rose 136 basis points from the 1994 second quarter as a result of the loan sale.
The percentage of net credit card losses to average credit card loans on-balance
sheet increased to 1.20% for the third quarter of 1994 from 1.11% the same
period in 1993 and from .93% in the 1994 second quarter. This increase reflects
the aging of the on balance sheet credit card portfolio. Net losses for the
first nine months of 1994 on the total managed credit card portfolio, which
included securitized receivables, were 1.55% of average managed credit card
loans, compared with 2.54% 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 September 30, 1994, the reserve for foreclosed properties totaled $0.6
million, a decrease of $5.2 million from December 31, 1993, the result of write-
downs on foreclosed properties taken in the first nine months of 1994.
The allowance for loan losses at September 30, 1994 was $225.4 million, or
3.46% of net loans, compared with $254.7 million, or 4.42% of net loans, at
September 30, 1993 and $245.8 million, or 4.29%, at June 30, 1994. The decrease
from September 30, 1993 primarily reflected charge-offs taken on real estate
related loans, the majority of which resulted from the real estate loan sale. 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)
September 30, 1994
Percentage of
Allowance Allowance to Loans
Amount in Each Category
Commercial $ 20,780 .94%
Credit Card 68,500 3.93
Other Consumer 5,563 .33
Real Estate 72,764 8.23
Unallocated 57,752
Total $225,359 3.46%
15
<PAGE>
Table 6
Non-Interest Income and Expense
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months [ZW]
Ended Nine Months Ended
September [ZW]
30 June 30 September 30
1994 [ZW]
1993 1994 1994 1993
- -
<S> <C> <C> [ZW]
<C> <C> <C>
Non-interest income:
Credit card servicing income $ 91,883 $ 30,319 [ZW]
$ 77,469 $245,889 $ 90,619
Credit card service charges 16,802 [ZW]
20,275 18,566 50,816 46,837
Service charges on deposit
accounts 16,234 [ZW]
16,222 18,106 50,037 48,403
Trust income 4,747 [ZW]
4,452 4,601 14,417 13,453
Mortgage servicing and origination 4,117 [ZW]
6,229 4,869 14,363 16,117
Other service charges and fees 3,626 [ZW]
3,803 4,064 11,418 11,042
Gain on sale of mortgage servicing [ZW]
6,000 6,000
Trading profits (losses) 343 [ZW]
(640) (266) (374) (645)
Other 7,906 [ZW]
4,855 8,748 23,892 15,638
Non-interest operating
income 151,658 [ZW]
85,515 136,157 416,458 241,464
Securities available for sale
gains [ZW]
140 3,265 3,193 1,665
Investment securities gains
(losses) [ZW]
22 2 45 (1) 151
Total non-interest income $151,820 $ 85,517 [ZW]
$139,467 $419,650 $243,280
Non-interest expense:
Salaries $ 68,028 $ 53,811 [ZW]
$ 64,345 $192,314 $153,610
Employee benefits 17,354 [ZW]
13,909 17,989 53,405 44,347
Total staff expense 85,382 [ZW]
67,720 82,334 245,719 197,957
Credit card solicitation 24,200 [ZW]
13,727 24,250 69,837 40,237
Travel and communications 14,499 [ZW]
8,866 13,546 41,362 25,147
Supplies and equipment 13,502 [ZW]
10,863 13,095 38,596 29,695
External data processing services 13,049 [ZW]
9,547 12,128 36,456 25,335
Occupancy 13,038 [ZW]
10,760 10,855 34,604 29,728
Contract termination [ZW]
49,000 49,000
Restructuring charge [ZW]
33,619 33,619
Professional services 6,424 [ZW]
3,729 6,069 16,773 10,535
Public relations, sales and
advertising 4,105 [ZW]
4,456 4,824 13,197 13,286
FDIC assessment 4,242 [ZW]
4,396 4,248 12,381 13,857
Credit and collection 3,323 [ZW]
2,877 3,088 9,064 7,725
Foreclosed property 595 [ZW]
1,256 810 1,189 9,080
Other 11,836 [ZW]
9,319 11,378 33,751 25,800
Total non-interest expense $276,814 $147,516 [ZW]
$186,625 $635,548 $428,382
</TABLE>
16
<PAGE>
Non-Interest Income
Total non-interest income was $151.8 million in the third quarter of 1994
compared with $85.5 million in the third quarter of 1993. This is an increase of
$66.3 million, or 78%, from the previous year. The primary source of growth was
the increase in credit card servicing income and a $6.0 million gain on the sale
of mortgage servicing rights. Credit card servicing income rose $61.6 million,
or 203%, from the 1993 third quarter to $91.9 million primarily as a result of
the 1993 and 1994 securitizations. This category houses the income received from
servicing the $5.1 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, $1.2 billion in June, 1994 and
approximately $600 million in September, 1994). Income from credit card service
charges decreased $3.5 million, or 17%, for the third quarter of 1994 compared
with the same time period in 1993. This decrease is attributable to the $729.0
million, or 26% decrease in average on-balance sheet credit card outstandings
resulting from the securitizations. Mortgage servicing and origination fee
income declined 34% and 15% from the third quarter of 1993 and second quarter of
1994, respectively, to $4.1 million as a result of a significant decrease in
mortgage loan volume resulting from rising rates. For the third quarter of 1994,
Signet recorded trading gains of $0.3 million, an improvement from $0.6 million
of losses in the 1993 third quarter. In the third quarter of 1994, $0.1 million
of net gains were recognized on transactions in the securities available for
sale portfolio. There were no such net gains for the third quarter of 1993.
Nominal net gains were recognized in the third quarter of 1994 and 1993 on
investment securities that were called.
For the first nine months of 1994 non-interest income grew $176.4 million or
72% from the same period of 1993 to $419.7 million. A $155.3 million increase in
credit card servicing income due to the 1993 and 1994 securitizations, a $6.0
million gain on the sale of mortgage servicing rights and a $4.0 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 third quarter and first nine months of
1994 was $276.8 million and $635.5 million, respectively, representing increases
of 88% and 48% from the same periods in 1993. When comparing the third quarter
and first nine months of 1994 to the same periods in 1993, increases occurred in
all the major categories except foreclosed property, FDIC assessment and public
relations, sales and advertising. 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 special charge of $82.6 million for restructuring
and for terminating certain data processing contracts, as well as continuation
of the credit card solicitation program and the growth in the credit card
business. Excluding the restructuring charges, data processing contracts
termination fee and direct costs related to credit card, non-interest expense
during the third quarter and first nine months of 1994 rose 4% and 5%,
respectively, compared with 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 15% from
third quarter of 1993. Total salary and employee benefits increased $17.7
million and $47.8 million from the third quarter and first nine months 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 third quarter and first nine months, expenses associated
with the credit card solicitation program were $24.2 million and $69.8 million,
respectively, representing increases of $10.5 million and $29.6 million from the
comparable periods of 1993. Subsequent to the Separation, Capital One Bank will
be responsible for solicitation expenses associated with increasing Capital One
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 nine months of 1994 was 78.3%
compared with 65.4% for the same period in 1993. Excluding the restructuring
charges, contract termination fee and foreclosed property expense from non-
interest expense causes the ratio to fall to 59.4% and 57.8% for the respective
time periods. Since 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 further reduces the ratio to 55.7% for 1994
compared with 54.4% for the first nine months 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
17
<PAGE>
reductions and revenue initiatives. Signet recorded special one-time charges
of $82.6 million during the third quarter in connection with cost-reduction
measures (principally an early retirement plan and employee severance) and
termination of certain data processing services related to the separation of
the credit card business. As a result of implementing the cost-reduction
measures, the number of full-time equivalent employees fell 4% from June 30
to September 30, 1994. Further reductions are expected in the fourth quarter.
In the fourth quarter, the Company expects to record additional restructuring
charges of approximately $8 to $10 million as the consolidation of operations
and facilities in Signet's core banking business is finalized.
Income Taxes
Signet recorded an income tax benefit of $1.7 million for the quarter and
income tax expense of $47.5 million for the nine months ended September 30, 1994
compared with expenses of $19.7 million and $53.0 million for the same periods
in 1993. The tax benefit in the third quarter resulted from the special charges
of $82.6 million. The increase in tax expense for the nine months 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 first
nine months of 1994 was 30.7% compared with 29.9% for the first nine months of
1993.
Financial Condition
Earning assets averaged $9.6 billion for the third quarter and $10.0 billion
for the first nine months of 1994, a decrease of 12% and 6% from the same
respective periods last year. Average investment securities declined $1.6
billion, or 89%, and average securities available for sale rose $860 million
from the prior year's third 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 $554.7 million for the third quarter 1994, down from
$997.3 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 $6.1 billion for the quarter, reflecting a
2.1% decline from the third quarter in 1993. Average credit card loans on the
balance sheet, including held for securitization, decreased 26% to $2.1 billion
as a result of securitizing $3.0 billion in credit card loans since September
30, 1993. The $305.6 million rise in other consumer loans resulted primarily
from a $235.5 million growth in student loans. The loan category experiencing
the largest decline from the third quarter of 1993 was real estate-construction,
down 45% to $229.6 million. Average real estate-commercial mortgage loans
declined 5% to $564.4 million and real estate-residential mortgages were up 17%
to $89.4 million as a result of loans acquired from Pioneer Financial
Corporation. 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 real estate loan sale impacted the real estate-construction and
real estate-commercial mortgage loan categories. The yield on earning assets was
8.31% for the quarter and 7.94% for the first nine months of 1994, compared with
7.84% and 7.83% in the prior year's respective periods.
Average interest bearing liabilities totaled $8.1 billion in the third
quarter, down 7% from the second quarter of 1994 and down 15% from the
corresponding time period in 1993. Savings certificates decreased $448.5
million, or 19% and $456.6 million, or 19%, from the third quarter and first
nine months 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
$92.5 million, or 5%, and $96.7 million, or 5%, from the third quarter and first
nine months 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
decreased $34.8 million and $23.4 million, respectively, from the third quarter
of 1993. Average core deposits remained relatively stable when comparing third
quarter and first nine months 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 $2.5 billion for the 1994 third quarter, down $1.2 billion from the
comparable 1993 period and down $543 million from the second quarter of 1994.
The lower level of purchased funds in the third quarter of 1994 compared with
the second quarter resulted from temporarily funding 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 Capital One Bank will begin
to assume responsibility for its funding needs. To transition Capital One Bank
to financing on a permanent basis, a Bridge Financing Facility of up to $2.5
billion has been arranged. This will result in higher funding costs for Capital
One Bank. The average rate on interest bearing liabilities rose 32 basis points
when compared with the third quarter of 1993 due to a rise in market rates and
lower income from derivative products.
18
<PAGE>
Table 7
Consolidated Average Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
[ZW]
Three Months Ended
[ZW]
September 30
[ZW]
1994 1993
Average [ZW]
Income/ Yield/ Average Income/
Balance [ZW]
Expense Rate Balance Expense
<S> <C> [ZW]
<C> <C> <C> <C>
Assets
Earning assets (tax equivalent basis):*
Interest bearing deposits with
other banks $ 243,888 [ZW]
$ 2,851 4.57% $ 217,335 $ 2,709
Federal funds and resale
agreements [ZW]
1,003,048 11,602 4.53 743,140 5,753
Trading account securities [ZW]
257,789 5,062 7.79 393,041 6,800
Loans held for securitization [ZW]
554,738 13,181 9.50 997,282 22,992
Loans held for sale [ZW]
127,542 2,270 6.96 272,735 4,791
Securities available for sale [ZW]
1,157,308 16,124 5.45 296,824 4,188
Investment securities-taxable [ZW]
20,984 311 5.93 1,568,534 22,505
Investment securities-nontaxable [ZW]
187,469 5,667 12.09 271,196 8,227
Loans (net of unearned income):
Commercial [ZW]
2,149,870 41,220 7.61 2,097,666 38,422
Credit card [ZW]
1,534,093 46,952 12.24 1,820,507 55,103
Other consumer [ZW]
1,512,629 35,825 9.37 1,207,054 24,407
Real estate-construction [ZW]
229,590 5,306 9.04 416,432 7,196
Real estate-commercial
mortgage [ZW]
564,423 13,389 9.41 592,539 11,727
Real estate-residential
mortgage [ZW]
89,412 1,917 8.58 76,137 1,878
Total loans 6,080,017 [ZW]
144,609 9.44 6,210,335 138,733
Total earning assets 9,632,783 [ZW]
$201,677 8.31% 10,970,422 $216,698
Non-rate related assets:
Cash and due from banks [ZW]
501,289 459,887
Allowance for loan losses [ZW]
(241,813) (259,042)
Premises and equipment (net) [ZW]
248,569 201,794
Other assets [ZW]
830,622 661,497
Total assets [ZW]
$10,971,450 $12,034,558
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits:
Money market and interest
checking $ 1,012,616 [ZW]
$ 5,842 2.29% $ 957,086 $ 5,607
Money market savings [ZW]
1,618,108 10,918 2.68 1,710,605 10,957
Savings accounts [ZW]
1,042,726 8,656 3.29 795,048 6,262
Savings certificates [ZW]
1,937,671 14,820 3.03 2,386,207 14,991
Large denomination
certificates [ZW]
274,959 3,115 4.43 298,358 2,897
Foreign [ZW]
205,970 2,385 4.53 240,812 2,014
Total interest bearing
deposits [ZW]
6,092,050 45,736 2.98 6,388,116 42,728
Federal funds and repurchase
agreements [ZW]
1,470,682 14,882 3.96 2,213,528 17,355
Other short-term borrowings [ZW]
304,970 3,751 4.81 628,094 8,364
Long-term borrowings [ZW]
253,773 4,131 6.37 285,992 4,167
Total interest bearing liabilities 8,121,475 [ZW]
$ 68,500 3.35% 9,515,730 $ 72,614
Non-interest bearing liabilities:
Demand deposits [ZW]
1,543,375 1,434,430
Other liabilities [ZW]
242,169 177,442
Common Stockholders' equity [ZW]
1,064,431 906,956
Total liabilities and stockholders'
equity [ZW]
$10,971,450 $12,034,558
Net interest income/spread [ZW]
$133,177 4.96% $144,084
Interest income to average earning
[ZW]
assets [ZW]
8.31%
Interest expense to average earning
[ZW]
assets [ZW]
2.82
Net yield [ZW]
margin [ZW]
5.49%
</TABLE>
*Includes the effects of taxable equivalent adjustments using a tax rate of
35%.
19
<PAGE>
<TABLE>
<CAPTION>
[ZW]
Nine Months Ended
June [ZW]
30 September 30
1994 [ZW]
1994 1993
Yield/ Average Income/ Yield/ Average Income/ [ZW]
Yield/ Average Income/ Yield/
Rate Balance Expense Rate Balance Expense [ZW]
Rate Balance Expense Rate
<C> <S> <C> <C> <C> [ZW]
<C> <C> <C> <C> <C>
4.88% $ 247,936 $ 2,952 4.71% $ 250,754 $ [ZW]
8,374 4.40% $ 265,815 $ 9,099 4.51%
3.03 856,757 8,674 4.01 823,814 [ZW]
25,226 4.04 735,030 16,863 3.03
6.86 272,872 4,747 6.98 272,145 [ZW]
15,449 7.59 532,351 24,705 6.20
9.22 755,494 17,848 9.45 552,329 [ZW]
38,904 9.39 339,744 23,270 9.13
6.87 212,378 3,115 5.80 231,268 [ZW]
11,146 6.36 209,039 10,903 6.88
5.52 1,351,368 16,529 4.84 1,425,643 [ZW]
56,788 5.25 313,057 13,715 5.78
5.74 20,942 307 5.86 22,916 [ZW]
1,003 5.84 1,663,639 72,245 5.80
12.13 205,078 6,231 12.15 203,961 [ZW]
18,543 12.12 278,697 24,615 11.78
7.27 2,108,076 40,103 7.63 2,133,242 [ZW]
122,309 7.67 2,085,524 117,836 7.55
12.11 1,941,897 53,255 10.97 1,766,782 [ZW]
150,983 11.39 1,808,999 167,445 12.34
8.04 1,384,050 26,681 7.70 1,406,142 [ZW]
87,780 8.31 1,185,891 71,953 8.10
6.76 262,844 5,248 7.90 261,718 [ZW]
15,795 7.96 479,809 25,108 6.90
7.85 573,203 12,390 8.67 572,674 [ZW]
36,793 8.59 612,123 36,180 7.90
9.87 74,312 1,514 8.15 78,743 [ZW]
5,247 8.88 78,618 5,898 10.00
8.86 6,344,382 139,191 8.80 6,219,301 [ZW]
418,907 9.01 6,250,964 424,420 9.08
7.84% 10,267,207 $199,594 7.80% 10,002,131 [ZW]
$594,340 7.94% 10,588,336 $619,835 7.83%
499,712 [ZW]
496,765 448,177
(248,846) [ZW]
(247,634) (265,787)
238,529 [ZW]
237,224 200,268
44,834 [ZW]
771,338 651,846
$11,501,436 [ZW]
$11,259,824 $11,622,840
2.32% $ 1,022,071 $ 5,605 2.20% $ 1,018,734 $ [ZW]
16,999 2.23% $ 945,412 $ 17,036 2.41%
2.54 1,669,819 11,381 2.73 1,662,027 [ZW]
33,617 2.70 1,758,742 34,437 2.62
3.12 981,676 7,751 3.17 978,809 [ZW]
23,355 3.19 744,855 17,458 3.13
2.49 1,972,308 13,993 2.85 1,981,775 [ZW]
41,863 2.82 2,438,403 45,662 2.50
3.80 344,830 3,635 4.17 316,045 [ZW]
9,974 4.16 255,916 7,775 4.01
3.27 215,035 2,112 3.89 227,651 [ZW]
6,678 3.87 177,000 4,328 3.22
2.65 6,205,739 44,477 2.87 6,185,041 [ZW]
132,486 2.86 6,320,328 126,696 2.68
3.07 1,905,695 18,510 3.84 1,697,530 [ZW]
46,619 3.62 2,088,890 49,291 3.11
5.21 333,315 4,145 4.92 304,563 [ZW]
10,949 4.74 477,237 19,162 5.29
5.70 254,007 4,183 6.51 255,332 [ZW]
12,180 6.29 293,680 13,139 5.90
3.03% 8,698,756 $ 71,315 3.29% 8,442,466 [ZW]
$202,234 3.20% 9,180,135 $208,288 3.03%
1,563,117 [ZW]
1,554,188 1,395,769
222,536 [ZW]
233,420 174,706
1,017,027 [ZW]
1,029,750 872,230
$11,501,436 [ZW]
$11,259,824 $11,622,840
4.81% $128,279 4.51% [ZW]
$392,106 4.74% $411,547 4.80%
7.84% [ZW]
7.80% 7.94% 7.83%
2.63 [ZW]
2.79 2.70 2.63
5.21% [ZW]
5.01% 5.24% 5.20%
</TABLE>
20
<PAGE>
Credit Card Business
As noted earlier, 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 pre-approval 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
Table 8
Managed Credit Card Portfolio Delinquencies*
(dollars in thousands)
<TABLE>
<CAPTION>
September 30 June 30 March [ZW]
31 December 31 September 30
1994 1994 [ZW]
1994 1993 1993
Number
of Days Delinquent Delinquent [ZW]
Delinquent Delinquent Delinquent
Delinquent Amount Percent Amount Percent Amount [ZW]
Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> [ZW]
<C> <C> <C> <C> <C>
30-59 days $ 76,133 1.07% $ 59,281 .89% $ 50,461 [ZW]
.85% $ 52,099 1.01% $ 44,810 1.02%
60-89 days 37,615 .53 29,817 .44 27,575 [ZW]
.46 28,236 .55 24,516 .56
90+ days 64,434 .91 52,124 .78 50,278 [ZW]
.84 50,359 .98 48,881 1.12
Total $ 178,182 2.51% $ 141,222 2.11% $ 128,314 [ZW]
2.15% $ 130,694 2.54% $ 118,207 2.70%
</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.
card portfolio (which includes securitized receivables) increased by $2.7
billion, or 64%, from September 30, 1993 and by $443.0 million, or 7%, from June
30, 1994. Absolute dollars of net loan losses, on a managed portfolio basis,
also rose from $61.0 million for the first nine months of 1993 to $72.6 million
for the same time period of 1994. However, the ratio of charge-offs to average
loans fell from 2.54% for the first nine months of 1993 to 1.55% 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.
The ratio of managed credit card loans sixty days or more past due increased
to 1.44% of related loans at September 30, 1994 from 1.22% at June 30, 1994,
while the dollar amount rose to $102 million from $82 million at the same
respective dates. Although the delinquency ratio has risen from the prior
quarter-end, it remains at a level which is low for the industry, reflecting the
high quality of the credit card portfolio. 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.
21
<PAGE>
Table 9
Managed Credit Card Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
[ZW]
Three Months Ended
September 30 [ZW]
June 30 March 31 December 31 September 30
1994 [ZW]
1994 1994 1993 1993
<S> <C> [ZW]
<C> <C> <C> <C>
Period-end balances:
On balance sheet loans held
for securitization $ 151,198 $ [ZW]
750,000 $1,000,000 $ 750,000
On balance sheet loans 1,742,622 [ZW]
1,299,627 1,600,756 $1,808,515 1,348,928
Securitized loans 5,138,457 [ZW]
4,539,655 3,289,656 3,289,656 2,186,580
Total period-end managed
portfolio $7,032,277 [ZW]
$6,589,282 $5,890,412 $5,098,171 $4,285,508
Average balances:
On balance sheet loans held
for securitization $ 554,738 $ [ZW]
755,494 $ 344,445 $ 554,348 $ 997,283
On balance sheet loans 1,534,093 [ZW]
1,941,897 1,827,581 1,631,570 1,820,507
Securitized loans 4,734,917 [ZW]
3,605,589 3,289,656 2,476,613 1,012,898
Total average managed portfolio $6,823,748 [ZW]
$6,302,980 $5,461,682 $4,662,531 $3,830,688
</TABLE>
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 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 and its managed loan portfolio 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
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. As a result, growth in the Company's managed loan portfolio in recent
months has been less than that achieved in prior fiscal periods.
Signet has securitized a total of $5.1 billion of credit card receivables as
of September 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 additional credit card receivables
during the 1994 fourth quarter. It is anticipated that after the Separation,
Capital One Bank will continue to securitize credit card receivables. Signet may
also utilize securitization with respect to its retained credit card receivables
and other loan products.
Signet has successfully implemented its information-based strategy to
originate and manage credit card accounts. Signet has also employed this
information-based strategy in other areas of the Company, such as educational
lending, consumer lending, equity line and mortgage banking. During the first
nine months of 1994, other consumer loans grew by $370 million as student loans
rose $238 million, installment loans increased $79 million and equity lines
advanced $53 million. While initial results are promising, it is too early to
determine the ultimate success of this strategy.
22
<PAGE>
Table 10
Impact of the Credit Card Securitizations
(dollars in thousands)
<TABLE>
<CAPTION>
[ZW]
Three Months Ended
September 30 June 30 [ZW]
March 31 December 31 September 30
1994 1994 [ZW]
1994 1993 1993
<S> <C> <C> [ZW]
<C> <C> <C>
Statement of Consolidated
Income (as reported)
Net interest income $ 129,722 $ [ZW]
124,910 $ 127,216 $ 129,756 $ 139,922
Provision for loan losses 3,000 [ZW]
2,999 5,499 10,276 12,501
Non-interest income 151,820 [ZW]
139,467 128,363 122,156 85,517
Non-interest expense 276,814 [ZW]
186,625 172,109 169,934 147,516
Income before income taxes $ 1,728 $ [ZW]
74,753 $ 77,971 $ 71,702 $ 65,422
Securitizations
Net interest income $ 81,996 $ [ZW]
72,943 $ 73,492 $ 61,006 $ 35,431
Provision for loan losses 19,343 [ZW]
17,755 16,116 15,959 13,783
Non-interest income (62,653) [ZW]
(55,188) (57,376) (45,047) (21,648)
Non-interest expense - [ZW]
- - - - -
Income before income taxes $ - $ - [ZW]
$ - $ - $ -
Managed Statement of Income
(adjusted)
Net interest income $ 211,718 $ 197,853 [ZW]
$ 200,708 $ 190,762 $ 175,353
rovision for loan losses 22,343 [ZW]
20,754 21,615 26,235 26,284
Non-interest income 89,167 [ZW]
84,279 70,987 77,109 63,869
Non-interest expense 276,814 [ZW]
186,625 172,109 169,934 147,516
Income before income taxes $ 1,728 $ [ZW]
74,753 77,971 $ 71,702 $ 65,422
As reported:
Average earning assets $9,632,783 $10,267,207 [ZW]
$10,111,663 $10,446,944 $10,970,422
Return on assets 0.13% [ZW]
1.78% 1.90% 1.71% 1.51%
Net yield margin 5.49 [ZW]
5.01 5.24 5.07 5.21
Including securitized credit
cards:
Average earning assets $14,367,700 $13,872,796 [ZW]
$13,401,319 $12,923,557 $11,983,320
Return on assets 0.09% [ZW]
1.35% 1.48% 1.41% 1.39%
Net yield margin 5.94 [ZW]
5.82 6.18 5.97 5.94
Yield on managed portfolio 12.04% [ZW]
11.97% 12.32% 12.85% 13.24%
</TABLE>
Risk Elements
Non-Performing Assets
Non-performing assets include non-accrual loans, restructured loans and
foreclosed properties. Non-performing assets declined $11.8 million or 15% from
June 30, 1994. Non-performing assets represented 1.01% of loans and foreclosed
properties at September 30, 1994, down from 1.35% and 1.97% at June 30, 1994 and
September 30, 1993, respectively. Non-performing assets are at their lowest
level since December 31, 1986. The allowance for loan losses equaled 590% of
non-performing loans at September 30, 1994, down slightly from 617% at June 30,
1994 and up from 471% at September 30, 1993. The ratio of the allowance to non-
performing assets also improved to 342% at September 30, 1994 from 316% at June
30, 1994 and 222% at September 30, 1993.
Foreclosed properties totaled $27.7 million (net of reserve) at the end of
the third quarter of 1994 and were equal to 42% of total non-performing assets
and 59% of non-performing real estate assets. The gross foreclosed properties
balance reflected an aggregate discount of approximately 52% from prior charge-
offs and write-downs. Signet sold $13.4 million and $21.6 million of foreclosed
properties during the third quarter and the first nine months of 1994,
respectively.
Accruing loans which are contractually past due 90 days or more as to
principal or interest payments totaled $62.6 million at September 30, 1994. This
is a 17% increase from the $53.7 million 1994 second quarter level, and
representsa 6% improvement from the $66.7 million reported at September 30,
1993. The September 30, 1994 total was comprised of $6.7 million of commercial
loans; $17.5 million of credit card loans; $19.5 million of other consumer loans
(of which $15.6 million are student loan delinquencies which are government
guaranteed and do not represent material loss exposure); $11.3 million of
mortgage loans; and $7.6 million of construction loans.
23
<PAGE>
Table 11
Non-performing Assets and Past Due Loans
(dollars in thousands)
<TABLE>
<CAPTION>
September 30 June 30 [ZW]
December 31
1994 1993 1994 [ZW]
1993
<S> <C> <C> <C> <C>
Non-accrual loans:
Commercial $16,361 $ 20,267 $17,258 $ [ZW]
42,303
Consumer 1,518 2,272 1,634 [ZW]
2,191
Real estate-construction 9,080 22,564 9,759 [ZW]
17,837
Real estate-mortgage* 9,064 7,350 7,512 [ZW]
6,523
Total non-accrual loans 36,023 52,453 36,163 [ZW]
68,854
Restructured loans:
Commercial 1,184 425 2,675 [ZW]
1,609
Real estate-construction 1,000 1,200 1,000 [ZW]
3,470
Total restructured loans 2,184 1,625 3,675 [ZW]
5,079
Total non-performing loans 38,207 54,078 39,838 [ZW]
73,933
Legally foreclosed properties 27,004 56,725 38,257 [ZW]
37,938
In substance foreclosed properties 1,209 11,029 1,851 [ZW]
10,357
Less foreclosed property reserve (563) (7,312) (2,291) [ZW]
(5,742)
Total foreclosed properties 27,650 60,442 37,817 [ZW]
42,553
Total non-performing assets $65,857 $114,520 $77,655 [ZW]
$116,486
Percentage to loans (net of unearned)
and foreclosed properties 1.01% 1.97% [ZW]
1.35% 3.08%
Allowance for loan losses to:
Non-performing loans 589.84 471.00 616.91 [ZW]
228.25
Non-performing assets 342.19 222.41 316.48 [ZW]
146.61
Accruing loans past due 90 days or more $62,626 $ 66,695 $53,679 $ [ZW]
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.
Real Estate Lending
Signet's real estate-construction loan exposure at September 30, 1994
totaled $218.5 million, a 29% decline from the 1993 year-end level and a 41%
decline from the September 30, 1993 level. Approximately $73 million of the
decline from December 31, 1993 was due to the real estate loan sale. Of the
total construction loan portfolio, approximately 44% was located in the Metro-
Washington area. The largest type of construction financing was residential at
38%. Commercial mortgage loans totaled $532.4 million at September 30, 1994 and
included $ 250.3 million of mini-permanent (interim) mortgage loans. Commercial
mortgage loans declined $49 million since December 31, 1993, of which $29
million was due to the real estate loan sale.
Stockholders' Equity Data
At September 30, 1994, stockholders' equity totaled $1.1 billion, an
increase of 17% from the previous year's level of $926 million. This increase
reflects the earnings of the Company over the past year and the acquisition of
Pioneer Financial Corporation. During the third quarter of 1994, Signet
completed the acquisition of Pioneer Financial Corporation, the parent company
of Pioneer Federal Savings Bank, a $400 million financial institution located in
Chester, Virginia. The transaction was a tax-free exchange of stock. Pioneer's
shareholders received .6232 shares of Signet common stock for each Pioneer share
held. This resulted in Signet issuing approximately 1.5 million shares of common
stock. The transaction had 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 fair value with
unrealized gains and losses reported in a separate component of stockholders'
equity, net of tax. At September 30, 1994, the net unrealized losses, net of
tax, related to securities available for sale, totaled $27.6 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 9.81% at September 30,
1994, which is an improvement from 9.58% at June 30, 1994 and 7.92% at September
30, 1993. Signet's risk-adjusted capital ratios at September 30, 1994 remained
strong at 12.71% and 15.98% for Tier I and Total Capital, respectively. Signet's
leverage ratio at September 30, 1994 was 9.65%, an improvement from 8.94% at
June 30, 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
24
<PAGE>
Table 12
Selected Capital Data
(dollars in thousands)
<TABLE>
<CAPTION>
[ZW]
September 30 September 30 December 31
[ZW]
1994 1993 1993
<S> [ZW]
<C> <C> <C>
Qualifying common stockholders' equity [ZW]
$1,098,911 $ 926,030 $ 964,662
Less goodwill and other disallowed [ZW]
intangibles (44,014) [ZW]
(23,679) (23,404)
Total Tier I capital [ZW]
1,054,897 902,351 941,258
Qualifying [ZW]
debt [ZW]
166,400 225,927 222,607
Qualifying allowance for loan [ZW]
losses 105,237 [ZW]
109,899 107,646
Total Tier II [ZW]
capital [ZW]
271,637 335,826 330,253
Total risk-based capital [ZW]
$1,326,534 $1,238,177 $1,271,511
Total risk-adjusted assets [ZW]
$8,298,825 $8,647,106 $8,466,048
Ratios:
Tier I [ZW]
capital [ZW]
12.71% 10.44% 11.12%
Total risk-based [ZW]
capital [ZW]
15.98 14.32 15.02
Tier I [ZW]
leverage [ZW]
9.65 7.51 8.13
Tangible Tier I [ZW]
leverage [ZW]
9.30 7.30 7.88
Total stockholders' equity to [ZW]
assets 9.81 [ZW]
7.92 8.14
Total stockholders' equity + allowance to [ZW]
loans 20.10 [ZW]
20.49 19.30
Common dividend payout ratio [ZW]
(year-to-date) 40.32 [ZW]
25.11 26.14
Book value per share [ZW]
$ 18.52 $ 16.39 $ 17.04
</TABLE>
other factors. At September 30, 1994, all 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 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. Given the
timing of the Separation, interest rate sensitivity was evaluated on the Company
excluding those assets which will transfer to Capital One Bank. Those
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 $3.0 billion, or 31% of earning assets at September 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 111% of total loans as of September 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 nine months of 1994, cash and cash equivalents
decreased by $297 million primarily as a result of a sharp decline in interest
bearing deposits with other banks. Cash provided by operations was $302 million
for this time period resulting mainly from proceeds from securitization of
credit card loans. Cash provided by investing activities amounted to $385
million principally due to proceeds from sales and maturities of securities
available for sale exceeding purchases. Cash used by financing activities
amounted to $984 million as there was a decrease in short-term borrowings and
deposits.
25
<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.
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 there-unto duly authorized.
SIGNET BANKING CORPORATION
(Registrant)
Date: November 10, 1994 /s/ Wallace B. Millner, III
Wallace B. Millner, III
Senior Executive Vice
President & Chief
Financial Officer
Date: November 10, 1994 /s/ W. H. Catlett, Jr.
W. H. Catlett, Jr.
Executive Vice President
& Controller
(Chief Accounting Officer)
26
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(dollar amounts - except per share - in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Common and common equivalent:
Average shares outstanding 57,401,869 56,415,623 56,956,229 56,207,960
Dilutive stock options-based on the treasury
stock method using average market price 496,209 532,239 537,132 591,405
Shares used 57,898,078 56,947,862 57,493,361 56,799,365
Net income applicable to Common Stock $ 3,462 $ 45,763 $ 106,960 $ 124,470
Per share amount $ .05 $ .80 $ 1.86 $ 2.19
Assuming full dilution:
Average shares outstanding 57,401,869 56,415,623 56,956,229 56,207,960
Dilutive stock options-based on the treasury
stock method using the period end market price,
if higher than average market price 496,209 594,465 547,627 655,580
Shares used 57,898,078 57,010,088 57,503,856 56,863,540
Net income applicable to Common Stock $ 3,462 $ 45,763 $ 106,960 $ 124,470
Per share amount $ .05 $ .80 $ 1.86 $ 2.19
</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.
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 453,020
<INT-BEARING-DEPOSITS> 239,274
<FED-FUNDS-SOLD> 1,090,348
<TRADING-ASSETS> 279,245
<INVESTMENTS-HELD-FOR-SALE> 1,113,371
<INVESTMENTS-CARRYING> 203,021
<INVESTMENTS-MARKET> 210,993
<LOANS> 6,511,155
<ALLOWANCE> 225,359
<TOTAL-ASSETS> 11,045,233
<DEPOSITS> 7,651,080
<SHORT-TERM> 1,793,953
<LIABILITIES-OTHER> 263,385
<LONG-TERM> 253,729
<COMMON> 292,389
0
0
<OTHER-SE> 790,697
<TOTAL-LIABILITIES-AND-EQUITY> 11,045,233
<INTEREST-LOAN> 415,511
<INTEREST-INVEST> 13,287
<INTEREST-OTHER> 155,284
<INTEREST-TOTAL> 584,082
<INTEREST-DEPOSIT> 132,486
<INTEREST-EXPENSE> 202,234
<INTEREST-INCOME-NET> 381,848
<LOAN-LOSSES> 11,498
<SECURITIES-GAINS> 3,192
<EXPENSE-OTHER> 635,548
<INCOME-PRETAX> 154,452
<INCOME-PRE-EXTRAORDINARY> 154,452
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,960
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 5.24
<LOANS-NON> 36,023
<LOANS-PAST> 62,626
<LOANS-TROUBLED> 2,184
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 253,313
<CHARGE-OFFS> 62,256
<RECOVERIES> 24,196
<ALLOWANCE-CLOSE> 225,359
<ALLOWANCE-DOMESTIC> 167,607
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 57,752
</TABLE>
