SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required). For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ____________ to ____________.
Commission File No. 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
incorporation or organization) Number)
7 North Eighth Street 23219
Richmond, Virginia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (804) 747-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par Value New York Stock Exchange
Rights to Purchase Series A
Junior Participating Preferred
Stock, $20 par value New York Stock Exchange
(Title of each class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 1997: *
Common Stock, $5 Par Value - $1,825,200,384
The number of shares outstanding of each of the registrant's classes of common
stock as of February 28, 1997:
Common Stock, $5 Par Value - 60,202,621
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* In determining this figure, the Registrant has assumed that the executive
officers of the Registrant, the Registrant's directors, and persons known to
the Registrant to be the beneficial owners of more than five percent of the
Registrant's Common Stock, that directly or indirectly control the
Registrant, are affiliates. Such assumption shall not be deemed to be
conclusive for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the annual report to shareholders for the year ended December 31,
1996 are incorporated by reference into Parts I, II and IV.
2. Portions of the proxy statement for the annual shareholders' meeting to be
held on April 29, 1997 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
General
The Registrant is a registered bank holding company, incorporated in
Virginia in 1962, and had consolidated assets of $11.7 billion as of December
31, 1996. On the basis of total assets and deposits at December 31, 1996, the
Registrant is the second largest banking organization headquartered in Virginia
and provided interstate financial services through Signet Bank (which resulted
from the mergers of Signet Bank/Virginia and Signet Bank/Maryland in 1995 and
Signet Bank N.A. in June 1996) headquartered in Richmond, Virginia.
On February 28, 1995, Signet distributed all of the remaining Capital
One Financial Corporation common stock it held to Signet stockholders in a
tax-free distribution (the "spin-off"). Related assets of $3.6 billion and
equity of $0.4 billion were included in the spin-off at that time. The spin-off
created two independent financial institutions, each pursuing separate long-term
business strategies.
The Registrant is engaged in general commercial and consumer banking
businesses through its principal bank subsidiary, Signet Bank, which is a member
of the Federal Reserve System. Signet Bank provides financial services through
banking offices located throughout Virginia, Maryland and Washington, D.C.,
on-line INTERNET access and a 24-hour full-service Telephone Banking Center.
Signet Bank owns a commercial bank operating in the Bahamas. International
banking operations are conducted through a foreign branch of Signet Bank.
Service subsidiaries are engaged in writing insurance in connection with the
lending activities of the banks and bank-related subsidiaries and owning real
estate for banking premises. Other subsidiaries are engaged in trust operations,
various kinds of lending and leasing activities, insurance agency activities,
mortgage lending and broker and dealer activities relating to certain phases of
the domestic securities business.
As of December 31, 1996, the Registrant and its subsidiaries employed
3,862 full-time and 941 part-time employees.
Domestic Banking Operations
Signet Bank, incorporated under the laws of Virginia, had assets of
$11.7 billion at December 31, 1996. Signet Bank provides all customary banking
services to businesses and individuals.
Domestic Trust Operations
Trust operations are administered by Signet Trust Company, a subsidiary
of the Registrant which presently operates four offices in Virginia, one office
in Maryland and one office in Washington, D.C.
International Banking Operations
International banking operations are conducted through Signet Bank's
international division and through Signet Bank (Bahamas), Ltd., a subsidiary of
Signet Bank. Signet Bank also conducts international banking operations through
a foreign branch located in the Bahamas.
International banking is subject to special risks such as exchange
controls and other regulatory or political policies of governments, both foreign
and domestic. Currency devaluation is an additional risk of international
banking; however, substantially all of the Registrant's international assets are
repayable in U.S. dollars.
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Domestic Bank-Related Activities
Signet Commercial Credit Corporation, a wholly-owned subsidiary of the
Registrant, is engaged in bank-related activities in the United States. It makes
loans that are often secured by inventory, accounts receivable or like security
and are generally structured on a revolving basis.
Signet Insurance Services, Inc., a wholly-owned subsidiary of the
Registrant, provides, as an agent, a full line of life and property/casualty
insurance coverage for both individuals and business enterprises.
Signet Mortgage Corporation, a wholly-owned subsidiary of Signet Bank,
engages in the business of servicing and selling mortgage loans.
Signet Leasing and Financial Corporation, a wholly-owned subsidiary of
Signet Bank, engages in diversified equipment lease financing activities
(excluding passenger automobiles) for commercial customers on a national basis.
Signet Business Leasing Corporation, a wholly-owned subsidiary of
Signet Bank, engages in small ticket lease financing, primarily targeting small
businesses on a national basis.
Signet Financial Services, Inc., a wholly-owned subsidiary of the
Registrant, acts as an introducing broker and dealer in certain phases of the
domestic securities business.
Virtus Capital Management, Inc. a wholly-owned subsidiary of the
Registrant, acts as investment manager of various registered open-end management
investment companies, mutual funds, etc. and as a sponsor of mutual funds.
Competition
The Registrant is subject to substantial competition in all phases of
its business. Its banks compete not only with other commercial banks but with
other financial institutions, including brokerage firms, credit card banks,
savings and loan associations and savings banks, credit unions, consumer loan
companies, finance companies, insurance companies and certain governmental
agencies, many of which are substantially larger than the Registrant. The
Registrant's non-banking subsidiaries also operate in highly competitive fields
and compete with organizations substantially larger than themselves.
See "Regulation" below for a discussion of legislation which has
increased competition in the markets served by the Registrant.
Government Policy
The earnings of the Registrant are affected not only by general
economic conditions but also by the policies of various governmental regulatory
authorities. In particular, the Federal Reserve System regulates money and
credit conditions in order to influence general economic conditions, primarily
through open market transactions in U.S. Government securities, varying the
discount rate on member bank borrowings and setting reserve requirements against
member bank deposits. These policies have a significant influence on overall
growth and distribution of bank loans, investments and deposits, and affect
interest rates charged on loans or paid for time and savings deposits. Federal
Reserve monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future. The Registrant cannot accurately predict the effect such policies may
have in the future on its business and earnings.
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Capital Guidelines
The Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") has adopted risk-based capital guidelines for bank holding
companies. The minimum guidelines for the ratio of capital to risk-weighted
assets (including certain off-balance-sheet activities, such as standby letters
of credit) is 8 percent. At least half of the total capital must be composed of
common equity, retained earnings and qualifying perpetual preferred stock less
disallowed intangibles, including goodwill ("Tier I capital"). The remainder may
consist of qualifying subordinated debt, other preferred stock and a limited
amount of the loan loss allowance. At December 31, 1996, the Registrant's Tier I
and total capital ratios were 10.78% and 14.70%, respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of Tier I capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other bank
holding companies are generally required to maintain a leverage ratio of 3
percent plus an additional cushion of at least 100 to 200 basis points. The
Registrant's leverage ratio at December 31, 1996 was 7.43 percent. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve Board has indicated that
it will continue to consider a "tangible Tier I leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activities.
Signet Bank, the Registrant's subsidiary bank, is subject to similar
capital requirements adopted by its appropriate federal bank regulator. As of
December 31, 1996, Signet Bank met the "well capitalized" criteria, as the Tier
I, total capital and leverage ratios for Signet Bank were 10.17%, 13.33% and
6.93%, respectively. For further discussion about capital matters, refer to the
portions of Signet's 1996 Annual Report to Shareholders incorporated by
reference herein (Exhibit 13.1).
Failure to meet capital guidelines could subject a national or state
member bank to a variety of enforcement remedies, including the termination of
deposit insurance by the FDIC and a prohibition on the taking of brokered
deposits.
Supervision
Signet Bank is regularly examined by the Federal Reserve Board and by
the Bureau of Financial Institutions of the Virginia State Corporation
Commission and the Maryland Bank Commissioner and is also subject to regulation
and examination by the Federal Deposit Insurance Corporation. The Registrant is
also subject to examination by the Federal Reserve Board.
The Registrant's non-banking subsidiaries are supervised by the Federal
Reserve Board. In addition, Signet Insurance Services, Inc. is subject to
insurance laws and regulations of Virginia and Maryland, respectively, and the
activities of Signet Financial Services, Inc. and Virtus Capital Management,
Inc. are regulated by the Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. and state securities laws.
Regulation
The Registrant is registered under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). The BHC Act restricts the activities of the
Registrant and requires prior approval of the Federal Reserve Board of any
acquisition by the Registrant of more than 5% of the voting shares of any bank
or bank holding company, any acquisition of all or substantially all of the
assets of a bank and any merger or consolidation with another bank holding
company. Under the BHC Act, as amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act, the Registrant may acquire other banks located outside
of Virginia and may merge subsidiary banks with out of state banks where such
mergers are specifically authorized by statute in the state where the bank is
located. (See the discussion of interstate banking legislation below.) The BHC
Act also prohibits the Registrant from engaging in any business in the United
States other than that of managing or controlling banks or businesses closely
related to banking, or of furnishing services to or performing services for
subsidiaries and, with certain
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limited exceptions, from acquiring more than 5% of the voting shares of any
company. The Federal Reserve Board generally follows a restrictive policy in
permitting the entry of bank holding companies and other bank affiliates into
domestic and foreign bank-related activities. Further, under Section 106 of the
1970 Amendments to the BHC Act and the Federal Reserve Board's regulations, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or
provision of any property or service. Federal law imposes limitations on the
ability of the Registrant and its subsidiaries to engage in certain phases of
the domestic securities business.
The Registrant is a bank holding company and is a legal entity separate
and distinct from its banking and other subsidiaries. The principal sources of
the Registrant's revenues are interest income derived from loans to and deposits
in subsidiaries and dividends the Registrant receives from its subsidiaries. The
right of the Registrant to participate as a shareholder in any distribution of
assets of any subsidiary upon its liquidation or reorganization or otherwise is
subject to the prior claims of creditors of any such subsidiary. Signet Bank is
subject to claims by creditors for long-term and short-term debt obligations,
including substantial obligations for federal funds purchased and securities
sold under repurchase agreements, as well as deposit liabilities. There is also
a number of federal and state legal limitations to the extent to which Signet
Bank may pay dividends or otherwise supply funds to the Registrant or its
affiliates. The prior approval of the appropriate federal bank regulator is
required if the total of all dividends declared by a national bank or state
member bank in any calendar year will exceed the sum of such bank's net profits,
as defined by the regulators, for the year plus the preceding two calendar
years. In addition, a dividend may not be paid in excess of a bank's undivided
profits then on hand, after deducting losses and bad debts in excess of the
allowance for loan and lease losses. The payment of dividends by the Registrant
and its banking subsidiary may also be affected or limited by other factors,
such as the requirement to maintain adequate capital above regulatory minimums.
In addition, the appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
national bank, a state member bank or a bank holding company that the payment of
dividends would be an unsafe or unsound practice and to prohibit payment
thereof. The payment of dividends that deplete a bank's capital base could be
deemed to constitute such an unsafe or unsound practice. The Federal Reserve
Board has indicated that banking organizations should generally pay dividends
only out of current operating earnings. Under applicable regulatory
restrictions, the Registrant's banking subsidiary, Signet Bank, was able to pay
dividends as of January 1, 1997.
Under federal law, Signet Bank may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, the Registrant or any non-bank subsidiary, or take its securities
as collateral for loans to any borrower. In addition, federal law requires that
certain transactions between Signet Bank and its affiliates, including sales of
assets and furnishing of services, must be on terms that are at least as
favorable to the banks as those prevailing in transactions with independent
third parties.
Signet Bank is subject to various statutes and regulations relating to
required reserves, investments, loans, acquisitions of fixed assets, interest
rates payable on deposits, requirements for meeting community credit needs,
transactions among affiliates and the Registrant, mergers and consolidations,
and other aspects of their operations.
On July 1, 1994, legislation became effective which permits
out-of-state bank holding companies that do not already have a Virginia bank
subsidiary to acquire Virginia banking institutions if the laws of the
out-of-state bank holding company's home state permit acquisitions of banking
institutions in that state by Virginia bank holding companies under the same
conditions.
On September 29, 1994, the federal Riegle-Neal Interstate Banking and
Branching Efficiency Act (the "Riegle Act") became law. Under the Riegle Act,
effective September 30, 1995, the Federal Reserve may approve bank holding
company acquisition of banks in other states, subject to certain aging and
deposit concentration limits. Commencing June 1, 1997 (or earlier if a
particular state chooses), banks in one state may merge with banks in another
state, unless the other state has chosen not to implement this section of the
Riegle Act. These mergers are also subject to similar aging and deposit
concentration limits.
On February 23, 1995, the Virginia General Assembly passed legislation,
effective July 1, 1995, which permits Virginia banks to merge with out-of-state
banks, and out-of-state banks resulting from such an interstate merger
transaction to maintain and operate branches in Virginia of a merged Virginia
bank, if the laws of the home state of such out-of-state bank permit interstate
merger transactions. In addition, effective July 1, 1995, Virginia banks are
permitted to establish de novo branches in other states, and out-of-state banks
are permitted to establish de novo branches in Virginia, if the laws of the home
state of such out-of-state bank permit Virginia banks to establish de novo
branches in that state.
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Effective September 29, 1995, out-of-state banks may enter Maryland by
acquiring single branches or other parts of Maryland banks, by de novo branching
and through mergers with or acquisitions of other banks. An out-of-state bank
may not acquire an existing branch before June 1, 1997, unless the laws of that
bank's home state would permit a Maryland bank to establish a branch in that
state under similar conditions. In July 1996, the Council of the District of
Columbia passed similar legislation with respect to the entry of out-of-state
banks into the District of Columbia through acquisition of branches, de novo
branches and through mergers with or acquisitions of other banks.
Maryland law allows statewide branching, subject to regulatory
approval. Virginia law provides that a bank may establish new branches, subject
to regulatory approval, anywhere in the state and, effective July 1, 1995, in
other states with branching reciprocity. District of Columbia law allows
branching by District of Columbia banks within the District, subject to
regulatory approval.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), contains a number of provisions which directly or indirectly
affect the activities of federally insured national and state-chartered
commercial banks.
FIRREA made a number of important changes in the deposit insurance
system. FIRREA established separate insurance funds for banks (the Bank
Insurance Fund ("BIF")) and savings associations (the Savings Association
Insurance Fund) to be managed by the Federal Deposit Insurance Corporation (the
"FDIC"). All national and state-chartered commercial banks that were insured by
the FDIC at the time of the enactment of FIRREA were automatically insured by
BIF.
FIRREA gives the Federal Reserve Board specific authority to permit the
acquisition of healthy, as well as failing, savings associations by a bank
holding company under the BHC Act.
FIRREA enhances the enforcement powers of the federal banking
regulators, increases the penalties for violations of law and substantially
revises and codifies the powers of receivers and conservators of depository
institutions. The receivership and conservatorship provisions of FIRREA include
a statutory claims procedure and provisions which confirm the powers of the FDIC
to obtain a stay of pending litigation and to repudiate certain contracts or
leases. The Crime Control Act of 1990, also contains a number of provisions
which enhance the enforcement powers of the federal banking regulators and
increase the penalties for violations of law.
Under Federal Reserve Board policy, the Registrant is expected to act
as a source of financial strength to its subsidiary bank and to commit resources
to support such a subsidiary. This support may be required at times when, absent
such Federal Reserve Board policy, the Registrant may not find itself able to
provide it.
The Registrant's subsidiary bank is subject to FDIC deposit insurance
assessments. FIRREA requires that the FDIC reach an insurance fund reserve for
the BIF of $1.25 for every $100 of insured deposits. If the reserve ratio of the
BIF is less than the designated reserve ratio, the FDIC is required to set
assessment rates sufficient to increase the ratio to the required ratio, and is
authorized to impose special additional assessments. A significant increase in
the assessment could have an adverse impact on the Registrant's results of
operations. See discussion below under Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), for further information on the risk-based
insurance assessment system adopted by the FDIC.
In December 1991, FDICIA was enacted. FDICIA substantially revises the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
makes revisions to several other federal banking statutes.
FDICIA requires the federal banking agencies to take "prompt corrective
action" with depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". A depository institution's capital tier
depends upon where its capital levels are in relation to various relevant
capital measures, which include a risk-based capital measure and a leverage
ratio capital measure, and certain other factors.
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A depository institution is well capitalized if it significantly
exceeds the minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets each such measure, undercapitalized
if it fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
to meet any critical capital level set forth in the regulations. The critical
capital level must be a level of tangible equity equal to not less than two
percent of total assets and not more than 65 percent of the minimum leverage
ratio to be prescribed by regulation (except to the extent that two percent
would be higher than such 65 percent level). An institution may be deemed to be
in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit a capital restoration plan. The federal banking agencies
may not accept a capital plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. For a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company is limited to the lesser of
(i) an amount equal to 5 percent of the depository institution's total assets at
the time it became undercapitalized and (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
Under FDICIA, an institution that is not well capitalized is generally
prohibited from accepting brokered deposits and offering interest rates on
deposits higher than the prevailing rate in its market. In addition, "pass
through" insurance coverage may not be available for certain employee benefit
accounts.
FDICIA restated Section 22(h) of the Federal Reserve Act, a statutory
provision which, among other things, restricts the amounts and terms of
extensions of credit which may be made by a bank to its executive officers,
directors, principal shareholders (collectively, "insiders"), and to their
related interests. In addition to limitations previously in place, FDICIA
requires a bank, when lending to insiders, to follow credit underwriting
procedures that are not less stringent than those applicable to comparable
transactions by the bank with persons outside the bank. Directors and their
related interests are now subject to the same aggregate lending limits
previously applicable to executive officers and their principal shareholders and
their related interests; further, the amount a bank can lend in the aggregate to
insiders, and to their related interests, is limited to an amount equal to the
bank's unimpaired capital and surplus. Insiders are also prohibited from
knowingly receiving, or knowingly permitting their related interests to receive,
any extension of credit not authorized by Section 22(h) of the Federal Reserve
Act.
Under FDICIA, each insured depository institution is required to submit
annual financial statements to the FDIC, its primary federal regulatory, and any
appropriate state banking supervisor and a report signed by the chief executive
officer and chief accounting or financial officer which contains (i) a statement
of management's responsibilities for preparing financial reports, establishing
and maintaining an adequate internal control structure, and complying with laws
and regulations relating to safety and soundness and (ii) an assessment of the
effectiveness of such structures and compliance effort. The institution's
independent public accountant will then be required to attest to and report
separately on the assertion of the institution's management on internal control
over financial reporting.
Each insured depository institution will be required to have an
independent audit committee made up entirely of outside directors who are
independent of management of the institution and who satisfy any specific
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requirements the FDIC may establish. Their duties are to include review of the
various reports required under FDICIA. In the case of any insured depository
institution which the FDIC determines to be a "large institution", the audit
committee must include members with banking or related financial expertise.
Also, in the case of such large institutions, the committee must have access to
its own outside counsel, and may not include any large customers of the
institution. There are certain exemptions for institutions that are part of a
holding company structure, but the institution must have total assets of less
than $9 billion, and an examination rating of 1 or 2.
FDICIA amended the Federal Deposit Insurance Act by inserting a new
provision concerning accounting objectives, standards and requirements. Among
other matters, the federal banking agencies are required to: (i) review the
accounting principles used by depository institutions in preparing financial
reports required to be filed with a federal banking agency and related matters
with respect to such reports; (ii) modify or eliminate any accounting principles
or reporting requirements which are inconsistent with FDICIA's objectives of
effective supervision, prompt corrective action, and increased accuracy of
financial statements; (iii) prescribe regulations which require that all assets
and liabilities, including contingent assets and liabilities, of insured
depository institutions be reported in, or otherwise taken into account of, in
the preparation of any balance sheet, financial statement, report of condition,
or other report required to be filed with the federal banking agency; and (iv)
develop jointly with the other appropriate federal banking agencies, a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practical, in any such reports. All financial reports and statements are to
be prepared in accordance with generally accepted accounting principles, except
that each federal banking agency has the power to implement more stringent
procedures in certain instances.
FDICIA also imposes certain operational and managerial standards on
financial institutions relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. FDICIA also imposes new restrictions on activities and investments of
insured state banks, and prescribes limitations on risks posed by exposure of
insured banks to other depository institutions, including adoption of policies
to limit overnight credit exposures to correspondent banks.
FDICIA requires the federal banking regulators to adopt rules
prescribing certain safety and soundness standards for insured depository
institutions and their holding companies. The Uniform Financial Institutions
Rating System ("UFIRS") is an internal rating system used by the federal and
state regulators for assessing the soundness of financial institutions on a
uniform basis and for identifying those institutions requiring special
supervisory attention. On December 20, 1996, the FDIC Board of Directors adopted
the Federal Financial Institutions Examination Council's ("FFIEC") updated
UFIRS, which replaces the 1979 statement of policy and is effective January 1,
1997. The updated rating system now will be referred to as the "CAMELS" rating
system, as each financial institution is assigned a rating based on an
evaluation of five essential components of an institution's financial condition
and operations, including Capital adequacy, Asset quality, Management, Earnings,
Liquidity and Sensitivity. The standards are intended to enable the regulatory
agencies to address problems at depository institutions and holding companies
before the problems cause significant deterioration in the financial condition
of the institution. The CAMELS rating system establishes the objectives of
proper operations and management, but leaves specific methods for achieving
those objectives to each institution.
FDICIA sets forth a new Truth in Savings Act. The Federal Reserve Board
has adopted regulations implementing the Truth in Savings Act. A variety of
significant new disclosure requirements are imposed concerning interest rates
and terms of deposit accounts. A requirement is also imposed that interest paid
on interest-bearing accounts must be calculated on the full amount of principal,
as opposed to on only non-reservable balances.
Under FDICIA, the federal banking agencies adopted regulations
providing standards for extensions of credit that are secured by liens on
interests in real estate or made for the purpose of financing the construction
of buildings or other improvements of real estate. In prescribing standards, the
agencies must consider the risk posed to the deposit insurance fund, the need
for safe and sound operation of depository institutions, and the availability of
credit.
Under FDICIA, the FDIC adopted a risk-based insurance assessment system
for implementation January 1, 1994 that evaluates an institution's potential for
causing a loss to the insurance fund and to base deposit insurance premiums upon
individual bank profiles. Under the risk-based assessment system, each
institution pays FDIC insurance premiums within a range from 0 cents to 31 cents
per $100 of deposits, depending on the institution's
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capital adequacy and a supervisory judgment of overall risk. As of December 31,
1996, Signet Bank paid no deposit insurance premium except for those deposits
obtained in the acquisition of Pioneer Financial Corporation ("Pioneer"), a
savings and loan holding company. The premium on these deposits remained at 23
cents per $100 of deposits. The FDIC lowered the 1996 assessment for Signet Bank
to the minimum semiannual assessment of $1,000 except for the assessment on
deposits acquired from Pioneer, which remained unchanged at 23 cents per $100 of
deposits. In 1997, the annual rate paid on deposits acquired from Pioneer will
be reduced from 23 cents to 6 cents per $100 of deposits.
As a result of The Deposit Insurance Funds Act of 1996 (the "Funds
Act), the FDIC Board of Directors approved the imposition of a special
assessment rate of 65.7 cents per $100 of Savings Association Insurance Fund
("SAIF") assessable deposits on October 8, 1996. The Funds Act also authorizes
the Financing Corporation ("FICO") to impose periodic assessments on depository
institutions that are members of the BIF in order to spread the cost of interest
payments on the outstanding FICO bonds over a larger number of institutions.
Thrift deposits will be assessed 6 cents per $100 annually, and bank deposits
will be assessed 13 cents. These payments will start January 1, 1997 and run
through 2000.
From time to time, various legislative proposals are submitted to and
considered by Congress concerning the banking industry. Recent legislative
initiatives have included, among other things, proposals to reform deposit
insurance, limit the investments that a depository institution may make with
insured funds, expand the powers of banking organizations to enter into new
financial service industries and revise the structure of the bank regulatory
system.
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Executive Officers of the Registrant
The following table sets forth information with respect to the
Registrant's executive officers:
<TABLE>
<CAPTION>
Names, Positions and Offices
With Registrant During Last An Officer of the
Five Years Age Registrant Since
- ------------------------------ --- -----------------
<S> <C>
Malcolm S. McDonald 58 1982
Chairman and Chief Executive Officer (Principal
Executive Officer). Prior to December, 1996, he was
President and Chief Operating Officer.
T. Gaylon Layfield, III 45 1988
President and Chief Operating Officer. Prior to
December, 1996, he was Senior Executive Vice President.
Wallace B. Millner, III 57 1971
Vice Chairman and Chief Financial Officer
(Principal Financial Officer). Prior to May, 1996,
he was Senior Executive Vice President and
Chief Financial Officer (Principal Financial Officer).
David L. Brantley 47 1988
Executive Vice President and Treasurer. Prior to February,
1995, he was Senior Vice President and Treasurer.
W.H. Catlett, Jr. 48 1994
Executive Vice President and Controller (Principal
Accounting Officer). Prior to August, 1994, he was
a Senior Vice President.
Philip H. Davidson 52 1977
Executive Vice President.
Robert J. Merrick 51 1996
Executive Vice President and Chief Credit Officer.
Kenneth H. Trout 48 1990
Senior Executive Vice President. Prior to May, 1991, he
was an Executive Vice President.
Sara R. Wilson 46 1980
Executive Vice President, General Counsel and
Corporate Secretary. Prior to January, 1995, she was Executive
Vice President and General Counsel. Prior to January, 1994, she
was Senior Vice President and Senior Corporate Counsel.
</TABLE>
There are no family relationships (as defined in the applicable regulations)
among the above listed officers.
11
<PAGE>
The executive officers of the Registrant are elected to serve until the
next organizational meeting of the board of directors of the Registrant
following the next annual meeting of the stockholders of the Registrant and
until their successors are elected.
Statistical Information
The statistical information required by Item 1 is in the Registrant's
Annual Report to its shareholders for the year ended December 31, 1996, and is
incorporated herein by reference, as follows:
<TABLE>
<CAPTION>
Page in the Registrant's Annual
Report to its shareholders for
Guide 3 Disclosure the year ended December 31, 1996
------------------ --------------------------------
<S> <C>
I. Distribution of Assets, Liabilities and
Stockholders' Equity, Interest Rates and
Interest Differential
A. Average Balance Sheet 52
B. Net Interest Earnings Analysis 52
C. Rate/Volume Analysis 50
II. Investment Portfolio
A. Book Value of Investment Securities 62
B. Maturities of Investment Securities 30
C. Investment Securities Concentrations 30&31
III. Loan Portfolio
A. Types of Loans 53
B. Maturities and Sensitivities of
Loans to Changes in Interest Rates 27
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans 31&32
2. Potential Problem Loans 32
3. Foreign Outstandings Not Applicable
4. Loan Concentrations 53
D. Other Interest Bearing Assets Not Applicable
IV. Summary of Loan Loss Experience
A. Analysis of Allowance for Loan Losses 51
B. Allocation of the Allowance for Loan Losses 51
V. Deposits
A. Average Balances 52
B. Maturities of Large Denomination Certificates 33
C. Foreign Deposit Liability Disclosure 33
VI. Return on Equity and Assets
A. Return on Assets 49
B. Return on Equity 49
C. Dividend Payout Ratio 34
D. Equity to Assets Ratio 49
VII. Short-Term Borrowings 64
</TABLE>
12
<PAGE>
ITEM 2. PROPERTIES.
The executive offices of the Registrant and Signet Bank are located at
7 North Eighth Street, Richmond, Virginia, in a building owned by a subsidiary
of the Registrant. The Registrant's main operations center is located in Henrico
County, Virginia, in a newly constructed building completed in the first quarter
of 1996. The principal offices of Signet Bank are leased.
Of the Registrant's 239 domestic branch banking locations, 119 are
owned by subsidiaries of the Registrant. The remaining 120 branch banking
locations and offices of other subsidiaries are leased for various terms at an
aggregate annual rent of approximately $21,685,000.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant and its subsidiaries are parties plaintiff or defendant
in suits arising out of the collection of loans and the enforcement or defense
of the priority of its security interests. Management believes that the pending
actions against the Registrant or its subsidiaries, both individually and in the
aggregate, will not have a material adverse effect on the financial condition or
future operations of the Registrant. For further discussion of legal
proceedings, refer to the Registrant's 1996 Annual Report to Shareholders on
page 17 under the heading "Introduction" and on page 78 in Note O, incorporated
be reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The information required by Item 5 is included in the Registrant's
Annual Report to its shareholders for the year ended December 31, 1996 on page
44 under the heading "Selected Quarterly Financial Information", page 71 in Note
J, and page 90 under the heading "Quarterly Per Share Information", and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is included in the Registrant's
Annual Report to its shareholders for the year ended December 31, 1996 on pages
34 and 49 under the headings "Risk-Based and Other Capital Data" and "Selected
Financial Data", respectively, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required by Item 7 is included in the Registrant's
Annual Report to its shareholders for the year ended December 31, 1996 on pages
17-53 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is included in the Registrant's
Annual Report to its shareholders for the year ended December 31, 1996 on pages
54-84 under the heading "Signet Banking Corporation Consolidated Financial
Statements" and on page 44 under the heading "Selected Quarterly Financial
Information", and is incorporated herein by reference.
13
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 as to the directors of the
Registrant is included in the Registrant's 1997 Proxy Statement on pages 2-5
under the headings "Election of Directors" and "Other Directorships", and is
incorporated herein by reference.
The information required by Item 10 as to the executive officers of the
Registrant is included in Item 1 under the heading "Executive Officers of the
Registrant".
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is included in the Registrant's
1997 Proxy Statement on pages 8-13 under the headings "Compensation of the
Board" and "Executive Compensation", and is incorporated herein by reference.
Information under the headings "Organization and Compensation Committee Report
on Executive Compensation" and "Performance Graph" in the Registrant's 1997
Proxy Statement is not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is included in the Registrant's
1997 Proxy Statement on pages 1, 5, 6 and 7 under the headings "Proxy Statement"
and "Stock Ownership", and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is included in the Registrant's
1997 Proxy Statement on page 7 under the heading "Transactions", and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) (1) The following consolidated financial statements of Signet
Banking Corporation and Subsidiaries, included in the
Registrant's Annual Report to its shareholders for the year
ended December 31, 1996, are incorporated herein by reference
in Item 8:
Consolidated Balance Sheet - December 31, 1996 and 1995
Statement of Consolidated Income - Years ended December
31, 1996, 1995 and 1994
Statement of Consolidated Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Statement of Changes in Consolidated Stockholders' Equity
- Years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) All schedules are omitted since the required information is
either not applicable, not deemed material, or is shown in the
respective financial statements or in notes thereto.
14
<PAGE>
(3) Exhibits:
2.1 Separation, Distribution and Indemnity Agreement dated
as of February 22, 1994 among the Registrant, Signet
Bank and Capital One Financial Corporation (Incorporated
by reference to Exhibit 2.1 to Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
2.2 Retained Portfolio, Origination, Servicing and
Management Agreement dated as of February 22, 1994
between Signet Bank and Capital One Financial
Corporation (Incorporated by reference to Exhibit 2.1 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
3.1 Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
4.1 Indenture dated as of May 1, 1972 Providing for Issuance
of Unlimited Senior Debt Securities (Incorporated by
reference to Exhibit 4-3 to Registration Statement No.
2-43731).
4.2 Indenture dated as of September 1, 1970 Providing for
Issuance of Unlimited Capital Notes (Incorporated by
reference to Exhibit 4-2 to Registration Statement No.
2-37919).
4.3 Indenture dated as of May 1, 1985 relating to
$50,000,000 Floating Rate Subordinated Notes due 1997
(Incorporated by reference to Exhibit 4(a) to
Registration Statement No. 2-97720).
4.4 Indenture dated as of April 1, 1986 Providing for
Issuance of Unlimited Subordinated Debt Securities
(Incorporated by reference to Exhibit 4(a) to
Registration Statement No. 33-4491).
4.5 Officer's Certificate dated as of April 4, 1986 setting
forth the form and terms of $100,000,000 of unsecured
floating rate Subordinated Notes due in 1998
(Incorporated by reference to Exhibit 4.11 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1989).
4.6 Officers' Certificate dated as of May 23, 1989 setting
forth the form and terms of $100,000,000 of unsecured 9
5/8% Subordinated Notes due in 1999 (Incorporated by
reference to Exhibit 4.12 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1989).
4.7 Articles of Amendment, Rights Agreement, Series A Junior
Participating Preferred Stock (Incorporated by reference
to Exhibit 1 to Current Report on Form 8-K dated May 23,
1989).
10.1 Executive Employee Supplemental Retirement Plan
(Incorporated by reference to Exhibit 10.4 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1988).
10.2 Form of Executive Employment Agreement between the
Registrant and David L. Brantley, W.H. Catlett, Jr.,
Philip H. Davidson, Gordon Z. Holt, T. Gaylon Layfield,
III, Malcolm S. McDonald, John McKenney III, Robert J.
Merrick,
15
<PAGE>
Wallace B. Millner, III, Christopher Oddleifson, Keith
A. Reynolds, H. Nathaniel Taylor, Kenneth H. Trout, Sara
R. Wilson and Randolph W. Wyckoff
(Incorporated by reference to Exhibit 10.8 on Form 10-K
for the fiscal year ended December 31, 1989).
10.3 1983 Stock Option Plan (Incorporated by reference to
Exhibit A to Proxy Statement for 1983 Annual Meeting of
Shareholders).
10.4 1985 Union Trust Bancorp Key Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.13 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1985).
10.5 1992 Stock Option Plan (as amended and restated January
24, 1995) (Incorporated by reference to Exhibit I to
Proxy Statement for 1995 Annual Meeting of
Shareholders).
10.6 Executive Employee Excess Savings Plan (Incorporated by
reference to Exhibit 10.14 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1987).
10.7 Split Dollar Life Insurance Plan and Agreement
(Incorporated by reference to Exhibit 10.13 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1989).
10.8 Executive Employee Deferred Compensation Plan
(Incorporated by reference to Exhibit 10.15 to Annual
Report on Form 10-K for the fiscal year ended December
31, 1988).
10.9 1988 Deferred Compensation Plan (Incorporated by
reference to Exhibit 10.16 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.10 Excess Benefit Retirement Plan (Incorporated by
reference to Exhibit 10.17 to Annual Report on Form 10-K
for the fiscal year ended December 31, 1988).
10.11 Annual Executive Incentive Compensation Plan
(Incorporated by reference to Exhibit I to Proxy
Statement for 1994 Annual Meeting of Shareholders).
10.12 Executive Long-Term Incentive Plan (Incorporated by
reference to Exhibit II to Proxy Statement for 1994
Annual Meeting of Shareholders).
10.13 1994 Stock Incentive Plan (Incorporated by reference to
Exhibit III to Proxy Statement for 1994 Annual Meeting
of Shareholders).
10.14 1996 Non-Employee Directors Stock Option Plan
(Incorporated by reference to Exhibit I to Proxy
Statement for 1996 Annual Meeting of Shareholders).
11.1 Computation of Earnings Per Share (Filed herewith).
13.1 1996 Annual Report to Shareholders (Filed herewith).
21.1 Subsidiaries of the Registrant (Filed herewith).
23.1 Consent of Ernst & Young LLP (Filed herewith).
27.1 Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K
none
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNET BANKING CORPORATION
Date: February 25, 1997 By /S/ W. H. Catlett, Jr.
------------------------
W. H. Catlett, Jr.
Executive Vice President
and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 25th day of February, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/S/ Malcolm S. McDonald Director, Chairman and Chief Executive
--------------------------- Officer (Principal Executive Officer)
Malcolm S. McDonald
/S/ T. Gaylon Layfield, III Director, President and Chief Operating
--------------------------- Officer
T. Gaylon Layfield, III
/S/ Wallace B. Millner, III Vice Chairman and Chief Financial Officer
--------------------------- (Principal Financial Officer)
Wallace B. Millner, III
/S/ W. H. Catlett, Jr. Executive Vice President and Controller
--------------------------- (Principal Accounting Officer)
W. H. Catlett, Jr.
/S/ J. Henry Butta Director
---------------------------
J. Henry Butta
- ---------------------------- Director
Norwood H. Davis, Jr.
</TABLE>
17
<PAGE>
SIGNATURES TITLE
---------- -----
/S/ William C. DeRusha Director
---------------------------
William C. DeRusha
/S/ Robert M. Freeman Director
---------------------------
Robert M. Freeman
/S/ C. Stephenson Gillispie, Jr. Director
---------------------------
C. Stephenson Gillispie, Jr.
- ---------------------------- Director
Bruce C. Gottwald, Jr.
/S/ William R. Harvey Director
---------------------------
William R. Harvey, Ph.D.
/S/ Elizabeth G. Helm Director
---------------------------
Elizabeth G. Helm
/S/ Robert M. Heyssel, M.D. Director
---------------------------
Robert M. Heyssel, M.D.
/S/ Henry A. Rosenberg, Jr. Director
---------------------------
Henry A. Rosenberg, Jr.
/S/ Louis B. Thalheimer Director
---------------------------
Louis B. Thalheimer
18
<PAGE>
EXHIBITS TO SIGNET BANKING CORPORATION
ANNUAL REPORT ON FORM 10-K
DATED DECEMBER 31, 1996
COMMISSION FILE NO. 1-6505
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporation by
Number Description Reference to
- --------- ----------- -----------------
<S> <C>
2.1 Separation, Distribution and Indemnity Exhibit 3.1 to Annual Report on Form 10-K for
Agreement the fiscal year ended December 31, 1994
2.2 Retained Portfolio, Origination, Servicing Exhibit 3.1 to Annual Report on Form 10-K for
and Management Agreement the fiscal year ended December 31, 1994
3.1 Articles of Incorporation Exhibit 3.1 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992
3.2 Bylaws Exhibit 3.2 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1995
4.1 Instruments defining the rights of Exhibit 4-1, Registration No. 2-43731;
security holders, including Indentures Exhibit 4-2, Registration No. 2-37919;
Exhibit 4-3, Registration No. 2-97720;
Exhibit 4-6, Registration No. 2-45986;
Exhibit 4(a), Registration No. 2-97720;
Exhibit 4(a), Registration Statement No. 33-4491;
Exhibit 1 to Current Report on Form 8-K dated
May 23, 1989; Exhibit 4.11 to Annual Report on
Form 10-K for the fiscal year ended December
31, 1989
10.1 Executive Employee Supplemental Exhibit 10.4 to Annual Report on Form 10-K for
Retirement Plan the fiscal year ended December 31, 1988
10.2 Form of Executive Employment Exhibit 10.8 to Annual Report on Form 10-K for
Agreement between the Registrant the fiscal year ended December 31, 1989
and David L. Brantley, W.H. Catlett, Jr.,
Philip H. Davidson, Gordon Z. Holt, T. Gaylon
Layfield, III, Malcolm S. McDonald, John
McKenney III, Robert J. Merrick, Wallace B.
Millner, III, Christopher Oddleifson, Keith A.
Reynolds, H. Nathaniel Taylor, Kenneth H. Trout,
Sara R. Wilson and Randolph W. Wyckoff
10.3 1983 Stock Option Plan Exhibit A to Proxy Statement for 1983 Annual
Meeting of Shareholders
10.4 1985 Union Trust Bancorp Key Exhibit 10.13 to Annual Report on Form 10-K for
Employee Stock Option Plan the fiscal year ended December 31, 1985
10.5 1992 Stock Option Plan (as amended Exhibit I to Proxy Statement for 1995 Annual
January 24, 1995) Meeting of Shareholders
10.6 Executive Employee Excess Exhibit 10.14 to Annual Report on Form 10-K for
Savings Plan the fiscal year ended December 31, 1987
10.7 Split Dollar Life Insurance Plan Exhibit 10.13 to Annual Report on Form 10-K for
and Agreement the fiscal year ended December 31, 1989
20
<PAGE>
10.8 Executive Employee Deferred Exhibit 10.15 to Annual Report on Form 10-K for
Compensation Plan the fiscal year ended December 31, 1988
10.9 1988 Deferred Compensation Plan Exhibit 10.16 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1988
10.10 Excess Benefit Retirement Plan Exhibit 10.17 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1988
10.11 Annual Executive Incentive Exhibit I to Proxy Statement for 1994 Annual
Compensation Plan Meeting of Shareholders
10.12 Executive Long-Term Incentive Plan Exhibit II to Proxy Statement for 1994 Annual
Meeting of Shareholders
10.13 1994 Stock Incentive Plan Exhibit III to Proxy Statement for 1994 Annual
Meeting of Shareholders
10.14 1996 Non-Employee Directors Stock Exhibit I to Proxy Statement for 1996 Annual
Option Plan Meeting of Shareholders
11.1 Computation of Earnings per Share Page 22
13.1 1996 Annual Report to Shareholders Page 23
21.1 Subsidiaries of the Registrant Page 94
23.1 Consent of Independent Auditors,
Ernst & Young LLP Page 96
27.1 Financial Data Schedule Page 97
</TABLE>
21
Exhibit 11.1
SIGNET BANKING CORPORATION AND SUBSIDIARIES
FORM 10-K
COMPUTATION OF EARNINGS PER SHARE
(dollars in thousands - except per share)
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------- ------------------
<S> <C>
Common and common equivalent:
Average shares outstanding 59,572,983 58,843,986 57,355,021
Dilutive stock options--based on the
treasury stock method using average
market price 1,029,866 953,732 500,034
------------------ ------------------- ------------------
Shares used 60,602,849 59,797,718 57,855,055
================== =================== ==================
Net income applicable to Common Stock $ 124,927 $ 111,080 $ 149,834
================== =================== ==================
Per share amount $ 2.06 $ 1.86 $ 2.59
================== =================== ==================
Assuming full dilution:
Average shares outstanding 59,572,983 58,843,986 57,355,021
Dilutive stock options--based on the
treasury stock method using the
period end market price, if higher
than the average market price 1,099,471 982,435 507,906
================== =================== ==================
Shares used 60,672,454 59,826,421 57,862,927
================== =================== ==================
Net income applicable to Common Stock $ 124,927 $ 111,080 $ 149,834
================== =================== ==================
Per share amount $ 2.06 $ 1.86 $ 2.59
================== =================== ==================
</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 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.
22
Exhibit 13.1
SIGNET BANKING CORPORATION AND SUBSIDIARIES
Management's Discussion and ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1996 COMPARED TO 1995
INTRODUCTION
Signet Banking Corporation ("Signet" or "the Company"), with headquarters in
Richmond, Virginia, is a registered multi-state bank holding company whose stock
is listed on the New York Stock Exchange under the symbol SBK. At December 31,
1996, Signet had assets of approximately $11.7 billion and provided interstate
financial services through its principal subsidiary, Signet Bank, a Virginia
banking corporation headquartered in Richmond. Signet Bank has banking offices
in Virginia, Maryland and the District of Columbia. Signet Bank was formed by
the 1995 merger of Signet Bank/Virginia and Signet Bank/Maryland. In 1996,
Signet Bank N.A. also merged with Signet Bank.
Signet engages in general commercial and consumer banking businesses and
provides a full range of financial services to individuals, businesses and
organizations through 239 banking offices, 248 automated teller machines,
on-line INTERNET access and a 24-hour full-service Telephone Banking Center.
Signet offers investment services including municipal bond, government, federal
agency and money market sales and trading, foreign exchange trading, mutual
funds and discount brokerage. In addition, it provides specialized services for
trust, leasing, asset based lending, cash management, real estate and insurance.
Signet's primary market area for its traditional banking business extends from
Baltimore to Washington, south to Richmond, and on to Hampton Roads/Tidewater,
Virginia. The Company markets several of its products nationally and is
exploring the national marketing of other products.
On February 28, 1995, Signet distributed all of the remaining Capital One
Financial Corporation ("Capital One") common stock it held to Signet
stockholders in a tax-free distribution (the "spin-off"). Related assets of $3.6
billion and equity of $0.4 billion were included in the spin-off at that time.
The spin-off created two independent financial institutions, each pursuing
separate long-term business strategies.
In 1995, Signet began construction on a new operations center located close
to Richmond, Virginia which was completed and fully occupied in the third
quarter of 1996 at a total cost of approximately $55 million. In the second
quarter of 1995, Signet acquired the assets of Sheffield Management Company and
Sheffield Investments, Inc., managers and distributors of the Blanchard family
of mutual funds. These funds are marketed nationally through direct mail.
In the third quarter of 1995, Signet adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting For Mortgage Servicing
Rights." SFAS No. 122 requires that a mortgage banking enterprise recognize
internally originated rights to service mortgage loans sold to others as
separate assets. Upon adoption, Signet recognized pre-tax income of
approximately $3.7 million. The impact of adoption on 1995 pre-tax income was
$7.2 million (net of amortization). During 1996, Signet capitalized $10.0
million of originated mortgage servicing rights. On October 20, 1995, Signet's
Board of Directors raised the quarterly dividend by 3 cents to $0.20 per common
share.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1,
1996. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or the fair value less selling costs. Adoption of SFAS No. 121
did not have a material impact on the Company's financial position or results of
operations.
On March 19, 1996, Signet's management discovered that the Company was one
of several major financial institutions that were victims of fraudulent
commercial loan transactions which occurred prior to 1996. The Company had loan
outstandings related to these transactions of approximately $81 million. Federal
authorities have informed the Company that there have been substantial
recoveries of assets related to these transactions. Management recorded a $35
million commercial fraud loss in non-interest expense at December 31, 1995 ("the
fraud loss") and recorded the estimated probable recovery amount of $46 million
in other assets as a receivable. The receivable represents an amount management
believes is likely to be recovered based on current facts and circumstances. The
amount of the recovery was based on the Company's share of known claims to the
total amount held by federal authorities, less associated costs. The recovery
amount is subject to change, even in the near term, as additional assets are
recovered and/or additional claims are asserted. Management continues to believe
the $35 million charge to 1995 earnings is adequate to cover estimated losses
related to these fraudulent transactions based on currently available
17
<PAGE>
information, but is unable to predict the timing of the recovery. The Company
will vigorously pursue all other sources of recovery, but currently is unable to
determine the probability or amount of additional recoveries.
On October 17, 1996, Signet announced that it was initiating a wide-ranging
business redesign project, subsequently named ADVANCE, to accelerate the
Company's transformation from a traditional regional bank to a national,
information-based, financial services company. ADVANCE began in late 1996 with a
comprehensive seven-month review to be followed by an eighteen to twenty-four
month implementation period. The principal goals of ADVANCE are to align
Signet's processes and procedures more closely with strategies and to enhance
revenue by shifting focus from products to customers. Management expects
improved profitability as a result of ADVANCE. The Company has engaged Aston
Associates, a financial services consulting firm specializing in process
redesign, to assist Signet employees in the effort. Aston has recently completed
highly successful redesign engagements for two other large banking
organizations. The results of this project are expected to be announced late in
the 1997 second quarter.
On October 25, 1996, Signet's Board of Directors increased the quarterly
dividend by 5 percent to $0.21 per common share.
The following discussion of the 1996 operating results and financial
condition at December 31, 1996 is intended to help readers analyze the
accompanying Consolidated Financial Statements and related Notes. Certain
consolidated financial information is located in Tables 27 through 33. In
addition to the discussion of consolidated information, pro forma data are
provided for the same periods where it is meaningful to discuss the Company's
results excluding Capital One. Consolidated and pro forma results are the same
for time periods subsequent to February 28, 1995, the date of the spin-off.
SUMMARY OF PERFORMANCE
Signet reported consolidated net income for 1996 of $124.9 million, or $2.06 per
share, compared with $111.1 million, or $1.86 per share, in 1995. Consolidated
earnings for the year ended December 31, 1995 included the results of Capital
One for the two months prior to the spin-off on February 28, 1995 and the $35
million fraud loss. Net income increased 6% in 1996 from $118.3 million in 1995,
excluding Capital One and the fraud loss. Earnings per share rose 4% from $1.98
in 1995, excluding Capital One and the fraud loss. The return on assets ("ROA")
and the return on common stockholders' equity ("ROE") for the year ended
December 31, 1996 were 1.10% and 14.35%, respectively, down slightly from 1.12%
and 14.65% for the same ratios in 1995, excluding Capital One and the fraud
loss.
Taxable equivalent net interest income totaled $477.0 million for 1996, a
5% decline from the $503.8 million consolidated results for 1995, but down only
$1.7 million, or less than one percent from the 1995 level, on a pro forma
basis. The net yield margin for 1996 was 4.73%, a 34 basis point decline from
the 5.07% for the prior year, on a pro forma basis. This decline in the net
yield margin was primarily due to a deterioration in the net interest spread.
The provision for loan losses of $73.9 million represented more than double the
1995 level of $34.8 million, on a pro forma basis. The increase in the provision
was tied to growth in the consumer loans, primarily the loan-by-check portfolio.
On a pro forma basis, non-interest operating income was $80.8 million, or 42%,
higher in 1996 than in 1995, due to a rise in consumer loan servicing and
service charge income as the total amount of securitized assets rose
significantly. During 1996, Signet recognized net securities gains of $5.0
million, up from $1.8 million in 1995. Non-interest expense decreased $78.8
million from the previous year due in large part to the $35 million fraud loss
and the spin-off. On a pro forma basis, non-interest expense rose slightly in
spite of the fraud loss largely due to an increase in performance based pay.
Table 1 shows selected financial data for the past four years on a pro forma
basis.
INCOME STATEMENT ANALYSIS
Net Interest Income
Taxable equivalent net interest income, a primary contributor to earnings, was
$477.0 million for 1996, a decline of $26.8 million, or 5%, from the $503.8
million for 1995. The decline in net interest income reflected the impact of the
spin-off. On a pro forma basis, taxable equivalent net interest income was down
only $1.7 million in 1996. The discussion of net interest income should be read
in conjunction with Table 2--Net Interest Income Analysis and Table 8--Average
Balance Sheet, both of which were prepared on a pro forma basis.
Average earning assets totaled $10.1 billion for 1996, up $176 million from
the previous year's consolidated amount. Average earning assets were up $648
million, or 7%, from $9.4 billion for 1995, on a pro forma basis. Loan
securitizations reduced earning assets by transferring assets off the balance
sheet. Adding average securitized loans to both years' pro forma average earning
assets and adjusting for loans to be sold to Capital One, in accordance with
previously agreed upon terms of the spin-off, resulted in a 14% increase in
managed earning assets year-over-year, up to $10.7 billion. All the major loan
categories experienced increases in average balances in 1996 except the consumer
and real estate-commercial mortgage categories. Average on-balance sheet
consumer loans fell $132 million due to the securitizations. However, on a
managed basis, average consumer loans grew $565 million, or 22%. The real
18
<PAGE>
TABLE 1
SELECTED FINANCIAL DATA (excluding Capital One)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Summary of Operations (dollars in thousands-except per share)
Net interest income-taxable equivalent $476,984 $478,670 $358,740 $353,230
Less: taxable equivalent adjustment 8,224 10,603 13,706 15,753
- ------------------------------------------------------------------------------------------------------------------
Net interest income 468,760 468,067 345,034 337,477
Provision for loan losses 73,851 34,786 (16,229) 13,256
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 394,909 433,281 361,263 324,221
Non-interest operating income 274,556 193,780 195,205 193,817
Securities available for sale gains 5,021 532 3,413 3,913
Investment securities gains 1,257 46 405
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income 279,577 195,569 198,664 198,135
Non-interest expense(1) 485,318 484,520 488,309 444,036
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 189,168 144,330 71,618 78,320
Applicable income taxes(2) 64,241 48,769 15,775 14,391
- ------------------------------------------------------------------------------------------------------------------
Net income $124,927 $ 95,561 $ 55,843 $ 63,929
- ------------------------------------------------------------------------------------------------------------------
Per common share:
Net income $ 2.06 $ 1.60 $ 0.97 $ 1.12
Cash dividends declared 0.81 0.79 1.00 0.80
Book value at year-end 15.38 14.59 12.69 14.06
Average common shares outstanding (in thousands) 60,672 59,826 57,863 56,920
- ------------------------------------------------------------------------------------------------------------------
Selected Average Balances (dollars in millions)
Assets $ 11,364 $ 10,607 $ 8,839 $ 9,328
Earning assets 10,095 9,447 7,802 8,339
Loans (net of unearned income) 5,908 5,765 4,554 4,387
Managed consumer loan portfolio 3,097 2,532 1,785 1,472
Deposits 7,589 7,282 7,436 7,733
Interest bearing liabilities 8,670 8,055 6,282 6,973
Common stockholders' equity 870 808 818 775
- ------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances (dollars in millions)
Assets $ 11,720 $ 10,978 $ 9,859 $ 9,858
Earning assets 10,409 9,443 8,825 8,882
Loans (net of unearned income) 6,355 5,416 5,696 4,448
Managed consumer loan portfolio 3,366 2,807 2,295 1,563
Deposits 7,887 7,593 7,343 7,821
Interest bearing liabilities 8,499 8,024 7,331 7,376
Common stockholders' equity 924 864 744 796
- ------------------------------------------------------------------------------------------------------------------
Operating Ratios
Net income to:
Average common stockholders' equity(3) 14.35% 11.83% 6.83% 9.10%
Average assets(3) 1.10 0.90 0.63 0.69
Efficiency ratio excluding foreclosed property expense (3) 64.82 72.08 88.28 78.69
Stockholders' equity to assets at year-end 7.88 7.87 7.54 8.07
Loans to deposits (average) 77.86 79.17 61.24 56.73
Net loan losses to average loans 1.13 0.87 0.55 0.75
Net interest spread(4) 4.14 4.44 3.96 3.75
Net yield margin(4) 4.73 5.07 4.59 4.24
At year-end:
Allowance for loan losses to loans 2.15 2.39 2.67 4.27
Allowance for loan losses to non-performing loans 483.02 337.05 583.37 256.71
==================================================================================================================
</TABLE>
(1) 1994 included $43.2 million of restructuring charges. 1995 included the
$35.0 million fraud loss.
(2) Income taxes applicable to net securities available for sale gains and
investment securities gains were as follows: 1996--$1.8 million, 1995--$0.7
million, 1994--$1.2 million; and 1993--$1.5 million.
(3) The 1995 ROE and ROA excluding the fraud loss were 14.65% and 1.12%,
respectively. The 1995 efficiency ratio excluding the fraud loss and
foreclosed property expense was 66.88%. The 1994 ROE and ROA excluding
restructuring charges were 10.26% and .95%, respectively. The 1994
efficiency ratio excluding restructuring/spin-off charges and foreclosed
property expense was 80.30%.
(4) Net interest spread and net yield margin were calculated on a taxable
equivalent basis, using the federal income tax rate and state tax rates, as
applicable, reduced by the nondeductible portion of interest expense.
19
<PAGE>
TABLE 2
NET INTEREST INCOME ANALYSIS (excluding Capital One)
taxable equivalent basis (1)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
Year Ended ----------------------------- Year Ended --------------------------------
December 31 Increase Change due to (3) December 31 Increase Change due to (3)
(in thousands) 1996 1995 (Decrease) Volume Rates 1994 (Decrease) Volume Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees(2) $536,782 $541,780 $ (4,998) $ 13,342 $(18,340) $373,602 $168,178 $ 108,650 $59,528
Securities available
for sale 179,078 125,492 53,586 52,593 993 72,826 52,666 23,716 28,950
Investment securities 28,669 (28,669) (28,669) 28,200 469 5,929 (5,460)
Other earning assets 123,776 124,228 (452) 9,399 (9,851) 88,217 36,011 (1,159) 37,170
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 839,636 820,169 19,467 54,687 (35,220) 562,845 257,324 130,975 126,349
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing deposits 229,763 216,014 13,749 9,362 4,387 179,311 36,703 (4,439) 41,142
Federal funds and
repurchase agreements 114,688 105,290 9,398 18,811 (9,413) 3,213 102,077 101,668 409
Other short-term
borrowings 3,174 (3,174) (3,174) 4,896 (1,722) (1,115) (607)
Long-term borrowings 18,201 17,021 1,180 2,634 (1,454) 16,685 336 (104) 440
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 362,652 341,499 21,153 25,807 (4,654) 204,105 137,394 66,073 71,321
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $476,984 $478,670 $ (1,686) $ 31,618 $(33,304) $358,740 $119,930 $80,209 $ 39,721
====================================================================================================================================
</TABLE>
(1) Total income from earning assets includes the effects of taxable equivalent
adjustments using the federal income tax rate and state tax rates, as
applicable, reduced by the nondeductible portion of interest expense.
(2) Includes fees on loans of approximately $19,673, $19,322 and $14,019 for
1996, 1995 and 1994, respectively.
(3) The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change
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.
estate-commercial mortgage loan category declined $135 million, reflecting the
continued successful efforts of the Company to reduce its commercial real estate
exposure. Investment securities declined from a $323.9 million average for 1995,
on a pro forma basis, reflecting the reclassification of all of the Company's
investment securities to securities available for sale in December, 1995, as
allowed by implementation guidance for SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Average securities available for
sale increased $708 million from 1995. A portion of this increase resulted from
the reclassification noted above. See a more detailed discussion of Earning
Assets elsewhere in this Report.
Average interest bearing liabilities rose 8% to $8.7 billion for 1996, up
from $8.1 billion for 1995, on a pro forma basis. Declines in savings accounts
and other short-term borrowings were more than offset by growth in interest
bearing demand, savings certificates, large denomination certificates, and
foreign deposit categories as well as federal funds and repurchase agreements
and long-term borrowings. Savings accounts included deposits held on behalf of
Capital One as collateral for Capital One's secured card product until the end
of June, 1996. Approximately $462 million of these deposits were transferred to
another financial institution in the first quarter of 1996 and the remaining
$237 million were transferred to Capital One at the end of the second quarter of
1996. In 1996, average core deposits of $7.3 billion rose 3% from the prior year
and represented 72% of average earning assets and 123% of average loans.
Non-interest bearing demand deposits rose 4%, on average, during 1996. See a
more comprehensive discussion of Funding elsewhere in this Report.
The net interest spread of 4.14% for 1996 fell from the 4.44% reported for
the previous year, on a pro forma basis. The decline resulted from funding rates
falling more slowly than the decline in yields on earning assets. One reason
funding rates fell more slowly than the yields on earning assets is that Signet
is using its direct mail expertise to grow core deposits, some of which offer a
relatively high interest rate initially. The overall yield on earning assets for
1996 was 8.32%, down 36 basis points from 1995, while the rate paid for interest
bearing liabilities amounted to 4.18%, down only 6 basis points from the
previous year.
The net yield margin fell 34 basis points in 1996 to 4.73% from 5.07% for
1995, on a pro forma basis. The drop in the net yield margin was the net result
of several factors, as analyzed in Table 3. An approximate basis point impact
was calculated for each item noted.
Signet uses various off-balance sheet interest rate derivatives as an
integral part of its asset and liability management and trading activities. For
Signet, variable rate assets generally exceed variable rate liabilities. To
manage the resulting interest rate risk, Signet enters into derivative
transactions. Derivative contracts, used for interest rate risk management
purposes, (decreased)/increased interest on earning assets by ($6.7) million,
20
<PAGE>
TABLE 3
ANALYSIS OF CHANGE IN NET YIELD
MARGIN -- 1996 VERSUS 1995 (excluding Capital One)
- -------------------------------------------------------------
Net yield margin for the year ended December 31, 1995 5.07%
Higher average securities (securities
available for sale and investment
securities combined) (0.13)
Lower yield on loans held for
securitization (0.08)
Higher average commercial loans (0.07)
Lower average and yield on consumer loans (0.06)
Higher average/decline in yield on Federal funds
and resale agreements -- net (0.05)
Lower funding costs 0.05
- -------------------------------------------------------------
Net yield margin for the year ended
December 31, 1996 4.73%
=============================================================
($14.0) million and $13.4 million and decreased borrowing costs by $16.0
million, $20.3 million and $39.0 million for 1996, 1995 and 1994, respectively.
The overall increase in the net yield margin as a result of these instruments
amounted to 9, 5 and 52 basis points for 1996, 1995 and 1994, respectively. For
a more detailed description and discussion of derivative income and expense
impact on net income, refer to the Derivatives and Other Off-Balance Sheet Risk
section elsewhere in this Report.
Loan securitizations also have an effect on net interest income and the net
yield margin. For a detailed analysis of this effect, see the discussion of
Consumer Loan Growth and Table 11 elsewhere in this Report.
Provision and Allowance for Loan Losses
(on a pro forma basis)
The provision for loan losses is the periodic expense of maintaining an adequate
allowance to absorb anticipated future losses, net of recoveries, in the
existing loan portfolio. In evaluating the adequacy of the provision and the
allowance for loan losses, management takes into consideration several factors
including national and local economic trends and conditions; weighted average
historical losses; trends in delinquencies, bankruptcies and non-performing
loans; trends in watch list growth/reduction; off-balance sheet credit risk;
known deterioration and concentrations of credit; effects of any changes in
lending policies and procedures; credit evaluations; and the experience and
ability of lending management and staff. Commercial and real estate loan
charge-offs are recorded when any loan or portions of loans are determined to be
uncollectible. Consumer loans, other than credit card, typically are charged off
when they are six months past due, while credit card loans are typically charged
off when they are six months past due and a minimum payment has not been
received for 60 days. Consumer loans are also charged off when the customer
declares bankruptcy. Once a loan has been charged off, Signet continues to
pursue the collection of principal and interest. Table 4 provides a four-year
comparison of activity in the pro forma allowance for loan losses along with
details by loan category of the charge-offs and recoveries.
The provision for loan losses totaled $73.9 million for 1996 compared with
$34.8 million in 1995. The increase resulted primarily from growth and increased
losses in the loan-by-check portfolio, primarily from loans from 1995 and early
1996 solicitations as they matured.
Net charge-offs rose to $66.8 million for 1996, compared with $50.0 million
for the prior year. In 1995, $13.9 million of the charge-offs resulted from the
bulk sale of commercial real estate related loans for which there was sufficient
allowance already established. These sales were part of Signet's strategy to
reduce its overall commercial real estate exposure. Commercial loan net
charge-offs increased slightly when comparing 1996 with 1995 due to a higher
level of recoveries in 1995. Strong credit quality and the generally favorable
economic climate kept the commercial loan net charge-offs at a relatively low
amount. The 1995 commercial loan charge-offs included $1.3 million related to
the loan sale in the second quarter. Consumer loan net charge-offs rose in 1996
as Signet experienced a $7.5 million rise in loan-by-check risk test charge-offs
and a $20.8 million increase in other loan-by-check charge-offs. The
loan-by-check risk test charge-offs were on loans generated from direct mail
solicitations in late 1994 as Signet ran controlled tests to determine the
criteria to be used in future loan-by-check solicitations. See footnote 1 to
Table 4 for more detailed information on the loan-by-check charge-offs.
The allowance for loan losses at December 31, 1996 was $136.7 million, or
2.15% of year-end loans, compared with the 1995 year-end allowance of $129.7
million, or 2.39% of loans. The 1996 year-end allowance for loan losses equated
to 4.8 times year-end non-performing loans and 3.5 times year-end non-performing
assets, up from December 31, 1995 when the allowance for loan losses amounted to
3.4 times non-performing loans and 2.4 times non-performing assets. The rise in
the level of the allowance reflected a higher allocation for the growing
consumer loan portfolio, primarily in the loan-by-check category.
Signet's allocated allowance for loan losses for all loan categories is
detailed in Table 5. Management allocates a specific amount to classified
commercial and real estate loans which are individually reviewed. Classified
loans represent those loans in which contractual repayment of principal and
interest is questionable. The credit worthiness of the borrower, the adequacy of
the underlying collateral and the impact of business and economic conditions
upon the borrower are all evaluated monthly. These factors lead to the risk
ratings applied to these loans which assist in the related allowance allocation.
The consumer loan 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. Signet separates consumer loan
portfolios into homogeneous segments, and forecasts losses based on the
projected migration of delinquent accounts within each segment.
21
<PAGE>
TABLE 4
CHANGES IN ALLOWANCE FOR LOAN LOSSES (excluding Capital One)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
(dollars in thousands) 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $129,702 $152,003 $189,797 $209,543
Provision for loan losses 73,851 34,786 (16,229) 13,256
Transfer to loans held for securitization/sale (7,132)
Addition arising from acquisition 3,327
Loans charged-off:
Consumer (1) 54,332 32,386 2,652 1,850
Commercial 3,647 5,740 9,827 17,832
Real estate-construction 6,033 1,143 9,746 26,890
Real estate-mortgage(2) 7,542 18,627 20,360 5,720
- -----------------------------------------------------------------------------------------------------------------------
Total loans charged-off 71,554 57,896 42,585 52,292
Recoveries of loans previously charged-off:
Consumer(1) 1,994 1,509 1,101 1,338
Commercial 1,884 4,570 5,997 13,138
Real estate-construction 311 1,496 6,037 4,259
Real estate-mortgage(2) 519 366 4,558 555
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 4,708 7,941 17,693 19,290
- -----------------------------------------------------------------------------------------------------------------------
Net loans charged-off 66,846 49,955 24,892 33,002
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $136,707 $129,702 $152,003 $189,797
=======================================================================================================================
Net charge-offs to average loans:
Consumer 2.51% 1.39% 0.10% 0.04%
Commercial 0.06 0.04 0.18 0.22
Real estate 1.55 1.95 2.15 2.45
- -----------------------------------------------------------------------------------------------------------------------
Total 1.13% 0.87% 0.55% 0.75%
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loans losses to net loans at year-end 2.15% 2.39% 2.67% 4.27%
=======================================================================================================================
(1) Consumer includes loan-by-check net charge-offs
as noted below:
Loan-by-check risk tests $ 24,229 $ 16,763 $ 8
Other loan-by-check 24,334 3,575 222
- -----------------------------------------------------------------------------------------------------------------------
Total loan-by-check net charge-offs $ 48,563 $ 20,338 $ 230
- -----------------------------------------------------------------------------------------------------------------------
Average loan-by-check:
Loan-by-check risk tests $126,789 $211,192 $25,795
Other loan-by-check 678,672 218,401 33,749
- -----------------------------------------------------------------------------------------------------------------------
Total loan-by-check $805,461 $429,593 $59,544
- -----------------------------------------------------------------------------------------------------------------------
Net loan losses as a percentage of average
Loans-by-check:
Loan-by-check risk tests 19.11% 7.94% 0.03%
Other loan-by-check 3.59 1.64 0.66
- -----------------------------------------------------------------------------------------------------------------------
Total loan-by-check 6.03% 4.73% 0.39%
=======================================================================================================================
</TABLE>
(2) 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.
TABLE 5
ALLOWANCE FOR LOAN LOSSES ALLOCATION (excluding Capital One)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------------- ----------------------- ---------------------- -----------------------
Percentage of Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to Allowance Category to
(dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------------------------------------------------
Consumer $ 79,592 34.96% $ 49,825 31.45% $ 25,577 41.22% $ 3,514 27.59%
Commercial 30,741 52.45 26,367 55.52 34,041 42.74 33,618 51.05
Real estate* 21,326 12.59 40,123 13.03 60,532 16.04 83,315 21.36
Unallocated 5,048 13,387 31,853 69,350
- ----------------------------------------------------------------------------------------------------------------------------
Total $136,707 100.00% $129,702 100.00% $152,003 100.00% $ 189,797 100.00%
============================================================================================================================
</TABLE>
* Real estate loans include real estate-construction, real estate-commercial
mortgage and real estate-residential mortgage loans. Real estate-residential
has an insignificant amount of allowance allocated to it because of the
minimal credit risk associated with that type of loan.
22
<PAGE>
The remaining loan portfolios (unclassified commercial and real estate loans)
are allocated allowance by applying historical loss information to the loan
portfolios and taking into consideration other factors listed above. The overall
allocation is not 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 since the total allowance is a general allowance
applicable to the entire loan portfolio. Management continuously refines this
process and believes that the allowance for loan losses is adequate to cover
anticipated losses in the loan portfolio under current economic conditions.
Non-Interest Income
(on a pro forma basis)
A significant portion of Signet's revenue is derived from non-interest related
sources including service charges on deposit accounts, consumer loan servicing
income and service charge income, trust and other financial services income and
other income. Signet's business strategies continued to emphasize non-interest
operating income sources.
Table 6 details the various components of non-interest income for the past
four years on a pro forma basis. Non-interest income for 1996 was $279.6
million, up 43% from $195.6 million for 1995 and included $5.0 million ($3.3
million after-tax) and $0.5 million ($0.3 million after-tax), for 1996 and 1995,
respectively, of securities available for sale gains. Signet recognized nominal
gains on investment securities during 1995, as certain securities were called
for redemption.
Non-interest operating income rose $80.8 million to $274.6 million for
1996, a 42% increase versus 1995. Several factors contributed to the increase.
Consumer loan servicing income and service charge income, which includes ongoing
gains and servicing income on securitized assets, rose $37.8 million, or 287%,
from 1995 primarily due to an approximately $411 million increase in average
securitized consumer loans since the prior year. Signet recognized a $9.3
million gain on the securitization of student loans in the fourth quarter of
1996 compared with a $9.6 million gain on the securitization of home equity
loans during the fourth quarter of 1995. See Note P to Consolidated Financial
Statements for more details on securitizations and this important source of
non-interest income.
Service charges on deposit accounts remained relatively level from year to
year. Trust and other financial services income, which totaled $40.7 million,
was up 26% from last year primarily due to a rise in annuity product commissions
and mutual fund investment management fees. Mortgage servicing and origination
income totaled $32.3 million for 1996 compared with $22.4 million in 1995, an
increase of 44%, as a result of a rise in the volume of mortgage loans
originated and purchases of mortgage loan servicing rights. During 1996,
residential mortgage production totaled $1.1 billion, which was 44% higher than
the 1995 level primarily due to a lower residential mortgage rate environment.
However, in December, 1996, Signet sold its residential mortgage loan production
offices resulting in a small gain. The Company will retain mortgage servicing
activities. The Company's mortgage servicing portfolio grew to $7.3 billion at
TABLE 6
NON-INTEREST INCOME (excluding Capital One)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Percent Change
Year Ended Increase Year Ended
December 31 (Decrease) December 31
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1996/1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Service charges on deposit accounts $67,709 $ 68,231 (1)% $ 66,141 $64,471
Consumer loan servicing income and
service charge income 50,927 13,163 287 26,834 30,656
Trust and investment management income 40,729 32,340 26 28,085 24,702
Gain on securitization of loans 9,254 9,562 (3)
Mortgage servicing and origination 32,303 22,429 44 18,661 24,210
Trading profits (losses) 29,279 11,969 145 (268) (1,396)
Other service charges and fees 15,459 12,293 26 13,441 13,825
Gains (losses) on sale of mortgage loans 6,756 7,178 (6) (3,276) (3,987)
Gain on sale of mortgage servicing 6,499 977 N/M 6,000
Intercompany reimbursements from Capital One N/M 26,378 27,524
Other 15,641 15,638 N/M 13,209 13,812
- ------------------------------------------------------------------------------------------------------------------------
Non-interest operating income 274,556 193,780 42 195,205 193,817
Securities available for sale gains 5,021 532 N/M 3,413 3,913
Investment securities gains 1,257 N/M 46 405
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest income $279,577 $195,569 43% $198,664 $198,135
========================================================================================================================
</TABLE>
23
<PAGE>
year-end 1996, up from $6.6 billion at December 31, 1995. Other service charges
and fees, which consisted primarily of ATM fees ($4.1 million), fees related to
commercial and standby letters of credit ($3.7 million), checkbooks ($3.2
million) and safe deposit box rentals ($2.3 million) totaled $15.5 million, up
26% versus 1995. Trading profits derived from services performed as a dealer
bank for customers and from profits and losses earned on securities trading and
securities arbitrage positions improved to $29.3 million for 1996 up from $12.0
million in 1995. Results from sales of mortgage loans experienced a decline from
$7.2 million in 1995 to $6.8 million in 1996. The impact of adopting of SFAS No.
122 mentioned earlier and gains from the sale of approximately $29 million and
$179 million adjustable rate mortgage loans in December 1996 and 1995,
respectively, are recorded in this category. Gains on sales of mortgage
servicing rights amounted to $6.5 million in 1996, a significant increase from
$1.0 million in 1995. The remaining portion of non-interest operating income,
which included venture capital income and miscellaneous income from other
sources, amounted to $15.6 million for 1996, level with the prior year.
Non-Interest Expense
(on a pro forma basis)
Non-interest expense for 1996 totaled $485.3 million, relatively the same as
1995. Excluding the 1995 fraud loss, non-interest expenses were up $35.8
million, or 8%, from the prior year primarily due to higher staff expense. Table
7 details the various categories of non-interest expense for the past four years
on a pro forma basis.
Signet's efficiency ratio (the ratio of non-interest expense to taxable
equivalent operating income) was 64.58% for 1996, compared with 72.05% for 1995,
on a pro forma basis. Excluding the fraud loss and foreclosed property expense
from non-interest expense changes the ratio to 64.82% and 66.88% for the two
respective years. As a result of ADVANCE, management expects an improvement in
the efficiency ratio with an increase in revenues and a decline in expenses. The
Company anticipates taking a restructuring charge in the second quarter of 1997
related to ADVANCE.
Staff expense (salaries and employee benefits), the largest component of
non-interest expense, totaled $254.9 million, a 13% increase from 1995. Staff
expenses rose year-over-year primarily due to an increase in average full-time
employees. From December 31,1995 to December 31, 1996, the number of full-time
employees actually declined 3% as a result of Signet selling its mortgage
production offices in December of 1996.
Certain of the non-interest expense categories reflected the costs
associated with increased business volume. The $4.1 million increase in supplies
and equipment expense as well as the $5.4 million rise in external data
processing expense were attributable to servicing the expanded consumer loan
base. Public relations, sales and advertising expense rose $4.6 million, or 29%,
to $20.5 million as Signet expanded its consumer loan solicitation programs.
This strategy was implemented to increase account growth and outstandings and
has required significant out-of-pocket expenses to launch large scale but
carefully planned national solicitations. The Company's solicitation strategy,
which uses extensive testing, is designed to improve the efficiency of the
TABLE 7
NON-INTEREST EXPENSE (excluding Capital One)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Percent Change
Year Ended Increase Year Ended
(dollars in thousands) December 31 (Decrease) December 31
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1996/1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Salaries $ 213,120 $ 181,030 18% $ 186,216 $ 173,710
Employee benefits 41,807 44,014 (5) 50,039 55,492
- ----------------------------------------------------------------------------------------------------------------------------
Total staff expense 254,927 225,044 13 236,255 229,202
Supplies and equipment 40,280 36,170 11 34,045 32,587
Occupancy 38,335 38,484 N/M 41,869 39,094
External data processing services 32,473 27,115 20 27,660 27,344
Travel and communications 24,502 24,544 N/M 22,758 17,800
Commercial fraud loss 35,000 N/M
Restructuring charge N/M 43,212
Public relations, sales and
advertising 20,499 15,941 29 13,469 14,912
Professional services 14,412 16,176 (11) 16,905 14,096
Credit and collection 5,386 2,044 164 2,368 4,321
FDIC assessment 2,243 8,806 (75) 16,754 18,253
Foreclosed property-- net (1,830) (220) N/M (699) 13,575
Other 54,091 55,416 (2) 33,713 32,852
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 485,318 $ 484,520 N/M % $ 488,309 $ 444,036
============================================================================================================================
</TABLE>
24
<PAGE>
solicitation process, thereby improving opportunities to create value by
controlling credit exposure and creating higher probabilities for successful
growth. The success of this strategy is witnessed by the growth in the total
managed consumer loan portfolio from $1.6 billion at December 31, 1993 to $3.4
billion at December 31, 1996.
Professional services experienced a $1.8 million, or 11%, decline
year-to-year. The $6.6 million, or 75%, drop in deposit insurance assessment
from the Federal Deposit Insurance Corporation ("FDIC") reflects the decline in
the rates charged by the FDIC effective June 1, 1995. Included in the 1996 FDIC
assessment was a one-time $1.6 million charge for the Savings Association
Insurance Fund recapitalization. Signet Bank is "well capitalized" under FDIC
regulations and, as a result, pays the lowest FDIC insurance premium rate.
Income Taxes
(on a pro forma basis)
Income tax expense for 1996 was $64.2 million as compared with $48.8 million for
1995. This represented an effective tax rate of 34.0% for 1996, relatively
unchanged from the 33.8% for 1995. Note K to the Consolidated Financial
Statements reconciles reported income tax expense to the amount computed by
applying the federal statutory rate to income before income taxes.
BALANCE SHEET REVIEW
(on a pro forma basis)
Earning Assets
Average earning assets totaled $10.1 billion for 1996, as shown in Table
8--Average Balance Sheet, a 7% increase from the 1995 level. The portfolios
experiencing the largest declines were investment securities ($324 million) and
interest bearing deposits with other banks ($22 million), while the federal
funds sold and securities purchased under agreements to resell, securities
available for sale and the loan portfolios increased by $50 million, $708
million and $143 million, respectively. A more detailed discussion of the
various earning asset categories follows.
Loans
Loans (net of unearned income) for 1996, averaged $5.9 billion, an increase of
$143 million, or 2%, from the 1995 level. The securitization of $481 million of
home equity loans in December 1995 had minimal impact on the 1995 average and
therefore distorts the comparison of on-balance sheet loan balances. Including
securitized assets and loans held for securitization, average managed loans grew
$841 million, or 14%, from 1995 to 1996. Average balances increased in the
commercial, real estate-construction and real estate-residential mortgage loan
categories, while the consumer and real estate-commercial mortgage loan average
balances declined. Consumer loan balances declined due to the securitizations.
The composition of the loan portfolio has been significantly altered over the
past few years by strong growth in commercial and consumer loans, reflecting
positive response to Signet's innovative product offerings. In addition, Signet
reduced its overall average commercial real estate loan exposure by $110 million
during 1996. At year-end, Signet had no commercial loans outstanding to
borrowers in the same or related industries which, in total, exceeded ten
percent of total loans. Approximately half of the loan portfolio is secured,
including all real estate related loans, leases, and a portion of the consumer
and commercial loan portfolios. Signet reviews each of these prospective credits
in order to determine an adequate level of security or collateral prior to
making the loan. The type of collateral will vary and range from liquid assets
to real estate. The Company's access to collateral, in the event of borrower
default, is assured through adherence to lending laws and the Company's sound
lending standards and credit monitoring procedures. The unsecured portion
includes commercial, guaranteed student, loan-by-check and credit card loans.
The various on-balance sheet loan categories for the past four year-ends are
detailed in Table 9.
Consumer loans averaged $2.1 billion for 1996, a 6% decline from 1995, and
represented 35% of the total loan portfolio. The decline in the average balance
was due to securitizing $481 million of home equity loans in December 1995. On a
managed basis, consumer loans averaged $3.1 billion for 1996, a $565 million, or
22%, increase from 1995. This category consists of student, home equity,
installment (primarily loan-by-check), credit card and other consumer loan
types. The increase in managed consumer loans was concentrated in student loans
and installment loans generated by Signet's information-based strategy. The
growth was achieved through a variety of attractive products offered to
carefully targeted customer segments. Table 12 illustrates the effectiveness of
Signet's ability to implement growth strategies in the consumer loan markets in
1996. Risks faced by the Company include the possibility of (i) future economic
downturns causing an increase in credit losses and (ii) an increasing number of
consumers defaulting on payments or seeking protection under bankruptcy laws,
resulting in accounts being charged off as uncollectible.
Commercial loans, which represented 51% of the total average loan
portfolio, averaged $3.0 billion for 1996, an increase of 14% from last year, as
Signet successfully grew its leasing portfolio and targeted certain specialized
industries. Signet's commercial loan portfolio is oriented toward a diverse
group of middle market borrowers. These loans are predominately in the
manufacturing, wholesaling, services and real estate industries. Signet also
markets to certain specialized industries, such as media and health care. The
specialized industries are targeted based on industry expertise along with
prospects for profitability. The credit risk associated with middle market and
25
<PAGE>
TABLE 8
AVERAGE BALANCE SHEET (excluding Capital One)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Average Income\ Yield\ Average Income\ Yield\ Average Income\ Yield\
(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Earning assets (tax equivalent
basis):(1)
Interest bearing deposits
with other banks $ 9,659 $ 486 5.03% $31,649 $1,903 6.01% $249,866 $ 11,441 4.58%
Federal funds and resale
agreements 637,131 35,172 5.52 587,333 35,452 6.04 920,591 42,279 4.59
Trading account securities 512,798 32,460 6.33 476,361 30,800 6.47 287,192 21,487 7.48
Loans held for securitization 303,499 25,027 8.25 303,123 32,316 10.66
Loans held for sale 309,362 30,631 9.90 253,758 23,757 9.36 200,712 13,010 6.48
Securities available for sale 2,414,209 179,078 7.42 1,705,966 125,492 7.36 1,327,896 72,826 5.48
Investment securities-taxable 208,711 15,055 7.21 65,350 4,305 6.59
Investment securities-nontaxable 115,221 13,614 11.82 197,231 23,895 12.12
Loans (net of unearned
income):(2)
Consumer 2,081,167 225,491 10.83 2,213,646 244,485 11.04 1,497,056 128,570 8.59
Commercial 3,002,766 238,232 7.93 2,633,370 209,765 7.97 2,148,726 165,372 7.70
Real estate-construction 249,261 24,202 9.71 224,597 23,263 10.36 249,353 21,007 8.42
Real estate-commercial
mortgage 317,232 29,280 9.23 452,392 44,275 9.79 560,542 50,254 8.97
Real estate-residential
mortgage 258,013 19,577 7.59 241,038 19,992 8.29 97,855 8,399 8.58
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 5,908,439 536,782 9.09 5,765,043 541,780 9.40 4,553,532 373,602 8.20
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 10,095,097 $839,636 8.32% 9,447,165 $820,169 8.68% 7,802,370 $562,845 7.21%
- ---------------------------------------------------------------------------------------------------------------------------
Non-rate related assets:
Cash and due from banks 496,627 522,774 493,490
Allowance for loan losses (128,504) (138,655) (175,199)
Premises and equipment
(net) 194,315 172,119 189,894
Other assets 706,729 603,964 528,153
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $11,364,264 $10,607,367 $8,838,708
============================================================================================================================
Liabilities and Stockholders'
Equity
Interest bearing liabilities:
Deposits:
Interest bearing demand $2,625,049 $ 82,207 3.13% $2,395,017 $74,086 3.09% $2,639,388 $ 67,694 2.56%
Savings accounts 884,829 28,031 3.17 1,283,696 48,738 3.80 1,019,068 33,461 3.28
Savings certificates 2,166,840 102,204 4.72 1,852,542 81,345 4.39 1,981,823 66,352 3.35
Large denomination
certificates 161,674 9,083 5.62 105,390 5,498 5.22 159,027 7,382 4.64
Foreign 151,474 8,238 5.44 106,029 6,347 5.99 86,657 4,422 5.10
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 5,989,866 229,763 3.84 5,742,674 216,014 3.76 5,885,963 179,311 3.05
Federal funds and repurchase
agreements 2,385,502 114,688 4.81 2,003,775 105,290 5.25 68,041 3,213 4.72
Other short-term borrowings 55,654 3,174 5.70 74,286 4,896 6.59
Long-term borrowings 294,741 18,201 6.18 253,319 17,021 6.72 254,917 16,685 6.55
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 8,670,109 362,652 4.18% 8,055,422 341,499 4.24% 6,283,207 204,105 3.25%
- ----------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
liabilities:
Demand deposits 1,599,048 1,538,928 1,549,629
Other liabilities 224,646 205,342 187,995
Common stockholders' equity 870,461 807,675 817,877
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,364,264 $10,607,367 $8,838,708
============================================================================================================================
Net interest income /spread $476,984 4.14% $478,670 4.44% $ 358,740 3.96%
- ----------------------------------------------------------------------------------------------------------------------------
Interest income to average
earning assets 8.32% 8.68% 7.21%
Interest expense to average
earning assets 3.59 3.61 2.62
- ----------------------------------------------------------------------------------------------------------------------------
Net yield margin 4.73% 5.07% 4.59%
============================================================================================================================
</TABLE>
(1) Includes the effects of taxable equivalent adjustments, using the federal
income tax rate and state tax rates, as applicable, reduced by the
nondeductible portion of interest expense.
(2) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts. Also, interest income includes fees on loans of
approximately $19,673, $19,322 and $14,019 for 1996, 1995 and 1994,
respectively.
26
<PAGE>
TABLE 9
SUMMARY OF TOTAL LOANS (excluding Capital One)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C>
Loans:
Consumer $2,300,558 $1,751,274 $2,384,178 $1,243,080
Commercial 3,451,230 3,090,904 2,472,620 2,299,973
Real estate--construction 244,653 236,103 209,183 309,842
Real estate--commercial mortgage 254,060 366,698 526,956 581,529
Real estate--residential mortgage 329,466 122,584 191,508 71,411
- ----------------------------------------------------------------------------------------
Total $6,579,967 $5,567,563 $5,784,445 $4,505,835
========================================================================================
</TABLE>
specialized industry borrowers is principally influenced by general economic
conditions and the resulting impact on the borrower's operations. In addition,
the Company faces the risk of diminishing collateral values. Collateralization
for commercial loans primarily consists of liquid assets, trading assets and
capital assets, and is determined on a case-by-case basis.
Real estate-construction loans averaged $249 million, an increase of 11%,
or $25 million, from the 1995 average. This category represented less than 5% of
the average loan portfolio for 1996. During 1996 and 1995, the Company sold
portfolios of real estate related loans totaling $43 million and $55 million,
respectively. The 1995 sale accounted for approximately $13.9 million of net
charge-offs. The real estate loan sales impacted the real estate-construction
loan ($6 million in 1995) and real estate-commercial mortgage loan ($43 million
in 1996 and $49 million in 1995) categories. The credit risk associated with
real estate lending is principally influenced by real property markets and the
resulting impact on the borrower's operations. A primary risk associated with
the real estate business involves the possibility of future economic downturns
in the real property markets causing an increase in credit losses. Signet
maintains loan-to-value maximums of 80% for construction and commercial mortgage
loans. The maximum loan-to-value collateral limits have been established to meet
the Company's goals in targeting percentages based on diversification strategy,
market conditions and economic conditions.
Real estate-commercial mortgage loans represented less than 6% of the
average loan portfolio in 1996. This category averaged $317 million, a 30%
decline from 1995. The portfolio consisted of $198 million of commercial
mortgage loans and $119 million of mini-permanent (interim) mortgage loans
compared with $254 million and $198 million for the respective loan types in
1995. Construction loans typically are converted to mini-permanent mortgage
loans when the related project is generating sufficient cash to cover debt
service, and permanent financing, for various reasons, is not desired or
obtainable at the present time. Real estate-commercial mortgage loans decreased
partially as a result of the sale of approximately $43 million in 1996 and $49
million in 1995 of these loans.
Real estate-residential mortgage loans increased $17 million, or 7%, from
1995 to average $258 million even though Signet sold approximately $179 million
of adjustable rate residential mortgage loans in December, 1995 and an
additional $27 million in December, 1996. The 1995 sale resulted in a $3.1
million gain as management anticipated a rise in prepayments on this portfolio
as rates declined. It is the Company's policy to maintain average loan-to-value
maximums of 85% for real estate-residential mortgages. Loans above 80% have
mortgage insurance.
Table 10 shows the maturities of selected loan categories at year-end 1996.
Loans, as a result of maturities, monthly payments, sales and securitizations,
provide an important source of liquidity. See discussion on Liquidity elsewhere
in this Report. Unused loan commitments related primarily to commercial loans
TABLE 10
MATURITIES OF SELECTED LOANS
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Maturing
- -------------------------------------------------------------------------------------------------
Within After One Year But After
(in thousands) One Year Within Five Years Five Years Total
- -------------------------------------------------------------------------------------------------
<S> <C>
Commercial $1,145,696 $1,548,857 $756,677 $3,451,230
Real estate--construction 139,870 104,320 463 244,653
Real estate--commercial mortgage 82,826 103,326 67,908 254,060
- -------------------------------------------------------------------------------------------------
Total $1,368,392 $1,756,503 $825,048 $3,949,943
=================================================================================================
</TABLE>
For interest sensitivity purposes, $1,288,845 of the amounts due after one year
are fixed rate loans and $1,292,706 are variable rate loans.
27
<PAGE>
and excluding credit card loans were approximately $3.2 billion at year-end
1996, up from $2.7 billion at year-end 1995.
Consumer Loan Growth
In 1994, Signet expanded its use of information-based strategies which
significantly increased growth in the consumer loan portfolio. This technique
involved generating a data base of potentially creditworthy customers for
particular products and then following up with direct mail solicitations. Much
of the growth was in a new product, loan-by-check, whereby customers received a
direct-mail solicitation in the form of a check for a specified loan amount. To
activate the loan, customers simply endorse and present the check at their local
bank. Signet also is beginning to apply information-based strategies to home
equity, student and small business loans. Solicitations in these areas are in
testing stages. These tests are designed to help Signet develop products that
are both appealing to customers and economically profitable for the Company. As
a result of these solicitations, from December 31, 1994 to December 31, 1996,
the installment loan portfolio (primarily loan-by-check) grew $635 million; the
student loan portfolio (including $395 million of securitized loans) increased
$303 million; and the home equity loan portfolio (including $407 million of
securitized loans) was up $77 million. During the second quarter of 1996,
management delayed some of its national marketing programs in order to examine
market conditions and further calibrate the models used for targeting customers.
Signet focused its efforts on improving product design and delivery and on
developing new customer management techniques to improve account profitability.
TABLE 11
IMPACT OF CONSUMER LOAN SECURITIZATIONS (excluding Capital One)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Statement of Income
Net interest income $ 468,760 $ 468,067 $ 345,034 $ 337,477
Provision for loan losses 73,851 34,786 (16,229) 13,256
Non-interest income 279,577 195,569 198,664 198,135
Non-interest expense 485,318 484,520 488,309 444,036
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 189,168 $ 144,330 $ 71,618 $ 78,320
==========================================================================================================================
Adjustments for Securitizations
Net interest income $ 48,401 $ 31,734 $ 42,722 $ 45,789
Provision for loan losses 10,291 11,709 15,106 17,642
Non-interest income (45,716) (29,587) (27,616) (28,147)
Non-interest expense
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) to income before income taxes $ (7,606) $ (9,562) $ 0 $ 0
==========================================================================================================================
Adjustments for Loans To Be Sold to Capital One
Net interest income $ (8,379) $ (9,559) $ (2,638) $ 0
Provision for loan losses 0 (18,522) (1,043) 0
Non-interest income 8,379 (8,963) 1,595 0
Non-interest expense
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) to income before income taxes $ 0 $ 0 $ 0 $ 0
==========================================================================================================================
Managed Statement of Income (adjusted)
Net interest income $ 508,782 $ 490,242 $ 385,118 $ 383,266
Provision for loan losses 84,142 27,973 (2,166) 30,898
Non-interest income 242,240 157,019 172,643 169,988
Non-interest expense 485,318 484,520 488,309 444,036
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 181,562 $ 134,768 $ 71,618 $ 78,320
==========================================================================================================================
As reported (excluding Capital One):
Average earning assets $10,095,097 $9,447,165 $7,802,370 $8,339,320
Return on assets 1.10% 0.90% 0.63% 0.69%
Net yield margin 4.73% 5.07% 4.59% 4.24%
On a managed basis:
Average earning assets $10,658,885 $9,338,467 $8,089,158 $8,659,320
Return on assets 1.01% 0.85% 0.61% 0.66%
Net yield margin 4.85 5.36 4.93 4.61
Yield on managed consumer loan portfolio 10.95% 10.90% 10.03% 10.15%
==========================================================================================================================
</TABLE>
28
<PAGE>
In order to facilitate the growth in the consumer loan portfolio, the
Company has securitized portions of the portfolio. Table 11 indicates the impact
of securitizations on income, average assets, return on assets and net yield
margin for the past four years. Securitization is an off-balance sheet funding
technique which transforms a pool of loans into marketable securities. The loans
are generally transferred to a trust and interests in the trust are sold to
public or private investors for cash. In a securitization, the gain on the
initial sale of the loans is limited to the loans existing at the date of sale
and should not include amounts related to future loans to be sold according to
the terms of the securitization agreements. For loans with a relatively short
life (such as credit card receivables), no gain or loss is recorded at the time
of sale. Rather, the net of interest income, fee income, charge-offs and the
investors' coupon payments becomes servicing income for Signet and is recorded
each month as earned. Therefore, amounts that would previously have been
reported as interest income, loan service charges and provision for loan losses
are instead reported in non-interest income as consumer loan servicing income.
The change in the method of income recognition has a minimal impact on the
Company's earnings. Because loan losses are absorbed against these cash flows,
the Company's consumer loan servicing income over the term of the transaction
may vary depending upon the credit performance of the securitized loans.
However, the Company's exposure is generally contractually limited to these cash
flows. For loans with a longer average life (such as equity lines of credit and
student loans), a gain is recorded at the time of sale equal to the present
TABLE 12
MANAGED CONSUMER LOAN PORTFOLIO (excluding Capital One)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Average balances:
Installment loans $1,036,642 $697,660 $268,928 $221,699
Student loans 785,198 784,423 649,520 409,371
Home equity loans 135,954 411,364 462,315 452,789
Credit card 59,649 234,706 30,822
Other loans 63,724 85,493 85,471 68,198
- -----------------------------------------------------------------------------------------------------------------------
Sub-total average consumer loan portfolio 2,081,167 2,213,646 1,497,056 1,152,057
- -----------------------------------------------------------------------------------------------------------------------
Consumer loans held for sale 148,592 124,056
Credit card loans held for securitization 7,598 68,465
Home equity loans held for securitization 82,603
Student loans held for securitization 295,901 152,055
- -----------------------------------------------------------------------------------------------------------------------
Total average on-balance sheet portfolio 2,533,258 2,640,825 1,497,056 1,152,057
Securitized home equity loans 441,048 34,242
Securitized student loans 5,382
Securitized credit card loans 265,950 267,116 335,007 320,000
- -----------------------------------------------------------------------------------------------------------------------
Total securitized consumer loans 712,380 301,358 335,007 320,000
Less loans to be sold to Capital One (148,592) (410,056) (48,219)
- -----------------------------------------------------------------------------------------------------------------------
Total average managed consumer loan portfolio $3,097,046 $2,532,127 $1,783,844 $1,472,057
=======================================================================================================================
Period-end balances:
Installment loans $1,212,492 $810,999 $577,105 $225,766
Student loans 756,340 709,583 848,099 526,730
Home equity loans 181,879 87,348 511,947 434,101
Credit card 69,287 81,532 339,270
Other loans 80,560 61,812 107,757 56,483
- -----------------------------------------------------------------------------------------------------------------------
Sub-total period-end consumer loan portfolio 2,300,558 1,751,274 2,384,178 1,243,080
- -----------------------------------------------------------------------------------------------------------------------
Consumer loans held for sale 240,902
Credit card loans held for securitization 89,700
Student loans held for securitization 300,000
- -----------------------------------------------------------------------------------------------------------------------
Total period-end on-balance sheet portfolio 2,300,558 2,381,876 2,384,178 1,243,080
Securitized home equity loans 406,776 480,702
Securitized student loans 394,691
Securitized credit card loans 263,889 185,000 428,333 320,000
- -----------------------------------------------------------------------------------------------------------------------
Total securitized consumer loans 1,065,356 665,702 428,333 320,000
Less loans to be sold to Capital One (240,902) (517,295)
- -----------------------------------------------------------------------------------------------------------------------
Total period-end managed consumer loan portfolio $3,365,914 $2,806,676 $2,295,216 $1,563,080
=======================================================================================================================
</TABLE>
29
<PAGE>
value of the anticipated future net cash flows. For revolving transactions other
than credit card, gains are also recorded on subsequent sales. Management
intends to continue this securitization strategy in the future.
The managed consumer loan portfolio is comprised of consumer loans,
consumer loans held for securitization and securitized consumer loans, less
loans to be sold to Capital One in accordance with previously agreed upon terms
of the spin-off. Securitized consumer loans are not assets of the Company and,
therefore, are not shown on the balance sheet. Signet's managed consumer loan
portfolio increased by $559 million, or 20%, from December 31, 1995 to December
31, 1996, as indicated in Table 12.
Securities
The securities portfolio consists of trading account securities, securities
available for sale and investment securities. If the Company has the positive
intent and ability to hold securities until maturity, they are classified as
investment securities and carried at amortized historical cost. Otherwise,
securities are classified either as available for sale, which are carried at
market with unrealized gains and losses recorded through adjustments to
stockholders' equity, or as trading account securities and carried at market
with unrealized gains and losses recorded through earnings, depending on
management's asset/liability strategy, liquidity needs or objectives. The
accounting policy for securities is described in Note A to Consolidated
Financial Statements. In December, 1995, Signet reclassified the entire
investment securities portfolio to the available for sale category. Investment
securities for 1995 averaged $324 million.
At December 31, 1996, trading account securities consisted of $510 million
of government securities, $34 million of asset-backed securities and $2 million
of other securities which includes derivative contracts. Trading account
securities averaged $513 million in 1996, up 8% from the $476 million level in
1995.
Securities available for sale are used as part of management's
asset/liability strategy and may be sold in response to changes in interest
rates, resultant prepayment risk and other factors dictated by the strategy.
These securities consist principally of U.S. Treasury and mortgage-backed
securities. All mortgage-backed securities are subject to prepayment risk since
the mortgages related to these securities can prepay at any time without
penalty. This risk occurs when interest rates decline, causing the securities to
lose value since the term and, therefore, the interest stream of the securities
has shortened due to prepayments. The fixed rate mortgage-backed and treasury
securities are subject to interest rate risk. Therefore, when interest rates
fall, these fixed rate securities gain value. At December 31, 1996, the net
unrealized gains, net of tax, related to securities available for sale, totaled
$15.1 million, down from $45.2 million at the prior year-end, primarily from a
decline in the value of mortgage-backed securities and U.S. Treasury obligations
due to rising interest rates.
Securities available for sale for 1996 averaged $2.4 billion, an increase
of $708 million over the 1995 level, on a pro forma basis. Approximately $233
million of securities were reclassified from investment securities to securities
available for sale in December, 1995, as noted above. The U.S. Treasury
securities portfolio totaled $302 million at year-end 1996, down from $574
million at the end of 1995. At December 31, 1996, the securities available for
sale portfolio (excluding securities having no maturity) had a remaining average
maturity of approximately six years and unrealized gains of $28.3 million and
unrealized losses of $9.8 million. The average life of the mortgage-backed
securities portfolio extended approximately two years from last year-end due to
prepayment assumptions related to an increase in long-term Treasury rates. When
rates rise, prepayments decline and the average life is extended. Table 13 shows
the maturities of the securities available for sale portfolio and the weighted
average yields to maturity of such securities.
At December 31, 1996, all CMOs and mortgage-backed pass-through securities
held by Signet were issued or backed by federal agencies. At the end of the past
two years, Signet did not have any investments with a single issuer (except for
TABLE 13
SECURITIES AVAILABLE FOR SALE
December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Maturities
- ------------------------------------------------------------------------------------------------------------------------------------
Within 1 Year 1-5 Years 6-10 Years After 10 Years Total
(dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
U.S. Government and agency obligations --
Mortgage-backed securities $ 25,616 7.12% $203,344 8.38% $1,906,462 7.43% $2,135,422 7.52%
Other 175,570 6.80 76,398 7.02 50,352 7.01 302,320 6.89
States and political subdivisions 11,968 10.09 6,695 11.66 4,121 11.17 22,784 10.75
Other 13,369 6.76 63,845 6.98 $85,540 6.88% 162,754 6.28
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 226,523 7.01% $350,282 7.89% $1,960,935 7.43% $85,540 6.88% $2,623,280 7.40%
====================================================================================================================================
</TABLE>
The yields shown are actual weighted average interest rates at year-end on a
taxable equivalent basis using the federal income tax rate and state tax rates,
as applicable, reduced by the nondeductible portion of interest expense.
30
<PAGE>
U.S. Government and agency obligations which are separately disclosed in this
Report) which aggregated greater than ten percent of stockholders' equity.
Other Earning Assets
Other earning assets are comprised of interest bearing deposits with other
banks, federal funds sold and securities purchased under agreements to resell,
loans held for securitization and loans held for sale. Included in the loans
held for sale category were loans held by Signet on behalf of Capital One under
previously agreed upon terms of the spin-off. By the end of the third quarter of
1996, all of these loans had transferred to Capital One. Other earning assets
averaged $1.3 billion in 1996, up $84 million, or 7%, from $1.2 billion in 1995,
on a pro forma basis. These earning assets reflect the normal process of
balancing Signet Bank's reserve position; dealer activities, in which money
market instruments are bought and then sold to customers; and, for a short
period of time, holding loans and/or securities to be sold in the secondary
market. These investments are generally short-term, high quality and very liquid
(see Liquidity discussion) and, consequently, have yields generally lower than
loans or investment securities. The level of these investments can vary from
year-to-year, as they are used to manage interest rate risk, to take advantage
of short-term interest rate opportunities and provide liquidity.
RISK ELEMENTS
(on a pro forma basis)
Non-Performing Assets
Non-performing assets include non-accrual loans, restructured loans and
foreclosed properties. Table 14 provides details on the various components of
non-performing assets for the last four year-ends. Non-accrual loans are loans
on which interest accruals have been suspended. Signet discontinues interest
accruals on commercial and real estate loans when they become contractually past
due 90 days as to principal or interest payments, or when other internal or
external factors indicate that collection of principal or interest is doubtful.
Occasionally, exceptions are made to this policy if supporting collateral is
adequate and the loan is in the process of collection. Consumer loans, other
than credit card, typically are charged off when they are six months past due,
while credit card loans typically are charged off when the loan is six months
past due and a minimum payment has not been received for 60 days; therefore,
these loans are not usually placed in non-accruing status. See the discussion of
risks associated with the consumer loan portfolio discussed in the Loans
section. Restructured loans are loans on which a concession (such as a reduction
in interest rate below the current market rate for new debt with similar risks)
is granted to a borrower. Foreclosed properties are generated when Signet takes
possession of the collateral.
TABLE 14
NON-PERFORMING ASSETS(excluding Capital One)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C>
Non-accrual loans:
Commercial $ 8,850 $ 9,033 $10,548 $42,303
Consumer 2,404 1,572 1,708 2,191
Real estate-construction 2,842 2,988 5,490 17,837
Real estate-mortgage* 14,207 24,888 7,310 6,523
- --------------------------------------------------------------------------------------
Total non-accrual loans 28,303 38,481 25,056 68,854
Restructured loans:
Commercial 1,609
Real estate-construction 1,000 3,470
- --------------------------------------------------------------------------------------
Total restructured loans 1,000 5,079
- --------------------------------------------------------------------------------------
Total non-performing loans 28,303 38,481 26,056 73,933
Foreclosed properties 10,497 15,822 22,480 48,295
Less foreclosed property reserve (5,742)
- --------------------------------------------------------------------------------------
Total foreclosed properties 10,497 15,822 22,480 42,553
- --------------------------------------------------------------------------------------
Total non-performing assets $38,800 $54,303 $48,536 $116,486
- --------------------------------------------------------------------------------------
Percentage to loans (net of unearned) and
foreclosed properties 0.61% 1.00% 0.85% 2.59%
Allowance for loan losses to:
Non-performing loans 483.02% 337.05% 583.37% 256.71%
Non-performing assets 352.34 238.85 313.18 162.94
======================================================================================
</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.
31
<PAGE>
Non-performing assets at year-end 1996 totaled $38.8 million, or 0.61 % of
loans and foreclosed properties. This compares with $54.3 million, or 1.00 %,
respectively, at the end of 1995. Overall non-performing real estate assets
declined $16.2 million during the year, including $5.3 million of foreclosed
properties.
Foreclosed properties totaled $10.5 million at the end of 1996, and were
equal to 27% of total non-performing assets and 38% of non-performing real
estate assets. Signet sold $11.0 million of foreclosed properties during 1996.
Accruing loans past due 90 days or more as to principal or interest
payments totaled $71.4 million and $66.4 million at the end of 1996 and 1995,
respectively. The details of these past due loans are displayed in Table 15. The
past due commercial and real estate loans were in the process of collection and
were adequately collateralized. Also, more than 99% of the 1996 past due student
loans were indirectly government guaranteed and do not represent material loss
exposure to Signet.
At year-end 1996, management was monitoring $29.1 million of loans for
which the ability of the borrower to comply with present repayment terms was
uncertain. These loans were not included in the Table 15 disclosure. They are
followed closely, and management at present believes that the allowance for loan
losses is adequate to cover anticipated losses that may be attributable to these
loans.
Interest recorded as income on year-end non-accrual and restructured loans
was $0.7 million, $0.9 million and $0.5 million for 1996, 1995 and 1994,
respectively, compared with interest income of $3.1 million, $4.1 million and
$3.4 million for the same periods which would have been recorded had these loans
performed in accordance with their original terms. The pre-tax costs of carrying
(funding) an average of $16.8 million of foreclosed properties in 1996, $15.0
million in 1995 and $34.1 million in 1994 were approximately $0.7 million, $0.6
million and $1.1 million, respectively, when calculated by applying an average
annual cost of funds to the outstanding balance. These amounts have been
calculated using historical rates, and may not necessarily reflect improved
earnings on a prospective basis, as these funds may be reemployed at different
rates.
FUNDING
(on a pro forma basis)
Deposits
Signet offers a diverse range of products including interest bearing and
non-interest bearing demand, savings and certificates of deposits, both domestic
and foreign. The Company competes for deposits with other commercial banks,
savings banks, savings and loan associations, the bond and stock market and
other providers of non-bank financial services, including money market funds,
credit unions, mutual funds and other deposit gathering institutions. Average
deposits totaled $7.6 billion for 1996, up 4% from 1995. Core deposits averaged
$7.3 billion for 1996, up 3% from 1995. These deposits represent Signet's
largest and most important funding source due to their relatively low cost and
reasonably stable nature. This source of funding also enhances the Company's
overall liquidity position. The only core deposit category which experienced a
decline was savings, which fell $399 million. Savings accounts included deposits
held on behalf of Capital One as collateral for Capital One's secured card
product until the end of June, 1996. Approximately $462 million of these
deposits were transferred to another financial institution in the first quarter
of 1996 and the remaining $237 million were transferred to Capital One at the
end of the second quarter of 1996. These transfers caused the decline in average
savings accounts. Non-interest bearing demand deposits rose $60 million,
interest bearing demand increased $230 million and savings certificates were up
$314 million. Signet is using its direct mail expertise to grow core deposits.
At December 31, 1996, a total of approximately $515 million of interest bearing
demand deposits had been obtained in that manner. The competition among
financial institutions for these deposits and increased consumer awareness
TABLE 15
ACCRUING LOANS PAST DUE 90 DAYS OR MORE (excluding Capital One)
- ------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993
- ------------------------------------------------------------------------
Commercial $ 6,334 $ 6,326 $ 5,433 $ 2,641
Consumer:
Student loans 35,763 32,308 22,654 19,694
Credit card 2,180 5,118 3,289
Loan-by-check-risk tests 5,890 8,812
Loan-by-check-other 9,272 2,424 177
Other consumer 2,356 2,068 1,192 1,179
- ------------------------------------------------------------------------
Total consumer 55,461 50,730 27,312 20,873
Mortgage 7,508 9,200 5,464 5,989
Construction 2,181 115 2,363 11,133
- ------------------------------------------------------------------------
Total $71,484 $66,371 $40,572 $40,636
========================================================================
32
<PAGE>
have effectively increased the relative cost of and reduced the overall benefits
received from these deposits.
Purchased deposits (large denomination certificates and foreign deposits)
averaged $313 million for 1996, a rise of $102 million, or 48%, from the prior
year. Large denomination certificates are principally sold to existing corporate
customers. The demand for such funds depends upon the Company's varying
financing needs. As a result, the interest rates are based on market competition
for these funds. Table 16 shows the maturity composition of large denomination
certificates at year-end 1996.
TABLE 16
MATURITIES OF DOMESTIC LARGE
DENOMINATION CERTIFICATES
($100,000 OR MORE)
December 31, 1996
- ----------------------------------------------------------
(in thousands) Balance Percent
- ----------------------------------------------------------
3 months or less $137,196 60%
Over 3 through 6 months 33,721 15
Over 6 through 12 months 33,873 15
Over 12 months 24,089 10
- ----------------------------------------------------------
Total $228,879 100%
==========================================================
The majority of foreign deposits are in denominations of $100,000 or more.
Short-Term and Long-Term Borrowings
Short-term borrowings consist of federal funds purchased, securities sold under
repurchase agreements, commercial paper, Treasury tax and loan deposits, Federal
Reserve borrowings and short-term borrowings from other banks. This category of
borrowings is an accessible source of moderately priced funds and is an
important financing vehicle for Signet's balance sheet management. Signet
supplements its funding sources in the short-term money market and through
securitizations. Short-term borrowings have an original maturity of less than
one year. This category rose $326 million from 1995 to average $2.4 billion in
order to fund the growth in loans. See Note E to Consolidated Financial
Statements for further details on this source of funds.
Long-term borrowings represent a very stable, although relatively
expensive, source of funds and have been used to provide Tier II capital to
Signet's subsidiaries, for acquisitions and for general corporate purposes. This
category averaged $295 million for 1996, a $41 million increase from 1995.
During the second quarter of 1996, Signet Bank established a $2.5 billion Senior
and Subordinated Bank Note facility due from 30 days to 30 years from date of
issue. A total of $150 million of subordinated bank notes had been issued under
the facility at December 31, 1996. Signet has $50 million of floating rate
subordinated notes maturing in 1997. Note F to Consolidated Financial Statements
provides a detailed analysis of long-term borrowings at December 31, 1996 and
1995.
Stockholders' Equity
Stockholders' equity provides a source of permanent funding, allows for future
growth and assists the Company in withstanding unforeseen adverse developments.
At December 31, 1996, stockholders' equity totaled $924 million, an increase of
$60 million, or 7%, from the previous year-end level of $864 million. The
increase reflects net retained income for 1996 of $77 million and the issuance
of common stock through investor and employee stock purchase plans, as well as
the stock option plans, which, in total, added an additional $14 million in net
proceeds to equity. The change in net unrealized gains on securities available
for sale, net of tax, decreased equity by $30 million.
At the time of the spin-off, Signet's stockholders' equity was reduced by
$383 million, the amount of Capital One's stockholders' equity less minority
interest (see Note T to the Consolidated Financial Statements). This generally
reduced Signet's capital ratios; however, the ratios remained strong and Signet
Bank is "well-capitalized" under regulatory guidelines (see discussion on
Capital Analysis).
At December 31, 1996, the net unrealized gains, net of tax, related to
securities available for sale, totaled $15.1 million. Signet has no plans at
present to sell these securities.
The dividends declared during 1996 of $48.3 million represented an annual
rate of $0.81 per share. On October 20, 1995, Signet's Board of Directors raised
the quarterly dividend by 3 cents to $0.20 per common share. On October 25,
1996, Signet's Board of Directors increased the quarterly dividend by 5 percent
to $0.21 per common share. The principal sources of dividends to be paid to
shareholders are dividends and interest from Signet Bank. Various state and
federal laws and policies limit the ability to pay dividends to shareholders and
the ability of Signet Bank to pay dividends to the Company. Under applicable
regulatory restrictions, Signet Bank was able to pay dividends to the Company at
December 31, 1996.
Capital Analysis
A primary management objective is to sustain its strong capital position to
merit the confidence of customers, the investing public, banking regulators and
stockholders. A strong capital position enables the Company to withstand
unforeseen adverse developments and take advantage of profitable investment
opportunities.
Capital adequacy is defined as the amount of capital needed to maintain
future asset growth and to absorb losses. Regulators consider a range of factors
when determining capital adequacy, such as the organization's size, quality and
stability of earnings, risk diversification, management expertise, asset
quality, liquidity and internal controls. Management reviews the various capital
measures monthly and takes appropriate action to ensure they are within
established internal and external guidelines. Management believes
33
<PAGE>
TABLE 17
RISK-BASED AND OTHER CAPITAL DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------
(dollars in thousands--except per share) Balance Percent Balance Percent
- -------------------------------------------------------------------------------------------------
<S> <C>
Qualifying common stockholders' equity $ 908,982 $ 815,342
Less goodwill and other disallowed intangibles (52,163) (58,881)
- -------------------------------------------------------------------------------------------------
Total Tier I capital 856,819 10.78% 756,461 9.82%
Qualifying debt 211,667 114,534
Qualifying allowance for loan losses 99,793 96,751
- -------------------------------------------------------------------------------------------------
Total Tier II capital 311,460 3.92 211,285 2.74
- -------------------------------------------------------------------------------------------------
Total risked-based capital $1,168,279 14.70 $ 967,746 12.56
- -------------------------------------------------------------------------------------------------
Total risk-adjusted assets $7,946,546 $7,707,111
- -------------------------------------------------------------------------------------------------
Leverage ratio 7.43 6.93
- -------------------------------------------------------------------------------------------------
Tangible Tier I leverage ratio 6.72 6.36
- -------------------------------------------------------------------------------------------------
December 31
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C>
Other Ratios:
Common equity to assets (excluding Capital One) 7.88% 7.87% 7.54%
Internal equity capital generation rate 8.81 7.44 8.86
Common dividend payout ratio 39.32 42.55 38.61
Book value per share $15.38 $14.59 $18.96
===============================================================================
</TABLE>
Signet's current capital and liquidity positions are strong and its capital
position is adequate to support its business areas. Table 17 details certain
risk-based and other capital data. Note J to Consolidated Financial Statements
provides a detailed analysis of risk-based ratios at December 31, 1996 and 1995.
The Federal Reserve Board has issued capital guidelines which are sensitive
to credit risk factors (including off-balance sheet exposure). Emphasis is
placed on common stockholders' equity in relationship to total assets adjusted
for risk. The focus is principally on credit risk, but does include certain
interest rate and market risks when assigning risk categories. The risk-based
capital guidelines define capital as either core capital (Tier I) or
supplementary capital (Tier II). These guidelines require banking organizations
to meet a minimum total capital ratio of 8%, with at least 4% Tier I Capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking agencies to take prompt corrective action in
respect to depository institutions that do not meet minimum capital
requirements. FDICIA established five capital tiers: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. A depository institution's capital tier depends
upon the relationship of its capital levels to various relevant capital
measures, which include a risk-based capital measure and a leverage ratio
capital measure, and certain other factors. As of December 31, 1996, Signet's
banking subsidiary, Signet Bank, met the well-capitalized criteria.
As detailed in Table 17, the Company's consolidated risk-based capital
ratios at December 31, 1996 were 14.70% and 10.78% for Total Capital and Tier I
Capital, respectively. The Federal Reserve Board also requires a minimum
leverage ratio of 3%. For most corporations, including Signet, the minimum
leverage ratio is 3% plus an additional cushion of at least 100 to 200 basis
points depending upon risk profiles and other factors. The leverage ratio is
calculated by dividing Tier I Capital by the current quarter's total average
assets less goodwill and other disallowed intangibles. Signet's leverage ratio
at December 31, 1996 was 7.43%. The improvement in these capital ratios from
December 31,1995 reflects the impact of issuing $150 million of subordinated
bank notes. The Company's total stockholders' equity to assets ratio improved
from 7.87% at December 31, 1995 to 7.88% at year-end 1996. For informational
purposes, Table 18 details the components of Signet's intangible assets for the
past four years and the estimated amortization for the next five years. The
increase in goodwill during 1995 was due to the acquisition of the assets of
Sheffield Management Company and Sheffield Investments, Inc.
34
<PAGE>
TABLE 18
INTANGIBLE ASSETS (excluding Capital One)
- --------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993
- --------------------------------------------------------------------------
Goodwill $ 47,341 $ 53,125 $37,247 $22,833
Core deposit premiums 9,352 12,685 16,019 11,730
Mortgage servicing rights 82,597 58,668 29,431 12,847
- --------------------------------------------------------------------------
Total intangible assets $139,290 $124,478 $82,697 $47,410
==========================================================================
The amortization of goodwill and core deposit premiums is expected to be
approximately $9,125 annually over the next five years.
DERIVATIVE AND OTHER
OFF-BALANCE SHEET RISK
Signet has used financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers, to reduce its
own exposure to fluctuations in interest rates and to participate in trading
activities. These financial instruments include commitments to extend credit,
standby and commercial letters of credit, mortgages sold with recourse and
interest rate contracts, including forwards, futures, options and interest rate
swaps, caps and floors. These instruments involve, to varying degrees, elements
of credit or interest rate risk in excess of the amount recognized in the
balance sheet. Signet uses the same credit policies for off-balance sheet items
as it does for on-balance sheet instruments.
Interest rate swaps, where the Company generally makes variable rate
payments and receives fixed rate payments, were entered into to manage the
interest rate risk in the Company's existing balance sheet mix. During 1996, the
Company's interest rate swaps decreased income on earning assets by $7.5 million
and reduced borrowing costs by $17.5 million for a net pre-tax impact of $10.0
million. Of the existing interest rate swaps, $1.9 billion of notional value
will mature by 1999 and the rest will mature by 2006. Interest rate floors, with
average strike prices of approximately 6% tied to the three-month LIBOR,
increased income on earning assets by $0.9 million in 1996. Interest rate floors
were purchased to hedge variable rate assets against decreases in interest
rates. Maturity dates on the interest rate floors range from 1997-1999. Interest
rate caps, with average strike prices of approximately 8.0% tied to the
three-month LIBOR, increased borrowing costs by $1.8 million in 1996. Interest
rate caps were purchased to hedge variable rate liabilities against increases in
interest rates. All interest rate caps matured by the end of 1996. Futures
contracts were purchased to hedge interest rate changes on securities available
for sale and savings certificates. During 1996, gains and losses on closed
contracts had an immaterial impact on income on securities available for sale
and expense on savings certificates. As the derivative contracts mature,
management will determine the necessity to enter into additional contracts at
that time. Refer to Table 19 for a roll forward schedule of interest rate swap
activity. The impact of derivative activity on liquidity is discussed in the
Liquidity discussion. Refer to Note N and Note O to Consolidated Financial
Statements for further details of off-balance sheet risk.
Discussion of the impact of derivative income on operations is included in Note
A to Consolidated Financial Statements and the Interest Rate Sensitivity
discussion.
TABLE 19
INTEREST SWAPS
- --------------------------------------------------------------------
Synthetic Trading
(notional in millions) Alteration(a) Dealer(b) Total
- --------------------------------------------------------------------
Balance At December 31, 1994 $3,324 $277 $3,601
Additions 6,670 196 6,866
Expirations 1,005 203 1,208
Transferred to Capital One 6,165 6,165
- --------------------------------------------------------------------
Balance at December 31, 1995 2,824 270 3,094
Additions 611 209 820
Expirations 1,268 97 1,365
- --------------------------------------------------------------------
Balance at December 31, 1996 $2,167 $382 $2,549
====================================================================
(a) Impacts interest rate sensitivity. Synthetic alteration is risk-management
tool used to change the nature of an interest earning asset or interest
bearing liability from fixed rate to variable rate or vice versa.
(b) Impacts trading income.
INTEREST RATE SENSITIVITY
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 rising rates, banking businesses will experience wider spreads as
consumer deposit costs lag increases in market interest rates. Improved spreads
due to the lag in pricing on consumer deposits will be partially offset to the
extent that the funding cost on the investment portfolio increases. ALCO
routinely uses derivatives such as interest rate swaps to manage the Company's
interest rate risk.
ALCO, in managing interest rate sensitivity, also uses simulations to
measure the impact that market changes and alternative strategies might have on
net interest income and other income exposed to changing rates. Current period
maturity, repricing information and projected balance sheet strategies are used
to simulate rate sensitivity. The lag effect of consumer deposit rates,
determined through historical analysis and forecasting techniques, is also
modeled. These simulations show that an immediate and sustained 100 basis point
change in interest rates would have less than a 2% impact on rate sensitive
income over the next twelve months, reflecting Signet's conservative balance
sheet strategy. ALCO operates under a
35
<PAGE>
TABLE 20
INTEREST RATE SENSITIVITY
December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1-30 31-60 61-90 91-180 Within 180 Days- >1 Year- Over
(dollars in millions) Days Days Days Days 180 Days 1 Year 5 Years 5 Years
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Earning assets:
Securities available for sale $ 80 $ 166 $ 20 $ 103 $ 369 $ 178 $1,135 $ 941
Loans 3,488 46 181 108 3,823 366 1,182 984
Other earning assets 1,363 16 1,379 10 41
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets 4,931 228 201 211 5,571 554 2,358 1,925
Interest bearing liabilities:
Deposits:
Savings(1) 2,218 2,218 1,389
Other time 214 167 134 306 821 468 1,182 58
Short-term borrowings 1,916 26 13 1 1,956 3 4
Long-term borrowings 50 100 150 100 150
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 4,348 243 247 307 5,145 471 2,675 208
Non-rate related assets and liabilities, net 1,015 894
- ----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap 583 (15) (46) (96) 426 83 (1,332) 823
Impact of interest rate swaps, futures,
floors and caps (586) (126) (1,095) (700) (2,507) 351 1,966 190
Impact of securitizations and repricing(2) (135) (135) 135
- ----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap adjusted for
impact of securitizations, interest rate
swaps, futures, floors and caps(2) (138) (141) (1,141) (796) (2,216) 434 769 $1,013
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted interest sensitivity gap as a
percentage of total assets (1.18)% (1.20)% (9.74)% (6.79)% (18.91)% 3.70 % 6.56 % 8.64%
Cumulative adjusted interest sensitivity gap $(138) $ (279) $(1,420) $(2,216) $(2,216) $(1,782) $(1,013)
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted cumulative interest sensitivity gap
as a percentage of total assets (1.18)% (2.38)% (12.12)% (18.91)% (18.91)% (15.20)% (8.64)%
============================================================================================================================
</TABLE>
(1) Historical rate sensitivity analysis shows that interest checking and
statement savings, while technically subject to immediate withdrawal,
actually have shown repricings and run-off characteristics that generally
fall within 1-5 years. A similar analysis has been done with money market
savings and money market checking and these products have been adjusted
accordingly.
(2) Some of the coupons on securitizations are tied to commercial paper and
LIBOR rates and, therefore, are shown in the earliest period for repricing.
While the income from securitizations is booked in non-interest income, it
is shown in this chart as it is impacted by rate movements.
policy designed to limit the impact of a sudden 100 basis point change in
interest rates to no more than a 5% change in rate sensitive income over a
twelve month period.
During 1996, as well as at year-end, Signet positioned itself for a
declining rate environment. While Table 20 shows a basic 180-day net asset
position of $426 million at December 31, 1996, the Company has taken steps to
limit its exposure to declining interest rates through the use of derivative
products. Execution of these off-balance sheet interest rate and hedging
instruments resulted in a 180-day net liability position of $2.2 billion, or 19%
of total assets.
At December 31, 1996, the notional value of the Company's derivative
products for the purpose of managing interest rate risk were $2.2 billion of
interest rate swaps and $650 million of interest rate floors.
LIQUIDITY
Liquidity is the ability to meet present and future financial obligations either
through the sale or maturity of existing assets or by the acquisition of
additional funds through liability management. Both the coordination of asset
and liability maturities and effective liability management are important to the
maintenance of liquidity. Stable core deposits and other interest bearing funds,
accessibility to local, regional and national funding sources and readily
marketable assets are all important determinants of liquidity. Table 21 reflects
certain liquidity ratios for the past three year-ends, on a pro forma basis.
Asset liquidity is generally provided by interest bearing deposits with
other banks, federal funds sold and securities purchased under agreements to
resell, securities available for sale, loans held for sale and trading account
securities. Liability liquidity is measured by the Company's ability to obtain
deposits and purchased funds at favorable rates and in adequate amounts and by
the length of maturities. Since core deposits are the most stable source of
liquidity a bank can have because they are government insured, the high level of
average core deposits during 1996 maintained the Company's strong liquidity
36
<PAGE>
TABLE 21
LIQUIDITY RATIOS (excluding Capital One)
- ----------------------------------------------------------
December 31
- ----------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------
Ratio of liquid assets to:
Purchased funds 175.3% 198.0% 194.0%
Loans 72.7 85.4 58.0
Assets 39.4 42.1 33.5
==========================================================
position. Signet's 1996 average loan balances were entirely funded with core
deposits. Signet's equity base, as noted earlier, also provides a stable source
of funding. The parent company has not recently relied on the capital markets
for funding. The parent company has $50 million principal amount of Floating
Rate Subordinated Notes due in 1997 which will be paid off with existing excess
cash. As mentioned previously, during the second quarter of 1996, Signet Bank
established a $2.5 billion Senior and Subordinated Bank Note facility due from
30 days to 30 years from date of issue. A total of $150 million of subordinated
bank notes had been issued under the facility at December 31, 1996.
For 1996, cash and cash equivalents increased $285 million primarily due to
a rise in federal funds sold and securities purchased under resale agreements
which more than offset a decline in cash and due from banks. Cash provided by
operations was $1.3 billion for this time period resulting mainly from net
proceeds from sales of loans held for sale and from securitization of consumer
loans. Cash used by investing activities amounted to $1.5 billion principally
due to purchases of securities available for sale and an increase in loans, more
than offsetting proceeds from sales and maturities of securities available for
sale. Cash provided by financing activities amounted to $465 million due to an
increase in deposits, short-term borrowings and issuing the subordinated bank
notes.
The Company's future liquidity may be affected by derivative activities.
Potential losses are limited to counterparty risk in situations where Signet is
owed money; that is, when Signet holds contracts with positive fair values. The
Company's net unrealized gain as of December 31, 1996 was $38.8 million. The
Company does not expect any losses from counterparties failing to meet their
obligations. Also, at December 31, 1996, the Company had unrealized losses on
derivative transactions totaling $23.9 million, which if terminated would
require a cash outlay. Signet presently has no intention to terminate these
contracts. There are no credit concerns related to the Company's obligations and
it expects to meet those obligations without default.
Inflation
Since interest rates and inflation rates do not always move in concert, the
effect of inflation on banks may not necessarily be the same as on other
businesses. A bank's asset and liability structure differs significantly from
that of manufacturing and other concerns in that virtually all assets and
liabilities are of a monetary nature. Inflation affects a bank's lending
activities. Since inflation tends to drive the costs of goods and services
higher, the level of customers' financing needs usually rises to keep pace. As
loan demand increases, competition for variable funds may raise the base rate
charged for these funds. Banks then are faced with increased credit risk as
borrowers experience greater exposure to financial risk from the higher rates.
In such cases, banks place more emphasis on the adequacy of the allowance for
loan losses. As a result, continued inflation increases the overall cost of
doing business, both directly and indirectly.
Fair Value
The requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," are included in Note R to Consolidated Financial Statements. Since
interest rates, credit risks and other dimensions of fair value of the Company's
assets, liabilities and off-balance sheet instruments change rapidly and, since
this disclosure excludes some aspects of the Company's overall fair value, Note
R should not be viewed as an indication of the Company's overall market value.
Furthermore, certain valuation techniques used in developing Note R require
assumptions and forecasts of cash flows. While Note R complies with SFAS No.
107, these assumptions and other subjective determinations should be considered
when interpreting the data.
Recent Accounting Pronouncements
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 1996. SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996; thus, Signet will adopt the
statement beginning January 1, 1997. The effect of adopting SFAS No. 125 for
existing transactions is not expected to have a material impact on the Company's
financial position or results of operations. The Company is unable to complete
an assessment of the potential financial statement impact of applying the
statement to future transactions because the Company participates in a variety
of transfers of financial assets, and each transaction structure is unique.
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SIGNET BANKING CORPORATION AND SUBSIDIARIES
Management's Discussion and ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1995 COMPARED TO 1994
On February 28, 1995, Signet completed the spin-off of substantially all of
its credit card business. On March 19, 1996, Signet's management discovered that
the Company was one of several major financial institutions that were victims of
fraudulent commercial loan transactions which occurred prior to 1996. Management
recorded a $35 million commercial fraud loss in non-interest expense at December
31, 1995 ("the fraud loss") and recorded the estimated probable recovery amount
of $46 million in other assets as a receivable. For a more detailed discussion
of the spin-off and the fraud loss, please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1996 Compared To
1995. In addition to the discussion of consolidated information, pro forma data
is provided where it was meaningful to discuss the Company's results excluding
Capital One. Consolidated and pro forma results are the same for time periods
subsequent to February 28, 1995.
Income Statement Analysis
Signet reported consolidated net income for 1995 of $111.1 million, or $1.86 per
share, compared with $149.8 million, or $2.59 per share, in 1994. Consolidated
earnings for the year ended December 31, 1995 included the results of Capital
One for the two months prior to the spin-off on February 28, 1995 and the $35
million fraud loss. The 1994 consolidated net income reflected a full year of
Capital One's operations as well as special pre-tax charges of $92.2 million for
restructuring and for terminating certain data processing contracts. Included in
the restructuring charges were costs related to an early retirement plan,
employee severance and facilities consolidation. On a pro forma basis, 1995 net
income increased 71% from $55.8 million to $95.6 million. Pro forma earnings per
share rose 65% from $0.97 in 1994 to $1.60. The pro forma 1995 performance
reflected a substantial increase in net interest income, primarily resulting
from strong growth in the Company's consumer and commercial loan portfolios. The
return on assets ("ROA") and the return on common stockholders' equity ("ROE")
for the year ended December 31, 1995 were 1.00% and 12.79%, respectively,
compared with 1.31% and 14.33% for the same respective ratios in 1994. The pro
forma profitability measures reflected the rise in earnings in 1995, resulting
in an ROA of 0.90% and an ROE of 11.83%. These ratios compare favorably with the
0.63% ROA and 6.83% ROE achieved in 1994, on a pro forma basis.
Taxable equivalent net interest income totaled $503.8 million for 1995, a
decline of $19.9 million, or 4%, from the $523.7 million recorded in 1994. The
decline in net interest income reflected the impact of the spin-off. On a pro
forma basis, taxable equivalent net interest income rose $119.9 million in 1995
to $478.7 million primarily due to an improved mix and a higher level of
on-balance sheet average earning assets. The pro forma net yield margin for 1995
was 5.07%, a 48 basis point increase from the 4.59% for 1994. This increase in
the net yield margin was primarily due to an improvement in the net interest
spread. Higher yields and growth in commercial and consumer loans more than
offset the rise in funding rates to raise the net yield margin. The pro forma
net interest spread of 4.44% for 1995 rose significantly from the 3.96% reported
for 1994. The increase resulted from funding rates rising less than the increase
in yields on earning assets. The overall yield on earning assets for 1995 was
8.68%, up 147 basis points from 1994, while the rate paid for interest bearing
liabilities amounted to 4.24%, up 99 basis points from the previous year.
Non-interest operating income totaled $277.5 million for 1995, a 51%
decline from the $564.6 million for 1994. The drop resulted from a sharp decline
in credit card servicing and service charge income due to the spin-off. On a pro
forma basis, non-interest operating income amounted to $193.8 million for 1995,
a decline of $1.4 million, or less than 1% versus 1994. Two primary reasons for
this drop were: 1) prior to the spin-off the entire credit card portfolio
retained by Signet was securitized causing the pro forma consumer loan servicing
and service charge income to be $13.7 million higher in 1994; and 2)
intercompany reimbursements from Capital One for various fixed non-interest
expenses prior to the Separation totaled $26.4 million. Signet recognized a $9.6
million gain on the securitization of home equity loans during the fourth
quarter of 1995. During 1995, Signet recognized net securities gains of $1.8
million, down from $3.5 million in 1994.
Non-interest expense decreased $282.4 million from the previous year due in
large part to the restructuring and data processing contract termination charges
of $92.2 million and the spin-off. On a pro forma basis, non-interest expense
also fell, primarily due to the restructuring charges in 1994, offset in part by
the fraud loss in 1995. Declines in staff-related expenses were more than offset
by increases in costs associated with expanded marketing and testing initiatives
throughout the Company. Signet's pro forma efficiency ratio (the ratio of
non-interest expense to taxable equivalent operating income) was 72.05% for
1995, compared with 88.15% for 1994. Excluding the 1995 fraud loss and the 1994
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restructuring charges, other one-time spin-off related expenses and foreclosed
property expense from non-interest expense changed the ratio to 66.88% and
80.30% for the two respective years.
In the third quarter of 1994, Signet's Board of Directors approved a
comprehensive core bank improvement plan to reduce the efficiency ratio through
cost reductions and revenue initiatives. In conjunction with the plan, Signet
recorded a restructuring charge of $43.2 million ($28.1 million after-tax, or
$0.48 per share). The charge included approximately $15.6 million for increased
retiree medical and pension benefits related to an early retirement program in
which 225 employees participated; about $13.0 million of accelerated retiree
medical and pension obligations and anticipated severance benefits for
approximately 750 employees; and about $14.6 million related to the writedown of
bank-owned properties and lease terminations due to the expected facilities
abandonment related to the reduction in employees. As of December 31, 1995, the
amounts actually paid and charged against the restructuring liability were
approximately $7.0 million for severance payments to approximately 700
employees, $2.5 million for payments made under the early retirement program and
approximately $7.0 million for lease termination and other facilities related
costs. As a result of implementing the cost reduction measures, the number of
full-time equivalent employees excluding Capital One fell 7% from December 31,
1993.
Staff expense (salaries and employee benefits), the largest component of
non-interest expense, totaled $225.0 million, a 5% decline from 1994. Salaries
dropped 3% and benefits expense fell 12% year-over-year primarily due to the
decline in the number of employees mentioned above and favorable experience in
benefits expense during 1995. Certain of the non-interest expense categories
reflected the costs associated with increased business volume. The $2.1 million
increase in supplies and equipment expense was attributable to servicing the
expanded consumer loan base. Public relations, sales and advertising expense
rose $2.5 million, or 18%, to $15.9 million as Signet expanded its consumer loan
solicitation program. Occupancy expense decreased $3.4 million, or 8%, from
year-to-year, due to the restructuring mentioned earlier. The $8.0 million, or
47%, drop in deposit insurance assessment from the Federal Deposit Insurance
Corporation ("FDIC") reflected the decline in the rates charged by the FDIC
effective June 1, 1995. Other non-interest expense rose 64% from 1994 to 1995
primarily due to various servicing agreements with Capital One. These agreements
cover servicing for Signet's credit card portfolio, solicitation expense paid by
Capital One on Signet's behalf and payment of the difference between the secured
card deposits' stated and agreed upon rates.
The provision for loan losses of $38.7 million represented a significant
rise from the 1994 level of $14.5 million. On a pro forma basis, the provision
for loan losses totaled $34.8 million for 1995 compared with provision reversals
of $16.2 million in 1994. The increase resulted primarily from growth and
increased losses in the consumer loan portfolio. On a pro forma basis, net
charge-offs doubled to $50.0 million for 1995, compared with $24.9 million for
the prior year. In 1995, $13.9 million of the charge-offs resulted from the bulk
sale of commercial real estate related loans for which there was sufficient
allowance. Of the $30.1 million in real estate gross charge-offs in 1994,
approximately $21.0 million were the result of the sale of $102 million of
commercial real estate related loans. Commercial loan net charge-offs declined
when comparing 1995 with 1994 due to improved credit quality and the generally
favorable economic climate. Commercial net charge-offs for the Company totaled
$1.2 million, a $2.6 million decrease from the previous year. The 1995
commercial loan charge-offs included $1.3 million related to the loan sale in
the second quarter. Consumer loan net charge-offs rose in 1995 as Signet
experienced higher charge-offs related to certain risk tests conducted for its
"loan-by-check" product. These charge-offs were on loans generated from direct
mail solicitations in late 1994 as Signet ran controlled tests to determine the
criteria to be used when Signet expands loan-by-check solicitations. The
allowance for loan losses at December 31, 1995 was $129.7 million, or 2.39% of
year-end loans, compared with the pro forma 1994 year-end allowance of $152.0
million, or 2.67% of loans.
At December 31, 1995, Signet's loans that were considered to be impaired
under SFAS No. 114 were comprised of $32.6 million of non-accrual loans for
which the related allowance for loan losses was $10.6 million. The average
recorded investment in impaired loans during the year ended December 31, 1995
was approximately $28.8 million. Collateral dependent loans, which were measured
at the fair value of the loan's collateral, made up the majority of impaired
loans at December 31, 1995. For the year ended December 31, 1995, no interest
income was recorded on non-accrual loans. All interest receipts on impaired
loans were applied to the principal.
Pro forma income tax expense for 1995 was $48.8 million as compared with
$15.8 million for 1994. This represented an effective tax rate of 33.8% for 1995
and 22.0% for 1994. The significant increase in the effective tax rate was
attributable to a decline in the ratio of tax exempt income as a percentage of
pre-tax income. Pre-tax income grew dramatically and total tax exempt income
dropped from year-to-year as a majority of the municipal bonds have been called.
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Balance Sheet Review (on a pro forma basis)
On a pro forma basis, average earning assets amounted to $9.4 billion compared
with $7.8 billion for 1994, a 21% increase. Adding average securitized loans to
both years' pro forma average earning assets and adjusting for loans to be sold
to Capital One, in accordance with previously agreed upon terms of the spin-off,
resulted in a 15% increase in managed earning assets year-over-year. The
portfolios experiencing the largest declines were federal funds sold and
securities purchased under agreements to resell ($333 million) and interest
bearing deposits with other banks ($218 million), while the securities available
for sale and the loan portfolios increased by $378 million and $1.2 billion,
respectively. Loans (net of unearned income) for 1995, averaged $5.8 billion, an
increase of $1.2 billion, or 27%, from the 1994 level. The consumer, commercial
and real estate mortgage-residential loan categories experienced increases in
average balances in 1995. Decreases occurred in the real estate-construction and
real estate-commercial mortgage categories of the loan portfolio, reflecting the
continued successful efforts of the Company to reduce its commercial real estate
exposure. The composition of the loan portfolio has been significantly altered
over the past three years by strong growth in commercial and consumer loans
reflecting positive response to Signet's innovative product offerings. In
addition, Signet reduced its overall average commercial real estate loan
exposure by $133 million during 1995. Commercial loans, which represented 46% of
the total average loan portfolio, averaged $2.6 billion for 1995, an increase of
23% from last year. Consumer loans averaged $2.2 billion for 1995, a 48%
increase from 1994, and represented 38% of the total loan portfolio. Real
estate-construction loans averaged $225 million, a decrease of 10%, or $25
million, from the 1994 average. Real estate-commercial mortgage loans
represented less than 8% of the average loan portfolio in 1995. This category
averaged $452 million, a 19% decrease from 1994. Real estate-commercial mortgage
loans decreased partially as a result of the sale of approximately $49 million
in 1995 and $29 million in 1994 of these loans for which there was sufficient
allowance. Real estate-residential mortgage loans increased $143 million, or
146%, from 1994 to average $241 million as a result of growth in mortgages
originated by Signet and loans acquired in the Pioneer acquisition. In December,
1995, Signet sold approximately $179 million of adjustable rate mortgage loans
at a $3.1 million gain as management anticipated a rise in prepayments on this
portfolio as rates declined. Trading account securities averaged $476 million in
1995, up 66% from the $287 million level in 1994. Investment securities rose $61
million on average over 1994 reflecting the purchase of U. S. Government and
agency obligations in the fourth quarter of 1994. In December, 1995, as allowed
by implementation guidance for SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," the Company reclassified all of its investment
securities to securities available for sale. Securities available for sale for
1995 averaged $1.7 billion, an increase of $378 million over the 1994 level.
Approximately $233 million of securities were reclassified from investment
securities to securities available for sale in December, 1995, as noted above.
At December 31, 1995, the securities available for sale portfolio (excluding
securities having no maturity) had a remaining average maturity of approximately
four years and unrealized gains of $78.8 million and unrealized losses of $12.3
million.
Average interest bearing liabilities rose 28% to $8.1 billion for 1995, on
a pro forma basis. Declines in interest bearing demand, savings certificates,
large denomination certificates, other short-term borrowings and long-term
borrowings were more than offset by growth in savings accounts, foreign
deposits, federal funds and repurchase agreements. Included in savings accounts
were deposits held on behalf of Capital One as collateral for Capital One's
secured card product. In 1995, average core deposits of $7.1 billion declined
less than 2% from the prior year and represented 75% of average earning assets
and 123% of average loans. The mix in core deposits changed as depositors
responded to volatile interest rates by shortening maturities and transferring
from savings certificates into interest bearing demand products. Pro forma
non-interest bearing demand deposits declined less than 1%, on average, during
1995.
Risk Elements (on a pro forma basis)
Non-performing assets at year-end 1995 totaled $54.3 million, or 1.0% of loans
and foreclosed properties. This compares with $48.5 million, or 0.85%,
respectively, at the end of 1994. Overall non-performing real estate assets
increased $8.4 million although foreclosed properties dropped $6.7 million.
Foreclosed properties totaled $15.8 million at the end of 1995, and were equal
to 29% of total non-performing assets and 36% of non-performing real estate
assets. Signet sold $9.2 million of foreclosed properties during 1995. The
reserve for foreclosed properties was eliminated at December 31, 1994 since
management deemed foreclosed properties to be fairly valued on the balance
sheet.
Accruing loans past due 90 days or more as to principal or interest
payments totaled $66.4 million and $40.6 million at the end of 1995 and 1994,
respectively. Of the 1995 past due student loans, $30.7 million, or 95%, were
indirectly government guaranteed and did not represent material loss exposure to
Signet. At year-end 1995, management was monitoring $17.1 million of loans for
which the ability of the borrower to comply with present repayment terms was
uncertain. These loans were not included in the above disclosure.
Funding and Capital (on a pro forma basis)
Average deposits totaled $7.3 billion for 1995, down 2% from 1994. Core deposits
averaged $7.1 billion for 1995, virtually unchanged from 1994. Short-term
borrowings rose $1.9 billion from 1994 to average $2.1 billion in order to fund
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the growth in loans. Long-term borrowings averaged $253 million for 1995, a
decline of only $1.6 million from 1994.
At December 31, 1995, stockholders' equity totaled $864 million, an
increase of $120 million, or 16%, from the previous year-end pro forma level of
$744 million. The increase reflects net retained income for 1995 of $72 million
and the issuance of common stock through investor and employee stock purchase
plans, as well as the stock option plan, which in total added an additional $13
million in net proceeds to equity. At the time of the spin-off, Signet's
stockholders' equity was reduced by $383 million, the amount of Capital One's
stockholders' equity less minority interest.
Effective January 1, 1994, Signet adopted SFAS No. 115, which requires that
securities classified as available for sale be reported at fair value with
unrealized gains and losses reported as a component of retained earnings, net of
tax.
At December 31, 1995, the net unrealized gains, net of tax, related to
securities available for sale, totaled $45.2 million, primarily from a rise in
the value of mortgage-backed securities and U.S. Treasury obligations.
The dividends declared during 1995 of $46.5 million represented an annual
rate of $0.79 per share. On October 20, 1995, reflecting its confidence in the
Company's growth plans and improving profitability, Signet's Board of Directors
raised the quarterly dividend by 3 cents to $0.20 per common share.
The Company's risk-based capital ratios at December 31, 1995 were 12.56%
and 9.82% for Total Capital and Tier I Capital, respectively. Signet's leverage
ratio at December 31, 1995 was 6.93%. The decline in these capital ratios from
December 31,1994 reflects the impact of the spin-off. However, on a pro forma
basis, the Company's total stockholders' equity to assets ratio improved from
7.54% at December 31, 1994 to 7.87% at year-end 1995.
===============================================================================
SIGNET BANKING CORPORATION AND SUBSIDIARIES
1996 FOURTH QUARTER ANALYSIS
Tables 22 through 25, on the following pages, contain selected quarterly
financial data for the years ended December 31, 1996 and 1995. In addition to
the presentation of consolidated information, pro forma data is provided for the
first quarter of 1995 where it was meaningful to disclose the Company's results
excluding Capital One. Since Capital One was spun off on February 28, 1995,
consolidated and pro forma results are the same for all of 1996 and the second,
third and fourth quarters of 1995.
Consolidated net income for the 1996 fourth quarter was $33.6 million, or
$.55 per share, compared with $9.0 million, or $.15 per share, for the fourth
quarter of 1995. The 1996 fourth quarter included a $9.3 million gain from the
securitization of $405 million of student loans. The 1995 fourth quarter
included the $35.0 million fraud loss, as noted previously, as well as a $9.6
million gain related to the securitization of $481 million of equity line loans.
The fourth quarter 1996 results represent a 6% increase in net income from the
1995 fourth quarter net income of $31.8 million, or $.53 per share, excluding
the fraud loss.
The quarter ended December 31, 1996 ROA of 1.15% and ROE of 14.69% compares
favorably with the fourth quarter 1995 ROA of 0.33% and ROE of 4.18%. The
equity-to-assets ratio was 7.88% at December 31, 1996, up from 7.74% and 7.87%
at the end of the third quarter of 1996 and year-end 1995, respectively.
Total revenues (net interest income and non-interest income) for the
quarter were $206.3 million, up 11% from the previous quarter and up 12% from
the 1995 fourth quarter. Taxable equivalent net interest income totaled $119.0
million for the 1996 fourth quarter, up slightly compared with the $117.4
million reported in the fourth quarter of 1995. The net yield margin for the
fourth quarter of 1996 was 4.56%, a 14 basis point decline from the third
quarter of 1996, primarily the result of higher funding costs and lower yields
on earning assets. The net interest spread of 3.93% for the fourth quarter of
1996 declined 18 basis points from the third quarter of 1996. The fourth quarter
1996 net yield margin decreased 22 basis points from 4.78% in the fourth quarter
of 1995. The decline in the net yield margin was principally the result of a
deterioration in the net interest spread from 4.16% to 3.93%, as the yield on
earning assets fell while funding rates on core deposits rose. The lower yield
on earning assets from the same quarter last year was partly due to the
securitization of higher yielding home equity line and credit card loans.
Derivative contracts, used for interest rate risk management purposes,
reduced interest on earning assets by $1.7 million, $1.8 million and $3.2
million, and decreased borrowing costs by $4.5 million, $3.7 million and $3.3
million for the fourth quarter of 1996, third quarter of 1996 and fourth quarter
of 1995, respectively. The overall increase in the net yield margin as a result
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of these instruments amounted to 4 and 7 basis points for the fourth and third
quarters of 1996, respectively. Interest rate derivative products had minimal
impact on the fourth quarter 1995 net yield margin.
The $29.8 million provision for loan losses in the fourth quarter of 1996
exceeded net charge-offs by $8.3 million for the same period and represented an
$11.2 million increase from the 1995 fourth quarter level of $18.6 million. The
increase in the provision was tied to the growth in consumer loans, primarily
the loan-by-check portfolio. The Company provided $19.0 million for the
allowance for loan losses in the 1996 third quarter.
Net charge-offs amounted to $21.6 million in the fourth quarter of 1996, a
$4.6 million rise from the third quarter 1996 level of $17.0 million and up $6.0
million from $15.6 million in the fourth quarter of 1995. The increase in net
charge-offs from the third quarter of 1996 was primarily caused by a $2.4
million increase in charge-offs on real estate loans for which sufficient
specific allowance had already been provided and a $2.1 million increase in
loan-by-check charge-offs. The increase in net charge-offs from the prior year's
fourth quarter was primarily caused by a $4.3 million rise in loan-by-check
charge-offs along with a $6.3 million increase in real estate loan net
charge-offs partially offset by a $3.1 million drop in commercial loan net
charge-offs.
The allowance for loan losses at December 31, 1996 was $136.7 million, or
2.15% of year-end loans, up from $129.7 million, or 2.39% of loans at December
31, 1995 and the September 30, 1996 allowance of $128.5 million, or 2.08% of
loans. The December 31, 1996 allowance for loan losses equaled 4.8 times
non-performing loans and 3.5 times non-performing assets, an improvement from
December 31, 1995 when the allowance for loan losses amounted to 3.4 times
non-performing loans and 2.4 times non-performing assets. The rise in the level
of the allowance from year-end 1995 resulted primarily from an increase in the
allocation for consumer loans, principally the loan-by-check portfolio.
Non-interest income for the fourth quarter of 1996 totaled $89.6 million, a
$21.4 million, or 31%, increase over the fourth quarter of 1995 and the third
quarter of 1996. Several factors contributed to the increase in non-interest
income in the fourth quarter of 1996 compared to the same quarter of 1995.
Consumer loan servicing and service charge income, which includes ongoing gains
and servicing income on securitized assets, increased $5.6 million primarily due
to the securitization of home equity line loans in December 1995 and credit card
loans in early 1996. Non-interest income for the fourth quarter of 1996
benefited from strong trading profits, which were up $13.7 million from the same
period last year. Trust and other financial services income increased $1.2
million, or 13%, primarily from a rise in annuity product commissions and mutual
fund investment management fees. Both year's fourth quarters benefited from
gains from securitizations. The 1996 fourth quarter included a $9.3 million gain
from securitizing $405 million of student loans. Gains were realized in the
fourth quarter of 1995 related to the home equity line securitization ($9.6
million) and the sale of approximately $179 million of adjustable rate mortgage
loans ($3.1 million). In December, 1996, Signet sold its residential mortgage
loan production offices for a small gain.
The $21.4 million rise in non-interest income from the third to the fourth
quarter of 1996 resulted mainly from a $9.8 million rise in trading profits as
well as the $9.3 million gain from the securitization of $405 million of student
loans. Signet also realized a $5.5 million increase in securities available for
sale gains from quarter to quarter. The third quarter of 1996 included $6.8
million of revenues earned by Signet's specialty commercial groups.
Non-interest expense for the fourth quarter of 1996 totaled $125.3 million,
an increase of $8.1 million, or 7%, from the fourth quarter of 1995 (excluding
the fraud loss) reflecting continued investment in people and systems to build
the infrastructure for information based businesses. The largest increase was
$11.0 million in staff expense resulting primarily from an increase in the
average number of full-time employees and higher incentives due to excellent
trading profits. The 1996 year-end number of employees was down from the
previous year-end as Signet sold its residential mortgage loan production
offices in mid-December of 1996. The $1.7 million rise in external data
processing services, the $1.1 million increase in supplies and equipment expense
as well as a $0.3 million jump in credit and collection expenses were
attributable to servicing the expanded consumer loan base.
Non-interest expense rose $2.5 million, or 2%, from the third to the fourth
quarter of 1996 largely as a result of higher staff expenses. A $2.9 million
increase in salaries, mainly from higher incentives due to the outstanding
trading profits along with a $1.3 million rise in benefits expense due to a
year-to-date change in estimate in the third quarter as health care claims were
more favorable than originally projected, caused staff expenses to be up $4.2
million. The one-time $1.6 million charge for the Savings Association Insurance
Fund recapitalization recorded in the third quarter partially offset the rise in
staff expenses. Signet's efficiency ratio of 62% for the fourth quarter of 1996
was a slight improvement from the 63% reported for the fourth quarter of 1995,
excluding the fraud loss. In addition, this ratio improved from 65% for the
third quarter of 1996.
Income tax expense for the fourth quarter of 1996 was $17.5 million,
compared with the fourth quarter 1995 expense of $3.9 million and third quarter
1996 expense of $15.1 million. The Company's effective tax rate was
approximately 34% for the 1996 third and fourth quarters. The lower tax amount
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and percentage for the fourth quarter of 1995 was attributable to the fraud loss
which caused pre-tax income to be unusually low. Non-taxable income represented
a higher percentage of the 1995 fourth quarter pre-tax income, thus driving the
tax rate down to 30%.
Average earning assets totaled $10.4 billion for the fourth quarter of
1996, up $646 million, or 7%, from the fourth quarter of 1995 and up a modest
$187 million from the $10.2 billion reported for the third quarter of 1996.
Adding average securitized loans to both years' quarterly average earning assets
and adjusting for loans to be sold to Capital One, in accordance with previously
agreed upon terms of the spin-off, reflected a 13% increase in managed earning
assets from the fourth quarter of 1995 compared with the fourth quarter of 1996.
Loans (net of unearned income) for the fourth quarter of 1996 averaged $6.3
billion, up $722 million, or 13%, from the fourth quarter 1995 and up $392
million, or 7%, from the third quarter of 1996. Including securitized assets and
loans held for securitization, managed loans grew $253 million during the
quarter and totaled approximately $7.4 billion at December 31, 1996. From
September 30, 1996, to December 31, 1996, the managed consumer loan portfolio
increased $149 million, or 5%, as the installment loan portfolio (primarily
loan-by-check) grew $84 million and the student loan portfolio (including
student loans held for securitization and securitized) increased $31 million.
The average amount of commercial loans increased $129 million when comparing the
fourth quarter of 1996 to the prior quarter, as Signet continues to successfully
grow its leasing portfolio and target certain specialized industries.
Investment securities declined from a $206 million average in the fourth
quarter of 1995 to zero in the fourth quarter of 1996, reflecting the
reclassification of all of the Company's investment securities to securities
available for sale in December, 1995, as allowed by implementation guidance for
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Average securities available for sale increased $557 million, or
29%, in the fourth quarter of 1996 compared with the average for the same
quarter of 1995. Approximately $206 million of this increase resulted from the
reclassification of investment securities to securities available for sale in
December, 1995, as noted above.
Interest bearing liabilities averaged $8.9 billion in the fourth quarter of
1996, up $514 million, or 6%, from the fourth quarter of 1995. The increase came
from a $370 million rise in average deposits and a $147 million increase in
average long-term debt, as Signet Bank issued $150 million of subordinated bank
notes in 1996. Average non-interest bearing demand deposits remained relatively
level at $1.6 billion when comparing the fourth quarter of 1996 to the same
quarter of 1995.
Non-performing assets at December 31, 1996 totaled $38.8 million, or 0.61%
of loans and foreclosed properties, down from $54.3 million, or 1.00%, at
December 31, 1995 and $43.9 million, or 0.71%, at September 30, 1996. Accruing
loans contractually past due 90 days or more as to principal or interest
payments totaled $71.5 million, $66.4 million and $78.0 million as of December
31, 1996, December 31, 1995 and September 30, 1996, respectively.
At December 31, 1996, stockholders' equity totaled $924 million, an
increase of $35 million, or 4%, from the September 30, 1996 level of $889
million as net income, the issuance of common stock and net unrealized gains on
securities available for sale exceeded dividends declared. Unrealized gains and
losses, net of tax, on securities available for sale increased equity by $9.7
million in the fourth quarter of 1996. The dividends declared during the fourth
quarter of 1996 were $11.8 million or $0.21 per common share.
43
<PAGE>
TABLE 22
SELECTED QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Due to the significance of the spin-off of Capital One on February 28, 1995, pro
forma financial information for the first quarter of 1995 is provided below to
illustrate Signet's financial results and other data assuming the spin-off
occurred prior to January 1, 1995. Consolidated and pro forma results are the
same for time periods subsequent to February 28, 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1996
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C>
Consolidated (dollars in thousands-except per share)
Earnings
Interest income $ 212,561 $ 211,043 $ 206,226 $ 201,582
Interest expense 95,842 92,609 88,853 85,348
- ---------------------------------------------------------------------------------------------
Net interest income 116,719 118,434 117,373 116,234
Provision for loan losses 29,800 19,000 13,794 11,257
- ---------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 86,919 99,434 103,579 104,977
Non-interest operating income (1) 84,667 68,758 63,707 57,424
Securities gains (losses) 4,894 (629) 164 592
Non-interest expense(2) 125,337 122,855 121,511 115,615
- ---------------------------------------------------------------------------------------------
Income before income taxes (benefit) 51,143 44,708 45,939 47,378
Applicable income taxes (benefit) 17,498 15,102 15,458 16,183
- ---------------------------------------------------------------------------------------------
Net income 33,645 29,606 30,481 31,195
Net income excluding the commercial
fraud loss 33,645 29,606 30,481 31,195
Per Common Share
Net income $ 0.55 $ 0.49 $ 0.50 $ 0.52
Net income excluding the commercial
fraud loss 0.55 0.49 0.50 0.52
- ---------------------------------------------------------------------------------------------
Pro Forma (excluding Capital One):
Earnings
Net interest income (taxable equivalent)$ 118,992 $ 120,492 $ 119,122 $ 118,378
Net interest income 116,719 118,434 117,373 116,234
Net income 33,645 29,606 30,481 31,195
Net income excluding the commercial
fraud loss(3) 33,645 29,606 30,481 31,195
Per Common Share
Net income $ 0.55 $ 0.49 $ 0.50 $ 0.52
Net income excluding the commercial
fraud loss(3) 0.55 0.49 0.50 0.52
Book value 15.38 14.89 14.48 14.39
At Period-end
Earning assets $10,408,563 $10,172,640 $10,227,741 $10,372,978
Loans (net of unearned income) 6,354,886 6,172,067 5,912,220 5,794,051
Core Deposits 7,615,196 7,469,693 7,195,218 7,325,134
Number of common stockholders 15,111 15,164 15,137 15,176
Full-time employees 3,862 4,201 4,221 4,119
Part-time employees 941 955 1,003 954
Ratios
Return on average assets 1.15% 1.03% 1.08% 1.13%
Return on average common
stockholders' equity 14.69 13.63 14.47 14.60
Efficiency ratio(4) 62.31 64.92 66.16 66.23
Net interest spread 3.93 4.11 4.19 4.32
Net yield margin 4.56 4.70 4.75 4.91
Total stockholders' equity to assets 7.88 7.74 7.48 7.19
Average Shares Outstanding (in thousands) 61,089 60,738 60,502 60,357
Credit Quality Data
Non-performing assets $ 38,800 $ 43,851 $ 54,864 $ 47,203
Accruing loans past due 90 days or more 81,750 78,033 70,762 65,199
Net charge-offs(5) 21,552 16,983 13,785 14,526
Allowance for loan losses to:
Non-performing loans 483.02% 441.17% 371.73% 395.64%
Non-performing assets 352.34 292.95 230.46 267.85
Net loans 2.15 2.08 2.14 2.18
Non-performing assets to loans and
foreclosed properties 0.61 0.71 0.92 0.81
Net loan losses to average loans 1.36 1.15 0.95 1.04
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1995
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------
<S> <C>
Consolidated (dollars in thousands-except per share)
Earnings
Interest income $ 206,989 $ 206,743 $ 202,735 $ 249,532
Interest expense 91,394 89,799 85,289 106,283
- --------------------------------------------------------------------------------------------
Net interest income 115,595 116,944 117,446 143,249
Provision for loan losses 18,604 8,681 4,250 7,180
- --------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 96,991 108,263 113,196 136,069
Non-interest operating income (1) 67,666 46,363 42,692 120,758
Securities gains (losses) 454 731 247 357
Non-interest expense(2) 152,191 109,507 111,444 190,926
- --------------------------------------------------------------------------------------------
Income before income taxes (benefit) 12,920 45,850 44,691 66,258
Applicable income taxes (benefit) 3,894 15,707 15,005 24,033
- --------------------------------------------------------------------------------------------
Net income 9,026 30,143 29,686 42,225
Net income excluding the commercial
fraud loss 31,776 30,143 29,686 42,225
Per Common Share
Net income $ 0.15 $ 0.50 $ 0.50 $ 0.71
Net income excluding the commercial
fraud loss 0.53 0.50 0.50 0.71
- --------------------------------------------------------------------------------------------
Pro Forma (excluding Capital One):
Earnings
Net interest income (taxable equivalent)$ 117,443 $ 119,482 $ 120,401 $ 121,344
Net interest income 115,595 116,944 117,446 118,082
Net income 9,026 30,143 29,686 26,706
Net income excluding the commercial
fraud loss(3) 31,776 30,143 29,686 26,706
Per Common Share
Net income $ 0.15 $ 0.50 $ 0.50 $ 0.45
Net income excluding the commercial
fraud loss(3) 0.53 0.50 0.50 0.45
Book value 14.59 14.27 13.90 13.15
At Period-end
Earning assets $ 9,443,028 $ 9,911,356 $ 9,514,318 $ 9,337,761
Loans (net of unearned income) 5,416,028 5,509,437 5,684,427 5,647,599
Core Deposits 7,413,414 7,173,040 7,106,437 7,113,166
Number of common stockholders 15,166 15,134 15,259 15,374
Full-time employees 3,974 3,900 3,743 3,759
Part-time employees 1,021 1,049 1,133 1,029
Ratios
Return on average assets 0.33% 1.11% 1.14% 1.06%
Return on average common
stockholders' equity 4.18 14.51 15.00 14.34
Efficiency ratio(4) 63.47 65.99 68.67 69.95
Net interest spread 4.16 4.32 4.50 4.83
Net yield margin 4.78 4.96 5.14 5.42
Total stockholders' equity to assets 7.87 7.59 7.70 7.36
Average Shares Outstanding (in thousands) 60,230 60,146 59,760 59,163
Credit Quality Data
Non-performing assets $ 54,303 $ 51,504 $ 57,447 $ 41,597
Accruing loans past due 90 days or more 66,371 66,232 54,538 42,919
Net charge-offs(5) 15,623 12,964 18,593 2,775
Allowance for loan losses to:
Non-performing loans 337.05% 339.92% 297.24% 574.88%
Non-performing assets 238.85 251.77 237.60 364.76
Net loans 2.39 2.35 2.40 2.69
Non-performing assets to loans and
foreclosed properties 1.00 0.93 1.01 0.73
Net loan losses to average loans 1.12 0.89 1.27 0.19
============================================================================================
</TABLE>
(1) The fourth quarters of 1996 and 1995 included gains on securitization of
loans of $9.3 million and $9.6 million, respectively.
(2) The first quarter of 1995 included $29.1 million of credit card solicitation
charges. The fourth quarter of 1995 included the $35.0 million fraud loss.
(3) The fourth quarter of 1995 included the $35.0 million fraud loss.
(4) The efficiency ratio has been adjusted to exclude the fraud loss and
foreclosed property expense.
(5) The second quarter of 1995 included approximately $13.9 million of
charge-offs related to the sale of approximately $55.0 million of real
estate related loans for which there was sufficient allowance.
The "Consolidated" section of the above schedule is a tabulation of the
Company's unaudited quarterly results of operations for the years ended December
31, 1996 and 1995.
The Company's common shares are traded on the New York Stock Exchange under the
symbol SBK. In addition, shares may be traded in the over-the-counter stock
market.
44
<PAGE>
TABLE 23
QUARTER-END BALANCE SHEET TREND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(in thousands) 12/31/96 9/30/96 6/30/96 3/31/96
- -----------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 566,520 $ 592,307 $ 533,728 $ 477,370
Interest bearing deposits with
other banks 3,200 2,211 1,977 2,479
Federal funds sold and resale
agreements 777,999 589,590 599,027 1,048,139
Trading account securities 546,372 478,631 546,756 487,206
Loans held for securitization 300,000 300,000 300,000
Loans held for sale 102,826 110,005 320,316 297,147
Securities available for sale 2,623,280 2,520,136 2,547,445 2,443,956
Investment securities
Loans:
Consumer 2,300,558 2,221,244 2,016,363 2,086,519
Commercial 3,451,230 3,325,278 3,209,292 3,011,812
Real estate--construction 244,653 250,140 255,822 250,046
Real estate mortgage--commercial 254,060 275,995 332,856 359,445
Real estate mortgage--residential 329,466 311,169 258,996 232,322
- -----------------------------------------------------------------------------------------
Gross loans 6,579,967 6,383,826 6,073,329 5,940,144
Less: Unearned income (225,081) (211,759) (161,109) (146,093)
Allowance for loan losses (136,707) (128,459) (126,442) (126,433)
- -----------------------------------------------------------------------------------------
Net loans 6,218,179 6,043,608 5,785,778 5,667,618
Premises and equipment (net) 184,413 191,402 195,410 201,690
Interest receivable 107,504 101,958 116,767 106,094
Due from broker 299,645
Other assets 590,125 562,711 578,609 562,325
- -----------------------------------------------------------------------------------------
Total assets $11,720,418 $11,492,559 $11,525,813 $11,893,669
=========================================================================================
Liabilities
Non-interest bearing deposits $ 1,751,238 $ 1,774,901 $ 1,669,006 $ 1,713,563
Interest bearing deposits:
Interest bearing demand 2,955,576 2,739,923 2,530,148 2,585,045
Savings accounts 651,544 669,062 705,910 961,171
Savings certificates 2,256,838 2,285,807 2,290,154 2,065,355
Large denomination certificates 228,879 204,940 146,500 126,077
Foreign 43,267 159,446 138,168 291,382
- -----------------------------------------------------------------------------------------
Total interest bearing deposits 6,136,104 6,059,178 5,810,880 6,029,030
- -----------------------------------------------------------------------------------------
Total deposits 7,887,342 7,834,079 7,479,886 7,742,593
Securities sold under repurchase
agreements 1,467,565 1,356,190 1,767,963 1,228,482
Federal funds purchased 495,171 799,376 948,969 1,002,344
Other short-term borrowings
Long-term borrowings 400,014 400,018 250,021 252,974
Interest payable 30,507 31,134 26,010 24,873
Due to broker 300,000 600,812
Other liabilities 215,704 182,288 190,616 186,938
- -----------------------------------------------------------------------------------------
Total liabilities 10,796,303 10,603,085 10,663,465 11,039,016
Stockholders' Equity
Common stock 300,387 298,622 297,819 296,936
Capital surplus, net 209,327 207,180 204,763 202,513
Retained earnings 399,268 378,204 360,529 341,946
Unrealized gains on
securities available for
sale, net of deferred taxes 15,133 5,468 (763) 13,258
- -----------------------------------------------------------------------------------------
Total stockholders' equity 924,115 889,474 862,348 854,653
- -----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,720,418 $11,492,559 $11,525,813 $11,893,669
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(in thousands) 12/31/95 9/30/95 6/30/95 3/31/95
- ----------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 599,113 $ 498,193 $ 529,205 $ 541,946
Interest bearing deposits with
other banks 3,129 1,712 14,610 33,523
Federal funds sold and resale
agreements 460,217 425,305 638,641 772,865
Trading account securities 478,723 464,950 439,737 490,266
Loans held for securitization 389,700 750,000 450,300 150,000
Loans held for sale 361,260 267,535 259,372 159,224
Securities available for sale 2,333,971 2,195,180 1,651,554 1,692,387
Investment securities 297,237 375,677 391,897
Loans:
Consumer 1,751,274 1,776,434 2,116,882 2,229,957
Commercial 3,090,904 2,982,401 2,820,339 2,577,674
Real estate--construction 236,103 237,271 227,531 211,097
Real estate mortgage--commercial 366,698 406,102 433,701 505,717
Real estate mortgage--residential 122,584 248,145 224,433 225,477
- ----------------------------------------------------------------------------------------
Gross loans 5,567,563 5,650,353 5,822,886 5,749,922
Less: Unearned income (151,535) (140,916) (138,459) (102,323)
Allowance for loan losses (129,702) (129,672) (136,497) (151,729)
- ----------------------------------------------------------------------------------------
Net loans 5,286,326 5,379,765 5,547,930 5,495,870
Premises and equipment (net) 192,431 180,549 166,731 160,672
Interest receivable 104,437 98,000 90,190 75,082
Due from broker
Other assets 768,558 534,689 458,370 513,994
- ----------------------------------------------------------------------------------------
Total assets $10,977,865 $11,093,115 $10,622,317 $10,477,726
========================================================================================
Liabilities
Non-interest bearing deposits $ 1,726,378 $ 1,603,922 $ 1,647,309 $ 1,533,797
Interest bearing deposits:
Interest bearing demand 2,441,125 2,402,077 2,358,788 2,405,637
Savings accounts 1,395,514 1,338,824 1,291,289 1,224,393
Savings certificates 1,850,397 1,828,217 1,809,051 1,949,339
Large denomination certificates 129,711 99,890 99,020 100,987
Foreign 49,846 80,318 96,084 183,337
- ----------------------------------------------------------------------------------------
Total interest bearing deposits 5,866,593 5,749,326 5,654,232 5,863,693
- ----------------------------------------------------------------------------------------
Total deposits 7,592,971 7,353,248 7,301,541 7,397,490
Securities sold under repurchase
agreements 1,124,105 1,153,479 1,229,433 1,202,629
Federal funds purchased 780,193 1,285,918 816,946 521,295
Other short-term borrowings 105,408
Long-term borrowings 253,033 253,129 253,222 253,550
Interest payable 19,460 23,455 18,030 26,047
Due to broker 125,000
Other liabilities 219,154 181,514 185,140 199,831
- ----------------------------------------------------------------------------------------
Total liabilities 10,113,916 10,250,743 9,804,312 9,706,250
Stockholders' Equity
Common stock 296,044 295,244 294,175 293,298
Capital surplus, net 200,093 197,911 195,899 193,986
Retained earnings 322,614 325,416 305,296 285,603
Unrealized gains on
securities available for
sale, net of deferred taxes 45,198 23,801 22,635 (1,411)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 863,949 842,372 818,005 771,476
- ----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $10,977,865 $11,093,115 $10,622,317 $10,477,726
========================================================================================
</TABLE>
45
<PAGE>
TABLE 24
QUARTERLY AVERAGE BALANCE SHEET TREND (excluding Capital One)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------
(in thousands) 12/31/96 9/30/96 6/30/96 3/31/96
- ------------------------------------------------------------------------------------------------
<S> <C>
Assets
Earning assets
Interest bearing deposits with
other banks $ 14,779 $ 8,322 $ 2,862 $ 12,633
Federal funds sold and resale
agreements 621,548 632,373 703,429 591,396
Trading account securities 516,477 534,483 493,912 506,040
Loans held for securitization 283,696 300,000 300,000 330,557
Loans held for sale 145,687 322,318 381,530 389,569
Securities available for sale 2,488,683 2,477,984 2,379,317 2,309,330
Investment securities-taxable
Investment securities-nontaxable
Loans (net of unearned income):
Consumer 2,298,475 2,061,732 2,055,518 1,906,768
Commercial 3,161,213 3,031,863 2,923,535 2,892,389
Real estate--construction 248,339 250,921 252,540 245,237
Real estate mortgage--commercial 272,376 291,124 348,219 357,989
Real estate mortgage--residential 339,652 292,405 234,634 164,087
- ------------------------------------------------------------------------------------------------
Total loans 6,320,055 5,928,045 5,814,446 5,566,470
- ------------------------------------------------------------------------------------------------
Total earning assets 10,390,925 10,203,525 10,075,496 9,705,995
Non-rate related assets:
Cash and due from banks 469,854 473,638 514,523 529,040
Allowance for loan losses (132,385) (126,539) (126,569) (128,503)
Premises and equipment (net) 189,320 194,211 197,471 196,314
Other assets 692,199 684,580 685,761 764,784
- ------------------------------------------------------------------------------------------------
Total assets $11,609,913 $11,429,415 $11,346,682 $11,067,630
- ------------------------------------------------------------------------------------------------
Liabilities and Stockholders'
Equity Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,830,942 $ 2,654,412 $ 2,537,684 $ 2,474,573
Savings accounts 658,926 687,441 949,193 1,248,406
Savings certificates 2,269,278 2,288,185 2,158,040 1,949,398
Large denomination certificates 227,394 180,640 126,537 111,194
Foreign 144,797 187,614 179,726 93,435
- ------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,131,337 5,998,292 5,951,180 5,877,006
Federal funds and repurchase
agreements 2,335,823 2,507,844 2,491,809 2,205,733
Other short-term borrowings
Long-term borrowings 400,016 274,419 250,606 252,991
- ------------------------------------------------------------------------------------------------
Total interest bearing liabilities 8,867,176 8,780,555 8,693,595 8,335,730
Non-interest bearing liabilities:
Demand deposits 1,577,660 1,570,541 1,574,282 1,674,258
Other liabilities 253,806 214,518 231,798 198,254
Common stockholders' equity 911,271 863,801 847,007 859,388
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,609,913 $11,429,415 $11,346,682 $11,067,630
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Three Months Ended
- ---------------------------------------------------------------------------------------------
(in thousands) 12/31/95 9/30/95 6/30/95 3/31/95
- ---------------------------------------------------------------------------------------------
<S> <C>
Assets
Earning assets
Interest bearing deposits with
other banks $ 7,077 $ 8,136 $ 22,799 $ 89,749
Federal funds sold and resale
agreements 538,752 469,512 532,922 812,447
Trading account securities 469,665 464,254 553,080 418,011
Loans held for securitization 623,801 425,543 153,300 1,667
Loans held for sale 369,802 312,734 234,107 94,718
Securities available for sale 1,932,161 1,712,148 1,679,836 1,494,844
Investment securities-taxable 154,857 230,852 235,514 214,027
Investment securities-nontaxable 50,812 106,860 146,867 157,609
Loans (net of unearned income):
Consumer 1,824,487 2,182,724 2,349,345 2,505,854
Commercial 2,863,087 2,747,241 2,553,554 2,362,850
Real estate--construction 242,094 230,364 217,685 207,805
Real estate mortgage--commercial 387,273 423,622 480,112 520,340
Real estate mortgage--residential 281,250 241,066 236,107 204,888
- ----------------------------------------------------------------------------------------------
Total loans 5,598,191 5,825,017 5,836,803 5,801,737
- ----------------------------------------------------------------------------------------------
Total earning assets 9,745,118 9,555,056 9,395,228 9,084,809
Non-rate related assets:
Cash and due from banks 543,776 533,901 509,633 503,217
Allowance for loan losses (125,658) (133,144) (144,407) (151,757)
Premises and equipment (net) 188,689 174,691 164,536 160,217
Other assets 630,085 625,258 561,476 598,458
- ----------------------------------------------------------------------------------------------
Total assets $10,982,010 $10,755,762 $10,486,466 $10,194,944
==============================================================================================
Liabilities and Stockholders'
Equity Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,406,323 $ 2,379,104 $ 2,378,621 $ 2,416,303
Savings accounts 1,372,400 1,315,832 1,255,593 1,188,584
Savings certificates 1,800,643 1,791,296 1,876,689 1,943,788
Large denomination certificates 104,933 100,367 92,660 123,864
Foreign 77,306 116,204 146,829 83,737
- ----------------------------------------------------------------------------------------------
Total interest bearing deposits 5,761,605 5,702,803 5,750,392 5,756,276
Federal funds and repurchase
agreements 2,338,713 2,201,617 1,950,959 1,512,558
Other short-term borrowings 30,098 195,275
Long-term borrowings 253,085 253,174 253,427 253,596
- ----------------------------------------------------------------------------------------------
Total interest bearing liabilities 8,353,403 8,157,594 7,984,876 7,717,705
Non-interest bearing liabilities:
Demand deposits 1,584,375 1,557,185 1,497,770 1,515,423
Other liabilities 188,036 216,792 210,092 206,520
Common stockholders' equity 856,196 824,191 793,728 755,296
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $10,982,010 $10,755,762 $10,486,466 $10,194,944
==============================================================================================
</TABLE>
46
<PAGE>
TABLE 25
QUARTERLY INCOME TREND (excluding Capital One)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees:
Consumer $ 62,188 $ 55,516 $ 54,725 $ 53,062 $ 52,026 $ 60,296 $ 62,068 $ 70,095
Commercial 61,509 59,691 56,568 55,352 56,128 53,703 50,358 46,365
Real estate--construction 5,991 6,085 6,064 6,062 6,402 6,080 5,628 5,152
Real estate--commercial mortgage 5,552 6,036 7,710 8,150 8,856 9,358 11,276 12,131
Real estate--residential mortgage 6,496 5,701 4,176 3,204 5,628 5,011 5,074 4,279
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, including fees 141,736 133,029 129,243 125,830 129,040 134,448 134,404 138,022
Interest bearing deposits with other banks 183 106 43 154 102 127 358 1,316
Federal funds sold and resale agreements 8,648 8,793 9,543 8,188 8,025 7,166 8,232 12,029
Trading account securities 8,090 8,383 7,865 8,122 7,736 7,410 8,936 6,718
Loans held for securitization 5,611 6,005 5,992 7,419 14,262 11,561 6,420 73
Loans held for sale 2,525 8,441 9,579 10,086 8,635 7,785 5,858 1,479
Securities available for sale 45,768 46,286 43,961 41,783 35,442 31,963 31,342 26,512
Investment securities--taxable 2,797 4,190 4,257 3,811
Investment securities--nontaxable 950 2,093 2,928 3,139
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 212,561 211,043 206,226 201,582 206,989 206,743 202,735 193,099
Interest expense:
Interest bearing demand 24,688 21,230 18,209 18,080 18,677 18,667 18,643 18,099
Savings accounts 4,399 4,607 7,530 11,495 13,426 12,785 11,800 10,727
Savings certificates 27,047 27,227 25,395 22,535 21,381 22,070 20,747 17,147
Large denomination certificates 3,261 2,566 1,731 1,525 1,451 1,332 1,186 1,529
Foreign 1,961 2,583 2,415 1,279 1,138 1,721 2,235 1,253
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 61,356 58,213 55,280 54,914 56,073 56,575 54,611 48,755
Securities sold under repurchase agreements 19,085 19,329 17,084 14,511 16,343 14,689 13,880 11,732
Federal funds purchased 9,238 10,939 12,693 11,809 14,874 14,211 12,266 7,295
Other short-term borrowings 413 2,761
Long-term borrowings 6,163 4,128 3,796 4,114 4,104 4,324 4,119 4,474
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 95,842 92,609 88,853 85,348 91,394 89,799 85,289 75,017
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 116,719 118,434 117,373 116,234 115,595 116,944 117,446 118,082
Provision for loan losses 29,800 19,000 13,794 11,257 18,604 8,681 4,250 3,251
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 86,919 99,434 103,579 104,977 96,991 108,263 113,196 114,831
Non-interest income:
Service charges on deposit accounts 17,198 17,180 17,100 16,231 16,816 17,732 17,212 16,471
Consumer loan servicing and service charge income 12,056 11,439 15,276 12,156 6,468 2,511 1,633 2,551
Trust and other financial services income 10,708 10,308 10,108 9,605 9,460 8,680 7,104 7,096
Gain on securitization of loans 9,254 9,562
Other 35,451 29,831 21,223 19,432 25,360 17,440 16,743 10,941
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest operating income 84,667 68,758 63,707 57,424 67,666 46,363 42,692 37,059
Securities available for sale gains (losses) 4,894 (629) 164 592 20 166 244 102
Investment securities gains 434 565 3 255
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 89,561 68,129 63,871 58,016 68,120 47,094 42,939 37,416
Non-interest expense:
Salaries 57,513 54,605 52,302 48,700 48,932 45,792 43,668 42,638
Employee benefits 10,129 8,811 10,466 12,401 7,723 10,517 12,076 13,698
Supplies and equipment 10,654 10,036 9,985 9,605 9,513 9,384 8,715 8,558
Occupancy 9,576 9,045 9,520 10,194 9,572 9,635 9,434 9,843
External data processing services 9,002 7,992 8,333 7,146 7,289 6,868 6,748 6,210
Travel and communications 5,645 6,231 6,706 5,920 7,208 6,138 5,604 5,594
Commercial fraud loss 35,000
Other 22,818 26,135 24,199 21,649 26,954 21,173 25,199 24,837
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 125,337 122,855 121,511 115,615 152,191 109,507 111,444 111,378
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 51,143 44,708 45,939 47,378 12,920 45,850 44,691 40,869
Applicable income taxes 17,498 15,102 15,458 16,183 3,894 15,707 15,005 14,163
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 33,645 $ 29,606 $ 30,481 $ 31,195 $ 9,026 $ 30,143 $ 29,686 $ 26,706
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
TABLE 26
STATEMENT OF CONSOLIDATED INCOME (excluding Capital One)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) (unaudited) 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees:
Consumer $225,491 $244,485 $128,570 $ 87,286
Commercial 233,120 206,554 163,195 157,157
Real estate--construction 24,202 23,262 20,977 31,570
Real estate--commercial mortgage 27,448 41,621 47,520 44,830
Real estate--residential mortgage 19,577 19,992 8,399 7,634
- -----------------------------------------------------------------------------------------------------------------------
Total loans, including fees 529,838 535,914 368,661 328,477
Interest bearing deposits with other banks 486 1,903 11,441 12,031
Federal funds sold and resale agreements 35,172 35,452 42,279 23,196
Trading account securities 32,460 30,800 21,487 31,297
Loans held for securitization 25,027 32,316
Loans held for sale 30,631 23,757 13,010 16,875
Securities available for sale 177,798 125,259 72,113 17,064
Investment securities-taxable 15,055 4,305 93,538
Investment securities-nontaxable 9,110 15,843 21,390
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 831,412 809,566 549,139 543,868
Interest expense:
Interest bearing demand 82,207 74,086 67,694 68,007
Savings accounts 28,031 48,738 33,461 24,079
Savings certificates 102,204 81,345 66,352 58,514
Large denomination certificates 9,083 5,498 7,382 10,970
Foreign 8,238 6,347 4,422 6,627
- -----------------------------------------------------------------------------------------------------------------------
Total interest on deposits 229,763 216,014 179,311 168,197
Securities sold under repurchase agreements 70,009 56,644
Federal funds purchased 44,679 48,646 3,213
Other short-term borrowings 3,174 4,896 21,513
Long-term borrowings 18,201 17,021 16,685 16,681
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 362,652 341,499 204,105 206,391
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 468,760 468,067 345,034 337,477
Provision for loan losses 73,851 34,786 (16,229) 13,256
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 394,909 433,281 361,263 324,221
Non-interest income:
Service charges on deposit accounts 67,709 68,231 66,141 64,471
Consumer loan servicing and service charge income 50,927 13,163 26,834 30,656
Trust and investment management income 40,729 32,340 28,085 24,702
Gain on securitization of loans 9,254 9,562
Other 105,937 70,484 74,145 73,988
- -----------------------------------------------------------------------------------------------------------------------
Non-interest operating income 274,556 193,780 195,205 193,817
Securities available for sale gains 5,021 532 3,413 3,913
Investment securities gains 1,257 46 405
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest income 279,577 195,569 198,664 198,135
Non-interest expense:
Salaries 213,120 181,030 186,216 173,710
Employee benefits 41,807 44,014 50,039 55,492
Supplies and equipment 40,280 36,170 34,045 32,587
Occupancy 38,335 38,484 41,869 39,094
External data processing services 32,473 27,115 27,660 27,344
Travel and communications 24,502 24,544 22,758 17,800
Commercial fraud loss 35,000
Restructuring charges 43,212
Other 94,801 98,163 82,510 98,009
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest expense 485,318 484,520 488,309 444,036
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 189,168 144,330 71,618 78,320
Applicable income taxes 64,241 48,769 15,775 14,391
- -----------------------------------------------------------------------------------------------------------------------
Net income $124,927 $ 95,561 $ 55,843 $ 63,929
=======================================================================================================================
</TABLE>
48
<PAGE>
TABLE 27
SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Summary of Operations (dollars in thousands-except per share)
Net interest income-taxable equivalent $476,984 $503,837 $523,717 $545,093 $454,912 $420,026
Less: taxable equivalent adjustment 8,224 10,603 13,706 15,753 19,302 22,056
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 468,760 493,234 510,011 529,340 435,610 397,970
Provision for loan losses (2) 73,851 38,715 14,498 47,286 67,794 287,484
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 394,909 454,519 495,513 482,054 367,816 110,486
Non-interest operating income (3) 274,556 277,479 564,624 361,118 280,988 248,537
Securities available for sale gains 5,021 532 3,413 3,913 10,504 94,666
Investment securities gains (losses) 1,257 46 405 (17,951) (1,445)
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest income 279,577 279,268 568,083 365,436 273,541 341,758
Non-interest expense (4) 485,318 564,068 846,423 598,316 499,239 508,925
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 189,168 169,719 217,173 249,174 142,118 (56,681)
Applicable income taxes (benefit) (5) 64,241 58,639 67,339 74,760 32,918 (30,934)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $124,927 $111,080 $149,834 $174,414 $109,200 $(25,747)
======================================================================================================================
Per common share:
Net income (loss) $ 2.06 $ 1.86 $ 2.59 $ 3.06 $ 1.96 $ (0.48)
Cash dividends declared (6) 0.81 0.79 1.00 0.80 0.45 0.30
Book value at year-end 15.38 14.59 18.96 17.04 14.77 13.17
Average shares outstanding (in thousands) 60,672 59,826 57,863 56,920 55,727 53,994
- ----------------------------------------------------------------------------------------------------------------------
Selected Average Balances (dollars in millions)
Assets $ 11,364 $ 11,134 $ 11,469 $ 11,617 $ 11,168 $ 11,534
Earning assets 10,095 9,919 10,152 10,553 10,181 10,538
Loans (net of unearned income) 5,908 6,120 6,408 6,206 5,618 6,071
Deposits 7,589 7,367 7,747 7,733 7,886 8,362
Long-term borrowings 295 233 255 287 298 318
Interest bearing liabilities 8,670 8,501 8,606 9,121 9,000 9,506
Common stockholders' equity 870 868 1,046 889 768 750
- ----------------------------------------------------------------------------------------------------------------------
Selected Year-End Balances (dollars in millions)
Assets $ 11,720 $ 10,978 $ 12,931 $ 11,849 $ 12,093 $ 11,239
Earning assets 10,409 9,443 11,479 10,745 11,010 9,443
Loans (net of unearned income) 6,355 5,416 7,924 6,310 5,809 5,884
Deposits 7,887 7,593 7,822 7,821 7,823 8,481
Long-term borrowings 400 253 254 266 298 299
Interest bearing liabilities 8,499 8,024 9,846 9,167 9,684 9,031
Common stockholders' equity 924 864 1,111 965 827 712
- ----------------------------------------------------------------------------------------------------------------------
Operating Ratios
Net income to:
Average common stockholders' equity 14.35% 12.79% 14.33% 19.62% 14.22% N/M
Average assets 1.10 1.00 1.31 1.50 0.98 N/M
Stockholders' equity to assets (average) 7.66 7.80 9.12 7.65 6.88 6.50%
Loans to deposits (average) 77.86 83.07 82.72 80.26 71.24 72.60
Net loan losses to average loans 1.13 0.87 0.71 0.91 2.34 2.03
Net interest spread (7) 4.14 4.45 4.63 4.76 4.05 3.40
Net yield margin (7) 4.73 5.08 5.16 5.17 4.47 3.98
At year-end:
Allowance for loan losses to loans 2.15 2.39 2.78 4.01 4.57 5.60
Allowance for loan losses to non-
performing loans 483.02 337.05 846.32 342.63 228.25 156.84
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Signet spun off Capital One on February 28, 1995. The amounts of pre-tax
income related to Capital One were as follows: 1995--$27.4 million;
1994--$146.8 million; 1993--$170.9 million; 1992--$48.9 million; and
1991--$53.5 million.
(2) 1991 included a special provision of $146.6 million to accelerate the
reduction of real estate assets.
(3) 1996 included a $9.3 million gain on securitization of student loans, 1995
included a $9.6 million gain on securitization of home equity loans and $7.2
million related to the implementation of SFAS No. 122.
(4) 1993, 1992 and 1991 included provisions of $7.4 million, $15.5 million and
$71.9 million, respectively, to the reserve for foreclosed properties, which
had December 31, 1993, 1992 and 1991 balances of $5.7 million, $10.6 million
and $41.6 million, respectively. 1995, 1994, 1993, 1992, and 1991 included
$29.1 million, $100.9 million, $55.8 million, $23.1 million, and $14.6
million, respectively, of Capital One credit card solicitation expenses.
1994 included a $49.0 million contract termination fee and $43.2 million of
restructuring charges. 1995 included the $35.0 million fraud loss.
(5) Income taxes (benefit) applicable to net securities available for sale gains
and investment securities gains (losses) were as follows: 1996--$1.8
million; 1995--$0.7 million; 1994--$1.2 million; 1993--$1.5 million;
1992--($2.5) million; and 1991--$32.9 million. Additionally, 1992 included
$6.3 million of recaptured alternative minimum tax.
(6) In March, 1991, Signet announced that, thereafter, its dividend declaration
would be made in the month following the end of each quarter instead of in
the last month of each quarter. As a result, 1991 included only three
dividend declarations; however, four dividend payments were made.
(7) Net interest spread and net yield margin were calculated on a taxable
equivalent basis, using the federal income tax rate and state tax rates, as
applicable, reduced by the nondeductible portion of interest expense.
49
<PAGE>
TABLE 28
NET INTEREST INCOME ANALYSIS
taxable equivalent basis (1)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
Year Ended ------------ Year Ended ------------
December 31 Increase Change due to (3) December 31 Increase Change due to (3)
(in thousands) 1996 1995 (Decrease) Volume Rates 1994 (Decrease) Volume Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees:(2)
Consumer $225,491 $292,024 $(66,533) $(53,312) $(13,221) $342,670 $(50,646) $(86,336) $35,690
Commercial 238,232 209,765 28,467 29,422 (955) 165,372 44,393 38,501 5,892
Real estate--construction 24,202 23,263 939 2,456 (1,517) 21,007 2,256 (2,252) 4,508
Real estate--commercial mortgage 29,280 44,275 (14,995) (12,584) (2,411) 50,254 (5,979) (10,281) 4,302
Real estate--residential mortgage 19,577 19,992 (415) 1,349 (1,764) 8,399 11,593 11,882 (289)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 536,782 589,319 (52,537) (19,932) (32,605) 587,702 1,617 (27,043) 28,660
Interest bearing deposits with other banks 486 2,025 (1,539) (1,255) (284) 11,512 (9,487) (12,269) 2,782
Federal funds and resale agreements 35,172 38,732 (3,560) (374) (3,186) 44,294 (5,562) (17,472) 11,910
Trading account securities 32,460 30,800 1,660 2,333 (673) 21,487 9,313 12,555 (3,242)
Loans held for securitization 25,027 36,448 (11,421) (3,526) (7,895) 41,015 (4,567) (9,625) 5,058
Loans held for sale 30,631 23,757 6,874 5,439 1,435 13,010 10,747 3,972 6,775
Securities available for sale 179,078 126,717 52,361 51,005 1,356 73,409 53,308 24,415 28,893
Investment securities--taxable 15,190 (15,190) (15,190) 4,395 10,795 10,341 454
Investment securities--nontaxable 13,614 (13,614) (13,614) 23,895 (10,281) (9,695) (586)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 839,636 876,602 (36,966) 15,385 (52,351) 820,719 55,883 (19,254) 75,137
Interest expense:
Interest bearing demand 82,207 74,086 8,121 7,123 998 67,694 6,392 (7,513) 13,905
Savings accounts 28,031 48,738 (20,707) (13,483) (7,224) 33,461 15,277 9,513 5,764
Savings certificates 102,204 81,345 20,859 14,470 6,389 61,377 19,968 (4,169) 24,137
Large denomination certificates 9,083 11,669 (2,586) (1,997) (589) 14,527 (2,858) (6,516) 3,658
Foreign 8,238 6,347 1,891 2,519 (628) 10,071 (3,724) (6,893) 3,169
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 229,763 222,185 7,578 6,029 1,549 187,130 35,055 (11,395) 46,450
Federal funds and repurchase agreements 114,688 109,961 4,727 15,714 (10,987) 65,894 44,067 17,530 26,537
Other short-term borrowings 15,302 (15,302) (15,302) 27,293 (11,991) (16,091) 4,100
Long-term borrowings 18,201 25,317 (7,116) (4,520) (2,596) 16,685 8,632 7,566 1,066
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 362,652 372,765 (10,113) 7,446 (17,559) 297,002 75,763 (3,673) 79,436
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $476,984 $503,837 $(26,853) $ 8,711 $(35,564) $523,717 $(19,880) $(11,861) $(8,019)
====================================================================================================================================
</TABLE>
(1) Total income from earning assets includes the effects of taxable equivalent
adjustments using the federal income tax rate and state tax rates, as
applicable, reduced by the nondeductible portion of interest expense.
(2) Includes fees on loans of approximately $19,673, $25,938 and $30,497 for
1996, 1995, and 1994, respectively.
(3) The change in interest due to both volume and rates has been allocated in
proportion to the relationship of the absolute dollar amounts of the change
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. 50 <PAGE>
TABLE 29
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at beginning of year $129,702 $220,519 $253,313 $265,536 $329,371
Provision for loan losses 73,851 38,715 14,498 47,286 67,794
Transfer to loans held for securitization/sale (7,871) (4,869) (2,902)
Addition arising from acquisition 3,327
Transfer to Capital One Financial Corporation (68,516)
Loans charged-off:
Consumer 54,332 37,483 34,600 41,475 48,185
Commercial 3,647 5,740 9,827 17,832 33,238
Real estate--construction 6,033 1,143 9,746 26,890 58,406
Real estate--mortgage * 7,542 18,627 20,360 5,720 15,140
- ------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 71,554 62,993 74,533 91,917 154,969
Recoveries of loans previously charged-off:
Consumer 1,994 3,416 12,191 17,358 15,488
Commercial 1,884 4,570 5,997 13,138 6,992
Real estate--construction 311 1,496 6,037 4,259 523
Real estate--mortgage * 519 366 4,558 555 337
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 4,708 9,848 28,783 35,310 23,340
- ------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 66,846 53,145 45,750 56,607 131,629
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year $136,707 $129,702 $220,519 $253,313 $265,536
========================================================================================================================
Net charge-offs to average loans:
Consumer 2.51% 1.33% 0.67% 0.81% 1.71%
Commercial 0.06 0.04 0.18 0.22 1.17
Real estate 1.55 1.95 2.15 2.45 4.93
- ------------------------------------------------------------------------------------------------------------------------
Total 1.13% 0.87% 0.71% 0.91% 2.34%
- ------------------------------------------------------------------------------------------------------------------------
Allowance for loans losses to net loans at year-end 2.15% 2.39% 2.78% 4.01% 4.57%
========================================================================================================================
</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.
TABLE 30
ALLOWANCE FOR LOAN LOSSES ALLOCATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to
(dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------------
<S> <C>
Consumer (1) $ 79,592 34.96% $ 49,825 31.45% $ 94,093 57.56%
Commercial 30,741 52.45 26,367 55.52 34,041 30.86
Commercial-special (2)
Real estate (3) 21,326 12.59 40,123 13.03 60,532 11.58
Real estate--special (2)
Unallocated 5,048 13,387 31,853
- -----------------------------------------------------------------------------------------------------
Total $136,707 100.00% $129,702 100.00% $220,519 100.00%
=====================================================================================================
</TABLE>
- ---------------------------------------------------------------------------
December 31, 1993 December 31, 1992
----------------- -----------------
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
(dollars in thousands) Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------
Consumer (1) $ 67,030 48.77% $ 59,501 41.32%
Commercial 33,618 35.87 33,930 36.87
Commercial-special (2) 0.24 1,064 0.34
Real estate (3) 25,684 11.31 19,056 14.30
Real estate--special (2) 57,631 3.81 98,924 7.17
Unallocated 69,350 53,061
- ---------------------------------------------------------------------------
Total $253,313 100.00% $ 265,536 100.00%
===========================================================================
(1) On February 28, 1995, Signet transferred $68,516 of allowance for loan
losses to Capital One in conjunction with the spin-off.
(2) Allowance allocated to an accelerated real estate asset reduction program
which was established in 1991 and successfully terminated at the beginning
of 1994.
(3) Real estate loans include real estate--construction, real estate--commercial
mortgage and real estate--residential mortgage loans. Real
estate--residential has an insignificant amount of allowance allocated to it
because of the minimal credit risk associated with that type of loan.
51
<PAGE>
TABLE 31
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Average Income\ Yield\ Average Income\ Yield\ Average Income\ Yield\
(dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Earning assets (tax equivalent
basis):(1)
Interest bearing deposits
with other banks $ 9,659 $ 486 5.03% $ 33,750 $ 2,025 6.00% $ 251,266 $ 11,512 4.58%
Federal funds and resale agreements 637,131 35,172 5.52 643,386 38,732 6.02 970,300 44,294 4.56
Trading account securities 512,798 32,460 6.33 476,361 30,800 6.47 287,192 21,487 7.48
Loans held for securitization 303,499 25,027 8.25 338,877 36,448 10.76 432,581 41,015 9.48
Loans held for sale 309,362 30,631 9.90 253,758 23,757 9.36 200,712 13,010 6.48
Securities available for sale 2,414,209 179,078 7.42 1,726,886 126,717 7.34 1,338,449 73,409 5.48
Investment securities--taxable 210,893 15,190 7.20 66,829 4,395 6.58
Investment securities--nontaxable 115,221 13,614 11.82 197,231 23,895 12.12
Loans (net of unearned income):(2)
Consumer 2,081,167 225,491 10.83 2,568,796 292,024 11.37 3,351,159 342,670 10.23
Commercial 3,002,766 238,232 7.93 2,633,370 209,765 7.97 2,148,726 165,372 7.70
Real estate--construction 249,261 24,202 9.71 224,597 23,263 10.36 249,353 21,007 8.42
Real estate--commercial mortgage 317,232 29,280 9.23 452,392 44,275 9.79 560,542 50,254 8.97
Real estate--residential mortgage 258,013 19,577 7.59 241,038 19,992 8.29 97,855 8,399 8.58
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 5,908,439 536,782 9.09 6,120,193 589,319 9.63 6,407,635 587,702 9.17
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 10,095,097 $839,636 8.32 9,919,325 $876,602 8.84 10,152,195 $820,719 8.08
- -----------------------------------------------------------------------------------------------------------------------------------
Non-rate related assets:
Cash and due from banks 496,627 523,224 501,821
Allowance for loan losses (128,504) (149,681) (241,633)
Premises and equipment (net) 194,315 188,974 242,933
Other assets 706,729 652,515 813,312
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,364,264 $11,134,357 $11,468,628
===================================================================================================================================
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,625,049 $ 82,207 3.13% $2,395,017 $ 74,086 3.09% $ 2,639,388 $ 67,694 2.56%
Savings accounts 884,829 28,031 3.17 1,283,695 48,738 3.80 1,019,068 33,461 3.28
Savings certificates 2,166,840 102,204 4.72 1,854,091 81,345 4.39 1,981,823 61,377 3.10
Large denomination certificates 161,674 9,083 5.62 196,798 11,669 5.93 318,659 14,527 4.56
Foreign 151,474 8,238 5.44 106,029 6,347 5.99 236,765 10,071 4.25
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 5,989,866 229,763 3.84 5,835,630 222,185 3.81 6,195,703 187,130 3.02
Federal funds and
repurchase agreements 2,385,502 114,688 4.81 2,071,944 109,961 5.31 1,677,884 65,894 3.93
Other short-term borrowings 228,572 15,302 6.69 477,424 27,293 5.72
Long-term borrowings 294,741 18,201 6.18 364,713 25,317 6.94 254,917 16,685 6.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 8,670,109 362,652 4.18 8,500,859 372,765 4.39 8,605,928 297,002 3.45
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits 1,599,048 1,531,553 1,550,902
Other liabilities 224,646 233,495 265,899
Common stockholders' equity 870,461 868,450 1,045,899
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,364,264 $11,134,357 $11,468,628
====================================================================================================================================
Net interest income/spread $476,984 4.14% $503,837 4.45% $523,717 4.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income to average earning assets 8.32% 8.84% 8.08%
Interest expense to average earning assets 3.59 3.76 2.92
- ------------------------------------------------------------------------------------------------------------------------------------
Net yield margin 4.73% 5.08% 5.16%
====================================================================================================================================
</TABLE>
(1) Includes the effects of taxable equivalent adjustments, using the federal
income tax rate and state tax rates, as applicable, reduced by the
nondeductible portion of interest expense.
(2) For the purpose of these computations, nonaccrual loans are included in the
daily average loan amounts. Also, interest income includes fees on loans of
approximately $19,673, $25,938 and $30,497 for 1996, 1995 and 1994,
respectively.
52
<PAGE>
TABLE 32
NON-PERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Non-accrual loans:
Commercial $ 8,850 $ 9,033 $10,548 $ 42,303 $ 25,470
Consumer 2,404 1,572 1,708 2,191 808
Real estate--construction 2,842 2,988 5,490 17,837 52,051
Real estate-mortgage* 14,207 24,888 7,310 6,523 7,341
- ----------------------------------------------------------------------------------------------------------
Total non-accrual loans 28,303 38,481 25,056 68,854 85,670
Restructured loans:
Commercial 1,609 8,099
Real estate--construction 1,000 3,470 22,568
- ----------------------------------------------------------------------------------------------------------
Total restructured loans 1,000 5,079 30,667
- ----------------------------------------------------------------------------------------------------------
Total non-performing loans 28,303 38,481 26,056 73,933 116,337
Foreclosed properties 10,497 15,822 22,480 48,295 75,403
Less foreclosed property reserve (5,742) (10,625)
- ----------------------------------------------------------------------------------------------------------
Total foreclosed properties 10,497 15,822 22,480 42,553 64,778
Total non-performing assets $38,800 $54,303 $48,536 $116,486 $181,115
Percentage to loans (net of unearned)
and foreclosed properties 0.61% 1.00% 0.61% 1.83% 3.08%
Allowance for loan losses to:
Non-performing loans 483.02% 337.05% 846.32% 342.63% 228.25%
Non-performing assets 352.34 238.85 454.34 217.46 146.61
- ----------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $71,484 $66,371 $65,333 $ 58,891 $ 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.
TABLE 33
SUMMARY OF TOTAL LOANS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Loans:
Consumer $2,300,558 $1,751,274 $4,612,633 $3,105,824 $2,423,176
Commercial 3,451,230 3,090,904 2,472,620 2,299,973 2,181,218
Real estate--construction 244,653 236,103 209,183 309,842 549,001
Real estate--commercial mortgage 254,060 366,698 526,956 581,529 632,072
Real estate--residential mortgage 329,466 122,584 191,508 71,411 77,844
- ---------------------------------------------------------------------------------------------------------------------------
Total $6,579,967 $5,567,563 $8,012,900 $6,368,579 $5,863,311
===========================================================================================================================
</TABLE>
53
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
Consolidated BALANCE SHEET
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands--except per share) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 566,520 $ 599,113
Interest bearing deposits with other banks 3,200 3,129
Federal funds sold and securities purchased under resale agreements 777,999 460,217
Trading account securities 546,372 478,723
Loans held for securitization 389,700
Loans held for sale 102,826 361,260
Securities available for sale 2,623,280 2,333,971
Loans:
Consumer 2,300,558 1,751,274
Commercial 3,451,230 3,090,904
Real estate--construction 244,653 236,103
Real estate--commercial mortgage 254,060 366,698
Real estate--residential mortgage 329,466 122,584
- --------------------------------------------------------------------------------------------------------------------------
Gross loans 6,579,967 5,567,563
Less: Unearned income (225,081) (151,535)
Allowance for loan losses (136,707) (129,702)
- --------------------------------------------------------------------------------------------------------------------------
Net loans 6,218,179 5,286,326
- --------------------------------------------------------------------------------------------------------------------------
Premises and equipment (net) 184,413 192,431
Interest receivable 107,504 104,437
Other assets 590,125 768,558
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,720,418 $10,977,865
==========================================================================================================================
Liabilities
Non-interest bearing deposits $ 1,751,238 $ 1,726,378
Interest bearing deposits:
Interest bearing demand 2,955,576 2,441,125
Savings accounts 651,544 1,395,514
Savings certificates 2,256,838 1,850,397
Large denomination certificates 228,879 129,711
Foreign 43,267 49,846
- --------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 6,136,104 5,866,593
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 7,887,342 7,592,971
- --------------------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements 1,467,565 1,124,105
Federal funds purchased 495,171 780,193
Long-term borrowings 400,014 253,033
Interest payable 30,507 19,460
Due to broker 300,000 125,000
Other liabilities 215,704 219,154
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,796,303 10,113,916
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common Stock, par value $5 per share; Authorized 100,000,000 shares,
issued and outstanding 60,077,489 (1996), and 59,208,745 (1995) 300,387 296,044
Capital surplus, net 209,327 200,093
Retained earnings 399,268 322,614
Unrealized gains on securities available for sale, net of deferred taxes 15,133 45,198
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 924,115 863,949
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,720,418 $10,977,865
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
54
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
Statement of CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands--except per share) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income:
Loans, including fees:
Consumer $225,491 $292,024 $342,670
Commercial 233,120 206,554 163,195
Real estate--construction 24,202 23,262 20,977
Real estate--commercial mortgage 27,448 41,621 47,520
Real estate--residential mortgage 19,577 19,992 8,399
- -----------------------------------------------------------------------------------------------------------------------------
Total loans, including fees 529,838 583,453 582,761
Interest bearing deposits with other banks 486 2,025 11,512
Federal funds sold and resale agreements 35,172 38,732 44,294
Trading account securities 32,460 30,800 21,487
Loans held for securitization 25,027 36,448 41,015
Loans held for sale 30,631 23,757 13,010
Securities available for sale 177,798 126,484 72,696
Investment securities 24,300 20,238
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 831,412 865,999 807,013
Interest expense:
Interest bearing demand 82,207 74,086 67,694
Savings accounts 28,031 48,738 33,461
Savings certificates 102,204 81,345 61,377
Large denomination certificates 9,083 11,669 14,527
Foreign 8,238 6,347 10,071
- -----------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 229,763 222,185 187,130
Securities sold under repurchase agreements 70,009 56,739 37,712
Federal funds purchased 44,679 53,222 28,182
Other short-term borrowings 15,302 27,293
Long-term borrowings 18,201 25,317 16,685
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 362,652 372,765 297,002
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 468,760 493,234 510,011
Provision for loan losses 73,851 38,715 14,498
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 394,909 454,519 495,513
Non-interest income:
Service charges on deposit accounts 67,709 68,231 66,141
Consumer loan servicing and service charge income 50,927 94,389 410,605
Trust and investment management income 40,729 32,584 29,401
Gain on securitization of loans 9,254 9,562
Other 105,937 72,713 58,477
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest operating income 274,556 277,479 564,624
Securities available for sale gains 5,021 532 3,413
Investment securities gains 1,257 46
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 279,577 279,268 568,083
Non-interest expense:
Salaries 213,120 196,093 257,297
Employee benefits 41,807 48,657 66,188
Supplies and equipment 40,280 42,138 54,862
Occupancy 38,335 40,595 47,059
External data processing services 32,473 29,951 50,026
Travel and communications 24,502 32,103 57,543
Capital One credit card solicitation 29,050 100,886
Commercial fraud loss 35,000
Contract termination 49,000
Restructuring charges 43,212
Other 94,801 110,481 120,350
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 485,318 564,068 846,423
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (Capital One Financial
Corporation amounted to $0, $27,407 and
$146,827, respectively) 189,168 169,719 217,173
Applicable income taxes 64,241 58,639 67,339
- -------------------------------------------------------------------------------------------------------------------------------
Net income $124,927 $111,080 $149,834
===============================================================================================================================
Earnings per common share $ 2.06 $ 1.86 $ 2.59
Cash dividends declared per share 0.81 0.79 1.00
Average common shares outstanding 60,672 59,826 57,863
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
55
<PAGE>
Signet Banking Corporation and Subsidiaries
Statement of CONSOLIDATED
CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities
Net income $ 124,927 $ 111,080 $ 149,834
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Provision for loan losses 73,851 38,715 14,498
Provision and writedowns on foreclosed property 455 1,924 1,536
Depreciation and amortization 42,260 35,366 44,055
Securities available for sale gains (5,021) (532) (3,413)
Other (gains) losses, net (45,289) (29,966) 3,498
Increase in interest receivable (3,067) (5,880) (14,439)
(Increase) decrease in other assets 194,036 (564,983) (170,009)
Increase in interest payable 11,047 9,799 2,873
Increase in other liabilities 199,905 64,851 268,010
Proceeds from securitization of consumer loans 508,960 673,256 2,393,936
Proceeds from sales of loans held for sale 30,850,963 36,741,671 24,552,546
Purchases and originations of loans held for sale (30,585,773) (37,026,247) (26,597,903)
Proceeds from sales of trading account securities 19,297,376 16,352,644 15,690,746
Purchases of trading account securities (19,335,746) (16,466,358) (15,654,476)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,328,884 (64,660) 681,292
Investing Activities
Proceeds from maturities of investment securities 180,725 64,542
Purchases of investment securities (25,510) (213,057)
Proceeds from sales of securities available for sale 1,439,853 1,033,081 1,380,809
Proceeds from maturities of securities available for sale 299,218 621,509 2,289,363
Purchases of securities available for sale (2,081,983) (2,760,830) (3,188,560)
Net increase in loans (1,127,154) (1,228,969) (1,700,052)
Recoveries of loans previously charged-off 4,708 9,848 28,783
Purchases of premises and equipment (19,727) (70,639) (75,210)
Purchases of mortgage servicing rights (23,633) (31,590) (18,784)
Acquisition of Sheffield Management Company
and Sheffield Investments, Inc. (20,996)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,508,718) (2,293,371) (1,432,166)
Financing Activities
Net increase in deposits 294,371 394,356 900
Net increase (decrease) in short-term borrowings 58,438 (342,369) 687,644
Increase in Capital One Financial Corporation long-term
debt prior to spin-off 1,388,153
Proceeds from issuance of long-term debt 150,000
Payments on long-term debt (3,019) (608) (12,511)
Net issuance of common stock 13,577 4,084 75,972
Payment of cash dividends (48,273) (46,489) (57,192)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 465,094 1,397,127 694,813
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 285,260 (960,904) (56,061)
Cash and cash equivalents at beginning of period 1,062,459 2,023,363 2,079,424
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,347,719 $ 1,062,459 $ 2,023,363
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures
Interest paid $ 352,125 $ 385,072 $ 294,130
Income taxes paid 24,672 21,455 47,091
Transfer of loans to foreclosed property 6,736 5,790 10,112
Transfer of loans to loans held for securitization 989,700 2,000,000
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
56
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
Statement of CHANGES IN CONSOLIDATED
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock Unrealized Total
------------------ Capital Deferred Gains/(Losses) Retained Stockholders'
(dollars in thousands--except per share) Shares Amount Surplus Compensation on Securities Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance December 31, 1993 56,608,578 $283,043 $133,038 $548,581 $964,662
Adjustment to beginning balance for
change in accounting method for
net unrealized gain on securities
available for sale, net of tax
$16,147 $29,987 29,987
Net income 149,834 149,834
Issuance of Common Stock
Related to acquisition 1,514,286 7,571 51,708 59,279
Other 513,895 2,570 14,123 16,693
Cash dividends--Common Stock--
$1.00 a share (57,192) (57,192)
Change in net unrealized losses on
securities available for sale,
net of tax benefit of $27,880 (51,784) (51,784)
- -----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 58,636,759 293,184 198,869 (21,797) 641,223 1,111,479
Net income 111,080 111,080
Issuance of Common Stock 830,463 4,152 8,431 12,583
Purchase of Common Stock (258,477) (1,292) (7,207) (8,499)
Cash dividends--Common Stock--
$.79 a share (46,489) (46,489)
Spin-off of Capital One Financial
Corporation (383,200) (383,200)
Change in net unrealized gains on
securities available for sale,
net of tax of $36,074 66,995 66,995
- -----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 59,208,745 296,044 200,093 45,198 322,614 863,949
Net income 124,927 124,927
Issuance of Common Stock 763,124 3,815 9,696 13,511
Restricted stock awards 105,620 528 2,627 $(3,155)
Amortization of deferred compensation 66 66
Cash dividends--Common Stock--
$.81 a share (48,273) (48,273)
Change in net unrealized gains on
securities available for sale,
net of tax benefit of $16,189 (30,065) (30,065)
- ------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 60,077,489 $300,387 $212,416 $(3,089) $15,133 $399,268 $924,115
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
57
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands-except per share)
NOTE A
SIGNIFICANT
ACCOUNTING
POLICIES
Signet Banking Corporation ("Signet" or the "Company") engages in general
commercial and consumer banking and provides a full range of financial services
to individuals, businesses and organizations. Signet offers investment services
including municipal bond, government, federal agency and money market sales and
trading, foreign exchange trading, mutual funds and discount brokerage. In
addition, it provides specialized services for trust, leasing, asset-based
lending, cash management, real estate and insurance. Signet's primary market
area for its traditional banking business extends from Baltimore to Washington,
south to Richmond, and on to Hampton Roads/Tidewater, Virginia. The Company
markets several of its products nationally and is exploring the national
marketing of certain other products.
The consolidated financial statements of Signet and subsidiaries are
prepared in conformity with generally accepted accounting principles and
prevailing practices of the banking industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. The following is a summary of the significant accounting
and reporting policies used in preparing the financial statements.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," on January 1, 1996. The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In determining the
recoverability of an asset, the enterprise should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the undiscounted cash flows is less than the carrying amount of the
asset, an impairment loss would be recognized. The Statement also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less selling costs.
Adoption of the Statement did not have a material impact on the Company's
financial position or results of operations.
Consolidation and Reclassifications: The consolidated financial statements
include the accounts of Signet, including Signet Bank, its principal banking
subsidiary. Capital One Financial Corporation is included in the financial
statements through February 28, 1995, at which time the spin-off to
share-holders was completed. All significant intercompany balances and
transactions have been eliminated. Certain prior years' amounts have been
reclassified to conform to the 1996 presentation.
Statement of Consolidated Cash Flows: Cash and cash equivalents, as presented in
the statement of cash flows, includes cash and due from banks, interest bearing
deposits with other banks, and federal funds sold and securities purchased under
resale agreements.
Trading Instruments: Financial instruments (including trading account securities
and derivatives) used for trading purposes are recorded in the consolidated
balance sheet at fair value at the reporting date. Realized and unrealized
changes in fair values are recognized in other non-interest income in the period
in which the changes occur. Trading instruments included in the consolidated
balance sheet are comprised primarily of government securities and asset-backed
securities. Interest revenue arising from these trading instruments is included
in the statement of consolidated operations as part of total interest income.
The increase in net unrealized income on all trading activities during 1996 and
1995 was $6,349 and $1,875, respectively.
Loans Held For Sale and Securitization: Loans held for sale and securitization
are carried at the lower of aggregate cost or market value.
58
<PAGE>
NOTE A
SIGNIFICANT
ACCOUNTING
POLICIES
CONTINUED
Securities Available For Sale: Securities available for sale represent those
securities not classified as either investment securities or trading account
securities. Securities available for sale includes securities for which the
primary objective is to realize a holding gain, and/or securities held for
indefinite periods of time and not intended to be held until maturity.
Securities held for indefinite periods of time include securities that may be
sold in response to changes in interest rates and/or significant prepayment
risks. Securities available for sale are carried at market value, with
unrealized gains and losses recorded in retained earnings. When securities are
sold, the adjusted costs of the specific securities sold are used to compute
gains or losses on the sales.
In December 1995, the Company reclassified all of its investment
securities, with a carrying value of $232,864 and a fair value of $238,918, to
securities available for sale as allowed by implementation guidance for SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
reclassification resulted in an unrealized gain of $6,054 which was recorded in
equity, net of tax.
Loans: Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. It is management's practice to
cease accruing interest on commercial and real estate loans when payments are 90
days delinquent. However, management may elect to continue the accrual of
interest when the estimated net realizable value of collateral is sufficient to
cover the principal balance and accrued interest, and the loan is in the process
of collection. Consumer loans, other than credit card, typically are charged off
when the loan is six months past due, while credit card loans typically are
charged off when the loan is six months past due and a minimum payment has not
been received for 60 days. Consumer loans are also charged off when the customer
declares bankruptcy. Loan origination and commitment fees and certain direct
loan origination costs are deferred and generally amortized as adjustments of
the related loans' yields over their contractual lives except for certain loans
(e.g., home equity lines), which consider anticipated prepayments in
establishing an economic life. Credit card loan annual membership fees and
direct origination costs are deferred and amortized over one year on a
straight-line basis. Deferred fees (net of deferred costs) on credit card loans
were $1,002 and $1,194 at December 31, 1996 and 1995, respectively.
Allowance for Loan Losses: The allowance for loan losses is maintained to absorb
anticipated future losses, net of recoveries, in the existing loan portfolio.
The provision for loan losses is the periodic cost of maintaining an adequate
allowance. In evaluating the adequacy of the allowance for loan losses,
management takes into consideration the following factors: the condition of
industries and geographic areas experiencing or expected to experience
particular economic adversities; historical charge-off and recovery activity
(noting any particular trend changes over recent periods); trends in
delinquencies, bankruptcies and non-performing loans; trends in loan volume and
size of credit risks; any irrevocable commitments to extend funds; the degree of
risk in the composition of the loan portfolio; current and anticipated economic
conditions; credit evaluations; and underwriting policies.
In 1995, Signet adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." In accordance with these
statements, impaired loans, other than consumer loans and small balance
commercial loans excluded by the statement, are measured and reported based on
the present value of expected cash flows discounted at the loan's effective
interest rate, or at the fair value of the loan's collateral if the loan is
collateral dependent. Impaired loans are specifically reviewed loans for which
it is probable that Signet will be unable to collect all amounts due according
to the terms of the loan agreement. A valuation allowance is required to the
extent that the measure of impaired loans is less than the recorded investment.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE A
SIGNIFICANT
ACCOUNTING
POLICIES
CONTINUED
Interest receipts on impaired loans are applied in a manner consistent
with Signet's policy for non-accrual loans. For the years ended December 31,
1996 and 1995, no interest income was recorded on non-accrual loans. All
interest receipts on impaired loans were applied to the principal.
Premises and Equipment: Premises and equipment are stated at cost, less
allowances for depreciation and amortization of $177,715 and $173,336 at
December 31, 1996 and 1995, respectively. Depreciation and amortization expense
are generally computed using the straight-line method. Interest costs of $520
and $689 in 1996 and 1995, respectively, related to the construction of major
operating facilities were capitalized using a weighted average interest rate.
Foreclosed Property: Real estate acquired in satisfaction of a loan is included
in other assets and stated at the lower of (1) fair value minus estimated costs
to sell; or (2) cost, defined as the fair value of the asset on the date of
foreclosure.
Intangible Assets: Goodwill, representing the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line basis over
periods not exceeding fifteen years. Other acquired intangible assets such as
deposit base intangibles are amortized on a straight-line basis over the
expected periods of benefit.
Preferred Stock: The Company is authorized to issue, in series, up to 5,000,000
shares of Preferred Stock with a par value of $20 per share.
Risk Management Instruments: The Company enters into a variety of interest rate
contracts, primarily interest rate swaps, to manage its interest rate exposure
through the use of synthetic alteration. Synthetic alteration changes the nature
of an interest-earning asset or interest-bearing liability from fixed rate to
variable rate or vice versa. These instruments are not marked to market. Related
income or expense, including amortization of purchase premiums or settlement
gains or losses is recorded as an adjustment to the yield of the related
interest-earning asset or interest-bearing liability over the periods covered by
the contracts. If an existing asset or liability designated for such accounting
treatment matures, is sold, extinguished, or terminated, the risk management
instrument is either redesignated to another existing or anticipated asset or
liability or terminated. If a risk management instrument designated for such
accounting treatment is related to an anticipated transaction that is no longer
likely to occur, the instrument is either redesignated to another existing or
anticipated asset or liability or terminated. If an instrument is terminated
because the related assets or liabilities no longer exist or an anticipated
transaction will not occur, any gain or loss is recognized into income;
otherwise, any gain or loss is deferred and amortized as an adjustment to the
yield of the designated asset or liability over the remaining periods originally
covered by the contract.
The Company may, from time to time, use interest rate swaps to manage the
interest rate risk associated with securitizations. Income or expense from these
swaps is recorded on an accrual basis along with securitization income in
non-interest income.
Sales and Servicing of Loans: Signet periodically securitizes and sells loans,
primarily consumer loans such as credit card receivables, home equity lines,
student loans, and residential mortgage loans. Signet records these transactions
as sales in accordance with SFAS No. 77, "Reporting by Transferors for Transfers
of Receivables with Recourse." Gains on the initial sale of securitized loans
are limited to the amounts related to loans existing at the time of sale and do
not include amounts related to future loans expected to be sold during the
reinvestment period. Due to the relatively short average life of credit card
loans, no gain or loss is recorded at the time of sale. Rather, loan servicing
fees, which represent credit card interest and fees in excess of interest paid
to certificate holders, credit losses, and other trust expenses, are recorded
over the life of the transaction as earned. Transaction expenses are deferred
and amortized over the reinvestment period of the transaction as a reduction of
loan servicing fees. For home equity line and student loan securitizations,
which have substantially longer average lives, a gain or loss is recorded at the
60
<PAGE>
NOTE A
SIGNIFICANT
ACCOUNT
POLICIES
CONTINUED
time of the sale equal to the present value of the anticipated future net cash
flows, net of transaction expenses and any unamortized deferred loan origination
costs. For securitizations with revolving features, other than credit card,
present value gains on subsequent sales are also recorded.
The majority of Signet's mortgage loan sales are in the secondary market
with servicing retained. During the third quarter of 1995, the Company elected
to adopt SFAS No. 122, "Accounting for Mortgage Servicing Rights." In accordance
with the statement, the cost of mortgage loans purchased or originated with a
definitive plan to sell the loans and retain the mortgage servicing rights is
allocated between the loans and the servicing rights based on their estimated
fair values at the purchase or origination date. In determining the estimated
fair value of the mortgage servicing rights, Signet utilizes a discounted cash
flow model which incorporates assumptions such as prepayment speeds of the
underlying loans, default rates, servicing income, servicing costs, and
inflation factors. Mortgage servicing rights are amortized in proportion to and
over the period of estimated net servicing income.
For the purpose of evaluating and measuring impairment of capitalized
mortgage servicing rights, Signet uses the predominant risk characteristics of
loan type and interest rate. The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights in each stratum exceed their
fair values and is recorded through a valuation allowance. No valuation
allowance was necessary at December 31, 1996 or 1995 for any capitalized
mortgage servicing rights.
The effect of adopting SFAS No. 122 on the Company's consolidated financial
statements was an increase in pre-tax income of approximately $7.2 million (net
of amortization). During 1996, Signet capitalized $10.0 million of originated
mortgage servicing rights. In addition to originated mortgage servicing rights,
Signet capitalized $23.6 and $31.6 million of purchased mortgage servicing
rights in 1996 and 1995, respectively. Amortization expense related to mortgage
servicing rights was $9.5, $5.6 and $2.2 million for 1996, 1995 and 1994,
respectively. At December 31, 1996, Signet's portfolio of capitalized mortgage
servicing rights totaled $82.6 million and had a market value of $109.1 million.
Stock-Based Compensation: The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and
related Interpretations in accounting for its employee stock options and stock
awards because the alternative fair value accounting recommended by SFAS No.
123, "Accounting for Stock-Based Compensation," requires the use of option
valuation models that were not developed for valuing employee stock options.
Under APB No. 25, no compensation expense is recognized for the Company's stock
option plans and stock purchase plan.
Income Taxes: Prepaid and deferred income taxes are provided for timing
differences between income and expense for financial reporting purposes and for
income tax purposes.
Earnings Per Share: Earnings per share were based on the average number of
shares outstanding and applicable equivalents (stock options).
Recent Accounting Pronouncements: SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," was issued in
1996. SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets, including securitizations, and extinguishments of
liabilities. The statement is effective for such transactions occurring after
December 31, 1996. Subsequent to the issuance of SFAS No. 125, SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," was issued. SFAS No. 127 defers for one year the effective date of
accounting for secured borrowings and collateral, repurchase agreements,
dollar-roll, securities lending, and similar transactions. Signet will adopt the
requirements of SFAS No. 125 beginning January 1, 1997, except for the deferred
requirements, which Signet will adopt beginning January 1, 1998. The effect of
adopting SFAS No. 125 for existing transactions is not expected to have a
material impact on the Company's financial position or results of operations.
The Company is unable to complete an assessment of the potential financial
statement impact of applying the statement to future transactions because the
Company participates in a variety of transfers of financial assets, and each
transaction structure is unique.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE B
CASH AND DUE
FROM BANKS
The domestic bank subsidiaries are required to maintain average reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances were
approximately $41,430 and $87,477 for the years ended December 31, 1996 and
1995, respectively.
NOTE C
SECURITIES
AVAILABLE
FOR SALE
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C>
December 31, 1996
U.S. Government and agency obligations--
Mortgage-backed securities $2,124,019 $19,199 $ (7,796) $2,135,422
Other 298,175 4,145 302,320
Obligations of states and political subdivisions 22,244 540 22,784
Other 160,347 4,415 (2,008) 162,754
- -----------------------------------------------------------------------------------------------
$2,604,785 $28,299 $ (9,804) $2,623,280
===============================================================================================
December 31, 1995
U.S. Government and agency obligations--
Mortgage-backed securities $ 1,478,517 $52,301 $1,530,818
Other 562,815 20,468 $ (8) 583,275
Obligations of states and political subdivisions 53,031 1,671 (6) 54,696
Other 173,137 4,343 (12,298) 165,182
- -----------------------------------------------------------------------------------------------
$ 2,267,500 $78,783 $(12,312) $2,333,971
===============================================================================================
December 31, 1994
U.S. Government and agency obligations--
Mortgage-backed securities $ 633,338 $(26,335) $ 607,003
Other 461,140 $ 11 (3,274) 457,877
Obligations of states and political subdivisions 110 6 116
Other 184,703 1,603 (9,606) 176,700
- -----------------------------------------------------------------------------------------------
$ 1,279,291 $ 1,620 $(39,215) $1,241,696
===============================================================================================
</TABLE>
The cost and fair values of securities available for sale by contractual
maturity, except mortgage-backed securities for which an expected average life
based on prepayment assumptions is used, at December 31, 1996 are shown below:
Fair
Cost Value
- ------------------------------------------------------------------------
Due in one year or less $ 225,454 $ 226,523
Due after one year through five years 345,227 350,282
Due after five years through ten years 1,950,375 1,960,935
Due after ten years 83,729 85,540
- ------------------------------------------------------------------------
$2,604,785 $2,623,280
========================================================================
62
<PAGE>
NOTE C
SECURITIES
AVAILABLE
FOR SALE
CONTINUED
Securities available for sale with aggregate book values of approximately
$2,093,763, $1,476,767 and $623,743 at December 31, 1996, 1995 and 1994,
respectively, were pledged to secure public deposits, repurchase agreements and
other banking transactions. Gross gains of $20,610, $2,610 and $6,152, and gross
losses of $15,589, $2,078 and $2,739 were realized on those sales for 1996, 1995
and 1994, respectively. Gross gains of $-0-, $1,257 and $113 and gross losses of
$-0-, $-0-, and $67 were realized on called investment securities for 1996, 1995
and 1994, respectively.
NOTE D
ALLOWANCE FOR
LOAN LOSSES
AND RESERVE
FOR FORECLOSED
PROPERTY
The following is a summary of changes in the allowance for loan losses:
Year Ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of year $129,702 $220,519 $253,313
Provision for loan losses 73,851 38,715 14,498
Net deduction arising in purchase/sale transactions (7,871) (1,542)
Transfer to Capital One Financial Corporation (68,516)
Losses 71,554 62,993 74,533
Recoveries 4,708 9,848 28,783
- --------------------------------------------------------------------------------
Net loan losses 66,846 53,145 45,750
- --------------------------------------------------------------------------------
Balance at end of year $136,707 $129,702 $220,519
================================================================================
The following is a summary of changes in the reserve for foreclosed property:
Year Ended
December 31
1994
- ----------------------------------------------------------------
Balance at beginning of year $5,742
Reductions to reserve credited to expense (1,764)
Writedowns of foreclosed property (3,978)
- ----------------------------------------------------------------
Balance at end of year $ 0
================================================================
At December 31, 1996, Signet's loans that were considered to be impaired
under SFAS No. 114 were comprised of $22,529 of non-accrual loans for which the
related allowance for credit losses was $4,305. The average recorded investment
in impaired loans during the year ended December 31, 1996 was approximately
$24,684. At December 31, 1995, Signet's loans that were considered to be
impaired under SFAS No. 114 were comprised of $32,617 of non-accrual loans for
which the related allowance for credit losses was $10,598. The average recorded
investment in impaired loans during the year ended December 31, 1995 was
approximately $28,830. Collateral dependent loans, which were measured at the
fair value of the loan's collateral, made up the majority of impaired loans at
December 31, 1996 and 1995. Interest recorded as income on year-end non-accrual
and restructured loans was $0.7 million, $0.9 million and $0.5 million for 1996,
1995 and 1994, respectively, compared with interest income of $3.1 million, $4.1
million and $3.4 million for the same periods which would have been recorded had
these loans performed in accordance with their original terms.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE E
SECURITIES
SOLD UNDER
REPURCHASE
AGREEMENTS
AND OTHER
SHORT-TERM
BORROWINGS
The following is a summary of short-term borrowings for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Maximum Average
Outstanding Weighted Interest
at Any Outstanding Average Average Rate at
Month End at Year End Outstanding Interest Rate Year End
- --------------------------------------------------------------------------------------------------
<S> <C>
1996
Repurchase agreements $ 1,871,996 $ 1,467,565 $ 1,545,179 4.5% 5.4%
Federal funds 1,108,257 495,171 840,323 5.3 6.0
- ------------------------------------------------------------------------------------------------
Total $ 1,962,736 $ 2,385,502 4.8% 5.5%
================================================================================================
1995
Repurchase agreements $ 1,494,736 $ 1,124,105 $ 1,172,410 4.8% 4.8%
Federal funds 1,285,918 780,193 899,534 5.9 5.3
Commercial Paper 88,626 -- 13,579 5.1 --
Bridge financing facility 1,000,000 -- 170,136 7.1 --
Other short-term borrowings 167,034 -- 44,855 5.5 --
- ------------------------------------------------------------------------------------------------
Total $ 1,904,298 $ 2,300,514 5.4% 5.0%
================================================================================================
1994
Repurchase agreements $ 1,218,035 $ 875,458 $ 1,015,595 3.7% 4.5%
Federal funds 1,273,862 881,693 662,289 4.3 4.6
Commercial paper 147,372 108,664 126,903 3.6 5.3
Bridge financing facility 1,700,000 1,300,000 175,342 7.1 6.6
Other short-term borrowings 372,054 146,955 175,178 5.8 5.4
- ------------------------------------------------------------------------------------------------
Total $ 3,312,770 $ 2,155,307 4.3% 5.8%
================================================================================================
</TABLE>
The weighted average interest rate is calculated by dividing annual
interest expense by the daily average outstanding principal balance. The
Company's policy related to repurchase agreements is to maintain control of the
underlying securities.
In connection with the Separation (described in Note T), Capital One Bank
obtained a syndicated bank loan facility (the "Bridge Financing Facility") to
meet its interim funding and liquidity needs. The initial amount of borrowing
under the Bridge Financing Facility was approximately $1.7 billion at 60 basis
points over LIBOR before financing costs. In December 1994, Capital One reduced
the Bridge Financing Facility by $400 million through new funding sources,
primarily large denomination certificates. In early 1995, the Bridge Financing
Facility was further reduced by bank notes with longer maturities. In
conjunction with the spin-off on February 28, 1995, the Bridge Financing
Facility was transferred to Capital One and was no longer a source of funding
for Signet.
64
<PAGE>
NOTE F
LONG-TERM
BORROWINGS
Long-term borrowings consisted of the following:
December 31
1996 1995
- -------------------------------------------------------------------------
Notes and mortgages (5-11 3/5%): $ 14 $ 3,033
Subordinated notes:
7 4/5% due 2006 150,000
9 5/8% due 1999 100,000 100,000
Floating Rate (3 month LIBOR + 3/16) due 1998 100,000 100,000
Floating Rate (3 month LIBOR + 1/8) due 1997 50,000 50,000
- -------------------------------------------------------------------------
400,000 250,000
- -------------------------------------------------------------------------
$400,014 $253,033
=========================================================================
In 1996 Signet Bank established a $2.5 billion Senior and Subordinated Bank
Note facility, due from 30 days to 30 years from date of issue. A total of
$150,000 of Subordinated Bank Notes due in 2006 had been issued under the
facility at December 31, 1996. Interest on the Notes is payable semiannually on
March 15 and September 15. The Notes are not redeemable prior to their maturity.
As part of the Company's asset-liability management, an interest rate swap of
$150,000 notional value was purchased. This transaction in effect converts the
debt from 7 4/5% to six-month LIBOR. The interest rate swap matures on September
15, 2006 in conjunction with the Notes.
The Company has $100,000 principal amount of unsecured 9 5/8% Subordinated
Notes due in 1999. Interest on the Notes is payable semiannually on June 1 and
December 1. The Notes are not redeemable prior to their maturity. As part of the
Company's asset-liability management, an interest rate swap of $100,000 notional
value was purchased. This transaction in effect converts the debt from 9 5/8% to
three-month LIBOR. The interest rate swap matures on June 1, 1999 in conjunction
with the Notes.
The Company has $100,000 principal amount of Floating Rate Subordinated
Notes due in 1998. The Notes are redeemable at the option of the Company at
their principal amount plus accrued interest. The interest rate is determined
quarterly based on the London interbank offered quotations for three-month U.S.
dollar deposits.
The Company has $50,000 principal amount of Floating Rate Subordinated
Notes due in 1997. The Notes are redeemable at the option of the Company at
their principal amount plus accrued interest. The interest rate is determined
quarterly based on the London interbank offered quotations for three-month U.S.
dollar deposits.
There were no premises at December 31, 1996 subject to liens relating to
notes and mortgages. Maturities of long-term borrowings in the aggregate for the
next five years are as follows:
1997 $ 50,014
1998 100,000
1999 100,000
2000 0
2001 0
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE G
COMMON STOCK
At December 31, 1996, the Company had reserved 4,563,325 shares of its Common
Stock for issuance in connection with stock option, employee and investor stock
purchase plans.
The following is a summary of the number of shares of Common Stock issued:
Year Ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
Investor stock purchase plan 317,962 327,539 263,180
Employee stock purchase plan 154,060 143,821 114,057
Stock option plan 291,102 359,103 136,658
Acquisition of Pioneer Financial Corporation 1,514,286
Restricted Stock Awards 105,620
- --------------------------------------------------------------------------------
Total 868,744 830,463 2,028,181
================================================================================
Under the Investor Stock Purchase Plan, 290,422 shares of Common Stock were
reserved at December 31, 1996. The plan provides that the price of the Common
Stock will be 95% of market value at the time of purchase through dividend
reinvestment and 100% of market value at the time of purchase through optional
cash contributions.
Each outstanding share of the Company's Common Stock contains one Preferred
Share Purchase Right. Each right will entitle stockholders to buy one
two-hundredth of a share of a new Series of Preferred Stock at an exercise price
of $70. Each two-hundredth of a share of the new Preferred Stock has terms
designed to approximate the economic equivalent of one share of Common Stock.
The rights will be exercisable only if a person or group acquires 20% or more of
the Company's Common Stock or announces a tender offer, the consummation of
which would result in ownership by a person or group of 20% or more of the
Common Stock. The rights, which do not have voting privileges, expire in 1999,
but may be redeemed by the Company prior to that time under certain
circumstances, for $0.01 per right. These rights should not interfere with a
business combination approved by the Company's Board of Directors; however, they
could cause substantial dilution to a person or group attempting to acquire the
Company without conditioning the offer on redemption of the rights or acquiring
a substantial number of the rights. Until the rights become exercisable, they
have no dilutive effect on earnings per share.
NOTE H
EMPLOYEE
BENEFIT PLANS
The Company and its subsidiaries have a defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's career average earnings. The Company's funding policy is to
contribute amounts to the plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Company may determine to be appropriate from
time to time. Approximately 95% of the plan assets at December 31, 1996 were
invested in listed stocks and bonds. Another 1% was invested in a money market
fund sponsored by an affiliate. Net periodic pension cost included the following
components:
1996 1995 1994
- -------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 5,884 $ 4,870 $ 7,379
Interest cost on projected benefit obligation 6,354 7,912 6,737
Actual return on plan assets (10,812) (18,683) 5,548
Net amortization and deferral 3,132 8,047 (14,256)
- -------------------------------------------------------------------------------
Net periodic pension cost $ 4,558 $ 2,146 $ 5,408
===============================================================================
66
<PAGE>
NOTE H
EMPLOYEE
BENEFIT PLANS
CONTINUED
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet:
December 31
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ (88,481) $(88,366)
===============================================================================
Accumulated benefit obligation $ (97,489) $(96,228)
===============================================================================
Projected benefit obligation $ (97,489) $(96,228)
Plan assets, at fair value 100,299 98,352
- -------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 2,810 2,124
Unrecognized net asset (3,784) (4,731)
Unrecognized prior service cost 1,891 2,092
Unrecognized net loss 17,612 21,502
- -------------------------------------------------------------------------------
Net pension asset $ 18,529 $ 20,987
===============================================================================
Assumptions used were as follows:
1996 1995 1994
- -------------------------------------------------------------------------------
Discount rates 7.50% 7.00% 8.50%
Rates of increase in compensation levels of employees 5.00 5.00 5.00
Expected long-term rate of return on plan assets 8.50 9.50 8.75
Assumption changes, a rise in the number of employees, and an increase in
the unfunded liability resulted in a $1.3 million, $0.6 million and $0.4 million
increase, respectively, in net periodic pension cost from 1995 to 1996. The
excess of contribution over service cost, the spin-off of Capital One and a
reduction in the workforce due to restructuring resulted in a $1.9 million, $1.3
million and $0.4 million decline, respectively, in net periodic pension cost
from 1994 to 1995. The impact of the change in assumptions for 1994 to 1995 was
immaterial.
The Company sponsors a contributory savings plan and a profit sharing plan.
The savings plan allows substantially all full time employees to participate
while the profit sharing plan allows participation after satisfaction of service
requirements. The Company matches a portion of the contribution made by
employees, which is based upon a percent of defined compensation, to the savings
plan. The profit sharing contribution is based upon the return on equity of the
Company. The Company's expense was $8,343, $15,908 and $23,729 in 1996, 1995 and
1994 under these plans, respectively. The Company's expense declined from 1995
to 1996 due to a drop in the return on equity, excluding the commercial fraud
loss.
The Company sponsors postretirement defined benefit plans that provide
medical and life insurance benefits to retirees. Employees who retire after age
55 with 10 years of service are eligible to participate. The postretirement
health care plan is contributory for participants who retire after June 1, 1991
with retiree contributions adjusted annually and contains other cost sharing
features such as deductibles and coinsurance. The life insurance is
noncontributory. The accounting for the health care plan anticipates future
cost-sharing changes to the written plan that are consistent with the Company's
expressed intent to increase retiree contributions annually in accordance with
increases in health care costs. The Company's policy is to fund the cost of
medical benefits in amounts determined at the discretion of management.
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE H
EMPLOYEE
BENEFIT PLANS
CONTINUED
The following table sets forth the plans' combined funded status reconciled
with the amount shown in the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
December 31
1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $(28,792) $(35,326)
Fully eligible active plan participants (662) (869)
Other active plan participants (1,767) (2,807)
- -----------------------------------------------------------------------------------------------
(31,221) (39,002)
Plan assets at fair value, primarily listed stocks and bonds 5,623 5,767
- -----------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets (25,598) (33,235)
Unrecognized transition obligation 20,364 24,162
Unrecognized net loss (19,101) (13,492)
- -----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(24,335) $(22,565)
===============================================================================================
</TABLE>
Net periodic postretirement benefit cost includes the following components:
Year Ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 840 $ 807 $1,457
Interest cost 2,647 3,470 3,758
Actual return on plan assets (731) ( 960) (74)
Amortization of transition obligation over 20 years 1,373 1,652 2,010
Net amortization and deferral (359) (8) (385)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $3,770 $4,961 $6,766
================================================================================
For measurement purposes, a 5.50% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996 for all participants;
the rate was assumed to remain at that level thereafter. The $8 million decline
in the accumulated postretirement benefit obligation from 1995 to 1996 resulted
primarily from the decrease in the assumed rate of increase of per capita health
care cost. For 1995, a 9.50% and 7.60% annual rate of increase in the per capita
cost of covered health care benefits was assumed for participants under 65 years
of age and 65 years and over, respectively; the rate was assumed to decrease
gradually to 5% in 2005 and remain at that level thereafter. For 1994, an 11%
and 9% annual rate of increase in the per capita cost of covered health care
benefits was assumed for participants under 65 years of age and 65 years and
over, respectively; the rate was assumed to decrease gradually to 6.50% in 2005
and remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation for the medical plans as of
December 31, 1996 and 1995 by $2.8 million and $4.3 million, respectively, and
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by $0.3 million, 1995 by $0.5 million and
1994 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50%, 7.00% and 8.50% for 1996, 1995 and
1994, respectively. The expected long-term rate of return on plan assets, after
estimated income taxes, was 8.50%, 9.50% and 8.75% for 1996, 1995 and 1994,
respectively.
In 1995, a $2.4 million reduction in postemployment expense resulted from a
change in medicare to primary/secondary status for those employees eligible for
medicare and a decrease in the long-term disability population. No related
expense was reported in 1996 and 1994.
The Company has a Flexible Benefits Plan for its employees. The plan allows
employees to select their benefit options, including medical coverage,
disability insurance and paid leave. The plan enables the Company to better
68
<PAGE>
NOTE H
EMPLOYEE
BENEFIT PLANS
CONTINUED
manage its rising health care costs, as well as provide employees more choice in
the selection of their benefits package.
As described in Note L, in 1994 Signet implemented a comprehensive core
bank improvement plan. As a result of restructuring the Company, charges of $9.0
million and $10.5 million relating to the Pension Plan and Postretirement
Benefits other than Pensions, respectively, were reported on the income
statement under restructuring charges in 1994.
NOTE I
STOCK PLANS
At December 31, 1996, Signet had five stock-based compensation plans, which are
described in the following paragraphs. In accordance with APB No. 25, no
compensation expense has been recognized for the Company's stock option plans
and stock purchase plan. Had compensation expense for the Company's five
stock-based compensation plans been determined based on the fair value at the
grant date, consistent with the method in SFAS No.123, "Accounting for
Stock-Based Compensation", the Company's net income and earnings per share would
have been reduced to the following pro forma amounts(1):
1996 1995
- -------------------------------------------------------------
Net income As reported $124,927 $111,080
Pro forma 122,843 108,895
Earnings per share As reported $ 2.06 $ 1.86
Pro forma 2.03 1.82
=============================================================
(1) SFAS No. 123 is applicable only to options granted subsequent to December
31, 1994; therefore, this information is not required for 1994.
Stock Option Plans: Signet maintains three stock option plans. Some executives
still hold options granted under the 1983 Stock Option Plan ("1983 Plan"), but
the Company can no longer grant options under this plan. The 1992 Stock Option
Plan ("1992 Plan") authorizes the Company to grant options or stock appreciation
rights to key personnel for up to 4,000,000 shares of Common Stock. Under the
1996 Non-Employee Directors Stock Option Plan ("1996 Plan"), the Company may
grant options to non-employee members of the Board of Directors for up to
300,000 shares of Common Stock. Under all three plans, the exercise price of
each option equals the market price of the Common Stock on the grant date and an
option's maximum term is ten years. The options have no vesting period, but
exercise is restricted for six months from the grant date.
The 1983 Plan and the 1992 Plan permit reload options. Under a reload
option, an employee satisfies the exercise price by tendering to the Company
already owned shares (rather than cash), and the Company automatically grants a
new option at the current market price for each previously owned share tendered.
The reload option is subject to the same restrictions on exercisability as those
of the underlying option possessing the reload feature.
In 1995, special stock options were granted to executives under the 1992
Plan, following the spin-off of Capital One ("Special Grant"). Sixty percent of
the options vest if the Company achieves certain market-to-book performance
goals relative to the 100 largest U.S. banks based on asset size. Additional 20%
vesting occurs if, before February 28, 2000, and at least 12 months after
attaining prior vesting milestones, the market-to-book performance goals are
again achieved. If the Company fails to achieve all market-to-book performance
goals, the unvested options become vested and exercisable on March 1, 2002. The
exercise price of each option, which has a ten-year maximum term, equals the
market price of the Common Stock on the grant date.
Effective February 28, 1995, the date of the Capital One spin-off, the
number of options outstanding and the option prices were adjusted, so the value
of options would not change.
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE I
STOCK PLANS
CONTINUED
The fair value of each option was estimated at the grant date using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for all stock option plan grants in 1996 and 1995, respectively:
dividend yields of 2.91% and 3.03%; and expected volatilities of 23.1% and
37.1%. For the 1992 Plan, risk-free interest rates of 6.2% and 5.4% were used
for 1996 and 1995, respectively. For the 1996 Plan and the Special Grant,
risk-free interest rates of 6.41% and 5.52%, respectively, were used. Expected
lives of 5 years for the 1992 Plan options and 8 years for the Special Grant
options and the 1996 Plan options were assumed.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation models require the use of highly subjective
assumptions, including the expected volatility of the stock price. Because the
Company's stock option plans have characteristics significantly different from
traded options, and because changes in the subjective assumptions can materially
affect the fair value estimates, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of employee
stock options.
A summary of the Company's stock option activity and related information
for all stock option plans for the years ended December 31, 1996, 1995, and
1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
- -----------------------------------------------------------------------------------------------------
<S> <C>
Outstanding at
beginning of year 2,387,643 $13.84 1,060,331 $21.35 1,033,508 $16.81
Granted 302,363 24.34 740,290 21.53 219,027 36.70
Exercised (372,523) 11.98 (456,368) 11.66 (191,304) 14.19
Expired (2,200) 23.88 (32,279) 16.98 (900) 36.56
Adjustment for
Capital One
spin-off 1,075,669 12.03
- -----------------------------------------------------------------------------------------------------
Outstanding at
end of year 2,315,283 $15.32 2,387,643 $13.84 1,060,331 $21.35
Options exercisable
at year-end 1,754,888 $14.26 1,844,296 $12.53 1,052,158 $21.24
Weighted-average
fair value of
options granted
during the year $ 5.67 $ 5.84 --(2)
=====================================================================================================
</TABLE>
(2) SFAS No. 123 is applicable only to options granted subsequent to December
31, 1994; therefore, this information is not required for 1994.
70
<PAGE>
NOTE I
STOCK PLANS
CONTINUED
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
- ----------------------------------------------------------------------------------------------
<S> <C>
$ 1.90 - 6.50 100,166 2.14 years $ 4.65 100,166 $ 4.65
6.91 -10.15 407,152 3.31 7.58 407,152 7.58
11.36 -16.76 684,353 6.99 14.02 684,353 14.02
17.24 -25.75 1,080,500 8.07 19.58 552,860 20.99
26.00 -30.19 43,112 9.65 27.17 10,357 26.20
- ----------------------------------------------------------------------------------------------
$ 1.90 -30.19 2,315,283 6.69 $15.32 1,754,888 $14.26
==============================================================================================
</TABLE>
At December 31, 1996 and 1995, options for 2,319,961 and 2,576,873 shares,
respectively, of Common Stock were available for future grants under the 1992
Plan. Under the 1996 Plan, options for 290,000 shares of Common Stock were
available for future grants at December 31, 1996.
Restricted Stock Awards: Under the 1994 Stock Incentive Plan, the Company may
award up to 300,000 shares of Common Stock to employees in management positions.
On December 9, 1996, the Company awarded 105,620 shares of Common Stock to
employees. These awards vest 25% one year from the award date and the remaining
75% two years from the award date. Compensation expense recognized in 1996
related to these awards was $66.
The fair value of each award is the market price of the Common Stock on the
award date. The weighted-average fair value of awards granted during 1996 was
$29.875. At December 31, 1996 and 1995, 194,380 and 300,000 shares,
respectively, of Common Stock were available for future awards.
Employee Stock Purchase Plan: Under the Employee Stock Purchase Plan, the
Company is authorized to issue up to 1,088,500 shares of Common Stock to its
full-time employees. Under the plan, employees purchased 154,060 and 143,821
shares of Common Stock in 1996 and 1995, respectively. At December 31, 1996 and
1995, 407,403 and 561,463 shares, respectively, of Common Stock were available
for purchase by employees under this plan.
NOTE J
DIVIDENDS
AND CAPITAL
ADEQUACY
Certain regulatory restrictions exist regarding the ability of the subsidiaries
to transfer funds to the Parent Company in the form of cash dividends, loans or
advances. At December 31, 1996, approximately $106,984 and $4,380 of the
retained earnings of Signet Bank and Signet Trust Company, respectively, and
approximately $9,196 of the retained earnings of the nonbank subsidiaries were
available for payment of dividends to the Parent Company, without prior approval
by regulatory authorities. The regulatory authorities may also consider factors
such as the level of current and expected earnings stream, maintenance of an
adequate loan loss reserve and an adequate capital base when determining amounts
available for the payment of dividends. The restricted net assets of the
domestic bank subsidiaries amounted to $745,696 at December 31, 1996.
As of December 31, 1996, the most recent notification from the Federal
Reserve Board categorized Signet Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
Signet Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE J
DIVIDENDS
AND CAPITAL
ADEQUACY
CONTINUED
institution's category. Management believes, as of December 31, 1996, that the
Company and Signet Bank meet all capital adequacy requirements to which they are
subject.
The Company's and Signet Bank's capital amounts and ratios are presented in
the table below:
<TABLE>
<CAPTION>
"Well Capitalized"
Requirements
- ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1996:
Total Capital to Risk Weighted Assets
Consolidated $1,168,279 14.70% $794,655 10.0%
Signet Bank 1,049,228 13.33 786,851 10.0
Tier I Capital to Risk Weighted Assets
Consolidated 856,819 10.78 476,793 6.0
Signet Bank 800,398 10.17 472,111 6.0
Tier I Capital to Average Assets (Leverage Ratio)
Consolidated 856,819 7.43 576,644 5.0
Signet Bank 800,398 6.93 577,457 5.0
===================================================================================================
As of December 31, 1995:
Total Capital to Risk Weighted Assets
Consolidated $ 967,746 12.56% $770,712 10.0%
Signet Bank 824,718 10.97 751,872 10.0
Tier I Capital to Risk Weighted Assets
Consolidated 756,461 9.82 462,427 6.0
Signet Bank 627,847 8.35 451,123 6.0
Tier I Capital to Average Assets (Leverage Ratio)
Consolidated 756,461 6.93 546,157 5.0
Signet Bank 627,847 5.88 534,266 5.0
===================================================================================================
</TABLE>
NOTE K
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
December 31
1996 1995
- ------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 49,949 $ 46,646
Foreclosed property 2,705 4,305
Commercial fraud loss 12,355 12,250
Other 29,556 32,779
- ------------------------------------------------------------------
Total deferred tax assets 94,565 95,980
Deferred tax liabilities:
Leasing 113,942 94,995
Unrealized gains on securities 8,205 24,341
Other 26,588 28,646
- ------------------------------------------------------------------
Total deferred tax liabilities 148,735 147,982
- ------------------------------------------------------------------
Net deferred tax liabilities $(54,170) $(52,002)
==================================================================
72
<PAGE>
NOTE K
INCOME TAXES
CONTINUED
Differences between applicable income taxes (benefit) and the amount
computed by applying statutory income tax rates are summarized as follows:
Year Ended December 31
1996 1995 1994
- -------------------------------------------------------------------------
Amounts at statutory rates $66,209 $59,402 $76,011
Effect of:
Tax exempt income (5,036) (6,774) (8,582)
State taxes net of federal benefit 3,741 5,246 2,248
Other (673) 765 (2,338)
- -------------------------------------------------------------------------
Applicable income taxes $64,241 $58,639 $67,339
- -------------------------------------------------------------------------
Taxes currently payable $46,939 $35,180 $33,156
Deferred income taxes 17,302 23,459 34,183
- -------------------------------------------------------------------------
Applicable income taxes $64,241 $58,639 $67,339
========================================================================
Applicable income taxes include $1,847 in 1996, $677 in 1995 and $1,243 in
1994 relating to securities available for sale gains and investment securities
gains.
The components of income tax expense are as follows:
Year Ended December 31
1996 1995 1994
-----------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
- ------------------------------------------------------------------------------
Federal $44,001 $14,485 $32,468 $18,101 $34,396 $29,484
State 2,938 2,817 2,712 5,358 (1,240) 4,699
- ------------------------------------------------------------------------------
$46,939 $17,302 $35,180 $23,459 $33,156 $34,183
==============================================================================
NOTE L
RESTRUCTURING
AND CONTRACT
TERMINATION
CHARGES
In the third quarter of 1994, Signet's Board of Directors approved a
comprehensive core bank improvement plan aimed at reducing Signet's efficiency
ratio through cost reductions and revenue initiatives in order to enhance its
competitive position. This impacted employees and operations throughout the
organization. The consolidated statement of income for 1994 includes a pretax
charge of $43.2 million related to the plan. The charge included approximately
$15.6 million primarily for increased retiree medical and pension benefits
related to an early retirement program in which 225 employees participated,
approximately $13.0 million of accelerated retiree medical and pension expense
and anticipated severance benefits for approximately 750 employees, and
approximately $14.6 million related to the writedown of bank-owned properties
and lease termination costs due to the expected abandonment of facilities
resulting from the reduction in employees. As of December 31, 1996, the
restructuring plan had been completed and Signet had reduced the restructuring
liability by approximately $7.0 million for severance payments to approximately
700 employees, $2.5 million for payments made under the early retirement program
and approximately $12.8 million for lease termination and other facilities
related costs. In addition, $19.5 million was transferred from the restructuring
liability to Signet's pension benefit liability and postretirement benefit
liability (See Footnote H) and $1.4 million was reversed in conjunction with the
conclusion of the program.
Also, in conjunction with the anticipated Capital One spin-off, Signet
recorded a special pretax charge of $49.0 million for terminating data
processing contracts related to the credit card business in 1994. This charge
was included in Capital One's financial results. As the contract termination
charge was paid in 1994, no related liability remains.
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE M
OTHER
NON-INTEREST
INCOME AND
EXPENSE
The following schedule represents the items comprising other non-interest income
and expense:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C>
Other non-interest income:
Mortgage servicing and origination $ 32,303 $ 22,429 $ 18,661
Trading profits (losses) 29,279 11,969 (268)
Other service charges and fees 15,459 12,293 13,592
Gains (losses) on sales of mortgage loans 6,756 7,178 (3,276)
Gain on sale of mortgage servicing 6,499 977 6,000
Other 15,641 17,867 23,768
- --------------------------------------------------------------------------------------------------
Total $105,937 $ 72,713 $ 58,477
==================================================================================================
Other non-interest expense:
Public relations, sales and advertising $ 20,499 $ 18,054 $ 16,662
Professional services 14,412 19,920 26,108
Credit and collection 5,386 3,790 11,646
Taxes and licenses other than payroll and income 3,516 3,896 3,448
FDIC assessment 2,243 8,981 16,754
Insurance 1,700 1,614 1,783
Other 47,045 54,226 43,949
- --------------------------------------------------------------------------------------------------
Total $ 94,801 $110,481 $120,350
==================================================================================================
</TABLE>
NOTE N
DERIVATIVE
FINANCIAL
INSTRUMENTS
The Company is party to derivative financial instruments with off-balance sheet
risk in the normal course of business to reduce its own exposure to fluctuations
in interest rates, to participate in trading activities and to meet the
financing needs of customers. These instruments include forward and futures
contracts; options; and interest rate swaps, caps and floors. In general terms,
derivative financial instruments are contracts or agreements whose value can be
linked to interest rates, exchange rates, security prices or financial indices.
These instruments involve, to varying degrees, elements of credit or interest
rate risk in excess of the amount recognized in the balance sheet. The Company
attempts to limit its credit risk by dealing with creditworthy counterparties,
obtaining collateral where appropriate and utilizing master netting arrangements
in accordance with FASB Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts." The Company's credit exposure that results from entering
into derivative financial instruments is limited to the current fair value of
contracts with a positive fair value expected to be received from
counterparties. The Company does not expect any counterparties to fail to meet
their obligations. The market risk of derivative financial instruments arises
from the potential for changes in value due to fluctuations in interest and
foreign exchange rates.
74
<PAGE>
NOTE N
DERIVATIVE
FINANCIAL
INSTRUMENTS
CONTINUED
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
(in thousands (in millions) Carrying Fair Fair (in millions) Carrying Fair Fair
except where noted) Notional (a) Value (b) Value (c) Value Notional (a) Value (b) Value (c) Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Derivative Financial
Instruments:
Held for trading:
Forward and futures
contracts $ 814 $(1,253) $(1,253) $ (32) $ 1,300 $ (7) $ (7) $ 944
Interest rate swap
agreements 382 5,367 5,367 3,149 270 803 803 698
Interest rate caps,
floors and options(d) 1,207 1,016 1,016 2,307 478 (50) (50) 4,064
Held for purposes other
than trading:
Forward and futures
contracts 89 59 59 111 (1,476) (1,476)
Interest rate swap
agreements 2,167 16,841 2,824 33,549
Interest rate caps and
floors(e) 650 5,396 1,006 950 10,179 14,680
</TABLE>
(a) The contract or notional amounts of the financial derivative instruments
shown in the table are in millions and represent the extent of involvement
the Company has in particular classes of instruments and may exceed the
actual amount of credit risk involved at December 31, 1996 and 1995,
respectively.
(b) Carrying values in the table are included in the statement of financial
position under the following captions: forward and futures contracts are
included in interest bearing deposits with other banks, trading account
securities, loans held for sale and other assets; interest rate swaps are
included in interest receivable and other assets; interest rate caps and
floors are included in other assets; purchased options are included in loans
held for sale and other assets; and sold options are included in other
liabilities.
(c) Fair values for forward and futures contracts and interest rate caps and
floors and options are based on quoted market prices. The fair value of
interest rate swaps is the estimated amount that the Company would receive
or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the swap
counterparties.
(d) Includes (notional) purchased interest rate caps and purchased options which
have no credit risk of $964 and $213 at December 31, 1996 and 1995,
respectively.
(e) Includes (notional) purchased interest rate caps and floors which have no
credit risk of $650 and $950 at December 31, 1996 and 1995, respectively.
Futures contracts are legal agreements to buy or sell a standardized
quantity of a commodity or standardized financial instrument at a specified
future date and price. Futures contracts are traded on organized exchanges.
Forward contracts are legal contracts between two parties to purchase and sell a
specific quantity of a financial instrument or commodity at a price specified
now, with delivery and settlement at a specified future date. Exchange traded
futures do not have any credit risk; however, risks related to futures and
forwards traded over-the-counter arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities values and interest rates. While in theory futures and forwards
represent obligations to make or take delivery, in fact most are closed out by
taking an exact but opposite position in the same contract. Cash requirements of
futures and forwards include receipt/payment of cash for the sale or purchase of
the contracts.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE N
DERIVATIVE
FINANCIAL
INSTRUMENTS
CONTINUED
Interest rate caps are tools used to manage exposure to interest rate risk
by modifying the rate sensitivity of selected liabilities by setting an upper
limit on a certain interest rate index. The Company typically pays a fee for the
cap and receives the amount by which the actual rate exceeds the contractual
rate, if any. Interest rate floors are tools to manage exposure to interest rate
risk by modifying the rate sensitivity of selected assets by setting a lower
limit on a certain interest rate index. The Company typically pays a fee for the
floor and receives the amount by which the contractual rate exceeds the actual
rate, if any. Cash flows from swaps, caps and floors are received or paid on the
established contract dates. Options are contracts that give the holder the right
to buy (call) or sell (put) a specified quantity of an asset from/to the issuer
of such a contract at a fixed price within a specified period of time. As a
writer of options, the Company receives a premium at the outset and then bears
the risk of an unfavorable change in the price of the financial instrument
underlying the option.
The Company maintains active trading positions in derivative financial
instruments. All trading derivative types and on-balance sheet instruments are
managed in the aggregate. Trading positions in derivative financial instruments
are carried at fair value and changes in fair values are reflected in trading
income as they occur. Net trading gains/(losses) in earnings on derivative
financial instruments totaled $19,453, ($32,590) and ($22,168) in the years
ended December 31, 1996, 1995 and 1994, respectively. See Note M for total
trading income. The Company manages the potential credit exposure through
careful evaluation of counterparty credit standing, collateral agreements, and
other contract provisions. The potential credit exposure from future market
movements is evaluated by using models that take into consideration possible
changes over time in interest rates and other relevant factors.
The Company's principal objective in holding or issuing derivatives for
purposes other than trading is asset-liability management. The operations of the
Company are subject to a risk of interest-rate fluctuations to the extent there
is a difference between the amount of the Company's interest-earning assets and
the amount of interest-bearing liabilities that mature or reprice in specified
periods. The main objective of the Company's asset-liability management
activities is to provide maximum levels of net interest income while maintaining
acceptable levels of interest-rate and liquidity risk and facilitating the
funding needs of the Company. To achieve that objective, the Company uses a
combination of derivative financial instruments. The majority of the
asset-liability management activities involve the use of interest rate swaps
whereby fixed rate assets are converted to variable rate assets or fixed rate
liabilities are converted to variable rate liabilities. Derivatives held or
issued for purposes other than trading are not marked to market. Related income
or expense including amortization of purchase premiums or settlement gains or
losses are recorded as an adjustment to the yield of the related interest
earning asset or interest bearing liability over the periods covered by the
contracts. If an instrument is terminated, any gain or loss is deferred and
amortized as an adjustment to the yield of the designated assets or liabilities
over the remaining periods originally covered by the contract.
The Company also acts as an intermediary in arranging interest rate swaps,
caps and floors. As an intermediary, the Company becomes a principal in the
exchange of interest payments between the parties and, therefore, is exposed to
loss should one of the parties default. The Company minimizes the risk by
performing normal credit reviews on its customers. As a writer of interest rate
caps and floors, the Company receives a fee at the outset and then bears the
risk of an unfavorable change in interest rates. The Company minimizes its
exposure to interest rate risk by entering into offsetting positions that
essentially counterbalance each other. These activities are immaterial to
operations.
76
<PAGE>
NOTE O
COMMITMENTS
AND
CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of customers. These
instruments include commitments to extend credit, standby and commercial letters
of credit and recourse obligations. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet. The Company attempts to limit its credit risk by dealing with
creditworthy counterparties and obtaining collateral where appropriate.
Off-Balance Sheet Items December 31
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit (unused)-net $4,562 $3,505
Standby and commercial letters of credit 304 318
Mortgage loans sold with recourse 4 15
================================================================================
The fair value of commercial lending related letters of credit and
commitments reflects the amount Signet would have to pay a counterparty to
assume these obligations and was $10,496 and $10,209 at December 31, 1996 and
1995, respectively. These amounts were estimated as the amount of fees currently
charged to enter into similar agreements, taking into account the present
creditworthiness of the counterparties.
Commitments to extend credit include the unused portions of commitments
that obligate a bank to extend credit in the form of loans, participations in
loans or similar transactions. Commitments to extend credit would also include
loan proceeds that a bank is obligated to advance, such as loan draws,
construction progress payments, rotating or revolving credit arrangements (other
than credit cards and related plans), or similar transactions. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee by the counterparty. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby and commercial letters of credit are conditional commitments issued
by the Company, and unless discussed otherwise, have the same characteristics as
discussed for commitments. Standby letters of credit are instruments issued by
the Company which represent an obligation to guarantee payments on certain
transactions. If a customer defaulted on loan payments, the issuer of the letter
would be called upon to make payments. Standby letters of credit represent
contingent liabilities; therefore, they are not included on the Company's
balance sheet. Commercial letters of credit are conditional commitments on the
part of a bank to provide payment on drafts drawn in accordance with the terms
of a document. A commercial letter of credit is issued to specifically
facilitate trade or commerce. Under the terms of a commercial letter of credit,
as a general rule, drafts will be drawn when the underlying transaction is
consummated as intended. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral deemed necessary by the
Company upon extension of credit is based on management's credit evaluation of
the counterparty and the particular transaction. Collateral held varies but may
include accounts receivable, marketable securities, deposit accounts, inventory
and property, plant and equipment. Credit risk (the possibility that a loss may
occur from the failure of another party to perform according to the terms of a
contract) exists to the extent of the contract amount in the case of commitments
and letters of credit. No significant losses are anticipated as a result of
these transactions.
The Company sells residential mortgage loans with recourse to the Federal
National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Company
(FHLMC). Mortgages are collateralized by 1-4 family residential homes. The
Company's policy is for an average 85% loan-to-value ratio upon inception of the
loan. Loans above 80% have mortgage insurance. It is not practicable to
separately estimate the value of mortgage loans sold with recourse due to the
excessive cost involved. These values are included in the loans held for sale
valuation (see Note R for further discussion).
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE O
COMMITMENTS
AND
CONTINGENCIES
CONTINUED
Certain premises are leased under agreements which expire at various dates
through 2051, without taking into consideration renewal options available to the
lessee. Many of these leases require the lessee to pay property taxes, insurance
premiums, cost of maintenance and other costs. In some cases, rentals are
subject to increase in relation to a cost of living index. Total rental expense
amounted to approximately $21,003 in 1996, $22,827 in 1995 and $21,947 in 1994.
Future minimum rental commitments as of December 31, 1996 for all
non-cancelable operating leases with initial or remaining terms of one year or
more amounted to $113,050 and rental commitments for the next five years are as
follows:
1997 $18,466
1998 18,368
1999 15,055
2000 12,514
2001 10,414
The Company has entered into several agreements under which certain data
processing services, including management of the Company's data center and
installation of various new application systems, will be provided by outside
parties. The cost of these services is determined by volume considerations, in
addition to an agreed base rate, for remaining terms up to five years.
On March 19, 1996, Signet's management discovered that the Company was one
of several major financial institutions that were victims of fraudulent
commercial loan transactions which occurred prior to 1996. The Company had loan
outstandings related to these transactions of approximately $81 million. Federal
authorities have informed the Company that there have been substantial
recoveries of assets related to these transactions. Management recorded a $35
million commercial fraud loss in non-interest expense at December 31, 1995 and
recorded the estimated probable recovery amount of $46 million in other assets
as a receivable. The receivable represents an amount management believes is
likely to be recovered based on current facts and circumstances. The amount of
the recovery was based on the Company's share of known claims to the total
amount held by federal authorities, less associated costs. The recovery amount
is subject to change, even in the near term, as additional assets are recovered
and/or additional claims are asserted. Management continues to believe the $35
million charge to 1995 earnings is adequate to cover estimated losses related to
these fraudulent transactions based on currently available information, but is
unable to predict the timing of the recovery. The Company will vigorously pursue
all other sources of recovery, but currently is unable to determine the
probability or amount of additional recoveries.
78
<PAGE>
NOTE P
Securitizations
Signet periodically securitizes loans, primarily consumer loans such as credit
card receivables, home equity lines and student loans. In accordance with these
agreements, a fixed amount of cash or excess servicing fees may be required to
be set aside to cover credit losses and is included in other assets. Recourse
obligations related to these transactions are not material. Amounts related to
these securitizations are as follows:
<TABLE>
<CAPTION>
Credit Home Equity Student
Card Lines Loans
- ---------------------------------------------------------------------------------------------
<S> <C>
1996
Initial amount securitized $ 90,000 $404,591
Initial gain recorded 9,254
Gain on additional sales of receivables $ 7,576
Receivables outstanding at December 31 263,889 406,896 428,435
Amount set aside to absorb credit losses at December 31 5,288 6,317
- ---------------------------------------------------------------------------------------------
1995
Initial amount securitized 185,000 480,702
Initial gain recorded 9,562
Receivables outstanding at December 31 185,000 480,702
- ---------------------------------------------------------------------------------------------
1994
Initial amount securitized* 2,398,801
=============================================================================================
</TABLE>
* In conjunction with the spin-off of Capital One, Signet's rights and
obligations under substantially all of its credit card securitization
agreements entered into before February 28, 1995, as well as any related
assets and liabilities were transferred to Capital One Bank.
NOTE Q
CONCENTRATIONS
OF RISK
During 1996 and 1995, the Company maintained a concentration of business
activities with customers located within Virginia, Maryland and the District of
Columbia. As of December 31, 1996 and 1995, the Company held approximately $2.6
billion and $2.4 billion, respectively, in U.S. Government sponsored and U.S.
Government agency financial instruments, which have little, if any, credit risk.
In addition, as of December 31, 1996 and 1995, the Company had $1.3 billion and
$1.2 billion, respectively, of credit exposure in manufacturing industries.
Credit exposure in servicing industries was $1.4 billion for both December 31,
1996 and 1995. The Company's current commercial lending policies are strongly
oriented toward diversified middle market borrowers. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable, marketable securities, deposit accounts,
inventory, property, plant and equipment, real estate and income-producing
commercial properties.
Signet has a contract with Electronic Data Systems ("EDS") under which EDS
manages Signet's information services, including the data center,
telecommunications, systems and programming. EDS is the primary provider of
computer services for Signet. The contract terminates in 2001.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE R
DISCLOSURES
ABOUT FAIR
VALUE OF
FINANCIAL
INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
See Note N - Derivative Financial Instruments for fair value information on
Signet's derivatives.
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1996 1995
-------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------
<S> <C>
The estimated fair values of the Company's
financial instruments required to be
disclosed under SFAS No. 107:
Assets:
Cash and due from banks(a) $ 566,520 $ 566,520 $ 599,113 $ 599,113
Interest bearing deposits with other banks(a)(e) 3,200 3,200 3,129 3,129
Federal funds sold and securities purchased
under resale agreements(a) 777,999 777,999 460,217 460,217
Trading account securities(b)(e) 547,473 547,473 478,705 478,705
Loans held for securitization(a) 389,700 389,700
Loans held for sale(a)(b)(e) 102,767 102,767 362,736 362,736
Securities available for sale(b) 2,623,280 2,623,280 2,333,971 2,333,971
Loans(c)(f) 5,828,994 5,883,318 4,920,793 4,960,403
Interest receivable(a)(e) 107,425 107,425 104,259 104,259
Other assets(a)(e)(g) 77,761 77,761 126,894 126,894
Liabilities:
Non-interest bearing deposits(a) 1,751,238 1,751,238 1,726,378 1,726,378
Interest bearing deposits(d) 6,136,104 6,159,097 5,866,593 5,865,813
Securities sold under repurchase
agreements(a) 1,467,565 1,467,565 1,124,105 1,124,105
Federal funds purchased(a) 495,171 495,171 780,193 780,193
Long-term borrowings(b)(d) 400,014 414,054 253,033 262,920
Interest payable(a) 30,507 30,507 19,460 19,460
Due to broker(a) 300,000 300,000 125,000 125,000
Other liabilities(a)(e)(g) 1,372 1,372 2,149 2,149
========================================================================================================
</TABLE>
(a) The carrying amount approximates fair value.
(b) Fair values are based on published market prices or dealer quotes.
(c) For credit card and equity line receivables with short-term and/or variable
characteristics, the total receivables outstanding approximates fair value.
This amount excludes any value related to account relationship. The fair
value of other types of loans is estimated by discounting the future cash
flows using the comparable risk-free rate and adjusting for credit risk and
operating costs.
(d) The fair value of demand deposits, savings accounts and money market
deposits with no defined maturity, by SFAS No. 107 definition, is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit and some long term debt is estimated by discounting the future cash
flows using the current rates at which similar liabilities would be
incurred.
(e) Carrying values in the table are included in the statement of financial
position under the indicated captions, except for certain derivative amounts
(see Note N).
(f) As required by SFAS No. 107, lease receivables (net of unearned income) with
a carrying value totaling $389,185 and $365,533 at December 31, 1996 and
1995, respectively, are excluded. The carrying values are net of the
allowance for loan losses and related unearned income.
(g) Only financial instruments as defined by SFAS No. 107 are included in this
category.
80
<PAGE>
NOTE S
SIGNET BANKING
CORPORATION
(PARENT
COMPANY ONLY)
CONDENSED
FINANCIAL
INFORMATION
December 31
Balance Sheet 1996 1995
- ---------------------------------------------------------------------
Assets
Securities available for sale $ 144 $ 10,646
Commercial loans 777
Advances to bank subsidiaries 231,131 215,929
Investments in:
Bank subsidiaries 875,030 812,110
Non-bank subsidiaries 41,035 39,026
Other assets 30,492 39,503
- ---------------------------------------------------------------------
$1,177,832 $1,117,991
=====================================================================
Liabilities
Long-term borrowings-subordinated notes $ 250,000 $ 250,000
Other liabilities 3,717 4,042
- ---------------------------------------------------------------------
Total liabilities 253,717 254,042
Common Stockholders' Equity 924,115 863,949
- ---------------------------------------------------------------------
$1,177,832 $1,117,991
=====================================================================
Year Ended December 31
Statement of Income 1996 1995 1994
- --------------------------------------------------------------------------------
Income:
Dividends from bank subsidiaries $ 56,088 $ 57,651 $ 75,531
Interest from:
Bank subsidiaries 13,799 14,240 10,545
Non-bank subsidiaries 2 50 286
Others 191 1,357 4,528
Other income--net 2,361 2,538 5,562
- --------------------------------------------------------------------------------
72,441 75,836 96,452
Expense:
Interest 16,295 18,429 20,983
Non-interest 2,374 2,594 4,489
- --------------------------------------------------------------------------------
18,669 21,023 25,472
================================================================================
Income before income taxes benefit and equity
in undistributed net income of subsidiaries 53,772 54,813 70,980
Applicable income taxes benefit (559) (806) (1,204)
- --------------------------------------------------------------------------------
54,331 55,619 72,184
Equity in undistributed net income:
Bank subsidiaries 69,262 39,380 66,101
Non-bank subsidiaries 1,334 16,081 11,549
- --------------------------------------------------------------------------------
Net income $124,927 $111,080 $149,834
===============================================================================
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(dollars in thousands-except per share)
NOTE S
SIGNET BANKING
CORPORATION
(PARENT
COMPANY ONLY)
CONDENSED
FINANCIAL INFORMATION
CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
Statement of Cash Flows 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C>
Operating Activities
Net Income $124,927 $111,080 $149,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (70,596) (55,461) (77,650)
Realized securities available for sale (gains) losses (16) 418 (459)
Decrease (increase) in other assets 10,379 26,389 (8,160)
(Decrease) increase in other liabilities (604) (4,239) 454
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,090 78,187 64,019
Investing Activities
Decrease (increase) in interest bearing deposits with other banks 110,000 (55,000)
Proceeds from sales of securities available of sale 19,904 47,552 3,662
Purchases of securities available for sale (9,961) (39,469)
(Increase) decrease in advances to subsidiaries (15,202) (11,052) 100,683
Increase in investment in subsidiaries (24,913) (37,721) (56,535)
Net decrease (increase) in loans 777 3,354 (4,131)
- -------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (29,395) 72,664 (11,321)
Financing Activities
Decrease in commercial paper (108,664) (59,824)
Decrease in long-term borrowings (11,943)
Proceeds from issuance of common stock 13,577 4,084 75,972
Payment of cash dividends (48,273) (46,489) (57,192)
- -------------------------------------------------------------------------------------------------------
Net cash used by financing activities (34,696) (151,069) (52,987)
- -------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1) (218) (289)
Cash and cash equivalents at beginning of year 1 219 508
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0 $ 1 $ 219
=======================================================================================================
Supplemental disclosures
Interest paid $ 16,016 $ 18,327 $ 20,692
Income taxes (received) paid (3,707) (27,453) 5,288
Distribution of common stock of Capital One
Financial Corporation 383,200
</TABLE>
The long-term borrowings mature over the next three years as follows:
1997--$50,000, 1998--$100,000, 1999--$100,000.
82
<PAGE>
NOTE T
SPIN-OFF
CAPITAL ONE
FINANCIAL
CORPORATION
("CAPITAL ONE")
On February 28, 1995, Signet distributed all of the remaining Capital One common
stock it held to Signet stockholders in a tax free distribution (the
"spin-off"). Related assets of $3.6 billion and equity of $0.4 billion were
included in the spin-off at that time. Subsequent to February 28,1995, Capital
One's results of operations and financial position are excluded from Signet's.
On February 28, 1995, $6.2 billion (notional) of interest rate swaps were
transferred to Capital One.
Various agreements existed between Signet and Capital One. These included
basic servicing agreements, an agreement to hold secured card deposits on behalf
of Capital One which amounted to $679,101 at December 31,1995 and which
transferred to Capital One in 1996, and an agreement to hold non-card consumer
loans, amounting to $240,902 at December 31,1995, which were sold to Capital One
in 1996. The net amount Signet paid to Capital One related to these agreements
since the spin-off was $22,324.
Capital One summary financial data follows:
<TABLE>
<CAPTION>
February 28 December 31
1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C>
Federal funds sold $ 304,500 $ 300,000
Loans held for securitization 450,000
Securities available for sale 351,425 99,070
Net loans 2,088,554 2,159,939
Other assets 444,809 513,537
- ---------------------------------------------------------------------------------------------------
Total assets $3,639,288 $3,072,546
===================================================================================================
Deposits $ 622,898 $ 452,201
Short-term borrowings 1,066,103 2,040,688
Bank notes 1,388,158 22,000
Other liabilities 69,257 83,100
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,146,416 2,597,989
Stockholders' equity [includes minority interest of $109,672 (1995)
and $106,900 (1994)] 492,872 474,557
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,639,288 $3,072,546
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Two Months Ended Year Ended
February 28, December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C>
Net interest income $ 25,167 $ 164,977
Provision for loan losses 3,929 30,727
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,238 134,250
Non-interest income 87,679 396,902
Non-interest expense (1994 includes a $49,000
contract termination fee) 81,510 384,325
- ---------------------------------------------------------------------------------------------------
Income before income taxes 27,407 146,827
Applicable income taxes 9,870 51,564
- ---------------------------------------------------------------------------------------------------
Net income $ 17,537 $ 95,263
===================================================================================================
</TABLE>
83
<PAGE>
Report of ERNST & YOUNG LLP,
INDEPEDENT AUDITORS
Stockholders and Board of Directors
Signet Banking Corporation
We have audited the accompanying consolidated balance sheet of Signet
Banking Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Signet Banking
Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
January 22, 1997
84
<PAGE>
SIGNET BANKING CORPORATION AND SUBSIDIARIES
Consolidating BALANCE SHEET
<TABLE>
<CAPTION>
Signet Banking Signet Signet Banking
December 31, 1996 Corporation Bank Other Corporation
(in thousands) (unaudited) (Parent Company) Consolidated Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 566,520 $11,989 $ (11,989) $ 566,520
Interest bearing deposits with other banks 3,200 3,200
Fed funds sold and resale agreements 777,999 777,999
Trading account securities 544,294 2,078 546,372
Loans held for sale 102,527 299 102,826
Securities available for sale $ 144 2,638,412 4,984 (20,260) 2,623,280
Loans 6,579,967 6,579,967
Less: Unearned Income (225,081) (225,081)
Allowance for loan losses (136,707) (136,707)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 6,218,179 6,218,179
Premises and equipment 180,763 3,650 184,413
Other assets 1,177,688 635,415 32,392 (1,147,866) 697,629
- ---------------------------------------------------------------------------------------------------------------------------
$1,177,832 $11,664,109 $58,592 $(1,180,115) $11,720,418
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Non-interest bearing deposits $ 1,763,227 $ (11,989) $ 1,751,238
Interest bearing deposits 6,291,104 (155,000) 6,136,104
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 8,054,331 (166,989) 7,887,342
Other short-term borrowings 2,058,662 (95,926) 1,962,736
Long-term borrowings $ 250,000 150,014 400,014
Other liabilities 3,717 538,933 $ 4,695 (1,134) 546,211
Stockholders' equity 924,115 862,169 53,897 (916,066) 924,115
- ---------------------------------------------------------------------------------------------------------------------------
$1,177,832 $11,664,109 $58,592 $(1,180,115) $11,720,418
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Statement of CONSOLIDATING INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1996
(in thousands) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income $ 13,754 $ 832,805 $ 396 $ (15,543) $ 831,412
Interest expense 16,056 362,046 2 (15,452) 362,652
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) (2,302) 470,759 394 (91) 468,760
Provision for loan losses 73,851 73,851
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) after
provision for loan losses (2,302) 396,908 394 (91) 394,909
Non-interest operating income 2,345 229,333 43,317 (439) 274,556
Securities gains (losses) 16 5,013 (8) 5,021
Non-interest expense 2,375 445,255 38,191 (503) 485,318
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) (2,316) 185,999 5,520 (35) 189,168
Applicable income taxes (benefit) (559) 62,784 2,051 (35) 64,241
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,757) $ 123,215 $ 3,469 $ 124,927
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
SIGNET BANK
Consolidating BALANCE SHEET
<TABLE>
<CAPTION>
Signet Bank
Excluding
December 31, 1996 Signet Mortgage Signet Mortgage
(in thousands) (unaudited) Corporation Corporation Eliminations Signet Bank
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ 566,520 $ 3,161 $ (3,161) $ 566,520
Fed funds sold and resale agreements 777,999 777,999
Trading account securities 544,294 544,294
Loans held for sale 6,960 95,567 102,527
Securities available for sale 2,638,054 358 2,638,412
Loans 6,574,758 5,209 6,579,967
Less: Unearned Income (225,081) (225,081)
Allowance for loan losses (136,707) (136,707)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 6,212,970 5,209 6,218,179
Investment in subsidiary 19,689 (19,689)
Premises and equipment 178,443 2,320 180,763
Advances to affiliates--net 162,454 (162,454)
Other assets 548,092 87,323 635,415
- ---------------------------------------------------------------------------------------------------------------------------
$11,655,475 $193,938 $(185,304) $11,664,109
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing deposits $ 1,766,304 $ 84 $ (3,161) $ 1,763,227
Interest bearing deposits 6,291,104 6,291,104
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 8,057,408 84 (3,161) 8,054,331
Advances from affiliates--net 162,454 (162,454)
Other short-term borrowings 2,008,662 2,008,662
Long-term borrowings 200,014 200,014
Other liabilities 526,399 11,711 538,110
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,792,483 174,249 (165,615) 10,801,117
Stockholders' Equity
Common stock 68,242 750 (750) 68,242
Capital surplus 429,354 500 (500) 429,354
Retained earnings 365,396 18,439 (18,439) 365,396
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 862,992 19,689 (19,689) 862,992
- ---------------------------------------------------------------------------------------------------------------------------
$11,655,475 $193,938 $(185,304) $11,664,109
===========================================================================================================================
</TABLE>
Statement of CONSOLIDATING INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1996
(in thousands) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest income $ 824,551 $ 8,254 $ 832,805
Interest expense 353,678 8,368 362,046
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense) 470,873 (114) 470,759
Provision for loan losses 73,797 54 73,851
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (expense)
after provision for loan losses 397,076 (168) 396,908
Non-interest operating income 182,454 46,879 229,333
Securities gains 5,013 5,013
Non-interest expense 403,472 41,783 445,255
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 181,071 4,928 185,999
Applicable income taxes 60,851 1,933 62,784
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 120,220 $ 2,995 $ 123,215
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE>
Signet STOCK INFORMATION
The Common Stock of SIGNET BANKING CORPORATION is traded on the New York Stock
Exchange under the symbol "SBK."
Issues and Conversions
<TABLE>
<S> <C>
March 29, 1965 2:1 stock split distributed to shareholders of record on March 17.
November 20, 1969 3:2 stock split distributed to shareholders of record on October 20.
July 20, 1984 2:1 stock split distributed to shareholders of record on June 29.
July 14, 1986 Union Trust Bancorp (UTB) of Baltimore acquired at an
exchange rate of 2.05 Signet shares for each UTB share.
July 27, 1993 2:1 stock split distributed to shareholders of record on July 6.
September 1, 1994 Pioneer Financial Corporation (PION) of Chester, Virginia, acquired at an exchange rate of .6232
Signet shares for each PION share.
November 22, 1994 Capital One Financial Corporation (COF) established and 7,125,000 COF shares sold through an
Initial Public Offering.
February 28, 1995 Signet's interest in Capital One Financial Corporation spun off in a tax-free distribution to
Signet shareholders of record on February 10.
March 1, 1995 Signet share price adjusted to reflect the spin-off of Capital One.
</TABLE>
Quarterly Per Share Information
First quarter 1995 data include Signet's ownership of Capital One Financial
Corporation through February 28, 1995
<TABLE>
<CAPTION>
1995 First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C>
Price Range 7 5/8-36 5/8 20 1/8-23 1/4 21 1/2-28 22-28
Book Value $13.15 $13.90 $14.27 $14.59
E.P.S. .45 .50 .50 .53
Dividends Declared .25 .17 .17 .20
Average Common Shares
and Equivalents (000s) 59,142 59,669 60,146 60,230
<CAPTION>
1996 First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C>
Price Range 21 3/8-27 1/4 23 1/4-27 21-29 25-30 3/4
Book Value $14.39 $14.48 $14.89 $15.38
E.P.S. .52 .50 .49 .55
Dividends Declared .20 .20 .20 .21
Average Common Shares
and Equivalents (000s) 60,357 60,502 60,738 61,089
</TABLE>
Total Return to Shareholders in 1996
Value of 1 Signet share on December 31, 1995 $23.75
Cash dividends paid by Signet in 1996 .81
Value of 1 Signet share on December 31, 1996 30.75
- --------------------------------------------------------------------------------
$31.56
Total Annual Return to Shareholders in 1996 32.9%
Annual Return of S&P 500 in 1996 20.3%
Total Return of Keefe, Bruyette & Woods 50 Bank Index in 1996 41.5%
90
Exhibit 21.1
1996 SUBSIDIARIES OF SIGNET BANKING CORPORATION
<TABLE>
<CAPTION>
Subsidiary Place of Incorporation
- ---------- ----------------------
<S> <C>
Signet Banking Corporation
Elgin Corporation Virginia
Signet Commercial Credit Corporation Virginia
General Finance Service Corporation Pennsylvania
The Budget Plan Company of Virginia Virginia
Signet Insurance Services, Inc. Virginia
Signet Investment Banking Company Virginia
Signet Financial Services, Inc. Virginia
Signet Trust Company Virginia
Signet Realty, Inc. Maryland
Signet Strategic Capital Corporation Virginia
Signet Student Loan Corporation Virginia
Virtus Capital Management, Inc. Maryland
Signet Bank Virginia
DOPWO, Inc. Virginia
800 Building Corporation Virginia
F H Crossings, Ltd. Virginia
F H Properties, No. 4, Inc. Virginia
F H Properties, No, 6, Inc. Virginia
F H Properties, No. 7, Inc. Virginia
F H Properties, No. 9, Inc. Virginia
F H Properties, No. 10, Inc. Virginia
F H Properties, No. 11, Inc. Virginia
F H Properties, No. 13, Inc. Virginia
MWG VII, Inc. Virginia
PFR Corporation Virginia
Pioneer Development Corporation Virginia
Pioneer Properties, I Virginia
Signet Bank (Bahamas), Ltd. Bahamas
Second Eleutheran Investment Co., Ltd. Bahamas
Signet Business Leasing Corporation Virginia
Signet Lending Services, Inc. Tennessee
Signet Mortgage Corporation Virginia
Signet Municipal LeaseCorp. Virginia
Signet Residential Finance Corporation Virginia
Signet Second Mortgage Corporation Virginia
Landexco, Inc. Maryland
NP Corporation Maryland
EEI Holding's Corporation, Inc. Maryland
RE IV, Inc. Maryland
RE VIII, Inc. Maryland
RE IX, Inc. Maryland
RE XI, Inc. Maryland
RE XV, Inc. Maryland
SM II, Inc. Maryland
SM III, Inc. Maryland
SM IV, Inc. Maryland
SM V, Inc. Maryland
SM VI, Inc. Maryland
SM VII, Inc. Maryland
SM VIII, Inc. Maryland
SM IX, Inc. Maryland
SM X, Inc. Maryland
SM XI, Inc. Maryland
SM XII, Inc. Maryland
SM XIII, Inc. Maryland
SM XIV, Inc. Maryland
SM XV, Inc. Maryland
SM XVI, Inc. Maryland
NP No. 3 Corporation Maryland
NP No. 4 Corporation Maryland
NP No. 5 Corporation Maryland
NP No. 7 Corporation Maryland
NP No. 8 Corporation Maryland
NP No. 9 Corporation Maryland
NP No. 10 Corporation Maryland
St. Paul Realty, Inc. Maryland
Signet Equipment Company Maryland
Signet Leasing and Financial Corporation Maryland
Signet Loan Company/Pennsylvania Pennsylvania
UTC Prop. No. 2, Inc. Maryland
UTC Prop. No. 3, Inc. Maryland
UTC Prop. No. 4, Inc. Maryland
UTC Prop. No. 5, Inc. Maryland
UTC Prop. No. 6, Inc. Maryland
Wharton & Bennett, Inc. Maryland
</TABLE>
December 31, 1996
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of Signet Banking Corporation, or most recent post-effective
amendments thereto, filed prior to March 14, 1997, of our report dated January
22, 1997, with respect to the consolidated financial statements of Signet
Banking Corporation included in the 1996 Annual Report to Shareholders
incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 1996:
- Form S-8 (2-82600) - Form S-3 (33-4491)
- Form S-8 (33-2498) - Form S-3 (33-21963)
- Form S-8 (33-43190) - Form S-3 (33-28089)
- Form S-8 (33-10637) - Form S-3 (2-92081)
- Form S-8 (33-47591) - Form S-3 (33-54803)
- Form S-8 (33-47590)
- Form S-8 (33-57455)
- Form S-8 (33-022996)
ERNST & YOUNG LLP
Richmond, Virginia
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 566,250
<INT-BEARING-DEPOSITS> 3,200
<FED-FUNDS-SOLD> 777,999
<TRADING-ASSETS> 546,372
<INVESTMENTS-HELD-FOR-SALE> 102,826
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,579,967
<ALLOWANCE> 136,707
<TOTAL-ASSETS> 11,720,418
<DEPOSITS> 7,887,342
<SHORT-TERM> 1,962,736
<LIABILITIES-OTHER> 546,211
<LONG-TERM> 400,014
0
0
<COMMON> 300,387
<OTHER-SE> 623,728
<TOTAL-LIABILITIES-AND-EQUITY> 11,720,418
<INTEREST-LOAN> 529,838
<INTEREST-INVEST> 0
<INTEREST-OTHER> 301,574
<INTEREST-TOTAL> 831,412
<INTEREST-DEPOSIT> 229,763
<INTEREST-EXPENSE> 362,652
<INTEREST-INCOME-NET> 468,760
<LOAN-LOSSES> 73,851
<SECURITIES-GAINS> 5,021
<EXPENSE-OTHER> 485,318
<INCOME-PRETAX> 189,168
<INCOME-PRE-EXTRAORDINARY> 189,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,927
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 4.73
<LOANS-NON> 28,303
<LOANS-PAST> 71,484
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 129,702
<CHARGE-OFFS> 71,554
<RECOVERIES> 4,708
<ALLOWANCE-CLOSE> 136,707
<ALLOWANCE-DOMESTIC> 131,659
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,048
</TABLE>
